Australia – inflation still falling while the RBA governor keeps inventing ruses to keep hiking rates
It's Wednesday and there is a lot going on in the data release sense -…
On Friday, we had the extraordinary admission from our Federal government that they had overestimated the injection required to fund their wage subsidy JobKeeper program by some $A60 billion. When the overall program was announced the Treasury allocated $A133 billion to it. So now they are admitting to a 45 per cent forecasting error, which sort of dwarfs the worst errors that the IMF makes, and they sure make some bad mistakes in their projections. Whatever the reason for the mistake, the way the Treasurer has defended it is quite repugnant – claiming virtue out of the incompetence. And while all the Labor Party economists are talking about seeing the error from space, none of them picked it up or had the nous to realise that the figures didn’t add up when the Government originally released them. I am the only economist who wrote that the figures published by the Government didn’t make sense. I did that on April 29, 2020. I also wrote to the Treasury and the Treasurer requesting answers to questions that reflected my concern. They didn’t bother replying. Now everyone is wise after the fact. Anyway, the $A60 billion is a nice round figure. And I outline a plan in this blog post on exactly how the Treasurer can spend it and improve the well-being of more than a million Australians with a stroke of the pen.
As everyone knows now, the boffins in Treasury have made the largest official forecasting error in Australian history by admitting that their celebrated JobKeeper wage subsidy program, which they claimed would inject $A133 billion over 6 months into the economy and reduce the unemployment rate by 5 percentage points (from 15 per cent to 10 per cent), would now actually cost $A60 billion less than thought due to an ‘accounting’ or ‘form fill out’ error.
Here is their press release (May 22, 2020) – JobKeeper update.
Instead of 6.5 million workers being covered, the Treasury now claims that only 3.5 million workers will receive payments.
Strangely, the Treasury continues to claim:
Treasury’s overall view of the labour market is unaffected by this reporting error … It remains the case that in the absence of the JobKeeper program, Treasury expects the unemployment rate would have been around 5 percentage points higher. Treasury continues to expect the unemployment rate to reach around 10 per cent …
Regular readers will know that on April 29, 2020, just after the JobKeeper scheme was announced, I wrote this blog post – JobKeeper wage subsidy – some strange arithmetic is afoot (April 29. 2020).
It was clear to me that the estimates provided by the government didn’t add up or jive with reality.
I was the only economist who made that claim at the time – conservative or ‘progressive’.
I wrote to the Treasury and the Treasurer’s office at the time with a series of question and requests for more information pointing out what appeared to be errors.
In the past, academic researchers such as myself have often written to government departments to seek such information or briefings and the government typically has responded positively.
This time, I didn’t receive a reply from either the Treasurer or the Treasury. Closed shop these days.
It is a pity that the Treasury didn’t take heed of that post and my questions.
I wonder who is going to take responsibility for this scale of error.
There was no way the original estimates could have been correct.
It is all very well for the Treasury to claim there were bookkeeping errors but their economists should have had the nous to realise that it all didn’t add up. It was obvious.
The Labor Opposition Leader put out a Tweet about the error on Friday evening (20:01):
A mistake you could have seen from space.
If they can’t get this right, then how can they be trusted to get the recovery right?
But, no-one in the Labor Party picked the error up.
The shadow treasurer didn’t pick it up and praised the JobKeeper program.
Another economics spokesperson, who likes to claim MMT is nonsense, didn’t pick it up.
None of the Labor advisors – formal or informal – didn’t pick up the absurdity of the numbers at the time. They tweet a lot about themselves and what smart guys they are, but couldn’t even cope with simple arithmetic.
It is easy to say that you “could have seen … [the error] … from space” after the fact.
At his press conference on Friday, the Treasurer tried to make virtue of the fact that his government was starving a severely recessed economy of $A60 billion when just a week before the ABS had published horrific labour market data – see below.
In an Interview on the ABC television (May 22, 2020) – Job Keeper Interview – he told the host that:
1. “these numbers are good news for the taxpayers. $60 billion less than would have otherwise been spent because the Australian economy has not deteriorated by as much as Treasury initially forecast. This is all borrowed money …”
The host ticked that lie.
2. He kept repeating the line “This is good news for the taxpayer” and “its all borrowed money”.
3. “Every dollar that we’re spending is borrowed money. It means that our children will be paying it back. It will take years to pay back the accumulated debt from the coronavirus period, there’s no doubt about that.”
4. “The JobKeeper program and the JobSeeker program are to work in complement to each other. One has got 1.6 million workers on it, the other will have 3.5 million workers on it according to Treasury. That’s nearly half the Australian labour force.”
In actual fact, it is only 37 per cent of the Labour Force as at April 2020 – nowhere near nearly half.
But in this era of $A60 billion errors anything is close enough!
The reality is this.
What an Modern Monetary Theory (MMT) understanding furnishes one with is the insight that if there is mass unemployment then you know at least one other thing – that the fiscal deficit is too small.
In extraordinary situations, this statement might be recast as the fiscal surplus is too large.
But in recessionary times, when there is rising unemployment, the government has all the financial capacity it needs to stop those workers losing jobs.
As I note below, this government has overseen a massive rise in labour underutilisation over the last several weeks.
Now it can be said that a significant proportion of the job losses (and labour force exits) have arisen as a result of the lockdown rules being imposed by state and federal governments.
But whatever the cause the workers lose their incomes and a proportion go on unemployment benefits (JobKeeper) and those that exit the labour force as a result of a lack of job opportunities miss out altogether.
So for the Treasurer to be happy that he is no longer spending the $A60 billion is tantamount to saying he has chosen to allow around 1,480 thousand workers to be without jobs.
He is idly sitting by while the lives of these workers is trashed.
Further, as I will demonstrate tomorrow when I analyse all the debt and central bank purchases of government debt that his statements about ‘borrowed’ money are very misleading.
The bottom line is that before this mistake was realised, the fiscal stimulus was grossly inadequate.
Trying to make virtue of the fact that you are spending $60b less than you thought when you were not spending enough in the first place while the unemployment rate skyrockets should disqualify one from office.
Anyway, here is a surefire way to spend the $A60 billion and dramatically improve the well-being of the most disadvantaged.
CofFEE has updated our modelling of the investment required to reduce the unemployment rate from 10 per cent to 4 per cent.
The latest updated reflect the deterioration of the labour market as captured in the April Labour Force data, which I analysed in this blog post – Australian labour force data – underutilisation rate rises to 23.4 per cent (May 14, 2020).
In April, the Australian Bureau of Statistics told us that:
1. Employment fell by 594.300.
2. Official unemployment rose by 104,500, which took the unemployment rate to 6.2 per cent.
3. The participation rate fell by 2.5 points and was 2.7 points below the August 2019 peak of 66.2 per cent.
4. That difference amounts to 554.4 thousand workers who lost their jobs and dropped out of the labour force, thus, not being counted among the official unemployed.
5. Underemployment rose by 4.9 points to 13.7 per cent and when added to the official unemployment generated a total labour underutilisation rate of (a staggering) 19.9 per cent or 2,639.4 thousand workers.
6. But if you add the workers who dropped out of the labour force during April 2020 as a result of the collapsing employment opportunities (in other words, they told the ABS they were not actively searching) then the total unemployment is closer to 9.7 per cent rather than 6.2 per cent.
And the total underutilisation of available and willing labour is closer to 23.4 per cent rather than 19.9 per cent.
In other words, a disaster, however you want to spin it.
I provided some estimates of the investment required to introduce a Job Guarantee in Australia based on the March 2020 labour force data in this blog post – A Job Guarantee would require $A26.5 billion net to reduce the unemployment rate by 6 percentage points (April 30, 2020).
But with the rapid and substantial deterioration of the labour market in April, we decided to rerun our model to take into account the increased scale of the problem.
The exercise we constructed was not to get the economy back to full employment, which we believe is on that has an official unemployment rate of 2 per cent or less, zero underemployment and participation rates at their peak (that is, no hidden unemployment).
Our estimating framework allows us to model that scenario but this time we chose something less than that objective for reasons we explained in that earlier cited blog post.
Our view is that the fiscal intervention proposed by the Federal government is grossly inadequate in size and poorly targetted in scope.
The $A60 billion admission reinforces that view.
As part of the stimulus package, the Australian Treasury estimated that the unemployment rate would reach 10 per cent by June 2020. They claimed the wage subsidy would keep the unemployment rate from rising to 15 per cent.
Well given the level of incompetence displayed by that agency that was revealed last Friday, anything could happen.
But in our modelling exercise:
1. We took the June 2020 estimate of 10 per cent unemployment as a starting point.
2. The pre-GFC low-point unemployment rate (February 2008) was 4 per cent. So, we entered this crisis in a worse position than just before the GFC.
3. We also recognised that the potential labour force at an unemployment rate of 4 per cent would be much larger than it was estimated to be by the ABS in April 2020. We thus used the August 2019 participation rate as the benchmark and added the hidden unemployed to our estimates of jobs required.
4. This what we found based upon the updated data – if the unemployment rate was 10 per cent and we wanted it to be 4 per cent, the government would have to create:
(a) 1,212.4 thousand jobs in total (assuming the participation rate doesn’t change any further). Of those, 705.8 thousand would go to those who were in the labour force in April 2020, and 506.6 thousand would go to those who had dropped out of the labour force in April 2020.
(b) 1002.9 thousand full-time jobs (assuming the full-time/part-time mix doesn’t change).
(c) 209.5 thousand part-time jobs.
5. Based upon the current national minimum wage in Australia ($A740.62 per week), an average full-time working week of 38 hours, 30 per cent on-costs (hiring costs), plus additional capital costs per worker (plant, equipment) of 35 per cent, the total annual full-time Job Guarantee job outlay would be $A77,024.48 and the annual wage received by the worker would be $A38,512.24
The capital costs etc were estimated from a survey my research centre – Centre of Full Employment and Equity (CofFEE) – undertook of Local Governments to assess supervision, plant and other costs that would be required to supplement each Job Guarantee job.
The 35 per cent assumption is based on a labour intensive suite of jobs.
The outlays for part-time workers are proportional to the ratio of average part-time to full-time working hours.
You can read about that survey and all the details of our research work in this report – Creating effective local labour markets: a new framework for regional employment policy.
6. We took into account:
(a) Labour productivity – and created a ‘composite’ job.
(b) Multiplier effects of each new Job Guarantee job – so how much does GDP and consumption expenditure increase.
(c) In turn, how this impacts on corporate profits and non-government sector employment.
(d) The extra tax revenue the government receives as a result of the higher employment levels both in the public and private sector.
(e) We also differentiated between the workers who would be receiving unemployment benefits and those outside the labour force who would not in the calculations of the increased wage income.
This distinction also conditioned our estimates of the reduced outlays on unemployment benefits under the assumption that only a proportion of the workers who were employed in the Job Guarantee were receiving income support payments (those in the labour force), which would be terminated.
This clawback was also calibrated according to estimates of different income support payments by family structure and marital (now called partnership) status.
It is important to note that our modelling did not seek to add the jobs required to eliminate underemployment. We will include that when we release the full report in a week or so.
This is the current underemployment situation (as at April 2020):
1. Total Underemployment (000s) 1816.1 thousand.
2. Underemployed preferred extra hours (hrs/week) 15.0
3. Total FTE jobs required to eliminate underemployment – 638.1 thousand.
To reduce the unemployment rate by 6 percentage points (say from 10 per cent to 4 per cent – in fact, it doesn’t matter where you begin the simulation), then the following results are relevant.
|Total Rise in Employment (000s)||Job Guarantee||Private Sector|
Why does the private sector also expand?
Because the income stimulus to unemployed workers at the start (which is the difference between their Job Guarantee wage and the unemployment benefit) provides stimulus for increased consumption spending, which induces further income growth and via the multiplier effects a much larger final increase in national income and that stimulates the growth in private sector employment and corporate profits.
So introducing the Job Guarantee dramatically improves the material circumstances of the most disadvantaged.
But it also improves the situation for employers and profit recipients (which, of course, is not the driving motivation but a positive derivative impact).
To accomplish that increase in employment, the Federal government would outlay:
|Investment||$A billion||Per cent|
|Gross investment required over 12 months||80.6||Net investment required over 12 months||53.9||Clawback over 12 months||26.6|
|Change in government share of GDP||3.6|
What explains the clawback?
The Government receives extra personal tax revenue ($A6.99 billion), extra corporate tax revenue ($A3.8 billion), reduced unemployment benefit outlays ($A8.7 billion) and increased indirect taxes ($A9.4 billion) at current policy parameters.
And that $A60 billion?
To implement a Job Guarantee and reduce the unemployment rate by 6 percentage points:
1. The Federal government would have to outlay just $53.9 billion in net terms over the next 12 months.
2. The wage subsidy Job Keeper program involved gross outlays of $A133 billion minus the mistake of $A60 billion to reduce the unemployment rate by 5 percentage points over a 6 month period.
3. Do the sums!
It makes no sense to oversee a labour market with drastic rises in unemployment and underemployment, when all that has to happen is for the government to announce a Job Guarantee.
That is enough for today!
(c) Copyright 2020 William Mitchell. All Rights Reserved.
This Post Has 21 Comments
The post on this site Jan 30th 2018 – Planning public works history has a lot to say if we listen properly.
“The neo-liberal era has also been marked by a major reduction in Departmental capacity to design and implement fiscal policy – given the obsession with monetary policy and the major outsourcing of “fiscal-type” government services to the private sector.
Many of the major government policy departments in the advanced nations are now just contract managers for outsourced service delivery.
So this diminution in the overall capacity of the government machine to implement efficiently and speedily complicated nation-wide infrastructure programs has to be addressed as a matter of urgency by progressive politicians.
As a result of what we learned during the GFC, we can no longer deny that fiscal policy is required to address serious swings in non-government spending.
Monetary policy has been proven – categorically – to be ineffective in dealing with aggregate demand failures of the sort we have witnessed in that crisis.”
Is that not the real issue at the moment if and when they decide to introduce a JG ? How long is it going to take to be paid for doing nothing to being productive ?
It’s not an overnight story. We can’t do these things overnight and people are being displaced. Are all of those workers that have been displaced well-suited to the kinds of jobs we’re gonna be creating? There will be a lot of administrative work that will need to be done.
It’s never about the number it is about the skills and real resources. Since years of neoliberalism has reduced the capacity to implement changes quickly. How would you implement it ?
We need to show in great detail how we would do this or these questions are going to keep coming up from our opponents. Even more so now in this climate. You are probably looking at A decade to phase it in properly.
A MMT’d learning video perhaps ?
Hi Bill, the link to the 29 Apr article is not working
[Bill notes: Thanks for spotting the error]
P.S.: My children are already so worried of paying it all off 🙂 I’m enjoying reading Randy’s Primer and the textbook.
Bill – from a new convert, thank you for all your hard work and paving the way for better education regarding the increasingly more obvious fiscal realities. It’s both a disgrace and a tragedy that the gormless media are patting the dimwits in Canberra on the back for their covid response (even after this momentous cockup). Unfortunately it feels like we’ve got nowhere to turn to with either major party.
Here’s the URL for Bill Mitchell’s 2018 blog post cited by Derek Henry above:
I wonder how far out in space the Labor Party gurus would have to be to spot the error? That aside, MMT analysis seems ‘wing agnostic’ and deserving of serious review by economists and policymakers – many of whom are plainly still stuck in the ‘how can we afford it’ paradigm. I share Derek’s ‘overnight story’ concern for MMT. Firstly, what would a JG mean for worker and small business incentive? Would those who dislike their current work week prefer a JG to their current situation? Would it be a big deal if they were not ‘well-suited’? Aha – a possible solution! Could part of the JG include a ‘conscription component’? Perhaps all people between 17-25 years should spend at least 6 months in a task which builds knowledge or resilience capability in local community (e.g. managing the fire risk that appears part of the new climate normal). Secondly, would a JG impact on the exchange rate? Would it matter?
“He is idly sitting by while the lives of these workers is trashed.” Bill’s throwaway line about the Australian Treasurer applies, of course, to the entire global neoliberal system, which the Treasurer merely happens to embody in a particular locality at a particular moment. What has amazed and disappointed me most of all in our collective responses to the Covid Crisis is the virtual abandonment of big picture thinking in favor of focusing on the details of our dilemma, the inability or unwillingness of not only the elites (as one might expect) but also the masses (for which one might have higher hopes) to see the forest for the trees. There we were just a couple of months ago, on a freight train hurtling down the track of capitalist mass production and consumption, heading hellbent toward the yawning abyss of plutocracy and ecocide, and suddenly, unexpectedly, the train came to an abrupt stop. And now here we passengers are, most of us scratching our heads and hoping “they” figure out how to get the train moving again ASAP so it can reach or exceed its prior speed. Wouldn’t a modicum of wisdom–hell, a tiny dose of common sense–have welcomed this opportunity, however painfully it arrived, to pause and ponder whether we wanted to continue this insane, frenzied journey, whether there were other tracks on which we could travel, other destinations that beckoned to us, whether we really wanted to be on this freight train at all, and, if not, upon what alternative vehicle might we progress together? Yes, there’s been some of this big picture thinking here and there on the margins of the mainstream, but decades of TINA neoliberalism seem to have stunted the vast majority of imaginations across-the-board to the point where our avoidance of immediate death–escaping Covid infection right now–is our all-consuming obsession, the horizon of our feverish and hazy vision. Thus I greatly appreciate it when Bill holds forth with more than numbers and charts (not for a moment to dis “the trees”) and puts big and bold ideas on the table concerning “the forest.” This he does and does well, but the rest of us must pick them up and run with them, run as if our lives depended on them…because, well, they probably do.
This is one of the reasons why I rate Bill. Everything is always backed by empirical data and statistics. It’s progressive economics but always grounded in data. How could others not pick up an error of that magnitude?
Neoliberals do not want that!
But they do want to keep wages low, or debt pressure high, meaning workers will be less likely to complain or make demands. As workers struggle to provide their families with all the temptations that a capitalist society offers, they become far less likely to risk their employment, and less able to improve their situation. A healthy pool of unemployed helps maintain that dogma!
We will need to factor in the early superannuation withdrawals because they will also function as economic stimulus – $10.6 billion worth so far and more coming.
It may be appalling that a sovereign government has allowed and encouraged the private sector to do the governments job for it by raiding their retirement savings today and thus reducing their capacity to spend when they are no longer actively earning an income – nonetheless, that spending will have an effect.
At least Credit Suisse understands the realities exposed by MMT when they say………………
” Many commentators will argue that the government should keep its power dry, by saving the missing $60 billion worth of stimulus for a rainy day. But underneath many of these claims is the view that the Federal government is somehow funding constrained and needs to eventually pay for the stimulus. This is not technically correct. Fiscal deficits create deposits and reserves in the banking system, because they occur in the first instance on “overdraft-like” terms with the RBA. Whether or not the government chooses to spend $60 billion today or tomorrow is not a question of funding or sustainability of funding – it is a matter of choice.”
I am new to this world of economics, and am learning on the fly. I am an Architect by training, and the PM comments regarding the $60B being like getting a house built for way less than intended raises a question in my mind. Why have you built a house for so much less when the kids and the mother-in-law have to sleep in the garden shed because you don’t have enough bedrooms? I have found this Governments response of penny pinching, restricting certain groups and the like totally heartless. In answer to Boris’ comment above “My children are already so worried of paying it all off” which is repeated everywhere, perhaps money wisely spent is not actually a debt to be paid in the future but an investment in a better one? I used to say to my son when travelling on the train, “do you know how much these rails line cost to build 100 years ago?” The answer was that it didn’t matter as it allows us to have the wonderful system today that allows so many to get to work and be productive.
When they say the Government has to borrow the money shouldn’t we be asking from whom? The Auditor General should have those so called figures which could be analysed, by Bill preferably, to show how fictitious they actually are.
” would a JG impact on the exchange rate? Would it matter?”
Surely the elimination of the Poverty Industry itself would counteract any initial devaluation.
Just as devaluation following the loss of thermal coal export-income during conversion to pumped hydro backed green electricity would be counteracted by increased economic efficiency.
Can you share a source for
“Credit Suisse understands the realities exposed by MMT when they say …”?
I want to post it on another site, but I need a source.
I’m 73 and I could’t find it with google.
The comments you want are by Damien Boey from Credit Suisse. A secondary link is below.
Steve_American (If Bill allows it:)
I think the author draws the wrong conclusion while recognising the capacity of the currency-issuer.
BTW, here is a MMT thread on (America based) ‘Political Forum.com’
” Would a JG impact on the exchange rate? Would it matter?”
Full employment at all times encourages Foreign Direct Investment which helps the exchange rate. Since we use floating ones now anyways they flexibility takes the strain. For example.
The evidence shows – Bill’s post on this site 9th Feb 2016 – Is exchange rate depreciation inflationary. That pass through inflation is not as bad as it was.
Since we all Only have a limited amount of disposable income every month. If imports do become more expensive we change our spending habits instead. We don’t borrow money to buy avocados. We tend to buy cheaper alternative instead and look locally.
Because exporters have spent years building up their market share that they do not want to lose, they have some tough choices to make. Just ask the Irish mushroom farmers about their experiences after the Brexit vote.
Cut working hours
Become more productive
Cut their prices
If and when they cut their prices the exchange rate will adjust upwards. Find its true level eventually as the gamblers of FX get stopped out based on their fixed exchange rate thinking. The Kaldorian view point stop out I call it.
@Eco Newbie: I’m trying to write something on MMT for leftwing newspaper in UK (Morning Star). The last thing I wrote was: “All good public expenditure is an investment in well-being” but I really need to qualify it. Your comment stimulated me to ask for help here.
And another “progressive” in the Guardian today- Richard Denniss- claims he said the numbers were dodgy, and links to his own article to prove it. I read the article and I cannot read what he says it says!! At least he does go on to say that we need a huge stimulus.
Dear Neale (at 2020/05/28 at 3:11 pm)
Thanks for the Comment. There is certainly plenty of that around this week.
Several commentators have claimed they were ‘sceptical’ but in their writing or comments in the press you wouldn’t have guessed it until now.
Others like this case, try to claim they wrote about their doubts, although within the usual meaning of English words and prose you could distil that conclusion from what they offered.
You can draw your own conclusions about all that.
Bill, I think you missed out an important word? Did you mean to have “not” in this sentence?
“But it also improves the situation for employers and profit recipients (which, of course, is NOT the driving motivation but a positive derivative impact).”
Greg responded to Derek Henry, asking, “Would those who dislike their current work week prefer a JG to their current situation? Would it be a big deal if they were not ‘well-suited’ [to the JG jobs].”
Well, it has always been part of Bill’s notion of the Job Guarantee that the job should be created to suit the worker’s skills and abilities (and disabilities). Therefore if the JG is run properly, the workers will all be well-suited to their jobs.
Bill has also pointed out over the years that JG jobs will act as a minimum level of quality for a job: if a private-sector job fails to match the JG in overall attractiveness (pay, conditions, job satisfaction, training, prospects for advancement…) then no-one will do that job: the private employer must make a better offer.
Bill has argued that if that better offer (e.g. higher pay) is more than the business can afford, then really the business was never viable in the first place, since it relied on subsidies (government top-up payments to its workers so that they can survive).
My own thought is that during the pandemic, many (most?) of those in a JG job should be receiving the wage and staying home to protect themseves and others, even if they can’t do work while at home. Yes, this might well mean that many people currently doing low-wage jobs that expose them to possible infection (e.g. in food retail, facing customers) will quit those jobs to stay home unless the wage is raised. I think it’s fair that they should get that danger-money.
(I’m writing this from the United Kingdom, where statistics like the current rate of new infections per million population are in the worst one or two of all countries.)
The “children worry” comment with a smiley at the end was meant in a sarcastic way, to reflect the mainstream political discussion.
Yes you’re completely right about the infrastructure investment example. That’s what Japan has been doing: the “sad, poor country with so much debt” – and maglev trains.
I’ve heard of a local attempt at something similar: a highway in Adelaide where the government built only half of the width “to save money” and then 10 or so years later, when they finally had no choice but to finish the original full scope, just the “other half” cost triple of the full scope original cost or something like that. So that’s a local counterexample of your rail story 🙂
Meanwhile these days freeway users now pay out of their pockets per mile to Transurban and the best one can do is to buy shares in the company to make it less annoying. My children are luckily not yet old enough to be reading books about “government takes taxes and with them pays for roads” and me then having to explain that both the “with them pays” and the “for roads” parts are untrue as the windshield beeper beeps at the toll point 🙂