Aug 30 2020
At a time when we are forced to think short term due to the current pandemic, and live our lives with some trepidation, it may be helpful to gain some perspective, hope and justified confidence by taking a satellite view of the economic and employment world over a century or more.
In the case of our economy and livelihood, it is useful to begin with some historical perspective, as shown in the chart below.
Immediately obvious is the large reduction in the number of recessions and depressions in the Post-Industrial Age (or Infotronics Age), from 1965 onwards. In the preceding 187 years of our Agrarian and Industrial Ages, we experienced 34 years of negative growth in GDP, or one in every five to six years. Indeed, over that period we had 22 single recession years and five multiple recession years (depressions). The depressions occurred during the following periods:
- 1841-43 3 years 31% fall in GDP
- 1854-56 3 years 31% fall in GDP
- 1890-93 4 years 29% fall in GDP
- 1929-31 3 years 20% fall in GDP
- 1944-45 2 years 7.3% fall in GDP
We could all spare a thought for the generation born in the 1880s. Those poor Australians lived through the following:
- The 1890s Depression
- Five other recessions
- World War I
- Another recession
- The 1930s Depression
- World War II
- And a third depression in 1944-45.
That amounted to 25 years of deprivation through six recessions, three depressions and two great wars, before most finally had peace, the chance of home ownership and prosperity.
In contrast, since 1965, we have had four single recession years, or three recessions and a depression if the 2020 one spills into 2021. Hopefully not.
So, negative growth years have been 11 years apart on average over the past 55 years, providing double the breathing space of the previous two economic ages.
It is not well known that the cause of fewer recessions these days is less to do with economic management (fiscal and monetary)—helpful though that is—and more to do with our mix of industries. Agriculture once accounted for 15% of our GDP (compared with less than 3% of our GDP today). In those days, droughts, floods, low commodity prices and exchange rates could reduce the 15% by a third (5% of GDP) and trigger a recession. Not any more: reduction by a third would now take less than 1% off our GDP growth.
In the case of the 2020 recession, it has been equally due to human activity as it has been due to nature’s force majeure. And, unfortunately, it may take four to five years for households to regain our 2019 SOL (standard of living or real GDP per capita). By then, we could expect to resume our upward climb in both GDP and SOL terms.
The employment scene
The history of employment and unemployment in Australia is a fascinating journey. Traditionally, societies need four-in-ten of the individuals in their population to be working in an equivalent full-time and paid capacity to support the very young, the very old and the working individuals themselves.
Employment was very difficult for the nation in our 18th and 19th centuries, due to our demographics at the time. Up until Federation in 1901, half the population was under 15 years of age, or over 60. In addition, childrearing added to the number that could not easily be included in the paid workforce. Many children aged between 11 to 14 were part of the workforce.
That didn’t prevent periods of debilitating unemployment, which occurred during the depressions mentioned earlier.
The chart below shows the long history of unemployment from 1890, with over 18% unemployment in the 1890s and almost the same level in the 1930s.
Although the current situation in 2020 is cushioned by welfare measures such as the JobKeeper Payment scheme, an unemployment level of about 12.5% has been recorded. However, as the chart suggests, this level will likely fall over the next several years. Nonetheless, a return to ‘full’ employment may take until the middle of this decade.
For those wondering why 5% unemployment is defined as ‘full’ employment, the term apparently has some genesis in the fact that at 5% the employment composition is thought to be roughly divisible into three categories. The categories include one third that is not really ready to accept a job at that point in time, another third that is waiting for the ‘right’ job to come along, and the last third that is desperate for a job and will usually get one within 6 months.
In line with that definition, levels of 1-3% unemployment recorded in the 30 years following the end of WWII have been described as ‘over-employment’!
In our short 232-year history as a modern economy, ‘full’ employment seems to have prevailed for some 60% of any 100-year period. However, in 2020, we are in the 40% high unemployment category for a while.
A better future
We always recover and go on to a better future.
However, some reforms are overdue in all sectors. As a result, our economy has had sluggish productivity growth for well over a decade. The nation needs the following major reforms:
We need to empower the House of Representatives to be able to reform and govern, as it is the only democratically elected house at the federal level. The UK disempowered their undemocratic Upper House (the House of Lords) many decades ago from being able to reject bills, and now they can only delay them. Our Senate is not democratically elected and is often a rejection or dilution chamber. Our Lower House is consequently hampered.
Labour market reform
Our labour market is passing through radical change in the current Infotronics Age, mostly centred on more freedom and flexibility for workers. This market is creating over 300,000 new businesses each year, and workers are taking part in the emerging gig economy, and being paid on outputs more than inputs. Workers are seeking greater flexibility to ensure they have a work-life balance, and adopting digital-era technology and telecommunications to enjoy such flexibility and productivity. The present IR system is more Industrial Age than our new Infotronics Age.
We haven’t had any meaningful tax reform since the GST, which was two decades ago! It’s way overdue. Stamp duties that hinder dwelling exchange and mobility, payroll taxes that discourage employment, corporate income taxes that are now non-competitive internationally, and a GST that is too low—and that has too many exemptions—are preventing lower personal and business income taxes.
Corporate performance and profitability
The nation’s 2.5 million businesses have averaged a net profit after tax on equity of just 3.1% over several decades, when the 10-year bond rate averaged 5.5%. This is disturbing.
Our largest 2000 corporations (accounting for 47% of the nation’s total revenue) average just over half the profitability of US corporates, and that is not due to our smaller population, or our mix of industries. In addition, one in six of these corporations records losses over any three-year period. Only one in ten achieve or better WBP profitability compared with four in ten American firms. This is likely due to many corporations not understanding the fundamental rules of success, which leads to sub-optimal strategies.
So, both our governments and our businesses have work to do. The aftermath of the COVID-19 pandemic may well spur all of us into action.