How much does the public know about interest rates?

Much election-year political point-scoring assumes that public knowledge of economics is minimal. In 2004, the Coalition encouraged us to believe that the double-digit interest rates experienced during the last Labor government might return with a new Labor government. This year, Labor is suggesting, with all the fine-print qualifications the Coalition attached to interest rates last time, that it might be able to do something about grocery and petrol prices.

How easily fooled is the public on these things? On interest rates, answers to questions in the 2005 Australian Survey of Social Attitudes suggested a public without the level of policy understanding needed to evaluate the government’s claims. Respondents were asked how much knowledge they had of the role of the Reserve Bank. 6.5% said they had ‘a lot’ of knowledge, and another 31% said that they had ‘some’ knowledge. The rest admitted little or no knowledge.

Yet even these numbers may be overstating the public’s formal understanding. Another question asked how much knowledge the respondent had of how monetary policy is determined. Given that the Reserve Bank determines monetary policy all 37.5% with some or a lot of knowledge of its role ought to have also been knowledgeable about monetary policy. But instead 5% claimed ‘a lot’ of knowledge of how monetary policy is determined and 25% ‘some’ knowledge’. Some of those who think they know about the RBA need to visit its website.

Yet it is not clear that the proportion of the public who bought the Coalition’s 2004 line on interest rates is anywhere near as large as the proportion of the public lacking the necessary knowledge of the RBA and monetary policy. In a recent opinion piece Andrew Leigh reports evidence casting doubt on the role of interest rates in changing votes. In an ACNielsen poll that appeared in The Age yesterday only 31% said they believed interest rates would be higher under Labor, with 49% saying that they would be the same and 7% thinking that they would be lower.

According to Andrew Leigh, all 14 financial market economists in a Reuters survey thought that which party was in power would make no difference to interest rates. So nearly half the public holds the same view as people who study interest rates professionally. Perhaps voters compensate, in part, for their lack of knowledge by believing experts over politicians.

There is less expert commentary and so far as I can recall no surveys on public understanding of petrol and grocery prices. So perhaps Labor will find a more gullible audience for its campaigns on these. On the other hand, they are setting the same trap for themselves that the Coalition set for itself in 2004. There is even less the government can sensibly do about either petrol or grocery prices than it can sensibly do about interest rates. So Labor are gambling that luck will be on their side by the time of the 2010 campaign. As the Prime Minister is finding, though, luck isn’t a reliable ally.

23 thoughts on “How much does the public know about interest rates?

  1. I don’t know that I’m too troubled about the disparity between self-reported knowledge about the role of the RBA and how monetary policy is determined. Thinking about those questions myself, I am well aware that it is the RBA that determines monetary policy. At the same time, I am less confident that I understand the process of how they determine it – I know they are influenced by economic indicators such as inflation rates, but how they put these together to make a decision is something I rely on economists to tell me.

    Regarding Labor’s “war on prices”, one advantage they have in avoiding the trap Howard has fallen into is that the issues they say they will tackle are a lot fuzzier than interest rates. There is a single identifiable number (the RBA-determined interest rate) that betrays Howard’s lie. Petrol and grocery prices aren’t open to the same objective comparisons – they are not uniform across locations, outlets, etc., will move over time due to inflation, market conditions for specific items, etc. This is not to say that they have any more chance of meeting their promises than Howard did, but I think it will be harder to prove that they were dreaming.

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  2. Strictly speaking, Howard didn’t lie about interest rates, all he said was they’d be lower. It was no worse than the little weaselly truths we are bombarded with on a daily basis by product advertising. I would assume most people are reasonably skeptical about one brand of washing detergent’s ability to make “things whiter” without ever explicitly naming what they will be whiter than. In Howards term of office, there are far more serious things to be pinning him on than a transparent election promise. Rudd has been a complete disappointment here.

    Labor is on potentially shifty ground – they might make some points for pleading empathy (or make some room for the argument that Costellos’ Ferrari economy isn’t evenly compensating everyone for their efforts) but as long as they don’t claim petrol will always be lower under a Labor government there is little to criticise directly.

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  3. “as long as they don’t claim petrol will always be lower under a Labor government there is little to criticise directly.”

    Though there is a serious tension in Labor’s campaign between suggesting high petrol prices are a problem and saying we must do more about climate change, which inevitably means higher prices for fossil fuel energy to discourage its use.

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  4. “Perhaps voters compensate, in part, for their lack of knowledge by believing experts over politicians” – but which experts? There are so many well-credentialled experts saying contradictory things, and most of us don’t even understand the terms.

    I’ve just been collecting stuff about housing affordability (you’re right Andrew, no one says why paying 30% of income = mortgage stress) and I’m not sure about the stuff I’m reading: Mark Bahnisch recently defined housing affordability(citing Demographia) as “the ratio between median housing price and average income” which made me think why is one a median and the other an average? what difference might that make? – but it’s all too hard, and you just give up and go back to reading novels. So I might now have ‘some’ knowledge of why house prices have gone up, compared to my pre-reading ignorance of a week ago, but I couldn’t tell you which of a dozen explanations is correct.

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  5. I would answer the question with ‘not a lot’.
    But I don’t think it matters. IMO the interest rate thing was essentially a proxy for ‘Latham is nuts’, and events since demonstrated the voters made the right call in 2004.
    I will believe until I’m six feet under that the 2001 election result was a mistake, but Latho’s defeat was good for the country, and if ignorance about interest rates contributed, more power to ignorance.

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  6. Actually I’m not sure I would agree with Leigh’s finding, Andrew. A corollary to higher interest rates is a recession. Stick a recession into the mix along with higher unemployment and all the misery that goes it and you’ll a government immediately on the nose. So Leigh’s research only went ½ way.

    I kinda think it’s a real dangerous time to be winning an election for labor. A recession is not around the corner just yet despite all the protestations from the scribes. However it’s a high delta in the next 2 years, which is even worse for them as they will own that one good and proper.. Add a sticky labor market as a result of the expected “tightening” by Gillard and company by scrapping workchoices sending the rate back towards 8% and you end up with a real situation on your hands.

    This could get really ugly as our economy is very leveraged, particularly on the housing side.

    My bet is the Labor front bench will look a lot different going into the next election that what it does after this one.

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  7. Andrew,

    I think it is a reasonable assumption that an incoming Government will be told by Treasury to tighten fiscal policy.

    My guess is Ken Henry would use the structural deterioration of the budget as the excuse.
    This would be beneficial in the midst of a once in a lifetime commodity boom.

    Given JC has NO econometric evidence for his absurd claim it is best to ignore it. Even Chris Murphy who now has no reputation after two elections has found it necessary to ASSUME the ALP would be pre 1993 policy which is contradicted by ALP policy.

    Those people who believe interest rates will go up are like JC soldered on coalition voters.
    clearly after the last elections few others believe this.

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  8. Oh, it’s just another example of one of the well known problems of democracy. The individual cost of holding irrational or ignorant beliefs in politics is miniscule because the chances of any one individual’s views deciding an election are miniscule. IOW it’s perfectly rational behaviour on the part of the average punter to stay ignorant about the RBA – there are better things to do with your time.

    As the man said, democracy is the worst political system ever invented except for all the others that hae been tried.

    And Homer, Wayne Swan has said in a coded but crystal clear way that he intends bringing down a very tough first budget (including lots of public service cuts – don’t buy Canberra real estate at the moment). It’s true his calculation (like Howard’s in 1996) is probably more political than economic (its a matter of getting the bad news out of the way a long time before an election as well as putting money in the kitty for a future pre-election spending spree). But it will indeed coincide with Treasury’s economic-based advice.

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  9. Andrew, couldn’t the proportion of people who bought the interest rates line in 2004 have fallen in light of the 5 increases since then? As for market economists, they are almost uniformly macroeconomists focussed on the short term who have little time for how supply-side factors may affect aggregate indicators in the longer term. I haven’t read the Econtech report, but it is quite possible that over a 3-5 year period, more regulated labour markets could lead to higher interest rates than would otherwise be the case.

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  10. Rajat – Some members of the public presumably assume that what actually happened at various times is linked to who is in power, and their views would be influenced by the 5 increases since 2004. But it looks to me as if the single-largest group in the ACNielsen survey don’t believe that who is in power has a predictable or systematic effect.

    Perhaps WorkChoices being repealed would increase costs to industry, but that will squeeze profits as well as put pressure on prices, and there will be many other things happening in the economy at the same time. Given the overall likely similarity of economic policy between the major parties I think ‘much the same’ is the most realistic prediction for interest rates.

    And we should not forget that higher interest rates are not 100% a bad development, and (as now) they can be a symptom of a very positive development, a strong economy that is finally close to fixing a 30-year old public policy problem, high unemployment.

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  11. Andrew Norton wrote:

    Though there is a serious tension in Labor’s campaign between suggesting high petrol prices are a problem and saying we must do more about climate change, which inevitably means higher prices for fossil fuel energy to discourage its use.

    We’ve heard precious little from Labor about the death of cheap energy capitalism (other than the tokenistic signing of treaties and some ill defined plans on carbon trading). I think they’d prefer to bury that problem under some easier to digest ideas before unleashing the monster. For the Greens, it’s an important wider narrative but I’d guess Rudd won’t touch it with a barge pole until he has applied the araldite.

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  12. If Paul Kelly was right then we would have seen a wages blow-out in 93-96 and prices rising. Unfortunately for Paul the profit share has been rising for some time now and core inflation was killed by Bernie back then.

    DD I hadn’t known that. Makes political sense though.

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  13. Homer – The difference between then and now is that there were more underutilised productive resources in the economy. But I think you are right that low inflation has co-existed with a more regulated labour market than we have now or had between 1996 and 2005.

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  14. Not sure what you mean Homer. The labour market was in the opposite condition in 1993-96 and commodity prices only rose towards the end of that period.

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  15. with great respect you two have lost your memories. in 1993 we got EBAS. this was the showing in legislation what was happening unoffically that bargaining was going on at the enterprise level. Pattern bargaining was long gone.

    Impossible to argue that EBAs cause a wage breakout and Gilly has said pattern bargaining is/will be illegal.

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  16. Homer – No, I was just presuming that Labor would not go back to more regulation than it had before it lost office in 1996.

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  17. My guess to what will happen with the labour market is this: just like in 1983 when Hawke announced the hitherto undiscovered budget deficit from Fraser and reneged on all the election promises, Rudd will front up in the post election froth and solemnly announce that the legalities of winding back AWA’s is much harder than originally thought. They’ll fiddle on the margins and leave it.

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  18. In 1993 unemployment was 11%.
    In 2008, unemployment will be 4%.
    How EBAs worked under Labor in the mid-90s is simply no evidence for how things will work in 2008. If WorkChoices (as it’s critics insist) is holding down wages, then ‘ripping it up’ must increase wage growth, which almost inevitably means higher inflation and higher interest rates. It really is as simple as that. If WorkChoices is bad for wages and conditions, Labor’s policy must be bad for interest rates. You can’t have it both ways. Frankly.
    Though I do think that ACCI’s 1.4% interest rate increase is probably a bit overblown, assuming Labor goes no further than they’ve publicly stated…

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  19. Wage growth is not inflationary, whether it is a function of the “skills crisis” or union wage pressure. Inflation is solely the debasement of the currency by increasing monetary supply faster than monetary growth. The CPI is an indicator of price growth, not monetary growth. The RBA has been increasing the M3 money supply by around 14% per annum in recent times. Although GDP growth is not necessarily an substitute for demand for money growth, it is an indicator of growth in economic activity which would generally lead to an increase in the demand for money. Do you think economic growth of around 3% is an indicator of such a large increase in the demand for money? I certainly don’t, but for some reason the RBA does. Fools.

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  20. As a “CONSTITUTIONALIST” I look at matters differently.
    We have a budget (appropriation Bills) submitted in May when the constitutional process (Section57) may require about 5 months. Hence, the government basically blackmails the OPPOSITION to pass Appropriation Bills, regardless how terrible it is or the monies dries up when the new financial year on 1 July commences.
    Then, the government, commences to make absurd election promises, where constitutionally, if they were not included in the appropriation bills then they cannot be made.
    Then we have an independent Reserve Bank setting interest rates under what constitutional authority I ask where State banks cannot be dictated by the Reserve Bank!
    Then we have Mal Brough claiming that anyone questioning the 500 million dollars to be spend on Aboriginals is not a parent and does not care about children. Well, constitutionally every cent spend by the commonwealth must be accounted for!
    It doesn’t happen and that is why so much money is being wasted unchecked. For example the 55 million dollars for political advertising of WorkChoices.
    We have state government increasing charges because the monies we pay in taxes instead of being channelled back to the States as required by Section 94 of the Constitution is diverted to whatever.
    We have UNCONSTITUTIONAL tax deductions for religious funding and tax exemptions for religious organisations and this means the ordinary wage earning has to make up for this in additional taxes. Such tax exemptions and tax deductions are defacto Appropriation Bills but just not so applied in real terms.
    And on and on it goes.
    Ok my wife and I have no debts, and own our house, and have investment, but I for one rather see that we clamp down on the Federal Government spending and ensure surpluses are returned to the States, so we all can benefit and then the RBA may just see no need to increase rates!
    See also my blog at http://au.360.yahoo.com/profile-ijpxwMQ4dbXm0BMADq1lv8AYHknTV_QH

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