Flat White

The recession we have to have

19 March 2020

12:02 AM

19 March 2020

12:02 AM

Mark Twain said history doesn’t repeat itself but it often rhymes. That goes for a great many of history’s seeming reoccurrences, many of which give us that odd sense of feeling like we’ve been here before.   

In November 1990, the tall, dark, charismatic Zegna suit-wearing Paul Keating announced at a presser that Australia was in recession; the recession Australia had to have. That may or may not have been exact, but it was a rare moment a politician played a straight bat. The party was over.

In November 1990, I was just finishing year 1. And that recession was the last recession we had in Australia.  

If you acquaint yourself with economic history, you’ll notice economic cycles last about seven years. We have growth periods and then corrections. The degree and length of those ebbs and flows generally reflect the particular circumstances of that time. But ultimately, they all rhyme.   

For the uninitiated, a recession is marked by two quarters of negative economic growth. Economic growth is the percentage change, each quarter, in GDP. Relevantly, GDP is measured aggregately and not on a per capita basis.  

Why does this matter? 

Because changes in government policy can make economic growth look bigger even if it isn’t necessarily better. This is particularly evident in this latest economic cycle.  

While we have had sustained economic growth since the recession in the early 1990s, our population has also grown by 8.6 million.  The kicker is that, particularly since 2013, per capita economic growth has been in steady retreat with only some minor upticks. That means we are producing more overall but less per person. In short, we are less efficient.  

Also relevant is that, since the early nineties, the availability of credit has fuelled our economy more than any other period in history. Significantly more. In 1990, there was approximately $350 billion of consumer credit, much of which was contained by some pretty hefty interest rates. Today, we have an eye-watering $2.95 trillion of consumer credit hanging around the neck of our economy. Admittedly, interest rates are very low, but that’s a lot of money that still needs to be paid back. It also explains the government’s obsession with consumer demand, and rightly so, as it’s been keeping the economy afloat for a damn long time.  

The other anomaly in this recent economic cycle has been the meteoric rise of China. Particularly in Western Australia, we saw firsthand the boom which accompanied China’s insatiable demand for iron ore. If you were in the business, you made a lot of coin — but if you weren’t, you basically had to sell your arse to buy a steak and a pint. I vividly remember headlines predicting a 30-year boom. I also vividly remember my dad scoffing at that notion. He said it was impossible, and that the longer the boom, the harder they fall. 

Let’s fast forward to 2020.

I’m almost 36, a small business owner, and I’ve never really seen a proper economic downturn — but frankly, things don’t look great.  

Unemployment and underemployment are up, relaxed monetary policy has failed to stimulate economic growth, successive governments squandered cash reserves and have mortgaged the next couple of generations to the hilt, consumers are hocked to their eyeballs, economic reform is a can that has been kicked down the road for the last decade — oh, and China has a rather big thorn in its paw. And that’s the underlying economic situation before you even mention the words ‘bushfires’ and ‘coronavirus’. Healthy economies are better equipped to weather these shocks but weaker economies tend to be pushed towards the R-word. 

From what I hear, recessions aren’t fun. We all lose some skin. But a recession gives the economy an opportunity to shed bad assets, consolidate the good ones, and encourage fundamental economic reform. In short, you need to prune to encourage new growth. If you don’t, growth slows over time and the middle hollows out. The economy is just one giant fruit tree. And our economy is currently full of dead wood.  

We need leadership from government on economic reform: industrial relations and tax reform should be top of the agenda — followed by putting a lawnmower through unwieldy and pointless red and green tape. We need to make our economy a place where business can thrive because when business thrives, we all benefit. And our Senate crossbench needs to appreciate that good decisions can be hard decisions. There will be hardship for many Australians – but we can’t all win all the time. Sometimes, we need to put the country’s longer-term interests first. 

So, the ‘nice to haves’ need to go. We just can’t afford the fluff anymore. The Howard government called it paying a dividend to Australians, but in reality, those policies hooked the middle class on government handouts. We need to give our most vulnerable Australians the best care but everyone else just has to look after themselves. The Federal government should focus on the big things and forget about funding the toot at the local bowls club. 

And any talk of government spending other than for our most vulnerable citizens or for strategic industries is a waste of time. This isn’t a demand problem, it’s a structural problem — and we can’t collectively spend our way out of it. Going balls to the wall on stimulus is like trying to fix a leak in the roof by painting the fence blue.  

There are plenty of examples of weak governments managing the decline of debt-laden, highly regulated and sluggish economies. Don’t believe me? France hasn’t run a budget surplus since 1974. That means every year since Watergate, France has spent more than it’s earned. Its current generation is now being called on to repay that mortgage, and as a consequence, they’ve been in revolt for the last 70 weeks. 

We don’t want to be France. We need to pare back so we can regrow. And thrive.

Caroline Di Russo is a lawyer, businesswomen and unrepentant nerd.

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