Recessions are very costly events. The income losses come quickly and sustain for several periods after the worst has occurred. Unemployment rises sharply and if government doesn’t take appropriate action (job creation), it takes a very long time to return to previous levels. The losses of income are huge and are lost forever. The related pathologies such as increased rates of family breakdown, increased crime rates, increased alcohol and substance abuse, increased suicide rates, increased incidence of mental and physical problems, the lost opportunities for skill development and work experience among the young, make the costs of enduring recession very high. These costs dwarf any of the estimated costs of so-called structural rigidities (micro imbalances) that have been produced by researchers over the years. Mass unemployment is the single greatest source of income loss. It is amazing therefore that policy makers do not prioritise the avoidance of recession yet expend vast energy talking about structural reforms etc. The fact is that recessions can always be avoided and should be. Governments can always adjust fiscal policy settings to ensure there is sufficient total spending in the economy to avoid recession, irrespective of what the private sector spending patterns are.
The following graph shows the annual change in the Australian unemployment rate from 1945 to 2014. A positive bar indicates a rise in unemployment rates and a negative bar a drop.
You can see how the pattern has changed over the period, which can be marked by two quite distinct policy regimes.
This year marks the 70th anniversary of the presentation of the – White Paper on Full Employment – to the Australian Parliament, which marked a defining event in policy history.
As an aside, my research centre – Centre of Full Employment and Equity (known as CofFEE) – will be holding a one-day workshop in either Sydney or Melbourne to mark the anniversay (Saturday, May 30, 2015). More details as we plan the event).
Prior to 1975, the Federal government was committed to maintaining true full employment and ran deficits most of the time to ensure there was sufficient aggregate spending to absorb the growing workforce.
After 1975, the Federal government progressively abandoned that commitment as the neo-liberal policy dominance took hold. The 1975-76 Fiscal Statement was the first of the era to demonise deficits and to enunciate an ‘inflation-first’ strategy. The Government knowingly allowed unemployment to rise as part of the swing to the right.
Please read my blog – Tracing the origins of the fetish against deficits in Australia – for more discussion on this point.
The pattern changed after 1975. The rises in unemployment associated with downturns were larger and the recovery periods much longer. By the 1990s, the Government was allowing unemployment to rise for four successive years and for the next 15 years, only 2 of them saw modest declines in the high unemployment rate.
This was the neo-liberal period’s legacy as unemployment became a policy tool (to suppress wage demands and redistribute national income to profits) rather than a major policy target, which it had been in the prior period after World War II.
The News Limited (Murdoch) press published an article on November 14, 2014 – Economist expects recession in 2015 – which reported on a bank economist’s prediction that a recession for Australia this year.
The prediction, in itself, is not startling. If policy settings do not change (that is, unless they become more expansionary) and the Federal government goes through with its ill considered plan to impose even more fiscal austerity, then Australia will certainly go close to negative real GDP growth in the middle two quarters of the year.
Growth slowed considerably in the September-quarter 2014 and last month the unemployment rate rose sharply (0.3 points) to 6.4 per cent, confirming the trend to negative employment growth.
So the economy is clearly heading down.
The startling aspect of the journalism was that it didn’t question the economist’s claim that:
AUSTRALIA is headed for recession and nothing can be done to stop it … “It’s too late, the wheels are in motion” …
He also claimed that the recession will “create a sense of urgency that could lead to simplification of taxes and regulation”.
First, no recession is inevitable. A responsible, currency-issuing government always has the financial capacity to bridge any spending gap brought about by a reduction in private investment.
In Australia’s case, the massive investment boom that was associated with the mining sector has now ended and with austerity the principle policy mindset driving unemployment up, the non-mining firms are reluctant to invest much.
Also compounding the malaise, is the fact that households are acting in a wary manner with respect to consumption spending, in part, because they are so indebted from the pre-GFC credit binge, and also because the fear of unemployment is present.
But the Federal government could clearly expand its fiscal deficit with appropriate targetted spending measures and job creation programs, which would quickly reverse the private sector stagnation.
That is what the Government always did in the pre- neo-liberal period. It made sure it smoothed out non-government spending cycles to minimise the impact on unemployment and income generation.
Needless to say, real GDP growth rates were higher on average in this period, recessions fewer and shorter, and unemployment averaged 2.1 per cent. Since 1975, unemployment has averaged 6.9 per cent. The differences are not related to regulations or tax structures but to the willingness of the Government to take responsibility for job creation when private sector jobs growth lagged.
Second, the solution is not to give tax breaks to corporations etc or to further deregulate. More tighter regulation is required in the financial sector (certainly in banking and financial planning).
The corporate sector wants massive labour market deregulation – wage cuts, overtime rates cut, job protections abandoned, occupational and health standards reduced, and the rest of it. That will only cut into consumer confidence further.
Investment is driven by firms hoping to sell the expanded output that the extra productive infrastructure makes possible. Consumption spending and government spending drives those sales. Firms will not take on extra staff if they cannot sell the output no matter how cheap it becomes.
For a wealthy nation such as Australia, the wage cutting route and the make-jobs-more-precarious route are not the way to general prosperity. It is not even likely to make many firms more profitable.
The article thus reflected the latest narrative that the ‘market’ determines outcomes and governments can do nothing to stop the trends, other than to deregulate and introduce other pro-business policy changes.
The exact opposite is the truth. The government can always dominate the market outcomes and shape the destiny of the economy to advance socially-desirable outcomes if it has the will.
The big difference between the two periods shown in the introductory graph is that the will of the government changed as the neo-liberal ideology began to dominate.
All the talk about structural rigidities, globalisation, excessive trade union influence, poorly designed income support systems, etc etc are just smokescreens to divert attention from the ideological distaste among neo-liberals for active government involvement which treats business as just one part of the economy rather than the economy.
And, further, these smokescreens are designed to disabuse us of the notion that the economy is just one part of and a servant of society and to promote the alternative neo-liberal notion that we are all just a bunch of competing, maximising individual and if left alone to pursue our own self-interests will deliver the best for everyone and everything. If anyone is left behind then they haven’t tried hard enough and if we stop to help them we will only entrench their inertness.
On Tuesday, the Fairfax press published an article that topped the one discussed above (February 17, 2015) – Australia needs a recession to ‘concentrate’ political minds.
Once again the national media journalist in Australia (and it is the same all over) thought that his role was to be a mouthpiece or spokesperson for some investment banker who wanted his twisted version of economics to be disseminated in the national press.
Presumably, there was a commercial motive for the visit to Australia by the banker from Edinburgh who gave us a lecture about how:
Australia might need a recession to focus political minds on the growing imbalances in the economy
The journalist might have asked at the outset what the commercial interests the Edinburgh-based global asset manager Standard Life Investments, which the chief economist was representing, were in Australia.
He might have enquired in some depth what exposure the investment bank had to Australian economic outcomes and, in particular, certain sectors that might benefit from the policy changes he was claiming to be necessary.
Silence. Not a single hint from the journalist.
The article was presented as if this economist had insights which were important for us to learn about.
The article said that:
… it could take a 1980s-style crisis to force politicians to tackle the country’s shrinking income base while restructuring expenditure. A global downturn, coupled with policy missteps and a febrile industrial relations environment, drove inflation well into double digits, and unemployment above 10 per cent, in the early 1980s. The deep, enduring recession led to many of the reforms that made Australia a free-trading, low-tariff, globalised economy.
What followed those recessions was an increasingly neo-liberal focus which abandoned full employment as an objective, created the conditions for increased casualisation of the workforce, more precarious jobs, sluggish real wages growth, a massive redistribution of national income to profits, increased income inequality, sluggish growth, entrenched high unemployment, and a massive buildup of household debt.
Further, our cities have become difficult due to the failure to invest sufficiently in public transport infrastructure, public hospitals and schools are strained and breaking down, and there is no coherent strategy for addressing climate change and environmental degradation.
Some progress! Australia has gone backwards in many important ways in the last three decades.
According to the article, the investment banker also subscribes “to the principle of a balanced federal budget”. Did the journalist ask him to explain the basis for that subscription?
At present, with growth slowing and unemployment rising the fiscal deficit needs to be significantly larger than it is. It is highly unlikely given the long-period of external sector deficits and the current cautious return to saving by households that a fiscal surplus will ever be appropriate in the foreseeable future.
That is the conversation the nation has to have but no journalist will take it up. They all mindlessly buy into the we need to get back into fiscal surplus. Some become manic on that question (News Limited!), while others are prepared to run with the claim that there is no current urgency but it has to occur in the near future.
The investment banker was in the latter camp and said that “The whole obsession with quickly getting back to a surplus is really counter-productive.” We can agree on that.
But then, so as not to linger on the reasonable, he was quoted as saying that:
But structural impediments to growth have to be addressed by government policy – and it’s just not occurring.”
Growth slowed relatively quickly in Australia in the quarters after the fiscal stimulus was retrenched in 2012. It slowed further as private investment growth fell as the mining boom ended with the decline in the terms of trade (commodity prices – iron ore, coal etc).
Conversely, in 2009, real economic growth picked up very quickly when the Australian government introduced is rather large and quick fiscal stimulus. Australia avoided an official recession while most other nations entered the great recession.
No major structural changes, regulations, labour market rules, income support measures, tax structures, have changed over both periods.
The changes in growth rates are all down to aggregate spending and they have been dominated in the last six years by the fiscal swings and private investment (in response to terms of trade which are externally set).
Tax changes that have occurred have been favourable to business (mining and carbon tax abandoned). Growth has slowed further since those taxes were withdrawn by the Federal government.
If the government placed a few billion dollars of orders for public infrastructure and introduced a Job Guarantee (or any large-scale job creation initiative) then growth would rebound within a quarter – with zero structural change occurring.
That doesn’t mean that there needs to be structural changes to policies.
1. Banks need to be more tightly regulated.
2. Coal companies need to be put on notice that they will be closed down by law within 20 years.
3. Financial market regulations have to be introduced banning any speculative transaction that cannot be shown to advance the real interests of the economy.
4. Companies that pollute or otherwise degrade the environment have to pay fines and/or be closed down.
5. Wage setting institutions need to be empowered to ensure that real wages grow in line with national productivity growth to stop national income being redistributed to profits.
6. Lots more things here relating to inequality etc.
But none of these changes preclude the immediate growth stimulus that a fiscal policy intervention can achieve – any time the government has the will.
Finally, if a major recession was the stimulus for policy makers to act constructively and enhance the well-being of the people to whom they are accountable and responsible, how does the investment banker explain the Eurozone?
A passive press is a danger to democracy. Allowing these investment bankers to advance their commercial interests with little scrutiny and perpetuate myths about the effectiveness of fiscal policy interventions is a common practice among the fourth estate now.
There is never a need for a recession. They damage peoples’ lives – in some cases irretrievably. Suicide rates go up. Families break down. Mental and physical health falters. Crime rates rise. Poverty rises. Generations are denied work experience and on-the-job training and more.
As Arthur Okun wrote – the unemployment associated with recessions is “just the tip of the iceberg”.
Government fiscal intervention can always prevent a recession from occurring. It may not stop the fluctuations in private spending which would lead to a recession unchecked. But it can smooth out the aggregate spending variations that the private spending changes promote.
It is irresponsible to report that there is “nothing that can be done” to stop a recession.
Australian government considering dropping the 5-yearly population census
There was a Fairfax report from Peter Martin today (February 19, 2015) – Abbott government considers axing the Australian census to save money – that indicated the Australian government wants to drop the 5-yearly population census as a fiscal austerity measure.
You might also read this Fairfax article (February 19, 2015) – Census is good value and fundamental to our democracy.
I will write more about this issue once the facts become clearer.
But it is lunacy to abandon this data gathering exercise. The $440 million that will allegedly be saved is nothing. There is no financial crisis facing the Australian government. It has all the cash it needs and spending this amount will certainly not endanger any inflation barrier.
The Census is a magnificient dataset that researchers, policy makers, urban and social planners, etc use as an evidence base.
Personally, many of my published works in regional science have relied on the high quality data that the 5-yearly Census provides.
As Peter Martin writes:
The census offers a snapshot of where Australians come from, where they live, what type of families they have and how they work.
The small area and finely spatial-grained data that the Census provides, especially in regional areas, is irreplacable.
One of our leading demographers was quoted as saying:
It does what sample surveys cannot … It can track what is happening to comparatively small groups of people, such those born in particular countries. That can’t be picked up by smaller surveys … There is simply no other way of knowing how many people are in each town or suburb. Planners would be working without guidance. Over time it would be harder to know the size of the Australian population.
By way of juxtaposition, Matt Wade reported (second linked article) that the embarassing G20 meetings last year, which Australia hosted required Federal government outlays of $500 million.
Further, another Fairfax report today (February 19, 2015) – Abbott government’s metadata plan tipped to cost $300m – reports that the conservative government’s paranoid plan to force all telecommunication and Internet companies to keep massive databases of their customers’ metadata would cost $300 million.
This plan has massive flaws and will do nothing to reduce the risk of terrorist attacks.
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.