A national disgrace – the abandonment of full employment

Yesterday, I indicated that I would comment on an article that was published in the Melbourne Age (December 3, 2012) – Dimming of the light on the hill – which documented the Federal government’s abandonment of any commitment to achieving full employment. The by-line of the article read that “(o)nce it was a political mantra for the Labor Party, but the goal of full employment has dwindled to a distant memory”. This article is one of the first I have seen in years that tackles this question. It is a topic that most regular readers will realise is one that I have spent most of my career promoting for discussion. My Phd is about it. Many of my published articles and books is about it in one way or another. Modern Monetary Theory (MMT) is about it. But the mainstream media avoids discussing it and, instead, accepts the line peddled by the government and its crony economists that a lie is the truth. That 12.5 per cent labour underutilisation rates are in some way consistent with full employment. Our grasp of history is poor in this nation and this article serves to remind us of what was once a truth. It also reminds us that the abandonment of full employment as a policy objective by our Federal government ranks up there with the other (many) national disgraces, including, for example, our treatment of indigenous Australians and our treatment of refugees. Why do we gain succour from (unnecessarily) treating the most disadvantaged among us so poorly?

The article is about Australia and the Australian Labor Party in particular. But it could have been written about almost any Western government over the last 30 years with appropriate cutting-and-pasting to change the specific context.

The author of the article, David Day is a biographer of two past Labor Party Prime Ministers (John Curtin – 1941-45 and Ben Chifley – 1945-49), who were in office over the period that the Australian government signed key international agreements recognising and accepting their responsibilities

John Curtin was also the instigator of the famous – White Paper on Full Employment in Australia – which established the template for economic policy in Australia for the next 30 years.

The economist in charge of the development of the White Paper – H.C. Coombs – who would later become the first Governor of the Reserve Bank of Australia in 1960 – wrote an interesting paper in 1994 in his latter years – From Curtin to Keating : the 1945 and 1994 White Papers on Employment: a better environment for human and economic diversity? – which provides a background to the White Paper.

But importantly, given the scarcity of the hard copy, Coombs’ paper includes a digital copy of the original White Paper, and it should be compulsory reading for all Australians and all citizens of the world. It is 3.05 MB and in PDF.

As an aside, the paper was written while H.C. Coombs was working in the North Australia Research Unit (of the ANU), which is located on the campus at Charles Darwin University, in Darwin – a few buildings from where my current Darwin office is situated. While working at the NARU, Coombs was a major proponent of the “Community Development Employment Projects scheme”, which was an employment guarantee for indigenous Australians in remote areas. It was scrapped by the neo-liberal federal government some years ago.

Coombs considered “that rather than pay lots of Aboriginal people in remote areas unemployment benefits it would be more constructive for them to be employed … to undertake socially useful tasks”. The quote comes from a paper – Coombs’ Bastard Child: The Troubled Life of CDEP – which was presented by Dr Wil Sanders as the 2012 Nugget Coombs Memorial Lecture at CDU in October.

Coombs wrote in his 1994 article that:

The 1945 Paper argued that the tendency for economic fluctuations was inherent in the capitalist system but that the powers possessed by a Nation State could be used in the public interest to modify their effect on employment.

Despite the neo-liberal attack on public sector activity over the last 30 years they have never convincingly demonstrated why this underpinning for the 1945 White Paper is no longer valid.

Instead, we have seen concerted efforts by mainstream economists to re-define away the damage that the abandonment of the use of those “powers possessed by a Nation State” in the service of full employment has caused.

It is obvious that labour underutilisation rose during this period and has morphed from not only persistent unemployment but, now, persistent and increasing underemployment in many nations.

The mainstream response has been to claim that full employment now occurs at higher levels of unemployment than in the past because of a range of structural changes. I dealt with two such structural possibilities yesterday and demonstrated their failure to justify this argument.

The 1945 White Paper was unequivocal. It opened with the statement:

Full employment is a fundamental aim of the Commonwealth Government. The Government believes that the people of Australia will demand and are entitled to expect full employment … Despite the need for more houses, food, equipment and every other type of product, before the war not all those available for work were able to find employment or to feel a sense of security in their future. On the average during the twenty years between 1919 and 1939 more than one-tenth of the men and women desiring work were unemployed. In the worst period of the depression well over 25 per cent were left in unproductive idleness. By contrast, during the war no financial or other obstacles have been allowed to prevent the need for extra production being satisfied to the limit of our resources. It is true that war-time full employment has been accompanied by efforts and sacrifices and a curtailment of individual liberties which only the supreme emergency of war could justify; but it has shown up the wastes of unemployment in pre-war years, and it has taught us valuable lessons which we can apply to the problems of peace-time, when full employment must be achieved in ways consistent with a free society.

In peace-time the responsibility of Commonwealth and State Governments is to provide the general framework of a full employment economy, within which the operations of individuals and businesses can be carried on.

So the emphasis of macroeconomic policy in the period immediately following the Second World War was to promote full employment. Inflation control was not considered a major issue even though it was one of the stated policy targets of most governments.

In this period, the memories of the Great Depression still exerted an influence on the constituencies that elected the politicians. The experience of the Second World War showed governments that full employment could be maintained with appropriate use of budget deficits. The employment growth following the Great Depression really only accelerated with the onset of the War.

All the orthodox neoclassical remedies that had been tried during the 1930s largely failed. These are the same policies that are being proposed by neo-liberal economists now. We have short memories.

Following World War II, the problem that had to be addressed by governments was how to translate the full employed war economy with extensive civil controls and loss of liberty into a fully employed peacetime model. That is very clearly stated in the White Paper.

The first major statement addressing this problem came in the form of William Beveridge’s (1944) Full Employment in a Free Society. This was consistent with the new Keynesian orthodoxy of the time, which saw unemployment as a systemic failure and moved the focus from the ascriptive characteristics of the unemployed themselves and the prevailing wage levels.

Beveridge (1944, 123-135) said:

The ultimate responsibility for seeing that outlay as a whole, taking public and private outlay together, is sufficient to set up a demand for all the labour seeking employment, must be taken by the State…

The emphasis was on jobs. Beveridge defined full employment as an excess of vacancies at living wages over unemployed persons.

Beveridge by the way had earlier, in 1942, authored the Social Insurance and Allied Service, commonly referred to as the “Beveridge Report”, which was the basis of the development of the Welfare State.

The 1945 White Paper left no doubt as to who was responsible for the maintenance of full employment. We read:

The maintenance of conditions which will make full employment possible is an obligation owed to the people of Australia by Commonwealth and State Governments. Australian governments will have to accept new responsibilities and exercise new functions … Unemployment is an evil …

Part II of the 1945 White Paper was about Employment and Expenditure and described “the main factors determining the level of employment and … the kind of measures that will be necessary to avoid unemployment”.

We read the most basic macroeconomics – which, sadly, have been forgotten by most modern economists:

The amount of employment available at any time depends on the volume of production being undertaken. This is turn depends on the demand for goods and services – that is, on expenditure by individuals, firms, public authorities and oversea buyers. Full employment can be maintained only as long as total expenditure provides a market for all the goods and services turned out by Australian men and women, working with the available equipment and materials, and full employed after allowing for the need for leisure.

We learn that public spending “can be readily varied to offset variation in the unstable parts of expenditure” (private investment and exports). Public capital expenditure, in particular, can be controlled by the Government such that when:

… employment tends to decline, resources can be usefully employed by the decision to embark upon developmental work and to improve the collective capital equipment of the community. It is economical to use resources that would otherwise be idle in these forms of capital construction, and thus maintain the economy in full employment.

The White Paper later talked about the dangers of maintaining full employment – for example, “excess spending”:

Avoidance of this threat depends on the skill with which governments can control their expenditure policies. Experience will progressively improve the technique of this planning.

While its statements on fiscal policy and public finances reflects the spirit of the day the White Paper makes it very clear that central bank financing (at that time there was no Reserve Bank and the Commonwealth Bank (100 per cent publicly owned) played the role of the central bank):

… can be used to advantage up to the limit of available men and resources, but if carried beyond this point it would gravely threaten the real incomes of workers and low income groups and would result in conditions so unstable that full employment could not be maintained.

In other words, if the government allowed nominal aggregate demand growth to outstrip the real capacity of the economy to respond by increasing output then inflation would result and jeopardise the capacity of the government to maintain full employment. But up to and at the inflation threshold, there was no problem in using the currency creation capacity of the central bank in liaison with treasury to spend sufficient amounts to generate the required employment growth.

The policy environment that followed reflected these insights.

The post WWII period was marked by governments maintaining levels of demand sufficient to ensure enough jobs were created to meet the demands of the labour force, given labour productivity growth.

Governments used a range of fiscal and monetary measures to stabilise the economy in the face of fluctuations in private sector spending. Unemployment rates were usually below 2 per cent throughout this period.

Yesterday’s Melbourne Age article noted at the outset reflected on this extraordinary period when Australian governments took responsibility for full employment rather than now claiming they only have to ensure people are ready for work – which I call its full employability agenda. A much diminished goal for sure.

David Day writes:

More than 300,000 teenagers are leaving Australian schools about now. Tragically, many of them will be … joining the hundreds of thousands of Australians who are unemployed or underemployed.

In recent years, more than 15 per cent of teenage workers have been unable to find jobs and more than 5 per cent of all workers are presently unemployed. The latter figure is about three times the unemployment rate that prevailed throughout the long economic boom that lasted from 1940 until 1970.

The facts are actually worse than that. Around 38 per cent of teenagers in Australia are in one way or another not working the hours they desire – many not working at all.

Add to that the fact that there are 12.5 per cent of willing labour resources overall in Australia who are idle – and that is a conservative estimate – which means we are a very long way from the ideals set out in the 1945 White Paper.

David Day said that while the 1945 “Labor government of John Curtin that first made full employment a political mantra and then proceeded to prove that it was possible” the current:

Employment Minister Bill Shorten now speaks of 5 per cent unemployment as being the new “full employment”. At the same time, he presides over a system that denies dignity to unemployed workers who struggle to survive on a government pittance that is designed to punish and shame.

I told an SBS Radio journalist today who was asking why the Government refused to lift the unemployment benefit despite admitting themselves that it is below the poverty line that the Government was deliberately impoverishing the unemployment but at the same time refused to create the macroeconomic policy settings necessary to generate sufficient jobs.

The way they defend that irresponsible and unethical policy stance is to claim the current unemployment rate is full employment. The dirty way out that governments of both political persuasions have employed since they became infested with the lies of neo-liberalism.

Moreover, they ignore the rising underemployment which now stands at around 7.5 per cent. How are the lost hours of work that are embodied in the pool of idle labour remotely consistent with full employment? The Government is silent on that.

So David Day asks the obvious question:

What has happened to the modern Labor Party? How can it be comfortable punishing the unemployed for the plight the government has put them in? And why is the Liberal Party quiescent in this?

For make no mistake about it, the past few decades have seen governments of both persuasions preside over a deliberately created pool of hundreds of thousands of unemployed and underemployed workers.

These hapless workers are the human ammunition that the Reserve Bank keeps ready to deploy against the long-vanquished inflation bogy. If unemployment was ever to fall much below 5 per cent, the bank would quickly increase interest rates to push unemployment back up towards 5 per cent.

This has been one of the hallmarks of the neo-liberal era – the disregard for the losses embodied in maintaining huge pools of idle workers.

The mainstream economists worked hard in the 1970s (and a bit earlier) to dis-abuse us of the basic truth that underpinned the 1945 White Paper. In the current period, this campaign to turn a lie into a truth is manifest in the mantra of fiscal austerity – the so-called fiscal contraction expansion.

As economies go south as as result of the withdrawal of spending – the mantra just gets turned up. It was always a lie and no matter how hard they shout a lie cannot become a truth.

As we explain in our 2008 book – Full Employment abandoned – the concept of full employment, in the sense outlined above, lost meaning with development of the natural rate of unemployment (NRU), which spearheaded the resurgence of pre-Keynesian macroeconomic thinking in the form of Monetarism.

The natural rate approach claimed that the government (central bank) could promote variations in the unemployment rate by introducing unforeseen changes in inflation, a temporary capacity allowed due to expectational inertia on behalf of the workers.

Full employment is assumed to prevail (with unemployment at the natural rate) unless there are errors in interpreting price signals. The tendency is always to restore full employment by market mechanisms. There is no discretionary role for aggregate demand management.

The rise in acceptance of Monetarism and its new classical counterpart was not based on an empirical rejection of the Keynesian orthodoxy, but was according to Alan Blinder in 1988 “instead a triumph of a priori theorising over empiricism, of intellectual aesthetics over observation and, in some measure, of conservative ideology over liberalism. It was not, in a word, a Kuhnian scientific revolution”.

David Day falls prey to the Monetarist logic in his article when he claims that:

It was not all Labor’s fault. The whole Western world was experiencing the new phenomenon of ”stagflation”, with inflation and unemployment both rising sharply.

Policymakers were in a bind. If they tried to reduce unemployment, they stoked the already high inflation. And if they focused on reducing inflation, they increased the already high unemployment. It was in these circumstances that the goal of full employment gradually slipped off Labor’s agenda. A

The problem was (and remains) that the coincidence of unemployment and rising inflation in the 1970s was not a problem of excess demand. The fact is that that the instability came from the supply side as the OPEC sheiks drove up oil prices.

The policy response to cut aggregate demand and thus increase unemployment was exactly the wrong response. The Monetarists exploited that policy error and claimed that it demonstrated a categorical failure of the Keynesian approach.

Any Keynesian remedies proposed to reduce unemployment were met with derision from the bulk of the profession who had embraced Monetarism and its policy implications. They claimed that the economy would always tend back to a given natural rate of unemployment (which was associated with stable inflation), no matter what had happened to the economy over the course of time.

Time and the path the economy traced through time were thus irrelevant. Only microeconomic changes would cause the natural rate to change. Accordingly, the policy debate became increasingly concentrated on deregulation, privatisation, and reductions in the provisions of the Welfare State. The so-called structural or supply-side remedies.
Unemployment continued to persist at high levels and soon, underemployment entered the scene.

The Reserve Bank of Australia embraced this lunacy. It now conducts monetary policy in Australia to meet an openly published inflation target. It uses its control of the cash rate (market rate on overnight funds) to influence short-term interest rates. To what extent is the RBA working within its legal charter of 1959, which includes the maintenance of full employment, an artefact of the White Paper days.

In September 1996, the Treasurer and Reserve Bank Governor issued the Statement on the Conduct of Monetary Policy, which set out how the RBA was approaching the attainment of its three identified policy goals. It elaborated the adoption of inflation targeting as the primary policy target. The RBA (1996: 2) said it had “adopted the objective of keeping underlying inflation between 2 and 3 percent, on average, over the cycle.” In terms of the priorities, the Statement said (RBA, 1996: 2):

These objectives allow the Reserve Bank to focus on price (currency) stability while taking account of the implications of monetary policy for activity and, therefore, employment in the short term. Price stability is a crucial precondition for sustained growth in economic activity and employment.

The rest of the text emphasised the need to target inflation and inflationary expectations and the complementary role that “disciplined fiscal policy” had to play. There was no discussion about the links between full employment and price stability except that price stability in some way generated full employment even though the former required disciplined monetary and fiscal policy to achieve it.

In a stagflation environment if price spirals reflect cost-push and distributional conflict factors, such an approach can surely never work.

How does the RBA answer this apparent contradiction? The RBA says that it only has to meet an average inflation target over a business cycle. One RBA official argued in 1999 that the RBA is sensitive to the state of capacity in the economy when it pursues a change of interest rates aiming at the inflation target.

Consider, for example, a situation in which inflation is regarded as likely to be too high. A rise in interest rates will help to reduce inflation but can also be expected to reduce growth. How far and how quickly interest rates should be raised will depend partly on how the economy is performing at the time. If the economy is operating with very little surplus capacity or is overheating, a fairly rapid rise in interest rates might be called for; if, on the other hand, there is significant surplus capacity in the economy, the appropriate increase in rates might be more gradual. Thus it makes sense for policy to take account of short-run cyclical developments in pursuing the inflation target.

But in the next paragraph, he said that the trade-off between inflation and unemployment is not a long-run concern because, following NAIRU logic, it simply doesn’t exist.

We read:

Ultimately the growth performance of the economy is determined by the economy’s innate productive capacity, and it cannot be permanently stimulated by an expansionary monetary policy stance. Any attempt to do so simply results in rising inflation. The Bank’s policy target recognises this point. It allows policy to take a role in stabilising the business cycle but, beyond the length of a cycle, the aim is to limit inflation to the target of 2-3 per cent. In this way, policy can provide a favourable climate for growth in productive capacity, but it does not seek to engineer growth in the longer run by artificially stimulating demand.

The RBA is silent, however, about the stock of long-term unemployed that exists beyond the cycle. The empirical evidence is clear that the economy has not provided enough jobs since the mid-1970s and the conduct of monetary policy has contributed to the malaise.

The RBA. like central banks in most advanced nations, has forced the unemployed to engage in an involuntary fight against inflation and the fiscal authorities have further worsened the situation with complementary austerity.

David Day does note that the Labor Party under the Treasurership of Paul Keating set the central bank up to pursue this employment destroying role and the willingness to tolerate large pools of idle labour has become entrenched in both sides of politics, such that there is no longer a choice to be made by the voters:

Neither Labor nor Liberal politicians are willing to hold out hope for the hundreds of thousands of Australians who remain unemployed or underemployed. And neither party is willing to speak up for the many school leavers who will soon be joining them.

A level of 5 per cent unemployment has become the new normal. Curtin and Chifley would be appalled.

Conclusion

While there were major problems in the account of the period in the 1970s (the stagflation era) in the article by David Day, the argument he presented is so rarely seen in the mainstream media.

Citizens are constantly being bombarded with the view that we are at full employment and that there are plenty of jobs if only people would seek them. The reason they don’t is because welfare benefits are too high. Too high in the Australian context in 2012 is well below the poverty line – but that is just one of a number of details that the politicians and their lying economic advisers choose to ignore. Why let some ugly facts get in the way of maintaining power.

Tomorrow – for data freaks like me – the third-quarter National Accounts data comes out. I expect the economy to have slowed in the September quarter. Today’s – Government Finance Statistics, Australia, September Quarter 2012 – revealed that:

In seasonally adjusted chain volume terms, total general government final consumption expenditure decreased by $238m, a fall of 0.4% compared with June quarter 2012.

Total general government gross fixed capital formation, in seasonally adjusted chain volume terms, decreased by 18.1%

But at the same time:

Taxation revenue decreased 16.3% to $92,456m.

The latter follows the former as the Government’s obsessive pursuit of a budget surplus is driving economic activity down. We will see how much real GDP is slowing tomorrow.

That is enough for today!

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