Stimulus packages are designed to ‘oil the wheels’ of a working economy, writes Jim Stanford. But our economy is no longer working.
I didn’t know whether to laugh or cry at KPMG’s report this week on the economic effects of COVID-19. To be sure, they get points for courage: few would dare to put hard numbers on economic forecasts at a time when no-one can really guess where we are heading. But while most of the world descends into fear and anxiety, the KPMG modelers must have been drinking the happy juice: their conclusion is giddy in its optimism.
KPMG projects that Australia’s real GDP for 2020 would fall by just 0.9% because of the pandemic. True, that constitutes a recession – Australia’s first in almost three decades – but it’s a pretty gentle one (by way of comparison, the recession of 1982-83 was more than twice that bad).
Moreover, that baseline estimate was before consideration of the Commonwealth government’s ‘stimulus’ package last week: $17.6 billion of measures (mostly for business) to support confidence and keep the money flowing.
Commentators have derided that package for leaving out so many people who will need help. In contrast, the New Zealand aid package, announced days later, was four times as big (relative to GDP) and far more focused on pumping money right into workers’ and consumers’ pockets.
But KPMG judged the Coalition’s plan a “comprehensive and timely package”. In fact, assuming full “uptake” by business of the offered investment incentives, they predict Australia’s GDP would actually end up higher this year than if no pandemic had occurred. Apparently there’s nothing like a world health crisis to get business up and running.
This analysis of the crisis – that it’s a shallow, manageable downturn, and that a little bit of ‘stimulus’ can fix the problem – is badly off base. There is no doubt the Australian economy, already near-stalled at end-2019, is already in recession.
Cancelled transportation, cancelled tourism and entertainment events and services, and reduced output in many industries are reducing GDP right now. Second-order effects are being experienced across a wide swath: both consumers and businesses are scaling back their purchases dramatically.
Not even shoppers fighting in the aisles over toilet paper will be sufficient to offset this shock decline in aggregate demand. And disrupted supply chains, with imports from China and elsewhere in chaos, will have an additional huge ripple effect on Australian production –assuming we are allowed to go to work at all.
In sum, there’s already enough bad news in process to reduce GDP by 2% or more, for at least two quarters, and drive unemployment up to 8% or higher. The so-called “stimulus” package won’t significantly alter that trajectory at all.
However, we are likely heading into some kind of lockdown (like most of Europe is already in), in which case the downturn takes on a whole new order of magnitude. June quarter GDP will decline at 10% or faster (at annualized rates), and unemployment will leap well into double digits.
How soon and how quickly production would recover is unknown, depending first and foremost on how quickly people can leave their homes and resume normal activity (including working and spending). And if the decade after the 2008-09 GFC is any indication, we’d then be facing an extended period of hardship, perhaps for another decade.
Government cannot prevent this recession: it’s already upon us. But it can try to protect Australians from its worst effects. Equally importantly, it must fundamentally rethink how job-creation, incomes, and growth will be achieved in the aftermath of the pandemic.
Traditional notions of “stimulus” – typically understood as short-term pump-priming to lubricate an economic machine that is in otherwise good working order – will have no traction in a post-pandemic economy.
Government will need to play a much stronger role to mobilise economic resources, meet human needs, and get Australia working again.
Of course, immediate responses to the parallel crises of health and income are the top priority. These must include:
- Immediate mobilization of resources to protect health: including more staff at health facilities, quick deployment of off-site and mobile testing capacities, home support for people quarantined or recovering, and quick expansion of equipment and facilities where possible.
- Income protection for workers: including for casuals, self-employed, gig-workers, and many part-timers who don’t have effective access to sick pay. Incomes must be protected for all workers (regardless of employment status), through mandated special payments (as proposed by the ACTU).
- Other direct income supplements: similar to the one-time payments distributed in 2009, as well as more targeted aid (like higher Newstart).
- Debt relief and business assistance: emergency financing will be needed to keep firms viable in many industries (including airlines, other transportation, tourism, and hospitality). Other parts of society also need protection from creditors; foreclosures and evictions should be prohibited, and other personal and credit card debts deferred.
These immediate measures are crucial, but they won’t prevent a painful downturn: at best they can protect Australians against some of its worst economic consequences. But the government also needs to start preparing now to lead the longer-run reconstruction and reorientation of the economy. Because the traditional tools of monetary and fiscal adjustments will be incapable of addressing the scale of this crisis.
Monetary policy, indeed, has already lost most of its effectiveness: interest rates cuts will have virtually no impact on real economic activity in the coming year. And government fiscal initiatives will need to be far larger than what the Commonwealth has indicated so far.
More important, they should not be conceived as short-term “stimulus.” Rather, Australia’s economy will need to rely on expanded public service, public investment, and public entrepreneurship as its main ‘engines’ of growth for years to come.
The abysmal failure of private business capital spending in recent years – which had fallen by one-third since 2013, before anyone ever heard of coronavirus – had already laid bare the need for public investment and expanded public services to start leading growth.
Now, as the market economy shuts down, it is laughable to imagine (as did KPMG) that private capital spending could somehow lead the reconstruction of a national economy back to something even bigger and brighter than what we had before the pandemic.
There is enormous need for urgent rebuilding required in our economy and our communities. Repairing and strengthening health care infrastructure comes first, but other priorities, too, are urgent: like sustainable transit, green energy, non-market housing, aged care and early child education.
The case for mobilising resources under the leadership of governments and public institutions, and employing millions of Australians to do that work, is compelling. We can repair the damage of this crisis (and better prepare for the next one), deliver valuable services, and create millions of jobs. All we need is the willingness to imagine a different model of organizing and leading economic activity.
Great crises are frightening and dangerous. Our economic, social, and democratic institutions are damaged and fraying after 10 long years trying to recover from the last meltdown. Dangerous populist and authoritarian impulses have sprouted from that hardship. Progressives are not yet sufficiently united, confident and focused to turn the tide in our favour.
But a crisis can also be an opportunity. The failure of financialized, neoliberal capitalism will be laid bare more clearly than ever in coming months. The private sector will definitely be unable to get the economy back on its feet after this crisis. So we need to look elsewhere for economic leadership.
Just as World War II ‘solved’ the Great Depression by mobilizing enormous resources in an urgent attempt to meet a huge threat (global fascism), we now need another, peaceful war – a war on poverty, on epidemics, and on pollution.
And by organizing ourselves as society to fight that war, we will actually make ourselves better off right now: creating jobs and incomes, providing needed care and services, generating taxes. And we will benefit in the long-run by winning those ‘wars,’ and building a safer, sustainable world.