Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
Some readers have asked me to comment on the economic policy of The Australian Greens and how it sits with the other major political parties. I base this assessment on what appears to be the policy statement which was current as at November 2008. There is not a single reference to employment, unemployment or full employment as key economic goals. Moreover, there is as much neo-liberal macroeconomics in the document as you would find in the papers espousing the approach of the main parties. And worse still … if The Greens actually tried to implement some of their macroeconomics principles then they would undermine most of their other major policy goals. So there is no joy to be found in this place for a progressive who understands how the modern monetary system operates.
To clarify the absence of employment, unemployment or full employment as key economic goals. The Greens obviously think that employment and industrial relations policy does not form part of their economic policy stance. I don’t understand that at all. Full employment should be the key and central economic goal of any government.
Anyway, you have to read the separate document – Policy G2: Employment and Industrial Relations – to find out what they think about labour market policy. That document makes a lot of reasonable statements about fairness in the industrial relations system. There is a reasonable Principle (10 that “the objectives of profitability and efficiency should not override social and ecological objectives.”
We have to wait until Principle 17 to read that The Greens stand for “full employment, and job security for all who seek employment.” and Principle 18 “protection against the forced casualisation of work and greater protection for existing casual workers.”
But then by Principle 21 their aim to eliminate underemployment is blurred by wanting “a fairer sharing of paid work through mandated shorter standard working hours and a reversal of current trends towards increased unpaid overtime.” So are we to assume that The Greens accept that paid work is in finite supply and needs to be rationed so that everyone can get access to it?
I don’t hold that view. Ultimately, in a modern monetary economy, the national government chooses the national unemployment rate and can always generate enough employment (with associated hours of work) to satisfy the preferences of the labour force. There is never a “shortage” of work just a shortage of “funded work”. The two constructs are quite different.
Anyway, to accomplish these principles the Australian Greens want large scale retrenchment of the existing IR laws (which I agree with) and propose only two measures that relate to the goal of full employment.
First, under Policy Measure 51 they would “require the ABS to publish more meaningful monthly measures of underemployment and unemployment, with broader definitions of unemployment.” So this does not actually address the imperative of full employment. Rather, it would measure the policy-induced departure from full employment more accurately. With a dedicated full employment strategy, the imperative to generate more accurate statistics is reduced. But clearly it is sensible to create data gathering and information disseminating frameworks that fully inform the population of the state of the economy. Notwithstanding, the issues relating to how to accurately measure these constructs anyway.
Second, under Policy Measure 53, the Greens will “use a combination of government job creation and industry policy to achieve full employment and job security for all who seek employment.”
What are we talking about here in terms of industry policy? I guess they means protection and subsidy. How many jobs that strategy would create is questionable. In the days of large scale protection of manufacturing by the 1970s, these industries were shedding jobs as effective protection levels rose. As to public subsidies of private enterprise – that is the topic of another blog. In short, I don’t favour them. Capitalist enterprise is about risk. That should not be publicly-underwritten when there are many public good investments that go wanting. Further, if there is something that is worth doing – for example, a new green industry strategy, then I would favour public investment and public management. I reject outright the ideological view that the public sector should not be in competition with the private sector.
And so full employment presumably comes down to government job creation. Do they support a Job Guarantee then? I know they don’t publicly support it because they are scared of the fiscal consequences.
But if you are going to generate full employment via public sector job creation where the Government buys the labour at market prices in competition with the private sector then you risk inflation occuring well before you reach full employment. Clearly there is a strong need for more career-level public employment.
But in the true full employment era (1945-1975) the slack was taken up by “buffer jobs” in the public sector which were accessible to the most disadvantaged workers out there. These were not career public service jobs and the Government hiring was not competing with the private sector at market prices for the labour. That is the essence of a Job Guarantee. Any modern monetary economy requires this buffer stock employment capacity if it is to have full employment and price stability.
So my first recommendation to The Australian Greens is that they endorse as national policy the Job Guarantee.
But back to their macroeconomic understanding. In their Policy G1: Economics you soon realise that The Greens are as ignorant about macroeconomics as they are enlightened on cultural and environmental matters. Moreover, if they were more advanced in their macroeconomics understanding the rest of the policy positioning would resonate more strongly and have greater credibility.
Their statement of economics principles begins well by acknowledging the symbiosis that human economies have with the natural world. They also emphasise equity principles which I support and eschew a fundamental reliance on the “free market economy” which “by externalising the environmental and social costs of greenhouse gas emissions is creating the greatest market failure of all time, namely climate change.”
While I agree that climate change is a fundamental problem that will be exacerbated by maintaining a reliance on the private market to allocate economic resources I think the greatest market failure of all time is the failure of the economy to generate enough sustainable jobs to match the preferences of the available workforce.
After agreeing with their Principles covering the urgency of policies to address climate change; the renewal of collective will or solidaristic sentiment; and the need to ensure natural monopolies (for example Telstra – my example not the Greens) stay in public ownership and management, I got to Principles 8 and 9 which relate to budgets and debt.
The Greens say (quote):
8. government finances must be sustainable over the long run; budget deficits and surpluses must balance each other over the business cycle.
9. long term government borrowing is the preferred mechanism for funding long term infrastructure investments.
So where do you start with these fundamental principles? Are these political statements or a reflection of how The Greens (whoever wrote and endorsed and stood for office under this document) understand the system to work? It doesn’t really matter what the statements represent (politics or comprehension) when you consider they are totally inapplicable depictions of the way a modern monetary economy such as Australia works.
They are also dangerously naive statements because they erode the capacity of the Government to achieve much of what The Greens aspire to.
First, what does government finances must be sustainable in the long run mean? What is the long run and what is the definition of sustainable. Well I guess you infer meaning from the next phrase – the old neo-liberal con job – budget deficits and surpluses must balance each other over the business cycle.
So the business cycle – peak to trough and back to peak – defines the temporal perspective that will define the sustainability span – this presumably is the “long run”, which is a different conception of the long run than economists might consider.
So on average The Greens believe that the federal budget balance must be zero over the business cycle. What they mean is the structural balance (or full employment balance) should be zero on average over the cycle.
Hmm. What are their aspirations for non-government saving? They clearly want to reduce our reliance on coal exports and other mining products that may boost our net exports. So they are not hoping for a Norway-type situation where the net exports are so strong that the government sector has to run surpluses to avoid having too much nominal demand in the economy. Even for Norway, this is a temporary situation while their oil reserves last.
The Greens clearly do not understand that the government balance is a mirror image of the non-government balance – $-for-$. The only way you can run a budget on balance equal to zero over the cycle is if you do not want the non-government sector to net save in the currency of issue on average over the cycle.
This would be an atypical situation. The more normal circumstance would be for the private sector to desire to net save in the currency of issue. Given that current account deficits are also typical then this requires the government sector to be in deficit on average over the cycle.
Trying to run surpluses to balance on average over the cycle under these circumstances will damage the economy and deliver deficits anyway as output and income levels contract and the automatic stabilisers kick in. It is just economic vandalism to advocate policies that will be self-defeating but cause damage (rising unemployment and lost income) along the way.
Why would The Greens want to lock into this neo-liberal orthodoxy? Do they think it sounds responsible? The reality is that we need to re-condition the public debate about these concepts and options and educate all of us to realise that these flaky statements about plotting a path back into surplus is in some way sustainable but also responsible.
It is neither sustainable nor responsible.
Further, it will never sustain a fully employed economy. So this economic principle undermines its economic goals of full employment. It also undermines a lot of other initiatives that The Greens claim they would implement.
It gets worse though when we consider Principle 9. The Greens think that debt-issuance by the Federal Government is required to fund government spending. It is not because the federal government is not revenue-constrained. The federal government issues the currency – it is a monopolist in this regard. It never needs to finance its spending unlike a household which uses the currency of issue.
Why hang onto these neo-liberal myths which are designed to put the Government into a straitjacket and impose “fiscal discipline” on it? The straitjacket is what prevents the Government from achieving high levels of employment and maintaining high standards in public goods and infrastructure.
Reading on The Greens also want “a national carbon trading scheme” – which is odd given they do not like free markets! But my approach to carbon reduction will have to wait for another blog. I don’t support market-based schemes though and I am surprised The Greens do. The natural environment cannot be the subject to “trade-offs” which is at the heart of market-based allocations.
My conclusion is that The Greens are in need of some solid economics education. As it stands, their macroeconomics statements are neo-liberal gobblygook. In accepting the mainstream view on debt and deficits they reduce the room they have to credibly say anything about the other elements of their political agenda.
I also heard the other day that one Green State level MP is on the public record as saying that “no other economist thinks like Bill Mitchell so he must be wrong” (or words to that effect). When I was told this it reminded me of those advertisements that appeared daily in Melbourne newspapers in times gone by that said “X million Christians cannot be wrong” – you know appealing to numbers to evince credibility. My response: Lemmings all run over the cliff together!
But I also would remind everyone that we are currently in a serious global economic crisis that has been driven by the policy positions that are mainstream in my own profession. So X million economists can be wrong!
Tomorrow I will publish a FAQ about Modern Monetary Theory blog following a series of questions sent in by readers. At least that is what I plan to do right now. But some data might get in the way which wouldn’t be so bad.