With the economy growing below par and spirits so flat that people have
started making up new and silly terms like "technical income recession"
just to spook us, it's time we put our present discontents into context.
And
who better to provide it than the unfairly sacked secretary to the
Treasury, Dr Martin Parkinson, who on Friday gave the last of his final
speeches in a farewell tour equal to Johnny Farnham's (though well short
of Nelly Melba).
On his last day in the job, Parko reflected on
all the economic reforms he'd seen since he joined Treasury in 1981 and
the economy's greatly improved performance since then. We are, after
all, in our 24th year of growth since the severe recession of 1990-91.
Parkinson
observed that about half the people of working age today weren't old
enough to work at the time of that recession. They thus have little
conception of how terrible recessions are. Or why oldies like me object
to the R-word being invoked with such flimsy justification.
In
that recession, the official unemployment rate rose from 5.8 per cent in
December 1989 to 11.1 per cent in October 1992, an increase of more
than 5 percentage points.
But, as Parkinson reminds us, up to that
point we were used to having recessions about every seven years. In the
Whitlam government's recession of the mid-1970s, which continued for
some years into the Fraser government's term, the unemployment rate rose
by about 4 percentage points.
Then came the Fraser government's
own recession, in which unemployment rose from 5.4 per cent in June 1981
to 10.3 per cent in May 1983.
It was the era of "stop-start
growth". In banging on about 23 years of uninterrupted growth, however,
it's important to remember there were several periods of slower growth
in that time, as Parkinson acknowledges.
Indeed, Reserve Bank
governor Glenn Stevens observed recently that "but for the vagaries of
quarterly national accounting we might well have called the end of 2000 a
recession; we would have called the end of 2008 one, in fact I would
call it that ... I think we had a recession then, but it was a brief
one.
"It wasn't terribly deep and we got out of it fairly quickly.
The question isn't how you can go another 23 years without a recession,
it is how you have small ones and get out of them quickly."
Just
so. Parkinson notes that, in 2000-01, the unemployment rate increased by
about a percentage point, and during the global financial crisis of
2008-09, it went up by about 2 percentage points.
But this
acknowledgment that we've had a few mini-recessions in the past 23-plus
years only enhances Parkinson's point: compared with the previous 20
years, we've got vastly better at macro-economic management, at
smoothing the business cycle.
"Those recessions of the 1970s, '80s
and '90s were devastating to the economy," Parkinson said. "There was
the direct loss to economic output of having around 5 per cent of our
workforce thrown out of jobs.
"And there were the social and
personal costs of increased unemployment that are more difficult to
measure, but likely just as large, or larger, and more persistent, than
the direct loss to economic output.
"Large numbers of people
experienced long periods of unemployment following these recessions. In
many cases, those long-term unemployed never worked again."
In the
past 23 years we weren't knocked off course by the Asian financial
crisis of 1987-88 or by the bursting of the technology bubble and
subsequent recession in the United States in the early 2000s.
You
can't put such a record down to good luck. So what changed to make our
economic performance so much better than it had been? Parko identified
three main factors.
First, all the micro-economic reforms of
"product markets" (for oil, air travel, telecommunications,
manufacturing, agriculture, rail, waterfront, water and electricity,
bread and eggs) and "factor markets" (the exchange rate, banks and
financial markets; labour market decentralisation).
These reforms
not only improved the allocation of resources and so added to national
income, they also made the economy more flexible in its response to
economic shocks: less inflation-prone and unemployment-prone.
This, in turn, made the economy's growth more stable and the macro managers' job easier.
Second,
there were reforms in the way macro-economic management was conducted,
with the introduction of "frameworks" (rules and targets) and greater
transparency. Monetary policy (control of interest rates) is now
conducted independently by the Reserve Bank, guided by an inflation
target.
Fiscal policy (the budget) is now conducted according to
the Charter of Budget Honesty with a "medium-term fiscal strategy" and
regular reviews.
Third, the building of economic institutions with
operational independence in regulating the economy (Australian
Prudential Regulation Authority, Australian Securities and Investments
Commission, Australian Competition and Consumer Commission and
Australian Taxation Office) and in advising the government (Productivity
Commission).
Parkinson stressed that these reforms were "an important
pre-condition for stronger and more stable growth" but the growth itself
was produced mainly by Australia's businesses and households.
"Australia
is not immune from economic cycles," he concludes. "But the economic
reforms of the 1980s, 1990s and 2000s mean recessions will happen less
frequently and be less severe, on average, than if we still had the
economic policies and structures of the 1970s."
