Bill Mitchell-en Some lessons from history for the design of a
coronavirus fiscal intervention
(http://bilbo.economicoutlook.net/blog/?p=44558)
(i) Sarrera gisa: Australia, DTM, …
This post continues my thinking and analysis of the issues relating to the design of a fiscal intervention by the Australian government to ameliorate the damaging consequences of the coronavirus dislocation. Today, I delve a little bit back in history to provide some perspective on the current fiscal considerations. Further, I consider some of the problems already emerging in the policy response. And finally, I consider the lessons of history provide an important guide to the sort of interventions that the Australian government might usefully deploy. While the analysis is focused on Australia at present, the principles developed are portable across national boundaries. And the underlying Modern Monetary Theory (MMT) understanding is applicable everywhere there is a monetary system. This series of blog posts are building up to the production of my 10-point or something plan to address the crisis.
Dealing with the Second World War
The following graphs show the dramatic shifts in public and private spending during the Second World War. They are taken from the excellent historical data provided by M.W. Butlin – A Preliminary Annual Database, 1900/01 to 1973/74.
By the early 1940s, as the war in the Pacific was in full swing, the Australian government shifted its total consumption expenditure (including defence) in real terms from just under 10 per cent of GDP to close to 50 per cent.
The next graph shows the shift in the Australian government fiscal balance between 1930 and 1950 (as a per cent of GDP). The fiscal injection reached a peak of 14.12 per cent in 1943 and was over 5 per cent of 6 years.
So it was a massive federal intervention that was deemed to be required as part of the war effort.
There was a dramatic shift in the manufacturing sector towards armaments production. Manufacturing employment surged by 10.1 per cent in 1940 and 10.7 per cent in 1941, mostly as a result of women entering the labour force.
This article from the National Archives – Secondary Industries – provides some background.
We learn that during the War, “there was another upsurge in manufacturing” and:
By 1943, the Commonwealth Government had established 47 munitions factories and establishments, and there were also 178 government-financed annexes attached to private firms and state workshops … In five years manufacturing employment, which included a significant proportion of female workers, rose by 25 per cent, with 753,000 employed in 1944. Two-thirds of civilian employees were engaged …
In this historical account from the Victorian government – Women’s work during World War II – we learn that:
During World War II, with the male workforce considerably depleted and ‘manpower’ critical to maintain wartime production, women took on a significant role. Wartime created opportunities not only for the development of local engineering prowess, but also provided new employment opportunities for women …
And this archive – Women at Work – reports that:
Women’s participation in the workforce increased by 31% between 1939 and 1943 as women found work in factories and farms and were able to take up positions in country areas as teachers and nurses.
The point is that in time of emergency, there is substantial capacity to shift resources around into areas previously considered unimaginable.
The women factory workers had never done that sort of work before yet productivity rose during that period.
(iii) Gaur egungo parte-hartze fiskalaz
Current fiscal intervention – so far
Consider the current fiscal intervention in relation to this historical data and also the GFC stimulus provided by the Federal government.
As an aside, I have no issue with using the term ‘stimulus’. Some think we should use more drastic terms commensurate with the severity of the problem.
The Government has so far announced two fiscal stimulus measures:
1. March 16, 2020 – $A17.6 billion1
2. March 22, 2020 – $A66.0 billion
3. Total $A83.6 billion
4. In terms of the 2019 GDP, this amounts to 4.2 per cent.
5. The RBA also made $A90 billion available for SMSE loans at 0.25 per cent, and also cut the policy rate to 0.25 per cent. I will talk more about this later.
6. March 23, 2020 – the Federal parliament approves a further $A40 billion as an unspecified fund to be used if and when needed at the Government’s discretion, given they have also suspended Parliament for around 5 months, allegedly to reduce the risk of coronavirus contraction. The Opposition Labor party thought it a good idea allowing the Government to have this spending approval without scrutiny. I would not have done that.
7. So the unspecified pool adds another 2 per cent of GDP to the stimulus.
(iv) Azken Krisi Fiskal Handiaz, 2008an
Now think back to the GFC when the Opposition were in government and they were confronted with the impending collapse of the financial system after years of greed and excess and lack of prudential oversight.
Here is what it did:
1. October 2008 – $A10.4 billion.
- $A4.8 billion pre-Xmas pensioner payments
- $A3.9 billion family support
- $A1.5 billion first-home buyers grant tripled
- $A187 million training positions
2. February 2009 – $A42.0 billion (mostly infrastructure).
- $A26 billion for infrastructure
- $A2.7 billion small-business tax breaks
- $12.7 billion cash bonuses ($A950 for everyone earning less than $A80,000)
3. Total $A52.4 billion or 4.2 per cent of GDP.
4. The RBA also cut interest rates by 1 per cent to 3.25 per cent.
So, leaving aside the unspecified slush fund of $A40 billion, the current spending injection being proposed by the Australian government is equivalent in terms of proportion of GDP as the GFC response.
It is almost as though the Federal Treasury has some stimulus threshold beyond which they don’t want to go.
But, it will become clear that all of the unspecified slush fund of $A40 billion will be required and lots more if the nation is to get through the economic turmoil with a modicum of respectability.
The scale of the Federal government intervention is nowhere near what it executed during the Second World War yet I expect the ultimate shift in policy will have to be of similar magnitudes, albeit, perhaps, not for as long.
The virus will probably be corralled in a shorter time than it took to bring Japan to surrender.
(iv) Kontuan hartzeko zenbait puntu
Issues to consider
First, the Government is making out that the stimulus is, in fact, much larger than I have mentioned here, as a result of the $A90 billion that the RBA is making available to small and medium-sized businesses as loans at the current policy rate.
The problem with these types of measures, which are shared by quantitative easing (QE) policies is that they require firms and households to be prepared to borrow at a time when increased indebtedness is likely to be damaging without a solid sales and/or employment outlook.
I discussed the Household debt situation in Australia in this blog post (among others) – Household debt is part of a broader problem – be informed (November 22, 2017).
The most recent RBA data – Household Finances – Selected Ratios – E2 – shows that the ratio of household debt to annualised household disposable income is now at record levels – each month a new record is established.
The following graph shows the ratio from 1988 (the beginning of the series) to the June-quarter 2017.
In June 1988, the ratio was 63.2 per cent. It peaked at 171 per cent in the June-quarter 2007, just before the GFC emerged.
It stabilised for a while as the fear of unemployment and the economic slowdown curbed credit growth for a while. But that didn’t last.
Over the last two years it has accelerated considerably and in the September-quarter 2019, the ratio was 186.5 per cent, although in recent quarters we have seen a tapering, as economic conditions become less buoyant.
The position of Australian households, carrying record levels of debt, is made more precarious by the record low wages growth and the conduct of the private banks.
Please read my blog post – Australia’s household debt problem is not new – it is a neo-liberal product (February 22, 2017) – for more discussion on this point.
The problem is that in this environment, the consequences of the coronavirus disaster will only make the situation more precarious than it already was.
The next graph shows the way in which the evolution of the household debt ratio relates to the annual growth in household consumption expenditure.
The graph shows three distinct segments in the sample (which I confirmed using more sophisticated regime-switching analysis):
1. June-quarter 1989 to December-quarter 1999 – at which point the relationship started to shift outwards. At this point, the household debt ratio was 107.9.
2. March-quarter 2000 to March-quarter 2008 – taking us up to the GFC, at which point I detected further instability.
3. June-quarter 2008 to September-quarter 2019 (latest data).
And the dotted lines are the linear trends for each sub-sample derived from a simple regression equation.
The analysis is simple and illustrative. We should never infer too much from cross plots (correlation versus causation and all that) but the patterns are interesting.
As the household debt ratio rose in the late 1980s and into the 1990s, with the deregulation of the financial sector, growth in household consumption was stronger. Hence the upward sloping dotted line for the blue marker period.
In the second period, the relationship remains positive but it is weakening (flatter dotted line). So an increase in the household debt ratio is associated with a lower growth in household consumption than it would have in the earlier period.
Further, corporate debt remains at high levels, hovering around 2.8 times the total financial assets in the business sector. In the period before the GFC, the ratio peaked at 3.4 times.
With falling demand (sales) and a projected period of stagnation with commensurate loss of cash flow, it is highly unlikely that businesses will take on further debt, no matter how cheap it is.
And if they do it will because they are using the debt facility as a substitute for cash flow, which is a myopic strategy and will have negative long-run consequences for their viability.
Having said that, though, a credit line will help firms remain solvent if they have to roll-over existing debt obligations. In this case, they shift the obligation from existing creditors to the RBA.
Ultimately, the RBA can write of any loans it makes should that be deemed desirable.
I wrote about these considerations in this blog post (among others) – Fiscal stimulus disappears into saving – solution – bigger stimulus was needed in the first place (February 17, 2020).
The second problem with the current government aproach is that they are encouraging and allowing people to draw down their superannuation balances (up to $A10,000 per year for 2019-20 and 2020-21).
This option often comes up in public policy discussions and was last rehearsed as a solution to easing the housing affordability problem facing first-home buyers.
It would have been bad policy then and is a very bad policy choice now, in the context of the coronavirus crisis.
For the individuals, the draw down will reduce their future pension prospects and will be biased to those with those who in all likelihood already have balances at the lower end.
Younger people or those on low incomes will thus deplete their future pension balances quickly.
From the perspective of the superannuation funds, it will cause a liquidity rush (forced sale of assets) which will further damage their situation, given the recent short-run movements in the sharemarkets.
There is absolutely no reason to undermine the future to deal with the present crisis.
The Australian government has all the fiscal capacity it needs and should not compromise the future compounded growth of workers’ hard-earned savings.
(vi) Baliabide malgutasunaz
Resource flexibility
I was talking with a person the other day who told me there ‘must’ be a recession because so many workers are not going to be able to work for a while – for example, cafes, hotels, entertainment, and other service jobs.
I have also seen others claiming that advocacy of a Job Guarantee right now is irresponsible because workers will have to be confined to their homes.
At present, only those with risk factors (either have the virus, are entering the nation from areas where there is high incidence, or a frail) are confined to their homes (or isolation centres).
Work is on-going and can be designed to be ‘safe’.
Think about the experience of the Second World War.
There is no shortage of productive jobs that can be done which would be ‘safe’ in this social distancing era but would provide valuable outputs to society.
The Victorian Government announced, for example, in their – Economic Survival Package To Support Businesses And Jobs (March 21, 2020) – that:
The Government will establish a $500 million Working for Victoria Fund in consultation with the Victorian Council of Social Services and Victorian Trades Hall Council. The fund will help workers who have lost their jobs find new opportunities, including work cleaning public infrastructure or delivering food – providing vital contributions to our state’s response to the pandemic and affording those Victorians security when its needed most.
So think about it.
Australia has just been ravaged by drought, bushfire and then flood – before the coronavirus hit.
There is so much depleted land, infrastructure and personal care services that are required arising not only from these natural disasters but also from years of austerity and outsources of public services.
There are tens of thousand of jobs that the Federal government could fund across the regional and urban space to help improve our society.
There will probably be a shortage of medical support staff. Thousands of jobs could be created to ease the load in the short-term on the depleted health care ranks.
The food harvest is facilitated in so small way by visiting ‘backpackers’.
For those workers in regional areas who are now unable to work because of the closures enforced by the government or by consumer boycots (not going out anymore), the Government could help shift workers into the food harvesting sector for the time being while border controls prevent people from visiting and working.
And if we are to protect our aged members of the population, then we could ensure they are secure in their homes with adequate food and other supplies, are able to maintain their gardens (if they have them), and attend to other needs.
Thousands of jobs could serve this function for the time being. There would be no reason for such a person to take the risk of venturing to the supermarket, for example.
And what about the claims that these shifts cannot be facilitated quickly enough to avoid mass unemployment?
Well, I think I could retrain as a hospital orderly, for example, in a matter of hours or a few days at most, if I was required to.
The women who entered the factories in 1939 had no prior background. But productivity rose quickly.
So I advocate major public sector job creation to help workers adjust to the loss of their current jobs (while the crisis persists) and to provide a productive workforce to enhance our social offerings in terms of infrastructure and services.
The number of jobs that could be created to absorb those losing their jobs elsewhere, which would add social value, is limited only by our imaginations.
And I have a pretty active imagination!
There is no financial constraint preventing the Government from taking on this role.
Ondorioak
1. As I further develop the thinking towards my 10-point or something plan (where each post contains aspects of the final plan) I will consider the likely impacts on unemployment.
2. There is no doubt in my mind that people would prefer to continue working if that can be rendered safe.
3. The is no financial constraint preventing the government employing all the idle labour.
4. I have been doing some estimation of how much idle labour their might be in the medium-term.
5. And the estimates are shocking. Next time.
(…)
1 Australiar bilioi bat = mila milioi europar.
joseba says:
Australiako zorraz
Bill Mitchell-en These worn out debt narratives – Stop It! It’s ridiculous!
(http://bilbo.economicoutlook.net/blog/?p=44613)
(i) Hasiera gisa
(…) One of the issues (…) is the “what will happen to all the debt when the crisis is over” story. And, it is not just a narrative being promoted by the Right or the conservatives. The Federal Labour Party spokespersons and those hanging around the edges have started to push the narrative. As the Prime Minister told us the other day in relation to the people who are panic buying “Stop it! It’s Ridiculous!” I think he was actually talking about those (morons) who are starting the deficit hysteria before the deficits have even actually risen much. For their own health, I urge them to “stop it”. Imagine how apoplectic they are all going to be once the deficit goes to 10 per cent or more and the RBA is buying up all the debt. My god.
(ii) Nahaste-borraste
The Canberra Bubb need to get out more!
The Prime Minister said last week during a press conference:
On bulk purchasing of supplies: Stop hoarding. I can’t be more blunt about it. Stop it … It is not sensible, it is not helpful and it has been one of the most disappointing things I have seen in Australian behaviour in response to this crisis … Stop doing it. It’s ridiculous. It’s un-Australian, and it must stop …
He was obviously talking about the Treasurer, who on Monday, when announcing his $A130 billion1 JobKeeper wage subsidy plan, was asked “how are you going to pay for it” (yes, that one, again).
He said:
This will be paid back for years to come. There’s no secret in that. Of course, we will enter into discussions with the credit rating agencies over due course. Australia has entered into this crisis from a position of economic strength. Our debt to GDP ratio is around 20%. That’s a quarter of what it is in the United Kingdom, and in the United States and one 7th as Japan. That’s given us the fiscal responsibility to respond. We have delivered the first balanced budget in 11 years. That’s been important in allowing us to provide this level of support at at time of critical need.
The Prime Minister was clearly trying to stop his Treasurer lying to the people – stop it!
1. The deficits will not be paid back. Deficits are flows that exhaust. Any matching debt will be paid back upon maturity. Like is it regularly without consequence. The Australian government never has an issue meeting all its financial liabilities.
2. The credit rating agencies should be declared illegal. They provide no helpful input to any discussion about fiscal policy, and, rather, just distort the truth.
The Australian government debt has no credit risk. It is 100 per cent safe. No matter how large the outstanding debt is. 100 per cent safe.
So what value can a credit rating agency add to that?
I should charge the government heaps for that last credit rating. 100 per cent safe, zero credit risk. That is all anyone ever needs to know.
As we learned during the GFC, the credit rating agencies were found to have behaved corruptly and criminally. Many of the bosses of those agencies should have been imprisoned for their criminal behaviour.
The fact Mr Frydenberg mentioned them should disqualify him from office.
3. The story that a low deficit or low debt ratio makes it easier to support an economy during a crisis is well-rehearsed but is plain wrong.
It would not have mattered if Australia had Japanese-style deficits and debt ratios.
The Government would still have been able to announce its $A130 billion stimulus. No issues would have arisen.
And it is a lie to say that they delivered a “balanced budget” – they did not. They tried, but in doing so, the fiscal drag that they created coming up against negative growth in business investment and declining growth in household consumption expenditure, meant that the economy was slowing rapidly (labour underutilisation is at 13.7 per cent), and tax revenue was not going to grow fast enough to get them over the line.
As is usually the case.
Austerity backfires and just leaves a trail of damage to things that matter – employment, incomes, poverty reduction, etc – and doesn’t even achieve the things that do not matter (the financial ratios).
So he also lied about entering the medical crisis from a position of economic strength.
So, Josh, “Stop it! It’s Ridiculous!” Listen to your Prime Minister.
And I also think the Prime Minister was referring to the inane comments from the Labor Party Treasury spokesperson, Jim Chalmers, who has been doing the rounds telling the media that Australia:
… will be saddled as a nation with a generation of debt. It might be something like a trillion2 dollars by the time the government’s finished
Whew!
Sounds bad. A ‘generation of debt’. Which generation actually hasn’t grown up with government debt being positive.
And what does it matter if it is a trillion dollars or less?
A trillion dollars in risk-free, interest-earning non-government wealth, which would provide a portfolio choice to savers.
Although, of course, it is likely to be vacuumed up by the RBA, which has now decided to embark on large-scale purchases of government bonds.
Here is – Today’s data – the RBA purchased $3,000 million worth of Commonwealth Government Bonds across the yield curve.
Since March 20, 2020, they have purchased bonds worth $A29,890 million.
Getting up there!
Conniptions turning into apoplexy.
But be warned – the ICU beds are filling up in our hospitals and there won’t be emergency beds to accommodate your breakdown!.
So follow the Prime Minister’s advice, “Stop it! It’s Ridiculous!”
To be clear, I am not advocating any debt being issued, but the RBA hoovering operation will ultimately result in the deficits being matched by central bank bond purchases.
The difference between what I would do and what QE does in this context, is that the latter delivers capital gains to those who sell the bonds back to the RBA.
Why hand out corporate welfare like that?
Finally, we are drilling down to commentators who are not elected MPs. The Prime Minister also has a message for them – “Stop it! It’s Ridiculous!”
He was clearly referring to the Op Ed writers who are pushing the debt narrative.
For example, the Canberra Times published an Op Ed yesterday (March 31, 2020) – Before anyone asks: no, Australia does not have a debt problem – written by an academic at ANU who was a former advisor to current Labor Party MP, the latter has been particularly vocal in his hostility towards MMT.
Clearly, wanting to be on the wrong side of history.
As to the academic character, I have written about him before, unfortunately – see How social democratic parties erect the plank and then walk it – Part 1 (June 6, 2019).
A stuck needle on an appalling record.
We encounter the usual, weak-kneed faux progressive line.
‘Oh deficits are okay now because the economy is collapsing’ but ‘we shouldn’t worry yet’, why? ‘because:
… the costs of increased government spending are very low.
Adam Triggs then gives us a lecture on these costs:
1. We get a lesson in the classical loanable funds doctrine and crowding out.
So Triggs thinks that governments have to borrow to run deficits and that means “money is no longer going to other worthy investments” – clearly he has never understood the banking system – loans create deposits Adam. Its quite basic really.
He then tells us that in “normal times” there is “a limited pool of savings”, the extra borrowing will mean “higher interest rates”, which increase the cost of borrowing and “crowd out” all these other worthy investments.
There is no “limited pool of savings”. His former employer, Andrew Leigh likes to tout his “Keynesian” credentials. Well Keynes didn’t believe that there was a finite pool of savings.
Savings are a function of income. If income grows as a result of fiscal expansion or business investment or increased export revenue or household consumption, then saving will rise.
Luigi Pasinetti once noted that “investment brings forth its own saving” – an astute observation that applies to all spending sources.
And bank loans are not reserve-constrained. They don’t just sit around waiting to dollop out their current deposits to lenders in some sort of weird rationing plan.
They make loans when there are credit-worthy borrowers requesting them. They worry about whether they have the reserves to cover the transactions that will follow from the deposits the loans create later. They always know they can get reserves, if not from any other source, from the central bank.
There can never be ‘financial crowding out’ in a modern monetary economy.
And then the “increased government spending stimulates inflation” so “increased government spending can hurt businesses, households and individuals”.
Anyone who submitted that sort of logic in any of my macroeconomics classes without noting how flawed it was would be instantly failed.
All spending carries an inflation risk. Any growth in spending (private or public) can push nominal demand faster than the capacity of the productive side of the economy to respond to it in the form of production of real goods and services.
There is nothing special about government spending in this regard.
2. “The second potential cost of increased government spending is the future cost of paying interest on that debt.”
This is the ‘it is okay to borrow big when rates are low’ story that people, even progressives propagate, presumably to make them feel more comfortable.
And Triggs claims that because the Australian government can borrow cheaply then it should be the stimulus agent.
You cannot make this sort of stuff up.
Think about what is going on.
The government gets the central bank to type in some numbers (at present with lots of zeros after them) into various bank accounts – buying things (medical supplies), paying wage subsidies, unemployment benefits, etc etc.
That’s it. Spending accomplished.
Where is the borrowing in this story?
Nowhere significant.
The deficits add net financial assets to the non-government sector, which is making decisions all the time about how they will manage their overall portfolio of financial assets, with government bonds being part of the mix.
But the funds used by the non-government sector to purchase the bonds, ultimately came from the prior government deficits. In crude terms, bonds are just the accounting record of the spending that was not fully taxed away in the period it arose.
The current interest rates or bond yields are completely irrelevant to the capacity of the government to run deficits.
And whether it is desirable to run deficits is not determined by the current bond yields across the maturity range of the yield curve.
The purpose of fiscal policy is to advance well-being and this requires the government to ensure that spending growth in the economy is matched to the growth in productive capacity so as to achieve full employment and price stability.
That is how we should appraise the size of the deficit. All the neoliberal measures that Triggs seems obsessed with are irrelevant and just disclose a deep ignorance.
Poor Canberrans, waking up to this nonsense.
But the Prime Minister had the right call on this. Stop It! It’s Ridiculous!
joseba says:
Alokairu diru laguntzaz
Bill Mitchell-en JobKeeper1 wage subsidy – some strange arithmetic is afoot
(http://bilbo.economicoutlook.net/blog/?p=44812)
(i) Sarrera
… I have updated the US unemployment claims data with a new map and state table. Shocking. We are working on updated estimates of what the Australian government would need to invest to run a Job Guarantee. We haven’t done that for a while because I didn’t want the press to get obsessed with dollar amounts. But as I am currently talking a lot about the Job Guarantee in the media, I thought some numbers would be useful as a comparative exercise against the JobKeeper wage subsidy, which is the central stimulus plank of the Australian government. The current estimates suggest that to create around 685 thousand jobs might require an outlay of $34 billion2 over the course of a year. That got me thinking. The main response of the Australian government is the $A133 billion over 6 months JobKeeper wage subsidy scheme. The Treasury claims it will be the difference between an unemployment rate of 10 per cent and 15 per cent. That difference is 685 thousand jobs. Then start doing some division and multiplication and you start to see that this doesn’t make sense as I explain below.
(ii) Aritmetika pixka bat
Strange arithmetic – Australia’s JobKeeper wage subsidy
We are working on updated estimates of what the Australian government would need to invest to run a Job Guarantee. We haven’t done that for a while because I didn’t want the press to get obsessed with dollar amounts.
After all, as I have said often, the ‘cost’ of a public policy program is not the numbers that come out in government financial statements under ‘outlays’. The cost is the extra real resources that are consumed as a result of the program.
But as I am currently talking a lot about the Job Guarantee in the media, I thought some numbers would be useful as a comparative exercise against the JobKeeper wage subsidy, which is the central stimulus plank of the Australian government.
Well when I started digging things started to look pretty strange.
Here are some facts:
1. When the Treasurer announced the JobKeeper initiative on April 14, 2020 – Jobkeeper payment supporting millions of jobs – he said:
Given these actions and the position of economic strength from which we approached the coronavirus crisis Treasury expects the unemployment rate to rise to 10 per cent in the June quarter from 5.1 per cent in the most recent data.
In the absence of the $130 billion JobKeeper payment, Treasury estimates the unemployment rate would be 5 percentage points higher and would peak at around 15 per cent.
More than 800,000 businesses have already registered for the JobKeeper payment which will allow the economy to recover more quickly once we are through to the other side of the crisis.
I was immediately suspicious.
Why?
By their own statements, the JobKeeper is the difference between a 10 per cent unemployment rate and a 15 per cent rate.
5 per cent of the current labour force is equal to 686.8 thousand jobs – not millions.
But then I thought about it.
2. The announced injection is $A133 billion3.
The wage subsidy is a $A1,500 fortnightly payment “per eligible employee until 27 September 2020”. Firms have to pass the full amount on per worker and meet all other employment costs outside of the scheme.
Okay, so each worker gets $A1,500 per fortnight.
The specifics of who is eligible etc is one thing. I discussed my antagonism to the scheme in this blog post – The government should pay the workers 100 per cent, not rely on wage subsidies (March 31 , 2020).
Those criticisms remain but are not the point I am making here.
So if the outlay of $A133 billion is to protect 685 thousand jobs, that means $A193,651 per job protected, yet the workers are only getting $750 a week for 6 months.
A worker receiving the subsidy will get $A18,000 over the course of the scheme as long as the employer keeps them on.
Okay, that would imply 7,388,889 workers are being funded if the full $A133 billion was taken up. The March 2020 labour force was 13,736.2 thousand.
Which would mean that the JobKeeper was protecting something around 54 per cent of the labour force.
Which would mean the Treasury estimates that the JobKeeper would be the difference between a 10 per cent unemployment rate and a 15 per cent rate doesn’t make sense.
3. Then there are those 800,000 businesses the Treasurer claims have registered. Even if they employed just one person that would be more than 686.8 thousand.
And if the 7.3 million figure was correct, then they would on average be claiming for 9 workers. That sounds too many.
4. Then we hear – in Senate Estimates yesterday – that only 540,000 firms have enrolled in the scheme covering 3.3 million workers. See JobKeeper payments start next week, but hundreds of thousands of businesses hit by coronavirus aren’t signed up.
More confounding statistics.
Conclusion: I have written to Treasury to request their analysis. They have not released it publicly. I am waiting – probably in vain. Next step will be an FOI request. I would expect lots of blacked out sheets from that.
The points are:
1. Our Job Guarantee estimates so far, which I will release when we have double-triple and more checked them, suggest that the government needs to invest about $A34 billion to create 685 thousand jobs at minimum wage – which is close to the JobKeeper subsidy.
$A34 billion is a lot less than $A133 billion.
If we are right, then something is awfully wrong with the JobKeeper arithmetic and the statements the Treasurer has been making about it.
2. If businesses are not taking up the JobKeeper program – as today’s reports suggest – then the government will not go close to spending the $A133 billion.
Which means the stimulus will be much lower than suggested and the consequences will be very bad for Australia.
As my previous writing on the subject suggest, the stimulus is only about a half of what I think is required.
The latest data suggests it is even worse than that.
So I am waiting for the Treasury to enlighten me. As it stands, the $A133 billion figure does not make sense given other statements the Treasury have been making about the scheme.
joseba says:
Latest employment data for Australia exposes Federal government’s wilful neglect
(http://bilbo.economicoutlook.net/blog/?p=44853)
I reported in this blog post – Policy failure – Australian unemployment rate probably already around 10.9 per cent (April, 2020) – that the The Australian Bureau of Statistics has started publishing weekly employment data on a two-week cycle. The data is drawn from a new series made available as a result of the Single Touch Payroll data provided by the Australian Tax Office and provides researchers like me with much more timely data than the monthly labour force survey. The latest edition came out today (May 5, 2020) – Weekly Payroll Jobs and Wages in Australia, Week ending 18 April 2020 – which covers the new data from April 4, 2020. The results are shocking. The conclusion from my analysis of the latest available data is that some sectors in the Australian labour market have experienced a sudden and catastrophic contraction – like nothing we have ever seen in the data. Both employment losses and major wage losses are underway and the policy response is totally inadequate for the task. A much larger fiscal intervention is required and it has to be directed at workers rather than firms and support direct job creation.
Relevant blog posts as I trace the data trail over time are:
1. “We need the state to bail out the entire nation” (March 26, 2020).
2. The government should pay the workers 100 per cent, not rely on wage subsidies (March 30, 2020).
3. A Job Guarantee would require $A26.5 billion net to reduce the unemployment rate by 6 percentage points (April 30, 2020).
In terms of the coverage of the ATO Single Touch Payroll data, the ABS report that:
Approximately 99% of substantial employers (those with 20 or more employees) and 71% of small employers (19 or less employees) are currently reporting through Single Touch Payroll.
Jobs collapse in Australia continues
Here is what has happened to total employment in Australia since January 4, 2020 (the ATO data starts at the beginning of the year). The index is based at 100 on March 14, 2020 which appears to be around the peak employment, although it was slowing since February 29, 2020.
Overall, there has been a 7.5 per cent contraction between March 21, 2020 and April 18, 2020.
While the pattern was almost identical for males and females up to April 11, 2020, in the last week of the data, the percentage contraction in female employment has intensified.
Between March 21, 2020 and April 18, 2020, male employment has fallen by 6.2 per cent and female employment by 8.1 per cent
So the crisis is now impacting disproportionately on females.
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What does this imply?
We can do some ‘back-of-the-envelope’ calculations with some assumptions to see what this might imply.
The Labour Force survey is usually completed by the 11th day of each month.
If you take the national data and assume that total employment has contracted by 7.5 per cent in the month since the last survey (noting that the ATO payroll data is not a full sample and the dates of the two datasets – ATO and Labour Force – do not exactly align), then by April 18, 2020 (around 5 weeks after the last labour force survey was taken), total employment would have fallen by 976.3 thousand (net) jobs.
If there was no change in the participation rate over that time (assumption – but in all likelihood it will plunge), then unemployment would have more more than doubled from 718.6 thousand in the March data to an estimated 1,694.9 thousand by April 18, 2020 – an increase of nearly a million.
Again, assuming the labour force is unchanged in that period, the unemployment rate would have risen to 12.3 per cent (up from the official March figure of 5.2 per cent)
Given that “not all jobs in the Australian labour market are captured within these estimates”, the ABS urges caution in extrapolating them in the way I have above. But, I also emphasise that my calculations are not to be interpreted as being exact statements.
They are just ball park figures.
The ABS has specifically qualified the results by saying:
For context, high level analysis suggests that there was approximately 650,000-700,000 fewer paid employee jobs in STP-enabled businesses between 14 March and 18 April 2020.
They also note that “Owner managers of unincorporated enterprises are not included in the estimates”, which means that the employment losses are an understatement of what is actually happening.
Which means that the unemployment rate would be around 10.3 per cent if we take the upper bound of that range and assume the labour force is unchanged.
In fact, what will happen is that the participation rate will fall and the unemployment will become ‘hidden’ outside the official measured labour force.
Whatever the actual result (and we will get a better idea next week when the Labour Force survey data is published), the trends are shocking.
They represent the definition of policy failure.
It represents a staggering shift in a five week period and a sign that the Australian government’s fiscal intervention is less than half as much as it needs to be.
In this blog post – A Job Guarantee would require $A26.5 billion net to reduce the unemployment rate by 6 percentage points (April 30, 2020) – I used additional data provided by the Department of Social Services to the – Australian Senate Select Committee on COVID-19.
That data covered the rise in recipients of unemployment benefits in Australia between March 16, 2020 and April 27, 2020.
Using that data, I estimated that the unemployment rate would be around 12.5 per cent.
So you can see that the two datasets provide a convergence on the likely underlying unemployment rate.
In reference to the 1992 recession, the Treasurer told the press yesterday that:
In the current coronavirus, it is expected the unemployment rate will go up by around 5 per cent in three months, let alone three years.
Well it has already gone up by that in a few weeks!
The Treasurer also said that the Treasury is estimating the economy will decline by 10 per cent in the June quarter 2020.
Based on analysis of previous recessions, this Table helps us understand the relationship between GDP growth and changes in the official unemployment rate.
Period
GDP contraction (peak to trough) %
Increase in UR to peak (points)
September 1981 to June 1983
-3.71
4.69
June 1990 to June 1991
-1.43
4.71
From that Table, we derive a rough rule of thumb that:
For every 1 per cent that GDP contracts, the unemployment rate rises by 2.5 percentage points, which given the current labour force would add 304 thousand workers to the unemployment queue.
There are cyclical effects on participation etc that are not included in these types of estimates but they still help ground us in reality.
So if the economy is going to shrink by 10 per cent, then we haven’t gone close to the rise in unemployment yet! A horrifying medium-term future is upon the nation.
1. In the 1982 recession, total employment fell by 3.4 per cent from its peak in April 1982 to its trough in April 1983 – which was considered a devastating contraction.
It returned to its pre-recession peak in April 1984. So peak-trough-back to previous peak took 2 full years.
2. In the 1991 recession, considered the worst since the Great Depression, total employment fell by 4.0 per cent from its peak in July 1990 to its trough in February 1993.
It wasn’t until July 1994, that it returned to its pre-crisis peak – a full 49 months or over 4 years.
3. Derived from data provided by – Source papers in economic history – allows us to see what happened during the Great Depression.
The data is annual and employment in Australia peaked in 1930. By 1932, it had contracted by 9.7 per cent before exceeding the previous peak sometime in 1935.
We are staring at a situation now that looks like being up there with the Great Depression, although the main difference is that much of the employment lost is due to lockdown restrictions rather than a spending growth collapse.
Age breakdown
At the national level, no age breakdowns are provided.
But these are provided at the state/territory level and the following sequence of graphs gives the age profiles of the job loss for each region.
It is clear that our youth are bearing the brunt of the crisis, largely due to the industrial composition of the job losses – services, accommodation etc.
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Industry breakdown
The following graph shows the percentage decline in employment between March 21, 2020 and April 18, 2020 for the Australian industry sectors.
The red line is the national average loss (7.5 per cent).
As expected the worst hit sectors are Accommodation & food services (decline of 33.4 per cent) and Arts & recreation services (decline of 27 per cent).
Other sectors that deal face-to-face with people are also affected (Other services, 12 per cent; Rental, hiring and real estate services, 11 per cent).
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State breakdown
The spatial pattern is shown in the following graph.
Above-national average employment losses between March 21, 2020 and April 18, 2020 have been recorded in:
Victoria -8.6 per cent
South Australia -7.8 per cent
Tasmania -8 per cent
The small island state of Tasmania has had a severe concentrated outbreak of the coronavirus while Victoria is enduring a concentration related to a single workplace.
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Wages paid are also plunging
Last time I analysed this dataset, I didn’t have time to also consider the wage impacts.
The news is predictable given the scale of the crisis.
The ABS report that between March 14, 2020 and April 18, 2020:
1. “total wages paid by employers decreased by 8.2%”.
2. “Total wages paid decreased by 1.0%, compared to a decrease of 1.6% in the previous week.”
3. “Total wages: Tasmania decreased by 9.3%, and Victoria and the Northern Territory both decreased by 9.2%”.
4. “payments to people aged 20-29 decreased by 10.3%”.
5. “Accommodation and food services decreased by 30.3% and Arts and recreation services decreased by 17.3%”.
So not only is employment plunging across the board (and particularly in certain sectors), but the overall wages bill is collapsing.
In the December-quarter 2019, total wages and salaries of employees was $A212,320 million or around 42 per cent of GDP.
As a rough rule of thumb (noting my qualifications above to extrapolating the ATO data), an 8.2 per cent fall in wages paid would amount to $A17,410 million or around 3.5 per cent of GDP.
The Australian government could easily guarantee the wages of all workers and avoid this deflationary outcome of its lockdown rules.
That remains my firm recommendation.
The new narrative – high unemployment for as far as we can see
The RBA Board, today, maintained the interest rate at 0.25 per cent and extended their bond-buying behaviour to encompass corporate debt (going down to BBB- rated instruments).
It most recent forecasts, mentioned in – Statement by Philip Lowe, Governor: Monetary Policy Decision (May 5, 2020) – the RBA said:
In the baseline scenario considered by the Board, the unemployment rate peaks at around 10 per cent over coming months and is still above 7 per cent at the end of next year.
So at the end of 2021, the RBA is predicting that at least 275 thousand workers more will be unemployed than were jobless as the crisis unfolded.
And at that point, there were already over 400 thousand workers, under my definition of full employment, that were languishing in unemployment as a result of the Federal governments obsessive pursuit of a fiscal surplus.
It beggars belief that policy makers would allow the jobless rate to slowly decline in this way, accumulating the massive income and personal losses along the way.
If the RBA projections are correct and the labour force grows at its average medium-term rate over the period to the end of 2021, then there will still be 998.5 thousand workers unemployed at that point.
Only 254 thousand jobs would have been added between February 2020 and December 2021, an average monthly increment of only 13 thousand – a pitiful outlook.
And I haven’t even factored in what will happen to underemployment – noting that the broad underutilisation rate was already 14 per cent as the nation entered the crisis.
To put this in perspective, I took the RBA projections on face value and produced this graph. It is based on a constant labour force growth rate over the period shown and the peak and end-of-2021 unemployment rates of 10 and 7 per cent, respectively.
The blue line is the unemployment rate profile implied.
The other lines are the monthly behaviour of the unemployment rate in the 1982, 1991 and GFC cyclical events. They are indexed to 100 at the low-point unemployment rate for each cycle.
I have superimposed the earlier episodes onto the current calendar for comparative purposes.
The current crisis delivers much greater losses in terms of foregone income and personal tragedies than those past recessions (although the GFC wasn’t strictly a recession for Australia.)
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And in 2022, how quickly will the unemployment rate fall below the projected 7 per cent?
The point is that the media are already settling into this narrative – that things will be like this for the next 18 or more months.
It is a totally unnecessary narrative.
If the Federal government was using its currency-issuing capacity responsibly there would be no reason for unemployment to rise at all.
That’s right – no reason for the unemployment rate to rise at all.
The Federal government could offer a job to all workers unable to work or find work elsewhere.
In other words, the profile shown by the blue line (the RBA projections) is a political choice.
And the Government should be dammed for making that choice.
Conclusion
While the Federal government has certainly shifted its policy tune in the last 6 weeks after scorching the economy for some years as it obsessively pursued a totally inappropriate fiscal surplus, the evidence is clear – its current intervention is wrongly crafted and in absolute quantum way below what is necessary.
They are fostering the narrative that unemployment has to remain at elevated levels for the next two years to absolve themselves of the blame.
The reality is that they choose the unemployment rate and could do something about the massive spike in joblessness tomorrow if it so chose.