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Time for Rudd to give a full-throated defence of Keynesian stimulus Time for Rudd to give a full-throated defence of Keynesian stimulus
(25 days later)
With less than two weeks to go in the election campaign, it seems clear that Labor needs to do something out of the ordinary to win. In particular, if the switch to Kevin Rudd is to do more than erase some of the negativity surrounding his predecessor, he needs to offer more than the superficial appeal on show in shopping mall visits and the like. Rather, he needs to replace soundbites with a full-throated defences of Labor’s economic management in government.With less than two weeks to go in the election campaign, it seems clear that Labor needs to do something out of the ordinary to win. In particular, if the switch to Kevin Rudd is to do more than erase some of the negativity surrounding his predecessor, he needs to offer more than the superficial appeal on show in shopping mall visits and the like. Rather, he needs to replace soundbites with a full-throated defences of Labor’s economic management in government.
There were some glimpses of this in the most recent debate. For the most part, however, Labor has run the kind of dull and cautious campaign that would be appropriate for a candidate well ahead in the polls. The positive part of the campaign has consisted of daily announcements of the kind that might pick up a few votes with target groups, but feed the cynicism of voters in general. The net effect is little more than spinning wheels.There were some glimpses of this in the most recent debate. For the most part, however, Labor has run the kind of dull and cautious campaign that would be appropriate for a candidate well ahead in the polls. The positive part of the campaign has consisted of daily announcements of the kind that might pick up a few votes with target groups, but feed the cynicism of voters in general. The net effect is little more than spinning wheels.
The negative part of the campaign, focused on the expenditure cuts likely under an Abbott government, has had some effect, but has been crippled by Labor’s willingness to concede the economic debate as a whole to Abbott and his party. As long as the Liberals are seen as superior economic managers, budget cuts can be presented as a matter of stern economic necessity.The negative part of the campaign, focused on the expenditure cuts likely under an Abbott government, has had some effect, but has been crippled by Labor’s willingness to concede the economic debate as a whole to Abbott and his party. As long as the Liberals are seen as superior economic managers, budget cuts can be presented as a matter of stern economic necessity.
The core of Abbott’s position is the claim that the crucial test of good policy is the maintenance of consistent small surpluses. Since the Howard government achieved this, and Labor has not, acceptance of this claim implies the superiority of Abbott's party. Labor’s problem is that, for most of the past three years, the government’s fiscal policy and rhetoric was dominated by the failed attempt to return to surplus by 2012-13. The core of Abbott’s position is the claim that the crucial test of good policy is the maintenance of consistent small surpluses. Since the Howard government achieved this, and Labor has not, acceptance of this claim implies the superiority of Abbott's party. Labor’s problem is that, for most of the past three years, the government’s fiscal policy and rhetoric was dominated by the failed attempt to return to surplus by 2012-13. 
But Abbott’s policy prescription ignores the lessons of the global financial crisis (GFC). The austerity policies he advocates have led to disaster everywhere they have been applied. The outcomes have been worst in Europe and the UK. Even in the US, where stimulus was quickly replaced by budget cuts and sequestration, median household incomes remain below the 2007 level.But Abbott’s policy prescription ignores the lessons of the global financial crisis (GFC). The austerity policies he advocates have led to disaster everywhere they have been applied. The outcomes have been worst in Europe and the UK. Even in the US, where stimulus was quickly replaced by budget cuts and sequestration, median household incomes remain below the 2007 level.
The need for fiscal stimulus as a response to recession is now widely accepted, even by guardians of market orthodoxy like the International Monetary Fund. Australia’s handling of the GFC has been endorsed by the IMF and the OECD, not to mention the majority of Australian economists.The need for fiscal stimulus as a response to recession is now widely accepted, even by guardians of market orthodoxy like the International Monetary Fund. Australia’s handling of the GFC has been endorsed by the IMF and the OECD, not to mention the majority of Australian economists.
Moreoever, now that the need for active fiscal policy is accepted, analysis of the Howard government’s record has become much less favourable. The problem is that deficits during slumps need to be offset by more substantial surpluses during good times. By contrast, Howard pursued a political strategy of running down surpluses in the lead up to elections, with the aim of denying the opposition a "war chest" to fund promises. The IMF has correctly judged the Howard government’s last term in office as period of fiscal "profligacy" almost unique in Australia’s history. Moreoever, now that the need for active fiscal policy is accepted, analysis of the Howard government’s record has become much less favourable. The problem is that deficits during slumps need to be offset by more substantial surpluses during good times. By contrast, Howard pursued a political strategy of running down surpluses in the lead up to elections, with the aim of denying the opposition a "war chest" to fund promises. The IMF has correctly judged the Howard government’s last term in office as period of fiscal "profligacy" almost unique in Australia’s history. 
Some of the adverse effects of a likely Liberal government may be seen in Queensland. The combination of public sector cuts and a slowdown in the mining sector have produced rising unemployment and a declining ratio of employment to population. Tax cuts and other handouts to favoured groups have done nothing to offset this.Some of the adverse effects of a likely Liberal government may be seen in Queensland. The combination of public sector cuts and a slowdown in the mining sector have produced rising unemployment and a declining ratio of employment to population. Tax cuts and other handouts to favoured groups have done nothing to offset this.
The real danger will arise if the global economy enters another crisis, perhaps driven by a financial panic in emerging markets. Abbott’s rhetorical commitment to surplus, and his fear campaign about public debt, will make it very difficult for him to undertake the kind of fiscal stimulus that will be necessary. In reality, as the IMF and others have noted, Australia’s strong public finances give us plenty of fiscal space for successful macroeconomic management.The real danger will arise if the global economy enters another crisis, perhaps driven by a financial panic in emerging markets. Abbott’s rhetorical commitment to surplus, and his fear campaign about public debt, will make it very difficult for him to undertake the kind of fiscal stimulus that will be necessary. In reality, as the IMF and others have noted, Australia’s strong public finances give us plenty of fiscal space for successful macroeconomic management.
Rudd is uniquely positioned to deliver this message. Along with treasury secretary Ken Henry, he was largely responsible for the decision to “Go early, go hard and go households” with fiscal stimulus in 2008 and 2009, and with the original plan to wind back the stimulus gradually over time. By the time this decision turned into an obsessive and futile pursuit of surplus at any cost, he was on the backbench. And he has already articulated the need for a new direction in policy as the mining boom fades and the international environment becomes more threatening.Rudd is uniquely positioned to deliver this message. Along with treasury secretary Ken Henry, he was largely responsible for the decision to “Go early, go hard and go households” with fiscal stimulus in 2008 and 2009, and with the original plan to wind back the stimulus gradually over time. By the time this decision turned into an obsessive and futile pursuit of surplus at any cost, he was on the backbench. And he has already articulated the need for a new direction in policy as the mining boom fades and the international environment becomes more threatening.
Rudd’s popularity is enough to get him a hearing from the electorate which had long stopped listening to Julia Gillard. But if all they hear are slightly longer versions of Abbott’s three-word slogans combined with scare campaigns, they aren’t likely to give Labor another chance. What is needed is a real explanation of the issues facing Australia, and why Labor has the best policy to deal with those issues. There is still time to make this election a serious contest of ideas, but that time is running out fast. Rudd’s popularity is enough to get him a hearing from the electorate which had long stopped listening to Julia Gillard. But if all they hear are slightly longer versions of Abbott’s three-word slogans combined with scare campaigns, they aren’t likely to give Labor another chance. What is needed is a real explanation of the issues facing Australia, and why Labor has the best policy to deal with those issues. There is still time to make this election a serious contest of ideas, but that time is running out fast. 
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