I read the headline – Aussies don’t understand deficits: MP – in the Canberra Times with interest and after reading the article I returned to the on-going conversation I have with myself – why have we all been so stupid to have been so duped by the neo-liberal agenda? Almost all the public debate about the Federal Budget tomorrow is a total non sequitur. It bears no relation to the important questions that the Budget process has to deal with. Somehow, we are all sidelined by a rhetoric and a focus that conveniently diverts us away from these real issues and, instead, transfixes us on a piece of fiction. But a convenient fiction which maintains the relative power elites and perpetuates disadvantage. I understand all of that … but I still can’t get my head around why we have allowed ourselves to be so conned.
Continuing the developing country theme of Friday and in response to a comment from a reader I decided to write a short blog on the applicability of employment guarantees to poorer nations. They have particular issues which means that a Job Guarantee scheme has to be carefully designed. But with the experience of several countries and extensive research and evaluation of these schemes, I conclude that the employment guarantee approach to income security is broadly applicable. Most of the arguments against providing a buffer stock of jobs to insulate the workers against the fluctuations of the private economy are based on false neo-liberal arguments about national government budget constraints. Once you get over that sort of fallacious reasoning, then there are real issues left to confront and overcome. This is now an important part of my academic work and a very interesting part to say the least.
Today I have been working on a project for the Asian Development Bank concerning regional development and macroeconomic risk management in the Central Asian countries (all the “stans” plus a few others). I have also been reading a lot of the development economics literature lately, which is generally a place that the neo-liberal troglodytes really run amok. It certainly focuses one’s attention. In the advanced countries the media focuses on our own losses. In Australia, a lot is written about superannuation losses. And journalists, who largely ignored the fact that during the boom we still had around 10 per cent of our willing workers without enough work – wasted and excluded, are once again talking about unemployment. But overall, the public debate is not at all focused on how the current economic crisis is damaging the weakest of the weak in far off lands and killing people.
Everyday brings surprises as a social science researcher. Today I was gearing myself up for the lunchtime current affairs radio onslaught from the budget nazis – “see unemployment is still rising and stimulus doesn’t work” – that sort of thing. But then at 11.30 (or just after) I looked up today’s Labour Force data released by the Australian Bureau of Statistics and was … to say the least … surprised. Here is what I was expecting – the labour participation rate would fall a little and unemployment to continue rising. I expected full-time employment to fall and perhaps part-time employment to rise a little but for total employment overall to fall. However, given three other pieces of information, two of which were released yesterday, I was thinking that all these “bad movements” would be fairly moderate in size. So a surprise indeed but … we should be careful before we get too carried away.
Today’s ABS retail turnover data is very interesting considering the meltdown that is occuring elsewhere in the world. The summary result that retail turnover grew by 2.2 per cent in the month of March suggests that the Australian economy is still alive – at least in the consumer markets. This figure was a surprise to all those who were in denial of the usefulness of budget deficits – both the discretionary components (the “stimulus packages”) and the automatic stabiliser components.
In the 1980s, as high unemployment persisted following the 1975 OPEC oil shock and the stagflation that accompanied it and then the 1982 recession and its aftermath, neo-liberals started to seek new ways of justifying the lack of government action in restoring full employment. Being very clever, they came up with an ingenious solution – redefine what full employment means. So as the unemployment rate rose they claimed that the so-called “equilibrium unemployment rate” had also risen which meant that attempts to reduce it by expansionary policy would be inflationary. They claimed the only way the government could act was to initiate “structural reforms” aka privatisation, labour market deregulation, anti-union legislation and harsh welfare measures. Why should we be so surprised that they are at it again? The truth is that recessions cause structural imbalances which are corrected again if economic growth is strong enough in the post recession phase.
The discussion about the relative merits of monetary policy and fiscal policy is on-going. A regular billy blog reader has asked me to give some thought to this discussion, specifically in terms of whether monetary policy is a useful counter-stabilisation option. My view is that if one takes a modern monetary perspective then it is clear that the current reliance on monetary policy (accompanied by the budget deficit phobia) will always fail to deliver full employment and relies on the impoverishment of the disadvantaged for its ability to achieve low inflation. Accordingly, it would be far better for the government to set the short-term interest rate at zero and achieve full employment through appropriate levels of net spending (fiscal deficits).
As the Federal budget week approaches the various commentators and interest groups are whipping themselves into a lather about what choices the Government might have or not have. A recurring theme is whether the Government should honour its election commitment in 2007 to cut income taxes from July 2009. The debate is being constructed along the lines of whether the nation can now “afford these cuts” given the “rising debt” and the “shocking state” of the budget deficit. This debate demonstrates perfectly how bad policy can be made when the Government fails to understand its options as a monopoly issuer of a non-convertible currency.
Labour market researchers are concentrating their minds at present on how fast the unemployment rate is rising. While that is what the main game is clearly about, there are also interesting trends happening with respect to labour force participation rates. I have been tinkering around with various aspects of this behaviour because I am interested in this notion that there might be wealth effects operating to reverse the usual falls in participation during a downturn. I am also interested in estimating what is happening to hidden unemployment. So here is a brief report on some work to date.
In today’s Melbourne Age we learn very clearly that the previous Federal Treasurer didn’t have much idea at all about how the economy actually works. While he continues to promote his years in office as the great period of fiscal rectitude, the reality is that after 11 years at the wheel he still failed to create full employment. His Treasury years, in fact, will be remembered for his Government’s wilful neglect of the disadvantaged and the on-going and incredible waste of human potential that this disregard created. Now, as he sits at the back of our Parliament smouldering about his lost chance to rule, he thinks he has something to say about the monetary systems. Its a shame he isn’t clever enough to know how little he knows.
Today, the right-wing media that we are blessed with have wheeled out another one of their favourite little hobby-horses which they repeatedly use to promote the deregulation of the wages system. They are attacking the Government’s roll-back of Work Choices, which is aimed at restoring appropriate wages and conditions for non-standard work. In this specific case, two opinion columnists from the two major publishing houses are claiming that the Government is undermining the future employment prospects of our youth. Well if they had anything new to add by way of evidence it would be good for debate. As it is they both merely recite the dogma from the latest OECD report Jobs for Youth: Australia – and I don’t need to remind readers that that organisation has form. Its reputation in the area of labour market research is somewhat dubious after a series of recants over the last few years when confronted with solid evidence to the contrary. Anyway, here we go again.
Today, I was investigating pay structures and then became interested in the emerging public debate about Members of Parliament pay, after the Remuneration Tribunal has recommended that Electoral allowances go up 17 per cent per year to $32,000. Every time the pay of parliamentarians is increased there is a hue and cry from the media. In this case, even the Green’s Leader and an independent MP have also rejected their “own self interest” to oppose the pay rises. However, the Government will not stop the rises going through even though last year the PM froze the base rate pay to lead the wage restraint path in these difficult economic times. This raises two questions: (a) Are our pollies just lining their own nest? and (b) Should wages growth be restrained in times of recession? My spare moments today were filled with those issues.
Today I am in Melbourne (my home town) presenting a workshop on skills development for the new green jobs economy which is a joint Victorian Government/Brotherhood of St Laurence show. But that is not what I am writing about here. Regular readers of billy blog will know that when I talk about budget deficits I typically stress two points: (a) that the Government is not financially constrained and therefore all the hoopla about debt and future tax burdens are just a waste of time. But just because the Government can buy whatever is for sale by crediting relevant bank accounts doesn’t mean they should not place limits on the size of the deficit; and so (b) given the federal deficit “finances” private saving, it should therefore be aim to “fill” the spending gap left by the private desire to save. If the Government does that then it can maintain full employment and price stability and move towards a more equitable society. So it is of importance that we have some idea of the size of this spending (or output) gap.
Yesterday, after sort of saying it the day before and getting close to saying it late last week, and having to wait for the central bank governor to say it first, our Prime Minister, then in quick lock-step, our Treasurer both said the R-word. What gives with this political posturing. The Opposition is largely irrelevant at the moment anyway. The reluctance of the Government to admit the obvious is repugnant. It has been very obvious that the economy is in very bad shape and had been heading that way for some years despite the chimera of prosperity – as the snowball of future recession was growing in size with the private sector debt and the fiscal surplus. Right now, the Government needs to introduce policies that really arrest what we have known for months – that employment is going south and unemployment heading in the opposite direction. Perhaps today’s terrible projections from the International Monetary Fund will sharpen their focus on large-scale public sector job creation initiatives.
There was a story in The Australian newspaper today entitled RED schemes are good written by a former minister in the Whitlam government in the early 1970s. He was extolling the virtues of the old Regional Employment Development scheme, which was a public works direct job creation scheme. He was suggesting such schemes may again find favour as the recession deepens. The RED scheme was a less generous version of the Job Guarantee and suffered as a result of its modesty. It was never based on any fundamental understanding of a modern monetary economy as as such was always a “defensive” program. Defending itself continually from the conservative, soon-to-be, neo-liberal critics. That made me recall my favourite conservative “put down” term – boondoggling and raking – which is used whenever direct public job creation is mentioned as a possibility. Then I recalled a letter that was written by the previous Federal Employment Minister explaining in 2004 why my Job Guarantee proposal was a crock. One thing followed another …
I have resisted writing about the so-called National Broadband Plan (NBP) up until now because the level of debate is quite frustrating. Once again, on a crucial issue that goes to the heart of national development, we are all being hoodwinked by spurious neo-liberal logic. Like all these debates, once it is constructed along an inapplicable macroeconomics, then all sorts of nonsensical points are raised that sound reasonable but are not. For example, the current debate appears centred on how the Government will ever be able to pay back the debt that will be incurred to build the network if consumers find it too expensive to use? On the face of it, the question is seductively sensible. But if you understand the choices open to the Australian government as the sovereign issuer of the currency then you will immediately recognise that the question and related concerns are fundamentally flawed.
Today I was looking through annual reports of the Australian Future Fund, which is an example of what is known the world over as a sovereign fund. I have been keeping an eye on the performance of the Future Fund not the least because it is so exposed by its stake in Telstra, which has gone downhill ever since the previous regime persuaded Australians to buy a stake in something they already owned!. Anyway, most people have been conned by the Future Fund concept – it is shrouded in lies and deceit. In general, the idea of a sovereign fund is based on a misunderstanding (deliberate or otherwise) of the way the modern monetary economy operates. So its time to debrief and make it clear that these policy choices by governments generally undermine public goods and full employment.
The dreaded NAIRU is still about! I was thinking – rather optimistically – that it would just disappear from whence it came! But sorry to disappoint. Some economists just won’t learn. Yesterday the ABS released the latest data from the Australia Treasury Model (TRYM) database. You can get it here. Among other things of great interest that you can find in that database, is the Treasury TRYM model’s estimates of the so-called NAIRU. Sounds scary. Well, it stands for the the Non-Accelerating Inflation Rate of Unemployment and has a central place in neo-liberal mythology. The NAIRU is an important component of the TRYM model and influences the way it produces economic outcomes and policy simulations. So how much reliance should we place on this important component of the policy making process. Answer: not much!. My conclusion: any model that relies on a NAIRU is a crock!
In the last few weeks gardening has entered the macroeconomic discourse again. All over the place – apparently – little green shoots are emerging which bode well for the future. But are there any actual signs? Recent data releases from the US and today’s Index of Economic Activity in Australia suggest that the green shoots are still somewhat subterrainean in inclination. The latest data confirms the message that last week’s Labour Force data sent very loudly – the product and labour markets are now starting to align in a very ugly way and much more fertiliser (organic) is needed in the form of government stimulus …. sorry to repeat it, but, preferably in the form of direct job creation.
I am currently researching (again) long-term unemployment and how it behaves. Neo-liberal economists typically consider long term unemployment to be highly obdurate in relation to the business cycle and thus a primary constraint on a person’s chances of getting a job. This was the assertion that underpinned the neo-liberal approach to labour market policy and which in Australia culminated in the privatisation of the public employment service and the establishment of the (failed) Job Network. It is one of the most disappointing aspects of current federal policy that the Government is intent of keeping this ideologically-driven supply-side approach going. While the Prime Minister continually claims that he wants to introduce evidence-based policy, his decision to retain the supply side neo-liberal approach to labour market policy fails the facts test outright.