This post continues my thinking and analysis of the issues relating to the design of a fiscal intervention by the Australian government to ameliorate the damaging consequences of the coronavirus dislocation. Today, I delve a little bit back in history to provide some perspective on the current fiscal considerations. Further, I consider some of the problems already emerging in the policy response. And finally, I consider the lessons of history provide an important guide to the sort of interventions that the Australian government might usefully deploy. While the analysis is focused on Australia at present, the principles developed are portable across national boundaries. And the underlying Modern Monetary Theory (MMT) understanding is applicable everywhere there is a monetary system. This
Bill Mitchell considers the following as important: central banking, coronavirus, Fiscal Statements, Job Guarantee, Labour Force
This could be interesting, too:
Bill Mitchell writes More analysis from the coronavirus dataset
Bill Mitchell writes Ex German Finance minister deliberately misses the point about the ECB
This post continues my thinking and analysis of the issues relating to the design of a fiscal intervention by the Australian government to ameliorate the damaging consequences of the coronavirus dislocation. Today, I delve a little bit back in history to provide some perspective on the current fiscal considerations. Further, I consider some of the problems already emerging in the policy response. And finally, I consider the lessons of history provide an important guide to the sort of interventions that the Australian government might usefully deploy. While the analysis is focused on Australia at present, the principles developed are portable across national boundaries. And the underlying Modern Monetary Theory (MMT) understanding is applicable everywhere there is a monetary system. This series of blog posts are building up to the production of my 10-point or something plan to address the crisis.
Dealing with the Second World War
The following graphs show the dramatic shifts in public and private spending during the Second World War. They are taken from the excellent historical data provided by M.W. Butlin – A Preliminary Annual Database, 1900/01 to 1973/74.
By the early 1940s, as the war in the Pacific was in full swing, the Australian government shifted its total consumption expenditure (including defence) in real terms from just under 10 per cent of GDP to close to 50 per cent.
The next graph shows the shift in the Australian government fiscal balance between 1930 and 1950 (as a per cent of GDP). The fiscal injection reached a peak of 14.12 per cent in 1943 and was over 5 per cent of 6 years.
So it was a massive federal intervention that was deemed to be required as part of the war effort.
There was a dramatic shift in the manufacturing sector towards armaments production. Manufacturing employment surged by 10.1 per cent in 1940 and 10.7 per cent in 1941, mostly as a result of women entering the labour force.
This article from the National Archives – Secondary Industries – provides some background.
We learn that during the War, “there was another upsurge in manufacturing” and:
By 1943, the Commonwealth Government had established 47 munitions factories and establishments, and there were also 178 government-financed annexes attached to private firms and state workshops … In five years manufacturing employment, which included a significant proportion of female workers, rose by 25 per cent, with 753,000 employed in 1944. Two-thirds of civilian employees were engaged …
In this historical account from the Victorian government – Women’s work during World War II – we learn that:
During World War II, with the male workforce considerably depleted and ‘manpower’ critical to maintain wartime production, women took on a significant role. Wartime created opportunities not only for the development of local engineering prowess, but also provided new employment opportunities for women …
And this archive – Women at Work – reports that:
Women’s participation in the workforce increased by 31% between 1939 and 1943 as women found work in factories and farms and were able to take up positions in country areas as teachers and nurses.
The point is that in time of emergency, there is substantial capacity to shift resources around into areas previously considered unimaginable.
The women factory workers had never done that sort of work before yet productivity rose during that period.
Current fiscal intervention – so far
Consider the current fiscal intervention in relation to this historical data and also the GFC stimulus provided by the Federal government.
As an aside, I have no issue with using the term ‘stimulus’. Some think we should use more drastic terms commensurate with the severity of the problem.
The Government has so far announced two fiscal stimulus measures:
1. March 16, 2020 – $A17.6 billion
2. March 22, 2020 – $A66.0 billion
3. Total $A83.6 billion
4. In terms of the 2019 GDP, this amounts to 4.2 per cent.
5. The RBA also made $A90 billion available for SMSE loans at 0.25 per cent, and also cut the policy rate to 0.25 per cent. I will talk more about this later.
6. March 23, 2020 – the Federal parliament approves a further $A40 billion as an unspecified fund to be used if and when needed at the Government’s discretion, given they have also suspended Parliament for around 5 months, allegedly to reduce the risk of coronavirus contraction. The Opposition Labor party thought it a good idea allowing the Government to have this spending approval without scrutiny. I would not have done that.
7. So the unspecified pool adds another 2 per cent of GDP to the stimulus.
Now think back to the GFC when the Opposition were in government and they were confronted with the impending collapse of the financial system after years of greed and excess and lack of prudential oversight.
Here is what it did:
1. October 2008 – $A10.4 billion.
- $A4.8 billion pre-Xmas pensioner payments
- $A3.9 billion family support
- $A1.5 billion first-home buyers grant tripled
- $A187 million training positions
2. February 2009 – $A42.0 billion (mostly infrastructure).
- $A26 billion for infrastructure
- $A2.7 billion small-business tax breaks
- $12.7 billion cash bonuses ($A950 for everyone earning less than $A80,000)
3. Total $A52.4 billion or 4.2 per cent of GDP.
4. The RBA also cut interest rates by 1 per cent to 3.25 per cent.
So, leaving aside the unspecified slush fund of $A40 billion, the current spending injection being proposed by the Australian government is equivalent in terms of proportion of GDP as the GFC response.
It is almost as though the Federal Treasury has some stimulus threshold beyond which they don’t want to go.
But, it will become clear that all of the unspecified slush fund of $A40 billion will be required and lots more if the nation is to get through the economic turmoil with a modicum of respectability.
The scale of the Federal government intervention is nowhere near what it executed during the Second World War yet I expect the ultimate shift in policy will have to be of similar magnitudes, albeit, perhaps, not for as long.
The virus will probably be corralled in a shorter time than it took to bring Japan to surrender.
Issues to consider
First, the Government is making out that the stimulus is, in fact, much larger than I have mentioned here, as a result of the $A90 billion that the RBA is making available to small and medium-sized businesses as loans at the current policy rate.
The problem with these types of measures, which are shared by quantitative easing (QE) policies is that they require firms and households to be prepared to borrow at a time when increased indebtedness is likely to be damaging without a solid sales and/or employment outlook.
I discussed the Household debt situation in Australia in this blog post (among others) – Household debt is part of a broader problem – be informed (November 22, 2017).
The most recent RBA data – Household Finances – Selected Ratios – E2 – shows that the ratio of household debt to annualised household disposable income is now at record levels – each month a new record is established.
The following graph shows the ratio from 1988 (the beginning of the series) to the June-quarter 2017.
In June 1988, the ratio was 63.2 per cent. It peaked at 171 per cent in the June-quarter 2007, just before the GFC emerged.
It stabilised for a while as the fear of unemployment and the economic slowdown curbed credit growth for a while. But that didn’t last.
Over the last two years it has accelerated considerably and in the September-quarter 2019, the ratio was 186.5 per cent, although in recent quarters we have seen a tapering, as economic conditions become less buoyant.
The position of Australian households, carrying record levels of debt, is made more precarious by the record low wages growth and the conduct of the private banks.
Please read my blog post – Australia’s household debt problem is not new – it is a neo-liberal product (February 22, 2017) – for more discussion on this point.
The problem is that in this environment, the consequences of the coronavirus disaster will only make the situation more precarious than it already was.
The next graph shows the way in which the evolution of the household debt ratio relates to the annual growth in household consumption expenditure.
The graph shows three distinct segments in the sample (which I confirmed using more sophisticated regime-switching analysis):
1. June-quarter 1989 to December-quarter 1999 – at which point the relationship started to shift outwards. At this point, the household debt ratio was 107.9.
2. March-quarter 2000 to March-quarter 2008 – taking us up to the GFC, at which point I detected further instability.
3. June-quarter 2008 to September-quarter 2019 (latest data).
And the dotted lines are the linear trends for each sub-sample derived from a simple regression equation.
The analysis is simple and illustrative. We should never infer too much from cross plots (correlation versus causation and all that) but the patterns are interesting.
As the household debt ratio rose in the late 1980s and into the 1990s, with the deregulation of the financial sector, growth in household consumption was stronger. Hence the upward sloping dotted line for the blue marker period.
In the second period, the relationship remains positive but it is weakening (flatter dotted line). So an increase in the household debt ratio is associated with a lower growth in household consumption than it would have in the earlier period.
Further, corporate debt remains at high levels, hovering around 2.8 times the total financial assets in the business sector. In the period before the GFC, the ratio peaked at 3.4 times.
With falling demand (sales) and a projected period of stagnation with commensurate loss of cash flow, it is highly unlikely that businesses will take on further debt, no matter how cheap it is.
And if they do it will because they are using the debt facility as a substitute for cash flow, which is a myopic strategy and will have negative long-run consequences for their viability.
Having said that, though, a credit line will help firms remain solvent if they have to roll-over existing debt obligations. In this case, they shift the obligation from existing creditors to the RBA.
Ultimately, the RBA can write of any loans it makes should that be deemed desirable.
I wrote about these considerations in this blog post (among others) – Fiscal stimulus disappears into saving – solution – bigger stimulus was needed in the first place (February 17, 2020).
The second problem with the current government aproach is that they are encouraging and allowing people to draw down their superannuation balances (up to $A10,000 per year for 2019-20 and 2020-21).
This option often comes up in public policy discussions and was last rehearsed as a solution to easing the housing affordability problem facing first-home buyers.
It would have been bad policy then and is a very bad policy choice now, in the context of the coronavirus crisis.
For the individuals, the draw down will reduce their future pension prospects and will be biased to those with those who in all likelihood already have balances at the lower end.
Younger people or those on low incomes will thus deplete their future pension balances quickly.
From the perspective of the superannuation funds, it will cause a liquidity rush (forced sale of assets) which will further damage their situation, given the recent short-run movements in the sharemarkets.
There is absolutely no reason to undermine the future to deal with the present crisis.
The Australian government has all the fiscal capacity it needs and should not compromise the future compounded growth of workers’ hard-earned savings.
I was talking with a person the other day who told me there ‘must’ be a recession because so many workers are not going to be able to work for a while – for example, cafes, hotels, entertainment, and other service jobs.
I have also seen others claiming that advocacy of a Job Guarantee right now is irresponsible because workers will have to be confined to their homes.
At present, only those with risk factors (either have the virus, are entering the nation from areas where there is high incidence, or a frail) are confined to their homes (or isolation centres).
Work is on-going and can be designed to be ‘safe’.
Think about the experience of the Second World War.
There is no shortage of productive jobs that can be done which would be ‘safe’ in this social distancing era but would provide valuable outputs to society.
The Victorian Government announced, for example, in their – Economic Survival Package To Support Businesses And Jobs (March 21, 2020) – that:
The Government will establish a $500 million Working for Victoria Fund in consultation with the Victorian Council of Social Services and Victorian Trades Hall Council. The fund will help workers who have lost their jobs find new opportunities, including work cleaning public infrastructure or delivering food – providing vital contributions to our state’s response to the pandemic and affording those Victorians security when its needed most.
So think about it.
Australia has just been ravaged by drought, bushfire and then flood – before the coronavirus hit.
There is so much depleted land, infrastructure and personal care services that are required arising not only from these natural disasters but also from years of austerity and outsources of public services.
There are tens of thousand of jobs that the Federal government could fund across the regional and urban space to help improve our society.
There will probably be a shortage of medical support staff. Thousands of jobs could be created to ease the load in the short-term on the depleted health care ranks.
The food harvest is facilitated in so small way by visiting ‘backpackers’.
For those workers in regional areas who are now unable to work because of the closures enforced by the government or by consumer boycots (not going out anymore), the Government could help shift workers into the food harvesting sector for the time being while border controls prevent people from visiting and working.
And if we are to protect our aged members of the population, then we could ensure they are secure in their homes with adequate food and other supplies, are able to maintain their gardens (if they have them), and attend to other needs.
Thousands of jobs could serve this function for the time being. There would be no reason for such a person to take the risk of venturing to the supermarket, for example.
And what about the claims that these shifts cannot be facilitated quickly enough to avoid mass unemployment?
Well, I think I could retrain as a hospital orderly, for example, in a matter of hours or a few days at most, if I was required to.
The women who entered the factories in 1939 had no prior background. But productivity rose quickly.
So I advocate major public sector job creation to help workers adjust to the loss of their current jobs (while the crisis persists) and to provide a productive workforce to enhance our social offerings in terms of infrastructure and services.
The number of jobs that could be created to absorb those losing their jobs elsewhere, which would add social value, is limited only by our imaginations.
And I have a pretty active imagination!
There is no financial constraint preventing the Government from taking on this role.
As I further develop the thinking towards my 10-point or something plan (where each post contains aspects of the final plan) I will consider the likely impacts on unemployment.
There is no doubt in my mind that people would prefer to continue working if that can be rendered safe.
The is no financial constraint preventing the government employing all the idle labour.
I have been doing some estimation of how much idle labour their might be in the medium-term.
And the estimates are shocking. Next time.
For now, I have a difficult decision to make – will I fly tomorrow. So far I have been avoiding flying over the last 10 days. But I have some issues to deal with interstate which requires my presence. The problem is both the virus susceptibility and the possibility that NSW and Victoria will close their borders while I am away and as a consequence I would have to spend 14 days in isolation at either end.
That is enough for today!
(c) Copyright 2020 William Mitchell. All Rights Reserved.