Lockdowns scarred economy, and it’s a long way back

Treasurer Jim Chalmers during Question Time in the House of Representatives. Picture: NCA NewsWire / Gary Ramage

Treasurer Jim Chalmers is lucky the Morrison government in its last year in office ignored the economic advice of one of its main critics: Jim Chalmers.

Facing his first budget on October 25, with inflation surging globally, the serious prospect of recession in the US and Europe and large parts of China still in Covid lockdown, Chalmers is lucky his predecessor, Josh Frydenberg, ignored the clamour from the then Labor treasury spokesman and his mates in the left-wing media for more Covid stimulus spending and an extension of the JobKeeper program designed to protect people whose jobs had been lost during enforced lockdowns.

Despite the continuing hysterical post-election media campaign against its record, the Morrison government did sow the seeds of recovery from its own pandemic overspending and job losses.

Chalmers on September 20 revealed the budget bottom line for the year would be almost $50bn better than in Frydenberg’s March budget. Unemployment at 3.5 per cent is already at a 48-year low. Behind the budget improvement is surging revenue from commodity exports and higher income tax collections.

Yet in hindsight Frydenberg and Morrison did spend too much on pandemic relief. Just as during the 2008 Global Financial Crisis, events proved much less scary than forecasts suggested. The Australian Financial Review’s economics editor John Kehoe on August 3 cited psychologist Daniel Kahneman: “We often suffer hindsight bias and the illusion that past events were as predictable at the time they happened as they seem now.”

Yet to be fair to this column, it did argue way back on March 15, 2020, in a piece taking a swipe at “economic stimulistas” from Labor and the media that “right now it looks possible the financial contagion may end up worse than the virus”.

Today’s economic challenges must feel like a recurring nightmare to Chalmers, one time chief of staff to Rudd-Gillard-Rudd government treasurer Wayne Swan. Just as Rudd and Swan spent far more than necessary to avoid the effects of the Global Financial Crisis in 2008-09, Chalmers is now dealing with a budget mess similar to that left by Swan for the Abbott government in 2013.

It’s easy to understand how two relatively new governments – Rudd’s in 2008 and former prime minister Scott Morrison’s in 2020 – panicked in response to what must have looked like imminent political death.

Hopefully Chalmers and Anthony Albanese have learnt the lessons of the Rudd and Morrison years. They seem determined to tackle the nation’s long-term productivity problem in a way no government has since former PM John Howard lost office.

Despite severe problems affecting our biggest trading partner, China, mining is again underpinning Australia’s economy. During the GFC, booming iron ore and coal prices driven by expansionary policies in China prevented recession here.

Today, with much of the world’s energy market hit by gas shortages after Russia’s invasion of Ukraine and problems with renewable energy reliability in Europe, it is again surging exports receipts – especially for the coal that the ABC and Nine newspapers have been claiming no one wants – that are delivering for the new government’s bottom line. Thermal coal and gas are at global record prices, with coal now almost five times the price it was a decade ago.

Don’t expect many in the media to acknowledge the role of coal in the fiscal improvement. And don’t expect commentators who swallowed the fashionable Modern Monetary Theory that government deficits don’t matter, to acknowledge today’s inflation is at least in part the result of huge Covid-related central back stimulus around the world.

This newspaper’s Washington correspondent and former economics editor Adam Creighton in April blamed soaring inflation on politicians who imposed Covid lockdowns and then had to spend as much as $US9 trillion globally to keep their economies afloat. Some commentators dispute that link.

The AFR’s Aaron Patrick on June 29 discussed the role of ABC finance analyst Alan Kohler, a former commentator at this newspaper and former AFR Chanticleer columnist and editor. Kohler in his Eureka Report and in The New Daily has written in support of MMT and criticised global central banks for lifting interest rates to rein in galloping inflation.

Ross Gittins, economics editor at The Sydney Morning Herald and no deficit hawk, in his blog rossgittins.com on May 27, explained where MMT goes wrong: “Printing money to fund the deficit ain’t the free lunch it seems.” Apart from the role of excessive global fiscal stimulus in the inflation outbreak (technically such central bank money printing was a form of MMT), Gittins thought the biggest problem with MMT was politics.

Political motivation for fiscal expansion in the MMTers’ world could easily outweigh spending prudence. It’s similar to why we have an independent Reserve Bank to run monetary policy: to keep politics out of interest rate decisions.

Kohler has been arguing the RBA should not be tightening policy because much of the present surge in inflation is down to Russian President Vladimir Putin’s invasion of Ukraine and its effect on global gas and coal prices. He has also focused on domestic power prices that have risen partly because of the lack of a capacity mechanism in the Australian power generation system to mandate sufficient levels of dispatchable power.

As this column has noted before, the era of 18 per cent home mortgages suggests a combination of prudent fiscal tightening now and lifting of rates to normal, non-emergency levels is hardly draconian.

To that you can add legitimate criticism of RBA Governor Philip Lowe for arguing as recently as February that interest rates would be steady until 2024, and global supply chain disruptions brought about by the pandemic such as those now boosting new car prices here by as much as $10,000. Labor shortages driven by the collapse in international migration during the pandemic have lifted costs in the building and catering industries.

Yet the role of loose fiscal policy in inflation is clear. US based FactCheck.org on June 30 found President Joe Biden’s American Rescue Plan had been a factor “and a not unimportant one” in the rise of inflation, but “certainly … not the whole story”. It also cited former president Donald Trump’s $3.1 trillion stimulus, a post-pandemic spending boom and soaring energy prices driven by the invasion of Ukraine.

Even The Wall Street Journal, no supporter of President Biden, refused to blame inflation completely on his spending. Princeton economics professor Alan Blinder on June 29 wrote in the WSJ: “Both the administration and the Federal Reserve stuck with anti-recession policies like big spending and low interest rates too long, helping overheat the economy.”

He argued policymakers also badly misunderstood the time it would take for the world to sort out Covid-related supply chain issues.

As to whether the world is in for a monetary policy-induced recession, the WSJ has been optimistic, pointing out that despite two quarters of negative US growth (one technical measure of recession), US employment numbers continue to rise. Fingers crossed, but Chalmers was certainly bleak in his assessment of the global economy in his 7.30 interview with Laura Tingle last week.