British solution to unemployment – make them work for free

There was a story in the UK Guardian yesterday (July 29. 2012) – Million jobless may face six months’ unpaid work or have benefits stopped – that described how the failed neo-liberal British government is following the path that the conservatives followed in Australia in attempting to “manage” the unemployment that their flawed policy regime created. The Australian approach has failed dramatically and imposed considerable hardship on the most disadvantaged citizens in our midst. The same approach is unfolding in Britain and it to is already looming as a failure.

The Guardian article reports on a recent study by the Centre for Economic and Social Inclusion (CESI) in Britain which:

… predicts that over a five year period starting in June 2013, 1.78 million people will be unable to find work through the government’s current two-year-long employment scheme, the work programme, even if targets are met.

The scenario is this:

1. British government introduces austerity policies which deliberately create unemployment. Jobs vanish because aggregate demand contracts. People stop spending and firms stop investing because the fear of unemployment rises.

2. The same government then claims the solution to the rising unemployment is a Community Action Programme (CAP) – which advertises itself as providing “support” for the “Very Long-Term Unemployed”.

3. The CAP’s client base rises dramatically as a result of the austerity program which created the unemployment problem in the first place. The austerity program ensures that many of those that enter short-term unemployment transit as time elapses into long-term and then very long-term unemployment, thus, keeping a regular clientele for its CAP.

4. Faced with an explosion of people to be managed the British government then decides that those receiving jobseeker’s allowance (JSA) – the only thing between starvation and penury – are clearly unmotivated and need to work. Just the terminology is the same – the unemployed became jobseeekers!

5. Solution – force anyone on JSA for more than three years to work for no pay for 6 months. Refusal to work for the benefit which is well below the minimum wage then leads to cancellation of the said benefit.

CESI estimated that the British Department for Work and Pensions (DWP) – which oversees the scheme has dramatically under-estimated the number of unemployed who are being referred to its Work Program – by a factor of 19 per cent.

This is the program that the Government claims will find work for the long-term unemployed.

It all reads like deja vu to me. The conservative Australian government adopted the same strategy when it was elected in 1996. Its privatised public employment service – the so-called Job Network – was a refinement of the trend towards mean-spirited government that led to the abandonment of a commitment to full employment and the retrenchment of a comprehensive welfare state.

The Job Network was epitomised by the government’s pursuit of the diminished goal of full employability, which constructed mass unemployment as a supply-side problem rather than a system-level failure of the economy to provide enough jobs for those who desired to work at the current wage rates on offer.

Under full employability, the government no longer ensured that employment growth matches labour force growth but focused, instead, on getting individuals ‘work ready’, should there be jobs available.

It was the exemplar of the OECD’s Jobs Study approach which focused on supply-side activation – a fancy word for blaming the victims of a demand failure and threatening them with starvation should they not agree to submit to the pernicious management regime (relentless dole diaries, meetings with case managers etc) which included working for free.

The Job Network was introduced at at time when it the macroeconomic constraints on its effectiveness were substantial. First, the Australian economy had failed to generate sufficient employment since 1975 to match the preferences of the labour force. Second, gross flows data revealed large inertia in all labour force categories and average unemployment duration rising to around 52 weeks and inversely related to the demand side of the labour market.

These development were accompanied by a policy of deliberate fiscal drag (pursuit of budget surpluses) which created the demand failure. The situation in Britain at present is very similar.

The most salient and empirically robust fact about the performance of the Australian economy at the time the Job Network was introduced was that actual GDP growth was not been strong enough to achieve and sustain full employment. As a consequence, the low point unemployment rate had ratcheted upwards over successive economic cycles.

The same situation exists in Britain now.

The Australian government’s response was to the rising long-term unemployment was to introduce a privatised management scheme. They created a parasitic private sector fringe – the Job Network – in effect, a new industry, whose product was unemployment.

The conservatives who took office in 1996 were not the founders of the scheme however. The neo-liberal ideology had been infused in the so-called workers’ party – the Labor Party – which is also in government at present.

The creation of a competitive market for the provision of employment assistance began with the “Working Nation’ White Paper of 1994, which was a belated response to the massive 1991 recession – that was caused by failed government policy.

Under the Keating Labor Government, one third of the public assistance effort for the long-term unemployed was given to contractors in both private and not-for-profit agencies. This quasi-market was subject to oversight by an independent government regulator and agencies were paid on a ‘fee-for-success’ basis.

This was the basis for the “new industry” – profiting from unemployment.

The Government argued that a competitive model would improve the quality and flexibility of services provided to the most disadvantaged job seekers.

Agencies provided individual case management and were able to refer the long-term unemployed to a range of jobs and subsidised work and training programs provided under the government’s Jobs Compact.

The election of the Coalition Government in March 1996 saw the abolition of the Jobs Compact programs and thoroughgoing reforms to labour market assistance.

The Working Nation strategy was derided as an expensive policy failure unduly concerned with process, and the continuing role of the central bureaucracy (the CES) was seen as antithetic to innovation and the tailoring of interventions to meet the needs of heterogeneous job seekers.

The Government identified cost cutting and the tighter targeting of support as explicit objectives of reform implying an ability to deliver both better and cheaper assistance.

Appropriations for Labour Market and Training Assistance were cut from $2.16 billion in 1995-96 to $1.2 billion in 1997-98. However, the principle goal of reform was defined as delivering better and more sustainable employment outcomes for job seekers underwritten by a more competitive, flexible and performance-based approach to the delivery of employment assistance.

In 1998, the focus on outcomes and the use of competition to drive greater efficiency and choice underlay the dismantling of the CES and its replacement by Centrelink and the Job Network.

A 2002 report by the federal Productivity Commission described the Job Network as a ‘managed’ or ‘quasi’ market for the provision of subsidised employment services, which aims to mimic the activities of competitive markets by allowing scope for competition, flexibility in service delivery, rewards based on outcomes and some degree of choice for the unemployed.

First, the Job Network comprises multiple independent agencies, each having a share of a common system of public service provision. Second, the agencies will be a mix of profit and not-for-profit organisations; and third, job seekers do not purchase services but have services purchased on their behalf by government.

Under the Job Network, the government was a purchaser and regulator of employment services, not a direct provider. The role of government was to award contracts through a competitive tender process, regulate providers, determine standards, and to collect and disseminate performance information.

However, this perverse “quasi market” soon revealed it was not immune from market failure.

There was policy schizophrenia in expecting an outcome-based funding model for employment services to deliver ‘better and more sustainable employment outcomes’ in the absence of concomitant policies to alleviate the macroeconomic constraint and create real employment opportunities.

In a highly demand-constrained labour market, characterised by persistent unemployment and marked regional disparities, it was always unclear how the supply-side focus of the Job Network could be effective.

It was also the case that a system centred on outcome payments in which providers had discretion with respect to the level and nature of assistance afforded to job seekers created incentives for ‘creaming’ and ‘parking’.

The Productivity Commission’s Independent Review of the Job Network in 2002 found that the payments structure to Job Network providers has led to a substantial proportion of Intensive Assistance recipients being ‘parked’ – that is, taken onto the private agency books to get the first incentive payment but then ignored because the prospects of getting any further payments (for successful job placement) were bleak.

Job seekers with the greater chance of achieving a payable outcome were targeted while those in greatest need of assistance (with low employment probabilities) were left unsupported.

The lack of correspondence between needs and services reflected the difficulties associated with specifying objective outcomes and performance indicators that will allocate resources according to an ordering of societal needs; and relate to both the quality of assistance provided and the quality and sustainability of jobs attained.

The prices attached to employment outcomes also did not adequately reflect all the costs of unemployment which include not only income and output loss, but the deleterious effects on self confidence, competence, social integration and harmony, and the appreciation and use of individual freedom and responsibility.

Subsequent evaluations of the effectiveness of the Job Network showed it failed to provide sustained employment prospects for the vast majority of the case load.

One of the features of the system that was most repugnant was known as “breaching”. The Government of the day (in 2002-03) reacted to the early criticisms of its failed program by reinforcing what it called the Active Participation Model – aimed at reducing the outlays that were rising as unemployment continued to increase in the face of the on-going failure to stimulate aggregate demand.

The Government argued that the Active Participation Model would ensure the case loads carried by the Job Network agencies would decline.

Underlying the new approach to “mutual obligation” was the view that improving the effectiveness of the employment services system depended on changes to the system itself, and not on the expansion of employment opportunities.

The enhanced ‘effectiveness’ of the system was sought by a reconfiguration of the payment structure and greater integration between Job Network services and mutual obligation activities.

As a result, the ‘Job Search Training’ and ‘Intensive Assistance’ programs were recast as ‘Intensive Support’ and ‘Customised Assistance’. A job seeker who remained unemployed after 12 months would receive Customised Assistance (CA) for a further six-month period.

After that if the individual had not found work they would be required to undertake another Mutual Obligation activity, which included Work for the Dole programs.

The extant data at the time showed the Work for Dole programs to be a categorical failure in providing a bridge to paid-work in the open labour market.

Data on labour market assistance outcomes for the year to March 2002 showed that three months after completing Work for the Dole just 11.6 per cent of participants were in full-time work. Half of the participants remained unemployed or had withdrawn from the labour force while one-quarter were in receipt of further assistance.

Further, the Government introduced penalties that would be imposed on the long-term unemployed people found to be – in the Government’s assessment – not genuinely seeking work.

The Government gave the Job Network providers the power to identify and punish unemployed people that the Government believes are deliberately avoiding work.

Once identified, the Job Agencies were also able to force these workers to complete double the hours in work-for-the-dole programs and issue on-the-spot suspensions of payments for unemployed people who failed to attend interviews.

This penalty system was called breaching. The data that emerged was shocking. There was an escalation in the number of people subjected to the loss of benefits.

The evidence was that Job Network providers acted capriciously and had no specific procedural guidelines for making decisions about breach recommendations leading to inconsistent treatment of the unemployed within a single organisation.

We learned that unemployed workers who failed to attend a first interview were more consistently and readily breached than others. Rules of natural justice were not being correctly applied in all instances (some unemployed were subjected to unjust decision-making processes).

Job Network agencies used strategic breaching to remove potentially “non productive” unemployed from the books – which meant – workers who they felt they were unable to secure any further placement funding for.

Moreover, those that were being breached include schizophrenics who were prone to episodic illness and unable to attend interviews on days when they were suffering the most; homeless people who were unable to access mail at old addresses informing them of an activity test interview and other disadvantaged citizens.

The reality is that the new compliance regime that the Australian Government introduced did not address the substantive cause of the mass unemployment – the failure of the economy to provide enough jobs.

It established a new industry – with private parasites pursuing a profit motive by meeting perverse performance targets specified in their contracts. These agencies were meant to support the unemployed but quickly assumed a police-type role imposing fines and disciplining the unemployed.

The system failed to achieve any of its stated purposes which were, of-course, not the real roles that the government was interested in pursuing anyway.

The current British government is following Australia down this very sorry path.

The bias in seeing the private sector as the source of recovery is not confined to neo-liberal, market-oriented economists.

Many progressive economists still choose to operate in the same blinkered world. Consider the latest Op Ed in the New York Times by Paul Krugman (July 29, 2012) – Crash of the Bumblebee – where he correctly notes that “Europe’s single currency is a deeply flawed construction” because it has no capacity in its present form to ensure necessary fiscal transfers are made within the monetary system to defend states which fall foul of declining aggregate demand.

Paul Krugman constructs the solution to the current Euro malaise in this way:

The answer is fairly clear: policy makers would have to (a) do something to bring southern Europe’s borrowing costs down and (b) give Europe’s debtors the same kind of opportunity to export their way out of trouble that Germany received during the good years – that is, create a boom in Germany that mirrors the boom in southern Europe between 1999 and 2007.

The first part of the solution is crucial and the ECB has the capacity to “bank buy lots of southern European bonds to bring those borrowing costs down” and recent statements by the ECB boss suggest they might be prepared to use that capacity even though it will bring the ECB into direct conflift with the Germans.

In his July 26, 2012 speech in London, ECB boss Mario Draghi tried to convince the participants at a Global Investment Conference that the Eurozone was “much stronger than people acknowledge today” and the “progress has been extraordinary in the last six months”.

Which to an outsider raises question of what planet he is on.

He continued though with an implicit deference to the fact that his statements are hardly convincing by saying that:

… the euro is irreversible. And it’s not an empty word now, because I preceded saying exactly what actions have been made, are being made to make it irreversible … [and to reinforce that view in the private markets] … Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.

His assessment “that it will be enough” depends on what they do. But the fact is that despite the flawed structure of the monetary system the Euro bosses designed, the ECB remains capable of acting as both a monetary and fiscal authority in the Eurozone and ensuring that the lack of currency sovereignty among member states is not dysfunctional.

To some extent the ECB has been performing this role via its Securities Market Program (SMP), which has seen it purchase billions of government debt issued by vulnerable Southern European governments. The fact they have been buying this debt in the secondary bond markets (that is, after the primary issue has been purchased by others, mostly banks) is neither here nor there.

The primary tendering institutions knew that they would be able to offload the debt to the ECB once it was issued. These pathetic little hurdles that politicians and central bankers place in their own paths to give the impression that they are obeying fiscal constraints don’t help anyone.

The fact is that ECB has violated the spirit if not the law of the monetary system (wich was vehemtly biased against bailouts)

Which means it has to be prepared to fund the deficits that the member states are running which will include the discretionary policy decisions these states should take to engender growth.

But when Mr Draghi says that the ECB will do everything it can he is not intending to do “everything” if the current form is anything to go by. The SMP is within a straitjacket of the austerity that is being imposed (by the Troika which included the ECB).

The imposition of the austerity programs constitutes a sort of chase one’s own tail and we have seen over the last few years how the crisis has worsened but in a saw-tooth sort of pattern. The bond markets give up on a nation and bond yield soar, the ECB steps in and the leaders conclude publicly that the crisis is over – only to see it re-emerge soon after as the next piece of austerity-laden economic news signals the failure of the system.

But it remains clearly true that the ECB can drag this crisis out indefinitely by ensuring there commercial banks do not fail (and the LTRO program is sufficient in that regard) and ensuring bond yields remain within some range (and the SMP and LTRO is sufficient in that regard). The solution to the crisis goes well beyond keeping the private bond markets at bay though.

Growth is required and that means rising budget deficits in the current context. It is that part of the “real solution” that none of the political and economic leaders within the Eurozone will admit and action.

Paul Krugman though considers this growth priority within a very narrow lens. He clearly thinks it should occur through international trade with the Germans exporting less and importing more and the more afflicted Southern nations doing the opposite.

The Euro leaders think that same thing and so the only dispute between them (as arch-type neo-liberals) and Paul Krugman (the popular progressive voice) is in the way that this trade-led recovery can be motivated.

The Euro leaders want it to come about by impoverishing the deficit nations so much – via wage cuts and other cost cutting means – that pennies becomes millions – and the competitiveness drives rising exports.

Paul Krugman thinks it should come about by Germany being forced to increase domestic demand, presumably by increasing real wages growth. He thinks this will require “higher inflation” in Germany.

The reliance on the private sector to achieve the recovery at a time when it is unlikely the private sectors under either strategy have the capacity to generate enough new aggregate demand to make the recovery bind is the thing that the Euro leaders and Paul Krugman share.

I agree with Paul Krugman that the “German model” (stifling domestic demand and relying on the spending of other nations via exports) is not a solution for the monetary union in general. It didn’t even work to the benefit of the majority of Germans.

It required workers in Germany accept much lower real standards of living and job security while their hard work was exported to other nations, who ultimately could not sustain the necessary growth.

But I see a more obvious solution that recognises that the private sectors are holding massive levels of debt against housing stock that is no longer as valuable as it was at the height of the speculative mania. It recognises that growth requires aggregate demand escalation which is unlikely to come from these heavily indebted private spenders.

It recognises the deflationary impact of the rising unemployment in Europe, which places a further brake on the capacity and willingness of the private sector to go further into debt to drive growth.

It also recognises that the ECB has the capacity to fund the growth via fiscal expansion programs designed and implemented by the public sector in the member states.

Why does Paul Krugman eschew public-led recovery? Perhaps because it is not politically feasible in the current European climate. But then neither is his suggestion that German inflates to give scope for Greece and Spain to export their way out of crisis.

Paul Krugman then asks three questions and provides his answers.

1. “could the euro be saved? Yes, probably”. My answer is yes, definitely (given the above discussion).

2. ” Should it be saved? Yes, even though its creation now looks like a huge mistake”. He thinks it would amount to a failure of the “wider European project” if it failed. My view is different. The failure of the Euro at present is endangering the “wider project” and once again invoking the nationalistic, anti-democratic forces that have led Europe to internal conflicts and other horrific developments in the past.

My view is that the neo-liberal political program is not what the “wider project” was about and is derailing that project. The design of the EMU was a “huge mistake” but that only reflects the neo-liberal mindset which remains dominant now and continues to seek solutions that are dysfunctional and destructive to European unity.

European political unity does not require a monetary union. And unless they abandon the fiscal rules and austerity mindset, monetary union will always work against achieving sustained prosperity for the European population, which is essential for tolerance and acceptance of cultural differences.

Austerity is breeding increased cultural intolerance not harmony.

3. “But will it actually be saved?” Paul Krugman thinks it is “very much in doubt”. My view is that the elites will continue to muddle along with these ad hoc measures and the ECB will continue to keep the system from the brink of collapse. But the rising social instability that will accompany the harshness imposed by the fiscal austerity will eventually become unbearable.

It may be that the on-going deficits – that the austerity will not turn to surpluses – and which are effectively being funded by the ECB (via the LTRO and SMP) will be sufficient to underpin enough aggregate demand to keep some lid on unemployment.

But then one observes open unemployment now rising above 25 per cent in Spain and the conclusion that this is coming to a head is very compelling. Nations cannot endure that level of unemployment for extended periods without serious political consequences.

And I haven’t even mentioned the worst aspect of all of this folly – that youth unemployment is rising over 50 per cent in several nations. That is a time bomb for the future that will ensure the Euro crisis of today is reverberating in 20 years time – with future workers less productive and less resilient than their parents are today.

Conclusion

Sorry tale all round.

Alternative Olympic Games Medal Tally

My Alternative Olympic Games Medal Tally is now active.

I update it early in the day and again around lunchtime when all the sports are concluded for the day.

That is enough for today!

(c) Copyright 2012 Bill Mitchell. All Rights Reserved.