What should Australia do in the coming recession?

There is one hell of a recession coming for Australia. Economic activity has already reduced by 20% and actual unemployment will probably peak near 20% too, and about a million businesses have already applied for some sort of assistance. The population increase of the last 20 years has come to an abrupt halt, from an increase of a quarter of a million per year, to a decrease this year that can easily be half a million.

Even if countries stop their lock downs and gradually return to some semblance of economic policy sanity, there are three economic shocks Australia cannot avoid, and a fourth one its politicians must work hard to avoid:

1. A shock to commodity prices and profits. Oil prices have more than halved and coal prices are down 30% from last year. These prices should be expected to remain low given the huge reduction in international demand and the build up of stock piles. What that for instance does is make shall oil and gas exploration in Australia uneconomical. It greatly reduces profits to mining companies, and negatively affects pensions which have invested heavily in commodities.
2. A shock to tourism, business trips, and foreign students. This year, the tourists and traveling business people will stay away because they are not allowed to fly in. Ditto for many students. The hospitality, business travel, and student market should be expected to tank for several years because there is now less money for long-distance travel and high-priced university degrees. Also, China and India, which are the two biggest suppliers of foreign students, are going through their own down turn and are quite likely to try and reduce the number of students and business travelers going to Australia, keeping them in their own countries.
3. A shock to the property market via a reduction in population coupled with a glut in accommodations coming onto the market anyway. The property boom is effectively over and seems unlikely to re-start for years.
4. A shock to the trade relations with China. This one depends on whether the American lobby can be prevented from forcing Australia to sever the ties.

One should not underestimate the size of these shocks. They herald a major downturn in the biggest export industries and in the major sources of growth of the last 20 years. Let us look at the implications for foreign policy, education, macro-economic policy, and taxation.

Finance seems unlikely to be part of the solution since the boom in finance floated on the boom in the property market, the glut of new migrants coming to buy things and park their money, and the commodities boom.

Shipping and transport in general will take a huge knock as well, as the markets they served will go through a large recession too.

One other main industry in Australia, the bullshit industry, should also be expected to experience a huge crash. Flattery is a luxury good and hence suffers more as an industry in a recession than other industries. One should thus expect there to be no more money for all these vacuous business degree people occupying marketing, management, HR, and the many other protective layers of flattery and bullying around the CEOs. This quite enormous bullshit industry, employing millions, was always a form of hidden unemployment in Australia and now that the cash-cows paying for them are drying up, one should expect them out of a job soon. Put simply, the demand for motivational TED-talks and strategic retreats should be expected to dive close to zero right now, and remain there for several years.

Perhaps the more interesting question is what economic sectors apart from agriculture remain healthy and have growth potential the coming years? The landscape looks bleak on this point.

I can’t really see a clear growth market, apart from industries that are somewhat small at the moment, such as medical apps and devices, or the online gambling and gaming industries. They can grow, but they start from a low base. True, there are a lot of programmers in Australia that might be picked up by industries that are still small at the moment. However, the small competitive industries cant be expected to quickly absorb millions from other sectors.

So to be blunt, the party is over. What is then smart economic management?

It has been said that the government should stimulate demand beyond the lock down period. I am not so sure about that, because that is treating the shocks as if it’s a temporary demand shock. Yet, internal demand cannot compensate for foreign demand and so this shock must also be seen as a productivity shock in the sense that many activities previously supplied by Australians are no longer worth much. Such productivity shocks need restructuring. The government can postpone some restructuring by freezing a lot of jobs, but it is then postponing the inevitable by keeping jobs alive that no longer make sense. Freezing some marginal jobs probably makes sense, but the shock has really made lots of jobs totally useless and you should not want to keep those in place.

One alternative is for the government to create a lot of jobs by doing things that make sense anyway, like the New Deal programs of the 1930s, and like South Korea is already announcing. One idea is to massively expand solar energy. Another is to build a lot of extra infrastructure and to truly take up plans to green the deserts in the interior by pumping desalinated water to them. Such infrastructure projects needs a lot of construction, with pipes, dams, canals, and whatnot, and they make environmental sense.

So now is a good time for large projects with a long-term environmental bent to emerge. The beautification of the cities. Creating lots more reefs via, for instance, sinking lots of superfluous ships in the right places. That sort of thing. Similarly, now is the time to expand adult training in new IT technology.

The big macro-political issue is the fact that China is the biggest trading partner, but militarily and culturally Australia is tied to the US. For quite a while now, the US lobby has been targeting Australia’s economic ties with China. Understandably, Australian politicians have tried to have the best of both worlds by going along with the rhetoric of the American lobby whilst not disrupting trade with China. The big unknown is whether that can be kept up.

The uncertain element here is how the Americans are going to get over the corona crisis. Are they going to get very anti-China or not? If they do, you can virtually guarantee they will force Australia to break its ties with China, which Australia will simply have to comply with given how there are large US bases on its soil, and a totally integrated military and media. Yet, if the Americans decide one major shock is more than enough for a while and thus play nice with the Chinese, then that will make a big difference for the Australian economy as Chinese students, tourists, commodity buyers, and businessmen will then come flooding back in soon enough.

Managing the relationships with the Americans and the Chinese well is probably the best thing the Australian government can do for the economy. If China gets too pissed off, it will simply sever the economic ties with Australia, preventing students, tourists, and businessmen from going to Australia. If the Americans get too pissed off, they will do really nasty things to the Australian politicians they perceive are not toeing the line.

In the medium run, the basic game played by the economic elites of Australia in the last 20 years now seem to have come to an abrupt and unexpected end. The property game is over. Mining is marginalised. The foreign student gig is probably largely over, at least for a few years. Finance is similarly a much less lucrative game.

One should not expect the elites to just accept this and quickly orient Australia towards something else, like a high-skill strategy. Such things take time and elites usually resist any deep restructuring that threatens their existing political base. They tend to be nudged more by unfavourable election results and failed attempts at resuscitating the corpse. Yet, individual states can move in new directions much quicker. Victoria and New South Wales, for instance, with no mining to speak of and their property booms coming to a sudden end, might well reorient their economy relatively fast.

There are other issues that will come to a head due to this recession. One is the collapse of the tax base. In recent decades, much of big business and the elites have managed to avoid taxes, which have increasingly been on the middle classes. That cannot be sustained, so some of those who managed to get away with no taxes are going to have to be brought to heel. That is foremost a political fight and it will be ugly. Who are the elites going to tax a whole lot more? Property owners, banks, miners, foreign internet companies, the medical specialists, firms that are registered in tax havens? You can just imagine the political fights coming on this point.

There will have to be cuts in public services too, and the states are also going to have to renege on many of the promises they have made to Mates, such as via guaranteed profits for infrastructure projects. That will be ugly as well.

So the recession will come with one hell of a political fight.

Longer-term, Australia still has a lot going for it. It is looking good for solar and all you can do with the sun. It is looking good for high-end tourism. It is looking good for more agriculture, particularly if it can get desalination massively ramped up. It is looking good for many high-tech industries once it sheds the low-quality orientation in education that came with foreign students who couldn’t speak English, and skilled migrants who had the tech skills anyway. Commodities and finance will probably also find growth niches again after a few years. Etc. No need to panic too much.

In the long-run, Australia is still fine, with or without the Chinese market, but the next 5-10 years is now looking like a painful period of restructuring.