Joe Hockey’s shortcomings on economic policy were on show again last week. Why do the media give the Shadow Treasurer such an easy run on economic issues, asks Ian McAuley.
It has been an article of faith among conservative economists that monetary policy is to be preferred over fiscal policy. They don’t want governments engaged in direct decisions about spending. Rather, governments should take a back seat and let the “invisible hand” of the financial markets do the job. The only influence the government should exercise is through manipulating interest rates. Low interest rates stimulate business and domestic borrowing, and allow mortgagees to spend more, while high interest rates have a dampening effect.
The shortcoming of that theory is that while it is suitable for an Economics 1 exam question, it doesn’t work in the more complex real world. It has long been known that decision-makers are very slow to react to changes in interest rates. It takes time for businesses to make plans for capital expansions, to get approvals and to arrange finance. Similarly, to take a domestic example, there are long time lags for households contemplating renovations.
Read Ian’s full article in New Matilda here
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