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Lessons from the Great Depression: going beyond standard economic approaches to bolster Australia’s economy

Posted April 08, 2020

SGS Economics and Planning Terry Rawnsley

The Australian economy has not experienced an annual decline in Gross Domestic Product (GDP) since 1990-91. There have been many regional recessions during this time, but overall the Australian economy has continued to grow.

The COVID-19 pandemic represents the most significant challenge to Australia’s economy since the Second World War. The current social restrictions that are shutting down large parts of the Australian economy are unprecedented.

While Australia’s economy and society are very different from the late 1920s, we need to learn from the Great Depression and do more than apply the standard economic methods during the COVID-19 pandemic.

SGS Economics and Planning Bondi Beach Closed COVID 19 outbreak April 2020
Stage 3 COVID-19 Restrictions, Bondi Beach, Sydney, April 2020: Shutterstock

Australia’s economic history

Official Australian Bureau Statistics (ABS) statistics for GDP and the unemployment rate only extend back to 1959-60 and 1978 respectively. Data from a range of sources were collected to compile a volume measure of GDP and the unemployment rate back to 1905-06. Figure 1 shows the Australian unemployment rate from 1905-6, which helps to understand Australian economic history and contextualise current economic challenges.

There have been eight events since 1905-06 when the Australian economy has contracted in size:

  • In 1914-15 GDP fell by 11.0 per cent due to the onset of the First World War.
  • In 1919-20 GDP fell by 1.2 per cent due to the impact of the Spanish Flu.
  • The gold standard export shock of the 1920s when GDP declined in 1924-25 and 1926-27
  • The Great Depression.
  • Between 1943-44 and 1946-47 GDP fell 7.9 per cent initially a result of the domestic economy contracting due to the war efforts and then as war production ceased and the economy began to transition back to normal economic production.
  • In 1952-53 GDP declined by 2.0 per cent, driven by a 10 per cent fall in wool exports.
  • The two modern recessions saw a fall of 0.4 per cent in 1990-91; and 2.2 per cent in 1982-83.
FIGURE 1: AUSTRALIAN RECESSION EVENTS ORDERED BY SIZE
SGS Economics and Planning Australian Recessions
Source: SGS Economics & Planning and ABS Australian System of National Accounts

The Great Depression

The Great Depression marked a low point in Australia's economic wellbeing. There has been no other period in Australia where the national unemployment rate was so high for such a long period. In 1926-27 the unemployment rate was 4.2 per cent. By 1931-32 it had reached 19.7 per cent, roughly double the unemployment rate of Australia’s two-modern recessions 1990-91 and 1982-83. The unemployment rate remained above 11 per cent until 1935-36. The remainder of the 1930s continued to have high rates of unemployment. Only the mobilisation for the Second World War saw the unemployment rate return to its pre-depression level. Figure 2 shows the Australian unemployment rate from 1905-6.

The Great Depression saw three consecutive years of GDP decline. In 1928-29 GDP declined by 6.2 per cent, 1929-30 saw a 9.7 per cent decline and in 1930-31 GDP declined by 2.1 per cent. In total, the Australian economy declined by 17.1 per cent during the three-year period.

SGS Economics and Planning The Great Depression
The Great Depression: Shutterstock
FIGURE 2 ANNUAL AVERAGE UNEMPLOYMENT RATE 1905/6 – 2018/9
SGS Economics and Planning Unemployment Rate
Source: Goodridge et al. (1995), Borland et al. (1998) and ABS Labour Force Survey

Figure 3 shows the GDP declined in Australia for three consecutive years during the Great Depression. In 1928-29 GDP declined by 6.2 per cent, in 1929-30 by 9.7 per cent and in 1930-31 by 2.1 per cent. In total, the Australian economy declined by 17.1 per cent during this period.

FIGURE 3 ANNUAL CHANGE IN GDP, VOLUME MEASURE 1905/6 – 2018/9
SGS Economics and Planning GDP Growth Rate
Source: SGS Economics & Planning and ABS Australian System of National Accounts

To combat the Great Depression, governments around the world employed classical economic approaches. The classical economic approach involved reducing wages and trying to balance their budgets. All of which just further reduced aggregate demand in the economy and worsened the Great Depression. Unemployment remained stubbornly high throughout the 1930s, and it took the Second World War to bring it below seven per cent.

Current COVID-19 economic response

In contrast, the current Australian Government’s first stimulus package in response to the COVID-19 outbreak was very much a standard Keynesian approach to a slowing modern economy, including injections of cash for consumers who have the highest propensity to spend and incentives for businesses to invest. This first stimulus package would have been very appropriate during the second half of 2019 as the economy slowed. But due to its small-scale focus on encouraging business investment, and business uncertainty and supply chain disruptions, it was mostly ineffective.

This first package was supplemented with a second stimulus package with even larger spending designed to inject money into the economy at a vital time. State governments also adopted measures to support businesses through payroll tax relief, increased spending and government employment. These actions were supported by increased liquidity from the Reserve Bank of Australia, which was an important lesson from the Global Financial Crisis. The third stimulus package included the $130 billion Job Keeper payment.

Four non-standard economic approaches

Leaders managing the economic and social challenges of the COVID-19 pandemic may need to consider non-standard economic approaches throughout 2020 and 2021 as they attempt to avoid or soften any economic downturn in Australia.

Nationalising key services

The Australian Government could take equity or even nationalise critical parts of the national economy. The airlines would be an obvious example. The Australian economy will be hindered without a functioning domestic or international air travel market. This approach could involve governments owning (but not operating) airlines, with current management teams in place long enough for normal economic conditions to return. In another example, the government has effectively underwritten the private hospital sector.

Emergency equity

Emergency equity could be provided to selected listed companies with revenues reduced by more than 50 per cent (the 50 per cent figure can be debated as being too high or too low). These companies could be selected based on their ability to prosper at the end of the crisis and the negative impact their failure would have on broader supply chains. It would involve the Australian Government selecting the companies. An example is the bailout of the American financial and automotive sectors during the Global Financial Crisis.

Local infrastructure building program

Significant funds could also be provided to state and local governments to support an infrastructure building program to offset any collapse in private sector investment. This initiative could fund a major construction program in social and affordable housing to offset the fall in private dwelling construction. Alternatively, if a fall in house prices leads to mortgage defaults, state and local governments could purchase distressed new home sales for use as social housing.

Boost local government project pipeline

Local governments across the country have long lists of small-scale infrastructure projects which can provide a pipeline of work. Local government in a good position to identify additional projects such as tree planting, waterway remediation, and open space enhancements which can be undertaken by workers with a basic skill set. This approach would reduce the pressure on the more skilled construction workforce so they can focus on housing and infrastructure building. Funding for these types of projects would require some innovative funding mechanisms.

Going beyond standard economic approaches

While Australia’s economy and society are very different from the late 1920s, we need to learn from the Great Depression and do more than apply the standard economic approaches during the COVID-19 pandemic. The long time series of the unemployment rate and GDP shown in this article help contextualise the current challenges facing the Australian economy. Also discussed in the article are policies that could help soften any economic downturn in Australia during the pandemic.

Bibliography

ABS (Australian Bureau of Statistics), Year Book Australia, (various years), cat. no. 1301.0, ABS, Canberra.

ABS, Australian System of National Accounts, 2018-19, cat. no. 5204.0, ABS, Canberra.

ABS, Labour Force, Australia, 2018-19, cat. no. 6202.0, ABS, Canberra.

Borland, J, and Kennedy, S. (1998) ‘Dimensions, Structure and History of Australian Unemployment’, Reserve Bank Conference – 1998: Unemployment and the Australian Labour Market.

Butlin, N., (1985) Australian National Accounts 1788-1983, Australian National University Source Papers in Economic History No. 6, November 1985.

Goodridge, S., D. Harding and P. Lloyd (1995), ‘The Long-term Growth in Unemployment’, Melbourne Institute of Applied Economic and Social Research, University of Melbourne, Working Paper No. 2/95

SGS Economics Planning Terry Rawnsley
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