October 14, 2007 | Graham

Whose interest rate record is worse?

I’ve just been trawling news sites and The Australian links to this ad, obviously evidence of how positive Kevin Rudd’s campaign is going to be:

So, whose record is better on interest rates?
The graph below of 90 bank bill rates, taken from data on the RBA site puts it in perspective.
You can see the very dramatic peak under Gough Whitlam in 1974, followed by the peak in 1982 under Howard. You can then see two more humps, almost as high, which occurred under Keating. From December 1993 things have been relatively steady.
So why are people convinced that interest rates are always higher under Labor? Principally because the trouble was caused in the first case by Gough Whitlam’s irresponsible economic management, which was amplified by the oil shocks. Fraser spent most of his term wrestling with the aftermath. 1982 can hardly be blamed on Howard, as apart from the Whitlam legacy, he became treasurer about the same time the rates were peaking.
Things should have settled down after 1983, which was the worst recession since the Great Depression, but Keating kept pressing the pedal to the metal, which resulted in over-heating every time. The independence of the Reserve Bank, guaranteed under the Howard Government, makes this behaviour and miscalculation less likely – witness the increases in interest rates over the last period while the government is running into an election.
Should Howard get the credit for current low interest rates? Mostly. To his credit he has let the RBA set rates against his political preference and budgets have been in surplus. Some people think that governments have no effect on interest rates, which they think are entirely set by the market. This would be true if governments weren’t the biggest actors in the economy, but as they are, they influence the market just by their activities and do bear some share of the responsibility when rates go up, and when they come down. They are certainly the only participant who tends to act with a significant intent to influence rates, which is the reason why the RBA sometimes offers advice to governments about fiscal policy!
Will Rudd be bad for interest rates? It all depends. He has some able lieutenants in Tanner and Emmerson who should act to keep spending in check, but the behaviour of state Labor governments gives reason for concern. State governments have tended to bloat budgets, but are limited in their ability to do this because of their limited access to “growth taxes”. The Commonwealth has plenty of taxing powers and growth, so if the same path is followed federally as has been followed in the states, watch out.

Posted by Graham at 9:45 pm | Comments (12) |
Filed under: Australian Politics


  1. Do you know anything at all about interest rates in a deregulated market? On the evidence of this post, certainly not:
    > Should Howard get the credit for current low interest rates? Mostly.
    Huh? Australia currently has some of the highest interest rates in the OECD, and has throughout the Howard government. It’s the relativities that matter mate, not the absolute level.
    > Some people think that governments have no effect on interest rates, which they think are entirely set by the market.
    What else sets them? I don’t know if you’ve noticed but:
    a.) the government has no control over the RBA settings,
    b.) even the RBA has lost control of the market over the last few weeks. Current market rates are higher than those available from the RBA. Why? Because the market sets the rate, not the RBA (which can only influence). The goverment has no role at all.
    > This would be true if governments weren’t the biggest actors in the economy … [ etc ]
    Rubbish. This was true back in the day before the dollar floated. With free movement of capital and a currency set by interest rate differentials (I presume you know what that phrase means? No? Then go and find out before spouting nonsense about interest rates), then it makes no difference who borrows – government or private interests. This argument belongs to the world of the 1970’s.
    > State governments have tended to bloat budgets, but are limited in their ability to do this because of their limited access to “growth taxes”. The Commonwealth has plenty of taxing powers and growth
    What in heavens name is this supposed to mean? That the economy grows nationwide independent of the individual components of growth in each state? I hadn’t noticed that there was a massive free-floating ghost economy outside the states but inside the federal sphere. Where is it? If such a thing existed outside the reach of the states then it could not be accessed by actors in the economy ie. you and me, and neither would the growth of which you speak. In other words, economic activity and growth would only be occuring for federal (and perhaps foriegn) actors and would be entirely irrelevent to real people.
    Oh wait – hasn’t middle class welfare and the Canberra workforce grown massively under Howard? Maybe you’re right on that bit of detail.

    Comment by JM — October 15, 2007 @ 2:40 am

  2. A Labor troll already, how droll. Of course it would be too much to expect you to put some figures up or put your real name to the post!
    Still, I guess it means that Labor are taking the Internet side of this campaign seriously, which is something.

    Comment by Graham Young — October 15, 2007 @ 6:02 am

  3. Ah Graham! Complaining about a supposed Labor troll is a good one when it comes from someone who makes no secret about their membership of the Liberal Party. Try to remember that you’re a pot when describing a kettle.

    Comment by Dave Lee — October 15, 2007 @ 9:41 am

  4. Graham, it would be nice if commentators such as JM had some type of grasp of basic economics beyond Labor HQ talking points.
    The reality is that on any measure the Australian economy’s performance has been extraordinary…u/e at record lows, 16 years of economic growth etc etc etc.
    Given the dominance of the Labor Party by former union officials with no understanding of the mechanics of global financial markets and who will invariably put Australia on the path to an outbreak of wage-push inflation the logic of interest-rates being higher under the Labor Party is a legitimate argument to make.

    Comment by Matt — October 15, 2007 @ 11:33 am

  5. quote: “He has some able lieutenants in Tanner and Emmerson…”
    Wayne Swan is noticably absent. Graham, please take this opportunity to criticise his economic understanding.

    Comment by Benno — October 15, 2007 @ 12:57 pm

  6. Benno, I’m not making a comment on Wayne Swan. While he’s the ALP treasury spokesman I don’t have a good idea what he stand for, but I do know what Tanner and Emmerson stand for, and I generally approve.
    I’ll be interested to see where our trolls head now that the government is promising tax cuts and being criticised because these are supposed to be inflationary, which of course means higher interest rates. Will they still say that governments have no effect on interest rates?

    Comment by Graham — October 15, 2007 @ 10:15 pm

  7. > A Labor troll
    No. I made substantive comments on your post which haven’t responded to. Free speech is a right, but it carries a responsibility with it – to defend your opinion or withdraw it. You haven’t defended, can I assume you withdraw it?
    >how droll.
    Ahh, patronization, the absolute last refuge of the unthinking.
    > put some figures up
    Why? My argument is qualitative. Why does it need figures.
    > put your real name to the post!
    As opposed to what? My real name? You have that, you run your site, read your logs.
    Look all BS aside, I expected better of you – an honest argument would be more interesting. If you can’t defend your own statements don’t resort to meaningless insults.

    Comment by JM — October 16, 2007 @ 2:25 am

  8. Dear JM,
    You were asked to put up some facts and the best you can do is say you don’t have to because your comments were “qualitative”. So if there are no facts underlying your post, then there is nothing that can be argued about.
    One would have thought your whole contention that governments have no effect on interest rates was blown out the window by all the economists worrying today about whether the federal government’s tax cuts will be inflationary or not.
    And as a measure of your transparency I might point out that a set of initials does not constitute a name, and that’s all I have access to, apart from your hotmail address.
    You’re just trying to waste time, and that’s what trolls do. But I’m sure readers can work out what’s going on, so it’s not much of a tactic.

    Comment by Graham Young — October 16, 2007 @ 9:53 am

  9. I remember and was affected by almost all the changes in interest rates from 1975 when we purchased our first house in Brisbane at Kelvin Grove until our last house when we last left the property ownership scene in 1999 (mostly because local, State and Federal governments could not understand the benefits of, much less approve, a highly advanced, sustainable, eco-village development, causing it to fall over with a few of us losing out).
    I remember the awful interest rates on housing loans, even as a then bank employee, and on credit cards. When we came to sell our first house after making significant and aesthetically sympathetic renovations and improvements to our workers cottage, interest rates were so high, it forced buyers out of the market, and we accepted a low price as a consequence.
    I remain completely unconvinced that Labor has the ability to manage the economy. I don’t believe that Swan has the ability or the credentials. I do believe, and it’s borne out by the interest rates analysis that Labor is less interested in interest rates, and more in expensive collective social planning and programs.
    I’m unsure about Emmerson. He spruiks theory, and ideology and some of it sounds actually sensible but has hardly the opportunity to put either into practice. He or Tanner would have made better choices as Shadow Treasurer, but perhaps old antipathies or allegiances led to Swan’s appointment.
    I think that Labor Leader Rudd has announced so many inquiries and Commissions (a Labor tactic to divert public attention away from the workings and decisions of Labor in Government, despite Commissions and Inquiries, even so called “independent” bodies stacked with Labor friends and allies) because he does not trust or have faith in the experience, knowledge or abilities of his own front bench.
    It is far better for people to have their own earned money in their hands to spend as they see fit, rather than in government hands. Governments have far too much cash at their disposal, and in the hands of Labor, as can be seen in Queensland under Labor, money is spent in the wrong areas, especially in burgeoning public services employees. This has an effect on inflationary pressures and interest rates.
    With Mr Rudd and family reported to be prepared to pay $5m for a holiday house, he has no idea of issues of housing affordability, interest rates or other cost pressures.

    Comment by Derek Sheppard — October 16, 2007 @ 10:04 am

  10. Governments control interest rates?
    Those who believe that ought to have seen Jim Lehrer’s of News hour, SBS, interviewing Alan Greenspan, former Chairman of the US Federal Reserve Board. Greenspan who said that in 2004 they had tried to raise interest rates and the market overrode them, forcing rates even lower.
    That is from the man who was in control of the world’s largest economy!
    And Howard and Costello control Australian interest rates?
    Dream on.

    Comment by peter hindrup — October 16, 2007 @ 10:14 am

  11. I don’t really understand the arguments about the economy.
    All I know is that there are people with disabilities living on under $300.00 a week, paying at least a quarter of their income on rent – IF they are lucky enough to live in a office of housing unit, paying $120.00 for a set of wheelchair tyres every three to six months, waiting up to FIVE hours!!! for a wheelchair taxi – IF they can afford one, even at 1/2 price,
    not included in the community SOCIALLY because we can’t into our neighbours houses AND we need encourangement to talk to our neighbours, etc. etc.
    Me, I’m lucky; I have a husband who earns a little money from home while looking after me. I work too – but it’s unpaid work in the community.
    It’s single women with disabilites who are most disadvantaged – we are also 3 times more likely to be physically molested and raped – often by our family “friends”. That’s why we prefer to live isolated, lonely lives sometimes.
    We would like a two-tierd pension system.
    Surely with the average wage now on about $850.00 a week, and the economy supposedly running so well, this is not too much to ask.

    Comment by Ingrid Hindell — October 21, 2007 @ 1:45 pm

  12. You dimwits that swallow everything the media and people like howard tell you are pathetic!
    Can anybody exlain to me how “EXACTLY” John Howard has kept interest rates low. The surplas? I think not. Thats just our money that should have been spemt on the supply side to reduce pressures on interest rates. Anything else???
    Dont be a sheep.If you dont know economics dont pretend that you do and dont take a politicians word for it ,especially Howard the biggest liar this country has ever seen. Trust me he would sell his own mother for a win.

    Comment by Peter — October 25, 2007 @ 12:31 pm

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