It may sound like Australia’s political class is arguing about how to get people working again and businesses reopened, but listen closer. They’re fighting about something deeper, writes Gareth Hutchens.

Australia’s political class has started arguing about the best way to restart the economy.
It sounds like they’re arguing about something obvious, like how to get people working again and businesses reopened over the next few years.
But listen closer.
They’re fighting about something deeper what path should the economy take out of the crisis?
It’s a crucial question, because its answer will influence the nature of economic activity over the next few decades, along with Australia’s culture and its standing in the world.
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Why? Because of something called ‘path dependence’
Economists developed the theory of path dependence to explain why industries, and economies, follow certain growth paths once they’re established, and why it can be very difficult to shift to another growth path.
An extreme example would be the slave-based economy of the antebellum southern United States.
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The institution of slavery, which existed for hundreds of years in the US, had become so profitable for southern planters that the Mississippi River valley had, at one stage, more millionaires per person (among its white population) than any other region.
It took a civil war to change that growth path.
Australia’s growth pattern to change
A less extreme example would be the high level of immigration Australia has relied on for the past 20 years.
In 2000, when Australia’s population was 19 million, the Bureau of Statistics projected population growth would slow to a crawl by 2050 due to a severe decline in the birth rate and low migration.
It projected it would take until 2050 for the population to reach between 25 million and 28 million, and until 2100 to reach 32 million.
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But the Howard government started sharply increasing the immigration intake in the early 2000s, a practice continued by subsequent Labor and Coalition governments.
The shift in policy has caused Australia’s population to swell by 30 per cent since 2000, so it’s now sitting around 25 million 30 years earlier than the ABS projected.
In that time, government budgets, businesses, and universities have adapted to the higher rate of population growth and come to depend on it. Business models currently rely on it.
But the coronavirus shutdown with its severe constraints on the movement of people has produced a negative shock so large it will force many businesses and industries onto a different growth path in coming years.
As former senior Treasury official Greg Smith explained last month to the Committee for Economic Development of Australia: “In recent times, Australia’s growth has been heavily based on high short-and long-term immigration, which may now be impossible.
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“Constraints on the movement of people, which could continue for some years, may, in turn, change the course of Australia’s growth pattern and industry structure.”
Mr Smith said Australia may need to create new economic institutions on the other side of coronavirus and be ready for a different type of growth.
“Australia’s international trade and other economic strategies may require considerable adaptation,” he said.
“To the extent that past growth industries will not recover, or recover quickly, the economy will need to achieve rapid innovation and structural change to secure a sustainable growth recovery.”
Competing visions of the future
With Federal Parliament scheduled to sit this week, the health of the economy will be high on MPs’ minds.
It’s certainly high on the minds of the economic elite.
This chart uses a logarithmic scale to highlight coronavirus growth rates. Read our explainer to understand what that means and what we can learn from countries that have slowed the spread.
Some chief executives have already called on the Morrison Government to pursue their preferred suite of policies when the economy re-opens, with their policy wish list coming from the same kitbag that has dominated policymaking for the past 30 years, in the pre-coronavirus world: tax cuts, industrial relations reform, red tape reduction, an unemployment rate that keeps inflation low and strict welfare policies.
In a speech last week, Treasurer Josh Frydenberg said the Government would be looking at new and old policy ideas with “fresh eyes,” but the Coalition’s past approach to economic policy had worked well and would guide its behaviour.
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He said tax reform, industrial relations reform, and regulatory reforms to “reduce the cost burden on businesses” would be necessary in coming years.
But others have called for a bolder vision.
The Australia Industry Group, which represents more than 60,000 businesses, said the Government ought to tackle the economic crisis and the climate crisis at the same time.
“Two of the biggest questions facing us today are how do we restore growth following the pandemic, and how do we make a successful transition to net zero emissions by 2050,” Ai Group chief executive Innes Willox said in a speech last week.
“Answering these questions together can boost our growth and put it on firmer long-term foundations.”
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The Investor Agenda, a global group of fund managers and institutional investors that manages over $50 trillion worth of assets, says governments should use their economic recovery plans to spur growth and create significant employment by accelerating the shift towards net-zero emissions.
In a statement last week, the investors urged governments to veer away from old growth paths.
“Recovery plans that exacerbate climate change would expose investors and national economies to escalating financial, health and social risks in coming years,” the group said.
“The path we choose in the coming months will have significant ramifications for our global economy and generations to come.”
Record surge in US unemployment
The immediate struggle is for economies to absorb the newly unemployed.
On Friday evening, data showed the United States economy lost a record 20.5 million jobs in April, unlike anything the country has seen in peacetime.
In March, the US unemployment rate had been 4.4 per cent, but last month it surged to 14.7 per cent smashing the post-World War II record of 10.8 per cent from late 1982.
In addition to the millions of freshly unemployed, 5.1 million workers had their hours reduced.
And in a sign of the wild disconnect between stock markets and the real economy, major US stock indexes still jumped on Friday to finish the week higher.
The Nasdaq posted its fifth straight daily gain, while the Dow Jones Industrial Average rose 1.91 per cent, to 24,331.32, and the S&P 500 gained 1.69 per cent, to 2,929.8.
Where Australia stands
This week, the ABS will release its April labour force figures (on Thursday), which will show a surge in Australia’s unemployment rate too.
In March, the official unemployment was still 5.2 per cent, but this week’s figure is expected to show a clear deterioration.
Last week, the Reserve Bank said the unemployment rate would probably peak at 10 per cent this year.
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