90,000 jobs for 42 billion is a bad strategy …

Yesterday the Government announced its latest fiscal response to the rapidly worsening economic situation. They will spend $42 billion (mostly in 2009 and into 2010 to shore up aggregate demand. They estimate this will underwrite 90,000 jobs in the economy. That is not new jobs but existing jobs. They also estimate that the unemployment rate will rise to 7 per cent over the coming year which is around 300,000 people extra who will be without work. That will take unemployment towards 850,000 and underemployment will certainly rise in lock-step (already around 600,000) so you see the scale of the deterioration.

However, while I think the package is a step in the right direction, the Government has failed to really target jobs. If the Government had have introduced a Job Guarantee and paid the workers the current national minimum wage (with holiday pay etc) it could have hired 557,000 full-time equivalent workers for around $8.3 billion per year. Where does this figure come from?

In a major report Creating effective local labour markets: a new framework for regional employment that CofFEE released (in partnership with Jobs Australia) in November 2008 we estimated that to achieve a full employment level (consistent with 2 per cent official unemployment, no hidden unemployment and no time-related underemployment), an extra 559.2 thousand jobs would have been required in May 2008. The figure will be higher now and increasing by the week.

In addition the research that underpinned the report conducted a national survey of local governments in Australia. We identified hundreds of thousands of jobs that would be suitable for low-skill workers in areas such as community development and environmental care services. There is enormous unmet need for public works across regional Australia.

The report also proposes a role for the state in direct skill formation through a National Skills Development (NSD) framework which we consider will address the skills problem and support the global competitiveness of Australian industry. Several points need to be considered when developing a NSD framework:

  • Maintaining a buffer stock of public sector jobs provides work for all irrespective of their skill levels and also allows paid-work opportunities to be structured into training and career development;
  • The Federal and State Governments must renew their commitment to trade training and to adequately fund our public schools and universities. Public policy must also set in place safety-net structures to ensure that every person under 20 years of age is in education, training or a paid job;
  • Occupational planning capacities must be reintroduced to ensure that the apprenticeship and training programmes are targeted in areas of regional and industrial need;
  • By maintaining full employment private employers will be forced by competition to take a major responsibility for training and skill development of our workforce.

The Job Guarantee (JG) would restore the role of the public sector as a significant employer, and to do so in a way that also controls inflation. The JG is based on a buffer stock principle whereby the public sector offers a fixed wage job for up to 35 hours per week to anyone willing and able to work, thereby establishing and maintaining a buffer stock of employed workers which expands (declines) when private sector activity declines (expands), much like today’s unemployed buffer stocks.

The JG provides a platform for developing the national skills base, by comparing the observed skills and competencies of the JG workforce with the emerging skills requirements of each regional labour market. This would inform the provision of accredited training (both in-house and via external providers such as TAFE), the indenturing of apprentices, and the design of JG activities so that they include experiential development of skills expected to be in local demand, thereby restoring the role of the public sector as a net trainer of skilled workers and minimising the likelihood of inflationary bottle-necks in labour supply.

The flexibility of the JG would extend to designing jobs to accommodate individuals with special physical, intellectual and behavioural needs. It could also be adapted to address the needs of rural and remote communities, and to reflect cultural norms within indigenous and other non-Anglo Australian communities. The JG is intended as a platform to: provide economic security and social integration for those whose labour is currently being under-utilised; reduce social dislocation arising from unemployment and poverty; and contribute to the quality of life of all by its contributions to a better environment, public amenity and improved services. As a minimum wage employer that accommodates the poaching of its skilled workers by other employers, and even facilitates this practice when extra workers are needed in the private sector, the JG is a superior price stabiliser than the present method that entails keeping over a million people precariously unemployed and under-employed, and in a condition of skill-atrophying idleness, social exclusion and poverty.

The point is that the Government has missed a wonderful opportunity to secure the jobs for all at a fraction of the investment that it proposed yesterday.

Yesterday’s announcement also estimated that the Government’s $22 billion surplus in 2007-08 will become a $22.5 billion deficit in 2009 which would be around 2.0 to 2.5 per cent of GDP. This will not be enough. It should go towards 5 or 6 per cent of GDP to really protect jobs, However the reaction from commentators has been predictable.

One commentator (Ross Gittins, SMH) said today that

Worrying about the budget going into deficit is like being told a friend has been killed in a car crash and then inquiring about the fate of the car. At such times there are more important things to worry about.

This is a poor analogy. I agree that you worry about the humans first and the twisted steel second. But the twisted steel is still bad. A budget deficit is almost always going to a good thing because it will be financing saving in the private sector and maintaining aggregate demand to keep employment high and unemployment low.

The other incredible claims come from a (now) side player – the former Treasurer and budget vandal Peter Costello. He was on ABC Lateline last night labelling the fiscal package the “biggest economic U-turn in Australia’s history”. To some extent I agree with him that the budget surplus mania that Rudd and Swan were extolling throughout 2008 was totally inappropriate. Their ambition to be fiscal conservatives meant that they maintained the criminal surpluses that Costello had run which had prevented the economy from producing enough jobs and working hours to generate full employment. They should have begun reversing the damaging surpluses the day they took power. They have been dragged into this position now by the sheer magnitude of the global economic collapse. So no credit to them for that. But they should get credit for finally going for growth now and abandoning the passionate defence of surpluses.

Costello claims that the government is to blame for the deficit, saying that:

I would not go deliberately into deficit, in fact, even Kevin Rudd says he didn’t go deliberately into deficit.

The essential point is that the U-turn is large because the country was mis-managed by the previous government for so long. The fiscal drag that Costello lumbered the economy with was so large and persisted for so long that the pre-conditions for the severe downturn were being laid long ago. The government surpluses forced us to adopt a growth strategy based on increasing levels of private sector (mostly household) debt. That was never going to be sustainable. The precariousness of the economy increased year by year as the private debt levels soared. The claim that the government was reducing its own debt while true only undermined the secure wealth holdings (government bonds) held by the private sector.

There has not been a magical deterioration going on in Australia in the last year. We were heading for this years ago and only a massive build up of household debt (the “credit binge”) and the commodity price boom saved us from a severe downturn earlier than now. The Australian economy was being mis-managed by the previous government and sitting on a knife-edge of record levels of household debt – just waiting for a major world event to push us into crisis. The world event has happened and the triggers that were in place (debt, fiscal drag from the surpluses) have now required a massive response from the federal government.

If the previous government had have managed the economy responsibly, we would have already been in deficit, the household sector would not have been dis-saving at the alarming proportions of the last few years, and we could have had true full employment. Households would also have had more robust balance sheets (less debt, less volatile assets) to withstand the cyclical downturn.

So my view is that Costello is the vandal and the current government is starting to clean up his mess. However, I would have used the fiscal powers that the Government has and is now starting to exercise to first of all introduce a Job Guarantee to provide some security to the hundreds of thousands that will be without work at the end of 2009. Given I would have billions left over to spend I would then revitalise public infrastructure and develop a national skills development framework along the lines suggested above.

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    3 Responses to 90,000 jobs for 42 billion is a bad strategy …

    1. Sam Sharp says:

      Hello Dr Mitchell. I heard and enjoyed your interview this evening on ‘The National Interest’. As a result I have visited the CoFFee website which I found interesting too.

      In the interview, you indicated that governments were entities unlike others in the community and had the capacity to fund deficits. Presumably, deficit spending becomes excessive at the point that full employment is reached, clearly a socially responsible goal. However, what are the negative consequence of this spending? If we are to avoid runaway inflation or mortgaging the future how is this to be done in a way that minimises the fallout?

      On another matter, I noticed a reference to ‘Markov switching models’. I studied and used Markov chains many years ago in the analysis of population movements. I don’t find any further references to this in your listed chapters and papers. Would it be possible for you to point me in the direction of this research?

      With thanks

      Sam Sharp (PhD)
      Sydney

    2. bill says:

      Dear Sam, thanks for your comment. Keep exploring the CofFEE WWW as it is updated regularly with new reports and data.

      The Federal Government is the monopoly issuer of the currency that we use and is required by them to resolve our tax obligations with them. The important implication of this is that the Federal Government does not have a financial constraint like the household and business sector (and the other levels of government). That means it can buy whatever is available for purchase in the economy. That is not the same thing as saying that there are no consequences that arise from its spending. As you note it spending pushing nominal demand beyond true full employment (which means the economy cannot produce any more goods and services then inflation will result. No socially responsible government would do this anyway.

      And the first thing the Federal Government should do is purchase resources that are what I call “zero bid” in the private market – that is, no one wants to use them. These resources are the unemployment labour that is left idle by the private firms and represents a massive workforce that can undertake valuable community development and environmental care work that will never be provided by private profit-seeking firms. Work can be valuable even though it doesn’t fit the private calculus of profit.

      In purchasing this labour at the current minimum wage (with all the other entitlements that any proper job enjoys – holiday and sick pay, superannuation etc), the Government is not introducing any inflationary pressure into the economy – they are not competing for resources that the private sector wants. Categorically, an unemployed person is someone who has no demand for their services.

      The idea of mortgaging the future is often proffered by neo-liberals to scare us away from budget deficits. In fact, the budget deficit doesn’t need any “financing” at all. The reason central banks issue debt on behalf of the Treasury is explained in other posts on this blog and many papers I have written. For example, I refer you to a recent blog entry.

      On MS models and MS-VAR models, I recently finished an ARC grant which studies job creation and job destruction processes where I used Markov switching models. That work is still to be published. I also have a PhD student who has done a major study in employment dynamics using the MS-VAR class of model and he will be finished in a month or so. We will publish a lot of his work soon.

      best wishes
      bill

    3. Sam Sharp says:

      Thank you Bill for such a full response. I will watch out for the publications you refer to.

      All the best

      Sam

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