Vital reason Aussies need $900 bonus

 

Here's why we should worry about recessions.

They're very sneaky.

The thing about recessions, you see, is they start before you realise. Economic data comes out after events happen, not before. Sometimes it is not until a recession is over that the economists are able to figure out that we had one at all.

They stuff you up big time. They stuff you up permanently.

It's been a long time since our last recession. Twenty-eight years. It's easy to imagine we must be due for one. I know more than a few young people who want a recession. They look forward to a nice cleansing fire which will, they imagine, make houses more affordable.

It's not like that. As the next chart shows, the biggest effect of recessions is that they cause large jumps in the number of people with no job. In the 1980s recession, the number of job seekers shot up by 240,000, a very large number given the population at the time. In the 1990s recession, the number of jobless rose by 460,000.

Unemployment spikes during every recession, and falls again slowly afterwards. Picture: Supplied
Unemployment spikes during every recession, and falls again slowly afterwards. Picture: Supplied

In the 2008 GFC, we dodged a recession and unemployment rose by less. Of course, unemployment can also drift upward when growth is merely low - for example, the era between 2011 and 2014.

But when you actually get negative growth - the shrinking economy that we call a recession - the rate of job loss is both rapid and devastating. This is not just economic statistics, it is suffering. Families break down, suicides rise, people lose their homes and children go hungry.

The effect of recessions is enduring. On the day the recession ends those people don't just stroll back into work. The chart above shows that although unemployment rises fast in recessions, it falls slowly afterwards. It may take years for unemployed people to find their way back to work.

Some older people may never work again. Instead of retiring at a time of their choosing, with enough super, they lose their job, spend a humiliating few years applying for roles and never hearing back, perhaps drive Uber for a little while, then are forced to admit that their work life is over.

Recessions permanently affect the wealth of the nation. The word economists use is hysteresis. When you get a recession, the economy's lower growth path is not usually temporary but permanent.

It often doesn't catch up. You can see this on the next chart. By dodging the 2008 recession, Australia ended up with higher GDP per capita than the US and an even bigger gap to the UK.

While other economies have faltered, Australia has thrived. Picture: Supplied
While other economies have faltered, Australia has thrived. Picture: Supplied

A permanently lower growth path leaves a country with less money than it would have otherwise had to spend in each household, and less to spend on hospitals, schools, infrastructure and defence.

In my lifetime, Australia has gone from being economically run-of-the-mill to one of the wealthiest countries in the world. A major reason for that is we have not had a recession in an era where other countries have had several.

WHY WE SHOULD SPEND

All this is simply to say: Avoiding a recession is an extremely important thing to do.

There are two main tricks you can use to dodge a recession when one looks to be coming. Trick one is cutting interest rates. We've done that. Big time. Interest rates are at a record low of 1 per cent and expectations are that they will fall to even lower record lows.

The second trick is using the national budget. One big theory of recessions is that people simply aren't spending enough. We all get nervous and start saving, and that positive cycle of spending slows down. After all, one person's spending is another person's income.

In this theory, the government has a role to play. When households get nervous, it should get generous. If we close our wallets, it should open its wallet. By spending, it can keep that cycle of spending and income moving, and prevent a collapse into recession.

Kevin Rudd did this during the global financial crisis. In early 2009, the government gave $900 to around 8 million Australians. And it worked.

Kevin Rudd’s $900 cash boost helped stave off recession last time. Picture: Supplied
Kevin Rudd’s $900 cash boost helped stave off recession last time. Picture: Supplied

While economies in the rest of the world collapsed into recession, Australian retail sales jumped. To be fair, it was not just about Rudd's fiscal policy. The Chinese government was also spending up big to prevent recession, and we benefited from their expenditure too. Which makes sense. If spending by one government is useful to prevent recession, then spending by more than one is more useful still.

Of course, Kevin Rudd's stimulus spending was controversial. It sent the budget into deficit because the government spent more than they were getting in taxes. That added to the national debt. Nobody is saying that spending to avoid a recession is costless.

But when you dodge a recession, it is easy to focus on the debt you just built up. The counterfactual scenario can't be seen. The mass unemployment you avoided is invisible. The risk is that we become complacent and don't do what's needed next time a recession is coming.

The stimulus program was much-maligned but ended up being a huge success. Picture: AAP Image/Dan Peled
The stimulus program was much-maligned but ended up being a huge success. Picture: AAP Image/Dan Peled

SPEND MORE, TAX LESS

Government spending to avoid a recession includes both spending more and taxing less. Some of which happens automatically. The government will naturally hand out more Newstart payments if more people are unemployed. And it will take less income tax and company tax as the economy falters.

But that automatic component is not usually enough. Hence Rudd's $900 cheques. Josh Frydenberg's $1080 Low and middle income tax offset (LMITO) that many taxpayers got after lodging their returns this year is hopefully helping a bit too. But the data we have on retail sales this year says they fell, so it may not have been enough. Will the government have the confidence to do more?

Governments sometimes feel nervous about simply handing out cash. When they spend to prevent a recession, they often want something to show for it too. The Rudd Government, for example, built school halls and subsidised the installation of insulation (the pink batts scheme). The RBA has called for the government to do infrastructure spending to help boost the economy and avoid a recession.

Scott Morrison should take a leaf from Rudd’s book. Picture: Kym Smith
Scott Morrison should take a leaf from Rudd’s book. Picture: Kym Smith

It's a nice idea - that the government is spending not only to dodge the recession but to set the country up for the future at the same time. The problem with this approach is that it can be slow.

If you are going to spend on infrastructure, you can't spend it all right now. Projects need to be properly designed. They talk about projects being "shovel-ready" but few actually are.

What's more, if you use infrastructure projects to boost the economy it is hard to turn off the spending taps when the risk of recession is over. Big projects take years and usually run late.

The weakness in spending in the Australian economy right now is in households. And so it is household budgets that need the most propping up.

Cutting taxes on households and boosting payments to households are fast simple ways to help prop up household budgets.

The Coalition demonised Rudd's $900 cheques so much they might feel silly doing something similar, but if they go down that path we should praise their practicality not hoot at their hypocrisy. After all, letting a recession sneak up on us is the worst possible outcome.

Jason Murphy is an economist. He is the author of the new book Incentivology. Continue the conversation @jasemurphy