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The Forum > Article Comments > Defining a recession > Comments

Defining a recession : Comments

By Saul Eslake, published 27/1/2009

An unwillingness to acknowledge that the economy is in recession can delay the adoption of policies designed to ameliorate its effects.

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It’s unfortunate that none of the Rudd Government’s measured have been designed with long-term improvements in welfare, productivity, tax structure, incentives etc in mind. There have been many sound proposals in recent years for improving the structure of our tax/welfare system, encouraging initiative and innovation, etc. Now huge sums of money are being expended without any reference to such improvements. Urgency is no excuse, Treasury could have dusted off relevant proposals in a flash.

There are also questions as to whether the various spending will have any positive impact. Clearly not in such cases as further massive subsidies to expand activities rather than to rationalise in the light of massive over-supply in lower-cost countries.

More broadly, eminent Harvard economist Robert Barro, an expert in macroeconomics and economic growth, has recently challenged the presumption that government spending in the current crisis will have a multiplier effect, i.e. that it will generate more resources than it uses – the only rationale for such expenditure. Barro understands that Team Obama is using a 1.5 multiplier, whereby a $1bn intervention generates an additional $I.5bn of economic activity.

Barro examines other instances of massive government intervention – defence expenditure in WWI, WWII and the Korean and Vietnam wars. He finds at best a multiplier of 0.8 and argues that it is likely to be less now. People would expect wartime expenditures to be temporary, and consumer demand would not fall as much as in peacetime, where increased government spending (and eventually taxation) suggest longer-term lower disposable incomes; a military draft has a direct, coercive impact on employment; and as regards WWII, the US economy grew strongly from 1933 (aside from 1938), and the wartime growth can not be attributed solely to the war-related expenditure.

In short, the government should focus on measures with long-term benefits which can be rapidly implemented to ameliorate the recession in the short term.

[Note: Eslake has just been appointed to Anna Bligh’s “Job Squad”, giving some hope for sensible outcomes.]
Posted by Faustino, Tuesday, 27 January 2009 4:15:59 PM
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Oops, the second para should read "Clearly not in such cases as further massive subsidies to the motor vehicle industry to expand activities rather than to rationalise in the light of massive over-supply in lower-cost countries."
Posted by Faustino, Tuesday, 27 January 2009 4:19:37 PM
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I hope that the current government will get rid of the incredibly expensive, inefficient and unfair Job Network and stop punishing the unemployed. I bet Therese Rein thanks her lucky stars she was forced to sell her business at the end of 2006.

Really folks what proportion of Newstart recipienst do you believe are "dole bludgers".
Could you live on $224 per week and look presentable enough to perform well at job interviews?

I also live in hope that the government will change the methods used to calculate unemployment because the current definition belittles those who are unemployed and lets politicians off the hook because the unemployment figure is artificially low and no body is addressing the very real social problems of such high numbers of hidden unemployment. You feel like you are reliving the 1920s and await a rerun of the 1930s and 1940s,
Posted by billie, Tuesday, 27 January 2009 10:07:00 PM
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What is really at stake in setting up a definition of recession? Surely when there are a number of symptoms in the economy that can be identified appropriate action can taken to deal with them. In the present circumstances some kind stimulus is needed, but one that supports long term goals. On this Estlake is right. Supporting commercial property investment does not qualify. Building actual infrastructure projects does and all we get on that in NSW is dither and party factionlism. Even if we don't deserve better (since we elected them) we can reasonably expect better.
Posted by Bruce Kaye, Wednesday, 28 January 2009 9:36:45 AM
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Comment on Dr Estlake

If the word “Recession” is to have any value it must be so defined as to be helpful to decision making. By this test, Dr Eslake’s point is both valid and invalid. He makes a valid point that waiting for two consecutive quarters of declining GDP before resorting to ameliorative action can be harmful. However, GDP numbers are hard to compile and are quite often wrong and subsequently revised. Or a single number might be close-to-right but reflect a significantly large stochastic event with negligible consequences. From this perspective, policy based on a single number is unsafe – waiting for two of them is better.

The policy implications of “Recession” and “Depression” gain significance through the media: the more frequently the term “Recession” is used the more people will think that the economy is not right. The more the word “Depression” is used the more people think the economy is bad indeed. Since people’s expectations matter, policy-makers do keep an eye on the use of these words in the media. Otherwise policy is based on following the movements of a multitude of statistical series and running them through models (Always remembering the weakness of modelling).

Tom Jilek
Posted by Tom Jilek, Thursday, 29 January 2009 10:57:00 AM
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