by Richard Denniss
[Originally published by Guardian Australia, 05 August 2020]
Australian economic debate relies more heavily on metaphors than it does on evidence, experience or expertise. While the prime minister, treasurer and self-appointed business leaders drone endlessly about what the economy “needs”, they simply refuse to provide any evidence that they know what they are talking about. For decades the inanity of Australia’s economic debate has been concealed behind the sugar hit of surging world demand for our exports, and surging population growth on house prices and retail profits. But in the deepest recession in modern history, the shallowness of Australia’s economic debate is about to become clear for all to see.
Treasurer Josh Frydenberg’s admission last week that his favourite politicians were Margaret Thatcher and Ronald Reagan was as informative as the fact that my favourite Marvel heroes are Thor and Iron Man. Given that Thatcher oversaw burgeoning unemployment and Reagan doubled the US government’s debt, you can see why our current treasurer might have an affinity for his cold war heroes. But for those of us interested in the Morrison government’s actual plans to get us out of the hole we are in, the treasurer’s last big interview told us even less than his recent “mini-budget” did.
According to Frydenberg, Australia’s economy will shrink by a record 7% in the current quarter. To put that into perspective, the entire 1991 recession saw GDP fall by 1.4% and the 1983 recession, which saw four quarters of contraction in a row, saw GDP fall by “only” 3.8%. For the 60 years we have collected quarterly GDP data, the biggest previous quarterly contraction of GDP was back in June 1974, when the economy contracted by 2%. But apart from drawing inspiration from Thatcher and Reagan, what exactly is the government’s plan to create jobs for the almost million people who are already unemployed, let alone for the many more who are predicted to be unemployed by the end of the year?
In March and April, the Morrison government was more enthusiastic about stimulating the economy than many expected but, by July, it had grown tired of its flirtation with Keynesianism. In his mini-budget, Frydenberg simply turned his back on all that economics has to offer and – at the same press conference where he announced the largest ever decline in GDP – he announced his government would be cutting spending in September this year. The consequences of that decision will be disastrous for the economy and, most likely, for the Coalition.
If private demand and investment is falling (it is) and if foreign demand for our exports, including education and tourism, is collapsing (it is), the only thing that can stop GDP spiralling downwards is a big increase in government spending. That’s not ideology or theory, it’s just maths. GDP is the sum of its parts, and if the private-sector parts are shrinking (they are), virtually every economist agrees it’s a good idea for the government to spend more. Morrison and Frydenberg spent the first half of year pretending to understand and accept this most simple of economic tenets but, as of last week, they have clearly decided to put storytelling ahead of solid evidence.
In explaining why they had to cut government spending on unemployment benefits – and in turn cut the amount of money the unemployed spend in their local shops – the prime minister and treasurer dusted off old anecdotes, unsourced, about unemployed people turning down work because life was “easier”. To be clear, there are currently 13 unemployed people for every job vacancy.
The Coalition love to tell stories about what great economic managers they are, despite ABS data suggesting otherwise. But, of course, in Australia the key to being a “great economic manager” isn’t delivering high rates of economic growth or budget surpluses (neither of which the Abbott/Turnbull/Morrison governments have actually done). On the contrary, the key to being a great economic manager is to tell great stories.
Central to the Coalition’s economic narrative is to take credit for everything good that happens in the economy and shift the blame for anything bad. When unemployment is falling, say it’s because your tax cuts are working to “strengthen” the economy. When unemployment is rising, blame the unemployed and say you need to cut unemployment benefits.
The same applies when telling stories about the budget. When times are good, cut taxes for your friends and, when times are tough, cut spending on those who never vote for you. Likewise, with productivity growth, consumer confidence or private investment. If things are looking up, link it to your tax and welfare cuts, and if things are going badly, blame it on union power and lazy workers.
Conservatives have masterfully implemented the old adage to “never let a crisis go to waste” – successfully blaming the victims of Australia’s economic system for all of its failings, while taking credit for managing all of its successes. But they have never had to tell a story about an economy that shrank 7% in a single quarter, driving unemployment to 10%.
Economic evidence contradicts the story that cutting government spending in September will help the Australian economy recover from the biggest recession in nearly 100 years. Economic evidence contradicts the story that the unemployed are the cause of their own unemployment. And economic evidence suggests that unless the Coalition changes course radically, and spends more money in the second half of this year than it did in the first, then things are going to go from bad to worse for both the economy and the government.
The thing about telling stories about what a great economic manager you are is that people might believe you. That’s a good thing when the Australian economy has grown more or less steadily for the past 29 years – albeit thanks to surging Chinese demand for iron ore, education and tourism and surging population growth. But when an actual crisis shows up, claiming to be a great economic manager means that people will expect you to have the skill to address a crisis.
Unemployment is about to rise, and the economy is not going to “snap back”. Increased training will not create jobs. Cutting unemployment benefits will not create jobs. Industrial relations reform will not create jobs. The reason that companies are shedding staff is that there aren’t enough customers with enough money, or enough confidence, to buy the things that companies sell. The only thing that will pull Australia out of this nosedive is a big increase in government spending, and the government has just announced it plans to cut spending. Strap yourself in – the storytelling is about to go fantastical as the economy goes very, very quiet.
Richard Denniss is chief economist at independent thinktank the Australia Institute