Viw Magazine

Men's Weekly

.

  • 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

VR Training in Australia – Conflict Resolution Training For Employees

In today’s rapidly evolving workplaces, Australian organisations are turning to immersive learning tools like VR to handle specialised n...

Financial Planning For Couples

Why Every Couple Should Talk About Money And A Will (Before It’s Too Late) When you’re in a new, exciting relationship, it’s easy t...

Navigating Relationships While Living with Depression

Living with depression can feel like carrying an invisible weight—one that not only affects how you experience the world but also how yo...

Choosing the Right Vinyl Flooring Suppliers for Your Home or Business

When it comes to selecting flooring options that combine durability, style, and affordability, vinyl flooring stands out as a top choice. ...

Why Food Manufacturing Cleaning Services Are Essential for Safety and Quality

The complexity of food production environments demands specialised cleaning approaches that go beyond regular janitorial work. This is whe...

The Importance of Choosing the Right Industrial Electrician Melbourne for Your Business

When it comes to powering large-scale operations and complex machinery, commercial electrical services are not enough. Industrial environm...

What to Expect During a Property Settlement After Separation

Separation is a challenging and emotional time, and one of the most complex aspects can be the division of property. However, understandin...

Designing the Ideal Healthcare Environment with a Professional Medical Centre Fitout

When it comes to healthcare spaces, functionality, hygiene, and patient comfort take top priority. An intelligently designed medical centr...

Stay Comfortable Year-Round with Ducted Cooling Melbourne

When the temperature starts to rise, having a reliable and efficient cooling system becomes a priority. With unpredictable weather and sud...

Best Practices for Content Ownership and Tagging Across Departments

Image by kaboompics on Freepik The bigger and more complex content ecosystems grow, the more valuable ownership and tagging become. In ent...

Understanding Public Liability Insurance Australia: What You Need to Know

Image by rawpixel.com on Freepik The necessity of public liability insurance in Australia is that it acts as a financial safeguard for busi...

How HID Proximity Cards Improve Workplace Security Without Slowing Down Access

In today’s workplaces, security is non-negotiable, but so is speed. Companies are under pressure to protect their people, property, and ...

Unlock Business Insights Faster with Power BI Tools

In this digital age where data drives the consumer landscape, businesses are shipping huge amounts of data every day. To remain competit...

Why Split System Installation Is a Smart Choice for Home Climate Control

Temperature control is essential for comfort, and when it comes to efficient, versatile cooling and heating, a split system is one of the ...

What You Need to Know About SMSF Setup in Australia

Setting up a self-managed super fund (SMSF) is becoming an increasingly popular choice for Australians who want more control over their re...

The Ultimate Guide to Door Replacement: Everything You Need to Know

Image by freepik Sure, swapping out a door is a fairly easy task, but it requires careful consideration of options for materials, designs...

Common Web Development Issues Perth Businesses Face (and How Agencies Fix Them)

Image by freepik Let's be honest, in the bustling heart of Perth's business scene, a website that's not up to scratch is like trying to he...

Life With Clear Aligners: 10 Small Changes That Make a Big Difference

Image by tonodiaz on Freepik Clear aligners have transformed orthodontics, offering a nearly invisible way to straighten teeth without the...

Choosing the Right Hair Loss Treatment for Your Needs

Millions of people experience hair loss globally, and it can be a major cause of emotional discomfort and self-consciousness. Hair loss ca...

Cardboard Display Boxes: An Effective Solution for Retail Presentation

In the competitive world of retail, how products are presented can be just as important as the products themselves. Cardboard display boxe...