Ross Greenwood speaks to Australian National University Professor Warwick Mckibbin after the International Monetary Fund has downgraded Australia’s economic growth forecasts amid slowing global growth.
Ross Greenwood: I want to take you now to the economy and indeed these forecasts from overnight. As I’d said, the International Monetary Fund downgrading global growth but also downgrading as Australia’s forecast for economic growth even faster. As it says, Australia’s growth over the coming year set to be around 1.7%. I previously said 2.1% and this is also in the era of these super low interest rates.
Interest rates that many of us could never have ever dreamed of occurring and plus then central banks and governments try to work out what to do. How do you stimulate the economy? How do you actually build growth and is it a case as you cut interest rates that you start to deteriorate the confidence even more? One man who is really instructive and this sort of stuff is the professor and director of the ANU Centre for Applied Macroeconomic Analysis in the Crawford School of Public Policy that’s at the ANU, and that is Warwick McKibbin.
Now, Warwick McKibbin has been for almost 10 years a director of the Reserve Bank and is considered internationally one of the foremost economic thinkers, certainly in this country but also around the world. Now it’s always great to get me on the program and he’s with me right now. Warwick many thanks for your time.
Interview with: Warwick Kibbin, Professor, ANU
Warwick Kibbin: That was a great introduction. Thanks, Ross.
Ross Greenwood: All right, so I just want to kick it off and just start with this. You’ve written a piece talking about these uber low interest rates and suggesting that if ultimately the Reserve Bank is forced into the unorthodox methods of trying to stimulate the economy such as potentially quantitative easing or indeed negative interest rates you warned it could undermine finance and capitalism. Just explain why you believe it could undermine the system.
Warwick Kibbin: Well, the interest rates from the head of the department of home economy enables people to allocate capital to investment and people to save, but it also gives you an indication of what assets might be risky and what assets might not be risky. Once you have central banks hauling all of the assets and changing the prices just purely by their own mandate, it gets rid of the capacity for people to understand what is risky. Once you get to quantitative easing, which we’re seeing in Europe and Japan, a lot of companies that should have gone out of business, stay in business. You actually cause growth to slow. You cause firms not to buy, but to linger on and absorb resources in the economy. That actually creates a lot more long term problems than it solves.
Ross Greenwood: Do you think that the alternative for central banks around the world, including our own Reserve Bank, was to keep interest rates higher and to allow, shall I say, some businesses to go broke, to allow some people who are] and really over their heads to flounder? Really in many ways, and I remember living through a recession, it was through almost like the cleansing of the economic system at that time that the green shoots sprouted for the next era of economic growth in Australia. It was one of those points where yes, it was very sad and yes, it was very tough, but at the end of the day it was almost necessary to clean out the system.
Warwick Kibbin: That’s half the story. That’s after you have the recession. The questions is where and the current problem we face is very weak investment globally and trade stopping in its tracks. Now, the investment and trade effects of Donald Trump’s economic policies are pretty much the key driver here. People don’t know what the US will be doing in terms of trade. People are changing their trading patterns. They’re reducing their trade. They are being levied tariffs as well as thinking they might be levied higher tariffs. People are not investing anywhere in the world where investment is very weak.
You’ve got weak investment, you’ve got trade falling. That’s why Australia is more impacted in the slowdown than most of the world because we rely a lot on trade, and particularly try to have minerals and other exports. The problem is that the whole world is gripped by this uncertainty and by trade. Now, we can’t do anything about the trade issue except to argue for open markets and to convince the US president to change the policy. What we can do is to increase power policy clarity in Australia so that we can get Australian companies to invest. The reason we are not investing is right across all the policies that the government has to focus on.
We don’t have clarity on energy policy, on climate policy, on all these areas where there’s a lot of potential investment. The people are sitting back. Firms are sitting back waiting for signals on whether or not a certain policy will be implemented and also whether or not it would be bipartisan. Part of the problem here is the opposition always opposes. We need some core national projects, bipartisan support so that the government doesn’t have to worry about negotiating with crossbenchers so that can implement a policy with industry that will last for a very long period of time and therefore investment will flow.
Ross Greenwood: It’s one of those things we’ve talked about here often, Warwick, because I’ve often said there should be, as you pointed out there, a core set of principles on which both political parties agree to give certainty inside the economy. Rather than nitpicking at the sides, once you’ve got those core set of policies in place, like here is a set of infrastructure priorities, here is an energy policy that will last 20 years, here is a superannuation policy that the people can have certainty about, here’s a set of tax policies that we all fundamentally agree on. In other words, we’d like people to be taxed less. We would like to have progressive taxes. All of these types of things. It just again means it’s short political cycles plus the era of opposition, I’d call it, it’s been one of those things that is in many ways held Australia back.
Warwick Kibbin: I agree completely, Ross, that’s exactly my opinion. I think the key issue here is for the government to sit down with the opposition and work out what are the areas in which there is commonality of interest and commonality of views. I think there still needs to be an energy policy that’s more than just threatening industry. There needs to be a climate policy, which is more than sitting back and waiting to see what the world is doing. In almost every area you can see that the government is attacking business rather than working with the opposition and working with business to get investment to flow.
Ross Greenwood: Then you come to another aspect of this and that is the back and forwards between the Central Bank, the Reserve Bank and the government. The government, and even today again, has said, “No, we’re sticking with the course. We’re actually not going to bring tax cuts forward. We are determined to have a surplus.” You get a sense that that’s also for political reasons. It’s why they were voted in a game because they seemed to be a safe pair of hands with the economy. Then you’ve got the Central Bank which says, “Hang on, we’ve got interest rates already at three quarters of a percent. We’re probably heading to half a percent. There’s not too much more we can do. You’ve got to step up to the plate and start to do some more to stimulate the economy.” Where does that argument ultimately lie?
Warwick Kibbin: Again, I agree that the problem is if you look at what does the interest rate policy below 2% or 1.5% do to the economy, my view and the evidence is mounting, when you cut interest rates to such low levels, you undermine consumer confidence so consumers don’t spend. You undermine investment confidence so people don’t invest. You can see that in the consumer confidence and business confidence indicators. Actually having the opposite effect at some point, what do you end up doing with lowering interest rates is increasing asset prices.
Price of housing, share market evaluations, anything that’s nailed down with the supply very quickly. The price will go up. Then you create all sorts of problems in the economy because you’re not pricing the assets appropriately, even the expected real return that they should generate over a long future. The problem is I think if you keep cutting interest rates below a certain level, it’s counterproductive. I think that’s clear in all the countries that have gone down this road. The final point I would stress is that anyone who’s gone into quantitative easing policy have done so in a crisis.
We’re not in a crisis. We are in a gradually slowing global economy. We’re slowing ourselves. We need policy reform. We don’t need this last minute, really serious surgery on a key part of the economy when in fact we can fix it with less dramatic means.
Ross Greenwood: Of course it is uncharted borders for a country such as Australia to even consider these policies and then to have these ultra-low interest rates because one of the fundamental problems, as I said is how on earth do you ever raise those interest rates without doing enormous harm to not only households, but also to the business sector?
Warwick Kibbin: Again, look at the history. If you look at what the Fed did in 2001 to 2004 they put interest rates down to 1%. It created an enormous housing boom. Then they started raising interest rates from 2004 to 2007. The entire system started to break down because they realized there was a lot of investments in assets which were completely mispriced. The risk was much higher than the return. When they then hit the point where the market started to fall to pieces, they tried to cut interest rates, but instead doing that with the global financial crisis. It was history here in the US and this time it’s even bigger because we got not 1% interest rates, but we’re talking about going well towards zero, which I think is really dangerous territory.
Ross Greenwood: Tell you what, always great to have you in the program, professor Warwick McKibbin in the country. It’s rare these days because he’s studying and doing a lot of work overseas, the director of the ANU Centre for Applied Macroeconomic Analysis in the Crawford School of Public Policy. Warwick, really look forward to having a chat in the future again. Many thanks for your time.
Warwick Kibbin: Thanks for having me on the show, Ross. I always enjoy it.
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