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Ross Gittins on why this recession is different.

24 minutes


Ross Gittins

BCom (Newcastle), Hon DLitt (Macquarie), Hon DSc (Economics) (Sydney), FCA, FRSN

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Episode Notes

Ross Gittins, Economics Editor for the Sydney Morning Herald, has seen both sides of three recessions. This one is the fourth he’s worked through. So why is this one “completely different” and why does this experienced commentator say it will it be harder to get out of? Listen in as Ross and host Ginger Gorman discuss the ins and outs of our struggling economy.

Ginger Gorman:    [00:06] Good day and thank you for tuning into Seriously Social. This is the podcast where we use the lens of the social sciences to help us consider all kinds of tricky aspects of Australian society, our relationships, human connections and societal structures. We get experts to give us get new insights and help us think about things in new ways.

This season, we are focusing on our world in transition and with me now is Ross Gittins. You may have heard of him. He’s the economics columnist for the Sydney Morning Herald and The Age and Ross is also a Fellow of the Academy of Social Sciences in Australia.

Thank you so much for joining me.

Ross Gittins:         My pleasure, Ginger.

Ginger:                  Let’s position ourselves, firstly, right before the pandemic. You’ve said previously that the economy was growing weakly at that point. What did you mean?

Ross:                     One of the things I meant was that [01:00] normally, before a recession, you have a boom. In fact, you have the recession because you’ve had the boom. Inflation’s gone up, the Government’s got very worried about inflation, the Reserve Bank jacks up interest rates to try and slow everything down. They often overdo it and you go into recession. So, that’s the normal. You’re coming out of a big boom where things got too hot.

This one is completely different. The economy has been growing very weakly. We went through a situation where the Reserve Bank was desperately trying to get the economy to grow faster by cutting interest rates. We’ve had interest rates down a long way before we ever heard about the virus.

And then the Reserve Bank was also urging the Government to spend more money, particularly on infrastructure, but the Government was really mainly concerned about getting the budget [02:00] back to surplus. And so, it was in fact, raising more in taxes than it was spending, and that was the way it was getting the budget deficit down and getting back to surplus.

So, that contributed to the economy’s weakness. That’s where we were. And so, what that says is don’t get the idea that when we get out of this blip called the recession, when we fix the virus and it’s all over, we’ll be roaring back off again. We won’t be. If anything, at best, we will go back to weak growth and that is a worry.

Ginger:                  So, Ross, if we think about what you’ve just described that in fact, it was a very weak economy around the time the virus hit in February, March, what does that then mean that we have this global catastrophe and effectively an economic crisis [03:00] on top of that weakly growing economy?

Ross:                     It means we’re in a lot of trouble. But really, what the pandemic has done has made everybody afraid that they might catch the virus and it might kill them. And so, what that’s done it has been the cause of people to cut back their contact with other people, and that inevitably means that they cut back their economic activity, the shopping that they do, the football matches that they go to, the restaurants that they go to, the pubs they hang out in.

Now, it’s also true that the Government came along and actually kind of made what people were doing naturally, made it compulsory for everybody. And so, what happened was that we had this sudden drop in economic activity. A lot of people, about a million I think it was, lost their jobs.

And so, now, for the first [04:00] time in almost 30 years, the economy has contracted so greatly that we’re in recession and it won’t be easy to get ourselves out of that because it shakes people’s confidence in the future. And that’s actually what happens in every recession, but this time we’ve got the added complication of people worried about the pandemic and when it will be over, and whether it’s going to get them.

And so, that’s made this a particularly deep recession. In the June quarter, in the last three months leading up to the end of June, the economy actually contracted by 7%. That’s the biggest fall in economic activity since the Great Depression.

Ginger:                  Having said that, Ross, I was interested to see one of your articles that you published last month and you said it’s a terrible recession, but it could have been worse. [05:00] What did you mean by that?

Ross:                     Well, I meant a few things, but one thing I meant was that we thought, the officials thought that getting on top of the virus, controlling the virus, supressing the virus would do a lot more damage to the economy than it did. And, in fact, it hasn’t and that’s because we’ve got on top of the virus more quickly than we initially expected we’d be able to. That was because we got in quick.

The key to dealing with viruses, which is easy to say now, but you had to be an epidemiologist to know beforehand is get in quick. The quicker you get in, the less trouble you have and that’s because of the nature of exponential growth.

When things kind of double every few days, every [06:00] day you delay getting started has a big effect. We started very early and that means that it didn’t knock the economy around as much as we thought. The we thought the economy would contract by more than 7%, a lot more. But in the end, it was only 7%.

Now, of course, we do have the complication of the second wave in Victoria, but generally speaking, remember that Victoria accounts for about a quarter of the national economy. So, we’re saying 25% of the economy’s got a problem, but 75% of it doesn’t. So, we’re not doing too badly.

Ginger:                  But in terms of the way we’ve handled it, it wasn’t just that we very quickly moved to shut things down and manage people’s social contact. It was also that the Government rapidly put in place a suite of economic measures, [07:00] such as JobKeeper, free childcare and so forth that really did support, perhaps not keeping the economy going, but at least putting it on life support, as I think the Prime Minister said at one point.

Ross:                     That’s true, but there’s a point I forgot. The main thing we did quick was close our borders to foreign travellers because at the start of the pandemic, we didn’t have anybody who had it. The only way we could get it was for people from overseas to bring it in. And once it got to Australia, it would spread around the local population.

So, the most important thing to do quickly was actually close the borders rather than also to start introducing the social distancing, which is the thing that really reduced economic activity and caused [08:00] a lot of firms to say, “Well, look, if I’m not able to operate, I’ve got all these people working for me. I’ve got nothing for them to do. I’m sorry, but I’m going to have to let them go.” And so, that was a big part of it.

But you’re right. Another important was, and this is actually kind of the virtue of this thing happening because of the pandemic and because of the lockdown, when the Government says, “Look, it’s not just going to be voluntary that you don’t go to restaurants. It’s going to be compulsory. We’re going to close down the restaurants. We’re going to order you to stay in your house.” When you’ve got the Government doing that, the Government can be in no doubt that it has to take economic measures to offset the adverse economic consequences of social distancing.

Ginger:                  One of the measures the Government brought in very fast was the JobKeeper, and obviously, [09:00] this is a very expensive programme. What is your view on the effectiveness of that particular measure?

Ross:                     I think it’s been a good measure. It’s one that we’ve copied our own version from what the Brits have done and what the Americans have done. So, it’s not exactly an Australian invention, but it’s certainly hugely expensive. It’s a wage subsidy scheme. It’s says that for all the firms that have been seriously affected by the pandemic that have had a significant reduction in their sales, we are prepared to pay a subsidy to all of those workers that the firms keep with them, even if they don’t have much work for them to do.

And the reason for that is to say, “Well, look, this thing we hope is kind of [10:00] manmade and it won’t last all that long. So, if we can retain the links between an employer and their employees, if they can keep that link going while we sort this thing out, while we get on top of the virus, then it will be much easier.” It will in fact, be better not only for the workers, but also for the firm to say, “Well, look, that’s all we’ve been allowed to resume business. We’ve got plenty of people coming through the doors, so everyone comes back to work and everything’s lovely.” That’s the objective and that will work, in many cases.

But as employers in Victoria are pointing out, if you keep that going for too long, even with the help of things like JobKeeper, it becomes impossible to keep the business going, especially if you’re a small business. [11:00] You don’t have a lot of fat to draw on and you don’t have any income coming in, but you still have certain expenses going out, especially things like rent.

So, it’s not a perfect scheme. It was pulled together in a hurry. It was initially a one size fits all. People will point out to you that some of the part-time workers got more in the wage subsidy than they would normally earn in a week. And you can say, “Well, look, what a waste of money. That’s terrible.” Well, it’s terrible and it’s not terrible because the secondary objective of the JobKeeper, and all the other measures that the Government has taken, has just been to pump government money into the economy. Recessions are about the private sector contracting and the Government expanding to try and make up the differences.

So, [12:00] when governments are in recession, if they’re running a budget surplus, that immediately turns into a deficit and they have to add to the deficit by pumping out money, giving money to people in the hope that they’ll spend it. The money will go around in the economy and create employment or at the very least, limit the fall in employment and the increase in unemployment. Now, that’s a big part of it.

And if you say, “Well, look, those people got a bit more than they needed, that’s bad in one sense, but it’s not so bad in that if the Government hadn’t paid them more than they needed, then the Government would have had to spend the money some other way.

Ginger:                  But, Ross, I did see an article yesterday on the ABC where one of Australia’s big meat manufacturers that’s got plants all over the country, the boss was saying he had 150 jobs, [13:00] manual labour jobs, fairly unskilled jobs that he just couldn’t fill because workers, according to him, were getting more on the JobKeeper scheme. So, they didn’t need those jobs that he was offering.

Ross:                     Employers pop up saying that in every recession and they used to say it before we had JobKeeper because we’ve never had a recession with JobKeeper before. So, I take all that stuff with a grain of salt. And I think, if I was running an abattoir, I’d be thinking, “Whoa, where are all those lazy workers? Why don’t they come down here and lay about with sharp knives and things and possibly cut their fingers off?”

At one level, working in abattoirs, you can think of as unskilled. In fact, if you’re too unskilled, you can do yourself an injury. So, it’s not as if this is a really attractive job and these lazy buggers [14:00] just don’t want to do it.

Ginger:                  When I spoke to you before this interview in preparation, you were saying that one of the questions people ask in every recession is, “Where do all the jobs come from?” Where will all the jobs come from, and how do you answer that question then?

Ross:                     One of my advantages is that I’m so old that this is the fourth recession that I’ve worked through. And so, I get asked that question in every recession and when I was young and innocent, I used to read up all this stuff and I’d say things like, “Oh, well, I read an article the other day that says there’s going to be a lot of growth in nanotechnology. So, maybe some of the jobs will come from nanotechnology.”

Because I’ve been on both sides of three recessions, I know the answer to it and I know my answer to it is, and that is I don’t know where the jobs will come from. But if you come back and see me in two or three years’ time and I will look up the figures [15:00] and tell you where they did come from because what I do know is that they do come.

We’ve had recessions before and we’ve lived to tell the tale. I’m confident that even this recession, which will be harder to get out than previous recessions, we will nonetheless live to tell the tale, which is not to say that some people might not be permanently adversely affected by the recession, but most of us will sail on.

The other thing I’ve learnt to say is that jobs will come in the services sector. I know that from the figures because that’s where the increase in jobs has come from for the past 50 years.

Ginger:                  Ross, you made an interesting side point there that this recession, according to you, will be hard to get out of. And I wonder if [16:00] people don’t understand that that sometimes a deep recession may drag on for years. We may be seeing the impacts of this for a decade or so to come.

Ross:                     Well, only if we mismanage it. But this will be a much harder recession to get out of than previous recessions.

Ginger:                  Why though? Why are you saying that?

Ross:                     I said that because it’s almost 30 years since our last recession. That means that most people under 50 have never consciously lived through it. They might have been 10 or 12 at the time of the last one, so they don’t have any experience of that. What I know is that people hate recessions.

At the moment, they hate the virus and the lockdown, but once we get on top of that, it will be the recession that they hate because they will see that they’re not getting pay rises, it’s hard to get a job. They know friends who lost their jobs and are still searching for them [17:00] or they’ve got children who haven’t been able to find a job. It’s a big worry for people leaving education. And the other thing, and this is the sort of iron rule of all recessions and that is, getting into it is a lot easier than climbing out of it.

You lose all the jobs, there is a fall in employment and an increase in unemployment that happened reasonably quickly and then it takes years for you to get back to that level of employment that you were previously at. That’s the hard part. That’s the grind. But that’s also the bit that the Government has the most ability to do something about if it is of a mind to and if it’s not prepared to live with high levels of unemployment.

Ginger:                  One of the groups you’ve been most concerned about in your writing, Ross, are young [18:00] people and how they’re faring. And you’ve posited that in fact, young people are going to carry the worst scars or the biggest burden from this current crisis. Could you tell me why you’re so worried about that cohort?

Ross:                     It’s because employers fix their problem in recessions by cancelling their annual intake of people at the entry level, people just leaving school or more these days, just leaving university. So, you say, “Well, look, I don’t want to have to lay off all my staff. That would be very hard on them, so what I’ll do is I’ll run the numbers down by natural attrition.” And that says when people leave, they’re not replaced. But the other thing it says is we’re certainly not going to go out and hire anybody. And that is what employers do almost automatically in every downturn.

But when you think about it, the people who [19:00] are most affected by that are the people who are trying to enter the workforce. It’s a device that’s aimed at helping the people who are already in the workforce, reducing the chance of them losing their jobs, but you do that by not offering jobs to young people, who are leaving education and looking for a job. And we know that from the GFC.

We felt that we got through the Global Financial Crisis without having a recession, unlike just about all the other rich countries, which is true, but if you looked at the figures very closely, you discovered that still meant that young people leaving the education system bore the great burden of the downturn that was the Global Financial Crisis because they took a lot longer to find jobs.

[20:00] That’s what happens in every recession. It even happened in the GFC, which we say wasn’t a recession. I don’t say it, but everybody else does. And so, there is just no doubt that it’s the young people, as a class, who bear the heaviest burden during a recession.

Ginger:                  Given that, Ross, I just want to circle back to the JobKeeper before I let you go. We’ve seen that the Government has announced a tapering off of the JobKeeper. Is that going to negatively affect young people and particularly young people in Victoria, who as you say, are in extreme lockdown at the moment?

Ross:                     Yes, it will. Now, the Government might modify its arrangements of phasing the thing out to accommodate Victoria. Whether or not they accommodate Victoria as well as they should [21:00] and whether or not in any case they’re phasing down the JobKeeper arrangement too quickly, which is their great temptation because this is a government that believes in small government. And the problem with recessions is that the answer to every recession is for the Government to spend lots of money. And the deeper the recession, the more money the Government has to spend.

Now, that’s something that really worries a political party that’s been telling us for years that our big problem is deficit and debt. If you are locked into this thing that the biggest problem in the world is deficit and debt, you’re constitutionally disadvantaged to do what has to be done in a recession and that is spend bucketloads, shedloads of money.

Ginger:                  It’s a real catch-22, isn’t it, for them?

Ross:                     It is for them. [22:00] And that’s the sad thing and that’s the reason why just about, not all economists, but many economists are saying to the Government, “You’ve got to spend more.”

The Reserve Bank Governor has been saying that and many other economists are agreeing. And so, the idea that, okay, you say, “Well, look, JobKeeper’s done its job.” It is true that JobKeeper is propping up some firms, which from the moment JobKeeper stops will just collapse. That’s true. That’s an inevitable consequence. It’s not a good reason for saying, “Oh, let’s cut it off now,” because those firms will collapse all right and so will other firms that could have survived.

Ginger:                  Ross, thank you so much for talking to me today.

Ross:                     My pleasure.

Ginger:                  And thank you again for listening to Seriously Social. Don’t forget, if you like what you are [23:00] hearing, share our podcast with your friends and on your social channels and rate us wherever you get your podcasts from.

[End of recorded material 23:07]

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