Can the government stave off recession?

[MrBurns]

Ask the economists: Can the government stave off recession?
Interviews by Andrew Crook:

From Crikey 13th Jan

Check out Keens comments below -

Fears are growing for the health of the Australian economy after yesterday’s ANZ monthly survey of job ads showed a 9.7% fall in December and a close to 30% fall since July. Another survey released this morning confirmed the gloom -- economists are forecasting massive jumps in unemployment this year as Chinese growth slows and resources boom starts to tail off. All this could spell political chaos for Kevin Rudd, who has prided itself in staying ‘ahead of the curve’ on policies to stimulate the economy. But does the government really have the levers to stave off recession? Crikey asked a group of leading economists for their views on the best way forward.


Paul Brennan – Citigroup head of economics: Unfortunately it’s going to be hard to avoid a recession regardless of what the government does because the global backdrop will continue to deteriorate. All we can do is moderate the damage before developments overseas impact on the economy here. The government has already done quite a bit pre-emptively both in terms of fiscal and monetary policy -- we've stimulated the economy aggressively before rises in the unemployment rate. Interest rates are of course important and we think the cash rate will get to 3% by March. And certainly tax cuts would help. But the difficulty is that businesses and households want to pay down debt rather than spend. The classic stimulus measure is for the government to increase infrastructure spending, especially if there is going to be a protracted global downturn. Another measure in the short-term is public housing -- despite problems negotiating funding deals with the states, this could provide a more timely boost to the economy.


Michael Knox – Chief Economist and Director of Strategy at ABN AMRO Morgans: The crucial thing to encourage is investment from small and medium-sized firms. When SMEs invest they create employment -- when someone builds a new vehicle or a new truck and when someone buys a workstation they need to hire someone to operate them. One way to increase investment by SMEs is to cut interest rates aggressively and we expect the RBA to continue to do that this year. Another way to stimulate the economy is through investment allowances. At the moment the 10% investment allowance is far too small. The US already has allowances of around 50% and we need to follow suit.


Chris Caton – Chief Economist, BT Financial: First of all interest rates are critical, although this is, of course, a matter for the Reserve Bank. There's definitely room for a second stimulus package, especially if you go by the guideline that economic stimulus should be temporary, targeted and timely. Raising pension levels doesn’t really make sense because this would be permanent -- you don't want to do something that would threaten future flexibility. One-off payments would make more sense but if a recession is on the cards the government won’t be able to avoid it. If there were spending projects out there that could be justified, it would be a really good time to get them started, even though the effect of these might be some way off.


Josh Williamson -- Senior Strategist TD Securities: If the Rudd Government is wanting to minimise or avoid a recession in 2009 it needs to undertake fiscal initiatives with an immediate impact. This could come through tax cuts, increases in the pension rate or other welfare payments or even reductions in the level of the GST -- anything that can stimulate consumption and business activity. The government needs to be careful though because any excess federal government stimulus should be considered in light of the reaction from the Reserve Bank on interest rates. The other thing to consider is that a recession could be unavoidable, regardless of what the government does or doesn't do. They may only be a position where they can minimise the damage.


Assoc. Prof. Steve Keen: I think there's a 100% chance of not being able to stave off a recession this year. What we're going through is the greatest deleveraging in the history of capitalism. This is worse than the Great Depression, and the scale is so great that there is nothing the government can do aside from tinker around the edges -- it's completely out of their control. The can attenuate the effects to some extent by running a deficit and guaranteeing government deposits. But really, the government isn't really talking about a stimulus of the scale needed to drag us bank from the brink.

 

[gfresh]

No surprise there, that's textbook Keen..

I will agree however and say no But recessions aren't the end of civilizations, and life goes on, I think people have forgotten that when they hear all the talk..

Why the government should go all out avoid one is an interesting one, I think half the reason (most of the reason?) is that they don't want the stigma of a recession hanging over their term come next election... they also have to be seen to be doing "something" by the public during these times, even if it is likely to do little.

If this year Australia achieves say 0.5% growth, it won't technically be a recession, but it's hardly the economy roaring along, so it's much the same anyhow. But I'm sure the government will feel all warm and fuzzy "they prevented" the recession, in at least name only.

Let's see whether we have two more years of this and people gathering in the streets for this to be classified as a depression though.

 

[MrBurns]

No surprise there, that's textbook Keen..

I will agree however and say no But recessions aren't the end of civilizations, and life goes on, I think people have forgotten that when they hear all the talk..

Why the government should go all out avoid one is an interesting one, I think half the reason (most of the reason?) is that they don't want the stigma of a recession hanging over their term come next election... they also have to be seen to be doing "something" by the public during these times, even if it is likely to do little.

If this year Australia achieves say 0.5% growth, it won't technically be a recession, but it's hardly the economy roaring along, so it's much the same anyhow. But I'm sure the government will feel all warm and fuzzy "they prevented" the recession, in at least name only.

Let's see whether we have two more years of this and people gathering in the streets for this to be classified as a depression though.

Yes Paul Keating was right when he said "this is the recession we had to have"

According to Peter Schiff a recession is the only way out of this and the Govt cant stop it and will only make things worse by trying to bail out the situation.

Keen uses very strong language here.

 

[numbercruncher]

Can the government stave off recession?

Hope not, we need our medicine.

 

[Beej]

I don't agree with Keen, who just always sounds like a complete alarmist to me - saying that things are worse than the GD already is just plain silly! The other comments/views are all pretty much on the mark IMO. As they all said, it is unlikely the government can do anything to stop a recession if it is really on the cards, but they can certainly dampen it's impact and duration with the type or measures that are being undertaken (stimulatory spending, one off payments, infrastructure spending, lower interest rates, lower taxes etc).

But who knows, we might get lucky - maybe China and Asia will get going again sooner rather than later, and actually lead world growth out of the doldrums, meaning we would get the last-in, first-out effect plus the dampening effects of the government response and the interest rate response etc? Personally I think this is the best case scenario and AUs only chance of avoiding an official technical recession. However, at this point the odds on this outcome would have to be less than 25%?

As Gfresh said, a recession, while undesirable, is not the end of the world. We have had them before and we will have them again. I experienced the last one just at the beginning of my career and to be honest didn't really notice that much at the time, but then I didn't know any different and just thought that's how things were! I have also experienced severe, but industry specific downturns in the past as well that have impacted me quite a bit. Having now experienced boom times as well I can see the difference though - recession essentially means less raw opportunity and exuberance than in the good times.....

Cheers,

Beej

 

[Glen48]

If the Feds knocked the GST on the head or reduced it to 5% this would soon free up a lot of loot ( could be some drama with changing PC's?)
Looks like the new trend is to pay companies to keep employees on and let the ATO pay them, this keep the figure low.

 

[GumbyLearner]

Hope not, we need our medicine.

Very clever post NC :

 

[Calliope]

No. Batten down the hatches. If you have a job, forget about that overseas trip. If you go, your job won't be there when you come back. And whatever you do don't be tempted to get back into the market.

 

[Stormin_Norman]

like that video in the obama thread said. corrections are the solution, not the problem.

 

[doctorj]

No. Batten down the hatches. If you have a job, forget about that overseas trip. If you go, your job won't be there when you come back. And whatever you do don't be tempted to get back into the market.

Sadly this happened to a friend of mine. They went to visit family over the xmas/ny break and came back to find they weren't needed any more.

John Taylor (author of the 'Taylor Rule' for those that follow that sort of thing) recently wrote a paper that was very scathing of the actions of all governments. He uses evidence to support the idea that goverment actions actually increased the depth and severity of the crisis.

I personally believe that while there are things the government can and should do, its unlikely they'll be able to avert a recession.

 

[Temjin]

Yes, Keen always use strong language because he want to get his message across clearly.

However, if anyone has followed Nouriel Roubini in the last 3 years, you would find he is worse than Keen because he predicted doom and gloom for the US and everyone thought he was a lunatic and dismissed him. Now everywhere are asking him for advices and for his prediction in the coming years. (which is still doom and gloom for the US hah)

Of course, you can't simply extrapolate that and assume Keen will be like Nouriel with prediction of the end of the Australian's economy.

However, I agree that stimulus packages will not work (and a total waste of money too). Australia has been living well beyond their mean for over 30+ years since the credit boom started and it's absolutely normal for everything to "revert" back to the mean again. People need to start to learn to stop spending and save just like the Chinese. Of course, the Keynesian economists in their collected wisdom disagrees. Saving is bad for the economy and should be discouraged and possibly be punished in "unconventional" times.

If we just let everything crash, the economy will be back on its feet in a much shorter time. If government decides to intervene by injecting more medicine on a dieing patient, it will just prolong the suffering.

 

[cashcow]

I'd hate to see us disappear down the abyss, but I'd have thought companies (and guvmints!) should be at their most innovative and efficient when times are tough!

And while I empathise with those who are doing it tough at the moment, and whose jobs may not be secure, etc., sometimes I think a wakeup call is a good thing. Look to the future, applaud spending on value-adding infrastructure, education, training, and the like. I'm yet to see a consumer handout that, on balance, is a good thing. Don't forget it's not spelled econo-ME and that, ultimately, someone has to pay for it.

 

[GumbyLearner]

No, thats why they're now telling you to join the queue.

Tax office may outrank creditors in company crashes
http://www.theaustralian.news.com.au/business/story/0,28124,24922202-643,00.html

I suppose they have to pay for the FHOG grants somehow and Rudd's talkfest travel budget! :

 

[sinner]

Let's keep the news ball rolling kiddies!

Click links for full story...

We won't be rushed on stimulus package: Swan
http://www.abc.net.au/news/stories/2009/01/19/2469579.htm

Federal Treasurer Wayne Swan says the Government will not be rushed into developing another economic stimulus package.

The Government is considering more spending to generate economic activity, on top of the $36 billion of initiatives already announced.

The latest economic figures predict Australia will have significant budget deficits, a recession and a higher than expected unemployment level.

Peak credit is over they might say? You can lead a horse to the loan water but you can't make him borrow!
Figures show Australians continue to shed debt
http://www.abc.net.au/news/stories/2009/01/19/2469106.htm

Official figures reveal households and businesses continued to reduce their borrowings as 2008 drew to a close.

Commercial finance slumped 10.4 per cent from October to November, while personal finance fell 1.8 per cent.

But borrowing for housing rose 1.4 per cent after the Federal Government's boost to the first home owners grant scheme.

New statistics also show the value of goods Australia imported in December fell by $432 million in seasonally adjusted terms.

I thought we weren't supposed to talk down the economy Mr Turnbull?
Budget deficit must be last resort: Turnbull
http://www.abc.net.au/news/stories/2009/01/19/2469012.htm

Opposition Leader Malcolm Turnbull says Australians should be very concerned about today's dire economic forecast released by Access Economics.

But Mr Turnbull says putting the Budget into deficit to shore up the economy should only be used by the Government as a "last resort" and any deficit must be as low as possible.

Access Economics' business outlook predicts the country will be hit by a recession this year and has also described the Budget as "buggered", with a deficit likely.

A more international take on the title query...
Europe to suffer deep recession, surging unemployment: EU
http://www.abc.net.au/news/stories/2009/01/20/2469596.htm

The EU economy will shrink nearly 2 per cent this year as a severe recession drives unemployment and government deficits to levels not seen for years, the European Commission forecast.

After growing 1 per cent in 2008, the 27-nation economy of the European Union is poised to contract by 1.8 per cent this year, the EU's executive arm said in a dramatic downward revision of its forecasts.

Predicting that the roots of recovery will only take hold in the middle of the year, the commission forecast that the EU would achieve economic growth of only 0.5 per cent in 2010.