Why this is a bad time to win an election

Kevin Rudd came to power for the first time on December 3rd 2007, just a few months after the global financial crisis commenced, and some time before its severity was truly appreciated by the political classes of any nation. On September 7, he lost office for the last time.

The first election he won was a bad one to win, not because he was blamed for the calamity of the GFC itself of course, but because his entire term was dominated by reacting to it.

That reaction had parts that could be rubbished (everything from the Liberal Party’s favourite farce of the Pink Batts program to my pet hate, the First Home Vendors Boost) but a simple comparison of Australia’s economic performance to that of the rest of the OECD over the last six years shows that his reaction worked – see Figure 1, which shows unemployment in Australia, the US and Ireland. Unemployment never exceeded six per cent here, and growth turned negative for only one quarter. The US, on the other hand, had its longest post-war recession ever, and Europe’s obsession with austerity turned its downturn into a genuine second Great Depression.

Figure 1: Australia handled the GFC much better than the US or Europe

Graph for Why this is a bad time to win an election

Of course, though Rudd had bad luck to take over when this crisis was just beginning, he also had good luck on his side as well – not least that our biggest trading partner undertook an even bigger government stimulus in response to the crisis that gave us the best terms of trade in our history, and our biggest export boom.

So could this election be a good one to lose? Not for Rudd, of course. Surely there’s no way he will emulate “Lazarus with a triple by-pass” and make a comeback from this electoral defeat. But the ALP will hand over the reins of government to the Liberals at much the time that luck is no longer playing on the Australian side. If so, this will be unusual, since normally timing has played into the Liberals' hands rather than Labor’s.

Gough Whitlam’s victory over William McMahon in December 1972 took place at the beginning of one of the last booms in Australia’s generally booming Post-WWII economy. It will be hard for readers under 60 years old to appreciate this, but the average unemployment rate in Australia from 1950 till 1972 was below two per cent. However, shortly after Whitlam took power, the boom gave way to a huge bust.

The deterioration of the economy then was blamed on the Whitlam government’s policies, but the evidence is clear that he simply had the misfortune to come to power just when the long post-war boom was unravelling. As Figure 2 illustrates, however much Whitlam might have been ridiculed locally for the Khemlani affair and the like, the collapse in economic growth and the rise in unemployment during his term was a global phenomenon. His problem wasn’t bad economic management, but simply bad timing.

Figure 2: The downturn blamed on Whitlam was a global phenomenon

Graph for Why this is a bad time to win an election

Malcolm Fraser, on the other hand, was the one post-war example of a Liberal leader taking over from a Labor one at an inopportune time. The Liberals won that election on the basis that they were better economic managers than Labor – “just look at the evidence!” – but history shows that it was simply bad timing for Labor that was followed, on the surface at least, by bad policy by Fraser’s Liberals. Unemployment continued to get worse under Fraser (with Howard as his Treasurer), despite his very different approach to economic policy to Whitlam (and Jim Cairns), and this bad performance on unemployment was the opposite of what happening in the US at the time.

Hawke, on the other hand, took over from Fraser at almost the perfect time internationally. He and his “world’s greatest treasurer” Paul Keating could bask in the success of their economic policies, but again the Australian performance at the time largely mirrored what was happening in the US when Ronald Reagan was in the White House, and followed a very different political and economic agenda to Hawke and Keating (see figure 3). It was the politician’s timing that mattered once again, far more so than the politician’s policies.

Figure 3

Graph for Why this is a bad time to win an election

Ditto John Howard when he downed Paul Keating. By then, Australia had recovered from “the recession we had to have”, and the economy was improving in both Australia and the US, despite the fact that one country now had a conservative government and the other had Bill Clinton’s Democrats in power (see figure 4).

Figure 4

Graph for Why this is a bad time to win an election

Then along comes Rudd, and though yet again timing far more than his policies dictated the economic circumstances of the day, the undeniable fact is that Australia’s economic performance diverged from that of the rest of the world (see figure 5). Rudd’s policies – or rather those proposed by his Treasury Secretary Ken Henry of “Go early, go hard, go households” that Rudd adopted with gusto – worked.

Figure 5

Graph for Why this is a bad time to win an election

So if – with the sole exception of Rudd – it wasn’t the policies of politicians that determined the fates of their economies, what was it?

It was their timing relative to the global debt bubble that has determined the fate of Western economies ever since the early 1970s (see figure 6, which shows the rises and falls in the rate of growth of private debt in Australia and the US since 1970).

Whitlam had the great misfortune to come to power six months before the first popping of the bubble in mid-1973. Rudd was even unluckier; his first term began literally when the global recession commenced as the debt bubble had its biggest pop in history.

Fraser was, in some ways, the unluckiest of all: he came to power after the 1973 bursting of the debt bubble, but whereas the US then had another debt-driven revival, Australia didn’t. So the economy languished under him, not because of his policies (which were largely irrelevant), but because debt growth took a lot longer to rise again in Australia than it did in America after the 1973 crisis.

Hawke and Howard, on the other hand, had the fortune to come to power as the debt engine started revving again. 

Figure 6: Riding the waves of the private debt bubble

Graph for Why this is a bad time to win an election

So what could the future hold for Prime Minister Abbott? Here I have a hunch that he’ll end up suffering a similar fate, not to the previous Liberal leader he admires – John Howard – but to one I expect he detests – Malcolm Fraser.

Fraser, as noted, had the good fortune to take over from Whitlam after the bursting of the debt bubble was largely over, but the bad fortune that the revival in Australia's bubble was considerably more anaemic than America’s. Abbott could well find himself experiencing a similar double-edged sword of fate. He will take over when the deleveraging that caused the GFC has come to a temporary halt, and demand will be rising in the US (and maybe even in Europe, from the depths of its self-imposed Depression) thanks to rising private debt (see figure 7). But this rise could peter out even more quickly than it did for Fraser, leading to anaemic economic performance that will be blamed on the politician rather than the times.

Figure 7

Graph for Why this is a bad time to win an election

Australia also faces the headwinds of a possible bursting debt bubble in China, something that is also beyond Abbott’s control. Our new prime minister may find that he lives in interesting times, rather than favourable ones.

For a different take on the economic circumstances our new government faces, read today's article from Stephen Koukoulas: Abbott stumbles into a surplus of luck.

Steve Keen is author of Debunking Economics and the blog Debtwatch and is developer of the Minsky software program.

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Thank goodness for some global and historical context at last, instead of the incessant vomit of party-political propaganda from the tabloids that has fed prejudices for the past five years.

It's Timing the market, that matters........
More Debt will fix Debt........
And more Deregulation will fix the troubles caused by...................Ummmm.......Deregulation.

Welcome to Earth!!

shouldnt the business cycle be more aptly named the credit cycle?

Thanks Steve.

This is precisely why I wanted Abbott to win the election. After the reckless spending and stupid policies of the Howard era with which Tony partook I want to see how the party that got us into this mess will get us out.......

How do you tax an overly indebted population to fix an ever decreasing tax base.......and ever increasing expenditure. Wonder how long it will take for the penny to drop.

The penny wont drop.
Davo*, who drives a falcodore in Castle Hill has no idea Steve Keen even exists and has no chance of contemplating the global effects over 50 years of debt (usually private debt too) undertakings at different times.
I would love to see all their faces when someone explains nice and slowly to them that house prices have outstripped incomes over the past 10 years but to do that the next person to come along and buy his house has to take on even more debt. It can't last forever.

*probably his real name

Franky.... most people i see in my area now drive Audis and BMW's and im not in the eastern suburbs.

Well around here....... they drive Prados and Territories...! And they're in for more than a housing/debt bubble shock, they are also in for an OIL SHOCK.... like thones Steve fails to mention in the 70's and 80's. The difference with THIS oil shock is that it won't be caused by politics (OPEC oil embargo) but by geology, in the form of PEAK OIL....

Peak Oil is already rearing its ugly head in Egypt and Syria (http://www.financialsense.com/contributors/gail-tverberg/oil-gas-limits-...) and Australia is bang on target to run out of oil by ~2020 (http://damnthematrix.wordpress.com/2013/04/04/australia-still-on-target-...)

Worse........ the mad monk doesn't even know what Peak Oil is.......


I'm going to REALLY enjoy watching the mad monk screw up and get the blame for EVERYTHING that is about to go pear shaped.....

Err Steve, but Kouk reckons we are now in a world economic upswing??? Geez, I wish you economists would make up your minds, it gets pretty confusing for us plebs! :o)

Not all economists are created equal. Pay attention.

Question: What's the difference between a business economist and a real economist?

Business economists think that large fluctuations herald a trend. Real economists look at the long term (secular) behaviour. The first category recognises the noise but not the signal.

It's the bank's that have created over $1.5 Trillion of Household/Mortgage debt in this country --an outrageous economic crisis all on it's own that would never have happened under the country's banking system in the sixties and the seventies, AND IT'S THE BANKS THAT NEED TO BE HELD ACCOUNTABLE FOR THEIR ACTION'S.
As former BHP CEO Chief Don Argus said only 3 month's ago,if the level of debt in this country particularly Household/Mortgage debt isn't reigned in ASAP the country could face very low level's of growth for the next 30 years..
Secondly we need an economy that is no longer so dependant on the Resources sector of Australia for an income.A strongly diversified economy willl always be more resilient in the face of global recession's and downturn's than an economy that relies so heavily on one sector of it's economy to survive.

And Don would know "former CEO of National Australia Bank (1991-1999)"

Perhaps in addition to your last line, there could be a knock on effect of a debt bubble in China. Our foreign ownership laws for real estate have now put the Australian property market increasingly at the mercy of the Chinese economy.

Thanks Doctor, an interesting perspective, not the total picture but worth considering.

I Remember Whitlam, with great fondness, he stopped me from going to Vietnam. I also remember Jim Cairns stopping mining development, because it required US money.

As an economist, there is no requirement for you to be geo politically correct, but lets try and say it like it is. Whitlam and Cairns drove US investment out of Australia. It is easy to see why the Australian economy deteriorated.

However, I take your point that Australia, is an also ran because we rely on foreign capital to fund deficits. The theory is when you are a debtor country, then you just follow the international cycles.

During the Howard era Australia, had the chance to go from a borrower to a lender. Yet that paradigm is not in the Australian psyche, we would rather allow governments to pay our bills.

Unfortunately, that's why we are only a small shareholder, in our own country, it's mothers aprin strings. We just haven't learned to live like adults.

The economic paradigm is almost superflous, when you always borrow from other countries.

To use economic parlance, politicians are circumstance 'takers', not circumstance 'makers' (price takers vs. price makers)...

In spite of the relentless focus by a content starved media, on the political circus in Canberra, politicians are peripheral to, not at the centre of, life.

Generally, Australians are disengaged with politics.

Not only is it horribly corrupted, and bereft of conviction, as it turns out, it is largely of no consequence...


Wet, dry, small L, Liberal, conservative, progressive, left, right, green, right, or wrong.
Life carries on.

Well, Keyser Effendi, don't you believe this impotence argument.

While politicians cannot make a silk purse out of a sow's ear, they can certainly do the reverse ...

All that Keen's analaysis shows is that the US is the engine that pulls along the world regardless of their policies.

But now the engine is running out of puff and recovery- if there is any at all- will be microscopic
and short lived.


After reading Keen, Kouk, Burgess, Gawenda, Keane for the past months, I think it is time for BS to appoint some truly impartial and unbiased Spectators. I am somewhat disturbed that Steve Keen could airbrush from economic history the fact that Rudd inherited a $20 billion surplus to help him manage the GFC and left this country in $300 billion debt; and BS cannot have it both ways with the contributions of their 2 main economics experts - Kouk says we are on the cusp, Keen says we are peering over the cliff; make a call please BS; it's one or the other !

Peter Economists try to predict the future by models based on history.

A plea for certainty in an uncertain world? for some truly impartial, unbiased and clairvoyant gurus? If there were any, they would surely be out there somewhere outperforming Warren Buffet instead of merely writing for BS. What BS offers (and that includes the comments) is generally a most entertaining (and occasionally informative) read.

$20 billion was handy, but not the key factor. Firstly, it was achieved not through careful budgeting and managing incomes and outcomes, but by selling off every asset, at fire sale values. Hence the independent IMF rating of the Howard government as being one of the most wasteful in our history. Also, given the neglect of infrastructure (unless in a marginal seat), much had to be spent just to get things back to an acceptable level - if proper funding and maintenance had been achieved in the previous 11 years, our immediate costs wouldn't have been so high.

Other countries with healthy surplus and a heavy reliance on China (ie, identical position to Australia) still fell into recession during the GFC and suffered high unemployment.

Australia didn't. The discernible difference between Australia and others? The others went the austerity approach, (as the Coalition proposed) whilst Australia went alone and went the stimulus approach.
Both now have debts - as the recessions caused by austerity led to high debt as incomes dried up. Australia has debt, but its a lot lower than most, we avoided recession, and our unemployment rate stayed low. People go on about the $300 billion debt, whilst still employed and living comfortably, (we are the wealthiest we have ever been with our highest levels of disposable income) without considering the alternative offered by austerity - higher debt and high unemployment and recession.

In essence, we sit in our McMansions, watching our 55" LCD's, see news about the jobless in Europe or the US and the issues they face, before bemoaning about how hard we have it. We cry that our government should have acted the same way and gone austerity and that Rudd has a lot to answer for - he clearly needs to go for his economic vandalism. Before jumping online to plan our next trip to Phuket.


So how did Labor propose to repay the #300 billion debt, Brent ? That's right, there were booted out by the Oz public because of their poor financial stewardship, so now they don't have to worry about it anymore; the Coalition will have to manage repayment, plus service the $12 billion + annual interest bill. Deja vue, didn't the same thing also happen when Labor was previously in power ?
ps. I don't call pink batts, school halls, flat screen tv's, $900 cheques to deceased taxpayers etc fixing up infrastructure; when we did experience a natural disaster, Labor had pawned all of the jewels, and embarrassingly had to raise a flood levy to pay for disaster repairs. So please don't continue to talk rubbish about how wonderful Labor did over the past 6 years, the great majority of Australians cast their judgement on Saturday, and it was an indictment on Labor's woeful money management.

Brent we haven't had the GFC yet because we haven't had the residential property crash yet.

Just be patient...it will come.

not yet if we still have foreign investors, extremely low interest rates and now superfunds going into it....how long can it go for? is there any more furniture we can throw into the fire before we start stripping the house?

Kouk is mistaking the noise for the signal. Look at the long term trends, not short-term fluctuations.

Kouk is mistaking the noise for the signal. Look at the long term trends, not short-term fluctuations.

Keyser is on the money: "The political circus..sic..as it turns out, it is largely of no consequence". Now that's the truth! (just ask your friendly bank manager)

David states "The engine is running out of puff"- Minsky has had his day, now it's time to pay the rent.

Lets give free fares to all those greens who wish to return to Greenland. The (Palmer) Titanic has plenty of room.

Hmmm almost all of Steven Keen's predictions for the Australian economy since the start of the Financial Crises HAVE NOT HAPPENED... When will the doomsayers just move on...

Its like watching all the conspiracy theorist videos on YouTube... Entertaining, but not reality...

The Ox is slow............but the earth, is patient.
Time will show all things.

Colin, you like you meat well cooked, don't you?

steve did predict the GFC though ... and his explanation was pretty much what happened. but the fundamental was the mechanism in which credit is created in the banking system...not sure what steve's position on derivatives are, but i suspect the two go hand in hand in this dance.

Your statement ref Whitlam; "His problem wasn’t bad economic management, but simply bad timing" is a corker. I was there. There was no economic management. Your point gets lost in such overstatements.

During the Howard period Australia's foreign obligations rose AUD30bn per year. In the Rudd/Gillard period they rose at a reduced rate of AUD18bn per year.

So far Australia has avoided contraction during the deceleration of foreign obligations. Hard to see that continuing but may hang in there for the first Abbott term if infrastructure programs are in place.

I disagree. Although obviously globally events and socio-economic trends can develop outside of policy I find it stunning to suggest that Whitlam-Howard's policies had hardly any effect on the economy. Hawke/Keating/Howard made our economy more productive and flexible. Rudd just consumed capital to increase consumption. Hardly an achievement!

I have to say that it is little wonder people (those who can peer beyond the tabloid pictures) ar so disinterested in politics. My 19 year old niece wanted to know why she HAD to vote, because she didn't know who the prime minister was, let alone any of the hordes that hold sway in our government jungle. Just give me an iPhone and an iPod so I can go on my merry way!!!!!

The reason Australia steered clear of the worst of the GFC was because of good government policy. Getting money out in the economy saved jobs and kept things rolling along. Perhaps we can do away with having a govt and replace it with a fixed set of rules then just let the worlds debt levels dictate our lives...are you for real.

EXACTLY...... money is for spending, not hoarding. It's a means of trading, not a unit of wealth....

I look at all those poor people around me..... all they have is money!

Steve you lost me when you suggested that whitlam just had bad timing.I remember the serial disasters ,scandals,incompetence and waste of the Whitlam government well.It set new low standards of public behaviour by elected ministers.Whitlam got a bit of momentary sympathy when the Governor General revoked his commission but several weeks later on election day the people of Australia voted against his Labor Party in huge numbers.Two years later at the next election their memories were still working and they voted against Whitlam in almost identical numbers.How ever Whitlam was a much better speaker than Rudd and had the ability to tell a good joke.Pity his government was so bad.

What Keen is saying and what is correct is that our government only plays a small part in what actually happens economically. If no one wants our minerals it won't matter who is in, the only difference would be degrees of how bad it got.

It is the same now as it was in the past, human nature and nature run to cycles, you either get in line or get ut, if not it will throw you out, its a matter of reading the times.

I am amazed that this article ever made it as a serious economic assessment. Unless I've misunderstood it, cycles are all (or mostly) what matter, and mere governments have little effect. I beg to differ.

Firstly, I am not an opponent of the theory of cyclic moves in markets and sentiment. Yes, they do happen, and I do agree that to some extent they are outside the control of governments. But that doesn't mean an individual government cannot make things better or worse. Let's look at the examples:

Whitlam ran a reckless, sloppy fiscal policy that caused spending to skyrocket. Inflationary pressures were soon building but it wasn't until the external oil price shock that the wheels fell off. In effect, Australia had voted in a government that was poorly suited to dealing with difficult economic times and the outcome was a disaster. Whitlam caused enormous damage through his own ineptitude, regardless of the cycle.

Fraser squandered opportunities to reform the economy when the signs were begging for it. A new cycle of globalisation commenced around 1980 and Fraser did little to set our sails for it. In particular, he rejected most of John Howard's calls for renewing the economy through policy settings. When a world recession hit in late 1982 it was harsher than it needed to be here due to the damage caused by the union movement, particularly the AMWU that pushed so hard for a 35 hour week. When the storms hit, jobs disappeared and Fraser was blamed more than the unions.

Hawke came to power at a very good time politically. On a 'consensus' platform he and Keating brought in many of the reforms Howard had been unable to get Fraser to endorse. And many of these reforms passed the opposition of Democrats in the senate because the coalition, and particularly Howard, passed them. Both Keating and Howard remain heroes for recognising globalisation and setting policies to exploit the advantages. Unfortunately, Keating lost control of the budget and built up $96 billion in debt in the process.

When Howard and Costello assumed control they repaid the debt via good management, selling off assets and some later good luck with the China boom. At a time when the world was getting deeper into debt, Australia did the opposite - and this placed us in a strong position when the GFC later hit. This was a perfect example of a government acting contrary to the cycle - with a great outcome. I'd argue that Howard's loss in 2007 was primarily due to politics rather than anything in economics - Rudd was a clever salesman who conned the electorate into thinking that he actually had skills in running a government.

The mess we are in now is attributable to Labor, and Rudd in particular. Comparing our debt to the basketcase economies of the world is nonsense - there is nothing to brag about by saying that others stuffed up more than we did. Whatever the cycle, we at least have a new government that recognises the importance of slowing, if not reversing the slide into more debt. But without any more public assets to sell, or any good luck on the horizon, it'll be a slow process this time. Hence the need to avoid a slash and burn mentality, but to be firm with sticking to a sensible plan to reduce debt.

Great article Steve. It coincides with what I’ve been saying here the ages – that most of the success or failure of a government is due to world and therefore Australian economic conditions. In boom times, growth in government revenue is considerably greater and the government has more leeway with its expenditure and implementation of policies. From 2001-02 to 2006-07, the average annual increase in government expenditure was 6.5% (thus the award for most wasteful government), whereas from 2008-09 to 2012-13, the average annual increase in expenditure was 3.9%.

When there's a world and therefore Australian economic downturn, profits tend to fall and the government's revenue slows or even declines. The latter occurred in 2008-09 and 2009-10. Had the average annual increase in revenue from 2001-02 to 2006-07 (7.8%) continued through 2008-09 to 2012-13, the government's revenue would have been $298 billion higher in those five years. Had the government contracted its expenditure during the worst of the downturn (the GFC), we would have gone into recession, quite possibly a severe one, with even lower profits and considerably higher unemployment.

In the last four years of the Howard government, its surplus as a percentage of GDP was 1.5% to 1.7%. They probably could and should have put away twice this or about an extra $100 billion in current prices. In the six years before that, they probably could and should have put away another $100 billion extra. This means the country would have been far more prepared for the GFC and aftermath, the sharpest and most prolonged downturn since the 1930s.

The pattern of deficits this time has been no different to the downturns in the early 1980s (under a Coalition government) and early 1990s (under Labor). In fact, this is how it happens all around the world. A downturn will result in deficits; an upturn will result in surpluses. It hasn't got much to do with which side of politics is in office.

Whether Abbott and the Coalition are seen to be doing a good job will depend largely on world and therefore Australian economic conditions, and this has always been the case. Where the economy is going is anyone’s guess really. Based on latest Australian and overseas data, I‘d say that things will gradually improve, but it will take a long time. From what we’ve seen so far, the Coalition will be spending a fair bit of money and it doesn’t seem that they will put much of a dent in government debt for a long time. Will be interesting.

So when is the professor going to buy back his Surrey Hills place for the 40% discount he was expecting?

Chrispy is right. I am certain that the Coalition will not be putting much of a dent in federal government debt for a long time. Much of that debt is structural in any case, and has little to do with discriminatory spending by government.

I have observed that underpinning most of - what passes for - political analysis in BS is a general assumption that government debt is inherently bad and needs to be paid off as soon as possible. Many on the right simply adhere to the mantra "deficits bad, surpluses good". And nothing could be further from the truth. From a post-Keynesian perspective, arguably the central government should always aim (on average) to run a deficit roughly equal to the annual gain in real productivity (some would say the change GDP, however the GDP measuring stick is demonstrably flawed).

In order to gain a proper understanding of this issue, it needs to be recognised that the instruments of public debt issued by a sovereign state are of a quite different nature to household debt, business debt, or even the debt of lower levels of government. The difference being that none of these entities issue their own currency. Federal government securities are in many ways the equivalent of money because they are risk free, and they are basically interchangeable with state fiat money. The financial system needs to have a stock of government securities for reasons of liquidity management and risk management. Therefore, to attempt to pay off all federal government debt is an extremely foolish course of action.

There are many other important macroeconomic aspects of government debt, but time and space do not allow a detailed discussion of them here