Australian Economic Miracle?

Matt Yglesias at Slate’s Moneybox has been focusing on Australia’s two-decades without a recession because:

The fact that a living breathing developed economy seems to have mastered the trick of avoiding spells of mass unemployment should be a bigger story than it is.

Wrong!  Yglesias misses a big story. Australian mass unemployment has been terrible during the first half of this period and for almost three decades in total.  From 1975 until the early 2000s, Australian unemployment averaged 7.5% and during the recession of the early 1990s, it reached close to 11%!  That is worse than the US has ever had since the Great Depression.

Graph of Adjusted Unemployment Rate in Australia

The reason Yglesias missed this is understandable.  He has fallen into the cult of GDP mutilitarianism.  Instead of looking at how people at the bottom of the labor force are doing (the unemployed) or at how people at the median of the economy are doing, he looks at the aggregate income and concludes that it is a miracle.

Unfortunately, it is hard to find median income statistics for Australia,* but by more common measures, the Australian economy done very well during the past decade and their unemployment rate has improved markedly from the dismal situation they had in the early 1990s.  But halfway through the period that Yglesias sees as so remarkable, Australians still thought of themselves as an economic basket case due to persistent high unemployment. See Joanne Loundes’ paper [pdf] for a brief history of Australia’s problem with unemployment.

Perhaps Australia’s decades of enormous unemployment created the political will necessary to use better monetary policy during the past 15 years than you see in most other rich countries.  Yglesias is right that their monetary policy seems to have prioritized unemployment over inflation more than elsewhere recently.  But in the historical context, this is understandable.  The lesson from Australia may be that it takes three decades of terrible unemployment to create the political will to finally do anything about it.

 

*According to a graph at Seeking Alpha, Australia has been a big success since the mid nineties in median income growth.

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Posted in Macro

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