Why Australian cities need post-COVID vision, not free parking



Brent Toderian/Twitter

Rebecca Clements, University of Sydney; Elizabeth Taylor, Monash University, and Thami Croeser, RMIT University

Many Australian cities have fallen back on offering free car parking to attract visitors back to the CBD after the pandemic. In contrast, cities around the world are basing their recovery strategies on bold and evidence-based urban transformations.




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How COVID all but killed the Australian CBD


In August, Adelaide City councillors voted for incentives for people to drive and park within the CBD, including a controversial “driver’s month” promotion. In Perth, free parking in the CBD during the holidays is expected to cost A$700,000.

In Victoria, the state hit hardest by the pandemic, the City of Geelong has announced a range of free CBD parking policies estimated to cost several million dollars. Melbourne City Council has endorsed free on-street parking via a voucher system estimated to cost $1.6 million in lost revenue. It’s also seeking to reduce the state-based congestion levy on off-street parking by 25%.

The move to increase car traffic into the central city is perhaps most surprising in the case of Melbourne. Planners have called it a “1960s solution” and a “lost opportunity”. Free parking and other incentives for car travel are at odds with the city’s recent Transport Strategy 2030, which seeks to prioritise walking, cycling and public transport.

Parking incentives don’t work

These car-led approaches to a hoped-for economic recovery were rushed out ahead of new evidence and modelling. This approach also goes against decades of available evidence on the detrimental impacts of conventional urban parking policies in Australia and internationally.

Free parking – pursued and mandated in many cities since the mid-20th century – has a nasty habit of building in unnecessary car use through narrowly targeted subsidies to car users, which directly undermine other transport modes. Parking researcher Liz Taylor recently explained the historical myths and troubled relationships between retail and parking we risk perpetuating.




Read more:
The elephant in the planning scheme: how cities still work around the dominance of parking space


COVID has changed cities, and we must adjust

Cheap parking has poor prospects for attracting enough visitors to offset the changes the pandemic has brought to Australian CBDs. CBDs rely heavily on daily office workers – who are now largely working from home – and on large residential populations, including international students and tourists to whom borders are now closed.

In Melbourne, daily journeys into the city are down 90%. Only 8% of office towers are occupied.

Even so, car traffic is now at roughly 90% of its pre-COVID levels. Cars are already back, but that does not translate to people in CBDs – and road capacity means the city can’t manage many more cars.

Chart showing use of cars, public transport and walking in Melbourne from January to the end of November
Apple mobility data for Melbourne show car travel is back to almost pre-pandemic levels.
Apple Mobility Trends, CC BY

Similarly, Australian CBD retail landscapes have been drastically altered. Experts predict many lasting changes, including retail “localism” in the suburbs.




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The suburbs are the future of post-COVID retail


Parking hasn’t played any role in these changes. Instead, major economic shifts and political decisions have forced and enabled changes in work and lifestyle.

Many CBD workers simply won’t have to come back. CBDs previously didn’t need to be pleasant to be full of people – many were forced to be there. That has changed, and so the city must change too – from a destination of default to a destination of choice.

The adjustment can create better cities

Encouraging cars back into the hearts of cities isn’t just a bad recovery strategy. It could be a huge missed opportunity to create more attractive, high-amenity cities.

Around the world, many cities are welcoming the chance to use parking and streets differently, farewelling the daily car commute to embrace something better.

In Paris, Mayor Anne Hidalgo’s visionary “15-minute city” plan aims to replace 60,000 surface parking spaces with green pedestrianised streets, safe dedicated cycling networks and “children streets” near schools. The plan actively turns away from car dominance.

Barcelona’s mayor has announced a massive green revamp of the central city. Its already successful Superblock model, based on large-scale pedestrianisation, will be super-sized. Intersections and parking are being turned into parks and plazas.




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Superblocks are transforming Barcelona. They might work in Australian cities too


London is creating hundreds of low-traffic neighbourhoods (LTNs), as is car-dependent Brussels. LTNs are based on transforming streets with quality cycling and pedestrian infrastructure, closing some streets to car traffic and otherwise instituting low speeds. Oslo’s “Vision Zero” strategy demonstrates the power of these measures to transform cities.

As these cities are finding, street reclamation projects can succeed quickly, and local businesses and neighbourhoods of all income levels benefit. However, leaders need to “hold their nerve” through the complex period of change.

New ways of seeing cities

Australian cities are changing with COVID too. Melbourne in particular has been forced to radically rethink streets as public space at a metropolitan scale. Through innovative co-operation between retailers and local councils, hundreds of parklets have emerged across the city.

These spaces offer sensible, creative and exciting ways for people to re-embrace dining out after lockdown. The enthusiastic reception is already causing many retailers to forget about parking and call for permanent changes.

The City of Melbourne has issued 1,300 outdoor dining permits and transformed 200 on-street parking spaces. This raises the the question of whether free parking is the best use of its precious public space and funds.

Diners sit within a green parklet on Lygon Street in Melbourne, having fun on reclaimed street space.
A parklet on reclaimed street space on Lygon Street, Melbourne.
Liz Taylor (own photo)

While systematic study of parking is often scarce, far stronger evidence supports the economic value of space for active transport, green space and outdoor dining. Our future cities can be places where people “will see the street belongs to them”.

Street space can feel like the exclusive (and hostile) realm of cars, but it is simply public land that is currently (mis)allocated to cars. Perceptions are beginning to change, allowing city residents to reimagine what streets might offer beyond moving and storing cars.

The race is on to invite people back to our cities. But a return to streets full of cars, narrow sidewalks crowded with pedestrians, and parking problems that never go away simply isn’t much of an invitation.

When urbanist Brent Toderian asked people to post photos showing #TheBeautyofCities, the hundreds of submissions featured green streets full of people walking, cycling and having fun, not car parking and traffic.The Conversation

Rebecca Clements, Postdoctoral Research Associate, Faculty of Architecture, Building and Planning, University of Sydney; Elizabeth Taylor, Senior Lecturer in Urban Planning & Design, Monash University, and Thami Croeser, Research Officer, Centre for Urban Research, RMIT University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

6 things to watch for as Australia crawls out of recession



Sergey Tinyakov/Shutterstock

Janine Dixon, Victoria University

Our economy has grown in the September quarter (the three months to September) after two quarters of going backwards.

Using the literal meaning of recession, we are no longer in one – economic output (the things we produce and consume) is no longer be going backwards.

But things won’t be like they were. Even a rebound in gross domestic product of 3.3% (the biggest in 40 years) doesn’t make up for the 7% we lost in the previous quarter, meaning we’ll remain worse off than we were at the start of the year and much worse off than we would have been had the pandemic not happened.

Here are six things to expect as the economy recovers:

1. Consumer spending will recover first, but might need help

Consumer spending will to return to normal first, as forecast in the budget.

(Don’t be fooled by the forecast decline of 1.5% for 2020-21 compared to 2019-20. From where we stood in the June quarter 2020 – an enormous decline of 12% on the March quarter – this is a massive recovery.)

So far the signs are promising, but in part this might be because the stimulus payments are still flowing, keeping household disposable income above pre-COVID levels.




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It isn’t right to say we are out of recession, as these six graphs demonstrate


The coronavirus supplement that tops up JobKeeper and other benefits (originally A$225 per week) winds down to $75 per week after Christmas and expires on March 31.

JobKeeper, originally $1,500 per fortnight, became harder to get in October and will wind down to $1,000 per fortnight in January and $650 for part-time workers, before expiring on March 31.

Victoria has funded tutors to assist students left behind.
fizkes/Shutterstock

Treasury expects wage growth to be slower than price growth for the next two years, so a household-led recovery is by no means guaranteed.

If the recovery stalls in the household sector, activities such as hospitality, retail and arts and entertainment will suffer a second blow and unemployment will remain high.

After the year we’ve had, the household sector could be forgiven for losing confidence.

The government should consider extending the coronavirus supplement payments, and be ready for further one-off stimulus payments if required.

Unlike the imminent income tax cuts, these measures are temporary and can be discontinued as soon as they are no longer required.

Governments can also stimulate demand directly. Victoria has announced an additional 4000 tutors to assist school students left behind after an interrupted year. Other areas in which governments could usefully create meaningful jobs include the care sector and the arts.

2. Overseas demand won’t assist in the recovery

Exports face headwinds and are unlikely to recover over the next 18 months.

The International Monetary Fund expects the global economy to shrink by 4.4% in 2020 after growing 2.8% in 2019, a turnaround of more than 7%.

This will be apparent in all of Australia’s major customers including China and will depress demand for exports.




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More importantly, travel bans have come close to eliminating “exports” of tourism and education, which together account for almost one fifth of Australian export income.

This income will remain weak until international travel properly restarts.

3. We will lose four years population growth

Before the crisis, the 2019 mid-year budget update predicted Australia’s population would grow from 25.6 million to 28.4 million by June 2026.

Births and immigration will remain low for years.
KieferPix/Shutterstock

This year’s budget says we won’t get there until June 2030, a full four years later.

Even after travel resumes, net overseas migration is expected to remain lower than before due to economic uncertainty and weak labour market conditions.

Businesses will find it more difficult to get the staff they need through skilled migration, crating a greater role for higher education and vocational education.

By 2024 migration is assumed to return to normal, yet population growth will continue to be slow. This is because the birth rate is projected to be lower than usual for the remainder of the decade.

4. Business investment will be weaker, and different

2020 has been a difficult year, but it’s also been the year we’ve learnt to do things differently.

We have learnt about on-line shopping, working from home, telehealth and on-line entertainment, and we will continue to make use of what we have learnt after the pandemic is over.

These changes could drive the next genuine wave of productivity growth.




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Bricks-and-mortar retail, commercial office space, roads, bridges and railways are all investments that facilitate the meeting and movement of people.

With new technologies and a smaller population that is learning to keep things local, these old-world investments won’t be as generate the same returns as they once might have.

Where we might see the investment dollars being spent is on home improvements, while government investment dollars could be spent on improving local amenities such as parks and community centres.

5. We’ll need to get more people into paid work

A year ago, 66% of Australia’s adult population was participating in the labour market, either by being employed or looking for work.

During the crisis the participation rate dipped below 63%.

Australia’s economy could place more emphasis on caring.
Toa55/Shutterstock

It has since returned to 65.8%, a touch above where the budget expects it will stay.
Other countries including Canada, Britain, New Zealand and Germany do better than us.

There’s room to get more unpaid carers (many of them women) into the paid workforce.

More than 900,000 people who perform significant unpaid caring work say they would like more paid employment.

In my work for the National Foundation for Australian Women, I found the net budgetary cost of increasing caring services was modest, mainly because it brought about a strong increase in the tax-paying workforce.

6. One last dark cloud: the terms of trade

The terms of trade measure what we can buy for each unit of what we sell; how many imports we can buy for each unit we export.

The budget forecasts a fall of almost 11% in 2021-22 as a result of lower prices for iron ore.

Taking a long view, this may be nothing more than a correction, but it is as big a fall in a single year as we experienced in the dog days after the end of mining boom when the terms of trade declined for four consecutive years, and we experienced four years without real growth in income growth per capita.




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An all-out trade war with China would cost Australia 6% of GDP


Population, participation and productivity are the “three P’s” that drive economic growth in the long run, but in the short run a big decline in the terms of trade poses a real risk to a household-led economic recovery.

Where to from here

In an effort to avoid more economic pain, the government has rightly abandoned fiscal restraint in the most recent budget.

Much of its recovery strategy (perhaps too much) is built around income tax cuts and investment incentives.

I see a need for a greater emphasis on temporary measures aimed at supporting household spending, given the role it will have to play in unwinding the recession.




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In the longer term, there is a case for paring back some of the larger income tax cuts to expand child care, aged care and disability care; measures that would support low-paid workers, boost labour force participation, and improve the standard of living for many Australians.The Conversation

Janine Dixon, Economist at Centre of Policy Studies, Victoria University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

It isn’t right to say we are out of recession, as these six graphs demonstrate



Lukas Coch/AAP

Peter Martin, Crawford School of Public Policy, Australian National University

It’d be wrong to say that we are out of recession, although that’s how the graph of Wednesday’s GDP numbers makes it look.

Gross domestic product (the measure of everything produced and earned and spent) fell 7% between the March and June quarters after slipping 0.3% between the December and March quarters, and then rebounded 3.3% between the June and September quarters.

It was the biggest bounce since 1976, after the biggest fall on record.


Quarterly percentage change in gross domestic product


ABS National Accounts

But it hasn’t anything like got us back to where we were.

When the levels rather than the changes in GDP are graphed, it is clear that, as Treasurer Josh Frydenberg put it, we have “a lot of ground to make up”.


Quarterly real gross domestic product


ABS National Accounts

At first sight the graph of quarterly gross domestic product looks odd. Surely if GDP fell 7% and then rebounded by half that much it should have got back half its losses.

But 3.3% of a small number is much less than 7% of a bigger number. We’ve regained only two fifths of what we lost.




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6 things to watch for as Australia crawls out of recession


And we’ve lost more than that. Had the economy grown as the Reserve Bank forecast before the coronavirus crisis, we would have spent and earned A$509 billion in the September quarter instead of $476 billion.

It’s consumer spending that’s bounced

What drove the bounce was a rebound in consumer spending after months in which we were confined to quarters, and here the news is better than it seems.


Quarterly change in household final consumption expenditure


ABS Australian National Accounts

Nationwide, household spending jumped 7.9% after falling 12.5%, but excluding locked-down Victoria (which will have its own delayed bounceback) household spending in the rest of the country rebounded 11% after falling 12%.

And it bounced back in exactly the places it collapsed while we were locked down; in services such as tourism and hospitality.


Household spending by category

National, percentage change between June quarter and September quarter.
Australian Treasury

Victoria’s economy literally went backwards.

Spending in Victoria continued to fall while spending everywhere else bounced back.

In only one category, home alcohol consumption, did spending in Victoria advance while spending in other places retreated.


State and territory final demand, September quarter


ABS Australian National Accounts

Consumers financed the extra spending by saving less, but even so, Australia’s household saving ratio remained alarmingly high.

In the June quarter Australian households saved a record (upwardly revised) 22.1% of what they earned. In the September quarter that fell to 18.9%, which is still far too high.

In good times, less-worried Australians save less than half that.


Household saving ratio


ABS Australian National Accounts

Frydenberg put the best spin he could on the extraordinarily high amount of saving by saying it would provide “ongoing support for the economic recovery in the new year as confidence continues to build”.

Australia was as well positioned to recover as “any nation on earth”. Over the past year its economy has contracted less than Britain, France, Germany and Japan.

Exports, business investment continue to fall

Much of that success is due to Australia’s achievement in getting on top of the virus and the success of JobKeeper in keeping Australians in work until conditions improved. The Reserve Bank believes it saved 700,000 jobs.

Working against that has been the forth consecutive quarterly fall in export income (something set to worsen unless relations with China improve) and the sixth consecutive fall in business investment.

In a quarter when consumer spending recovered, non-mining business investment fell a further 3% on top of a fall of 8.6% in the previous quarter.

The US National Bureau of Economic Research defines a recession as

a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales

On that basis Australia is still in one. Employment, income and production remain well down on where they were a year ago. GDP is down 3.8% on where it was a year ago.

Reserve Bank Governor Philip Lowe.
MICK TSIKAS/AAP

Speaking as the national accounts were being released, Reserve Bank Governor Philip Lowe said he expected Australia’s unemployment rate to remain above 6% for the next two years.

Annual wage growth would remain less than 2%

It was possible the economy could do better.

His forecasts assume no widespread vaccination against coronavirus until late next year. They also assume international travel restrictions until 2022.

But it was also possible things could be worse.

Just three months ago that many were hailing a robust bounce-back in Europe.

Now, Europe’s economy is expected to sink again in the December quarter as member states struggle to contain the virus.

Australia was on a different path, but there was “no guarantee we will remain so”.The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Don’t worry about the debt: we need more stimulus to avoid a prolonged recession



Shutterstock

Danielle Wood, Grattan Institute and Tom Crowley, Grattan Institute

After two decades equating budget surpluses with good economic management, it might seem convenient that the federal government has changed its fiscal strategy just before the budget to focus on jobs over keeping the deficit in check.

But it’s the right move. The world has changed in ways that make government spending more necessary and government debt more sustainable than ever.

Debt talk still dominates newspaper headlines and many of Treasurer Josh Frydenberg’s media appearances. But it shouldn’t. Here’s why.

We are in the middle of a major economic shock

The COVID-19 recession is the biggest economic shock since the Great Depression. GDP fell 6.3% in the year to June, the worst annual result since 1929.

The federal government should use its balance sheet to spread the costs of such a large shock over time. The alternative would be to leave those who lost their jobs or businesses in poverty.

The government’s emergency response saved businesses and jobs from going under in the short term. Now, as we emerge from the crisis into the recovery phase, large-scale stimulus is needed to boost demand and create new jobs.

Debt has never been cheaper

It has never been cheaper for governments to borrow. As the next chart shows, the interest rate on 10-year Australian Government Bonds is less than 1%. If inflation stays above 1%, as the Reserve Bank and Treasury expect, the “real” interest rate the federal government pays on the bond will be negative. That is, it will effectively be paid to borrow.


Yields on 10 Year Australian Government Bonds.

Author provided

These very low interest costs change the dynamics of managing debt we accrue now. Investments that boost future growth – including spending to reduce unemployment and close the output gap – will pay for themselves.

This is the fiscal “free lunch” spoken about by the former chief economist of the International Monetary Fund, Olivier Blanchard, and the deputy governor of the Reserve Bank of Australia, Guy Debelle.

Extra stimulus won’t spook financial markets

To get the unemployment rate below 5% by the end of 2022, the Grattan Institute estimates a further A$100 billion to A$120 billion of fiscal stimulus is needed on top of what governments have already announced.




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This is unlikely to cause financial markets to break a sweat. Even if gross debt was to nudge 50% of GDP in the next few years, it would still be far below that of most other developed nations before the COVID crisis. At the end of 2018-19, the gross public debt in the UK was 85% of GDP, in the US 103%, and in Japan more than 200%. All have borrowed substantially more since then at very low rates.

There’s also no risk that significant government spending will cause wages or inflation to rise dramatically. In fact, Australia has the opposite problem. Wages were stagnant before the crisis and are forecast to remain so for years. Inflation has been persistently below the Reserve Bank’s inflation target and is forecast to remain so for years.

We can manage debt without austerity

Frydenberg has signalled that, as employment recovers, the government’s fiscal strategy will shift to stabilising and then reducing debt as a share of GDP. Although his stated threshold of “well under 6% unemployment” is not ambitious enough, the idea makes sense.

The good news is that with interest rates on government borrowing so low, debt as a share of GDP can be reduced without pursuing austerity in the form of deficit reduction.

The interest rate is one of three factors that affect the size of debt relative to GDP. The other two are the budget balance (the incremental contribution to debt) and nominal GDP growth, which depends on economic activity and inflation.

Even if interest rates were a little higher than now (say, 1.5%), the government can reduce debt relative to GDP even while continuing to run large deficits, provided that nominal GDP growth returns to a moderate level (say, 4.5%, as it was before the pandemic).

The next chart shows that under these circumstances the government can run deficits of up to $50 billion and still reduce debt as a share of GDP.


Gross debt-to-GDP projections based on different budget deficit scenarios.

Author provided

Different rates of GDP growth would change this story, as the next chart shows. With an even higher nominal growth rate, debt would shrink even faster relative to GDP. In a scenario of prolonged low growth, debt would increase relative to GDP a little, but remain very modest.


Gross debt-to-GDP projections based on different GDP growth scenarios

Author provided

The government can do things to boost nominal growth in areas such as tax reform, education and skills, workforce participation, energy and climate policy, and land-use planning. The Reserve Bank should also do more by boosting inflation, which would support nominal growth.

Don’t scrimp on stimulus

There are many urgent and valuable priorities for government spending right now, such as permanently raising JobSeeker, boosting child-care support and building more social housing.

More debt might impose a small cost over a very long time. But the cost of insufficient stimulus and a prolonged recession would be vastly bigger.

The choice is simple. We should not let debt panic distract us from making it.The Conversation

Danielle Wood, Chief executive officer, Grattan Institute and Tom Crowley, Associate, Grattan Institute

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Vital Signs: How do you fight a recession without precedent?


Richard Holden, UNSW

It became official on Wednesday. The Australian economy is in recession for the first time in nearly three decades.

And the drop in economic activity is unprecedented. GDP fell 7% in the June quarter. The previous biggest post-war fall in Australia was 2% in June 1974.

But Treasurer Josh Frydenberg noted that in March he was told the June quarter contraction might be 20%. In Britain it was.

Bookkeeping aside, the question that matters is how to fight this recession.

Answering it requires an understanding that it is a different type of recession to those we’ve seen before.

As I pointed out earlier this year the recessions some of us grew up with in the early 1980s and 1990s were “business cycle” recessions.

They happened because the economy overtook its inbuilt speed limit and pushed up inflation. To curb it, central banks pushed up interest rates, pushed them up too far and choked off investment and spending, sending economic activity backwards.

A recession like no other

In 2020 we face a different sort of shock.

COVID-19 has hammered economic activity, even more so in countries such as the United States where it has run out of control.

Many of the opportunities we used to have to spend money (such as airlines, theatre tickets and cafe meals) simply haven’t been there.

They’ll come back when things return to closer to normal, perhaps though the wide deployment of a vaccine.

But we might not spend as we used to.




Read more:
Six graphs that explain Australia’s recession


Some people, out of work or on shorter hours won’t have the capacity to spend. Others will want to rebuild their savings.

And others who have been saving big might decide to keep doing it.


Household saving ratio


ABS Australian National Accounts

Australia’s household saving ratio surged to 19.7% in the June quarter.

It’s a peak not reached since 1974 at a time when there was much less of an age pension and superannuation, no Medicare and surging unemployment. In other words, its at a height not reached since people really needed to save.

The Bureau of Statistics says that if household income from all sources including early access to super was counted, the ratio is even higher. Its estimate of what it calls the “household experience savings ratio” is 24.8%.

That means households saved an extraordinary one in every four dollars that came through their doors in the June quarter, up from mere percentage points a few quarters earlier.

Much of it would have been what economists call precautionary saving, understandable given how much of the future is uncertain.

There’s such a thing as too much saving

But what if this extraordinarily high saving rate lasts beyond the point it is understandable, as it did in Japan.

As with Japan in the 1990s when saving soared, real interest rates are negative. We are so keen to save we don’t need a financial return.

There were signs of it worldwide, well before the pandemic. President’s Clinton’s Treasury Secretary Larry Summers referred to it as secular stagnation, a term first coined in the 1930s.




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Saving more than we are prepared to invest shrinks economic activity. It creates unemployment which itself creates uncertainly, prodding people to save still more than they invest.

It’s one of the reasons worldwide economic growth is low, interest rates are low, and inflation is low.

During the pandemic the government is spending more than A$100 billion on measures such as JobKeeper and JobSeeker.

If we won’t spend, out government will have to

Post pandemic it might have to keep spending big on physical and social infrastructure – things such as major projects and better aged care and health care.

If we won’t spend big again, it’ll have to. It’ll need to get the economy’s long term growth rate back up to 2%, or even the near 3% the Treasury thinks it is capable of.

It’ll require a lot.




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Australia used to have one of the lowest company tax rates in the developed world, now we have one of the highest. We tax labour income too much and consumption too little. And we have a hopelessly out of date and absurdly complex industrial relations system.

Each of those things are a handbrake on economic growth.

This is an unusual recession and an unusually deep one.

Digging our way out will require us to at first contain and defeat the virus, and then spend like Keynes and cut taxes like Friedman.The Conversation

Richard Holden, Professor of Economics, UNSW

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Six graphs that explain Australia’s recession


Peter Martin, Crawford School of Public Policy, Australian National University

Australia’s recession is the deepest since the Great Depression of the early 1930s.

Nothing else comes close.

The economy shrank an extraordinary 7% in the three months to June – by far the biggest collapse since the Bureau of Statistics began compiling records in 1959.

The previous worst quarterly outcome was minus 2%, in June 1974.


Quarterly percentage change in gross domestic product


ABS National Accounts

It was going to be worse.

Treasurer Josh Frydenberg told a parliament house press conference that in March his advisers were predicting a collapse three times as big in the June quarter – 20%. In May the forecast was for a June quarter collapse of 10%.

Britain’s economy actually did collapse 20% in the June quarter; the US economy collapsed by nearly 10%.

What staved off a collapse of the order feared was unprecedented government support – more than A$100 billion in JobKeeper and expanded JobSeeker payments alone–enough to actually lift household incomes while 643,000 Australians lost their jobs and many more lost hours.


Contribution of government benefits to household income growth


Commonwealth Treasury

A better measure of living standards, taking account households and businesses, so-called “real net national disposable income per capita”, fell nonetheless, by a record 8%.


Quarterly percentage change in living standards

Quarterly change in real national disposable income per capita.
ABS Australian National Accounts

Consumer spending fell by even more, an extraordinary 12.7%, in part because lockdowns and caution in the face of COVID-19 provided fewer opportunities to spend.

Given that consumer spending climbed not at all over the three quarters leading up to the June quarter, it meant that household spending fell over the entire financial year, for the first time since records have been kept.


Quarterly change in household final consumption expenditure


ABS Australian National Accounts

Spending on goods was barely hit, while spending on services collapsed 17.6%.

Spending on transport services, a category that encompasses everything from flights to public transport, fell 88%. Spending on accommodation, a category that encompasses tourism, fell 55.7%.

Spending on recreational and cultural services, a category that encompasses sporting events, gambling and performances and cinema admissions, fell 54.5%.


Household spending by category


Commonwealth Treasury

It meant far more income than usual was saved. During the depths of the global financial crisis, Australia’s household saving ratio climbed to a peak of 10.9% as households squirrelled away one in every ten dollars they earned.

In June they squirrelled away a remarkable 19.7% – one in five dollars that came in the door.


Household saving ratio


ABS Australian National Accounts

The Bureau of Statistics says if household income from special initiatives including early access to super was included, the household income ratio would be even higher. What it calls the “household experience savings ratio” would be 24.8%.

It’s possible to see households saving one in every four dollars as a “glass half full”. Frydenberg does.

He says this never-before-experienced accumulation of savings will be useful in the recovery, giving people the capacity to spend big when restrictions ease and they are better able to spend.

What if we remain unwilling to spend…

That’s assuming people aren’t “scarred” by the experience, left with damaged psyches and unwilling spend, a possibility the Treasurer acknowledges.

He says for the next quarter, the current one that encompasses the three months to the end of September, the Treasury is expecting economic activity to shrink only a little further or no further at all.

A lot depends on how soon Victoria’s Stage 4 restrictions and other restrictions are eased, which means a lot depends on things that are unknowable.

…and businesses unwilling to invest?

The Treasurer will deliver the budget in a little over four weeks’ time.

He said a key part of it will be measures to make it easier for businesses to do business, unlocking “entrepreneurship and innovation” at low cost.

Businesses certainly could invest more. Non-mining business investment was down 9.3% in the quarter. On Tuesday the Reserve Bank made available an extra $57 billion at low cost for banks to advance businesses and households.

But they are only likely to want to invest more when they can see returns.




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Examining the figures on Wednesday, former Reserve Bank economist Callam Pickering said they showed the economy being held together “with duct tape by JobKeeper and JobSeeker”.

At his press conference, Frydenberg resisted suggestions that he revisit the wind-downs of JobKeeper and the JobSeeker Coronavirus Supplement due to take place over the next six months.

But the Victorian situation is far worse than when he announced the schedule on July 21.

He might find there’s a case for more duct tape, for a while longer.The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

No snapback: Reserve Bank no longer confident of quick bounce out of recession



Olga Kashubin/Shutterstock

Peter Martin, Crawford School of Public Policy, Australian National University

The good news in the Reserve Bank’s latest quarterly set of forecasts is that the recession won’t be as steep as it thought last time.

The bad news is it now expects ultra-weak economic growth to drag on and on, pushing out the recovery and meaning Australia won’t return to the path it was on for years if not the end of the decade.

Its so-called baseline scenario, which is for the worst recession in 70 years, relies on a number of things going right:

the heightened restrictions in Victoria are in place for the announced six weeks and then gradually lifted. In other parts of the country, restrictions continue to be gradually lifted or are only tightened modestly for a limited time, although restrictions on international departures and arrivals are assumed to stay
in place until mid 2021

Whereas three months ago in its May update the Reserve Bank expected economic activity to collapse 8% in the year to June 2020 and then bounce back 7% over the following year, it now believes it collapsed a lesser 6% but will claw back only 4% in the year to come.

The direct impact of locked doors and shut shops was smaller than it expected, but the ongoing impacts are “likely to be larger”.

It’ll depend on households

What economic growth there is will be driven by household spending. Business investment, once a key economic driver, won’t be back to anything like where it was until well into 2023.

Business after business has been telling the bank’s liaison officers they have deferred or cancelled planned spending to preserve cash.

In usual times, household spending accounts for 60% of gross domestic product.




Read more:
The Reserve Bank thinks the recovery will look V-shaped. There are reasons to doubt it


The Reserve Bank believes household spending fell 11% by the middle of the year and will start to edge back up, but it warns that household incomes are expected to slide and unemployment grow as government winds back JobKeeper and JobSeeker:

The JobKeeper program ensures that many more workers remain attached to their job than otherwise. However, it is expected some workers will be retrenched once they are no longer eligible for the subsidy in late 2020 and early 2021. Moreover, the reinstatement of job search requirements for the JobSeeker program outside of Victoria in the September quarter and the lifting of restrictions will result in more people looking for jobs

It will have been heartened by the Prime Minister’s recent decision to make the wind-back of JobKeeper less steep.

The bank says that the way businesses and households adjust to a lower income in the months ahead will be “an important determinant of the outlook over the rest of the forecast period”.


Reserve Bank of Australia

It expects employment to fall further over the rest of the year, as job
losses from restrictions in Victoria and the tightening of JobKeeper more than offset a continued recovery in jobs elsewhere.

One in ten of the businesses it has contacted through its liaison program report wage cuts, most of them targeted towards senior management, but some implemented broadly.




Read more:
The Reserve Bank thinks the recovery will look V-shaped. There are reasons to doubt it


The proportion reporting wage cuts is “significantly higher” than during the global financial crisis.

By the end of next year the bank expects the published unemployment rate to be somewhere between 11% and 7%.

The forecast range is an indication of how uncertain it is about what will happen.


Reserve Bank of Australia

The bank’s forecasts for recession and recovery have a similarly wide range.

On one hand GDP might not be back to where it was until the middle of the decade, and not back to where it would have been until the start of the following decade.

On the other, it might have made up its losses by the end of next year.


Reserve Bank of Australia

The bank’s central “baseline” forecast points to a worse recession than any since World War II and the Great Depression.


Reserve Bank of Australia

Its upside scenario assumes quick progress in controlling the virus, improving consumer confidence as a result, a quick end to the outbreak in Victoria and no further major outbreaks.

The downside scenario assumes rolling outbreaks and rolling lockdowns along with a widespread resurgence in infections worldwide.

Risks a plenty…

It says if households conclude that low income growth will be more persistent than previously expected, they might “permanently adjust their spending” leaving the economy weaker for longer.

The uncertainty could lower firms’ risk appetite, prodding them to pay down debt and increase cash buffers rather than invest even when conditions recover.




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It really is different for young people: it’s harder to climb the jobs ladder


A sustained period of lower investment, combined with “scarring” as people unemployed or underemployed find themselves unable to improve their position could “damage the economy’s productive potential”.

…little harm in spending

The bank says there’s little more it can do. It has considered negative interest rates, and believes they would be of no real help.

It’ll be up to the government to support the economy with spending. Where needed the bank will buy government bonds with money it creates in order to keep borrowing costs low.

To make the point that government shouldn’t be afraid of borrowing, it includes a graph of government debt since Federation.


Reserve Bank of Australia

Its point is that as a proportion of the economy the government has borrowed and spent much much more in the past.

To the extent that it is needed to make households feel able to spend and businesses able to invest, it is worth it.The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Vital Signs: COVID-19 recession is different – and we need more stimulus to deal with it.



Shutterstock

Richard Holden, UNSW

Australia has done well on the public health front during the COVID-19 pandemic, thanks to decisive action by the National Cabinet in March. Australia has done better than most countries on the economic front, too, thanks to the federal government’s large fiscal measures.

But we are at a crossroads.

By September, we may well have largely dealt with the public health aspects of the pandemic. But the economic recovery will only just be starting. The danger is that misunderstanding the nature of this economic crisis will lead the government to bungle that recovery.




Read more:
Eradicating the COVID-19 coronavirus is also the best economic strategy


This recession is not like any recession in living memory.

Those of the 1980s and 1990s were “business cycle” recessions. The economy outpaced its inbuilt speed limit and inflation rose. To curb inflation, central banks pushed up interest rates. Those higher rates ended up choking off investment and spending too much.

The global financial crisis of 2008 was different again. That basically involved a massive dislocation in credit markets due to defaults (or the prospect of defaults) on mortgage debts packaged up and sold as investment products – known as mortgage-backed securities and collateralised debt obligations. When it finally became clear how bad these investments were, global credit markets effectively froze, bringing a range of otherwise healthy companies close to bankruptcy.

COVID-19 Recession

The economic crisis now was caused by a massive supply shock which, in turn, was caused by the virus.

For instance, Sweden’s “self-lockdown” saw economic activity drop 25%. Denmark’s coordinated lockdown resulted in economic activity falling 29%. According to Asger Lau Andersen and colleagues at the University of Copenhagen’s Center for Economic Behaviour and Inequality:

This implies that most of the economic contraction is caused by the virus itself and occurs regardless of whether governments mandate social distancing or not.

This is COVID-19 Recession phase one – a big supply shock while the virus ravages both the community and the economy.

Once the public health crisis has been brought under control, countries will emerge from the supply shock with fractured economies.

Australia will likely be in this position in the next couple of months. Household and company balance sheets will be badly damaged. Consumer and business confidence will be low. Unemployment high. Underemployment higher still. Renters or mortgage holders at greater risk of defaulting on payments.




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The economy in 7 graphs. How a tightening of wallets pushed Australia into recession


This will mark the beginning of COVID-19 Recession phase two.

Supply shocks create demand shocks

In a remarkable paper published in April, economists Veronica Guerrieri, Guido Lorenzoni, Ludwig Straub and Iván Werning develop a theory of what they call “Keynesian supply shocks”.

Their theory demonstrates how supply shocks can create demand shortages when markets are “incomplete” – which is pretty much all markets, all the time.

The COVID-19 supply shock is the shutting down, directly or indirectly, of industries such as hospitality and tourism. Workers in affected businesses lose their jobs and income. If they were on low incomes – as many workers in food and accommodation services are – their “marginal propensity to consume” (rather than than save their income) would have been high. If you don’t earn much, you don’t save much – you just spend. So their drop in consumption will be large unless they borrow to spend.

This is going to lead to an overall demand shortfall unless the workers who still have jobs and steady incomes start spending a lot more. But people typically won’t want to do that for multiple reasons – including the fact the goods consumers ordinarily spend big on – such as exotic holidays – are still not available.

The policy response

This all suggests policy responses to this economic crisis must be different to past responses.

Phase one has required ameliorating the supply shocks as much as possible.

Arguably the Australian government’s JobSeeker and JobKeeper programs have done that reasonably well – although JobKeeper in particular should have been better designed.

Phase two needs to deal with the demand shortfall that will become more apparent as the supply shocks fade.

That will require more stimulus, not less. Any focus on getting back to a balanced budget – encapsulated by Prime Minister Scott Morrison warning the government can’t save every job and needs to be “extremely cautious about expenditure” – is precisely not what is needed.




Read more:
The costs of the shutdown are overestimated — they’re outweighed by its $1 trillion benefit


In times of widespread falls in demand, with monetary policy that can no longer respond, fiscal contraction simply makes the crisis worse.

It’s a lesson learnt long ago by economists of all stripes, and immortalised by former US Federal Reserve chairman Ben Bernanke on the occasion of Keynesian critic Milton Friedman’s 90th birthday in 2002:

Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.

Mr Morrison needs to remember that lesson.The Conversation

Richard Holden, Professor of Economics, UNSW

This article is republished from The Conversation under a Creative Commons license. Read the original article.

We may live to regret open-slather construction stimulus


Martin Loosemore, University of Technology Sydney

Many countries around the world, including Australia, are looking to the construction industry to help rebuild economies. Industry bodies such as the Master Builders Association are strongly urging governments to bring forward spending on already approved infrastructure projects. They also want these projects to be unbundled into smaller contract packages so small local businesses and the whole sector get a piece of the pie.

We should not ignore the risks involved in the rush to get the economy going again. We will pay for mistakes made now in the form of debt created by cost blowouts and unscrupulous developers. We will have to live with poor-quality, ill-conceived and environmentally damaging developments for decades.

Of course, construction and infrastructure programs provide us with a powerful stimulus tool. It’s why federal and state governments are looking to this sector to drive recovery. The social impact of investing in more construction and infrastructure could certainly be significant.




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Construction is one of the country’s largest employers. The sector employs about 1.2 million people directly, and indirectly much more. It’s one of the largest employers of apprentices, youth and disadvantaged groups such as Indigenous people and refugees.

Investment in construction flows through the broader economy. The Australian Bureau of Statistics estimates every A$1 million spent on construction output generates A$2.9 million in output across the economy as a whole. Every job created in construction leads to another three in the wider economy.

Knowing this, state and local governments are relaxing hard-won controls to fast-track projects. Planning ministers are being given more power to override many of the statutory timeframes that govern normal planning and approval processes.

Fast-track approach creates risks

This approach creates many risks as well as many opportunities. If we do not control these risks in our rush to stimulate the economy, we are likely to regret this in future.

While the construction industry includes some world-class firms, the government-commissioned Productivity Commission inquiry into infrastructure raised many concerns about the lack of transparency and trust in development and infrastructure approval processes. It noted infrastructure project overruns were common. The extra costs amount to billions of dollars.

We are already battling a crisis of confidence in the residential apartments sector. Poor-quality buildings have devastated people’s lives. In New South Wales, the state government has appointed a building commissioner to clean up the mess.




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New NSW building law could be a game changer for apartment safety


Unscrupulously exploiting a crisis

Relaxing controls also opens the door to unscrupulous developers to exploit the crisis for their own personal gain. Transparency International’s recent submission to a Senate inquiry argues that powerful groups have too often prevailed over public interest. It warns:

Businesses in highly regulated industries, such as transport, mining, energy and property construction, all actively seek to influence politicians, although the channels of influence vary by industry.

In some countries we are already seeing developers exploiting the COVID-19 crisis to argue for relaxation and even removal of regulations put in place to ensure projects contribute positively to the communities in which they are built. A former senior adviser to US President Donald Trump has argued that his administration should trigger an emergency override of America’s environmental protection laws and establish “Australian-style permitting”.

If fast-tracked projects are undertaken without appropriate controls purely to boost the economy rather than meet a real community need, then we will be paying for this crisis for far longer than we expect.




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Focus must be on community benefit

As Elizabeth Mossop warned in her recent Conversation article, our governments are committing taxpayers to further debt to stimulate recovery from the economic impacts of the coronavirus pandemic. Infrastructure spending is great for economic stimulus, but it still has to be the right kind of infrastructure that meets local community needs.

Mossop argues for small-scale stimulus projects focused on local small businesses, rather than multinationals, to deliver broad, long-term community value. Investing stimulus funding in local businesses means the money recycles in the community, reduces inequality and helps meet real community needs.

Of course we need to move quickly to rebuild our economy. But we must also place the community at the heart of any decisions about which projects we push through the system.




Read more:
The PM wants to fast-track mega-projects for pandemic recovery. Here’s why that’s a bad idea


We could learn much from the principles of urban acupuncture, which would advocate a community-based approach to stimulus. It would also warn against awarding contracts to major multinationals. These corporations suck money out of needy communities into the pockets of shareholders with no links to the communities we need to help.

Research shows procuring from local businesses provides a 77-100% economic advantage and an 80-100% increase in jobs compared to procuring from multinationals.

If stimulus programs follow traditional approaches to infrastructure procurement in Australia, then we will miss an unprecedented opportunity to tackle growing inequity. Even before this crisis, many younger and poorer members of our society were already being left behind.The Conversation

Martin Loosemore, Professor of Construction Management, University of Technology Sydney

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Our needlessly precise definition of a recession is causing us needless trouble



DAVID CROSLING/AAP/RBA

John Hawkins, University of Canberra

Later today we’ll know what the bushfires and the coronavirus did to the economy in the three months to March: whether gross domestic product grew (as is usual) or whether it shrank (as is rare, and heralds a recession).

Gross domestic product (GDP) is an imperfect measure of everything that’s produced in the three months (and also everything that’s spent and earned).

Imperfect or not, it is measured the same way every time, which is why changes in it give us a good idea of changes in what we produce and earn.

Most likely it will tell us that what we produced and earned shrank.




Read more:
Australia’s first service sector recession will be unlike those that have gone before it


There is a minority view, held by five of 25 economists surveyed by Bloomberg, that it could tell us the economy grew, perhaps because of panic buying of toilet paper and the like in March, although much of the demand will have been satisfied by running down inventories in March rather than producing more.

This has led to headlines saying Australia might avoid a recession.

It would come as a surprise to those who have lost their jobs, had no work or closed their businesses. It reflects the media’s common, but flawed, definition of a recession as two consecutive quarterly falls in real GDP.

The ‘technical’ definition is wrong

This is sometimes referred to this as a “technical” recession, which is an odd distinction given that no-one refers to a “generic”, an “artistic” or a “lay” recession.

The inadequacy of the definition is illustrated by looking at the Australian economy’s response to the 1973 oil shock and subsequent global economic slowdown.


Quarterly change in GDP, seasonally adjusted 1960 – 2000


ABS 5206.0

Real GDP contracted in only one quarter of 1974, but by a massive 2%, the biggest plunge on record, and enough to mean that less was produced in the last quarter of 1974 than in the last quarter of 1973.

The unemployment rate more than doubled in the space of year. Consumer confidence plummeted.

Any reasonable person would have concluded that during 1974 the Australian economy was deep in recession.

So what is a recession?

Probably the most reputable source is the US National Bureau of Economic Research which has been studying business cycles for a century, and in the United States is regarded the arbiter of when recessions begin and end.

It defines a recession as

a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales

Note that there is nothing in this definition that limits a recession to (or requires) two quarters of sliding GDP in a row.

A “depression” is a very severe recession.

The newspaper article that sparked talk of ‘technical’ recessions.
New York Times

An elephant would still be an elephant if it didn’t have a trunk. As with a recession, there are many ways of defining an elephant, but we know what one is when we see one.

The narrower two-quarters-in-a-row definition was introduced in a 1974 newspaper article by Julius Shiskin, an economist then serving as the US Commissioner of Labor Statistics.

He set out some “useful guidelines” that could be used to guess at whether something was a recession while waiting for the formal declaration from the National Bureau of Economic Research.

One was “declines in real GNP for two consecutive quarters”.

It’s a rule of thumb…

The simplicity of the suggestion struck a chord, and it was widely adopted.

Australia has no institution comparable to the National Bureau of Economic Research to date recessions, but there is broad consensus we have had six:

  • the prolonged depression in the 1890s when the Federation drought coincided with the collapse of a speculative boom in Melbourne and weak global demand

  • the global great depression of the 1930s which followed the Wall Street crash and was exacerbated by tariff wars

  • the milder recession that followed a credit squeeze in the early 1960s

  • the mid-1970s recession also caused by a tightening of access to credit in the face of inflation and a sudden jump in oil prices

  • the early 1980s brought on a US recession and exacerbated by drought

  • the early 1990s “recession we had to have”, brought on by extremely high interest rates that caused the collapse of several Victorian financial institutions

During the 2008 global financial crisis, Australia’s economy performed better than almost all its peers, with no annual fall in GDP and a relatively small increase in unemployment.

When, after having fallen in the December quarter of 2008, real GDP climbed rather than fell again in the following quarter, Prime Minister Rudd said he had never been as elated.

It allowed him to claim he had avoided a “technical” recession.

…with real-world consequences

It is widely agreed that GDP will have fallen in the June quarter of 2020, the one following the March quarter.

So long as lockdowns do not need to be reimposed, the economy is likely to recover a bit in the September quarter, meaning that, unless GDP fell in the March quarter, Australia might be able to boast it has “technically” avoided a recession.

It would happen in the midst of what the Reserve Bank governor described this week as the biggest economic contraction since the 1930s.

It’ll turn on whether today’s figures show show a small rise (maybe 0.1%) or a small fall (maybe 0.1%) in March quarter GDP.

In other words, it’ll depend on nothing much.




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The Reserve Bank thinks the recovery will look V-shaped. There are reasons to doubt it


But the media definition of “technical” recession might be influencing policy design. When the government was concerned that the bushfires would lead to GDP contracting in the March quarter, its focus seemed to be on avoiding a second fall in the June quarter.

Its A$750 payments to income support recipients were rolled out only after March 31. Its increase in the instant asset write-off and cash flow assistance to small businesses were to end on June 30.

Once it became clear that GDP would fall in the June quarter, it appeared to shift its focus to avoiding a further fall in the September quarter, announcing JobKeeper and JobSeeker programmes that would run to the end of September.

It’s not the same as providing help when needed. It might be a consequence of our needlessly-precise definition of a recession.The Conversation

John Hawkins, Assistant Professor, School of Politics, Economics and Society, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article.