The Rudd government has been making the argument that their stimulus packages (there were two) have prevented unemployment from increasing to very high levels. They haven’t always been on message – poor Nick Sherry got his numbers mixed up and was quite insistent in early January that unemployment would rise above 8 percent in the second half of this year. Last November Treasury was forecasting 6.75 percent by the end of this year. That doesn’t look like happening. The unemployment situation has not been nearly as bad as was feared in late 2008. Rudd has even tried to claim that his government has created jobs. Well, no. Unemployment is higher than when they were first elected.
But they seem to have followed an ‘avoid unemployment at any cost’ type strategy. Here is David Gruen explaining the logic of that strategy.
It is worth providing a brief summary of some of the benefits of avoiding a recession that would not be relevant if a recession was instead simply an equilibrium market outcome.
The first, and most obvious, benefit is that involuntary unemployment is lower than it would otherwise be. Among other things, lower involuntary unemployment implies less long-term unemployment and hence less skill atrophy and less general disaffection with society on the part of the long-term unemployed. The Treasury estimates presented in Chart 9 imply that the fiscal packages reduced the peak unemployment rate by 1½ percentage points. I suspect, however, that this is an underestimate, both because it was calculated using conservative fiscal multiplier estimates, and because it takes insufficient account of the favourable feedback loop that I spoke about earlier when discussing the impact of expansionary macroeconomic policy on confidence.
But there are further benefits to avoiding a recession that would need to be taken into account in a realistic cost-benefit analysis of discretionary fiscal stimulus. Recessions break productive links between firms, and between firms and workers, when firms that would otherwise be viable over the long-term are driven into bankruptcy by a recession. In other words, plenty of the destruction that occurs in a recession is not creative destruction.
Finally, recessions do long-lasting damage, particularly to that cohort of people entering the labour market at the time the recession hits. Thus, for example, university graduates entering the labour market in a recession suffer sizeable initial earnings losses, losses that persist for a period estimated at between eight and fifteen years – that is, long after the recession has ended (Oreopoulos et al., 2006, Kahn 2009).
So how much has this strategy cost us?
What I have done is graph the size of stimulus pacakges releative to 2008 GDP and the increase in unemployment for some OECD economies. All data are from the OECD and the increase in unemployment is calculated as the difference between 2009 and the 2007 unemployment rate.
As can be seen the Australian stimulus was massive compared to most other OECD economies while our unemployment performance was average. As I keep saying, the government panicked and spent far too much money – money that we now know was poorly allocated on projects that were not carefully thought through.
Update: A comment at Bolt’s place asks about the New Zealand experience. I don’t have equivalent unemployment data for New Zealand, but I did discuss New Zealand here.
Sinclair, just a quick qualifier. You can’t look only at the discretionary stimulus because the automatic stabilisers are far larger in most European countries. For that reason the OECD’s last Economic Outlook measures the stimulus of different countries in terms of the joint size of both discretionary measures and the automatic stabilisers.
Another thing to remember is that a number of European countries have made extensive use of short hours schemes which basically allow firms to keep workers on the books despite them working either reduced hours or not working at all. For example, France’s reduction in hours worked is much larger than the change in unemployment would suggest. The OECD has talked about this and made the point that we can expect unemployment rates to stay higher for longer in those countries that have made extensive use of such schemes.
Labor Outsider
25 Feb 10 at 10:03 pm
With regard unemployment I feel the interpretations of the statistics are too elastic. I’m no statistician but looked at a 14.8 million hour reduction in total working hours and was not a bit surprised to hear Ken Henry say that our Full time Unemployment rate is actually 7/3%. We are not being told the whole truth. I resent that.
[Jane - there are issues and problems with all statistics. Using the hours worked data, and assuming that everyone had full-time employment, my colleague Ash de Silva and I estimated that the unemployent rate on that basis was over 10 percent. The ABS wrote in a letter to the Fin Review a couple of weeks ago that they simply calculate the statistics as per generally accepted conventions and it is up to users to interpret them. Sinc]
Jane
25 Feb 10 at 10:05 pm
I’d make one more point about the stimulus. Ex post the size of the stimulus does look to have been too large, but ex ante I’m not so sure. The forecasts (for what they are worth) of almost every major professional organisation (RBA, Treasury, private economists, OECD, IMF) were for the downturn to be far larger than it turned out to be. On top of that, the stimulus was also put in place to deal with the tail risks. I’d also note that in a recent speech, Phil Lowe of the RBA made it clear that the Bank thought that the stimulus had helped to stabilise aggregate demand.
One other thing, can anybody here point to a public statement by Joyce while Howard was PM expressing concern about the rapid growth of private foreign debt?
FWIW, I think there are legitimate questions about whether the Australian stimulus was designed in the right way, and further, now that it is clear that the economy is performing better than expected, the budget should return to balance/surplus more rapidly than currently planned. There are no longer concerns about the monetary transmission mechanism functioning properly so it is appropriate that we return to policy normality whereby monetary policy manages short term fluctuations in demand and fiscal policy is set in a medium term framework. That said, I’m not at all concerned about a fiscal crisis in Australia in either the short or medium term. Australia’s net public debt is extremely low, will increase but remain well below that of most other countries, and we do not have the large long term fiscal gaps of most other countries. Barnaby should tone things down.
Labor Outsider
25 Feb 10 at 10:25 pm
Joyce broke ranks with Howard over tax breaks for debt-driven foreign private-equity investors. Not quite the same thing but the idea that he was averse to opposing Howard, or indifferent to the meta-melodramas surrounding private debt, is nonsense.
C.L.
25 Feb 10 at 11:06 pm
Let’s face it according to you guys the government can never win. Unemployment doesn’t rise as high as feared then the stimulus wasn’t needed, if it had risen sharply you’d be saying the stimulus failed.
New Zealand’s unemployment rate was 7.3% sa in DQ.
sdfc
25 Feb 10 at 11:19 pm
How much stuff is China buying from New Zealand?
C.L.
25 Feb 10 at 11:23 pm
Don’t get excited CL, I was merely offering Sinclair some information.
sdfc
25 Feb 10 at 11:45 pm
I’m not excited. I’m just amused by your chauvinistic commitment to the Stimulus Saved Australia fairy tale. I look forward to your lengthily explained defence of the Easter Bunny.
C.L.
25 Feb 10 at 11:58 pm
Another crucial contribution from you CL.
sdfc
26 Feb 10 at 12:26 am
I’m here to help.
C.L.
26 Feb 10 at 2:28 am
sdfc – do you have an average New Zealand figure for the whole year?
Sinclair Davidson
26 Feb 10 at 7:18 am
LO – aren’t you on holdays?
Sinclair Davidson
26 Feb 10 at 7:18 am
Labor Insider:
Yea , he said he was on hols, but I think he just can’t help himself.
I’d make one more point about the stimulus. Ex post the size of the stimulus does look to have been too large, but ex ante I’m not so sure. The forecasts (for what they are worth) of almost every major professional organisation (RBA, Treasury, private economists, OECD, IMF) were for the downturn to be far larger than it turned out to be.
LO, we had a recession in the earlier part of the 90’s that was more serious than the one we experienced now. At the time most of our banking system was basically bust. Other than the stabilizers what do you think was different then and now in not having to go out and build school toilet blocks?
On top of that, the stimulus was also put in place to deal with the tail risks. I’d also note that in a recent speech, Phil Lowe of the RBA made it clear that the Bank thought that the stimulus had helped to stabilise aggregate demand.
I bet he was quiet about the hanger over. Doesn’t diplomatic speak suck?
One other thing, can anybody here point to a public statement by Joyce while Howard was PM expressing concern about the rapid growth of private foreign debt?
Why should he? He would have been drowned out by all the lefties a the time screaming about Howard’s spending. He wouldn’t have been heard.
FWIW, I think there are legitimate questions about whether the Australian stimulus was designed in the right way, and further, now that it is clear that the economy is performing better than expected, the budget should return to balance/surplus more rapidly than currently planned.
I’d be happy to frame a bet with you that we will not see a better scenario under this government.
There are no longer concerns about the monetary transmission mechanism functioning properly so it is appropriate that we return to policy normality whereby monetary policy manages short term fluctuations in demand and fiscal policy is set in a medium term framework.
Dude, hanging on a fence with both legs either side is going end up leaving a mark. It’s really going to hurt. If you have a problem on the monetary side, then deal with it with using monetary tools.
That said, I’m not at all concerned about a fiscal crisis in Australia in either the short or medium term.
Can you present evidence of any government since the war that has used fiscal policy and then quickly retreated? I can’t think there one. Government spending has been on a way trend with minor plateaus. Up!
Australia’s net public debt is extremely low, will increase but remain well below that of most other countries, and we do not have the large long term fiscal gaps of most other countries.
So what? The entire fucking western world is in dire straits at the moment in terms of fiscal health. Why would we use these deadbeats as some measure?
Barnaby should tone things down.
No. He should raise the volume about the dangers of government spending even more and promise to work to fire Ken Henry the moment Rudd concedes (any later and I would be hugely disappointed).
JC
26 Feb 10 at 8:23 am
At what point did this kind of thinking take over – where recessions have to be avoided at all costs? It is just kicking the can down the road. The eventual day of reckoning gets worse each time you do it.
Hawker
26 Feb 10 at 8:59 am
Forrest wrong as usual.
in the early 90s world trade had not fallen to the lowest levels since 1945 nor had world growth actually fallen.
There was no credit crunch which then turned into a GFC
moreover interest rates had a long way to fall in Australia.
In other words err no comparison.
Yeah ex-ante almost all forecasters had Australia facing a large drop in GDP, Access said it would be the largest drop since the war.
This time the Stimulus occurred before we were drastically affected.
You do not quickly retreat. That was part of Japan’s problem. you gradually retreat.
Yes our debt is very low , actually lower than in Keating’s time , and will be projected lower.
Only a imbecile would be talking about debt in Asutralia as a problem given how low it is and how it will get lower.
Yes sinkers if you merely ,looked at the structural deficits and their changes you get a much more accurate understanding
Butterfield, Bloomfield & Bishop
26 Feb 10 at 10:04 am
There was no credit crunch which then turned into a GFC
moreover interest rates had a long way to fall in Australia.
In other words err no comparison.
Are you out of your mind stupid. We had the banking system on its last legs and you’re suggesting there was no crddit crunch.
Someone, anyone. Please get the medics to homer, as he needs serious observation for mental disturbance issues.
I’m hereby immediately invoking Homer’s razor which is:
When homer/debbie makes what seems to be a malicious comment it’s more likely to be driven by the sheer force of the onset of middle-age retardation.
JC
26 Feb 10 at 10:17 am
The banking system was on its last legs was it.
Banks could gain access to capital markets any time they wanted to which is something they couldn’t do in the credit crunch.
We get out of the recession when interest rates fell and housing grew. Who was lending to housebuyers?
golly the lending to housing was how much?
but Forrest said the banks were on their last legs and couldn’t lend?
have another chocolate
Sinkers your figures are very misleading. If you are going to use figures from the OECD then learn what they contain.
Butterfield, Bloomfield & Bishop
26 Feb 10 at 10:34 am
Homer
early 90′s
3 state banks crashed. Anz and Wetptach trading at a huge discount and Tangible common equity crashed. Requiring significant recap.
Building societies falling like flies.
Various state government almost broke and close to default. See Vic.
And you’re suggesting we had no credit crunch in the early 90′s. You really are a freaking loon.
people were actually trading in IOU’s, you pathetic dazed loon.
Go away. Get back behind the garage AND stay there.
JC
26 Feb 10 at 10:43 am
Yes Forrest except someone was lending for housing old son.
A credit crunch is when banks cannot get capital which happened quite recently.
Any bank could get capital back then.
no only a few building societies ( such as Pyramid)crashed most were quite healthy because they mainly lent to housing.
no the Victorian Government wasn’t close to default at all.
you weren’t around. plenty of people were buying Victorian Government semi-governments securities.
produce some evidence instead of your constant ravings
Butterfield, Bloomfield & Bishop
26 Feb 10 at 11:25 am
homer:
Homes prices fell in that recession. There was a credit crunch and yet we didn’t need a pink bat stimulus to get us out of it.
JC
26 Feb 10 at 11:43 am
some house prices fell such as in Cherrybrook but it wasn’t uniform at all.
you say there was a credit crunch however you cannot provide any evidence that banks could not get capital.
whereas in the GFC even with a full government guarantee it took yonks for any banks to get financing.
Yes it was but a mere recession that needed no stimulus although under Sinkers definition there would have been one anyway.
this time round the GFC and credit crunch meant monetary policy response was limited.
We got a stimulus and it succeeded.
Butterfield, Bloomfield & Bishop
26 Feb 10 at 12:22 pm
some house prices fell such as in Cherrybrook but it wasn’t uniform at all.
Gee homer, I’m shocked, fallen outta my chair shocked it wasn’t a uniform fall in real estate prices. Who would ever have guessed it wasn’t “uniform”.
you say there was a credit crunch however you cannot provide any evidence that banks could not get capital.
Exactly what capital was available to the State bank of Vic, State bank of SA, State bank of WA.
There was no capital for ANZ and Wetpatch either for a while and they were on RBA life-support until people could get a handle on how large the losses were. Of course there was a credit crunch, you dope. Their TCE crashed through the floor.
We got a stimulus and it succeeded.
It’s failed dismally.
JC
26 Feb 10 at 12:40 pm
just remember Homer’s Razor, JC. It’s better for your health
jtfsoon
26 Feb 10 at 12:46 pm
Jason:
Are you copyrighting “Homer’s Razor”? It could be a good idea before it takes off.
JC
26 Feb 10 at 12:54 pm
[...] On the 26th of Feb, Sinclair Davidson of Catallaxy blog produced this interesting graph at this post: [...]
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