Australia’s 28 Years With No Recession Challenge Business Cycle Cliches

(p. 6) I had flown 16,000 miles . . .  to study . . .  the remarkable resilience of the Australian economy, which has gone nearly 28 years without a recession.

. . .

America is on the verge of its own economic milestone: The current expansion is on track to reach its 10th birthday this summer, which would also put it on record as the nation’s longest streak without a recession.

During the decade I’ve spent chronicling that growth as an economics writer, a persistent whisper has been: How long can it go? The run has been uneven, underwhelming and repeatedly on the verge of unraveling, including scary moments in 2010, 2015 and this past December. Seemingly every commentator without a good cliché blocker has referred to it as “long in the tooth.”

Even the language of economics suggests that an end to the good times is inevitable. If you’re going to call it the “business cycle,” things can’t just keep getting better forever. Some of history’s great economic thinkers have theorized that downturns are as essential to the workings of the economy as the seasons are to agriculture.

. . .

In November 1990, the Australian treasurer (and later prime minister) Paul Keating described a painful downturn then underway as “the recession we had to have.”

His point was that excesses in a lending and credit boom, combined with high inflation, meant that the Australian economy needed the wrenching experience of a downturn to rid itself of those excesses. It was also a horrible political gaffe, a comment that went over poorly in a country then burdened with an 11 percent unemployment rate.

But the question of whether he was right is profound — one that economists can still debate.

The great economic thinker Joseph Schumpeter argued that recessions served an essential purging mechanism enabling a society to become richer over time. Through business failures, capital is redeployed to emerging high-growth industries. In this thinking, recessions play a cleansing effect, clearing the way for the future.

Hyman Minsky, another 20th-century economist, argued that long periods of financial stability could breed complacency: The longer a nation goes without a downturn, the more risky behavior will build up in the economy, making the eventual downturn worse.

Those theories sound plausible. Data to support the case is a little harder to find. In fact, there is some evidence that recessions actually cause lasting damage to a country’s economic potential — that they hurt, rather than help — by thrusting people out of the work force unnecessarily and causing their skills to atrophy. Research shows that people who enter the work force during a recession take a hit to their earnings even decades later.

There have also been long periods when the Minskyite story has seemed not to apply, notably in the decades after World War II in the United States.

“I think Australia’s experience shows that you don’t need recessions to clean out the system, but it does show that what you need is strong, clear policy settings from governments,” said James Pearson, the chief executive of the Australian Chamber of Commerce and Industry. “There is a risk, and I think we’re seeing it in Australia today, that a prolonged period of economic growth without recession can lead to complacency both among policymakers and the electorate.”

. . .

Maybe the real reason Australia has made it so long without a downturn is an absence of complacency. No one is brimming with overconfidence that all is well and always will be.

“What has happened in the last 27 years is a series of shocks, each of which, thanks to policy and luck, we were able to overcome,” said Stephen Grenville, the former deputy governor of the Reserve Bank of Australia and now a fellow at the Lowy Institute. “That’s the nature of the economy we’re in now — an economy with shocks plus flexibility.”

It isn’t the absence of bad stuff happening in the economy that has kept Australia growing for so long. It is the nation’s economic flexibility and policymakers’ rejection of complacency.

. . .

The Australian experience is evidence that the “business cycle” is a misleading way to think about economic growth. Recessions aren’t like thunderstorms, an inevitable, random event that may be violent but provide much-needed water to crops.

Maybe recessions are more like car crashes. They may never be completely eliminated, but making the right choices can make them rarer and less damaging when they do happen.

For the full commentary, see:

(Note:  ellipses added.)

(Note:  the online version of the commentary has the date April 6, 2019, and has the title “What the Rest of the World Can Learn From the Australian Economic Miracle.”)

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