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Green Shoots

May 11th, 2009

I wrote this pre-budget piece for Crikey, but it doesn’t seem to have appeared on their website. I’ll check on this, but in the meantime, here it is

As the government puts the finishing touches to its budget, the biggest questions are how long the current recession will last and what form the recovery will take. In recent weeks, there has been something of an upsurge of optimism, reflected in widespread use of the phrase ‘green shoots’, first used in this context by Ben Bernanke on 15 March. Bernanke has a gift for the telling, if nto always accurate phrase. He popularised the term ‘Great Moderation’ used to describe the claim, widespread until 2008, that financial deregulation and improved monetary policy had permanently reduced macroeconomic volatility.

On most standard measures of US and global macroeconomic performance, it is hard to discern Bernanke’s green shoots. Unemployment is still rising (male unemployment in the US is now nearly 10 per cent), output is falling, and the markets at the core of the crisis, US housing and construction markets, are still falling.

Nevertheless, the situation has improved perceptibly since the beginning of the year. In particular, financial markets have been stabilised to the point where the risk of a complete collapse, comparable to the Great Depression, appears to have been averted. Risk measures such as the LIBOR spread have returned to normal levels, and, for firms and households with strong balance sheets and a desire to invest (both groups much smaller now than a year ago), credit is available.

That doesn’t mean that the banking system is out of the woods and, in this context, the ‘stress tests’ of US banks recently released by the US Treasury, represent an optimistic scenario, the product of bargaining between the government and the banks. Still, even if the actual outcome is substantially worse, it seems likely that the government has the resources to keep the system afloat.

More importantly, the end of the banking crisis does not resolve the imbalances that ultimately generated the financial crisis. Unsustainable patterns of borrowing and consumption, at the household and national level, need to be reversed and the adjustment process will inevitably be painful. This is true of Australia, where household debt has exploded, as well as of the US, though the stronger position of the public sector here gives us some big advantages.

In the real economy, there is a similar feeling that the risk of total collapse has been averted. The vast stockpiles of cars and other goods that piled up on wharves in the early months of this year are being whittled away, and more normal patterns of international trade are being restored, though total volumes of imports and exports are still declining.

The end of the ‘cliff-diving’ period in which measures of economic activity dropped precipitously does not, unfortunately, imply that recovery will begin soon. The decline in activity will slow down, and probably level out for some time before being reversed. Hopefully, the implementation, in the second half of the year, of spending initiatives that have already been announced will improve things. Still, it is hard to foresee a general upturn in global economic activity before 2010, and it will be some time after that before pre-recession levels of output and employment are regained.

Thus far, Australia has escaped remarkably lightly from the global crisis, and tomorrow’s budget projections will presumably reflect this. It is possible that some kind of recovery will emerge later in the year, and that unemployment rates can be held below 8 per cent, a rate that has already been surpassed in the EU and US.

On the other hand, there are some serious vulnerabilities yet to be faced. Thanks to long-term contracts, the full impact of the crash in demand for commodities has not yet made itself felt. Even more seriously, Australia experienced a house price bubble as big as any in the world, but has so far experienced only a modest correction. A bursting of the bubble, as in the US, Ireland and Spain could be very painful.

The problem for the government in framing a fiscal policy response is that it needs to provide both a credible stimulus to the economy and a credible commitment to return to surplus and then to pay down the accumulated debt that will arise from the recession. Given that depressed conditions are likely to persist for some time, any savings that can be made in public expenditure (including favored Treasury targets such as tax expenditures and ‘middle class welfare’) will be more than offset by increased demands in other areas.

The government’s only possible route to solvency is a substantial increase in the tax revenue share of GDP. An important first step is the cancellation or indefinite postponement of the second and third stages tax cuts promised in 2007. This would of course, entail breaking an election promise. Under normal circumstances, the need to restore trust in public processes would outweigh economic considerations. But these are not normal circumstances and the government has already acknowledged that not all promises can be delivered.

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  1. SeanG
    May 11th, 2009 at 19:00 | #1


    There is precedent for government’s increasing taxes in order to restore balanced budgets.

    What is your view on bank competition policy in Australia? The 4 Pillars rule can lead to a situation developing where competition amongst retail banks loosens and the big four get even bigger. Australia averted the “financial” part of this crisis because of a strong banking sector but we should not get complacent.

  2. May 11th, 2009 at 21:44 | #2

    Australia is being brutally punished for its neo-liberalism and its turbo capitalism whilst Britian is being rewarded for its neo-socialism and its hands on government. Or is it the other way around?

  3. carbonsink
    May 11th, 2009 at 22:15 | #3

    A lot of the ‘green shoots’ stuff is nonsense put about spruikers and cheerleaders, but when James Hamilton says this shoot is definitely growing bigger and greener I take notice.

    Thanks to long-term contracts, the full impact of the crash in demand for commodities has not yet made itself felt.

    Too true.

    Australia has produced a string of stunning trade numbers in recent months that surprised the market, but when you consider the miners were still getting boom prices for minerals and the AUD was off 30-40% for the October-March period, its not that surprising.

    Now with contracts being negotiated at prices 40-60% lower than 2008, the AUD up almost 30% since March, continued sluggish volumes, and resurgent retail sales domestically, I suspect there may be turnaround in coming months.

  4. paul walter
    May 12th, 2009 at 04:11 | #4

    Well, there seems to be lots of the usual hagglings about who should get what, but your key paragraph, rising above it all, concerning the lack of resolution of the banking, even systemic crisis and unsustainable organisational and individual debt, says it for me.
    They won’t touch the structures themselves; people remain deluded that they can run huge debts at the individual level, and can continue side show ally casino capitalism, rather than purposeful investment capitalism, at the big end.
    Deck chairs on the Titanic.

  5. Lesley de Voil
    May 12th, 2009 at 09:15 | #5

    I’ve been looking for some signs that this government is going to recognise that the “old” way of doing things is what caused the GFC in the first place. Not putting our efforts into altering the economy to incorporate properly the true cost to the environment of much of what we do in making holes in the ground, and shifting stuff from place to place, and then not caring about how we deal with the stuff we no longer have an immediate use for is a very short-sighted approach to sustainablility.
    Your title for this entry is thus misleading, and your use of it today of all days is not worthy of you.

  6. carbonsink
    May 12th, 2009 at 11:48 | #6

    Its interesting that the big collapse in govt revenues happened while there was a big cushion in place for mining income, namely the weak AUD and high contract prices. Both of those will be gone soon. What happens to govt revenues then?

    In the second half of 09 its possible that govt revenues will fall further, the miners will be doing some savage cost-cutting, and the govt will be winding back the stimulus to keep the deficit under control. Not a combination that’s conducive to economic growth.

    I think the govt went too early, giving the economy a big sugar kick when it really didn’t need it. They should have saved their pennies for the second half of 09.

    Rudd, Swan and Tanner must be hoping and praying the ‘green shoots’ are real and there’s rapid global recovery in 09, otherwise we’re screwed.

  7. derrida derider
    May 12th, 2009 at 11:52 | #7

    I dunno that the green shoots metaphor is right. What is now clear is that the world recession is likely to be just that; a recession, not a depression. The last couple of months have ruled out the real horror scenarios.

    I think it also looks like this recession will be milder in Australia than most developed countries, thanks to a strong banking sector (ie a cosy cartel that did not need to be too “innovative” to make a quid) and continued Chinese growth (as evident in continued strength in commodity prices – out ToT is still well above the levels obtaining in the 80s and 90s).

    But then the recession hasn’t fully hit here yet. It’s plausible that the government’s stimulus package has delayed it.

  8. carbonsink
    May 12th, 2009 at 14:48 | #8

    I think it also looks like this recession will be milder in Australia than most developed countries

    I still think we’re congratulating ourselves prematurely for the reasons outlined by ProfQ and my comment @6.

    and continued Chinese growth

    Well, supposedly. China’s exports fell 22.6% YoY in April, the sixth consecutive monthly decline in both exports and imports. Those aren’t the stats you’d expect from the world’s factory if ‘green shoots’ were popping up everywhere.

    If China has turned around its entirely due to government stimulus because the Americans and Europeans aren’t spending, and the Chinese consumer cannot hope to replace that demand overnight.

  9. plaasmatron
    May 13th, 2009 at 04:34 | #9

    The system has been perturbed. There has been an economic and political reaction of the scale no person of working age has ever witnessed. We are yet to see the effects of such an event on social systems, let alone environmental effects yet to play out. Those green shoots may just be the worms crawling into the coffin.

  10. May 13th, 2009 at 16:45 | #10

    A quick look through the RBA chartpack appears to show that Australia’s labour prodictivity has stalled signifantly with the strong / resilient labour market in recent times. Particularly in contrast to the USA. Are there any consequences / inperpretations of this?

  11. Alice
    May 13th, 2009 at 21:39 | #11

    Green shoots my eye….bear rally

  12. Monkey’s Uncle
    May 13th, 2009 at 21:58 | #12

    “The government’s only possible route to solvency is a substantial increase in the tax revenue share of GDP.”

    I agree. Although I would prefer spending cuts to make up a large proportion of any deficit reduction strategy also.

    The best strategy for increasing revenues is not to increase income tax, as this hits the productive economy and work incentives hardest. The best approach is to wind back wasteful and inefficient tax breaks that don’t contribute much to the economy.

    A few suggstions along these lines:
    – reverse the Howard government’s ridiculous irresponsible tax-free lump sum super payouts for over 60s. Re-impose a 15% tax on lump sum payouts. But preserve tax-free status for superannuation benefits that are rolled over into long-term income streams
    – introduce an inheritance tax on individuals who inherit more than a certain amount of wealth (say $200,000) over a given period
    – possibly introduce some sort of wealth or national property tax

    Hey, I might even write up an article on this and submit it to the IPA or CIS for publication!

  13. Alice
    May 14th, 2009 at 07:47 | #13

    12# Monkeys Uncle – You dont mean a Henry George style land tax?


    You will never get that published by the IPA or CIS..

  14. Ikonoclast
    May 14th, 2009 at 09:06 | #14

    The Bank of England sees a slow recovery for the UK at least.


    My interpretation is that predictions of early recovery are flawed being based on two things. The first is general innate or forced optimism; wishful thinking in other words. The second is the use of the same flawed “equilibrium” forecasting models and neoclassical economic theories which got us into the Global Financial Crisis in the first place.

    Only those economists who are doing quantitative analyses and using equations which model the dynamic instability of the system (e.g. the econophysicists) are putting forward theories which are empirically testable.

    The work of these theorists suggests that the private and business debt load is the essential problem. While that debt load exists and neoclassical economists keep trying to reflate the economy with even more private and business debt… why then our problems will continue.

    Government debt is a different issue. It can be used to engineer a softer landing but it must be coupled with an ongoing program to rein in private and business debt; especially inflationary private debt for consumption purposes. We need to find another way to solve unemployment other than by excessive debt-fuelled consumption.

    A great depression coupled with and exacerbated by resource shortages, environmental collapse and widespread conflicts is still the most likely outcome under current political and economic policies.

  15. Ikonoclast
    May 14th, 2009 at 09:39 | #15

    Some of the current thinking about pushing up the pension age is flawed. For an example of this thinking see;


    The first flawed assumption is that a rise in life expectancy is necessarily matched by an equal (or even partial) rise in the average upper age limit of work competence. This is not necessarily so. Much of the extra lifespan is being lived in a state of helpless dependence. The statistics on senile dementia and alzheimer’s disease bear this out (to say nothing of physical frailty).


    The second flawed assumption is that there is a not a better part of the potential workforce which should be employed first. This better part is the youth end of the workforce. Our policies ought first be bent to completely solving youth unemployment. Until unemployment in the under 30s (a broad definition of youth unemployment) is reduced to 2% (frictional unemployment) it is pointless and indeed counter-productive to raise the age pension age beyond 65.

    By all means let those who have the desire and competence to continue to work after 65 (full or part time) but do not enforce it until, at the very least, youth unemplomyent is resolved.

  16. Alice
    May 14th, 2009 at 12:19 | #16

    15# Ikono – I agree with this comment in another blog “Work longer, die earlier, so super funds…Ill add governments… will have a good time with your money.” Thats what its really about – yet more Casino capitalism – keep your money flowing in to bubbles that give a lot of people a chance to redistribute it to themselves.

  17. May 14th, 2009 at 13:06 | #17

    I am intrigued by the ambitious claims there will be growth of 4.5%. I wonder where will the productivity come from to generate the growth? The only green shoots are currently in the farming sector which seems to have sustained economic growth throughout the GFC. Whilst infrastructure spending is good for nation building (the construction corporations who know a golden government goose when it flies their way) it doesn’t add to growth, just improved national conditions.

    It would have been great to see our fearless leaders do something to posture our nation to capitalise on niche markets – such as agricultural sector export improvement initiatives (crops and livestock); seafaring transport to efficiently deliver exports; tourism; international student education etc. The R&D initiatives might be helpful but will only be effective where products are developed for the productive marketplace. Sadly none of the infrastructure designed by Eddington (Mr “I killed” Ansett) seems to have any concept of meeting agricultural needs such as drought proofing (lets not loose sight of the recent drastic effects that had on our economy) and improving water resource issues.

    Opportuntiy comes from adversity, and choas theory at its best will see new systems and ways of doing things come the fluctuation of conditions such as we are in the grip of.

    A final word, Einstein said no problem can be solved from applying the same mindset that created it…. now would be a good time to see some new thinking followed by new action. The splurge of cash into the community was a thoughtless consumer only focused concept that wasted a lot of valuable money.

    Growth will come from productivity, so will jobs.

  18. Monkey’s Uncle
    May 14th, 2009 at 17:32 | #18

    Alice @13, I broadly agree with the idea of taxing unimproved land value in the article link.

    The benefit of taxing the unimproved land value is that it doesn’t discourage investment in improving the land. It taxes passive wealth without impeding economic activity.

    And I was being facetious about getting that published by the IPA or CIS. There is no way they would publish it. Oh dear. It looks like I have alienated everyone across the political spectrum, so I have nowhere to go!

  19. Uncle Milton
    May 14th, 2009 at 17:55 | #19

    “The best approach is to wind back wasteful and inefficient tax breaks that don’t contribute much to the economy.”

    Around $70 billion worth, according to the Treasury.


    The structural budget deficit can be remedied very easily by closing down only some of these breaks.

  20. Alice
    May 14th, 2009 at 19:12 | #20

    Monkey’s Uncle – Im with you on that one – taxing unimproved land values. I think it is a good idea. I now dont know which school I belong to? I think lowering the fraction that banks can lend is a good idea. I think taxing the unimproved value of land is a good idea. I think giving people their own super so they can really decide where to invest for their retirement is a good idea (freedom of choice) and I beleive in welfare to the least well off and budget deficits in depressions. So it appears I am Georgian, Austrian, Keynesian.

    You do have nowhere to go re a sympathetic publisher (and I have nowhere to go either!)

  21. Monkey’s Uncle
    May 14th, 2009 at 23:14 | #21

    The problem with the policy of increasing the eligibility age for the age pension to 67 by 2023 is that it will largely be too little too late. The economic problems caused by an aging population will cause serious problems well before then, probably in the next five years or so.

    So it’s essentially a policy of sending a lifeline well after the ship has sunk.

    In any event, no government is going to suffer political pain as a result of a commitment that won’t even begin to take effect for several years to come (and could well be overturned in the meantime anway), so it is basically an empty gesture towards economic sustainability.

  22. SeanG
    May 14th, 2009 at 23:18 | #22


    I completely agree with you – this issue is so huge that tinkering with it is simply not acceptable.

  23. Monkey’s Uncle
    May 14th, 2009 at 23:33 | #23

    Sean, the aging of the population is very much the elephant in the room. It is hard to overestimate how serious a problem it will be.

    The evidence from Japan is that once a country’s population ages beyond a certain point, it is extremely difficult to keep economic growth going.

    The situation in western countries will probably be even worse, given that we lack the accumulated savings, family stability and the like of countries like Japan that would help mitigate its effects.

  24. SeanG
    May 15th, 2009 at 06:00 | #24

    True but unlike the Japanese and Europeans the problem is not as acute and we have still some budgetary flexibility to deal with it.

  25. Alice
    May 15th, 2009 at 11:37 | #25

    The green shoots are looking a little fragile again.

  26. carbonsink
    May 15th, 2009 at 12:59 | #26

    Stephen Long, permabear economics correspondent for Lateline, says there’s a frost building around the green shoots.

    RE: ageing population: As long as there is demand for our dirt, and we still have dirt to sell, Australia will be fine. Its these troughs in the economic cycle that we need to manage better. We need to put aside a lot more during the booms to get us through the busts.

  27. Alice
    May 15th, 2009 at 13:36 | #27

    Nauru had phosphorous to sell too… at least Australia seems to have a lot more dirt that Nauru had phosphorous. We’ll ignore the indirect global warming from all the dirt we sell though.

  28. Alice
    May 15th, 2009 at 14:50 | #28

    We all knew the exploding arms housing loans that underpin the toxic CDOs had tranches of re set dates in which artificially low initial rates were raised extraordinarily it would seem in later date periods. When will they really finish exploding?

  29. Alice
    May 15th, 2009 at 14:51 | #29

    Better invest in bulldozing industries.

  30. carbonsink
    May 15th, 2009 at 16:25 | #30

    We’ll ignore the indirect global warming from all the dirt we sell though.

    Of course we will. Australia profits from the destruction of planet Earth, it funds almost everything we do.

    BTW, Ministry of Commerce says: China says domestic demand can’t fill export hole

    “The priority now is to slow the decline in exports,” Yao said. “We cannot compensate for a fall in external demand by simply expanding domestic demand.”

    So … where exactly is this external demand going to come from? Europe? US? The green shoots seem to be wilting.

  31. Alice
    May 15th, 2009 at 22:49 | #31

    31# carbonsink

    “Of course we will. Australia profits from the destruction of planet Earth, it funds almost everything we do.”

    Which is pretty uninnovative and pretty unimaginative and pretty lacking in investment and ideas and ingenuity (where is public invtesment in ideas…is the CSIRO still active? Does it actually have any money or is it another oh so frowned upon public department…oh no, thats right. I forgot its not the governments job to invest in R & D – we have to wait for CC Amatil to build a robot bottling plant here and hire no one and take profits off shore for our only dose of “innovation”.

    When only big miners matter its time to take a raincheck of who we are and what we do and where we are going as as a nation.

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