The public debate is constantly distorted by claims that cannot be substantiated. One such claim is that the current period of budget deficits is building a stock of future claims on the well-being of the future generation – our kids. Accordingly, the neo-liberal deficit terrorists claim that the best thing we can do for the future generation is to avoid running deficits. My view is that we have been imposing a huge future burden on our children but this would be larger if we tried to run surpluses now. In fact, the years of surpluses exacted a huge toll on our children’s prospects that they will have to endure for years to come.
In an article in today’s The Australian (July 27) the former Treasurer waxed lyrical about how honourable he is in leaving Parliament on his own terms. He also makes this commentary on the state of play at present:
THE spending packages of the Rudd government will be sold to national journalists as economic stimuli. But at the local level they will be used for old-fashioned pork-barrelling. There will be no mention that the projects are funded by borrowing. Once a government embarks on a program to buy votes with borrowed money, there is no limit to the process until the economic consequences catch up, and they will. But the cynics know that this could take several electoral cycles.
Some may see this as a difficulty for the opposition. But in fact it is an opportunity. The public will wonder how all these local projects that the government could not afford when it did have money can be funded when it doesn’t have money. The money is being taken from the pockets of future taxpayers. The money is being borrowed and they will bear the cost. This is an intergenerational transfer from the future to the present generation. Although it is not due until 2012, the next Intergenerational Report will show how this has made life tougher for future Australians.
So you see that the past Treasurer continues to mislead us all about what is a future cost and what is not. Whenever I read this sort of rhetoric I am always reminded of the legacy that he left the future generation as a result of policies he was responsible for while in Government.
No better example of that than the lack of regard his government gave to youth. If you want to provide for the future generation then the things that will matter are education, employment and public infrastructure. All three are investments in the future. On all three, the previous government failed dramatically.
But first the fiscal errors in the previous statement. The current government has as much “money” now as it had yesterday and the same amount it will have tomorrow. That is, it has whatever it wants to spend. It always has that. It has no more or less capacity to spend today because there were surpluses in the past than it would have if there had have been deficits in the past.
Costello thinks the surpluses provided more capacity. That is plain false. I was giving a public lecture on Thursday night and on question time someone asked me whether the current government was lucky that they were able to draw down on the savings provided by the previous government’s surpluses.
I explained how it is a nonsensical notion thinking that a sovereign government would “save” in its own currency. It also belies the nature of government spending and taxation. They are flows – like a river – you don’t ask how much water has accumulated as it gushes out the tap. It is gone before you know it. Various metres can record the flow but unless there is a dam to store it as a stock it flows away.
Same with spending and taxation – it is accounted for but once it exits the economy – as a surplus (spending less than taxation) then it is gone for good. There is no storage shed in Canberra or Washington or anywhere else where the surpluses are saved up and available for the government to drive a truck down and pick up some dollars to spend.
Surpluses destroy financial assets that were previously in the hands of the non-government sector and these assets are gone forever.
Surpluses take money from the pockets of the households because the government spends less than they tax us.
The idea that borrowing “takes money from the pockets of future taxpayers” is equally nonsensical. The funds to pay for the bonds originate in the government net spending in the first place. The deficits add to bank reserves and non-government entities decide that it is in their best interests to hold the net increment in wealth in the form of government bonds rather than reserves. So the government is really borrowing their own spending back!
Once you understand that then the idea that there is a future burden will make you laugh. Further, the interest payments are incomes to the bond holders who presumably enjoy the return on their saving. Most will have children who will benefit from those payments.
When it is time for the government to relinquish a particular debt instrument and pay interest it just credits the relevant bank account and rips up the IOU record. The future generation has no less real options available to them as a consequence.
Whether future taxation is higher or lower is not conditioned by the deficits that the government has run in the past. It may be that the deficits will drive the economy into a solid growth path (they should if they are large enough and persistent enough). As incomes rise, tax revenue rises. The government may form the view that private spending is growing to quickly relative to the real capacity of the economy to meet that nominal spending growth with new goods and services. The government can then raise taxes to stifle demand and prevent inflation.
In doing so it is not providing itself with any extra revenue to help it pay its debt back. It is just adjusting aggregate demand to ensure the economy maintains price stability.
There has never been an empirical relationship shown between tax level changes and debt level changes lagged however many years you like. The notion is ridiculous.
So back to the costs that the future generation will bear. Consider the following graph which shows the unemployment rate for working age teenagers (15-19 year olds) since the early 1960s in Australia (using ABS labour force data from historical records that I have). That jump in the mid-1970s was the beginning of the neo-liberal obsession with reducing budget deficits and cutting the public sector back. Prior to that jump the youth unemployment rate was always just a little higher than the adult rate (but still low). The jump in the mid-1970s was largely due to government policy (more on this later).
It is often claimed that the seriousness of youth unemployment is less than the official unemployment rate might convey. The claim is based on the observation that an unemployed teenager who is searching for a full-time job is in a different situation than an unemployed teenager seeking part-time work. The worker who only wants part-time employment to help subsidise their education (perhaps full-time education) is not considered to be in the same welfare plight as a person who has left school and is desiring to embark on their full-time labour market attachment.
In this context, consider the following graph taken from ABS Labour Force survey data (from February 1978 to June 2009) which shows the 15-19 year old unemployment rate for all persons (blue line) and those who are looking for full-time work only (red line). While it is true that the retention rates in full-time education are rising and less teenagers overall (in absolute numbers) are looking for full-time work, the fact remains that those who do are severely disadvantaged.
In the full employment era (1945-1975) there were always enough full-time working opportunities for 15-19 year olds who did not want to stay at school. They were also able to build careers and progress within the organisations they worked for.
It should never be forgotten that one of the major reasons that the youth unemployment rate rose so sharply in the mid-1970s relates to the major cutbacks in the public service that began around 1975 and continued throughout the second half of the 1970s.
At that point, the public service was a major employer and trainer of our youth especially in the plethora of apprenticeships that were available within the public sector. These opportunities were savaged in the early Fraser years as the neo-liberal era began.
The following graph is taken from ABS Social Trends 2000 and shows the decline in the mid-1970s in apprenticeships.
Privatisation and contracting out also meant there were fewer jobs and on-the-job training opportunities for young people. You can see the sharp decline in the late 1980s that corresponded with continued public sector contraction. Further, in the 1980s, the Hawke government increasingly started to offer traineeships rather than apprenticeships as the neo-liberal economists gained sway – they argued that youth unemployment was high because their wages were excessive.
But the major reason that youth unemployment rose so sharply was because its major employer (the public sector) started to radically reduce the available job opportunities – all in the cause of cutting back on the public sector and pushing more responsibility onto the private market place. From 1975 onwards, there have never been close to enough jobs produced to satisfy the available labour supply.
In this context, the low-skilled, inexperienced youth are towards the back of the jobless queue. Behind them are the mentally ill, indigenous and and migrant workers.
What is of most concern is that we still haven’t learned the fallacy of compositions that plague an economy when there are aggregate constraints imposed on it.
Increased education qualifications and training will not protect a teenager from unemployment if there are not enough jobs overall. While persons who receive higher levels of education are less likely to experience unemployment it doesn’t follow that if everyone attains higher skills levels that unemployment disappears. When there are not enough jobs overall all that happens is that education and training shuffle the jobless queue and different people become unemployed.
In a dissenting report to the Main report of the Standing Committee on Employment, Education and Training in 1997 the following conclusion was drawn (it was written by three ALP MPs on the Committee):
The most significant factor influencing the employment of young people is the availability of jobs. The benefits of economic growth have not transferred into jobs for young people. Many entry level positions have disappeared.
There is not evidence to suggest that young people are less job ready now, than in the past. The cause of youth unemployment cannot be found in asserted deficiencies of young people themselves, but in the economy which increasingly fails to provide them with employment opportunities. The majority of the Committee, however, has focused on rectifying the alleged deficiencies of young people. Much attention was given to the attitude of young people — the ‘youth of today’.
So then you see that the current federal government has not learned the lesson either. Mark Arbib, the Employment Participation Minister has told the press that youth unemployment will rise in the coming year.
Arbib is now famous for the “work experience on the dole equals a full-time job” comment he made as he stumbled to justify the unjustifiable – the PM’s claim that the Government was creating 50,000 Green jobs to further meet the crisis that is besetting the labour market. The jobs were non-existent but try getting them to admit that.
Arbib told the press that youth who become employed should lower their expectations. He is quoted as saying:
A lot of these young people haven’t seen a tight labour market before … This is for all job seekers, not just young people: really, you’ve got to be as flexible as possible and adapt to a new labour market … It is in their interests to be at work, not looking for the perfect job or their dream job. You’ve got to work up to that
So with some tinkering we heard this before when Abbott, Dutton and Andrews railed us with the job snobs and cruisers terminology.
The best thing this government can do to prevent entrenched disadvantaged among our youth is to ensure they have work now. Enough work to go around at reasonable working conditions and sensible pay. Work experience while on the dole is not a job. It is a cop out by the government and it will be in these ways that the government increases the burden on our future generations.
So when we are worrying about future burdens we should forget issues relating to public debt. It is clear we need an increased budget deficit now to provide enough jobs for all those 15-19 year olds who are unable to find work and who are beginning their days of disadvantage early. The long-term consequences of the unemployment are significant.