Saturday, May 23, 2020

Women, part-timers and the young hardest hit by jobs crisis

At a time like this, measuring the rise in joblessness is very important. But it’s a trickier job than many realise. You have to draw boundaries somewhere, and where they should go can always be debated.

But some who don’t like comparing shades of grey think the problem can be reduced to good guys and bad guys. Why do the figures look strange? Because some prime minister a few years back changed the definition of unemployment to make it look smaller. Would you believe that someone who’s worked as little as one hour in a week is counted as employed?

Sorry, this fiddling is an urban myth. The truth isn’t nearly so exciting. But before I deflate the balloon, let me show you the circumstantial evidence.

The most recent figures, for April, show America’s rate of unemployment leaping more than 10 percentage points to 14.7 per cent – in just a month. Canada’s unemployment jumped 5 points to 13 per cent.

What happened to our rate? It crept up from 5.2 per cent to 6.2 per cent. Really? Are you kidding? What’s that if it’s not a fiddle?

Or, consider this. Our figures show that about 900,000 people lost their jobs in the four weeks to mid-April. But they also show that unemployment increased during the period by only about 100,000. How’s that possible? What’s that if it’s not a fiddle?

Actually, it’s support for one of my favourite sayings: the world is a complicated place. There are puzzles everywhere. If you want everything to be black or white – all good or all bad - you should never have left the security of primary school.

So, it may look like a conspiracy, but it ain’t. A sign that we’re dealing with a myth is that the identity of the PM who did the dirty deed changes with the political sympathies of the person who tells you they remember him doing it.

The figures we get each month for how many people are employed, unemployed or neither (“not in the labour force”) come from a huge monthly survey of households conducted by the Australian Bureau of Statistics, which brooks no interference from politicians.

The bureau follows international conventions set by the United Nations' International Labour Organisation, in Geneva. Its definitions haven’t changed in many decades. (I once ran into a union-movement economist who was an Australian representative on the ILO committee reviewing the definitions. To my surprise, he staunchly defended the decision to leave them unchanged, including the bit about one hour’s work meaning you were employed.)

As the bureau explains in its release, the main reason the North Americans’ unemployment rates are so much higher than ours has to do with workers who’ve been “stood down” for some weeks because the boss has no work for them, but hopes to bring them back when things improve.

We class such people a still employed, whereas the North Americans class them as unemployed. The bureau estimates that, if we did it the American way, our unemployment rate would be not 6.2 per cent, but 11.7 per cent.

Although about 900,000 Australians ceased to be employed during the four weeks to mid-April, it may amaze you that, in the same period, about 300,000 people went from not having a job to having one. This surprises people because they don’t realise how much coming and going there is in the labour force, even during recessions.

The bureau estimates that, even in a month where total employment seems hardly to have changed, on average about 300,000 people leave employment and about the same number move into employment.

It’s the net fall in employment of about 600,000 that matters. Why then did unemployment rise by only about 100,000? Because part of the definition of being unemployed is that you must be actively looking for job. Since we were in lockdown, 500,000 of these people didn’t start looking for another job, and so were classed as “not in the labour force”. As soon as they do start looking, they’ll be unemployed.

People make too much of the rule that an hour’s work means you’re not unemployed. Only 2.5 per cent of all those employed in March worked for only one to five hours a week. It’s true, however, that the international definition of unemployment is too narrow, especially in a world where one-third of our jobs are part-time.

This is why the bureau always calculates the rate of under-employment – people who have (mainly) part-time jobs, but would prefer to be working more hours than they’re able to, maybe even full-time hours.

The coronacession has meant many workers are having their hours cut. The number of underemployed people jumped by 100,000 to 800,000, taking the underemployed proportion of the labour force from 8.8 per cent to 13.7 per cent.

Delving into the figures, about 55 per cent of the 600,000 jobs lost in April were held by women, even though women accounted for only 47 per cent of the workforce. Almost two-thirds of the jobs lost were part-time.

Employment of people aged 15 to 24 fell by about 11 per cent, compared with a fall of 3 per cent for prime-aged workers (aged 25 to 54). Unemployment is a much bigger problem for the young, as is underemployment.

While your head’s still spinning, one last puzzle. Being counted as unemployed by the bureau is not the same thing as being eligible to receive unemployment benefits - the “JobSeeker” payment - from Centrelink.

Some people counted as unemployed aren’t eligible for the dole (often because their spouse’s income is too high), whereas some people eligible for the dole aren’t counted as unemployed (because they’re allowed to work a few hours a week before the dole cuts out).

Right now, however (and partly thanks to a temporary increase in how much your spouse may earn), there are 800,000 people counted as unemployed, but twice as many – 1.6 million – getting the JobSeeker payment.
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Wednesday, May 20, 2020

Joblessness hasn't been worse in our lifetimes - nor as hidden

Voters have highly stereotyped views about which side of politics is better at handling which of our problems. So it’s no surprise that the party of the bosses is seen as better at managing the economy, the budget and interest rates, whereas the party of the workers is regarded as better at industrial relations and anything that involves the government spending money.

These stereotypes aren’t necessarily right, but they’re deeply engrained in our thinking. What keeps politics interesting, however, is that voters’ list of our most pressing problems keeps changing with our circumstances. Sometimes Liberal strongpoints are at the top; sometimes Labor strongpoints.

The new problem for Scott Morrison is that though the Libs are seen as best at managing the economy and the budget, when the economy falls into to recession, voters’ focus shifts to the massive unemployment.

That’s a problem his opponents are regarded as better at – perhaps because we know fixing it involves spending shed-loads of money. The Libs are feeling terribly guilty about the $200 billion they’ve committed to spending so far, and are telling themselves they’ll be turning off the tap in September, come what may.

I’m sure you remember the shocking TV footage we saw some weeks back of long queues outside Centrelink offices. You’ve seen the movie; now read the stats. They arrived last Thursday. They showed what had happened in the jobs market just between mid-March and mid-April.

They were the most appalling news on jobs we've had since the Great Depression of the 1930s. Actually, they’re worse than then, in the sense that they happened in just a month (with some more bad months to come), whereas in the Depression it all took several years.

But the unique nature of this coronacession – where, acting under doctors’ orders, the government simply instructed non-essential businesses to close their doors – makes it much harder than usual to see what’s happening in what the media call “the jobs market” and the Australian Bureau of Statistics calls “the labour force”.

At present, a lot of the job loss remains hidden. Tracing what’s happening is like peeling an onion. Except that onions get smaller as you peel, whereas this problem gets bigger as you delve into the fine print. Much bigger.

How do we know how bad it was in the Depression? We know the rate of unemployment got to 20 per cent. By that measure, our problem is small. In April the number of people classed as unemployed by the bureau rose by about 100,000 to more than 800,000. Expressed as a proportion of the labour force (that is, everyone with a job or actively seeking one), the rate of unemployment rose just from 5.2 per cent to 6.2 per cent.

But don’t trust this. As most people know, the bureau’s definition of what it means to be unemployed is very narrow. You have to be actually looking for work and ready to take up any job you’re offered.

You get a better idea from the news that, of the 13 million Australians employed in March, 900,000 lost their jobs in April. However – and I know you’ll find this hard to believe – 300,000 people without jobs gained one during the month, so the net loss of jobs was almost 600,000.

But why, then, did unemployment rise by only 100,000 rather than 600,000? Because 500,000 people didn’t look for another job – understandable since so many employers were in lockdown – and so were classed as “not in the labour force”.

So that’s the first source of hidden joblessness. Most of those people will start looking for jobs as soon as it makes sense to, and then will be counted as unemployed.

The next source of hiddenness comes from the new and worthy JobKeeper wage subsidy scheme, intended to preserve the attachment between employers and their workers even though, during the lockdown, those employers don’t have much work needing to be done.

There are now more than 6 million workers on the JobKeeper allowance – that is, about half the entire workforce. Because they’re receiving a wage, they’re all counted as employed. Some are working pretty much as normal and some are working reduced hours, but many do no work at all.

It turns out that the best guide to what’s happening comes from the change in the total number of hours worked during the month. It’s fallen by an unprecedented 9.2 per cent, double the 4.6 per cent fall in the number of people employed.

The fall in hours is explained by people losing their jobs, people keeping their jobs but being given fewer hours to work, and people on JobKeeper working fewer hours – or none. This explains why, despite the limited rise in unemployment, the rate of underemployed workers (those working fewer hours than they want to) leapt from 8.8 per cent to 13.7 per cent.

All told, that means about 2.7 million people – almost one worker in five – either lost their job or lost hours during just a month. Gosh.
Read more >>

Monday, May 18, 2020

Obsession with jobless is Morrison's best chance of survival

As Scott Morrison contemplates returning to politics as usual, there’s something he should keep front-of-mind: governments that preside over severe recessions usually get tossed out.

Voters’ gratitude for being saved from the virus will fade, leaving them staring at that triumph’s horrendous price tag – its opportunity cost: the huge number of people still waiting to get a job back as we approach the federal election in early 2023.

It follows that Morrison’s best chance of pulling off two election miracles in succession rests in doing all in his power to get the rate of unemployment back down to the 5 per cent it was at before the virus hit.

To Morrison, returning to politics as usual means returning to what he calls “ideology” and I call governing not for all Australians but for the Liberal tribe – team Lifters – the “base” and its big business donors.

What he means by ideology is fighting for less government, lower taxes and the protection of tax breaks. Which, in turn, means shifting the balance in favour of the Lifters and against the rival Leaners tribe, aka Labor.

Liberal grandee John Howard sanctioned Morrison’s huge increase in government spending by telling him that, in a crisis, there’s no ideology. True. Any Liberal government would have done the same, as the big spending of Britain’s Conservatives and America’s Republicans suggests.

But now the lockdown is being unlocked, Morrison's being pressed by his base and big business supporters to get back to smaller government and lower taxes. He should be cutting company tax and revisiting industrial relations reform. If that ends the bipartisan co-operation from Labor and the unions, so be it.

But I’d think twice if I were Morrison. People close to him say that, at heart, he’s a pragmatist rather than an ideologue. If so, he should follow his instincts, which have served him well so far.

The case for not only delaying winding back the existing spending programs, but also spending a lot more, has much pragmatism going for it – especially if you’re hoping to be re-elected.

The decisions Morrison must make come in three parts. First is when it makes sense to start withdrawing the expensive JobKeeper wage subsidy scheme and the surprisingly generous doubling of the JobSeeker payment, which were always intended to be temporary.

The emergency and experimental JobKeeper scheme – which divides those without work into first and second class citizens and is replete with anomalies - will have to be brought to an end sometime.

By contrast, the idea that we could go on starving the unemployed on $40 a day forever was unrealistic. Now, after a recession as bad as this one, it will be a long time before voters again share the Lifters’ prejudice that anyone without a job must be a bludger.

Once most of the economy’s reopened, there will be a bounce back to some extent. But as has become the norm in recent years, the official forecasters are much more optimistic about the extent of the bounce-back than private forecasters are.

If I were Morrison, I wouldn’t be withdrawing any support to the jobless before I’d seen actual figures on the extent of the initial recovery. Withdraw the two key measures too soon and the much feared “second wave” could be economic rather than medical.

The bad news is that government spending to date has merely reduced the depth of the economy’s fall. Of itself, it’s not capable of stimulating growth in private sector demand in any positive sense.

And right now, it’s hard to think of a non-government factor that could drive the economy forward.
Consumer spending by deeply indebted, frightened households that are about to take a cut in their real wages? New investment by businesses facing weak demand for their products and much idle production capacity? Increased exports to a heavily recessed world?

So Morrison’s second pragmatic task is to come up with spending measures to actually kickstart demand in the immediate future. It wouldn’t be hard to think of sensible measures - provided the primary beneficiaries are people ineligible for membership of his Lifters tribe.

Third, this short-term pump-priming does need to be supplemented by reforms to keep the economy growing in the medium to longer term. But the place to look for ideas is the Productivity Commission’s Shifting the Dial report, not his Lifters tribe’s tired trickle-down agenda, which is rent-seeking thinly disguised by Liberal mythology about lower taxes boosting incentives.

It’s pseudo-economics, unsupported by empirical evidence. Rent-seeking is about grabbing a bigger slice of the pie, not growing it. You can get away with this when times are good, but when times are as tough as they will be, and since it doesn’t actually work, it won’t wash with the great unwashed voter.
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Saturday, May 16, 2020

There's a lot of economic worry about, but here's what matters

If you’re wondering what shape the economy will be in when we come out of lockdown, how the recovery will go – what to worry about and what not to – there are three key issues: the economy and its growth, the budget and its deficit, and unemployment and its consequences.

These three are different but related. The trick is to understand how they’re related. What causes what. The media bombards us with information about them — without pausing to put them into context.

For instance, we hear so much about the budget and its deficit (which adds to the huge amount of debt) that I’m sure some people think the budget is the economy. If only we could get the budget balanced, the economy would be right, right?

No. But you could be forgiven for thinking so because Prime Minister Scott Morrison and his Treasurer, Josh Frydenberg, have been saying things that get the two muddled up. They’ve been saying: terribly sorry about what the lockdown's done to the economy, and all the money we’ve had to spend on JobKeeper and JobSeeker and the rest as a consequence, but at least we’d got the economy back in good shape before, through no fault of ours, we were hit by the virus.

But they’re not talking about the economy, they’re talking about the budget. It was the budget they’d finally got back to balance after six years in office and were set to it get back into surplus this year before the virus upset their plans.

They were saying, at least we’d got the budget back in balance before we had to start spending like mad — about $200 billion so far — and going back into (huge) deficit. Trouble is, they’d got the budget back in shape by causing the economy to grow more slowly than it would have. So the economy was in a weak state before the virus hit – which doesn’t sound like a good thing to me.

Huh? Let’s get back to basics. The budget is just a summary of the federal government’s finances: how much money it brings in from taxes and charges, less how much money it puts out in spending on health, education, pensions and the rest.

When it raises and spends equal amounts, its budget is in balance. When it spends more than it raises, its budget is in deficit and this deficiency has to be covered by borrowing. When it raises more than it spends, its budget is in surplus. It will use the surplus to repay money it’s borrowed in earlier years.

The government and its budget are just part (a reasonably small part) of the economy, which consists of all our businesses and our households (you and me) as well as the government (federal, state and local).

The money the government raises in taxes comes from the rest of the economy, whereas the money it spends goes to the rest of the economy. So when the government reduces its deficit (as it has been until now), this means it’s reducing the net amount it’s putting into the private sector, causing its growth to be weaker than otherwise.

This can be a good thing if the private sector is growing too strongly and threatening to worsen inflation. But if the private sector’s growth is weak, as it has been, this pullback by the government will weaken it further – as it has been.

Until now. The response to the virus, with all the lockdown has done to reduce the turnover of businesses and the income of workers, has hit the private sector for six. But all the extra government spending – which has hugely increased the budget deficit – has done much to break the private sector’s fall. That cushioning will make it easier for businesses and workers to get back on their feet.

But here’s the thing: the government’s big spending (plus, don’t forget, the much less income and other taxes we’ll be paying on our greatly reduced incomes) has blown out the budget deficit and will hugely increase the government’s debt.

So, which is the bigger worry? The big increase in the government’s debt, or the big contraction in the economy? I think it’s obvious. It’s the health of the economy that matters most because that’s where all Australians (even the retired) gain their livelihood.

The budget isn’t an end in itself. It’s an instrument – one of the means to the ultimate end of helping Australians have a good life. In recent weeks, we’ve seen the government doing what all governments do: using its budget to protect our lives and livelihoods.

Sure, that will leave us with a lot more deficit and debt. But first things first. What matters most is the health, economic and social wellbeing of the people who constitute “the economy”.

We’ll worry about the debt later. In any case, as I’ll explain another day, the debt isn’t as worrying as it looks. Hint: the lower interest rates are, the less you need to worry about how much you owe — and the less hurry you need to be in to pay it back.

Next, what’s the relationship between the economy’s growth and unemployment, and which matters more? The economy is usually measured by the value of all the goods and services we produce – gross domestic product – during a period, which is also the nation’s income.

The econocrats are expecting real GDP to fall by an unprecedented 10 per cent in the present quarter, but then start growing quite quickly as businesses get back to normal. If that happens, it will be good because it’s goods and services that people are employed to help produce.

So an early return to growth in the economy is good because it gets employment up and unemployment down – which is what matters most if you think people matter more than money.

But here’s the trick: the economy returns to growth a lot earlier than unemployment returns to where it was.
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Wednesday, May 13, 2020

Let's not go back to politics as usual. It doesn't work.


With life cautiously returning to normal after the great lockdown, it’s time for Scott Morrison – who’s “had a good virus” – to think about where he goes from here. Does he want to be remembered as a single-minded warrior for his Liberal tribe, soon replaced by another scrapper, or as one of our great prime ministers, up there with Curtin and Menzies?

Does he want to cling to office by exploiting our divisions, or by uniting us in common cause? Does he want to deliver for the party base and its big business donors, or for everyone, even those without political clout?

After the shock of winning an election neither he nor anyone else expected him to, then being caught with no plans to do anything much, Morrison has been on a fast leadership learning curve. First his failure to take command of the bushfire crisis, then rising to the challenge of a pandemic for which we were quite unprepared.

Along with the premiers, his popularity has soared. At times of threat, people crave strong, confident leadership, and he has provided it. But as things start returning to normal, will it be back to squabbling politics as usual, as so many smarties are gleefully predicting?

Certainly, that’s where all our politicians’ instincts would lead them, and the media’s love of conflict would want them to be. But if Morrison allows that to happen, all the goodwill and community spirit will be lost – to Morrison’s detriment and ours.

Much has been made of our loss of trust in politicians and governments in recent years, but new polling by the Australian National University shows that, between January and April this year, confidence in the federal government increased from 27 per cent to 57 per cent, with state governments up from 40 per cent to 67 per cent.

This may be explained solely by our need for strong leadership, but I suspect another part of it is the cessation of politics as usual. Morrison has been too busy fighting the virus to waste time badmouthing his political opponents, saying things calculated to mislead, or making promises he can’t keep.

He’s been busy explaining how viruses work, what he plans to do about it and what he needs us to do. He’s been explaining, explaining, explaining. He’s stopped taking shots at the unions because he needs their co-operation. The opposition hasn’t been game to make any criticisms that weren’t constructive.

And we’ve loved it.

The news media are getting far more attention from their customers than usual. That may be because the virus is so new and frightening, but it also suggests the public finds a constant diet of the pollies’ squabbles and misbehaviour less engrossing than the press gallery does. Maybe people might be more interested in sensible discussion of the policies affecting their lives.

The handling of an epidemic and the way we cope with the huge economic cost of the medicos’ drastic remedies have obliged Morrison to rely heavily on his health and economic bureaucrats – the same people he was telling a few months earlier to keep their policy opinions to themselves and just do what they were told.

The ANU polling shows the public’s confidence in the public service has gone from 49 per cent to 65 per cent. Apart from serving the public, the bureaucrats’ job is to keep their political masters out of trouble. Who knew? Another of Morrison’s recent “learnings”.

Like most issues, responding to pandemics is a shared federal-state responsibility, requiring much co-operation and co-ordination – which, except for those holding neatness to be the highest virtue, has not required states with widely varying experiences of the virus to move in lockstep.

I suspect one reason the pollies are rating high is the blessed relief from federal-state bickering and buck-passing.

What all this says is that politics as usual wasn’t working well. The public was sick of it – as demonstrated by the two main parties’ ever-falling share of the vote and the rise of various populist parties.

Those who think there’s no alternative to politics as we’ve grown used to it show their ignorance. It wasn’t always this unedifying. And now Morrison has demonstrated how well he’s doing without it, there’s no reason we should return to it.

There’s no shortage of problems that need fixing, so governments need a big to-do list. They should focus on explaining and defending those programs, leaving no time for denigrating their opponents. They seem to have no inkling of how unpersuasive and off-putting voters find this.

If you don’t want voters to stop listening, stop refusing to give straight answers to questions. Pretend you’re a real person; throw away the talking points. Stop trying to get elected by telling us the other guy would be worse.

There’s always an important role for oppositions to keep governments on their toes. But less of the “they said white so we’d better say black to make us look different”. And, as Morrison has lately demonstrated, it does impress when you under-promise but over-deliver.
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Monday, May 11, 2020

How Morrison can give us a bright economic future

A big part of getting economic life back to normal involves restoring people’s faith that the future will be full of opportunity for progress. But that ain’t easy because the gloom of recession kills our belief that things could ever get better. And the longer we think like that, the truer it becomes.

So Scott Morrison needs to accept the paradox that returning the economy to normal demands that we don’t return to squabbling politics as usual, nor to governing primarily in the interests of the Liberal Party base and its corporate donors.

Why not? Because it wasn’t working well even before the virus arrived. The economy’s growth was weak and, that being so, business was reluctant to invest. Morrison is right to say we must grow our way out of debt and deficit, and that – ultimately, at least – we need a private sector-led recovery.

But with the recession leaving business with even more idle production capacity than it had last December, it’s delusional to expect that some tax incentive could prompt a surge in business investment.

So what can the government do that would get business investing? It can fix the dysfunctional attitudes to energy policy that are blocking much-needed investment in next-generation electricity production.

And the plain truth is that no government refusing to face the reality of climate change stands any hope of convincing us that our economic future is bright. What’s so stupid is that if the government weren’t so committed to helping losers fend off inevitable change in the economy’s structure, it would see more clearly the huge potential for Australia to be a big winner in the post-carbon world.

Only drawback: exploiting that potential would require huge private sector investment. Oh, that’s right, it’s the present lack of need for more investment that will slow any recovery.

Climate change has already started to bring much damage to our personal health, agriculture and tourism, but our hesitation to get on with helping to combat it is partly explained by our long-standing and lucrative comparative advantage as a major exporter of fossil fuels.

But a report by Tony Wood and colleagues at the Grattan Institute, to be published today, confirms Professor Ross Garnaut’s assessment that our abundant resources of wind and sun give us a potential comparative advantage in renewable energy – particularly if we get in early.

Wood also confirms Garnaut’s view that our money-making potential lies not so much in exporting renewable energy directly but indirectly, by using wind and solar to make energy-intensive "green" commodities for export.

Get it? If we play our cards right – if Morrison displays his newfound ability to provide the nation with genuine leadership – we could begin a whole new era of manufacturing industry in Australia, only this time one built on comparative advantage rather than protection.

Wood says the list of potential energy-intensive manufactures includes aluminium, aviation fuel, ammonia and steel. Tens of thousands of jobs could be created, comparable to the existing 55,000 geographically-concentrated carbon-intensive jobs.

How does a revived green manufacturing industry sound as a plan that could convince climate-change worriers (that is, everyone with a brain), business people and workers that there is a future for our economy?

And here’s the best bit: Wood says the economics favour establishing the new green manufacturing industries where a large industrial workforce is already established - such as those in central Queensland and the Hunter Valley.

"It is cheaper to make green steel in those places, where labour is available and affordable, than in the Pilbara – despite the cost of shipping iron ore to the east coast," he finds.

Notice the political attraction of this idea? You don’t leave the workers in these regions to their fate as the world’s inevitable move away from fossil fuels turns their mines into stranded assets, you set them up to work in a new carbon-free industry.

Wood’s investigations see most potential in moving to "green steel". At present, most steel is made by using coking coal and a blast furnace to reduce iron ore to iron metal. Trouble is, burning the coal produces much carbon dioxide. Green steel, by contrast, involves using renewables electricity to produce hydrogen for “direct reduction”, turning the ore to metal, with water as the byproduct.

Ultimately, the massive investment needed for new green industries would have to come from the private sector. But the government would need to get the ball rolling by helping to fund a steel flagship project – maybe one that starts by using natural gas, before progressing to hydrogen.

The happy notion that governments can sit back while the private sector pioneers new, radically different industries works well in textbooks, but not the real world.
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Saturday, May 9, 2020

Economic managers bank on us being smart as the average bear

It’s a lovely, comforting way to think about our economic problem. To beat the virus, we’ve had to put the economy into hibernation, but now it’s time for the bear to come out of its cave and get back to normal living. And it seems that’s just what Reserve Bank governor Dr Philip Lowe expects to happen.

The "baseline scenario" he outlined this week sees real gross domestic product falling by about 10 per cent over the first half of this year but then, it seems, growing by roughly 4 per cent in the second half, so that real GDP in December is just 6 per cent lower than it was in the December quarter last year. Then it “bounces back” to grow by 6 per cent over the course of next year.

Not bad, eh? We go down by 6 per cent this year, but then back up by 6 per cent next year. It can’t be quite so good as that sounds, however, because the rate of unemployment – which is expected roughly to have doubled to 10 per cent by the end of next month, is also expected to still be above 7 per cent at the end of next year.

These figures tell us that returning to positive growth in GDP is easier than returning to low unemployment. Unemployment goes up a lot faster than it comes down. That’s partly because the rate at which GDP grows isn’t as important as the level it attains. It’s the level that determines how many jobs there’ll be.

Now, no one can be sure how far the economy will fall, or how strongly it will recover when it stops falling. That’s always true, but it’s even truer with this recession because its cause is so different to past recessions.

This one's happened in the twinkling of an eye, as the government simply ordered many industries to close. So, when they’re allowed to reopen, maybe things will return to near normal pretty quickly.

Maybe - but I find it hard to believe.

Economists always rely on metaphors – often mixed – to explain the mysteries of economics to normal people. But we must be sure those metaphors don’t mislead us.

Bears have evolved to survive harsh winters intact, but humans haven’t. Bears may be used to it, but it’s an unprecedented, costly, worrying and uncertain period for our businesses and their employees.

The econocrats admit that "some jobs and businesses will have been lost permanently" and that firms and households are suffering from a "high level of uncertainty about the future" and will engage in "precautionary behaviour". They’ll be saving, not spending. If so, we won’t emerge from the cave in the same shape we went in.

Dr Richard Denniss and his team at the Australia Institute think tank have been examining the way our economy has recovered in previous recessions. They note that the expected contraction this time is far bigger than in the past: a fall in real GDP of about 10 per cent, compared to falls of 3.8 per cent in the recession of the early 1980s and just 1.4 per cent in our most recent recession in the early 1990s.

They also note that, in more recent years, the economy has grown much more slowly than it used to. Between the 1991 recession and the global financial crisis, our average rate of growth was 0.9 per cent a quarter, or 3.5 per cent a year. Since the financial crisis, however, it’s slowed to average 0.6 per cent a quarter, or 2.6 per cent a year.

Yet the Reserve Bank’s most likely scenario sees the economy bouncing back after the 10 per cent fall to grow by about 2 per cent a quarter from the end of next month. That’s growth at an annualised rate of roughly 8 per cent. Then, next year, it grows at an annual rate of 6 per cent, or roughly 1.5 per cent a quarter.

Now, since the economy will have so much spare capacity, it is technically possible for it to grow at such rapid rates for a couple of years before that idle capacity is used up.

But how likely is it? As Denniss asks, do recessions actually cause recoveries? Or, to test the “bounce back” metaphor, are economies like a rubber ball that hits the ground then bounces straight back up? Does the faster it goes down mean the faster it comes back up?

Some of our past recessions have had this classic V shape. But by no means all, or even most, of them. Sometimes they bounce back, sometimes they crawl.

There’s no law that says economies contract for only two quarters before they start growing. Nor that once they start growing, they strengthen. If you’ve lived through a few recessions, you’ll remember the expression “bumping along the bottom” and headlines about “jobless growth”.

So, given this varied experience, why are forecasts of quick and easy recoveries so common? Denniss thinks it may be because of the strange way macro-economists’ models are constructed. In the jargon, most macro models are Keynesian in the short term, but neo-classical in the (undefined) long term.

The neo-classical model assumes economies are always at full employment, meaning their growth over time is determined solely by growth in the three factors determining the increase in the economy’s production capacity: population, participation in the labour force and the productivity of labour.

The Keynesian short-term recognises that some “fluctuation” (a recession, say) can cause the economy to be below full employment. But the neo-classical long-term assumes the economy will always return to full employment at the level predetermined by the aforementioned “three Ps”.

So the economy’s bounce back is built into the model and must occur. Denniss says the trouble with this is it gives policymakers misplaced faith that GDP will bounce back, when it’s more likely that “GDP needs to be dragged back by sustained, and expensive, government stimulus”.
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Wednesday, May 6, 2020

Hard lessons on how recessions work and why we hate them

Forgive me for boasting about how old I am, but this coronacession – aka the Great Lockdown – will be the fourth severe recession of my career as an economic journalist. That makes recessions my special subject, though I’ve not had much call to talk about them for almost 30 years.

I was too young to remember much of Bob Menzies’ Credit Squeeze, which came within a whisker of tossing him out of office in 1961. But I was established in journalism before I saw the recession of the mid-1970s add the last nail to the coffin of the Whitlam government.

Malcolm Fraser’s prime ministership was cut short by the recession of the early 1980s. Bob Hawke’s successor, Paul Keating, should have been dispensed with at the 1993 election after the recession of the early 1990s, but was saved by our inordinate fear of Dr John Hewson’s proposed goods and services tax. By the next election in 1996, however, voters were on their verandahs with baseball bats waiting for Keating.

So, lesson No. 1: governments that preside over recessions usually get the blame for them. Lesson No. 2: in Australia, recessions happen roughly every seven years – or so I imagined at the time.

When the financial crisis of 2008 failed to sweep us into the world’s Great Recession, I was denied what I fondly assumed would be the biggest recession of my career. Why? Because Kevin Rudd did exactly what his econocrats told him to – and it worked.

In truth, we did have a recession, but one too small to remember. Another truth: more than a decade later, our economy had still not got back fully to normal and was in a weak state when the virus hit us some weeks ago.

In the decades since our last experience of severe recession, silly people in the financial markets and the media have given us the impression that a recession consists of real gross domestic product falling for two quarters in succession.

If you haven’t already, you’ll soon realise what nonsense that is. Lesson No. 3: the defining, terrible characteristic of recessions is soaring unemployment. That’s what makes people fear them so much. “What if I lost my job? How would I pay the mortgage? What about my kids? I’ve got one just finishing uni. Oh, what an appalling stuff-up. Those politicians are hopeless.”

Recessions inflict great harm on those who lose their jobs or their businesses. They make people terribly anxious. They heighten money worries and fights between spouses. They kill off any optimism about the future, leaving the public depressed and surly for month after month. They bark at every economist.

Lesson No. 4: unemployment shoots up, but crawls back down. I remember how much fuss there was when the number on unemployment benefits hit a million under the Hawke government. Last week Scott Morrison announced that, in just a few weeks, the number of people on the JobSeeker allowance (the latest in a long list of bureaucratic euphemisms for the dole) had topped 1.3 million – with a further 300,000 applications to be processed.

After the Hawke-Keating recession (the one we didn’t really have to have), it took almost 14 years for the rate of unemployment to get back down to the 5.9 per cent it was in November 1989.

And research by Professor Bob Gregory, of the Australian National University, suggests that people who’ve been unable to find a job for two years are unlikely to find one again. In recessions past, governments have hidden away some of these people by putting them on the disability pension.

In this recession, the new JobKeeper payment – a worthy measure – is helping to understate the number of workers counted as unemployed.

Lesson No. 5: though economic journalists make much of unemployment statistics, what brings the reality of high unemployment home to the public is TV footage of ashen-faced workers streaming out of factory gates after being laid off.

What did it this time was footage of all those young people queuing up the street and around the corner from Centrelink. Lesson No. 6: this recession, like all of them, will hit the young hardest, particularly those leaving the education system to start working. As part of this, the low-skilled are always hit harder.

What’s different this time – due to the recession’s unique cause: the government hitting the economy on the head with a hammer – is that job losses are so heavily concentrated in a few sectors: tourism and hospitality, arts and entertainment, and universities.

My final lesson is that public attitudes towards the unemployed are cyclical. Between recessions, many people see them as too lazy to work. Come the next recession, however, and we ooze sympathy. We know people who’ve lost their jobs and we’re hoping neither we nor our kids will be joining them.

So, give the jobless a hard time with pettifogging officiousness, robo-debt, payment by card not cash, Work for the Dole, drug testing, reverting to $40 a day? No, wouldn’t dream of it. Not if you’re hoping to be re-elected.
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Monday, May 4, 2020

First the economy needs CPR. We'll worry about reform later

I can’t take seriously all those people saying we mustn’t waste a crisis, but seize this great opportunity to introduce sweeping economic reform. It’s like telling a baby who hasn’t yet learnt to walk it should start training for the Olympics.

It’s true, of course, that we won’t get back to economic life as we used to know it – that is, knew it before the global financial crisis, more than a decade ago – until we get back to reasonably strong annual improvement in the productivity of labour.

But the plain fact is, you’ve got to have a functioning economy before you can worry about how fast its productivity is improving. So there’ll be a time to debate which policies would or wouldn't do most to enhance productivity, but we have more pressing matters to attend to.

Some in the don’t-waste-the-crisis party can be forgiven because they’re under 50 and have no memory of what happens in recessions. But as my colleague Shane Wright has said, most of them are "the usual suspects, falling back on their usual agendas".

They have no genuine concern about the economy’s present life-threatened state, but are business people engaged in rent-seeking, or economists running off faith in their economic model, whether or not it’s supported by empirical evidence their theory actually works.

These urgers have forgotten that micro-economic reform seeks to increase economic growth by making the supply (production) side of the economy work more efficiently. It delivers results only over the medium to long term. It’s thus no substitute for macro-economic management, which deals with managing the demand side of the economy in the short term.

Right now, the prospect of a 10 per cent unemployment rate tells us we have more supply than we’re able to use. Clearly, our problem’s that demand is insufficient. The improvement in economic efficiency we assume we could gain by, say, taxing land rather than the transfer of it, is minor compared with the monumental inefficiency we know for certain is occurring because 10 per cent of our workers can’t find work. Macro inefficiency always trumps micro inefficiency.

Right now, we don’t even have an economy that’s functioning, much less functioning well. Much of it’s closed - locked up by government decree. We’re starting to ease the lockdown, but we won’t be opening our borders for another year or two.

When we do have most of the lockdown removed, what will we see? The economy won’t snap back. Not even bounce back in any significant way. True, once businesses are allowed to reopen they’ll be making some sales rather than next to none. But with so many households unemployed, sales won’t go back to anything like where they were.

Most households and businesses will be in cost-cutting mode. Firms have been incurring overheads while earning little. Even those households still working will be worried about their big mortgages and fearful of losing their own jobs. As Treasury secretary Dr Steven Kennedy has warned, “some jobs and businesses will have been lost permanently”.

Most firms and households will be getting back to some semblance of normality, but few will be doing much that causes the economy to grow in any positive sense. As Reserve Bank governor Dr Philip Lowe has said, firms and households are suffering from a "high level of uncertainty about the future" and will engage in "precautionary behaviour". They’ll be saving not spending.

Sound like a bounce-back, or an economy still in the intensive care unit? Ask yourself this: which are the forces that will propel the economy forward? It won’t be the main factor we’ve relied on in recent years – high immigration. Our population’s now falling, as people on temporary visas are sent home and not replaced. (Not that population growth does anything much to lift income per person.)

It won’t be “external stimulus” because the rest of the world is growing faster than us (it isn’t), or a lower dollar is making our exports cheaper to foreigners because we’ll continue banning foreign tourists and overseas students. Export commodity prices aren’t rising.

It won’t be growth in real wages (employers will compulsively demand a wage freeze) nor a "wealth effect" from rising house prices prompting households to cut their rate of saving. And a key missing piece: it won’t be big cuts in interest rates to encourage borrowing and spending.

That leaves only "fiscal stimulus" – the budget. The huge government spending so far has merely limited the extent of the economy’s fall. Should Scott Morrison soon start winding it back as he says he plans to, we could fall even further.

No, if we're to actually recover what will come next is a lot more government spending, particularly on useful projects. It can only be a government-led recovery.
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Saturday, May 2, 2020

After the anti-social lockdown comes the anti-jobs recession


Until now, old farts like me have thought it a terrible thing that next to no one under 50 has any experience of how terrible recessions are. Even ABC guru Dr Norman Swan sees the costs of the lockdown as mainly social: the boredom, loneliness, anxiety, depression, suicide and domestic violence. Really? That’s as bad as it gets, eh?

But at least our lack of herd immunity from unrealistic expectations means only us old-timers will be expecting this recession to be pretty much the same as those we experienced in the early 1990s, the early ’80s and the mid-1970s. That’s good because this recession will be markedly different to any of those.

Usually, recessions happen because of governments’ policy error. Their attention wanders while the economy is speeding down the road, but then they realise how high inflation’s getting and they panic. They jam on the interest-rate brakes but hit them too hard for too long, and the economy ends up careering off the road and hitting a tree, with many people losing their jobs.

That’s why former prime minister Paul Keating said our last major recession was “the recession we had to have”. He was trying to conceal the truth that all recessions happen by accident.

Until now. Uniquely, this recession has happened because of a knowing act of government policy. It’s “the recession the medicos said we had to have” as the only way to stop the virus killing people.

As we’re about to discover, it’s a huge price to pay. And a month or two cooped up at home is the least of it. Many of those people who’ve lost their jobs will still be cooped up at home many months after the rest of us have resumed normal lives.

And let me tell you, being unemployed for months on end also has adverse social consequences: feelings of anxiety, inferiority and worthlessness, depression, suicidal thoughts, money worries that lead to marital conflict, breakups and violence.

It’s because this recession is happening by government decree – by the government ordering many industries to cease trading – that it will be so much bigger than usual. Usually, economies slow for months before they stop; this time, most industries stopped on pretty much the same day. (Not to mention that the same thing has happened around the world to the countries that buy our exports.)

This recession will be so big and bad that not even the official always-look-on-the-bright-side brigade is trying to gild the lily. Reserve Bank governor Dr Philip Lowe said last week the recession would be a “once in a lifetime event”.

“Over the first half of 2020, we are likely to experience the biggest contraction in national output and income we have witnessed since [the Great Depression of] the 1930s,” he warned.

More specifically, his best guess was that real gross domestic product would fall by about 10 per cent over the first half of this year, with most of that in June quarter. The unemployment rate is likely to have doubled to about 10 per cent by June, though the total hours worked in the economy is likely to fall by much more than that would suggest: about 20 per cent (because many of those on the JobKeeper payment won’t be working much, but won’t be counted as unemployed).

Preliminary figures from the Australian Bureau of Statistics show that employment fell by about 780,000 people over the three weeks to April 4. And so far, 3.3 million workers are covered by JobKeeper.

This week, Treasury Secretary Dr Steven Kennedy said that whereas unemployment rose to higher levels than this in the Great Depression [to 20 per cent], it did so over the course of a couple of years, compared with just a couple of months this time. “We have never seen an economic shock of this speed, magnitude and shape, reflecting that this is both a significant supply [shock] and demand shock,” he said.

The shock to supply comes from the government closing our borders to foreign tourists and overseas students, and ordering so many industries to cease supplying goods and services to their customers. The shock to demand comes from the loss of wages to workers laid off, the loss of profits to firms unable to sell their products, and the loss of confidence that spending big by households and firms at this time sounds like a good idea.

But the differences between this coronacession and previous recessions don’t stop there. As we’ve seen, recessions are usually preceded by booms. Not this time. Former top econocrat Dr Mike Keating has noted that our economy was performing very poorly for some years before the virus hit.

“Over the three years . . . to December 2019, real GDP growth averaged only 2.3 per cent, business investment was flat, labour productivity did not increase at all and real wages averaged only a 0.4 per cent annual rate of increase,” he says.

One thing this means is that whereas the fall in real incomes caused by a recession usually reverses only some of the strong growth in incomes during the preceding boom, this time the fall in incomes will be a much bigger setback.

Yet another difference this time is that, whereas the Reserve Bank responds to a recession by using its “monetary policy” to slash interest rates and impart a big stimulus to borrowing and spending, this time rates are already so low it’s been able to cut them by a mere 0.25 per cent before reaching its effective zero bound.

During the global financial crisis in 2008, it cut the official interest rate by 4 percentage points in five months. So the budget – “fiscal policy” - is the only instrument the government has to respond to the recession.

There is, however, one important respect in which this recession will resemble all others: unemployment shoots up a lot faster than it comes back down. I’d be sceptical of any happy talk about the economy bouncing back. Crawling back, more likely.
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