Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
There was an article in this morning’s Melbourne Age (September 26, 2012) by former Australian Federal Finance Minister Lindsay Tanner, which talked about the structural decline of social democratic parties around the world. Recently I was in the Netherlands for the Dutch national election and the Labor Party could not gain office and is likely to go into coalition with the Conservatives (what?) – the common bond – their support for the Euro and fiscal austerity. What set of circumstances would see what should be polar opposite political forces in coalition? And then there are the LDP and the Tories in the UK. And the debate in the US is not about a deficit versus a surplus but how quickly to get into surplus. The same goes in Australia. The policy debate is marked by claims from both major parties that they will generate bigger budget surpluses quicker than their opponents. The social democratic political tradition is fading because the parties have become indistinguishable from the conservatives in economic policy. They are all neo-liberals now and that is an ugly option for those with a progressive bent who have traditionally supported the social democratic parties.
The Melbourne Age article in question – A cynical Labor has lost its soul – is a full-frontal attack on the party that Lindsay Tanner served for all his political life.
For overseas readers, the Labor Party (now in government) began as the political arm of the trade union movement after severe attacks on union rights by employers in the big strikes in the late C19th. It was a classic social democrat party with socialism as a key national policy platform. It opposed state aid for private education, promoted full employment with liberal social transfers and guaranteed trade union rights (freedom of association etc).
The early roots of the party come out of the development of trade union in the 1860s before federation. The problem was that the power elites controlled the legislature and thwarted the attempts by unions to improve the circumstances of the workers.
Then came the 1890 maritime and shearers’ strikes which were dealt with harshly by the employers. As a response to the industrial defeat at the hands of capital, the striking shearers formed the Australian Labor Party in 1891.
By 1899, the first Labor government took office in the State of Queensland. The federal organisation formed in 1901 and ran a platform of democratic socialism although the substance of that ideology has always been questionable despite the popularism.
The commitment to socialism was not very well defined though and the party was not dominated by left-leaning trade unionists. It is often thought that trade unions provide most of the funds for the ALP while the corporate sector funds the conservatives. Examining the data will give you a very different picture of the funding sources and distribution of the major parties.
While a few years old now (2006) this study – Political finance in Australia: a skewed and secret system – will realign perceptions of these matters.
The fact is that the corporate sector provide a higher proportion of the ALP funds than the unions and only slightly less in absolute terms than what it contributes to the conservatives.
Vladimir Lenin made the following observation about Australia in 1913 (In Australia, Collected Works, Progress Publishers, Moscow, Vol. 19):
What sort of peculiar capitalist country is this, in which the workers’ representatives predominate in the upper house, and until recently did so in the lower house as well, and yet the capitalist system is in no danger?
The Australian Labor Party does not even call itself a socialist party. Actually it is a liberal bourgeois party, while the so-called Liberals in Australia are really conservatives.
Capitalism in Australia is still quite youthful. The country is only just taking shape as an independent state. The workers are for the most part emigrants from Britain. They left when the masses of British workers were Liberals …
The leaders of the Australian Labor Party are trade union officials, everywhere the most moderate and capital-serving element, and in Australia altogether peaceable, purely liberal.
That assessment resonates today.
But the links between the trade union movement and the ALP via the factions and paths for union leaders to move into Parliament are well-defined.
The reality is that the trade union movement has been losing its way for years now and it is not only because it has been seen as a blokey club with racist, sexist and homophobic overtones. The unions have lost support because they haven’t been doing what their principle raison d’etre calls for – to protect workers and their families.
Instead, trade unions have allowed the party that is meant to represent their interests – the ALP – to govern as if it is an agent of capital.
History tells us that the periods when the ALP have been in government workers endure real wage cuts, loss of wage share and entrenched unemployment.
Please read my blog – A new agenda for our union movement – for more discussion of this point.
The other point is that the Labor Party has traditionally been accused by the conservatives (Liberals aided in coalition by the National Party, a rural interests party) of being poor economic managers – spendthrifts with no fiscal discipline. This was of-course just a way of attacking their social policy which was considered as important as economic policy.
In the 1980s, the Labor Party changed direction dramatically – as did many social democratic parties around the world. It responded to these criticisms by becoming more neo-liberal in intent than even the conservatives. In the 1980s it led the way in privatising public enterprises, promising a new world of lower prices and higher employment. The opposite occurred.
It wasted billions of public money on private-public partnerships which only allowed the private property developers to dictate the direction, location and form of public infrastructure development. Please read my blog – Public infrastructure 101 – Part 1 – for more discussion on this point.
It also cemented as part of its national policy psyche the neo-liberal myth that federal governments have to run budget surpluses to maintain confidence with the amorphous “international investors”.
Two years ago it promised to deliver a budget surplus this year – because it considered that would allow them to wear the “badge of fiscal responsibility”. It is fair to say that the Government has become obsessive about their desire to deliver a budget surplus at all costs.
The Federal Labor government is caught up in the fiscal austerity narrative that the neo-liberals had imposed on failing economies everywhere.
It thinks that if it maintains its pursuit of a budget surplus the electorate will reward it for being a responsible fiscal manager. However, the electorate is more concerned about real income growth and employment opportunities and the government’s current strategy is undermining both.
I will come back to that discussion after considering Tanner’s thesis. Remember he only recently retired as the Federal Finance Minister.
Lindsay Tanner identifies the “Labor oligarchs” (the so-called “party machine men”) for stopping grass roots democracy in the party structure – for example, they have prevented the right of “party members to directly elect national conference delegates and administrative committee members”.
The Labor party machine is extremely right-wing in persuasion.
Lindsay Tanner considers that this is a world trend:
Over the past couple of years we have seen traditionally strong social democratic parties in Germany, New Zealand and Spain, as well as in New South Wales and Queensland, poll about a quarter of the vote in general elections. Even the mighty Swedish Social Democratic Party is now polling in the 20s. Federal Labor’s primary polling numbers have been in the 20s for a fair bit of the past year. The structural trend is obvious. Social democratic parties are slowly unravelling. While circumstances inevitably vary around the world, there is an underlying common factor: loss of purpose.
I have no trouble accepting this point. But where the rub occurs is in defining the “loss of purpose”.
Lindsay Tanner says that, historically, the Labor Party was “driven by purposes and beliefs”. which was exemplified, for example, in “Chiﬂey’s attempt to nationalise the banks” (in the late 1940s).
He now thinks that:
… if the current political indicators are conﬁrmed over the next couple of years, we could be entering a period of unprecedented bleakness. It would be a grave mistake to treat this threat as merely cyclical. There are structural and cyclical factors in play, but ultimately the structural determines the impact of the cyclical.
The reason for this demise? He thinks that in government the Party has been usurped by “cynical manipulators massaging polls and focus groups”.
That is clearly true. I had a (secret) meeting with a former minister soon after they lost an election in early 2000s. He told me that the day after the election (on the Sunday morning) the Labor party was out in Western Sydney polling to see why they lost. I said that he might have reflected on the fact that leadership is about shaping polls not reacting continuously to them. He stared at me with a blank expression as if I was speaking Dutch.
Lindsay Tanner thinks that all the major policy initiatives of the current “federal Labor government … [are] … have mostly been in response to external political circumstances … at the behest of random external forces”.
He says this “delivers some electoral success, but it is inevitably ﬂeeting and, meanwhile, the political capital on which longer-term electoral competitiveness depends is melting away”.
He says that Labor Party has moved from being “a party of initiative to a party that seeks power on the basis of managerial competence and arbitrating the competing claims of economic and social interest groups”.
1. “Labor’s historic mission – redistributing wealth and income to ordinary working people” is being undermined by “affluence”.
2. The Greens are now more relevant on the “left of the political spectrum” because the “the focus has shifted from material concerns to more abstract issues of environmental degradation, international co-operation and human rights”. Yet the Greens gained no traction in the Dutch election recently.
3. There has been an “emergence of a distinct class of political professionals, who now heavily inﬂuence the Labor Party” – they are “extremely adept at the mechanics of politics, but largely uninterested in its purpose”.
I haven’t any problems with that except Tanner, when he was Finance Minister, was a major part of the problem. He embodied the neo-liberal macroeconmomics paradigm with all its myths and biases towards unnecessary unemployment as much as anyone did.
Take for example this – Meet the Press – interview that he did on August 24, 2008. The discussion centred on the “need” for a budget surplus in Australia, even though the economy was slowing and unemployment was rising.
The conversation went like this:
Interviewer One: Minister … the Reserve Bank now realises that the economy is slowing dramatically. It’s changing its rhetoric – we all are expecting a boost to economic activity with an interest-rate cut next month. Doesn’t the Government, too, need to change its rhetoric? Do we still need a $20 billion surplus?
LINDSAY TANNER: We do need a strong surplus still, Paul. And I don’t believe the economy is slowing dramatically. It’s slowing somewhat … It’s really important that the Government is doing its bit to take the pressure off inflation and interest rates. And the Opposition is trying to punch big holes in the Budget’s surplus. One of the reasons why it’s possible the Reserve Bank may reduce interest rates in a week or two – it’s possible, we don’t know whether they will or not – is because the Budget is very strong, because the surplus is very substantial – that puts downward pressure on inflation and interest rates …
Interviewer Two: Mr Tanner, if the economy is not slowing dramatically, how do you account for the job losses, major job losses …
LINDSAY TANNER: Alison, the overall employment figures are still very robust … [then after a qualifying question] … But I can tell you this – if we weren’t putting downward inflation, a strong Budget surplus to put downward pressure on inflation and interest rates, over the course of the next year or two, you would see inflation ramp up, and that ultimately would lead to a serious crunch in the economy, and very substantial job losses …
Interviewer One: But Mr Tanner, you can’t both be right. The Reserve Bank can’t be right that inflation is significantly in check that it can start cutting rates, and you at the same time insisting it’s still a persistent problem.
LINDSAY TANNER: … The Reserve Bank did say of the Government’s Budget that it was mildly contractionary. That’s technical speak for “putting downward pressure on inflation and interest rates.” If the Reserve Bank does decide to cut interest rates, one of the factors will be that the Government has put in place a strong Budget surplus …
And so the dreadful interview went.
In this blog – A new progressive agenda? – I discussed in detail how social democratic and conservative governments became trapped by the neo-liberal economic myths that the mainstream of my profession perpetuate.
We also outlined the trend in our 2008 book – Full Employment abandoned.
We outlined what we called the full employment framework and its traced its demise under neo-liberalism and its ultimate replacement with the diminished full employability framework. We noted that under the former framework, everybody who wanted to earn an income was able to find employment. Maintaining full employment was an overriding goal of economic policy which governments of all political persuasions took seriously.
In Australia, for example, unemployment rates below two per cent were considered normal and when unemployment threatened to increase, government intervened by stimulating aggregate demand. Even conservative governments acted in this way, if only because they feared the electoral backlash that was associated with unemployment in excess of 2 per cent.
While unemployment was seen as a waste of resources and a loss of national income which together restrained the growth of living standards, it was also constructed in terms of social and philosophical objectives pertaining to dignity, well-being and the quest for sophistication. It was also clearly understood that the maintenance of full employment was the collective responsibility of society, expressed through the macroeconomic policy settings. Governments had to ensure that there were jobs available that were accessible to the most disadvantaged workers in the economy. We called this collective enterprise the Full Employment framework.
This framework has been systematically abandoned in most OECD countries over the last 30 years. The overriding priority of macroeconomic policy has shifted towards keeping inflation low and suppressing the stabilisation functions of fiscal policy. Concerted political campaigns by neo-liberal governments aided and abetted by a capitalist class intent on regaining total control of workplaces, have hectored communities into accepting that mass unemployment and rising underemployment is no longer the responsibility of government.
As a consequence, the insights gained from the writings of Keynes, Marx and Kalecki into how deficient demand in macroeconomic systems constrains employment opportunities and forces some individuals into involuntary unemployment have been discarded. The concept of systemic failure has been replaced by sheeting the responsibility for economic outcomes onto the individual.
Accordingly, anyone who is unemployed has chosen to be in that state either because they didn’t invest in appropriate skills; haven’t searched for available opportunities with sufficient effort or rigour; or have become either “work shy” or too selective in the jobs they would accept.
Governments are seen to have bolstered this individual lethargy through providing excessively generous income support payments and restrictive hiring and firing regulations. The prevailing view held by economists and policy makers is that individuals should be willing to adapt to changing circumstances and individuals should not be prevented in doing so by outdated regulations and institutions. The role of government is then prescribed as one of ensuring individuals reach states where they are employable.
This involves reducing the ease of access to income support payments via pernicious work tests and compliance programs; reducing or eliminating other “barriers” to employment (for example, unfair dismissal regulations); and forcing unemployed individuals into a relentless succession of training programs designed to address deficiencies in skills and character. We called this new paradigm the Full Employability framework.
The framework is exemplified in the 1994 Jobs Study published by the Organisation of Economic Cooperation and Development (OECD). Its main message (OECD, 1994, vii) accurately summarises the current state-of-the-art in policy thinking:
… it is an inability of OECD economies and societies to adapt rapidly and innovatively to a world of rapid structural change that is the principal cause of high and persistent unemployment … Consequently, the main thrust of the study was directed towards identifying the institutions, rules and regulations, and practices and policies which have weakened the capacity of OECD countries to adapt and to innovate, and to search for appropriate policy responses in all these areas … Action is required in all areas simultaneously for several reasons. First, the roots of structural unemployment have penetrated many if not all areas of the socioeconomic fabric; second, the political difficulties of implementing several of these policies call for a comprehensive strategy … third, there are synergies to exploit if various microeconomic polices are pursued in a co-ordinated way, both with regard to each other and the macroeconomic policy stance.
The OECD Jobs Study (1994: 74) also ratified the growing macroeconomic conservatism by articulating that the major task for macroeconomic policy was to allow governments to ‘work towards creating a healthy, stable and predictable environment allowing sustained growth of investment, output and employment. This implies a reduction in structural budget deficits and public sector debt over the medium term … [together with] … low inflation.
In the midst of the on-going debates about labour market deregulation, scrapping minimum wages, and the necessity of reforms to the taxation and welfare systems, the most salient, empirically robust fact of the last three or more decades – that actual GDP growth has rarely reached the rate required to maintain, let alone achieve, full employment – has been ignored.
The common element is that both sides of politics have followed the world trend and embraced neo-liberalism as their economic approach. While Labour and the Conservatives differ on social policy (even those differences are narrowing) they share almost lock-step the same economic mantra – run surpluses at all costs.
Think back to Lindsay Tanner’s view of budgets – that running budget surpluses allows interest rates to be lower. The problem is that this assumes that budget deficits are inflationary. Why then has Japan not experienced accelerating inflation for the last 20 years.
Why during the full employment era, when budget deficits were the norm, was inflation largely moderate?
The Reserve Bank of Australia has cut interest rates in the last several years because it fears the economy is diving into recession – in part, because of the contractionary fiscal stance of the federal government.
There is no virtue in driving the economy towards recession, which forces the central bank to lower rates, and then saying – see our fiscal policy is good because it results in lower interest rates. Meanwhile unemployment and underemployment has risen. That is the moronic position that Lindsay Tanner represented vigorously during his time as Minister of Finance.
He also failed to understand that in trying to achieve a budget surplus at a time when the economy is slowing is a self-defeating goal. The reality is always that the automatic stabilisers (that is, the plunging tax revenue growth) will likely see the budget in deficit anyway and there will be nothing positive to show for it.
Pro-cyclical fiscal policy at a time when private spending is weak overall is very irresponsible fiscal management. That was a legacy that is associated with Lindsay Tanner as much as any of this new era of neo-liberal politicians – Conservative or Labor.
Further, in his speeches and public statements, Lindsay Tanner regularly rehearsed all the usual myths – the primacy of a AAA rating even though the government doesn’t intend borrowing anymore (so on their own logic the claim is odd); the need to take pressure of the inflation rate (even though inflation is falling and well within the RBA’s upper bound for policy); the praise the IMF has bestowed on the Government (even though the IMF is deeply implicated in advocating policies that created and have extended the crisis).
The lesson has not been learned by these governments and that is why they are “purposeless”.
The conservative Australian government was only able to run surpluses for 10 years out of 11 (1996-2007) because private credit growth was so strong. This was a characteristic of the neo-liberal period.
Before the neo-liberal era, we witnessed:
1. Relatively continuous use of fiscal deficits.
2. Stable personal saving ratio of around 7-8 per cent of personal disposable income.
3. A consumption share of around 65 per cent of GDP.
4. Real wages growing in line with labour productivity – so that consumption could be driven by real wages growth rather than credit.
The neo-liberal period is in fact the outlier – an atypical period. Which makes the claims by those who hold out that governments should return to surplus as a demonstration of fiscal responsibility rather difficult to understand.
During the neo-liberal period, where actual budget surpluses were recorded, the economies typically went into recession soon after. The important point though is that the surpluses were made possible by the unsustainable growth in private credit which drove private spending and boosted tax revenue.
So it is highly likely that we are returning to a more normal environment now where the private sector are attempting to save more out of disposable income and reduce its reliance on credit.
Two implications arise if that if the private consumption is returning to more normal levels then two things follow:
1. The government will more likely have to run budget deficits of some magnitude indefinitely – as in the past.
2. Real wages growth will have to be more closely aligned with productivity growth to break the reliance on credit growth.
And when the nature of the balance sheet adjustments that are going on at present are included in the assessment these two points become amplified.
So waiting for a private consumption boom to save the economy is probably going to be a long wait. But it is also a trend that we don’t want to see revived under the previous circumstances – noted above.
This also makes the quest for fiscal austerity to be mindless and very destructive. Where will growth ever come from if consumers are returning to higher saving ratios, firms are very cautious, all countries are eroding the export markets of the others, and governments are adding tot he malaise?
An understanding of Modern Monetary Theory (MMT) allows one to lay most of the blame for this labour underutilisation across OECD countries lies with the policy failures of national governments. At a time when budget deficits should have been used to stimulate the demand needed to generate jobs for all those wanting work, various restrictions have been placed on fiscal policy by governments influenced by orthodox macroeconomic theory.
Social democratic parties are losing support because they have become indistinguishable from the conservatives in the important area of economic policy. Adopting austerity reduces the capacity of such parties to deliver a differentiated social policy when in government.
The Labor Party in the Netherlands, exemplifies this – they are pro-Euro and pro-austerity – which means they are pro unemployment, pro increased inequality and pro increased poverty. Left supporters will always desert parties that represent these things.
Social democratic parties have been eager to adopt the goal of full employability, significantly diminishing their responsibility for the optimum use of the nation’s labour resources. Accordingly, the aim of labour market policy has become limited to ensuring that individuals are employable. This new ambition became exemplified in the 1994 OECD Jobs Study.
As a result, successive governments in many countries began the relentless imposition of active labour market programs. These were designed to churn the unemployed through training programs and/or force participation in workfare compliance programs. The absurdity of requiring people to relentlessly search for work, and to engage in on-going training divorced of a paid-work context, seemed lost on government and their policy advisers. That the NAIRU approach seduced them at all is more difficult to understand given stark evidence that since 1975 there have never been enough jobs available to match the willing labour supply.
The abandonment of full employment has also presented neo-liberal governments with a new problem. With unemployment persisting at high levels due to the deliberate constraints imposed on the economy by restrictive fiscal (and monetary) policy, rising welfare payments placed pressures on the the traditional redistributive efforts of the welfare state. These pressures were erroneously seen as a threat to the fiscal position of government.
The neo-liberals managed to convince policy makers that fiscal conservatism was necessary and that the only way to resolve these pressures was to reduce the public commitment to income support and the pursuit of equity. Accompanying the neo-liberal attacks on macroeconomic policy have been concerted attacks on the supplementary institutions such as the industrial relations system and the Welfare State. For these attacks to be effective required a major recasting of the concept of citizenship.
Governments, aided by the urgings of the neo-liberal intellectuals in the media and in conservative think tanks, have undermined the notion of citizenship – the right to public services, which had been an essential part of the rationale for the system of social security.
The hallmark of the neo-liberal era is that individuals have to accept responsibility, be self-reliant, and fulfill their obligations to society.
Unemployment is couched as a problem of welfare dependence rather than a deficiency of jobs. To break this welfare dependency required responsibility to be shifted from government to the individual. To force individuals to become accountable for their own outcomes, governments embraced a shift from active to passive welfare and the introduction of alleged responsibilities to counter-balance existing rights.
When Lindsay Tanner was Finance Minister he stood as a senior representative of a government – a Labor Party government – that adopted all these attacks on welfare and income security.
It is telling that his essay discusses none of these issues. He is silent on the major reason why the Labor Party is becoming unelectable – their zealous grasp of neo-liberal economics – which stipulates a policy agenda that is the anathema of why the party formed in the first place
As Finance Minister, he perpetuated the neo-liberal myths about budgets and so helped significantly to seal the fate of his own party. He should own up to that rather than seek to maintain public relevance by invoking peripheral issues.
I am off to Perth soon (flight to catch) where I am addressing a major public sector union conference tomorrow morning. So ….
That is enough for today!
(c) Copyright 2012 Bill Mitchell. All Rights Reserved.