To the extent we didn’t know it before, the Reserve Bank (RBA) has confirmed that our economic future looks bleak indeed until well into the 2020s.
The bank put together three scenarios for the economy in Friday’s August Statement of Monetary Policy, which is now our most up-to-date official view of the economy — the government’s July economic update having been, through no fault of Josh Frydenberg, comprehensively trashed by events in Victoria.
Even the RBA’s “baseline” scenario, seen as most likely, paints a miserable few years for Australians. The Great Morrison Stagnation that was the world pre-COVID will seem like nirvana in 2021 and 2022. And we still don’t really know how the recovery will play out — the RBA admits (as it has done for a while now) that it is very difficult, if not impossible, to be confident about key economic estimates more than three months into the immediate future. Nevertheless.
“It is expected that there will be ample spare capacity in the labour market over the next few years, with broader measures of labour market underutilisation remaining elevated,” the RBA says. “Consumption is not expected to reach its pre-COVID-19 level until early 2022 … household income is expected to decline over coming quarters as government support is tapered.”
The RBA is also pessimistic about business investment other than mining. It expects it won’t start recovering until after household consumption has picked up again.
“The timing and pace of the recovery in non-mining investment remains highly uncertain, but is expected to lag the recovery in consumption. This reflects the assumption that firms will first use up spare capacity as demand picks up, as well as the typical long lags in the planning and approval of construction projects. By the end of the forecast horizon, non-mining business investment is forecast to still be below its pre-pandemic level.”
That will be a key impediment to jobs growth, and will create a vicious circle in which households aren’t spending because of a lack of jobs growth, and businesses aren’t investing, and putting on more staff, because households aren’t spending.
That was the kind of rut we were stuck in before the pandemic: the 2018-19 budget forecast of non-mining investment growth of over 5% ended up at just 1.6%; a similar forecast in last year’s pre-election budget was drastically revised down to 2% in last year’s Mid-Year Economic and Fiscal Outlook, long before anyone had heard of COVID-19.
Getting businesses investing is thus a key challenge of the October budget. Business, of course, is insisting that reducing company tax, making it easier to cut wages, increasing the GST and deregulation will get them investing, and the government is sympathetic to that view.
Even if we accept those arguments from business (in the face of evidence), there are other impediments to investment and innovation that the government can control.
It’s now well-established that growing market concentration in the US over the last two decades has led to overly high profits (at least according to the organ of socialism, The Economist) and declines in business investment. Labor’s Andrew Leigh has long studied and written about the problem from an Australian perspective, where if anything we have a significantly more concentrated economy.
The current recession will exacerbate this problem. As smaller, more marginal businesses succumb to the recession, larger businesses survive and enjoy greater market share. Competition regulators and governments are more likely to approve mergers of failing businesses with successful competitors. That happens in every recession.
But the pandemic has also entrenched the power of big yech. Apple, Amazon, Facebook and Google have all unveiled results recently that show them essentially impervious to the historic contraction underway — or, in the case of Amazon, actually benefiting from it. These companies are now significantly larger than all but the biggest economies around the world.
That was before the Trump administration decided it wanted one of the big tech firms to compulsorily acquire TikTok, one of the few successful competitors to big tech’s dominance outside China.
The only way to address the problem of concentration undermining investment is an aggressive application of competition law that reduces concentration. Business hates that idea with a passion — witness the hostile reaction to the Turnbull government’s idea for divestment powers in energy regulation, something even Labor thought was outrageous.
But failing that, a low-competition, low-investment future beckons, with permanent implications for economic growth.
There are only 2 things that grow an economy, demand and growth, demand creates growth, growth creates demand, increased demand increases profits and employment and increases incomes from the profit derived from that demand , it also increases taxes paid by workers and companies that flow back to government which enables infrastructure projects and spending which then creates profits and higher wages , once this demand circle is broken by austerity-driven conservative governments incomes drop, then demand drops, wages drop ,profits drop, taxes drop and the growth circle is broken and the hardest hit is small business, the small business sector is a victim of the small mind syndrome, they think cutting the wages of their workers increases their profits when in fact it has the total opposite effect, by cutting wages discretionary income shrinks and it is this very discretionary income that is spent in small business and the fools are then victims of their own small-minded greed.
Yes, braddybear, but you can achieve sooo many other things with an austerity budget. And the economic fallout from COVID-19 gives them just the cover they need to argue for it.
Just think!
You can justify further erosion of workers pay and conditions, bedding down the US-inspired un- and underemployed underclass of cheap serfs.
You can justify even deeper funding cuts to the ABC and universities.
You can justify propping up old economy businesses. (They’re employing people, after all, and every job is essential – expcet for those that aren’t, like at unis and the ABC.)
You can justify increased intransigence on climate change. (Obviously, we can’t afford to do anything about it – we’re in a COVID-19 depression.)
You can justify corporate tax cuts to unleash a business-led, ‘trickle down’ recovery.
I think it’s a mistake to start with the assumption that this mob wants to see the economy recover – and quickly. Why ‘waste the crisis’ when you’ve got an ideological agenda to pursue?
Nicely put.
The point about “propping up old economy businesses” is that they are the big donor dinosaurs who, in turn, prop up the old order.
Not quite Agni. The business of Australia is small business that contributes a fair wack of the GDP and employment opportunities. The big fleas have smaller flees who have smaller fleas and so on ad-infinitum.
Having made that point the small retailer (for example) is being overcome by the larger merchant; a theme that can be extended to other industries.
Small business is hoist by its own petard, seduced by Morrison and Abbott they support the government’s attacks on wages and conditions and the dumb bastards just don’t understand that one business staff is another business customer, cut discretionary incomes and customers have less to spend especially discretionary spending which impacts hardest on small business, I operated small/medium business for 30 years and had no trouble paying good wages, if you can’t operate a business and make sufficient profits to pay your staff a living wage then sell it and let somebody that can run it, same goes for farmers and mining companies if you need subsidising you’re not a capable business person or you’re corrupt it`s as simple as that.
It won’t happen. But it is time for #JoshFromAccounts to stop sleeping with his Thatcher doll and get his head around Modern Monetary Theory. The last 30 years has amply demonstrated the good sense in society, through its government, investing in a Guaranteed Jobs scheme to guarantee a future for the young. Youth unemployment and exposure to rampant employment exploitation has been tolerated for far too long. If this pandemic has shown us anything, it is that national governments must radically re-assume the responsibility for the social and economic well being of its citizens, instead of leaving crucial policy to the vagaries of markets. Viewed from a MMT perspective, the inevitably long economic and social recovery can be turned into a national opportunity to urgently decarbonise or society and re-industrialise the economy. We could, by 2030 be making the cheapest and cleanest energy in the world and, consequently, be making the cheapest sell and aluminium in the world and the young will then be reaping all the benefits of that. All that is needed is leadership, vision and courage. And sadly the absence of any of those factors is the problem.
I’d agree with everything you’ve said, except the requirement for vision.
#ScottyfromMarketing, #JoshfromAccounts have a vision. It’s winning the culture wars and creating a US-style bosses paradise. Economic recovery using MMT – or even the (much) less radical ideas behind Keynsian economics – won’t give them that.
Crazy conspiracy thinking? Only time will tell.
True Cate. And that is why I am pessimistic about the real change we could achieve.
MMT has its (strong) critics from informed people BA. Modern Monetary Theory (MMT) is a mutation from Friedman’s monetarism in that attempts to complement the government involvement with the economy (Keynesian for some) from the mid 40s until the mid 80s or there about. In a sentence, any government spending can be accommodated by the creation of money with the purpose of taxes being to monitor inflation via the money supply. MV = PT still holds for the MMT brigade. This approach was just what occurred post 2008-9 – while we wait for the bond rate to go negative.
This approach (as MMT recognises) is ONLY possible in an economy with complete control of fiat. Given that oil and almost everything else is expressed in US dollars MMT is applicable to the USA but its not clear as to its effects in the general case such as Australia. While the USA has the productive capacity that it does the deficit is not a big deal (and can be financed by bonds). For countries with diminished capacity (e.g. southern Europe) the policy, as Paul Krugman (with a Nobel) points out, would be a disaster. Krugman (among many) is not big on MMT being applied to the USA economy (.pdfs on the topic abound).
Would agree, yet to see a clear objective example of where MMT has been implemented anywhere and the results e.g. weaker economies lacking fiscal rectitude vs. those which have, like southern vs. northern Europe?
Sounds too much like free money that could go awry without a disciplined government and political economy?
Don’t you MMT deniers realise that Japan, the U.S and Britain have been printing money for years, it’ not how much you print its how its distributed and spent , conservative governments give it to those that don’t need it, Japan spreads it fairly around the populace, HOW FAR DOWN DOES THIS NATION HAVE TO GO BEFORE YOU DUMB FOOLS WAKE UP TO THE FACT YOUR`E BEING SCREWED EVER DEEPER BY THE MULTINATIONALS AND THE GREEDY RICH, F.F.S
Please see my reply to Jack in Rundle’s “We will only survive …” (14Aug 20:33). Jack and your good self are rather in agreement on the matter regarding debt but do come to terms with what the major critics of MMT have argued. Jack has also agreed (I believe) with my caveats regarding debt; loc cit.
The USA and the UK have some (not insignificant) productive capacity which permits control of their fiat. THAT is a major point. Even the pro MMT camp acknowledge that point of significance. Japan does not print money willy-nilly (a long rebuttal would be required).
As I have mentioned MTT works a charm (indirectly as petrodollars) but such is a special case. After a few hours among the Economic Journals at a university library you will see the matter for yourself.
By the way, it is analysis and not emotional flannel that wins the day BB.
MMT theory is, by its very fundamental claims, completely scalable. It need not be, and very probably will not be in practice, an all or nothing thing. So examination of theoretical extremes is useful, but the same needs to be applied to convention, and it is not. The fear of being first is just cowardice.
I wonder if you have comprehended all that I have written. There is a prima facie case that MMT “worked” in the case of the bail-outs of 2008-9 in the USA; at least up to a point. Yet the jobs that Trump created (and have now vanished) were created at the minimum wage whereas the MMT would have had the USA economy (by extrapolation) into the stratosphere.
Read some major heads who take a contrary view of MMT. If there was a “scratch” section on Crikey I would provide an entire lecture on the matter. As I have mentioned, it is a characteristic (and NOT an “extreme”) that a country has COMPLETE control over its fiat in order for MMT to be considered. In this regard, irrespective of the degree of application, some countries are “boarder-line” and for other countries MMT is NOT an option in any event.
MMT will work for sovereign nations that print their own currency but not in common market countries, that’s why Britain kept the pound when it joined the E.U. and why countries like Greece, Spain Italy etc can actually go bankrupt but a sovereign nation can`t, for gods sake I left school in second year, never went to university and I can understand that so why can`t these braindead economist,or at least admit their lies it if they do understand, it`s corruption by the rich and stupidity of the poor that allows these bastards to get away with their economic thievery.
“Business, of course, is insisting that reducing company tax, making it easier to cut wages, increasing the GST and deregulation will get them investing, and the government is sympathetic to that view.”
If people have less money, through lower wages, and products cost more due to increased GST (I doubt business would pass on price reductions due to lower wages) why would consumption improve to the point where business would invest more?
Perhaps Scomo and Joshy have never heard of Henry Ford, that well known radical lefty.
He realised that it was in his interests that he paid his workers enough for them to be able to afford the cars they made. It’s an economic idea based on self interest. What a pity that the Federal Government, and the bigwigs at the corporations it seeks to serve, have forgotten this notion.
PaulM, THEY HAVEN`T FORGOTTEN, those bastards love recessions, they can buy up everything cheap and keep workers in control and pay them starvation wages and the serfs keep voting them back like mongrel dogs that keep getting beaten while they lick their master’s boots, it’s getting very hard to feel sorry for the fools anymore
I’m sure that few need to be instructed that investment occurs ONLY when the capitalists anticipate profits WHATEVER the interest rate happens to be. Not a lot was anticipated during the 1930s but from the late 1940s the mood was different.
The behaviour of governments from the pandemic of 1919 to that of 2020+ is chalk and cheese. An entire State is locked down for under 50 cases in ICU. Just who the hell is going to invest when a Premier can shut a State down in x months form now?
As for your “solution” I have pointed out the ineffectiveness of anti-trust legislation in the USA regarding your article with Dyer of today. You might read (or reread) Marx on the ‘concentration of capital’ for a pointer as to the future. This is one aspect of Marxism that has not missed a beat.
Still not understanding exponential growth, eh Erasmus.
Keep plugging away, trooper.
It is the case that the public “thinks” that any non linear function (e.g a straight line DB) is exponential which is NOT the case at all.
If you are referring to the the growth of cases, DB, the function *is* geometric and NOT exponential.
Y = X^n is a geometric or power function
Y = n^x is an exponential function.
n is a constant > 1 and ‘X’ is the variable.
The growth graph begins at zero (reasonably enough) whereas an exponential function is NOT zero for x=0.
Try a few values with your calculator DB. I hope that explanation is of assistance.