The public macroeconomic mind map matters

I am currently in Darwin, which is in the Northern Territory of Australia (see map below). I will report on developments here in due course. But knowing that I would not have time to write a blog personally today (meetings and travel oblige!) I asked Victor Quirk, our guest blogger to offer some of his ideas on matters economic. He very kind obliged with the following essay which I think you will find very interesting. So thanks to Victor. I will be back tomorrow talking about turncoats who turn out to be nothing of the sort. Over to Victor …

The public macroeconomic mind map matters

Modern Monetary Theory (MMT) describes how the monetary systems common to most countries, except those of the Euro zone and a few others, offer far greater opportunities for enhancing social equity, sustainability, and productivity, than the people managing them either comprehend or are willing to admit, for reasons best known to themselves.

The good news is that this story is achieving noticeable momentum, and seems to draw new adherents to it every day, largely due to the solid empirical case for it built over many years by people like Professor Bill Mitchell here in Australia, and Randy Wray and Warren Mosler in the USA, and the growing number of articulate advocates around the world, like Marshall Auerback, who are getting this argument on to the public agenda with great effectiveness.

My personal interest in MMT has been in the theoretical basis it provides for re-establishing full employment in mixed economies, having worked for many years counselling, training and otherwise assisting people who were unemployed.

I became very aware of the politics of unemployment as an unemployed youth in Melbourne left to the tender mercies of the Fraser government (1976), when the thirty year policy of maintaining full employment (2 per cent unemployment) was deliberately abandoned in the mid 1970s.

The MMT movement, as regular readers of Billyblog are familiar, holds that national governments of countries with ‘modern monetary systems” are not constrained to spending only what they first raise in revenue, as are all other economic actors within these systems.

An inference I draw from this is that such governments do not make cuts to public spending because of shortages of money, as they routinely claim to the public, but because they are attempting to produce some other macroeconomic effect, like using unemployment to lower labour costs.

They always have the financial means to mobilise idle productive resources. They could, for example, provide a pool of minimum-wage public sector jobs to as many unemployed and underemployed people as want them, and thereby eliminate labour underutilisation.

This policy proposal arising from MMT, the Job Guarantee, is freely available to them to implement, and provides a vehicle for also addressing a range of currently intractable social and environmental problems in the process, with a minimal impact on inflation. Which begs the question: why don”t they even consider it, or try it?

Elsewhere, I have outlined various episodes in the history of opposition to full employment, being the central focus of the Phd I completed under Bill’s supervision.

I present evidence that unemployment is deliberately preserved as a means of disempowering working people, and that in order for it to have the desired effect, the unemployed have to be kept in as miserable condition as possible. In order for governments to avoid electoral backlash for doing this, they need to fabricate myths about the macroeconomy, particularly about the causation of unemployment, to camouflage their agenda.

Modern Monetary Theory is a very useful tool for exposing the lie of these myths, as we daily witness in BillyBlog.

An example of such mythmaking was provided in Britain just the other day, when the minister for disabled people in the Department for Work and Pensions, Maria Miller, said she believed the unemployment problem was down to a lack of “appetite” for the jobs on offer, that with over 400,000 job vacancies available, there was hardly a job shortage.

While the vacancy figure is to some extent a function of the speed at which the system, including employers, process applicants, were these vacancies all simultaneously filled there would still be 2.2 million Britons officially unemployed. Is she not capable of understanding this? Did none of her aides have a calculator handy?

No, she’s performing the standard task assigned to welfare ministers when governments are managing the electoral risk of ramping up unemployment and putting more pressure on the unemployed, particularly disabled unemployed people.

She is required to undermine public sympathy for the unemployed by shifting responsibility for their situation to them in order to distract attention from the real causation (insufficient public sector employment and spending) and to justify the government subsequently administering “tough love”, as she evidently intends for the disabled.

Senator Margaret Guilfoyle and Employment Minister Tony Street played much the same role in the Fraser Government of 1975-1982.

In a real sense, the level of unemployment is largely determined by what the public understand to be its cause. If the public are led to believe that unemployment is something akin to an act of God, like a flood or a drought, or the fault of the unemployed, then ruling elites have the scope to use it as a social engineering tool, just as they have done for centuries.

If, on the other hand, the general public understood that their government had the financial power to employ the unemployed, as countries like the UK, USA, Australia and many others do, how would governments resist calls to at least pilot schemes along the lines Bill and his colleagues propose?

After all, it was because the public understood the connection between public sector employment and unemployment that governments were forced to preserve full employment for the thirty years following the Second World War, in Australia and elsewhere.

Public awareness of aggregate demand management forced the Menzies Liberal government, that was privately hostile to full employment, (having opposed its establishment while in opposition during the war because they resented the bargaining power it conferred on workers), to still use large scale public sector employment to minimise unemployment, for fear of the public dumping them at the first opportunity had they failed to do so.

All this changed in the mid 1970s when the public macroeconomic mind map around the world was determinedly remodelled, led by a new regime at the OECD, and by a US economic education campaign heavily funded by US multinationals and conducted in several countries, including Australia, that gave the political elites a new story about how the economy worked, and which denounced aggregate demand management as no longer workable, claiming it was incompatible with efforts to stem and contain inflation.

Their campaign was assisted by the quadrupling of the price of oil in 1973-74, that sent inflation rates up around the world. Under cover of this “exogenous shock”, governments around the world who wished to abandon full employment did by so by cutting public sector jobs and expenditure, while blaming the resulting unemployment on the world crisis.

This scenario was actually outlined in the 1970 OECD publication “Inflation the Present Problem”, three years before the oil shock.

You”ll find more of this history in my previous guest blogs.

What I wish to consider today are some of the less obvious consequences that have flowed from the abandonment of Keynesian aggregate demand management in the 1970s, that continue to impact adversely on our lives here in Australia as elsewhere.

The strategic purpose of ‘small government”.

Significantly, among the notions that took hold under the new macroeconomic model, and which remain with us today, was the preference for private sector service provision over that of the public sector, based on assertions of the superior efficiency of the private sector. This was the justification for ongoing reductions to the size and capacity of the public sector as an end in itself.

This has increasingly manifested itself in various forms of ‘small government” fetishism since the 1980s, in the form of privatisation, outsourcing, public-private partnerships (PPPs), “user pays”, and general public sector retrenchment. This “philosophy” has served an important strategic purpose in undermining the prospect of a resumption of public sector employment as a means to control unemployment, but at what cost?

While running down the public sector affords numerous opportunities for transferring public wealth to private hands, it has seriously undermined the capacity of governments to govern. Governments pursue these strategies unabated, irrespective of the number that end up delivering poorer results for larger than anticipated outlays.

We need not look too hard for examples. In the Sydney Morning Herald article (February 6, 2012) – Socialising the losses on another botched project – Jacob Saulwick reported that a PPP to build trains for New South Wales now requires a government bailout.

The whole point of public private partnerships is for the private sector to take on the risks, and also some of the reward, for building major infrastructure. But today’s bailout of Reliance Rail elegantly undermines that logic, lumping the taxpayer with a $175 million bill because the project – to build and maintain 78 trains – had been botched so completely…

It is easy to blame the former Labor government for this mess, and that blame would be deserved. But consider also what role the bankers who put together Reliance Rail, and the main company behind it, Downer EDI, played.

They aggressively pitched for a lucrative government contract, under-bidding other interested manufacturers. They won the contract, and the financiers paid themselves upfront success and other fees of $50 million. And then they were incapable of filling the order. The financial crisis blew up Reliance’s debt-heavy financing model.

And the subcontractor they got to build the shells of the trains, Changchun Railway Vehicles, had never taken this type of order before.

The relevant minister explained the bailout in these terms:

The reality is that without this agreement, NSW Treasury estimates that the project could be facing up to $250 million in break costs and up to $1 billion in replacement funding. This would be a direct hit to the state’s balance sheet and see funds diverted from roads, school and hospitals.

Of course, the private sector is more efficient!

Around Australia today, as in many parts of the world, government services are increasingly being outsourced to contracted providers and government departments run down to the extent that they comprise little more than contract managers and web sites, with large numbers of their staff on short term contracts and in other forms of precarious employment.

Anecdotal evidence suggests fixed term contract employees spend considerable time positioning themselves for the next contract, while more generally, the capacity to govern in this remote way becomes less convincing as departmental operational experience of the service they are contract managing becomes a dim memory.

Example: Australia’s public employment service

Consider what has flowed from the outsourcing of the Commonwealth Employment Service (CES) in 1998 by the Howard government, in accordance with plans drawn up in 1993 by a McKinsey and Company consultant (Dr Paul Twomey) for the Keating Labor Government.

The Job network, as the privatised system was first called, entailed various private and non-profit groups competing for contracts that specified outcome payments for defined services, such as placing a person in a job, or preparing their resume, or training them in job seeking.

It was made clear in the first contract that future contracts would be judged on the capacity of an agency to “reduce its clients dependence on welfare”, which could be achieved by getting them a job, but more easily by recommending they be cut off their benefits for breaching any of the conditions of their benefits, including those imposed on case managed clients by the agencies themselves.

The Job Network was, after all, primarily designed as a breaching machine,(“breaching” being the colloquial term for cutting people off benefits) after CES staff proved insufficiently vigorous in their efforts to cut people off their benefits, as demanded of them by the Hawke and Keating Labor governments.

Privatisation made employment service staff job security dependent on their propensity to breach, thus creating a more compliant employment services workforce. With so many people being cut off their benefits around 1999-2000, it created a much reported poverty epidemic, prompting some abatement and modification to the forms of punishment inflicted.

While this system is cheaper, it delivers a fraction of the range of services once delivered to employers and job seekers by the CES. Neither does it capture the same quality of informed local labour market intelligence, as the CES once did.

For example, they now cannot tell how many actual vacancies are in the system because of multiple listings and phantom vacancies.

An Australian Productivity Commission study – Independent Review of Job Network – Productivity Commission Inquiry Report – released in September 2002, reported that it failed to deliver better quality services, despite claims that it would (being the private sector), but supported its continuation on the basis of its excellent “compliance effects”, that is, the number of people it cut off income support.

Yesterday, the Minister (Kate Ellis) announced yet another investigation into fraudulent claims by contracted employment services providers, who year after year are exposed for claiming payments for services they never delivered. Contracts are redesigned, yet the issue never goes away.

Friends and acquaintances that have been forced to attend these services in recent times are uniformly disgusted with the lack of assistance they get, and the constant reminders to inform their “provider” should they find work for themselves.

When they do, according to press reports, the “provider” (of nothing) calls the employer to confirm details of the placement and then lodges a $2000+ claim to the government for making the placement. The practice has been rampant throughout the system since its inception.

The non-profit sector is just as complicit in these practices as the private operators. In the Sydney Morning Herald article (December 12, 2011) – Catholic Church accused of multibillion-dollar job rort – we learn that:

… the Catholic Church’s employment arm [LETS] has been systematically rorting the taxpayer-funded welfare-to-work program, defrauding large sums from the multibillion-dollar scheme.

According to notes taken during a formal training session in May, management at one western Sydney branch told staff, where possible, not to record on the department’s file when a job seeker found their own work. Instead the manager encouraged staff to hide those jobs from the department, with the result that LETS would obtain a higher fee.

Staff were told that a single trusted manager would handle “found own employment” jobs and “broker” them to the department’s software system. Confidential records also indicate LETS has issued thousands of dollars in wage subsidies to employers that do not meet the criteria for such payments.

Employers and the people compelled to use these agencies as a condition of benefit receipt, are not aware of what generates a payment for the agency, or how much the provider gets for doing what, and subsequently communicate with employment services about their situation oblivious of the economic incentives driving the employment service representative’s agenda.

So while the CES costed more, it did more, in terms of the range of services and programs it delivered. Before it was repeatedly undermined in the 1990s, the CES took pains to create a highly skilled staff, and supported the work of other organisations throughout the community.

Job Services Australia costs less, but delivers less, and a smaller proportion of that cost is directed into the provision of service to either employers or unemployed people, because it is primarily focused on pocketing the surplus.

What is abundantly clear is that the unemployed are pawns in a game played by the agencies to extract money from the government, they receive poor quality advice and support, from poorly trained and under resourced staff, completely focused on low-cost revenue yielding activity. Its had numerous enquiries and reconfigurings, and yet successive governments have consistently said the system is working well.

Biosecurity

On another front, I have recently been talking to people around Australia engaged in various capacities with the issue of biosecurity, which is generally about protecting Australian agriculture and natural environment from invasive plants, animals and diseases, arriving from overseas.

While the Howard government notoriously traded away quarantine standards in free trade agreements, thus exposing the country to greater biosecurity risk, state government biosecurity departments have been progressively downsizing and cutting services for a decade, on the spurious basis that the private sector will fill the gap.

Biosecurity “extension officers”, who once were located in every part of the country in certain states, and who built up trusting relations with farmers and other land managers in their districts, used to visit farms and investigate weed and other infestation outbreaks, and provide practical hands-on advice to deal with the problem.

They would get plants tested, explain to farmers how control methods worked, and where the farmer couldn’t manage the problem, the extension officers would deal with it promptly themselves and send the farmer the bill.

As these departments cut back on staff, and officers were required to cover four or five districts instead of one, they were unable to affect the same degree of surveillance. They were also ordered not to do any hands-on work themselves, but simply order the farmer to get in a private consultant.

It was a common story that months go by, with repeated inspections of the property revealing the pest spreading to other properties, but despite the farmer’s calls, the consultant would check it out when he had a few jobs to do down that way, to make the trip worth his while.

The failure to have enough staff to allow for mentoring of novices leaves inexperienced university graduates in the field engendering little respect from farmers when ordering their compliance according to text book prescriptions, where formerly, experienced staff offered a range of compliance approaches to suit the farmer’s situation and the specific conditions of their land.

The turnover in contracted staff, where former permanent staff operated in the same districts for decades, coupled with the directive that staff not engage in practical work, means that few of the modern extension officers have the same depth of practical knowledge with which to advise land managers.

Others speak about the greater havoc being wrought on our natural environment by invasive exotic species being brought in by the horticultural industry, without any effective industry or government involvement in addressing the problem.

Considerable disquiet is expressed at the failure to adequately monitor the extent of the damage being done. People are talking about the problem costing billions to address if left unchecked for a few more years, as meanwhile invasive species transform the Australian landscape, including its ability to revive after bushfire.

In all these conversations almost everyone expressed the view that we are not coping with the mounting invasive species infestations in this country, and yet governments are continuing to cut staff.

Skills Shortages

Bill and I collaborated on some studies into the question of skills shortages a few years back, which I followed up with a pilot project for the university looking at addressing skill shortages in several local industries by providing visiting international post graduate engineers and other professionals with part time work. I have also been doing some careers counselling work for the university careers service.

The picture that emerges is that historically and internationally, with a few exceptions due to factors specific to certain national business cultures, the private sector has never trained enough skilled workers to meet its own skill needs. Australian industry has been reporting chronic skills shortages since the 1980s, and are clear that this impacts on their capacity to compete and innovate.

Governments respond to their calls for more skilled workers by agreeing to import skilled foreigners, who I’m sure need work too, but this is often not very satisfactory owing to the differences in industry standards and approaches, communications issues etc. It is also fairly nonsensical in a country that currently leaves 12 per cent of its willing labour supply unutilised.

Governments also tinker with the vocational and higher education systems, that they also have downsized, casualised, and dumbed-down, in order to increase throughput of people with pieces of paper, ignoring the difficulties many graduates experience obtaining work in many areas, because employers are seeking people with experience.

Employers do this because education and skill are related but different things. Skill includes a considerable amount of tacit knowledge, that is, insights gained through doing and experiencing, rather than through words.

The acquisition of skill requires that a novice be given skilled work to perform under the close supervision of a skilled practitioner, as in the case of acquiring the skill to drive a car.

Apart from the loss of the skilled practitioner’s output, the training employer carries the risk of inexpert performance, which could result in death or injury, loss of customers, damage to equipment, wastage of expensive materials, etc.

Employers would happily bear the cost of this investment if they expected to reap the dividend, but if the skills they have helped to inculcate in the novice are of value to any other employer, they must pay the market value for that workers skills lest they be poached.

The obvious strategy for them to adopt is to let other employers do the training, and bear the risks, and buy the skilled labour from the market at the rate they in any case would have to pay. Because most employers take this approach, too few novices are finding training opportunities, and too few skilled workers are being produced as a result.

What has this to do with the public sector?

During the thirty year period of full employment, Australia underwent a considerable degree of development and industrialisation, and although unemployment was kept below 2 per cent, it managed to meet its skilled labour requirements.

How? Because the public sector was deliberately made to train more skilled tradespeople and professionals than it required. It was a net supplier of skilled workers to the private sector.

When the public sector was downsized, outsourced and corporatized, when it was made to adopt the more efficient practices of the private sector, it ceased to perform this function.

During the period of full employment, public housing construction developed housing industry workers, public utilities, railway departments, etc., trained thousands of trades apprentices and professional interns, who then made their way to the better remunerated private sector.

That is why the chronic and intransigent skill shortages that so bedevil Australian industry emerged in the 1980s, as the public sector training positions dried up under the weight of public sector cuts.

Conclusion

Why is the macroeconomic framework we use is important?

The macroeconomic framework that the average person applies to the analysis of alternative policies, irrespective of its coherence, determines what they understand to be the intent and likely impact of those policies on themselves, and thus determines the likelihood of their support.

One only has to consider the billions that are spent each year around the globe in producing and disseminating free market, small government ideology, to appreciate how concerned those making these investments are to keep their preferred model of the economy prominent in public discourse.

Public acquiescence with their agenda is critical if they are to keep being allowed to do what they are doing, despite the mounting evidence of the systemic failure in public provision it produces.

It took something as concrete as actually experiencing full employment, engendered by defence preparations for the Second World War, to convince working Australians that, despite decades of conservative denial, their Commonwealth government did have the financial capacity to effectively eliminate unemployment.

Once this proposition was established, the strength of public comprehension of that point forced governments to maintain full employment for thirty years.

In the absence of a government somewhere again demonstrating this principle to the world, and although advocates of MMT may have fewer resources at their disposal to promote their case than do the paid advocates of conservative interest, they have the advantage a more positive, interesting and truthful story to tell.

By telling it they help reshape public awareness of how we”ve been short-changed by our political leaderships for decades, and thereby contribute to the growing momentum for change.

Cheers!

Victor Quirk.

Bill’s location

Darwin is a very fascinating city because it is right on the Australian frontier with Asia. It is a capital city but very remote and about 6 hours flight away from Newcastle. It is a shorter flight to Java etc than it is to Sydney/Newcastle on the East Coast.

That is enough for today!