The Governor of the Reserve bank, Ian Macfarlane, expressed concern last week that major Australian companies might react in a knee-jerk way to any signs of a downturn in the economy. He warned them against wielding the scalpel to workforces if profits looked like falling. He said chief executives might think that being tough with lay-offs would protect share prices because the market would think well of such conduct. It might be true if only one company did it, but if a lot of major companies did it, it would be an error. Earnings were meant to fall off in economic circumstances like those at present, but the more jobs were cut the deeper the downward cycle would be. There would be fewer people out there spending.
It was all standard economics. Indeed, similar words are used by economic historians to describe the lead into the Great Depression. But there are differences. We have better economic information gathering these days, so we are in a position to take pre-emptive action. And this is precisely what Mr Macfarlane has done. Last week the Reserve Bank reduced interest rates by a quarter of one per cent, and indicated another cut was possible early in the new year. That should encourage companies to accept that earning can fall in the short term without needing to cut jobs. However, in a fairly ruthless, market-driven world, we cannot expect individual boardrooms to act in the broad community interest, despite the urgings of the Reserve Bank Governor.
It is a classic of market failure. It is best dealt with by the incremental approach that the Reserve has taken over interest rates. It is not well dealt with by classic Keynesian responses of increasing government spending when a downturn looms. The trouble with government spending is that the stimulus is artificial. It creates debt which has to be repaid. It is often inefficient or spent on things which do little to help sustainable economic activity. Further, in a climate of general corporate fear, boosting government spending just adds to the insecurity.
As it happens, the Government has already squandered any opportunity for a Keynesian response with its band-aid spending spree to bribe disaffected pockets of voters. It has also engaged in huge amounts of unexpected spending with its misguided refugee policy and the “”war on terror”. Unfortunately, these things will have to be paid for in less spending in things like education.
That said, Australia is doing remarkably well economically. Inflation is well under control, the 1.1 per cent rise in GDP last quarter defied world trends. So as other countries in the world are facing downturns, or have recorded figures that show they are in recession, Australia continues to do well. No doubt we will be affected by world events. Some of our major trading partners, particularly Japan, are in downturn, so will be importing fewer Australian goods. But our dollar is very competitive.
If corporations heed Mr Macfarlane’s warning Australia should travel steadily on the economic front while the rest of the world takes a bigger dip. If Mr Macfarlane is right the only thing we have to fear is fear itself – and perhaps misguided corporate selfishness and greed.