The year Australian progressives abandoned the national commitment to full employment

At present, the unemployment rate in Australia is 4.2 per cent and falling. If the rate of new immigrants remains low for a while as our external borders open, then it is likely the unemployment rate will fall into the 3 per cent range soon. What people are learning is that the claims made by mainstream economists that full employment was anything between 5 and 8 per cent (at various times to suit their arguments) was a lie. It just suited their ideological agenda and flawed theoretical framework to maintain that narrative. Of course, underemployment is still very high, which means that even if the unemployment rate falls further, we are still a way from being at full employment. But with prices accelerating at present, we are seeing calls for government to pursue an austerity fiscal approach, which would prevent the unemployment rate falling further. We have been here before. Today, I document a major turning point in Australian politics, when the Labor government became the first to abandon the national government’s commitment to full employment, a policy approach that had defined the post Second World War period of prosperity. So … back to 1974 we go.

To remind you of the historical context, this graph shows the national unemployment rate since 1860 for Australia. As you can see, the last time the unemployment rate went below 4 per cent was in 1974 (when it averaged 2.7 per cent).

At that time, there was also virtually no underemployment.

The red segment from 1945 to 1974 represents the period of true full employment in Australia and it came about because the national government expressly took responsibility via the strategic use of its fiscal policy capacity to ensure there were enough jobs for all those who wanted to work.

And it wasn’t the private sector that ensured there were enough jobs.

As I have written often before, while private sector employment growth was strong, it was insufficient to ensure there was work for all.

Further, while there were also many opportunities in the main public sector agencies, the fact remains that the government offered a ‘buffer’ of jobs throughout the public sector that guaranteed anyone who wanted to work could find a job.

It was implicit, but even the most disadvantaged workers (those with less education, with criminal background, with mental illness, with limited English-speaking skills, etc) could gain jobs in public transport, local councils, etc anytime that they wanted to work.

1974 is an important break year in Australian history.

Over the years, I have done a lot of research tracing the turning points in the political commitment to full employment across many countries.

The book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, September 2017) – summarised some of that work.

The overwhelming finding from that research is that it was the social democratic politicians that turned neoliberal while in power and first abandoned the commitment to full employment.

Remember the famous – speech – on September 28, 1976 by British Labour Prime Minster James Callaghan at the Labour Party Conference held at Blackpool.

Callaghan’s famous declaration went like this:

We used to think that you could spend your way out of a recession, and increase employ­ment by cutting taxes and boosting Government spending. I tell you in all candour that that option no longer exists, and that in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of infla­tion into the economy, followed by a higher level of unemployment as the next step. Higher inflation followed by higher unemployment. We have just escaped from the highest rate of inflation this country has known; we have not yet escaped from the consequences: high unemployment.

His words have echoed down through the years and constituted one of the major turning points in ‘Left’ history. Successive, so-called progressive governments and politicians have repeated the words in one way or another.

For all intents and purposes, the British Labour Party, in government, had become the first practising neo-liberal government in British history.

Modern discussion among progressives has forgotten that there were other options at the time that the British government rejected, which would have significantly altered the course of history and saved Britain from its subsequent neoliberal ransacking.

Those rejections by the British Labour Party leadership were ideological rather than based on substance. They had become infested with Monetarist thought.

I have also documented in my book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015) – the way François Mitterrand’s French government in 1983, followed suit and abandoned its socialist agenda in favour of a neoliberal austerity approach under the watch of Jacques Delors, who would later develop that approach further to become the blueprint for the disastrous Eurozone.

But these shifts in political approach to neoliberalism came after 1974.

September 1974 – the Australian Labor Party in government is still committed to maintaining full employment

The second of the Whitlam government’s three budgets was delivered by the Treasurer, Frank Crean, on September 17, 1974.

The Budget was Crean’s second and last. In December 1974, Whitlam replaced Crean with Dr. Jim Cairns.

On September 17, 1974, the Treasurer, Frank Crean delivered the second fiscal statement (aka ‘budget’) of the Whitlam Labor Government.

You can find an interesting retrospective on Frank Crean’s political career in the Australian Treasury publication, Economic Roundup (Issue 2, 2013) – Frank Crean: a long wait for a turbulent tenure.

At the time Frank Crean finally became treasury after years in Opposition, the OPEC oil crisis hit and Australia (and the globe) was “facing the most turbulent global economic conditions since the depression as the quadrupling of oil prices saw the emergence of stagflation in almost all advanced economies.”

He stuck to his progressive credentials throughout though and had been stalked by William Hayden, who thought he should be Treasurer instead.

Prime Minister Whitlam favoured Hayden but also knew that Frank Crean was more qualified to take on the role.

The conservatives hated the Whitlam government (it was the first Labor government in 23 years in Australia).

The conservatives had by then acquired a ‘right to rule’ mentality and did everything they could to undermine the Whitlam government, which didn’t help itself through the actions of an inexperienced ministry.

After the oil shock, inflation accelerated in Australia and unemployment started to increase.

By 1974, the social democratic agenda of the Labor government was under strain from within and attack from without.

The 1974 ‘Budget Speech’ was seen as a key statement of what the Government was going to do to move beyond the inflationary spike that OPEC had introduced.

The – House of Representatives Official Hansard – records Frank Crean’s Speech and the debate that followed in the Australian Parliament (start at page 1274 Appropriation Bill (No. 1) 1974-75 Second Reading).

Beset with calls from economists and conservatives to cut spending to deal with the supply-side inflation shock, Frank Crean told the Parliament that:

The Budget proposals I am announcing tonight are designed to advance our programs and to make Australia a fairer society.

A functional approach to fiscal policy setting.

He acknowledged that his fiscal strategy was being “framed within the context of an economy subjected to exceptional strains:

We share with all our major trading partners problems of economic management unparalleled in modern times.

He noted that aggregate spending was moderating and “unemployment has increased and overtime working has diminished” but that “powerful cost pressures have been unleashed which threaten further unsettling price increases”.

His approach was to explore wage guidelines through the tax system to establish norms for wage and salary increases to contain the wage-price spiral that was emerging.

And at that point in the Speech he made his momentous statement:

The conventional response to inflation has relied almost entirely on the creation of mass unemployment. Those who advocate such a course in present conditions are unable to say what level of unemployment would markedly reduce inflation. The Government is not prepared deliberately to create a level of 4 or 5 per cent, or perhaps even higher unemployment.

He then said:

The Government is convinced that the best course is to attack the cost price spiral directly.

And he proposed a range of measures which would involve federal and state government charges, deals with unions and employers to elicit widespread cooperation to reduce inflationary pressures without creating mass unemployment.

To that end he noted:

To rely on unemployment to reduce cost pressures would inhibit that co-operation and could destroy the Government’s right to claim it. The Government
will not close off its options until the possibilities of co-operation have been given a proper test.

So the Labor government knew that if they scorched the Earth by driving workers into mass unemployment, any hope that they could pursue a cooperative consensus based on collective will would be lost.

The 1974-75 fiscal statement forecast a rise in the deficit of some $A278 million on the previous year.

The Treasury papers accompanying the 1974-75 fiscal statement note that:

… this estimated net outcome is heavily influenced by the effect of inflation on revenue and comparisons with past deficits have limited significance for purposes of economic analysis …

the last point can be illustrated by pointing out that should inflation be less severe than assumed in calculating the revenue estimates, the deficit will be larger, yet it would be meaningless to suggest that that outcome implied that the larger deficit had added to inflation.

It has to be said that Frank Crean did not enjoy an good working relationship with the Federal Treasury, who were stacked with conservative economists and who had opposed many of the major initiatives pursued by the Labor Government (equal pay, increases in the minimum wage etc).

The Labor leaders “successfully put forward to the Labor Party’s national conference a proposal to establish a Department of Economic Planning as a rival to Treasury but this was not enacted.”

The Treasury Roundup retrospective on Treasurer Crean noted that:

Crean as treasurer gradually became estranged from his department. By mid-1974 he ‘failed to argue strongly or effectively for his department’s views’ … Later he was reputedly dissociating himself from their views, claiming that papers brought before cabinet were the department’s views not his own … For its part ‘Treasury had more or less tolerated Crean’ … ‘Treasury weakened its own influence with the Labor Government not because its advice was often unpalatable but because it was always monolithic’ … By the time of the 1974 budget Treasury was regarded as sulking, preparing only a perfunctory draft of the budget speech and not helping explain it to the press.

So, with the major economic department undermining the efforts of the Government to pursue its progressive agenda, it was obvious that stormy waters would be encountered.

The point though is that the Labor government in September 1974 was still firmly committed to maintaining full employment and refusing to use mass unemployment as a way to discipline wage demands and reduce the inflationary pressures that were present.

It also clearly rejected the emerging Monetarist doctrines that were demand for a sharp rise in unemployment.

It also refused to bow to the demand of employers who wanted the Government to deliberately increase unemployment so as to thwart the wage demands of workers. We now have archived Cabinet papers released from the late 1960s that reveal letters from major employer groups demanding that the government push up the jobless rate to undermine union bargaining strength.

One year later

In 1973, the Reserve Bank of Australia has significantly tightened monetary policy to discipline the accelerating wage-price spiral triggered by the oil shock.

The so-called ‘liquidity squeeze’ saw property prices collapse and several large property developers went broke (Cambridge Credit, Home Units and Mainline Corporation being the most notable).

The Treasury retrospective concluded that:

Monetary policy appeared ineffective; ‘there was still no clear evidence that the … most protracted liquidity squeeze in Australia’s post-war history had made any identifiable impact on the wage-price spiral’

If only that conclusion had have become ingrained in the policy circles.

At any rate, unemployment rose as the economy slowed somewhat.

The Treasury also told Government that “100,000 workers would need to lose their jobs in order to get inflation under control”.

That would have pushed the unemployment rate up to over 4 per cent.

The constant struggle with Treasury reduced Frank Crean’s effectiveness within the Government and he lost the Treasurer’s position in December 1974 (replaced by socialist-oriented Jim Cairns).

Cairns had previously taught politics at the University of Melbourne and was the leader of the Labour Left. He led the anti-Vietnam war movement in Australia.

In 1975, there were a few scandals (well the orthodox press representing the conservatives made the events scandals), which sunk Cairns as Treasurer and he was replaced on June 6, 1975 by William (Bill) Hayden, who had always aspired to the job.

This is when the shift in Labor Party thinking began in earnest.

On August 19, 1975, Hayden delivered his first ‘Budget Speech’ and the last of the Whitlam government, which was controversially dismissed by the Governor-General, who was a drunk and dominated by the conservatives (with some CIA influence). The dismissal is another story.

The – Speech – was momentous in its impact on Australian politics, particularly, from the Left perspective.

Hayden told Parliament and the nation that:

This Budget is presented at a time of high inflation and, by Australian standards, high unemployment …

Some sacrifice and patient restraint is called for from all of us in our demands for more resources, whether it is additional public services that are wanted or higher personal incomes.

We expect that as the expansion of public sector activity is restrained, the opportunities for private sector expansion will improve, though full responses to greater room for growth may take time to develop …

In framing the Budget, therefore, we have exercised the utmost restraint on government spending …

In the context of an economy beginning to pick up, a deficit of the order initially projected would have been a prescription for accelerating inflation. Its acceptance would have been tantamount to abandoning concern with inflation, discarding our wages policies, condemning the corporate sector to an attack upon its profitability and threatening the future jobs of thousands of Australians all at a time when the first signs of improvement in most of those respects are beginning to appear.

We are no longer operating in that simple Keynesian world in which some reduction in unemployment could, apparently, always be purchased at the cost of some more inflation. Today, it is inflation itself which is the central policy problem. More inflation simply leads to more unemployment …

We therefore rejected a deficit or the order implied by all the expenditure proposals before us …

If Budget outlays this year were again to grow faster than total spending, a further decline in the private sector share of GDP would ensue. That would mean an accelerated deline in investment and productivity as well as a further contraction in job opportunities.

I will analyse the whole debate in more detail at another time.

But all the key points are on display here:

1. Rejection of the Keynesian consensus and adoption of a Monetarist inflation-first agenda, knowing that unemployment would rise.

2. Prioritisation of private employment over public.

3. Austerity mindset adopted.

4. Belief in Friedman’s natural rate of unemployment – reducing inflation will deliver full employment at whatever unemployment rate occurs.

5. Fiscal spending crowds out private spending – the last point in the quote.

This was the first time, that the progressive side of politics in Australia had articulated these Monetarist ideas.

That was the turning point and those views have dominated the Labor Party ever since.

I have been trying to find any documentary links between the developments within the British Labour Party at the time and the adoption of Monetarist thought by Dennis Healey etc and the evolution of Hayden’s thinking.

Both Anglo Labour Parties abandoned full employment around the same time and Hayden’s rejection of “simple Keynesian” policies resonates closely with Callaghan’s similar claims delivered a month later in Blackpool.

Conclusion

There is a lot more to write about this turning point – teasing out the lobbying forces etc that caused this shift in the Australian Labor Party.

But the shift has been incredibly damaging to the progressive agenda in Australia and now we have former Labor Prime Ministerial advisors claiming we should revert back to the shocking policies of the conservatives in the period ahead – I documented that in yesterday’s blog post – The last thing we need is a return to fiscal surpluses and rising household debt (February 21, 2022).

That is enough for today!

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