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The government quickly stepped in to prevent a potential collapse of the health system under the weight of Covid-19 cases. But will it go all in to head off economic disaster or let the market decide what happens come September? By Mike Seccombe.

Recession and government stimulus

Prime Minister Scott Morrison with a local resident at a media event to announce the HomeBuilder stimulus package in Googong, NSW.
Credit: AAP Image / Mick Tsikas

In the early ’80s, Barbara Pocock had moved from the Reserve Bank to a job with the Wran government in New South Wales, trying to get women a share of the jobs generated by the resources boom.

It didn’t last, though; boom soon turned to bust – unemployment almost doubled and Australia’s GDP shrank by 3.7 per cent between 1981 and 1983.

And so Pocock, like thousands of other bureaucrats across Australia, was put to work finding ways to spend government money to get people back to work and the country out of recession.

The overarching policy instituted by the new Hawke government was named the Community Employment Program (CEP). But all levels of government as well as the non-government sector set collectively about the task of what she calls “soaking up unemployment”.

It was a bottom-up approach.

“All over the country,” says Pocock, “tennis clubs, migrant organisations, legal services, women’s organisations, the CWA, everyone in the NGO space and in all the levels of governments were thinking about projects.”

She was in charge of administering the program for the Hunter region, around Newcastle.

“That was finding the proposals, developing the rationale for them and putting them up to the state committee, which had federal bureaucrats on it also, to approve,” she says.

“A lot of money – millions upon millions – was going out through rapidly pulled together proposals.”

This was active government, and it was demanding. They didn’t want to simply give people “sit-down money” as their skills atrophied in unemployment, but nor could they just throw money at projects, like spaghetti at a wall, hoping some would stick.

So, says Pocock, it fell to people such as her to “run the Geiger counter” over each project. What was the benefit to the community? Was it labour-intensive? How much of the money would go to administration, as opposed to direct employment? Would there be diversity in employment – for Indigenous people, women, people with disabilities?

“They had to have a training plan,” she says. “You couldn’t just put people on shovels, you actually needed to show what you were going to teach them as well, so that at the end of the recession they came out with skills as well as having done something useful.”

The money went to all sorts of projects: bricks-and-mortar ones and also human services ones. Building childcare centres, for example, and also staffing them.

Pocock, who is now an emeritus professor with the business school at the University of South Australia and an employment specialist, recalls critics at the time deriding the CEP as “basket weaving, or digging holes and filling them in again”.

And, no doubt, some money was wasted – but not much, Pocock says. The program produced useful infrastructure all over the country, and people with new skills.

The historical record bears her out. Those programs, along with other measures taken by the government of the time – and other factors, including the end of a long drought – saw the Australian economy roar out of recession in 1984. Unemployment, which always lags behind in a recovery, dropped from 10.3 per cent in 1983 to 6 per cent by 1989.

In the decades since, we’ve had one more recession – the one we “had to have”, in Paul Keating’s immortal words – in 1991, and another near miss, 12 years ago during the global financial crisis. During both, Australia had a Labor government, which responded with substantial stimulus packages – and each time the conservative oppositions complained of money wasted.

Now, after nearly three decades without a recession, we are in the Big One, and governed by people who have long argued against the need for massive government stimulus spending.

And Pocock wonders whether the government – and a cowed and hollowed-out bureaucracy – has not only the will but also the ability to lead a recovery, whether “we have forgotten how to run a government program, which has attention to the detail”.

It’s a good question, and others are asking it, too.

 

The nature of our current recession is unique. First, it was deliberately caused by a government shutdown in response to a pandemic; second, it happened so fast. During the early ’80s recession, for example, it was two years before unemployment peaked. This time, jobs disappeared in a matter of weeks.

Then, as The Australia Institute’s chief economist, Richard Denniss, points out, there’s the fact that recessions usually follow booms. It tends to be the case that central banks jack up interest rates to slow an economy that is moving too fast, then quickly cut them when the boom stops, in the hope of stimulating activity. Interest rates – monetary policy – are a major tool for managing the rate of growth.

But this time, there was no preceding boom and no high rates to cut.

The economy, says Denniss, “had been growing below trend for most of the period since the Coalition has been in office. Wage growth was low, productivity growth was low, private sector investment was low. We went into this recession with a sluggish economy.”

Long before we had heard of Covid-19, the Reserve Bank was alive to this risk and concerned about its diminished capacity to stimulate growth.

“The RBA was begging the government to start stimulating the economy last year; the monetary authority was begging us to have some stimulatory fiscal policy and the government was determined to ignore all that advice,” says Denniss.

This recession is more truly global than even the global financial crisis, meaning there’s little hope Australia will be helped by people and governments from other parts of the world, as happened during the GFC when China’s stimulus of its own economy also helped stimulate ours.

Tourists aren’t coming this time; foreign students aren’t coming. Nor are the migrants we have long relied on to pump up our GDP. During the past quarter-century, Australia has experienced one of the highest rates of population growth among developed countries – averaging about 1.4 per cent a year – mostly due to migration.

The Australian economy has typically followed the boom–bust cycle of commodities. While the sector has held up better than most this time, the trouble is that it doesn’t employ many people. And the areas that are labour-intensive – tourism, education, arts and entertainment, retail – have been hammered.

“Economists say GDP is equal to C plus I plus G plus X minus M,” says Denniss. “What that means is GDP is equal to the sum of consumer spending, plus private sector investment, plus government spending, plus net exports.

“Well, consumer spending is just being crushed,” he says. “Private sector investment has fallen off a cliff. All the people we sell stuff to have gone into deeper recessions, and at the same time as we have…

“The only thing propping us up is G: government spending.”

And there has certainly been a lot of that. All up, the federal government has announced measures totalling more than $250 billion.

Of greatest note is the effective doubling of the unemployment benefit, JobSeeker, at an estimated cost of $14 billion, and the massive JobKeeper package, which the government originally forecast to cost $130 billion, subsequently revised down to $70 billion in the biggest costing error in our history.

The government has called these measures “stimulus”, but they’re not – not in the way the sorts of projects that Barbara Pocock worked on were.

While JobSeeker and JobKeeper put money in people’s pockets, neither directly creates jobs. In the case of JobSeeker, the money is paid to people who don’t have jobs, while JobKeeper pays money to employers hard hit by the lockdown in order for them to keep employing people who have jobs. The design of the latter serves to disguise the full extent of the employment crisis.

As Jeff Borland, professor of economics at the University of Melbourne, pointed out this week in his regular snapshot of the labour market, “between March and May, there are an extra 400,000 employed persons working zero hours due to having no work, not enough work available or being stood down”.

Sixty per cent of the reduction in hours worked occurred among the lowest-paid 30 per cent of the workforce, in occupations with a high share of young people, women and casuals. JobKeeper does not extend to many of them.

The real picture is further clouded by the fact that in this recession, unlike previous ones, “decreases in employment are translating more into movement out of the labour force and less into unemployment,” as Borland put it.

Many people have simply given up on work. Australian Bureau of Statistics data show that the “participation rate” – the number of people either in work or actively looking for it –has fallen since the Covid-19 pandemic began, from 66.1 per cent in January to 62.9 in May.

Scratch the surface and it’s clear things are worse than they appear. Yet the government’s big-spending support programs are still due to wind up at the end of September. What comes next, we don’t know.

Treasurer Josh Frydenberg is expected to tell the country more on July 23 – a comfortable two weeks after the Eden-Monaro byelection.

There have been hints, although nothing concrete, that some version of JobKeeper or other support will continue past the cutoff date for the worst-affected industries.

Danielle Wood, budget policy and institutional reform program director at the Grattan Institute, says this is necessary.

“Without some kind of transition plan and replacement stimulus spending, the economy goes back into reverse, and obviously you shed jobs,” she says.

This week, Grattan released a lengthy paper – the institute actually called it a book – calling for more stimulus. It talked big money – everything the government saved through its JobKeeper underspend, and then some.

If Australia is to wrangle unemployment back to the level it was pre-Covid – about 5 per cent – the government will need to spend $70 billion to $90 billion more, according to Grattan’s calculations.

The institute’s analysis went on to offer the kind of stimulus prescription the government has shied away from thus far.

The report called for a permanent increase of $100 a week for JobSeeker and a 95 per cent subsidy for childcare for low-income earners to encourage parents into more paid work. It also outlined a $1 billion, six-month “tutoring blitz” to help a million school students disadvantaged by the Covid-19 lockdown, as well as shovel-ready maintenance and infrastructure projects, including social housing. The list went on.

The past week also saw the launch of the Million Jobs Plan, published by the climate change think tank Beyond Zero Emissions – involving experts and luminaries including Christiana Figueres, Malcolm Turnbull and Mike Cannon-Brookes – which identified areas where employment and environmental benefits could simultaneously be achieved. The think tank says it intends to present the government with a list of priority projects.

Australia’s chief scientist, Alan Finkel, echoed similar sentiments when he recently added his voice to a range of civil society groups calling for programs to increase Australia’s energy efficiency while creating a large number of jobs.

It is clear there is a great deal of creative thinking out there about paths out of our current crisis, from civil society groups, industry associations, think tanks and others.

But action will require money, and leadership, from government – and so far the government hasn’t bitten.

Consider Morrison’s pronouncement at the National Press Club last month: that it was vital to get the Australian economy “out of ICU” and “off the medication” of government support “before it becomes too accustomed to it”. He added: “We must enable our businesses to earn our way out of this crisis.”

The prime minister went on to talk about things such as tax and industrial relations reform, and other familiar small-government, business-centric talking points.

Of course, there are discussions to be had on those subjects – as the Grattan report notes – but those things are not going to address the immediate problem, says Richard Denniss.

“Business investment follows demand – whether it’s demand here in Australia, or consumer demand overseas. And it’s not there,” he says. He fears Australia is about to get “the most persuasive lesson that low interest rates and low tax rates are not the cause of private sector investment”.

Although the government has offered some stimulus – expediting some major infrastructure projects, and launching its widely criticised HomeBuilder scheme, which will aid the construction industry. But that, as Pocock notes, is not where the jobs are most needed.

The job creation proposals that have been offered so far, she says, are about “big yellow machines, digging roads and doing major infrastructure projects”.

“I don’t think they get how the labour market has changed,” she says. “I think there’s a 1950s mindset, without awareness of how much the world has changed and how important women’s earnings are.”

The clearest indication of that, she says, is the fact the childcare industry was the first one the government removed from the JobKeeper subsidy.

Former Liberal leader John Hewson, now an economics professor at the Australian National University’s Crawford School of Public Policy, agrees that the government doesn’t realise the scope of the problem or the actions required to respond.

“They don’t get it,” he says. “It’s a different world today.”

The government is trapped not only by entrenched ideology, Hewson says, but also by its past politicking about government waste.

Take HomeBuilder, for example. While none of the money committed went towards addressing the urgent need for public housing, the program also did nothing about making housing more energy efficient. But how could the government fund energy efficiency for Australian housing, given its previous attacks on Labor’s pink batts scheme during the GFC?

The Coalition and conservative media were largely successful then in convincing people that the Home Insulation Program (HIP), as it was officially called, was a debacle – evidence that direct stimulus efforts by government at a time of economic crisis were ineffectual and an enormous waste of taxpayers’ money.

And the program was not without serious issues: four workers died and there were 30 house fires that caused structural damage. But, as a subsequent royal commission found, the “incident rate” for “HIP installations” was far lower than for installations done before the program launched.

And when it ended, 1.1 million homes had been insulated. Subsequent analysis found huge savings in carbon emissions – some 22 million tonnes by 2030 – with associated savings in energy bills.

The program was a conspicuous success. But now, Hewson notes, the Morrison government has precluded itself from doing anything similar.

The conservative aversion to direct intervention in order to stimulate the economy is “ridiculous”, by Hewson’s description. “It is embarrassingly stupid stuff.”

But mostly it’s old thinking – an approach embodied by the infamous quote from Ronald Reagan’s 1981 inaugural address as president of the United States: “Government is not the solution to our problem, government is the problem.” What Hewson calls “the austerity mindset”.

But during the Covid-19 pandemic, government stepped in as the solution, and the public noticed.

They saw a functional public sector in this country – nurses, teachers and public health experts – working to rescue us. And they saw a dysfunctional public sector in the US, failing to do so.

Now, Barbara Pocock says, the public want government to step in again – to rescue us from the consequent economic crisis.

Correction: An earlier version of this article incorrectly stated 70,000 homes were insulated under the pink batts scheme. It was 1.1 million homes.

This article was first published in the print edition of The Saturday Paper on Jul 4, 2020 as "Cue the rescue".

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Mike Seccombe
is The Saturday Paper’s national correspondent.

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