On first looking into Edwards’ Keating

Evan Jones, University of Sydney

Preparing a new course on the Australian economy, I thought I’d better read closely John Edwards’ professional biography of Paul Keating—Keating: The Inside Story (1996). Keating was a significant Labor politician, and one of the most important Treasurers in Australian history. Edwards has been a journalist, completed a Ph.D. in the United States (while simultaneously reporting on the Uruguay Round for The Sydney Morning Herald), and worked for Keating between January 1991 and March 1994. Since then, Edwards has worked as a bank economist.

There have been detractors from the Keating legend.

Edwards admires his subject. He is highly complimentary of Keating’s contribution as Treasurer from 1983 to 1991. He is also complimentary of the state of respectable economic opinion that shaped Keating’s worldview.

There have been detractors from the Keating legend. The University of Newcastle’s Bill Mitchell offers this summation of the Hawke-Keating Governments:

In 1983, when Labor won government, unemployment ran at 9 per cent, inflation was at 11 per cent, and Australia’s net foreign liabilities were 28 per cent of national income. In 1996, when Labor lost office, unemployment was still at 9 per cent, inflation was down to 4 per cent, and Australia’s net foreign liabilities were up to 59 per cent of national income. Inflation: under control. Unemployment and the current account: out of control.

These are the three, hard facts about Australia and Labor’s economic policy over 13 years. They say a lot about what the Australian Labor government stood for after 30 years of economic expansion following the Second World War (1999 p. 18).

Edwards’ complimentary account of the Keating contribution and of the forces that led to the Hawke-Keating economic policy revolution contains a subsidiary current that implies a more complicated story. There is a critical strain in Edwards’ text that the author reports but does not draw out. Edwards’ account thus provides a robust vehicle to evaluate the Keating legacy. In what follows, I draw essentially on quotations from the Edwards book to construct a more jaundiced interpretation of the Hawke-Keating years. I quote no additional sources. This is an essay on Keating’s performance viewed through the lens of Edwards’ book. It is Edwards’ story, as edited by Jones.

Keating the master Treasurer in command of his subject

Keating’s self-evaluation as a man superior to other men began when he was Shadow Minister for Minerals and Energy. ‘[S]ome time in the late 1970s the understanding of the world that he had been seeking since adolescence finally snapped into focus’ (p. 146). Keating was visiting Mt Isa Mines and inferred that, with a mine of this quality in trouble, the exchange rate had to be over-valued.

From then on I was on the trail. You could look back and see the OPEC oil price rises, the wage increases of 1973–74, the budget spending increases, and it started to make sense (p. 146).

I didn’t know [then] what to do about the exchange rate. My solution to real wage overhang was to hit the unions on the head. Others had other ideas, like a wages accord and an incomes policy. But while people had been advocating these in the late 1970s, the Accord itself only came out of the 1982 recession. Of course, you have to remember that there was no economic policy debate in the 1970s – not like today (p. 192).

The Labor Party came to office in March 1983 with a formidable individual in the position of Secretary of the Treasury—John Stone. Immediately following the election, Stone sought to exercise his authority. Stone claimed that the inherited budget deficit should be the focus of economic policy and that election promises requiring increased spending would cut across this desired focus (p. 171, 195).

Keating the autodidact economist made rapid strides in self-confidence.

There was a conflict of wills between the Government and Stone during 1983, culminating in Stone’s fierce opposition to floating the currency. The decision was taken to float the currency (under pressure from the markets) by Hawke and Keating with Reserve Bank advice in December. There was also conflict with Keating over Stone’s defence of Treasury’s monopolisation of economic forecasting and over the character of the August 1984 budget (p. 241ff.). With the loss of direct influence, Stone resigned and was replaced in September 1984 by Bernie Fraser.

According to Edwards, Keating, with independent input from his office staff, was now weaning himself from Treasury control (p. 238). Keating also appears to have weaned himself of other influences. Symptomatic of this shift was Keating’s replacement on his own staff of John Langmore (a traditional ‘Keynesian’ brought over from the office of Ralph Willis, previous Shadow Treasurer) with the narrowly orthodox Tony Cole. (Edwards heralds the change as moving from the warm fuzziness of irrelevance to the cold hard light of day (p. 178).) Barry Hughes was a lone voice in Keating’s office bringing an alternative perspective.

Keating apparently came to the job of Treasurer somewhat insecure. Soon after, following the Summit of April 1983, ‘Paul thought he was fine … that he had mastered the brief and could reproduce the expected patter’ (p. 201). ‘He had mastered the lines from a set of Treasury dot points’ (p. 202). The deficit became the centre of attention. No wonder then that Keating ‘delighted Treasury’ (p. 202).

From a running start, Keating the autodidact economist made rapid strides in self-confidence. In May 1985, at the Tax Summit, he threw a tantrum because his Option C (which included a consumption tax) was not supported. ‘If this sort of proposal doesn’t get up, one has to decide if there’s much point in someone like me worrying about Australian institutional processes, and in Australian institutions, very much longer’ (p. 277).

By late 1985, according to Edwards, Keating was ‘fluent in the language, numbers and concepts of economic policy’ (p. 287). In Edwards’ words:

Keating at last understood things about money and power … and he had learned how to operate the levers and pulleys himself. Arriving at the centre, he said, he found it surprisingly simple. Half a dozen key people, three or four levers or pulleys of settings (he used the words interchangeably) over which he had some influence. The rest, he often said, was leads and lags … (p. 304).

There was no job in the world, he now concluded, that he could not creditably do, not because he was Australia’s greatest son but because he had discovered how ordinary the occupants of most of these jobs really were. … Now that he understood how all the bits fitted together, the knowledge of it had lost its fascination (p. 305).

Keating, in his own words, was surrounded by ‘blowfly journalists’, ‘frauds and phonies of all kinds’, ‘dopey businessmen’, ‘lefties and maddies of all kinds, fortunately too witless to matter’, etcetera. ‘And that was only the beginning of his list of problems with this small inward-looking frightened little country which ran down people who had a go’ (p. 306).

Keating returned from Paris to a caucus that was now rebelling against his agenda.

‘As for the government’s record [by 1987], Keating claimed complete success. The big macroeconomic issues of growth, employment, the trade imbalance and inflation had been solved. Now it was time to look at the more ‘delicate’ microeconomic issues’ (p. 312). Thus the Treasurer and Treasury appropriated the microeconomic agenda as naturally appropriate, given their superior expertise.

Responding to the October 1987 share market crash, ‘Keating urged calm and rejected claims that a world depression had commenced’ (p. 317). Keating set up his game plan for the Australian economy and related it to an impressed Alan Ramsey (the Fairfax journalist).

His message was that Australia was trading its way out of its current account problem. [In Ramsey’s words] ‘He turned two of the graphs [of fifteen illustrations] to the wall, propped them against the back of a settee, and began drawing furiously – figures, arrows, additions and subtractions, squiggles, bumps, curves, sweeps, hard underlines, his pen rarely pausing; the Van Gogh of Treasurers’ (p. 318).

By May 1989, strutting it in Paris with OECD heavies, for Keating:

[T]he people he thought of as his opponents or who had contested his supremacy in economic policy were more likely to be treated with contempt than respect. Ross Garnaut, the former economic adviser to the Prime Minister … was really, Keating now, believed, a B-grader. John Stone, the Treasury Secretary he had once flattered and treated with wary respect … was really a B-grader. Now that he had learned his job there were more and more B-graders … (p. 362).

Keating returned from Paris to a caucus that was now rebelling against his agenda. No matter; Keating would surmount the B-graders with a speech to an Australian Financial Review audience in June. Keating:

… would not be bothered by tricks and baubles … He would not be spooked by economic ratbaggery. He was interested in getting the current account right and controlling domestic demand. … He wasn’t bothered by the nervous nellies of the backbench, he said. He was in charge, and policy was on track. The papers the next day were laudatory. Once again, Keating had restored public confidence in the direction of economic policy. It was a turning point in the public debate (p. 372).

Keating had sorted out macroeconomic policy and microeconomic policy. He had also mastered the labour problem. ‘He and Kelty had, as he said, ran incomes policy for eight years, longer than anywhere else in the world’ (p. 418).

In mid-1992, even in the midst of rising doubt (of which more below), Keating returned to his theme of mastery of a recalcitrant environment.

You have to be able to feel what is happening. … We – Dawkins, Willis, me – haven’t got the energy we once had, but we have experience. … We are cleverer. You get cleverer with age. Things are puzzling and confused; you see them all jumbled up, and then one day – it’s like putting on a pair of glasses – they are suddenly clear and bright and you can see the arrangement, how all the bits fit (p. 320).

In December 1995, Keating summed up his legacy to Edwards:

When I came into parliament I learned to operate inside caucus and inside Cabinet, but at the same time I had this other stuff that other members did not have – this knowledge of the business world. … You have to remember that economic growth was not in the lexicon from around 1974 to 1980. I said to Hayden, “Use the word, use the word growth,” and he started to do it. … It’s like anything else that’s really good – it was based on a few simple ideas. The first was to open the place up and make it more competitive. The second was to integrate with Asia. It was all built on those ideas. … As you know, my idea is that our job as politicians is to get the changes in place, because the system runs itself (p. 531).

I suppose you could say – perhaps in a nutshell – equity and enterprise at home and opportunity abroad has been the thing which has motivated [the Labor Government] (p. 535).

Keating’s experts and their expertise

Edwards’ elaboration of Keating’s advisory network is generally supportive of the substance of the advice forthcoming. Treasury was there from the beginning. ‘In the long years of Australia’s postwar expansion … Treasury was often the solitary refuge of economic rationality in Canberra’ (pp. 179-80).

There was to be no gain without pain, heralded our experts.

Greg Smith, the Treasury tax expert, was (in Keating’s words) a genius (p. 238). Ted Evans had an air of ‘calm and strength’. ‘He thought formal economics training could reveal connections not apparent, but that otherwise economics was mostly common sense’ (pp. 268-9). ‘There was no bullshit with [Bernie] Fraser.’ Fraser’s self-evaluation, according to Edwards, offered ‘not a flash intelligence or political sympathy but weight, reliability, steadiness, reasonable judgement and the quality of command’ (p. 257). Chris Higgins [Treasury Secretary after Fraser] ‘was a very smart academic economist as well as a policy-maker. … [His doctoral supervisor, the famous econometric model-builder Lawrence Klein] would tell visiting Australians that Chris Higgins was one of the most brilliant students he ever had’ (p. 365). And so on.

These people were representative of the group of men, proverbially unassuming but strong-minded and universally competent, that was Keating’s brains trust in his period as Treasurer. The ensuing policy regime was essentially tough, uncompromising, in the application of the prevailing orthodoxy.

By late 1985, ‘Economic policy had been tightened, and tightened again’ (p. 290). In December, the overnight cash rate of interest was over eighteen per cent. ‘Keating thought a sharp, dramatic increase would crush expectations of a [further] falling dollar’ (p. 285). By early 1986, Keating wanted a reduction in rates, but Reserve Bank senior officials were unrepentant, ‘arguing that high rates were needed to reduce inflation and the current account deficit’ (p. 291). Rates did come down dramatically during early 1986, but were raised again after the continued exchange rate collapse. Reserve Bank Governor Bob Johnston said that ‘if only for his self-respect, he would not want it stated after the event that monetary policy had been conducted in an unwarrantedly easy manner’ (p. 295).

By mid-1987, our experts were committed ‘twin deficits’ fetishists. To attack the current account deficit, further spending cuts were required (p. 311). Edwards claims that Treasury Secretary Fraser differed from the monetary hard-liners, wanting the repression centred on spending cuts and wages control rather than further increases in interest rates. By early 1988, the Reserve Bank advised proceeding slowly on rate rises, but Keating (with Don Russell, his senior office adviser since 1985) again wanted an aggressive rise to exert ‘a rapid depressing influence on expectations’ (p. 328). By May 1988, David Morgan (now the Treasury’s senior monetary policy official) had become the monetary policy hawk (p. 332). By September 1988, Morgan’s ‘faction of hawks comprised most of the senior policy-makers, including Chris Higgins and usually Ted Evans’ (p. 340). This collective intelligence resulted in taking ‘cash rates from a monthly average of just over 10 per cent in March 1988 to just under eighteen per cent in November 1989, 90-day bills from nearly 11 per cent to over 18 per cent, and home loan rates from 13.5 per cent to 17 per cent’ (p. 329). Both Morgan and Higgins expected a soft landing from further monetary tightening (p. 350).

In late 1989, Keating had second thoughts about the official package.

But in mid-1989, Higgins was bolder about the prospects (and desirability?) of a collapse in asset prices. ‘[I]t is most important to be aware in advance that there is a price … we must be prepared to pay for overall slowing in demand and inflation’ (p. 373).

There was to be no gain without pain, heralded our experts. As it was, none of them shared the pain except Higgins, who paid the ultimate sacrifice with his life in December 1990, neglecting his faulty ticker. The rest of the experts have gone on comfortably to other employments, their reputations intact.

Flaws in the Glass

And yet, and yet, all was not well in this best of all possible worlds. Edwards’ account discloses Keating’s increasing frustration with the expert advice he was being offered.

The failure of his advisers’ forecasts was the first arena to arouse Keating’s suspicion.

He would discover, too, that while Treasury and Reserve Bank economists spent a lot of time working up their forecasts, most of the important things that happened were not in them. … Later he would say that forecasts were all bullshit anyway, and he relied ultimately on the opinion of a few people in business or government whose experience was long enough, and who Paul had known long enough to be able to interpret accurately (pp. 187–8).

In late 1989, Keating had had second thoughts about other parts of the official package. The current account deficit was resisting the experts’ commands.

This was the point at which Keating began to be, as he would later remark, hoisted on his own petard. He was appalled by the long string of bad current account deficits, which were now the single most important piece of economic and political news. His colleagues, especially John Dawkins and Peter Walsh, were depressed and bewildered. In 1985 and 1986 they had counted on the J-curve. It had not worked, or at least not in the way they expected. Now the ‘twin deficits’ theory was apparently not working. A six percentage-point increase in interest rates over fifteen months was apparently not working. Keating was increasingly sceptical of Treasury advice (p. 353).

In May 1989, Keating joined Ed Visbord, the then Australian ambassador to the OECD, in Paris.

Visbord had once been certain of things he was not certain of now. … But these days [following the freeing of markets in line with his ‘religion’], he would also say, no one knew how long the lag was between a policy action and its result. For that matter, no one was sure any more about how the policy instruments of the money supply, interest rates, taxes and spending worked at all. There was even concern at the OECD, which through its staff and its committees brought together the world’s best and most powerful policy economists, that they no longer knew quite how the world worked (p. 356).

The tortuously high interest rates didn’t seem to be bringing down demand as quickly as was expected.

Certainly the point at which it worked had been a long time coming, and the Treasurer was beginning to get impatient. ‘It will all come right, Treasurer’, he would recall Higgins reassuring him. The J-curve would eventually work. The twin deficits would eventually work. Eventually, it would all come right (p. 370).

The June 1989 Joint Economic Forecasting Group predicted continuing bad news on the current account. Keating annotated the report:

It makes the twin deficits theory look like bullshit. By the end of the year under forecast (1989–90) the govt will have presided over an 8 percentage point shift in the PSBR [Public Sector Borrowing Requirement]. It must be a world wide post-war record. 8 percentage points since 1985–86 (6 per cent public and 2 per cent private savings). Yet the current account will, according to these forecasts, be still 5 per cent of GDP. At least I can’t be burdened with any more talk about re-weighting the instruments of policy. We now all now what utter crap that is (p. 375).

And by mid-1989, tolerance of Keating’s policy of high interest rates and deep spending cuts was vanishing within the Labor caucus (p. 371).

Keating met with Reserve Bank officials in March 1991, desperate to engineer an interest rate cut, but facing resistance from his officials. After the meeting, he confided: ‘They go on with all this bullshit because they won’t admit it’s an art, not a science’ (p. 407).

In mid 1992, confronting the reality of the recession that we had to have, Keating flails at his own world of expert knowledge:

I’ll tell you what. This is all bullshit about the science of monetary policy. All bullshit. Every month for years we had papers on credit growth, the yield curve, etc., etc., the relation to GNE [Gross National Expenditure], and it was never any good at prediction. Never (p. 320).

Last days

Paul Keating became Prime Minister in December 1991. He could be thankful that the current account deficit was no longer a problem. There was still a current account deficit, but economists, who had convinced Keating to introduce draconian policies to combat the problem, had now decided that it wasn’t a problem. Except, of course, for those who had suffered under the previous draconian policies.

But Keating now faced a broader constituency. As Edwards notes, a Prime Minister ‘could not, as a Treasurer could, take refuge in technical competence and master of jargon’ (p. 449). One might wave the current account deficit away with a magic wand, but one couldn’t wave away the recession and its aftermath.

The World’s Greatest Treasurer still hankered after the simple stories.

So Keating adopted an idea from Dawkins, now in the luckless job of Treasurer, that the government needed a flashy once-off statement (p. 470). Thus One Nation was born. ‘Interest rate cuts won’t be enough to get the place going, [Keating] said. We need the infrastructure spending’ (p. 472).

But the World’s Greatest Treasurer still hankered after the simple stories. In mid-1992, facing Bill Kelty’s increasing frustration over the lack of progress on jobs, Keating responded: ‘It’s like a rubber band. It stretches and stretches, and then it snaps back. That’s what happens with employment. You get productivity at first, and then suddenly you get jobs. Employment suddenly catches up’ (p. 485).

In a conflict with Button over further cuts to automobile tariffs, Keating was similarly unrepentant. With a purist line on tariffs, said Keating ‘Now you can say Asia, trade, etcetera, etcetera, and it’s uncompromised. It’s kept us regarded seriously by the pointy heads, which eventually means we’re regarded seriously by the masses. They see our willingness to internationalise as the test’ (p. 489).

Keating also set in train the ‘national competition policy’ agenda, comprising a pre-ordained and top-down imposition of competitive principles (substance unspecified) to the entire economic and social infrastructure of the country.

If Keating didn’t experience the recession personally, he felt keenly one of its consequences—raging annual budget deficits.

Facing an election, Keating confronted, via ACTU intelligence, that ‘There were terrible problems in Bendigo, Ballarat and other provincial areas’ (p. 501). And this was just Victoria.

What would be done? Some pragmatic vote-buying devices would be developed. ‘Part of the Commonwealth Bank would be sold to fund the higher deficit’ (p. 501). The Bank provided a convenient nest egg, even if Keating had to brazen his way through the Government’s promise at the 1990 election that the Bank would not be privatised. But hypocrisy had already been embraced when the Government sold the first tranche of the Bank in 1991. By 1993, presumably the hypocrisy register with voters had slid off the scale so that principles no longer mattered.

After the 1993 election win, the problems remained, so further pragmatic fixes had to be engineered, and this in the face of the Reserve Bank hiking interest rates again. Enter Working Nation. More nest eggs had to be rifled to fund it. ‘Spending on these programs would be provided by the sale of Australia’s Commonwealth-owned civilian airports’ (p. 528). The May 1995 budget achieved a surplus by the foreshadowed sale of the remainder of the Commonwealth Bank (p. 528).

Edwards concludes: ‘Stripped of asset sales and repayments from the states … the deficit in the last year of Keating’s government was $9 billion’ (p. 537). Thirteen years of office—with endless budget expenditure cuts organised through the most elaborate and painful of procedures, draconian interest rates, and privatisation of cherished public assets—resulted in a final budget deficit comparable to that inherited from the Fraser Government in March 1983.

After the victory of the Coalition at the March 1996 election, Keating lamented, presciently: ‘The whole set-up of industrial relations and Medicare and social security would be wrecked [Edwards’ paraphrasing follows] and the thrust to engagement with Asia and trade would be blunted’ (p. 540).

What an achievement.


Edwards, J. 1996, Keating: The Inside Story, Ringwood, Penguin Books.

Mitchell, W. F. 1999, ‘Full employment abandoned: The macroeconomic story’, in Out of the Rut: Making Labor a Genuine Alternative, eds Carman M. & Rogers I., Allen & Unwin, Sydney.

Evan Jones is Associate Professor in Political Economy in the School of Economics and Political Science at the University of Sydney.

Read Jack Dempsey’s review of Don Watson’s biography of Paul Keating, Last Tango in Canberra.

Read Evan Jones’ critique of Australian economic policy, Economic Utopia and its Handmaidens.

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