Paul Keating declares "This is the recession we had to have."

November 23, 2018

On 29 November 1990, during his press conference over the release of Australia’s September quarter national accounts – showing a definitive and second negative quarter of GDP growth in a row – Labor Treasurer Paul Keating infamously told Australians, “This is the recession that Australia [we] had to have.”

The ABS figures showed that the Australian economy had contracted further – by almost 2% that quarter – and that unemployment was rising fast (around 8%) on its way to eventually exceed 11% in 1992 (which would not fall below 10% until May 1994).

The Reserve Bank of Australia’s (RBA’s) cash rate – which underpins all bank and other interest rates – had begun to fall over the year from its eye-watering 17.5% high but was still at a crippling “lucky 13%” at the time of Keating’s confirmed economic doom.

For the government, RBA and Treasury, the era’s key economic ills were high wage claims and rises (unrelated to productivity improvements), feeding into - or chasing the tail of - high actual and expected inflation. High interest rate policy - almost single-handedly - was targeting this vicious circle and trying to break it. (Chronically high current account deficits and debt-fuelled excesses were other ills – more context in further details below.)

Labor - via the Hawke-Keating government and their stronghold on most State administrations - were too reluctant to take head-on the industrial might and inflationary wage claims of the union movement, often tacitly supported by big (subsidised or protected) employers in Australia’s “industrial club”*. So it fell to applying cripplingly high interest rates to “scorch the earth” and “break Australia’s inflation stick” – to wring high inflation and lingering 1970s-era bad industrial habits out of our economy. 

The early-21st century Australian union movement craves returning Australia to the adversarial, centralised, wage-fixing IR days of the 1970s and 1980s – where craft or sector-wide wage claims bore little relation to productivity improvements.

The lessons of the early-1990s 'recession we had to have' must be front-and-centre as Labor and its union siblings mount a 'back to the future' campaign.

Mark/commiserate this anniversary of Keating’s “recession we had to have line by:

  • watching this documentary showing Keating’s immortalised words and the greater context around Australia’s early-1990s recession
  • recounting how PM Bob Hawke pledged in the 1987 Federal election campaign that “By 1990, no Australian child will be living in poverty
  • reading further about “the recession we had to have
  • reflecting on where you or your family were when you first heard/saw Treasurer Keating’s comments 
  • recalling the early-1990s recession, double-digit interest rates and how it affected your family, business and/or life
  • apprising yourself of the Conservative Party’s principles and policies to make Australia a better, more secure and prosperous place, and/or
  • sharing this Action Plan post on social media with family, friends, conservatives, classical liberals, those that remember Australia’s early-1990s recession and those that need to know about where we must not go again.

The Industrial Club -- Back then, the strong unions enjoyed the cover of an industrial relations (IR) and wage setting system that was highly regulated, centralised, strike-prone, inflexible and still into wage-fixing and indexation, with little regard for productivity improvements, let alone at the enterprise level. And big employers could cover the rising costs better than any smaller, pesky competitor also implicated. (Soaking all businesses in a sector with new regulations, stemming from new-found excesses, has a similarly anti-competitive effect.)

Further details on “the recession we had to have”

Towards the end of the 1980s, the Hawke-Keating Labor government, the Australian Treasury and the RBA saw persistently high and volatile inflation as Australia’s number one economic ill.

  • The other big ills were the nation’s chronically large current account deficit and ballooning household, commercial and foreign debt levels – all aided by poorly-managed financial deregulation and innovation which made debt far more accessible, blew out the supply of broad money and created an asset-price bubble.

Ten-year inflationary expectations had peaked near 10% in the late 1980s and was still a stubborn, obstinate 8% in the back-half of 1990. Within a year, it would plummet to below 4% – reflecting the economy’s sclerotic state and the belated belief of wage bargaining agents (particularly the industrial club) that the RBA was now deadly serious about fighting inflation. It has never risen to 5% since.

The RBA cash rate was still very high (13%, down from its peak of 17.5% early that year), primarily to break the inflation stick – its causes and effects.

By breaking the inflation stick and union/industrial club stronghold on wage-setting, green shoots of a more decentralised, cooperative enterprise-based wage bargaining and IR system could take hold – and enjoy mainstream support – with improvements to wages and conditions far more closely linked to productivity improvements at the firm level.

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