How an economic boom can run out the clock
Australia’s 27-year stretch of growth offers lessons for U.S. policy-makers
history suggests economic expansions come with expiration dates.
Since 1854, the U.S. has experienced 34 expansions, lasting from 10 months to 120. The current one, in its 10th year, is already longer than all but the one of the 1990s.
Is it doomed to end soon? While U.S. history suggests yes, one advanced economy far away suggests perhaps not.
Australia is experiencing an amazing economic run—a 27year expansion that survived a regional economic crisis in the 1990s, a global economic crisis in the 2000s, and a boom-boost cycle in its core commodity sector in the 2010s.
Its experience offers lessons for the U.S. and the rest of the world. Among them, the laws of economics don’t dictate that expansions run on preset timetables. Wise policy-making, and some good luck, carried Australia’s expansion into the record books. The more troubling news is the U.S. doesn’t seem to be following some of these lessons, and others might not apply.
Australia paid down gross government debt from 32% of gross domestic product in 1994 to less than 10% in 2007, according to International Monetary Fund estimates, effectively socking away resources during good times, taking some steam out of an already strong economy and leaving the government with a cushion to support the economy on a rainy day.
When the global crisis hit in 2008, Australia cut taxes and
increased spending, pumping 70 billion Australian dollars (US$52 billion) into its economy, equal to 1.6% of economic output, more than U.S. stimulus equal to 1.25% of output, according to Australian Treasury Department estimates.
Ben Jarman, economist at JPMorgan Chase & Co., said the stimulus helped convinced businesses that any downturn would be moderate, putting a brake on layoffs.
“Firms did not believe the downturn would persist,” he said. “This moderated the shock to unemployment and smoothed the income adjustment across households.”
Despite early forecasts that Australia’s jobless rate would head above 10%, in the end it peaked at less than 6%.
U.S. fiscal policy right now— tax cuts and increased spending—is
adding to growth at a moment of already low unemployment, heating up the economy when it’s already on strong footing and pushing up national debt. That could leave fewer resources when the next recession threatens. Mr. Jarman’s New York colleague, Michael Feroli, said that “is completely at odds with one of the main lessons of the Australian long expansion.”
Australia’s central bank, the Reserve Bank of Australia, also played a role cushioning the business cycle. The RBA lowered interest rates by 4.25 percentage points between September 2008 and April 2009 to 3%, stimulating borrowing, spending and investment.
It had plenty of room to cut rates because the central bank spent the prior six years raising interest rates, beginning the process when the Federal Reserve
was still cutting.
“The RBA was almost the only central bank in the developed world which didn’t make the mistake of leaving rates too low for too long,” said Saul Eslake, former Australian chief economist at Bank of America-Merrill Lynch.
That helped to tame a property price boom.
“The lesson for both economies is to regulate the finance sector vigilantly, to lean against bubbles, and to make financial stability one of the goals of the central bank,” said John Edwards, economist and former RBA board member.
The Fed is raising short-term rates now, but they’re still below 2%, leaving it little room to cut rates to stimulate the economy should a new downturn threaten.
Trade is another big part of Australia’s story. A 40% drop in the value of Australia’s currency after the collapse of Lehman Brothers, and a similar-sized drop after the Asian financial crisis in the 1990s, helped it to boost exports.
The currency might not offer the U.S. much help if the cycle turns, because the dollar typically attracts buyers seeking a haven during times of global stress. The dollar got stronger in the last crisis, not weaker.
Moreover, China and Australia have an economic relationship the U.S. can’t mimic. Australia runs a trade surplus with China, one of a few countries to do so, thanks in large part to its mineral exports, but also because it attracts tourism and foreign students to its schools.
China and Australia have a free-trade agreement. The U.S., on the other hand, is increasing trade barriers with China and others.
The policy differences seem to suggest high hurdles to an equally long U.S. boom.
And indeed, Australia’s own boom now faces its own threats.
The absence of recession has been accompanied by a long run higher of Australian house prices and fueled a borrowing binge that pushed household debt to 200% of household incomes.
The RBA identifies it as the biggest risk to the outlook.
The fiscal picture also changed. Australia’s federal budget has been in deficit since the 2008 crisis, fanning a run-up in government debt. It isn’t nearly as high as U.S. government debt, but when the next downturn nears, the Australian government might not be in position to fight like it did in the past.