Thursday, February 18, 2016

Rising Unemployment

Unemployment is back up to 6 per cent, off the back of a decrease in full time employment of over 40,000. The number of unemployed is over 760,000.

This number is way too high. This lingering and even rising unemployment number is a recipe for long-term unemployment, which in turn is a recipe for social disadvantage and the drugs, crime, homelessness and mental health problems that go with it. It is particularly not good enough when you realise that the developed countries that we did so much better than during the Global Financial Crisis have now improved and many of their jobless rates are lower than ours.

We are still running migrant worker programs as if the mining boom was in full swing, but it is not. It is high time we reduced those programs and gave our unemployed - our young people, our indigenous unemployed, and our older workers who have been thrown on the scrap heap prematurely – a decent chance to do the jobs that do become available.

If Australian workers lack the skills to do these jobs, this needs to be rectified, and our education and vocational training programs made to effectively prepare them for the world of work.

Tuesday, February 9, 2016

Intergenerational Equity – Intergenerational Report 2015

The real purpose of the Intergenerational Report 2015 was to try to justify the 2014 Budget cuts to pensions, education and health. The report made numerous misleading claims to try to convince us that we could not afford our present levels of commitment to older and younger people.

The first misleading claim is that labour force participation is going to fall and reduce per capita economic growth. The second misleading claim is that the costs of providing for an older population will increase significantly as a percentage of GDP over the next forty years. The third misleading claim is that in order to deal with these costs Australia must maintain high immigration, on the grounds that migrants tend to be younger than the average resident. The Intergenerational Report assumes Australia's population will rise from 23.8 as of mid-2015 to 40 million in 2055, a massive two-thirds increase in just 40 years. The Report is completely inadequate in dealing with the numerous economic, social, and environmental consequences of such an increase.

In fact an analysis of the Report by Bob Birrell and Katherine Betts shows there is NO net change in per capita economic growth over the next 40 years. There is a slight fall in real per capita economic growth from declining labour force participation of 0.1 percentage points a year. But this is totally offset by an increase of 0.1 percentage points a year because the proportion of the population who are children will fall relative to those aged 15 plus. Any decline in labour force participation of those aged 15 plus is offset by the rising share of the population in this broad age group. ("The 2015 intergenerational Report: Misleading findings and hidden agendas", Bob Birrell and Katherine Betts, The Australian Population Research Institute, Research Report, July 2015). It is regularly the case that the people who want to use a scare campaign about population and workforce ageing to attack social security "accidentally" forget to take into account the ways in which population ageing makes life easier for governments and communities.

The Report is also misleading about rising medical and hospital costs. It is true that health expenditure is rising and will continue to do so. But the vast majority of this extra cost is due to the higher costs of providing health care for everyone, including the implementation of new technology. While Commonwealth spending per person is projected to increase by $3700 by 2054-55, $3100, or 84 per cent of this, can be ascribed to non-demographic causes. Ageing is only a minor factor. (Ibid). I don't accept that our spending on health, welfare and pensions is unsustainable. We spend a lower proportion of GDP on government funded age pensions than most OECD countries.

And what of the third claim that we need high migration to slow down population ageing? Bob Birrell and Katherine Betts have calculated from the data in the report that every extra 70,000 migrants up to the year 2055 only increases economic growth by a mere 0.06 per cent. And yet an extra 70,000 net overseas migration adds over four million people, and the Report says nothing about the extra costs on the community that this imposes. Indeed the Report works on the basis of population growth between 2015 and 2055 of nearly 16 million!

The infrastructure costs of such an increase are glossed over with the claim, which Bob Birrell and Katherine Betts describe as bizarre, that infrastructure costs "are not linked explicitly to demographic factors".

The Report also is misleading about the issue of productivity. It says high levels of migration MIGHT increase productivity because migrants may, on average, be better educated than the average Australian. No evidence is advanced to support this optimism, and given the extent of the rorting of migrant worker and overseas student programs it seems to me to be doubtful. In any event Ross Gittins has reached the opposite conclusion - that high migration lowers national productivity. Rapid population growth, through its effects on congestion and land and housing prices, acts as a drag on productivity.

The Report also papers over the impacts of rapid population growth on the environment, saying the 'level of government spending on the environment is not directly linked with demographic factors". This is amateur hour. Population growth is a direct and indirect cause of environmental damage and should not be glossed over in this way. The fact that State and local governments have to do much of the heavy lifting in terms of maintaining water quality, and environmental repair, does not make these costs any less real.

The IGR finds that per capita income will be higher in real terms than it is today. Its modelling shows an increase, in constant dollars, from $64,400 to $117,300 by 2054-55. Bob Birrell and Katharine Betts say our descendants should he selves be able to comfortably deal with any extra costs that arise from providing for a larger cohort of older persons (Ibid, p.6). They say the IGR's own data show that the supposed ill-effects of ageing are trivial, and should be easily managed by future generations themselves. The IGR's lukewarm endorsement of massive immigration-driven population growth just about completely overlooks and fails to take into account the massive costs of such growth. (Ibid, p.v).

The problems which the Intergenerational Report 2015 says are looming are looming due to the policy failure of neo-classical economics, which has dominated economic policy-making since the 1970s. Its signature policies of economic growth, rapid population growth, globalisation, free trade, privatisation, and deregulation have progressively generated deficit and debt, de-industrialisation and unemployment, and a declining capacity to care for older Australians, younger Australians, and the environment.

After the war the Marshall Plan of 1947 paved the way for the re-industrialisation of Europe and a long period of economic prosperity. Lessons learned from the 1929 financial crash and the Great Depression saw an essentially tripartite political setting, with business, labour and government roughly in balance.

The free trade theory of comparative advantage espoused by David Ricardo in the 19th Century and the Washington Consensus in the 20th was not actually applied in western countries. Countries which actually applied the theory, for example Somalia with its comparative advantage in agriculture, continued to specialise in agriculture and remained poor. By contrast, Korea, through very heavy- handed industry policy, broke away from its comparative advantage in agriculture, and it's GDP per capita skyrocketed, whereas Somalia's remained static.

Other Asian nations which industrialised were also successful. As Eric Reinert says a nation with an inefficient manufacturing sector is much better off than a nation without any manufacturing sector at all.

But from the mid 1970s neo-liberal economic policies started de-industrialising countries both in the developed world and in the developing one. Free trade has undermined the manufacturing base of many western countries, including Australia. Neo-classical economics has failed to distinguish between the financial sector and real wealth creation. Where Roosevelt's New Deal reigned in the financial sector to become the servant rather than the master of capitalist development. Countries which did better during this period, such as Brazil, India, and China, did not embrace or implement neo-classical economics.

We need to return to the middle ground represented by initiatives such as the New Deal. Otherwise we will continue to de-industrialise, with the financial sector destroying value in the real economy, and business, labour and governments out of balance. Our debt and deficit will continue to grow, and we will be unable to meet the needs of older Australians and younger Australians, and we will continue to trash the environment in a futile quest for economic growth in the mistaken belief that this will solve our problems.

Monday, February 8, 2016

Intergenerational Equity - Change in the Eighties

John Edwards (Australian Financial Review March 2015) said "Elected on a platform of opposition to the Campbell recommendations and of budget expansionism, the Hawke Government abruptly moved in the reverse direction".

And there is no shortage of people working for big corporations or their political or media cheer squads who are happy to regard the 1980s and 1990s as a halcyon era of political and economic reform which served Australia well. The argument goes that floating the dollar, pulling down tariff barriers, deregulating the financial markets, and implementing National Competition Policy, laid the foundation for economic growth and rising living standards in the years that followed. It is said that Australia's income per head rose during this period as a result of these changes.

But less simplistic and more detailed analysis suggests that the deregulation and destruction of industry support, and the ripping up of the Australian Settlement which occurred in these years and subsequently, has not been the claimed road to paradise. Much of Australia's increased income has been a consequence of exports to China. China's increased prosperity has led to demand for Australian commodities, particularly minerals. The mining boom could not go on forever, and it has not. It has come at the cost of narrowing our economy, when we need a broader, more resilient, one.

Secondly Bob Birrell and Ernest Healy have pointed out that the achievements of the 1990s were not just attributable to the protection offered by the low Australian dollar and therefore vulnerable to the currency rise that came with the mining boom, much of the elaborately transformed manufacture (ETM) exports of the 1990s can be attributed to foundations which had been established during the protectionist period, which the market liberal policies of the 1980s and 1990s dismantled.

Peter Sheehan and colleagues showed that ETM exports from the mid-1980s to the early 1990s were predominantly those which had benefited from "industry specific policies directed at increased outward orientation and export levels". (P. J. Sheehan, Nick Pappas and Enjiang Cheng, 1994, The Rebirth of Australian Industry, Centre for Strategic Economic Studies, Victoria University, p. 30). The industries included telecommunication equipment, cars, computers and pharmaceuticals.

Motor vehicles were a standout, with an average annual rate of export growth of 16 per cent over the decade to 2000-01. Pharmaceutical exports grew by 21.4 per cent per annum during the same period, to $2.4 billion. (Jonathon Coppel and Ben McLean, 2002, 'Trends in Australia's  Exports, Reserve Bank of Australia Bulletin, April 2002, p.3).

New enterprises were not significant contributors. Bob Birrell and Ernest Healy present the heretical hypothesis that the tariff protection and industry policy support of the pre-reform era laid the foundation for Australia's ETM export successes in the 1990s, and that once this support was removed in the 1990s and 2000s that the success was short-lived.

Dennis Glover, Lecturer Graduate School of Humanities and Social Sciences at the University of Melbourne, draws a parallel between what happened to English workers in the first three decades of the 1800s and what happened in Australia from the Mid-eighties and the 2015. ("The unmaking of the Australian working class - and their right to resist", The Conversation, 3 August 2015).

Dr. Glover says that at the end of the eighteenth century the English working class of hand loom weavers, agricultural labourers, iron workers, miners and so on lived a largely rural existence, employed at home or in small workshops, with strong connections to village or parish life. But by the 1830s many had been agglomerated into large factories. Towns like Manchester, Liverpool and Leeds had been transformed into the "dark satanic mills" of Blake's poem. Crammed into dangerous slums, many died young and poor. The old world had been physically transformed: bricked over, blackened, cheapened, uglified.

Dr. Glover says something just as dramatic happened in Australia during the past three decades. He says the transformation from the industrial to the post-industrial era has been so total as to constitute the sociological equivalent of an extinction event. (Ibid). "The queues of workers' cars lining up each morning to get through the factory gate - gone. The publicly owned banks and utilities - gone, or about to go...... Secure, full-time employment, with its guarantee of holidays, sick pay and promotion - in many industries long gone. The working class dream of home ownership and upward mobility via cheap land, equal educational opportunities and cheap land - all are on the way out"(Ibid).

Dennis Glover describes this as the un-making of the Australian working class. "Just as 18th century England's green and pleasant fields were paved over with brick, its vocations replaced by the steam-powered machine, its pastoral life rent asunder by the regimentation of the Industrial Age, in just 30 years the world of the Australian working class, with its factories and unions and quality public services and the communities they supported, has been made all but extinct, wiped out, like the dinosaurs, by the fiery asteroid of creative destruction". (Ibid).

He describes this as the revolution the little people lost, and makes the astute observation that the little people, the losers, refuse to go away. They vote against more "economic reform" - they won't support a higher GST and they won't support more privatisations. One might add that they voted out the party of Workchoices and they don't support deregulated university fees or Medicare co-payments either.

Dr Glover asks why they don't thank Paul Keating for liberating them from their dull, monotonous, supposedly unskilled and unimportant jobs making cars? He answers by saying that Australia's working class won't easily give up without a fight, won't voluntarily accept poverty, and won't surrender its culture and traditions without a struggle. "Australia's wilful working class deserves to be rescued from the condescension of the economic reformers. Just like the members of the English working class who went through the Industrial Revolution, the people who have experienced the destruction of their industries and communities in places like Dandenong and Doveton in Melbourne's South-East, Norlane in Geelong, Broadmeadows in Melbourne's north, and Elizabeth outside Adelaide, where the car factories and canneries are still being closed and unemployment is still well above 20per cent after 25 years of economic growth, have something important to say to us" (Ibid).

He concludes with the observation that we should try to make economic change work for everyone.

Right wing commentators and economists regularly say the world is changing, and changing rapidly, and nations must change in order to survive. This is a classic case of seeking to profit from their own wrongdoing. Much of the change that is happening is being driven by policies advocated and implemented by right wing commentators. Much of the change is not inevitable. The fact that it is making it tougher to survive should be cause to question our policy directions, not head even faster towards the cliff.

One of the defining features of modern political life is a pervasive loss of faith in government's ability to solve problems, or indeed do anything much at all. Sally Young, Associate Professor of Political Science at the University of Melbourne, says we are living through a lost era of policy making. She says that politicians of today are suffering a crisis of confidence about whether their policy making can make a big difference. (The Age, 1 April 2015, p.20 ).

She notes that the Prime Ministers of the seventies built things. Gough Whitlam left behind Medibank, women's health centres, the Family Court, single-parent pensions, public transport projects, sewerage systems, the Arts Council, the National Gallery, Triple J and Legal Aid. He gave us free tertiary education, the Trade Practices Act, no fault divorce, needs based schools funding, the abolition of conscription, the Heritage Commission, aboriginal land rights, voting at age 18 and fair electoral boundaries.

But the situation since the 1970s has deteriorated dramatically. Erik S. Reinert from The Other Canon Foundation set this deterioration out in detail in 2012 in his paper "Neo-classical economics: A trail of economic destruction since the 1970s". He says that three decades of applying neoclassical economics and neo-liberal policies have destroyed, rather than created, real wages and wealth.

Reinert starts by observing that after the Second World War Two institutions were established which provided the conditions for an unprecedented increase in human welfare. The 1947 Marshall Plan paved the way for the re industrialisation of Europe and other nations all the way to Japan. The 1948 Havana Charter established rules of international trade that made this industrialisation possible. It allowed for "infant industry protection" where unemployment was present in a country. There was a tripartite political setting, with a balance of power between business, labor and government.

Countries with a diversified economy prospered. For example South Korea diversified away from agriculture and raw materials and into manufacturing industry. It did not continue to rely on its 'comparative advantage' in agriculture, instead using heavy-handed industry policy to break into manufacturing. On the other hand Somalia was richer than Korea until the mid 60s, but in Reinert's words "continued to specialise according to its comparative advantage in being poor".

Reinert says that the theory of "comparative advantage" advanced through David Ricardo's free trade theories was in practice only applied in the colonies. He says that the US Washington Consensus free trade theories were for a long time mainly intended for export, not for use at home. He says that "Unfortunately, in the end the West also started believing in the propaganda version of its own economic theory".

The world development record, expressed as a growth rate of GDP per capita, is described by Reinert as excellent from 1950 to 1973 but dismal from 1973 to 2001. He says that during this period Latin America experienced a string of 'lost decades'. Real wages in Peru were more than halved when the free trade shock and subsequent deindustrialisation hit Peru starting in the mid-1970s. Africa's beginning industrialisation was reversed, and the communist economies became poorer than they had been under a notoriously inefficient communist planned economy. Reinert concludes from this period that a nation with an inefficient manufacturing sector is much better off than a nation without any manufacturing sector at all.

Reinert says that even the United States finds that too much free trade has undermined its manufacturing base. The West has embarked on an attack on wage levels and purchasing power in the name of austerity. The results are likely to be just as harmful to real wages and purchasing power as they have been wherever they have been applied. A wave of neo-classical wealth destruction hit Latin America in the mid-seventies. It also hit the little industry Africa had managed to build. Another wave of destruction hit the centrally planned economies after the fall of the Berlin Wall. The fall of the Wall heralded a period of Western triumphalism, an in particular a failure of mainstream economics to distinguish between the financial sector and real wealth creation. This has now caught up with country after country in Europe and beyond.

Three economies which have done well during these lost decades have been Brazil, India and China. Reinert notes that they escaped the free market fundamentalism and free trade shock that accompanied the fall of the Berlin Wall. In these countries neoliberalism was met with resistance from a critical mass of economists.

Reinert says that what is needed is to recapture the middle ground. He supports the principles of the Havana Charter, unanimously approved by the members of the United Nations in 1948, as a blueprint for a world economic order that creates, rather than destroys, mass welfare. He says that of the three political systems which brought financial capital under control during the 1930s, - communism, fascism, and the New Deal - there is little doubt what most people today would choose. But that needs to be kept as a live option, and neoclassical economics is failing to do this. It fails to distinguish between the real economy and the financial sector, with the risk that financial sector stops adding value to the real economy, but starts to parasitically destroy value. (This paper is online at