.

  • Written by Richard Holden, Professor of Economics, UNSW
The Reserve Bank and government have the means to keep us from recession. They'll need the will. Shutterstock

The facts are not in dispute.

Annual GDP growth has fallen to 1.8%. On a per-capita basis we have had three consecutive quarters of negative growth. The last time that happened was during the drought and recession of 1982, almost four decades years ago.

The most recent inflation reading was literally zero. Real wage growth has been stagnant for six years. Household debt is nearly double disposable income. And underemployment is more than 8%, on top of a 5.2% rate of unemployment.

What is in dispute is what to do about it.

We’ve entered secular stagnation

After being been told for years that the economy is in good shape and that we are “transitioning away from the mining boom”, it’s time to face the reality that, like most advanced economies, we are in a low-growth, low-interest rate, low-inflation trap.

Former US Treasury Secretary Larry Summers has argued for some time that advanced economies, almost universally, are suffering from what he calls “secular stagnation” — a protracted period of low growth caused by too much savings chasing too few productive investment opportunities.

If the description applies to us, and it does, there are only two ways to escape it.

We’ve two options

One is unconventional monetary policy: measures that have the effect that pushing interest rates below zero would have.

The other is aggressive fiscal policy: either big (and if necessary, repeated) tax cuts or a big (and if necessary, repeated) boost in government spending, each of which would put the surplus at risk.

What would an aggressive-enough monetary policy look like?

The starting point is a concept known as the “equilibrium real interest rate”. It’s the real (inflation-adjusted) rate of interest consistent with stable macroeconomic performance (which means full employment without financial bubbles).

1: Aggressive monetary policy

There is compelling evidence that in advanced economies such as Australia the equilibrium real interest rate is negative.

But getting there in a low-inflation environment is hard. The Reserve Bank can, if it chooses, set the cash rate as low as 0% (this week it cut it to 1.25%) but it can’t safely move it much lower than zero. If it did, if people and firms found themselves having to pay money in order to keep money in banks, they might simply take their money out, giving the Reserve Bank even less control.

This problem is known as the “zero lower bound”. It means that if the bank needs to cut rates beyond than zero it’ll probably have to do something else that has a similar effect.

The most likely candidate is “quantitative easing” (QE), whereby the central bank buys long-term government bonds and other securities from investors that have them, effectively forcing cash into their hands, which the zero interest rate means they have little choice but to spend.

It shows up in lower longer-term interest rates (rates for borrowing 5, 10 or even 30 years into the future) and should boost spending and borrowing just as much as cutting short-term rates.


Read more: Secular stagnation: it's time to admit that Larry Summers was right about this global economic growth trap


There are at least three difficulties with QE in Australia.

The first is that because the Reserve Bank has never done it before, there are questions about how it would mechanically execute on it. The United States and European experience is helpful in providing a template.

The second difficulty is getting out. Nobody, including the US Federal Reserve, really knows what happens when QE is unwound.

Third, if secular stagnation persists, then QE needs to be a long-term strategy. But is it possible for a central bank to expand its balance sheet buying bonds and securities indefinitely, even if it was buying them at a modest pace? Again, nobody knows.

2: Aggressive fiscal policy

If nothing else, the headaches with monetary policy suggest that fiscal policy might be an attractive alternative. It might also be more effective.

As Reserve Bank governor Philip Lowe noted in a speech on Tuesday, done in a good way government spending on infrastructure could both boost the economy and boost longer term productivity, giving a double benefit. It could be complemented by “structural policies that support firms expanding, investing, innovating and employing people”.

It’s hard to argue with Lowe’s logic. So hard in fact that some of us have been saying exactly what he just said for some time.

A quicker way to boost the economy would be to splash cash, either as Kevin Rudd did in the form of cash payments during the global financial crisis, or in the form of tax offsets of the kind the Morrison government announced in the 2018 and 2019 budgets.


Read more: It’s the budget cash splash that reaches back in time


Delivered straight into bank accounts, both have much the same effect, even though one is classified as spending and the other as cutting tax.

The obstacle to doing such things is this government’s – make that this country’s – obsession with balanced budgets.

The surplus can wait

I have argued strongly and still believe that debt and deficits do matter, but at the moment we are in serious danger of falling into recession. That makes it imperative to act.

Given the politics of budget deficits and the narratives around economic management it might be that the burden of action falls on the organisation the least able to pull it off in the present circumstances. That’s the Reserve Bank.

If Australia does dip into recession in the next year or two it will be an unforced error.

Not only would the government be responsible for it by not having taken strong enough action on spending when it could, the bank would also be responsible by taking action too late and letting things get to the stage where it had to act while interest rates were near zero.


Read more: Expect weak economic growth for quite some time. What Wednesday's national accounts tell us


Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

Authors: Richard Holden, Professor of Economics, UNSW

Read more http://theconversation.com/vital-signs-if-we-fall-into-a-recession-and-we-might-well-have-ourselves-to-blame-118387

VIDEO: Michelle Grattan on the family law inquiry - and the UN climate change summit

University of Canberra Deputy Vice-Chancellor Leigh Sullivan discusses Scott Morrison’s new family law inquiry with Michelle Grattan. They also speak of the developments in the Tamil family from...

Michelle Grattan, Professorial Fellow, University of Canberra - avatar Michelle Grattan, Professorial Fellow, University of Canberra

Climate explained: why don't we have electric aircraft?

CC BY-ND Climate Explained is a collaboration between The Conversation, Stuff and the New Zealand Science Media Centre to answer your questions about climate change. If yo...

Dries Verstraete, Senior Lecturer in Aerospace Design and Propulsion, University of Sydney - avatar Dries Verstraete, Senior Lecturer in Aerospace Design and Propulsion, University of Sydney

Be excellent: how ancient virtues can guide our responses to the climate crisis

What would Socrates say about coal mining? Or recycling? www.shutterstock.comAs world chiefs and youth leaders gather in New York at the United Nations Climate Action Summit, many of us as individua...

Roger Crisp, Professorial Fellow, Dianoia Institute of Philosophy, Australian Catholic University - avatar Roger Crisp, Professorial Fellow, Dianoia Institute of Philosophy, Australian Catholic University

A shot of hope in the face of climate despair

We have a path forward through climate change. Ellie Barr/Unsplash, CC BY-SAHope, like a slinky, springs eternal. While rage, fear and disgust are all appropriate responses to the realities of climate...

Madeleine De Gabriele, Deputy Editor: Energy + Environment - avatar Madeleine De Gabriele, Deputy Editor: Energy + Environment

It's safest to avoid e-cigarettes altogether – unless vaping is helping you quit smoking

The recent vaping-related deaths in the US have brought the issue into the spotlight around the world. From shutterstock.comHealth authorities in the United States are investigating 530 cases of lung ...

Coral Gartner, Associate Professor, School of Public Health, The University of Queensland - avatar Coral Gartner, Associate Professor, School of Public Health, The University of Queensland

What is the charge of concealment of birth and why is it still happening in Australia?

There has been a long history of women being charged with, and prosecuted for, concealment of birth both within WA and the rest of Australia. ShutterstockIn August, a 24-year-old woman appeared before...

Amanda Gardiner, Lecturer, Edith Cowan University - avatar Amanda Gardiner, Lecturer, Edith Cowan University

We want to learn about climate change from weather presenters, not politicians

Melbourne's ABC weather presenter Paul Higgins discussing a trend towards warmer April days. ABC/MCCCRHOne of the great paradoxes of climate change communication in Australia is that politicians comma...

David Holmes, Director, Climate Change Communication Research Hub, Monash University - avatar David Holmes, Director, Climate Change Communication Research Hub, Monash University

Another stolen generation looms unless Indigenous women fleeing violence can find safe housing

In Western Australia more than half the children placed in state care are Aboriginal. The state government committed this month to reducing this over-representation, in a move that parallels the Closi...

Kyllie Cripps, Scientia Felllow and Senior Lecturer, Faculty of Law UNSW Sydney, UNSW - avatar Kyllie Cripps, Scientia Felllow and Senior Lecturer, Faculty of Law UNSW Sydney, UNSW

Ignoring young people's climate change fears is a recipe for anxiety

This story is part of Covering Climate Now, a global collaboration of more than 250 news outlets to strengthen coverage of the climate story. Thousands of school students across Australia are expecte...

Rachael Sharman, Senior Lecturer in Psychology, University of the Sunshine Coast - avatar Rachael Sharman, Senior Lecturer in Psychology, University of the Sunshine Coast

Friday essay: on the ending of a friendship

Shutterstock Friendship is an incomparable, immeasurable boon to me, and a source of life — not metaphorically but literally. -Simone Weil About eight years ago, I went to dinner with a de...

Kevin John Brophy, Emeritus Professor of Creative writing, University of Melbourne - avatar Kevin John Brophy, Emeritus Professor of Creative writing, University of Melbourne

We don't need another inquiry into family law – we need action

Over the next 12 months, a joint parliamentary committee will examine Australia’s family law system. It will be led by conservative Liberal MP Kevin Andrews and One Nation leader Pauline Hanson...

Miranda Kaye, Senior Lecturer, Faculty of Law, University of Technology Sydney - avatar Miranda Kaye, Senior Lecturer, Faculty of Law, University of Technology Sydney

Procurement’s role in climate change: putting government money where policy needs to go

Governments can choose to spend money in ways that support climate change policy, including a shift to electric vehicle fleets. from www.shutterstock.com, CC BY-NDThis story is part of Covering Climat...

Barbara Allen, Senior Lecturer in Public Management, Victoria University of Wellington - avatar Barbara Allen, Senior Lecturer in Public Management, Victoria University of Wellington

Why do men have nipples?

Men have nipples because of a quirk in how embryos develop. But that's only part of the story of this seemingly redundant body part. from www.shutterstock.comWomen’s nipples have long been a sou...

Michelle Moscova, Senior Lecturer in Anatomy, UNSW - avatar Michelle Moscova, Senior Lecturer in Anatomy, UNSW

Your brain has 'landmarks' that drive neural traffic and help you make hard decisions

The human brain has an estimated 100 billion neurons and 100 trillion neural connections. shutterstockBrain regions exchange information by sending and receiving signals through a network of nerve co...

Caio Seguin, PhD candidate, University of Melbourne - avatar Caio Seguin, PhD candidate, University of Melbourne

It's Newstart pay rise day. You're in line for 24 cents, which is peanuts

The extra 24 cents per day can buy an extra 36 peanuts per day, more if you buy in bulk. ShutterstockNewstart recipients and other Australians on benefits get their half-yearly pay rise today (and als...

Peter Martin., Visiting Fellow, Crawford School of Public Policy, Australian National University - avatar Peter Martin., Visiting Fellow, Crawford School of Public Policy, Australian National University

The big budget question is why the surplus wasn't big

Treasurer Josh Frydenberg and Finance Minister Mathias Cormann unveil a budget outcome as good as balanced on Thursday. Lukas Coch/AAPThe budget was for practical purposes in neither deficit nor in su...

Warren Hogan, Industry Professor, University of Technology Sydney - avatar Warren Hogan, Industry Professor, University of Technology Sydney

Vital Signs: NBN's new price plans are too little, too late

Lack of speed kills: finally NBN Co is thinking about a genuinely 21st century offering for customers. www.shutterstock.comThis week NBN Co announced pricing changes for the National Broadband Network...

Richard Holden, Professor of Economics, UNSW - avatar Richard Holden, Professor of Economics, UNSW

Grattan on Friday: Morrison government solid on industrial relations reform but bootlicks One Nation on family law

John Howard is remembered by his Liberal tribe as a reformer, but his legacy is mixed. The GST has endured but he essentially doomed his government when he let his ideological obsession with industria...

Michelle Grattan, Professorial Fellow, University of Canberra - avatar Michelle Grattan, Professorial Fellow, University of Canberra

How rising temperatures affect our health

The first half of 2019 is the equal hottest on record and summer is set to be a scorcher. Chayathorn Lertpanyaroj/ShutterstockThis story is part of Covering Climate Now, a global collaboration of more...

Liz Hanna, Honorary Senior Fellow, Australian National University - avatar Liz Hanna, Honorary Senior Fellow, Australian National University

Sick and Tired of Your Dead End Job? Try Teaching!

Tired of the same old grind at the office? Want an opportunity to impact lives both in your community and around the world? Do you love to travel and have new experiences? Teaching English is the perfect job for you! All you need is a willingness to ...

News Company - avatar News Company

The Impact of an Aging Population in Australia

There’s an issue on the horizon that Australia needs to prepare for. The portion of elderly citizens that make up the country’s overall population is increasing, and we might not have the infrastructure in place to support this. Australians h...

News Company - avatar News Company

LifeStyle

Yvonne Allen: Eight ways to super impress someone on a first date

According to Yvonne Allen well known relationship mentor, psychologist and matchmaker, a first dat...

Picking The Right Crystal Yoni Egg: Tips And Instructions

When you are ready to pick your own crystal yoni egg, you need to decide what you will use it for...

Top 5 Tips for Paddleboarding In Whitewater

Paddleboarding can be relaxing as well as intense. If you occasionally want to do something differen...

3 Most Promising Career Occupations for Graduates in 2019

Studying in college is a great adventure which opens up lots of career opportunities. Yet, at times...