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how things have changed « Previous | |Next »
October 15, 2008

The politics of prosperity that framed Labor's rise to power less than a year ago have transformed into the emerging politics of austerity. Austerity is not inflation---it is recession looming. Main Street may go bust, as it were. The world really has changed is the new economic narrative. Inflation is not the central concern. It is possibility of recession and a surge in unemployment that are the central policy problems, and then how to how to soften the slide.

Now it was only last week that Rudd and Co were trumpeting an IMF report that Australia was doing well---- a relative soft landing for Australia, with the economy expanding by 2 per cent-plus through 2009---- and the economic advisers in Treasury and the Reserve Bank were saying that China's growth was Australia's insurance policy. No worries. The world should be looking at us and so on.

My my how things have changed in a matter of days. First, there was the emergency government banking guarantees. Now we have Keynesian pump-priming to help kick-start the slowing economy:


We have a fiscal package that is worth a total of $10.4 billion, of which $9.65 billion will be spent in 2008-09, and which is targeted at pensioners, families, carers, seniors card holders and first-home buyers. They are being told to spent it quick smart. That is nearly half the previous budget surplus of almost $22 billion expended in one substantial hit around Xmas.

It can mean that they--the policy makers and ministers-- fear the risk of a deep recession in the global economy impacting heavily on Australia. The inflation hawks or policy mandarins at the RBA, would not have produced the 1% cut last week if they were concerned about inflation. So what happened to the first fiscal stimulus plan (the big tax cuts for households) announced in the 2008 Budget? Not working as a fiscal stimulus? Spent on shares?

So what was all that upbeat optimistic talk of the past two months about? Spin? Or have they--the policy mandarins at Treasury and the Reserve Bank--- just put the looming recession picture together: ---a global financial crisis, slowing global economic growth led by the teetering US, UK and European economies, falling prices for Australian commodities, the dollar has plunged, unemployment is going up, business and confidence indicators in Australia are dropping, and household debt levels are very high.

Or have the policy makers dumped their modeling since it doesn't work when faced with the extent of the damage that has already done from the fallout of the crash in stock markets and financial markets? Or did the policy makers look up from their modeling, peer into the abyss of a global recession and remember Keynes' advice on using fiscal policy to boost aggregate demand?

It's odd that Rudd Labor----Swan in particular--- are now trying to sell a message that they knew what was happening all the time and they were on top of it. What utter nonsense. They had little idea of what was going to happen. Few did.

This kind of fiscal stimulus does imply that the private sector is not spending and/or cannot spend. Consumer demand is down and business investment is falling. If old fashioned traditional Keynesian spending by the government is now deemed necessary, why isn't it embracing infrastructure, the development of new green technologies that addresses the reality of climate change, rather than shipping more coal and minerals to China.

| Posted by Gary Sauer-Thompson at 2:09 AM | | Comments (13)


Or they've realised the media and its depressive gloom is today's Goebbels/McCarthy and with all the bad news elsewhere in the world being repeated ad nauseam on our television sets it will affect Australia too.

So far forecasts are for a slow growth not a negative growth. It can only be a recession with a negative growth and as Paul Krugman's Slate column describes, this sort of injection is what needed to maintain confidence.

The reason for the falling commodities is apart from our asian neighbours, the others don't have the cash due to the credit crunch and our commodities are not as well diversified as they once were.

I couldn't find the Krugman Slate article. What is the title? I'm inclined towards Roubini's position that the U.S. will suffer its worst recession in 40 years and it lasting 18 to 24 months.

No so for Australia ---I agree with the slow growth scenario. But you have to wonder about the economic modelling when we go from upbeat China is our insurance policy to bring back Keynes and lets pump prime big time in a few days. It just makes you wonder.

The reasoning is this.
Consumers in the real economy are coming to the limits of their capacities to keep spending and take on more debt. With the costs of energy, food, etc rising they are pulling in their belts. They're not going to buy a new car or TV or anything else they can do without.

So there is a need to get money back into the pockets of average Australian consumers. It's classic counter cyclical Keynesianism. Will the multiplier effect be enough to avoid Australia being crunched into a recession by the global economy?

What happens to the big infrastructure deals now as tax revenues begin to dry up?

The fiscal actions taken so far (income relief to households via tax cuts and one off cash payments) do not resolve the fundamental debt problem of households. They cannot grow themselves out of a debt problem: when debt to disposable income is too high increasing the denominator with tax rebates is ineffective and only temporary. You need to reduce the debt. Any unsustainable debt problem requires debt reduction.

On the 7.30 Report last week, Steven Keen, from the University of Western Sydney, offered a gloomy prognosis and advised everyone to get out of debt. Sensible advice I thought.

His worst case prediction was for a repeat of the Great Depression, lasting for 10 years. Best case was for a recession worse than the one experienced in the early 1990s and lasting 1½ times as long.

He's dismissed as far too gloomy. Shaun Carrney in the Age says:

As the holder of a degree in economic history, I'm all for learning from the past, but the world's changed a lot since the 1930s. Communications and capital now move literally at the speed of light.

Governments have a much greater understanding of the value of co-ordinated action. And the behaviour of many governments, including our own, in the past couple of weeks suggests that while they were slothful and indolent in letting the debt problem fester, they're more agile and much less doctrinaire in responding to it than their predecessors were in 1929-32.On top of that, we have more human and physical resources, we're better educated, healthier and personally much more information- and asset-rich.

The debt of households is just pushed to one side and forgotten by Carney, who argues against a repeat of the Great Depression.

Falling houses prices and rising unemployment makes the debt even more of a burden for households. They owe more than the house is worth and do not have the income to repay the high repayments. Even The Age editorial fails to mention household debt.

Did Vee mean the Krugman Slate column about the Great Capitol Hill Babysitting Co-op Recession? It's at

Nan, a lot of commentators seem to decouple the financial mess from the economic stuff like housing and jobs. Keen sees the stock market as the canary in the coalmine, but others seem to think the canary is the main game.

I think the ALP are doing a bit of political banking.
Don't forget, this was supposed to be Howard's pork fund; it must be nightmarish for them to have to watch from the sidelines as Labor does what they could have been doing, had they played their cards right.
When things get worse, people will recall that good ol' Labor gave out a good divi at the beginning of it all, and not just to the nasty buggers who caused it all. The smarter folk could pay off a few bills and gird their loins ready for less easy times.
By the time the next election is due, people will have had time to make the adjustment in thinking and give Rudd another three years.
Turnbull and co know it, so are belatedly trying a small target strategy, linking with rather than fighting the government and continuing being seen as obstructionist.
They know they made greivous mistakes and displayed great hubris. They will have to wear these for a while, just as Labor had to from the late nineties.
As for the Goebells media, they will still try stunts of the ilk of the Minchin effort in the Senate yesterday over curtailling greenhouse policy "for the economy", that was so easily fended off by Chris Evans.
But if the reactionaries here and in America ever wake up, they will follow the likes of Turnbull and Fielding down the "small target" road for a bit, copping their lumps as they realise they must deserve, as they go.
The neolib/neo con era isnoe definitively; ingloriously consigned to the dustbin of history and neo Keynesianism is in- and should take at least as long to discredit as Eco rationalism took.

One way to understand the big turnaround was that the figures in the IMF report were outdated and that the recent ones were really a lot worse.They were looking at dole queues. Otherwise there would not have been a crisis plan developed over the weekend by Rudd, Swan, Gillard and Tanner, Treasury etc.

That didn't stop the senior Rudd Govt Ministers from using the IMF report in the previous to spin a line that things were really quite rosy in Australia and that the good times would continue. Oh happy days. Glorious sunshine.

So they were not leveling. It was media management as usual. So everyone other than the senior leadership of the Government are operating in the dark. We know things will be bad, but not how bad, or for how long, and where it will be particularly bad.We don't have any information. More media management.

Why not release Treasury’s preliminary estimates?

Gary said...

If old fashioned traditional Keynesian spending by the government is now deemed necessary why isn't it embracing infrastructure, the development of new green technologies that addresses the reality of climate change rather than shipping more coal and minerals to China.

Hear! Hear!

... or, at the very least, spread the largesse wider to those who'll multiply the money the most, not just those rich enough to borrow or buy houses, but people who'll spend it in ways that create more job security for others (and thus keep confidence up a bit more), i.e. the poorest.

here is a different perspective--from Tim Soutphommasane in the Guardian. He says that Australia's reputation as an economic strongman in the Asia-Pacific has changed.

Australian anxiety has turned into panic. Last week, as part of the coordinated international wave of interest rate cuts, the Reserve Bank of Australia slashed rates by a full percent. The real worry is that ongoing financial difficulties may quickly spill over to the real economy in Australia. For all the apparent resilience of the Australian economy, there is a genuine vulnerability. Australian households are heavily laden with debt: average household debt stands at 182% of annual household income, and is one of the highest in the world. An economy that once lived off the sheep's back has in more recent times been living off the back of its credit cards, pumped up by the wealth that comes with inflated house prices. In other words, the Australian economy has been playing by the same rules of neoliberal western capitalism.

The real test will be to stave off unemployment. A sudden rise in job losses is likely to mean an alarming rise in credit defaults, given the indebtedness of Australian households. Any sizeable deflation of the Australian housing bubble will have wide-ranging consequences.

even the mining companies like Rio and BHP are starting to sing a different tune as their shares continue to fall in value. Rio has had big change on its view of China's economic prospects. There will be less Chinese demand for Rio's exports of minerals.

I'm certainly not arguing for a "welfare-led recovery", but IF largesse is being spread around in Keynesian fashion, I think it is best distributed to those who'll spend it quickly(creating jobs) and get the wherewithall to get employment ($50 for black pants to go to a job interview is a big investment for someone on the dole). The Rudd government seems to continue the middle-class welfare sins of the Howard regime.

I'm certainly in favor of infrastructure spending, but hope this won't be knee-jerk poorly-planned investment. I'm also in favor of increasing (or stopping the otherwise inevitable fall of) employment through government programs, such as beefing up the public service.