Yesterday, after sort of saying it the day before and getting close to saying it late last week, and having to wait for the central bank governor to say it first, our Prime Minister, then in quick lock-step, our Treasurer both said the R-word. What gives with this political posturing. The Opposition is largely irrelevant at the moment anyway. The reluctance of the Government to admit the obvious is repugnant. It has been very obvious that the economy is in very bad shape and had been heading that way for some years despite the chimera of prosperity – as the snowball of future recession was growing in size with the private sector debt and the fiscal surplus. Right now, the Government needs to introduce policies that really arrest what we have known for months – that employment is going south and unemployment heading in the opposite direction. Perhaps today’s terrible projections from the International Monetary Fund will sharpen their focus on large-scale public sector job creation initiatives.
There was a story in The Australian newspaper today entitled RED schemes are good written by a former minister in the Whitlam government in the early 1970s. He was extolling the virtues of the old Regional Employment Development scheme, which was a public works direct job creation scheme. He was suggesting such schemes may again find favour as the recession deepens. The RED scheme was a less generous version of the Job Guarantee and suffered as a result of its modesty. It was never based on any fundamental understanding of a modern monetary economy as as such was always a “defensive” program. Defending itself continually from the conservative, soon-to-be, neo-liberal critics. That made me recall my favourite conservative “put down” term – boondoggling and raking – which is used whenever direct public job creation is mentioned as a possibility. Then I recalled a letter that was written by the previous Federal Employment Minister explaining in 2004 why my Job Guarantee proposal was a crock. One thing followed another …
I have resisted writing about the so-called National Broadband Plan (NBP) up until now because the level of debate is quite frustrating. Once again, on a crucial issue that goes to the heart of national development, we are all being hoodwinked by spurious neo-liberal logic. Like all these debates, once it is constructed along an inapplicable macroeconomics, then all sorts of nonsensical points are raised that sound reasonable but are not. For example, the current debate appears centred on how the Government will ever be able to pay back the debt that will be incurred to build the network if consumers find it too expensive to use? On the face of it, the question is seductively sensible. But if you understand the choices open to the Australian government as the sovereign issuer of the currency then you will immediately recognise that the question and related concerns are fundamentally flawed.
Today I was looking through annual reports of the Australian Future Fund, which is an example of what is known the world over as a sovereign fund. I have been keeping an eye on the performance of the Future Fund not the least because it is so exposed by its stake in Telstra, which has gone downhill ever since the previous regime persuaded Australians to buy a stake in something they already owned!. Anyway, most people have been conned by the Future Fund concept – it is shrouded in lies and deceit. In general, the idea of a sovereign fund is based on a misunderstanding (deliberate or otherwise) of the way the modern monetary economy operates. So its time to debrief and make it clear that these policy choices by governments generally undermine public goods and full employment.
The dreaded NAIRU is still about! I was thinking – rather optimistically – that it would just disappear from whence it came! But sorry to disappoint. Some economists just won’t learn. Yesterday the ABS released the latest data from the Australia Treasury Model (TRYM) database. You can get it here. Among other things of great interest that you can find in that database, is the Treasury TRYM model’s estimates of the so-called NAIRU. Sounds scary. Well, it stands for the the Non-Accelerating Inflation Rate of Unemployment and has a central place in neo-liberal mythology. The NAIRU is an important component of the TRYM model and influences the way it produces economic outcomes and policy simulations. So how much reliance should we place on this important component of the policy making process. Answer: not much!. My conclusion: any model that relies on a NAIRU is a crock!
In the last few weeks gardening has entered the macroeconomic discourse again. All over the place – apparently – little green shoots are emerging which bode well for the future. But are there any actual signs? Recent data releases from the US and today’s Index of Economic Activity in Australia suggest that the green shoots are still somewhat subterrainean in inclination. The latest data confirms the message that last week’s Labour Force data sent very loudly – the product and labour markets are now starting to align in a very ugly way and much more fertiliser (organic) is needed in the form of government stimulus …. sorry to repeat it, but, preferably in the form of direct job creation.
I am currently researching (again) long-term unemployment and how it behaves. Neo-liberal economists typically consider long term unemployment to be highly obdurate in relation to the business cycle and thus a primary constraint on a person’s chances of getting a job. This was the assertion that underpinned the neo-liberal approach to labour market policy and which in Australia culminated in the privatisation of the public employment service and the establishment of the (failed) Job Network. It is one of the most disappointing aspects of current federal policy that the Government is intent of keeping this ideologically-driven supply-side approach going. While the Prime Minister continually claims that he wants to introduce evidence-based policy, his decision to retain the supply side neo-liberal approach to labour market policy fails the facts test outright.
The recent policy decisions of the Federal government appears to be in line with those of the previous (insidious) regime when it comes to the unemployed. In expansion packages which have so far totalled more than $A50 billion, there has been an allocation of $650 million for a Jobs Plan and renewed funding for the privatised and failed Jobs Network. You might think that odd given that the unemployed bear the brunt of any economic downturn. I find it obscene. And with the May budget coming up, there will be increasing claims that there is “not enough fiscal room” to do anything more. After all, the Federal Employment Minister has told us “there is no quick fix” despite knowing full well they have the capacity to offer minimum wage public sector jobs to anyone who wanted one. We might take lessons from more enlightened
Yesterday’s labour force data which showed how quickly the labour market is deteriorating, brought some extraordinary reactions from the Federal government. So far their response suggests to me that they have no coherent plan to meet the crisis and are trying to operate within the same labour market policy framework that the previous government installed. That framework failed to achieve full employment when the economy was growing and will do nothing at all for a labour market that is now in freefall. A major shift in policy is needed. More worrying is that the labour force data shows that the teenage segment is in terrible shape. That requires immediate policy action. But the responses I have heard overnight suggest very little will be done because the Employment Minister seems to want us to believe that “there is no quick fix”. That claim is of-course nonsense. The costs of the downturn could be considerably lessened if the Government abandoned neo-liberalism and demonstrated some leadership through direct job creation.
Despite all of us commentators clutching at straws in recent weeks looking for good messages in each new data release (for example, yesterday’s consumer sentiment data), today’s ABS Labour Force data confirms the worst. The Australian labour market is contracting fast and is now outstripping the rate at which the US labour market is deteriorating. The overall unemployment rate rose a further 0.5 per cent in March to 5.7 per cent, meaning it has risen 1.2 per cent in the first three months of this year. The dream states of Western Australia and Queensland, which had enjoyed the commodities boom bounty while the rest of us slowed, are now looking significantly sick. The speed of this decline is now faster than the early stages of the 1982 and 1991 recessions. It is time the Government ramped up its new Jobs Plan to really stop this before it escalates further.
In this blog, we consider the debt question (again) with streamlined language to ensure it is accessible to all who choose to read it. Yesterday I asked whether future taxes will be higher, which is now being claimed by conservatives who are running a relentless political campaign against the demise of neo-liberalism. Today, the partner claim: will we be paying higher interest rates because of the borrowing? Answer: no! Whether interest rates are higher or lower in the future will have little to do with the movements in today’s budget balance. It is possible that voluntary arrangements set in place by the Australian government in the past will drive interest rates up. But if that occurs it will because the Government wants higher interest rates rather than having anything to do with the net spending that is being engaged in to stop employment growth falling off the cliff. So time to discuss bond markets a bit.
Several readers have asked me to demystify the processes involved in issuing Australian government debt. They also sought an explanation for the sort of scare-mongering that various commentators have been engaging in about the increasing budget deficit causing higher future tax and interest rates because the “mountains of debt” will have to be paid back somehow. Well anyone who is worrying about saddling your kids (and their kids) with mountains of debt and punishing levels of taxation should “just take a Bex, have a good lie down” … and stay calm. All of these claims are of-course mythical and are designed to perpetuate the neo-liberal view that governments should refrain from interfering in the private market. So its time to arm yourselves with the weapons (arguments) that you can use when your mates start up with this nonsense. Yes, its time to debrief!
On Friday, the US Bureau of Labor Statistics (BLS) published their latest labour force data which revealed that the US aggregate unemployment rate had risen to 8.5 per cent, the highest level since March 1982. It is clear that thousands of jobs are being lost (in net terms) in the US as the recession there intensifies and the deterioration is spawning protests. Times are changing for the US. Australian commentators seem to be suggesting that Australia is faring better at present. On the surface that may be right, but when you start digging a little, things do not look as well. This blog takes you through some graphs I have constructed as part of an academic paper I am working on. They are easy to understand and tell an interesting story.
I was asked by a journalist today to comment on employment trends in the public sector. I was also thinking about the statement made at the G20 meeting which has been reiterated by our Prime Minister – we will do whatever is necessary! Well what is necessary is a massive upscaling of public sector employment. The best place to start would be to offer employment at the minimum wage to anyone who wants a job and cannot find one. However, this week’s news about the revamped job-seeking program, Job Services Australia which appears to be the Australian government’s centrepiece employment strategy tells me that our Government, at least, is lying about being prepared to do what is necessary.
The only nautical analogy that I have carried through my days as a professional economist is the one that apparentely John F. Kennedy coined – A rising tide lifts all boats. It was used by famous American progressive economist Arthur Okun in the 1960s to motivate his research on upgrading benefits of what he called the high pressure economy. It was an aspirational term used to goad national governments into fiscal action to ensure that the economy was always as close to full employment (high pressure) as possible. Accordingly, when the economy is at high pressure, both the strong and the weak prosper. Labour participation is strong, unemployment is at the irreducible minimum, labour productivity is high, wages are high and a number of upgrading effects across social classes and generations occur. Children from disadvantaged families get a chance to transcend poverty and workers who are displaced by global economic changes are able to be re-absorbed into productive work. Direct public sector job creation is a significant part of the national government’s responsibilities in this regard. If the private sector is incapable of providing enough jobs then there is only one sector left, ladies and gentlemen. Today I read of a new nautical analogy and my how times have changed! Its time to debrief again!
I did a radio interview on the ABC Drive program this afternoon about different attitudes that Europeans and Americans have to dealing with recession, specifically in terms of the decision to offer shorter hours or use layoffs to trim the labour force as sales decline. While the solidaristic European model is preferred, both call into question what the national government should be doing.
Can a city or state become a sovereign nation? We know what a sovereign nation is – one that has the capacity to issue its own currency and oblige its residents to pay their taxes in that currency. We also know that a state or city is thus not a sovereign nation because it uses the currency of the sovereign nation it “lives within”. So a state or a city is financially constrained in much the same way as a household. In that context, spending has to be financed either from higher taxes or debt issues which clearly places some limits on what programs a city or state can pursue. Further, a city can go bankrupt (become insolvent) in the local currency whereas a sovereign government cannot. So how might cities solve their infrastructure and social needs when they are so constrained?
I received a call from a journalist at the Financial Review today asking how the Federal government could afford to run labour market programs given that it might suffer a substantial revenue loss if it cuts back net migration. I told him that irrespective of what happens to net migration and any losses to tax revenue that that might bring (should they cut it back), the Government will always be able to fund any labour market program if it thought that was the best use of its funds. It brings to mind a new theme in this period of turmoil – how can the government keep its programs going while at the same time bailing out all and sundry? Answer: easy, just keep funding them. The national government is not financially constrained and the size of its budget is nothing that can be determined independent of the shortfall of aggregate demand.
I am awarding this week’s worst piece of economics journalism to an article that appeared in Saturday’s Australian newspaper and was written by high-profile economics correspondent George Megalogenis. The article makes a sequence of statements that cannot be supported by any credible macroeconomic theory. Why do journalists write things that they do not seem to understand? Anyway, in case any of my readers happened to waste their time reading this article I offer the following clean-up job. Yes, its that time again. Time to debrief.
The issue of minimum wage adjustments always invokes a lot of debate and invokes the usual (boring) reactions from employer groups and conservative economists. Their narrative is always the same: you cannot have a minimum wage rise because it will cause unemployment among the low-skill ranks of the workforce. If you believed their logic, then there never would be a minimum wage rise. The reality is that there is no evidence available to support these notions and lots of evidence to refute it. The new problem is that the current Federal government is now aligning with the conservatives and using the same defective logic to oppose any reasonable rise in the minimum wage. Its that time again. Time to debrief.