Global economics rarely moves as fast as it has over the last twelve months. Inflation genie, global financial crisis and now, just eight months later, the interest rate rises are back. So was Australia’s providential passage through the economic storm the product of great economic management, a fortuitous escape or just an expensive hoax?
Up until now mainstream media have almost exclusively subscribed to the first theory. Slowly some commentators are arriving at the second. Ultimately it is likely to be proven to be the third.
The “never waste a crisis” mentality of politicians means that overreaction is always rewarded.
Those running the models feared underestimating the crash. Policy makers demanded extreme solutions and bureaucrats obliged. According to the prevailing narrative of the time Australia was certain to be swallowed up by last year’s melt-down. Treasury modelling demanded a massive stimulus over three years. Virtually everyone received a cheque in the post.
Three months later, the clearly signed Julia Gillard Memorial school halls began to appear. Among the mainstream media, economics writers and senior commentators took all the panicked experts at face value.
This time last year Australians were operating a basic assumption that the financial crisis would suck every one of us down the drain and into an unimaginable abyss. Even the Prime Minister got in on the act, describing the GFC as “a truly seismic period where nations move from one epoch to the next.”
Back in April this year when the Australian economy bottomed out, I visited five northern hemisphere economies and teased out the three factors which would set Australia’s economy apart from the rest of the world. The first was our lack of debt going into the crisis. The second was the resilient state of our banks. The third and perhaps most significant was the close correlation between the proportion of high-tech manufacturing in GDP and the slump in December.
It’s these factors which allowed Australia to autopilot its way out of recession but all of it was contingent on hitting the bottom and stabilizing.
To better understand where Australia might have gone, we need to examine household consumption of all leading nations in the months after the September crash but before stimuli were deployed. In the four months August through to November 2008, household consumption in Europe and the US was falling at the remarkable rate of over half a percent per month. Even after adjusting for the fact that Australian figures are reported in nominal rather than real terms, the contrast is clear – household consumption in Australia was holding steady.
Even more remarkable is that the four month data set is a powerful predictor of the December figures. Across wealthy economies, December household consumption fell around 1% on the previous month.
This pattern is striking across wealthy economies, with the Christmas month dropping twice as fast as previous months with an extraordinary correlation of 0.96. Early stimulators like Germany, Netherlands and Ireland fared better, while Asian nations which don’t traditionally celebrate Christmas fared worse. Breaking this pattern in December 2008 were Australia (up 4%) and the UK (up 1.2%).
Of course these patterns in final household consumption were yet to emerge when Australia embarked on the December cash payments. But Australia’s exceptional performance should have been staring Treasury Secretary Ken Henry in the face by mid-February 2009, well in time to moderate the massive commitments made in March and April 2009.
It’s not a good example, (why use it then?) but the US stimulus package was larger than Australia’s. We barely stumbled, while the US is still falling, with unemployment hitting 10.2% this week. So it is disingenuous at best to say the stimulus package determined our economic fate. In fact to claim that we were doomed without the stimulus is just as simplistic as suggesting we didn’t need any fiscal expansion at all.
As always, the reality is somewhere in between. The first hint of that in between is that Treasury have belatedly adjusted down their forecasts for GDP falls in the absence of stimulus. Just last month, Treasury liquid papered out their 2009 estimations of a 3.6% economic collapse in the country, revising that figure down to just 1.6%. That represents around 2% of fiscal deficit which the state never needed to fill. In other words, tens of billions each year we didn’t need to spend.
Assuming Treasury is better at calculating past trends than forecasting, we need to ask whether disbursing $100 billion was the right approach. Despite the call for shovel ready projects, only a quarter of school infrastructure projects have been started and interest rates are already going back up.
So how on earth did the ‘economic cataclysm’ scenario gain such traction? First, we assumed whatever happened overseas would surely strike here. Second, we relied too heavily on modelling. We forgot how limited models are in crisis scenarios because the formulas underpinning them are dominated by data from non-crisis periods. Associations between indicators and outcomes may hold in 99% of cases but completely dissociate in crisis periods.
The other danger for finance ministers was intellectual contagion. With such internationalised economies, big stimulus packages meant greater imports and indirectly ‘mutual stimulation. That’s why the IMF and G20 told all member nations to stimulate and do it hard, regardless of whether individual nations actually needed it. Just as there are no Porsches for late movers in the stock market, there are no political points for treasurers who exercise caution during a crisis.
However while reckless bravado might get you a Porsche, it can just as easily lead you to wrap it around a tree while trying to impress your mates. It’s one thing to go to the G20 and listen to the horror stories from economies with diabolical banking sectors, huge national debts and no mining revenues. It’s another thing entirely to assume we are destined for an identical fate.
What Australia needs is some honest debate. For Labor strategists, suppressing that debate is crucial as it inhibits any inconvenient questions about a smaller stimulus and a smaller debt. That’s why retorts like “pulling the rug out from under the economy” and “extra job losses” are the most logical defence to accusations of having panicked and bungled the recession.
Apart from South Korea and the US, Australia’s stimulus was the largest in the entire OECD. Why, no one is quite sure. By turning Australia into a mid-level indebted economy like the ‘rest of them’ the Government may well have forfeited Australia’s greatest economic asset.
Between them, Mr Rudd and Treasury have precipitated an over-reaction which will be an anchor on Australia for years to come. Treasury has fessed up and amended its figures. Now its time for Mr Rudd to put national interest over personal pride and take his foot off the stimulus accelerator.
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