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



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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.




Read more:
Now we’ll need $100-$120 billion. Why the budget has to spend big to avoid scarring


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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Have we just stumbled on the biggest productivity increase of the century?


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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When it comes to economic reform, the old days really were better. We checked


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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When it comes to economic reform, the old days really were better. We checked


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



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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.




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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.




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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.



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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.




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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.




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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.




Read more:
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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.

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


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

A go-slow on spending sent the economy backwards 0.3% in the first three months of this year, only the fourth such decline since Australia was last in recession in the early 1990s.

Treasurer Josh Frydenberg says Treasury has told him the next three months, the June quarter that we are in at present, will see a “far more severe” contraction, one private sector forecasters believe could be as high as 10%.

Asked whether that meant Australia was already in recession, he said it did.


Quarterly GDP growth since 1990


ABS 5206.0

Most unusually for an economic downturn, incomes rose throughout the quarter, pushed higher by a 6.2% increase in government payments related to COVID-19 and the bushfires, and an 11.1% increase in insurance payouts as a result of bushfires and hailstorms.

Household incomes even rose in per capita terms, by 0.1% after abstracting for population growth.

But rather than spend more, Australian households dramatically increased saving in the quarter, pushing the household saving ratio up from 3.5% to 5.5% and pushing down household spending 0.2%.


Household savings ratio


Commonwealth Treasury

Spending on goods actually increased over the three months as Australians stocked up on essentials including toilet paper in March.

The production of “petroleum, coal, chemical and rubber products” surged 8.1% as consumers stocked up on cleaning and disinfectant products.

But spending on services plummeted, led down by dramatic falls in spending on transport and hotels, cafes and restaurants.


Household consumption, March quarter


Commonwealth Treasury

Spending on transport services (airlines and the like) fell 12.0%. Spending on hotels, cafes and restaurants fell 9.2%, each the biggest fall on record.

“Production” in these industries fell 4.9% and 7.5%. Profits fell 6.8% and 14.2%.

Spending fell on ten of the 17 consumption categories.


Household consumption by category, March quarter


Commonwealth Treasury

Most of the changes took place at the very end of the March quarter.

A new index of the “stringency” of COVID-19 containment measures released with the national accounts shows these ramped up only in the final two weeks.

Most have been in place for the entirety of the June quarter to date, suggesting the impacts on spending and production will be a “lot more substantial”, in the words the treasurer used in the national accounts press conference.


ABS stringency of containment measures index


ABS 5206.0

Were it not for government spending, which has climbed 6.2% throughout the year, the plunge in March-quarter GDP would have been much more severe.

Calculations of the Bureau of Statistics suggest it would have been twice as severe, a March quarter decline of 0.6% rather than 0.3%.


General government expenditure


Commonwealth Treasury

The treasurer described Australia as “on the edge of the cliff” in the March quarter, facing “an economist’s version of Armageddon”.

The treasury had been contemplating a fall in gross domestic product of 20% in the June quarter. Australia has avoided that fate by acting on health and the economy early.

Its fall in GDP of 0.3% in the March quarter was one-third the OECD average.


International comparisons, real GDP growth, March quarter


Commonwealth Treasury

The treasurer has scheduled an economic update for July 23 which will include the result of a review of the JobKeeper program.

Asked whether it could be referred to as a mini-budget, he said it could be.




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


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.

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



Shutterstock

Isaac Gross, Monash University

Australia is on the brink of its first recession in almost 30 years.

The Australian Bureau of Statistics will deliver the official economic growth figure for the March quarter on Wednesday.

If it is negative (as is likely because of the downturn and the bushfires, but not guaranteed because of the surge in spending as Australians stocked up on essentials in March) and is then followed by another negative result in the June quarter (which is all but certain) Australia will be in what some people regard as a technical recession.

But the technicalities don’t matter. Close to 20% of Australia’s labour force is either unemployed or underemployed, something that dwarfs previous recessions.

Data already released suggests it will be different in other ways; important ones with important implications.

It will be our first “service sector” recession.

Recessions are usually defined by large falls in investment; in new cars, new houses and new businesses.




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As a result, in the early 1990s recession construction and manufacturing businesses were devastated. By contrast, employment in social services, education and food services continued to grow throughout the recession.

This time will be different.

Between March 14 and May 2 some 27% of the jobs in the accommodation and food services industry vanished, 19% of the jobs in the arts and recreation industry, and 11% of the jobs in professional and technical services – all well above the 6.5% and 7% of jobs lost in construction and manufacturing.


Jobs lost by industry, March 14 to May 2
,


6160.0.55.001 – Weekly Payroll Jobs and Wages in Australia, Week ending 2 May 2020

The closure of Australia’s borders coupled with the ongoing fear of infection, creates the risk that service sector job losses will continue to grow.

Even when the recession is over, they won’t bounce back in the way that manufacturing and construction jobs might have.

When previous recession temporarily slowed demand for things such as cars and buildings, the pent-up demand led to a surge in sales when incomes recovered.




Read more:
Unlocking Australia: What can benefit-cost analysis tell us?


But services are harder to store over time. Someone who skips the hairdresser for a year won’t buy a year’s worth of haircuts when conditions improve.

Nor will someone who stops going to pubs (probably) buy six months worth of drinks when pubs reopen.

It means most service sector businesses can’t expect a quick rebound. Four out of every five employed Australians work in services.

Not your grandparent’s recession

The usual playbook for dealing with a recession is to target the sectors most affected. This has meant rolling out big infrastructure projects that can hire newly-unemployed construction workers, and cutting taxes to encourage businesses to expand and hire.

But that strategy won’t be as effective this time. The tour guides and massage therapists whose service sector jobs have been destroyed are ill-suited to building high-speed trains.

And a lot of infrastructure programs are designed on the basis that Australia’s population would continue to expand. With almost two thirds of Australia’s population growth driven by overseas migration and borders now closed, that is no longer certain. Many projects that were previously considered worthwhile may no longer stack up.

The government will have to focus its recovery programs on those sectors hardest hit. For some, this will be straightforward.




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Look beyond a silver bullet train for stimulus


The government already plays a large role in the education industry. Universities could have their funding boosted to make up for the shortfall of international students, and domestic students should be encouraged to enrol in virtual courses to improve their skills.

For some other service industries, the government should extend JobKeeper to provide continuing assistance after it is due to end in September. Social distancing requirements are likely to limit the operations of businesses such as cinemas and theatres some time. Tourism will also remain depressed as long as our borders remains closed.

Despite the focus on mining and manufacturing in our economic discourse, Australia’s economy is overwhelmingly dominated by services.

If the government wants to stop this recession from turning into a depression, it will have to redirect its policy playbook toward services.The Conversation

Isaac Gross, Lecturer, Monash University

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

Recessions scar young people their entire lives, even into retirement



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Jenny Chesters, University of Melbourne

It is well-established that recessions hit young people the hardest.

We saw it in our early 1980s recession, our early 1990s recession, and in the one we are now entering.

The latest payroll data shows that for most age groups, employment fell 5% to 6% between mid-March and May. For workers in their 20s, it fell 10.7%

The most dramatic divergence in the fortunes of young and older Australians came in the mid 1970s recession when the unemployment rate for those aged 15-19 shot up from 4% to 10% in the space of one year. A year later it was 12%, and 15% a year after that.


Unemployment rates 1971-1977


ABS 6203.0

At the time, 15 to 19 years of age was when young people got jobs. Only one third completed Year 12.

What is less well known is how long the effects lasted. They seem to be present more than 40 years later.

The Australians who were 15 to 19 years old at the time of the mid-1970s recession were born in the early 1960s.

In almost every recent subjective well-being survey they have performed worse that those born before or after that period.




Read more:
There’s a reason you’re feeling no better off than 10 years ago. Here’s what HILDA says about well-being


Subjective well-being is determined by asking respondents how satisified they are with their lives on a scale of 0 to 10, where 0 is totally dissatisfied and 10 is totally satisfied.

Australia’s Household, Income and Labour Dynamics survey (HILDA) has been asking the question since 2001.

In order to fairly compare the life satisfaction of different generations it is necessary to adjust the findings to compensate for other things known to affect satisfaction including income, gender, marital status, education and employment status.

Doing that and selecting the 2001, 2006, 2011 and 2016 surveys to examine how children born at the start of the 1960s have fared relative to those born earlier and later, shows that regardless of their age at the time of the survey, they are less satisfied than those born at other times.


Subjective wellbeing by birth cohort over four HILDA surveys

Subjective well-being on a scale of 0 to 10 where 0 is totally dissatisfied and 10 is totally satisfied.
Regressions available upon request

The consistency of lower levels of subjective well-being reported by the 1961-1965 birth cohort suggests something has had a lasting effect.

An obvious candidate is the dramatic increase in the rate of youth unemployment in at the time many of this age group were trying to get a job.

Over time, labour markets can recover but the scars of entering the labour market during a time of sudden high unemployment can be permanent.




Read more:
The next employment challenge from coronavirus: how to help the young


The impacts of the early 1980s and early 1990s recessions on young people were alleviated somewhat by the doubling of the Year 12 retention rate and later by the doubling of university enrolments.

But the education sector is maxed out and might not be able to perform the same trick for the third recession in a row.

Reinvigorating apprenticeships and providing cadetships for non-trade occupations might help. Otherwise the effects of the 2020 recession on an unlucky group of Australians might stay with us for a very long time.The Conversation

Jenny Chesters, Senior Lecturer/ Research Fellow, University of Melbourne

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