It is my Friday Lay Day blog and it is going to be relatively quick. There was an article in the Wall Street Journal (December 23, 2015) – Economists Say ‘Bah! Humbug!’ to Christmas Presents – that says a lot about how my profession struggles to appreciate reality in all its dimensions. Every year, it…
Its my Friday lay day and a shorter blog day than usual. Today, it was revealed that one of the Australian government’s premier measures to combat unemployment has failed. Not just a small failure. Rather, the data just released shows the plan is a disaster. It was always going to be. The supply-side measure to provide wage subsidies to firms to take on unemployed workers who were above 50 years of age and were enduring entrenched unemployment failed because it doesn’t address the problem. Mass unemployment arises not because wages are too high relative to productivity (the mainstream myth) but because there is not enough sales to justify firms putting on extra workers. The lagging sales are because there is deficient total spending. Firms will not employ more workers if they cannot sell the extra output, no matter how cheaply the workforce becomes. The data we were apprised of today categorically supports that view. The data accompanying such programs always supports the view that demand is the problem not supply.
Wage subsidies do not work, do not work, do not work
How many more lessons do the supply-siders need?
As the newly-elected conservative Federal Government in Australia was elected in September 2013 it started to hack into public spending and the unemployment rate has risen sharply since. It is now higher than at the peak of the GFC upturn.
To cover its tracks it claimed that it was prioritising the creation of jobs through a wage subsidy scheme known as – Restart – which provided financial incentives of up to $A10,000 for up to two years to any firm that employed an unemployed person who was above 50 years of age and who had been on income support for more than 6 months.
The workers had to be “employed for at least 30 hours per week” to attract the full subsidy.
The Government allocated $524.8 million over four years to the scheme and projected that 32,000 workers would be employed per year for each of the years of the funding as a result of the initiative.
The scheme was introduced on July 1, 2014. Official data from the Senate estimates show that in the first five months of the scheme just 510 unemployed workers have been given jobs under the scheme of the 175,000 Australians who are eligible.
The official estimates suggest that “the program could fall 95 per cent short of the government’s target.”
Wage subsidies typically fail and are an inferior way of stimulating employment. They are motivated by the flawed idea that mass unemployment is the result of excessive real wages relative to productivity and if the wage that the firm has to pay is cut – either directly, by the workers accepting a lower wage or indirectly, by the government paying some of the wage – then firms will employ more workers.
Two obvious points are overlooked, which always conspire to undermine such wage subsidy schemes.
First, firms will not employ workers no matter how ‘cheap’ they become if the output that the workers might produce cannot be sold. Firms do not produce to generate infinite stores of inventory.
Second, firms might try to substitute subsidised workers for non-subsidised workers as long as the subsidy is in place, which renders any net employment effect negligible. In this case, there also appears to be no substitution occurring because firms are laying workers off generally as total spending is weak.
The better public policy way to increase employment is to create jobs directly via large scale public employment schemes.
There is a litany of failed wage subsidy schemes.
See this article from Joseph Stiglitz (January 1, 2015) – The politics of economic stupidity – where he says:
The malaise afflicting today’s global economy might be best reflected in two simple slogans: “It’s the politics, stupid” and “Demand, demand, demand” …
The near-global stagnation witnessed in 2014 is man-made. It is the result of politics and policies in several major economies-politics and policies that choked off demand. In the absence of demand, investment and jobs will fail to materialize. It is that simple.
Unfit for public office
Regular readers will know of my contempt for the former Federal Minister of Immigration Scott Morrison, who is now Minister for Social Services. His brief has shifted from treating refugees cruelly to imparting his own particular form of nastiness to the unemployed and other disadvantaged citizens in this nation.
Today, two snippets reveal his contemptuous approach to public office. First, there was this article in the Melbourne Age (January 2, 2015) – A taxing tale of two peak bodies – which reports that:
1. In one of his first acts as Minister for Social Services, Morrison cut funding to the Blind Citizens Australia (BCA), Deaf Australia, Homelessness Australia and Down Syndrome Australia, which are groups that provide advocacy and support to disabled and homeless people.
The rationale for the cuts – the public statement – centred on the need for fiscal austerity.
But without these organisations, the plight of these disability and disadvantage groups remains below the public radar and the Government can then all but ignore them. So the public can never find out about the government neglect for those in need.
But the article also revealed that the other public body carrying the initials – BCA – in this case, the – Business Council of Australia – which “represents the chief executives of approximately 100 large Australian corporations” (aka ‘the top-end-of-town’) received a very lucrative gift from the Government before Xmas.
The article notes that a week before Morrison cut funding to the disability and homeless groups:
… the government had back-flipped on a proposed tax avoidance reform (Section 25-90) entailing some $600 million in tax deductions that multinational companies could claim on interest on their debts in offshore subsidiaries.
As it turned out, the “stakeholders” with whom the government had “consulted” before it made its decision were the big audit firms (whose best clients are the multinationals) and assorted peak bodies such as the Minerals Council of Australia.
Austerity, it appears, doesn’t apply to some. As usual.
The article documents a range of other concessions that the Government has extended to big business since its election in 2013 while hacking into the support provided to groups, which provide services to the poor and disadvantaged.
Second, , we learned today that Morrison, in his previous role as Minister for Immigration and Border Security has tried to bully local governments who oppose his vicious approach to refugees. In this Melbourne Age article (January 1, 2015) – Scott Morrison threatens to stop citizenship ceremonies by Moreland City Council – we learn how the former Minister has threatened a Mayor over her stance against refugee policy – to wit, locking them up with their children on remote Pacific Islands in deplorable conditions and allowing bullying security guards to murder and beat them.
On Australia Day each year (January 26), local governments hold citizenship ceremonies around the nation. One local government area in inner-Melbourne, which has a policy of welcoming refugees and opposes the government’s brutal approach wrote to the Minister informing him that they would not read:
… out a ministerial message during the ceremonies.
The message is meant to be read before official speeches.
It turns out that the Ministerial message is a personal political statement from the Government and is not required under the law that governs citizenship ceremonies. It is thus gratuitous politicking.
The Mayor has refused to include the message in the upcoming ceremonies in her jurisdiction. She told the press that she did not want to be:
… forced to act as a mouthpiece for a government whose policies this council does not agree with … Many citizens-to-be at Moreland are former asylum seekers … I do not feel comfortable acting as a spokesperson when it comes to personal messages from the minister. I feel that the reading of a message from the minister in fact politicises what should be an apolitical occasion, as does threatening to remove Moreland’s ability to confer citizenship.
The Minister’s response? He claims it was his “prerogative” to enforce the reading aloud of his political message and he told the Mayor that:
If you fail to comply with this request by January 10 2015, I will withdraw your authority, and that of the deputy mayor and general manager, to preside at Australian citizenship ceremonies …
Nice! A bully boy who claims to be implementing his Christian values.
Time for Jazz Reggae Meltdown
To restore equinimity after reading all that we need some melody.
Here is Ciyo & YolanDa Brown’s Jazz Reggae Meltdown with Ciyo Brown on guitar and YolanDa Brown on tenor sax, with an all star supporting cast of British jazz-reggae fusion musicians.
This was recorded at the Hideaway Jazz Cafe in Streatham (London) on April 13, 2013.
Its mellow – which is a necessary tonic sometimes when dealing with matters of economic and social policy.
The Saturday Quiz will be back again tomorrow. It will be of an appropriate order of difficulty (-:
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.