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Fundamental lack of leadership vision in Australia’s response to the pandemic

Today, the Prime Minister of Australia indicated that the ‘effective’ unemployment rate in Australia is heading to 13 per cent as a result of the harsh lockdowns that have just begun in Victoria as it reels under a second wave of coronavirus (Source). The effective rate incorporates the official estimate (based on activity tests – search and willingness), the number of workers who have dropped out of the labour force due to a lack of opportunities, and those on wage subsidies who are not working at all. The Stage 4 Melbourne lockdown for the next six weeks will cut GDP by a further 2.5 per cent. While economists fuss about microeconomic losses, the daily output and income losses from the unemployment and underemployment are massive, not to mention the huge personal, family and community

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Today, the Prime Minister of Australia indicated that the ‘effective’ unemployment rate in Australia is heading to 13 per cent as a result of the harsh lockdowns that have just begun in Victoria as it reels under a second wave of coronavirus (Source). The effective rate incorporates the official estimate (based on activity tests – search and willingness), the number of workers who have dropped out of the labour force due to a lack of opportunities, and those on wage subsidies who are not working at all. The Stage 4 Melbourne lockdown for the next six weeks will cut GDP by a further 2.5 per cent. While economists fuss about microeconomic losses, the daily output and income losses from the unemployment and underemployment are massive, not to mention the huge personal, family and community losses. A responsible government, which issues its own currency and can procure any productive resources that are idle, would be doing everything it could to ensure these losses do not occur. It is not rocket science. The Federal government could ensure those who are unable to work due to the lockdown maintain their current incomes. The overwhelming impression I am getting as we enter the fourth month of this crisis is that the federal polity in Australia is lost. The scale of the disaster has so confronted the neoliberal DNA of the major parties that they are failing to articulate a coherent and viable short- and medium-term plan to deal with the crisis. The challenge is for the government to abandon its inclination to see a ‘return to surplus’ as a benchmark it aspires to. That mentality is making this disaster a catastrophe. We can do much better.

The prelude

It is also clear that Australia was ill-prepared for a crisis of this dimension and that the way in which we have adjusted to the crisis has ensured it has been worse than it might have been.

What does that mean?

There is evidence from the current Victorian difficulty in dealing with the second wave that many workers are still evading the restrictions because they do not have the economic means to ‘stay at home’, in the same way a higher income worker in professional occupations have.

Prior to the crisis, the Federal government (in various periods) has clearly encouraged and abetted the flattening of wages growth, the cutting of penalty rates for low income workers in service sectors, the profiteering of banks via excessive user charges and lax credit behaviour, the increased casualisation of the workforce, and the rise of the gig economy.

And its obsession with achieving a fiscal surplus, saw the Australian economic growth decline to around half its previous trend rate, and labour underutilisation rise to around 13.5 per cent as we headed into the pandemic.

So already, the economy was wasting at least 13.5 per cent of its available and willing labour supply because the government refused to spend enough to support output and income growth.

The obsession with surpluses has also caused degradation across our society in key areas:

1. Education – particularly vocational and higher education – the quality is declining, research funding is being squeezed, and there has been a bias pushed towards private, commercially-exploitable STEM outcomes rather than basic research across all areas of human society.

2. Public infrastructure – development handed over the private, profit-seeking developers under Public-Private Partnership agreements, which have reduced the quality of services arising from such capacity. Cutbacks to fire services etc ensured the bushfire disaster that preceded the pandemic caused more destruction than was necessary.

3. Telecommunications – the NBN disaster is directly the result of trying to make the agency responsible cover ‘costs’ via user pays and then scale down the quality of the technological innovations to ‘save’ federal outlays.

4. Utilities – for example, water and electricity supply. Excessive charges, declining quality of service and environmental disasters.

5. Public housing – Australia faces a shortage of 400,000 low-income houses as a result of refusing to invest.

6. Training and skills development – the obsession with creating a ‘competitive’ private training market has been a disaster.

7. The ‘unemployment industry’ – the privatisation of the public Commonwealth Employment Service and handing over the tasks to profit-seeking private operators has just created ‘rents’ for these operators, who rort the system and deliver no productive outcomes for the unemployed or society in general.

8. The climate crisis – neither political party will commit to carbon targets that will address the climate crisis in any effective way.

9. Household debt is at record levels and has maintained consumption expenditure growth in the face of flat wages growth. It is now so high that consumers are cutting spending in order to reduce the risk of insolvency.

On February 9, 2017, our Prime Minister who was then Treasurer demonstrated his concept of leadership when he brought a lump of coal into the national parliament as a statement of support for the fossil fuel industry and a indication that he rejected any climate change narratives.

That is the standard of leadership we are dealing with.

All these points taken together mean that we entered this crisis in a fragile state.

They also give a clue as to how a fiscal package might be best designed to deal with the economic damage of the crisis and position the nation in better shape in the future if we can get beyond the health issues.

The stark reality is that the Federal government’s response so far has not reflected any recognition of these structural weaknesses that their own past policies have helped create.

Effective leadership will require a fundamental shift in the past policy approach – away from the obsession with surpluses towards a major new period of nation building of the sort we saw in the immediate post WW2 period as the government took responsibility for putting the nation on the path to prosperity.

That sort of leadership was exemplified by the – 1945 White Paper on Full Employment.

Both major political parties have so far failed to articulate such a leadership plan.

Stop recession at all costs

In this blog post – Governments should do everything possible to avoid recessions – yet they don’t (June 29, 2020) – I made the case for governments taking a highly risk averse approach to dealing with crises.

It is better to err on the side of ‘too much’ net government spending, given the inflation risk is biased downwards, than to worry about the rising fiscal deficits.

Remember that government should never target a particular fiscal outcome.

How it should assess its performance is not in terms of any particular number is posted each year about the fiscal balance.

There is nothing you can say about a 10 per cent of GDP fiscal deficit relative to a 2 per cent deficit or a 1 per cent surplus, other than, the 10 per cent is a larger public contribution to GDP than a 1 per cent surplus.

But nothing qualitative can be said about that.

Which fiscal position is the appropriate one?

The answer is that is always depends on the context.

Australia runs a consistent external deficit, which means overall private domestic saving requires government deficits to support growth.

The only question now is how large the support from fiscal deficits should be.

Private debt levels have to fall and employment has to be supported.

My estimate is that the government might be at least $A100 billion short of where it should be.

The point is that capitalism is now on state life support. The only game in town that will maintain that fiscal policy.

The Government’s response has been inadequate

While the Federal government has provided a substantial fiscal stimulus of around $A164 billion (around 8.6 per cent of GDP) through to the financial year 2023-24 (Source).

The JobKeeper wage subsidy amounts to 4.5 per cent of GDP.

Other measures include loans to businesses, a HomeBuilder program to support the construction sector (but biased towards private, higher-income home building), some fast-tracked infrastructure projects, some modest support to the arts sector, free childcare for a time (see below), some skills investment (JobTrainer) and a temporary increase in the unemployment benefit (JobSeeker).

The State and Territory government stimulus packages on top of that federal support amounted to around 1.7 per cent of GDP.

Is that enough?

Clearly, if the effective unemployment rate is now 13 per cent (as above) then the conclusion that the fiscal intervention is way short of where it should be.

Part of the lack of leadership is in the on-going uncertainty that is crippling the confidence of consumers and firms.

The government was so unwilling to abandon its obsession with surpluses that is fiscal responses all had relatively short sunset clauses built into them. The JobKeeper program was initially for 6 months only.

It also was mean-spirited in the sense that it excluded more than 1 million casual workers – who were not in a position to manage the loss of income they faced with the lockdowns.

It also excluded the university sector, which has 70 per cent of its staff as casual workers. Many of these casual workers are also postgraduate students pursuing research careers and the evidence is mounting that they are abandoning their studies because they can no longer cope with the lack of income.

The size and scope of the schemes aside, the lack of willingness to provide certainty about the continuation of these schemes plagued the public debate in the months following the pandemic.

Everyday, there were pleas expressed in the media from businesses etc for the Government to provide more certainty about extending these programs.

The Government lagged those concerns. And when it finally agreed to extend the schemes for some time as the crisis became deeper, they also announced they were scaling the fiscal support back in a number of ways.

The abandoned free child care. They will cut the unemployment benefit supplement and the JobKeeper wage subsidy.

That is their version of leadership – cut fiscal support as the scale of the pandemic disaster intensifies and the socio-economic costs increase!

And the other dimension of this is that they are being dragged along by the disaster rather than showing a confident and well articulated path out of it.

They announce x dollars support, driven by their overall bias towards not expanding the deficit. Then the socio-economic crisis gets worse, in part, because the government has penny-pinched.

This creates incentives for exposed workers to avoid the health restrictions and the second wave of the pandemic intensifies.

Then the government responds – not leads – but cannot get beyond its neoliberal DNA.

This is where we are at.

The Opposition Labor position is no better.

They harangue the Government about jobs and other matters but they also have no clear path to follow.

They will not commit to major public sector job creation.

They will not commit to a Job Guarantee.

They will not commit to fast tracking green technologies and closing coal down.

They will not commit to major funding to education.

And so it goes.

What should it be doing?

The former Federal secretary was in the media yesterday extolling the virtues of productivity growth as the way to meet the challenges posed by the pandemic.

I agree that future material prosperity in an ageing population requires productivity growth to accelerate.

But I disagree that we need more deregulation (to stop “gumming up the system”) and more corporate tax cuts to achieve that.

The former Treasury secretary told the media that we need “to drive investment faster”, cut taxes and improve the skills of the workforce.

Basically more of the neoliberal agenda that has ruled since the 1980s.

Question: Has this agenda delivered faster productivity growth?

Answer: Definitely not.

Question: Has it delivered higher investment growth rates?

Answer: Definitely not.

Consider the following table which shows the decade average results for annual GDP growth, Labour Productivity growth per persons, and per hour worked, and private capital formation.

The 1960s were a superior decade relative to what followed.

Ask yourself why?

Decade Average annual GDP growth Average LP persons growth Average LP hour growth Private Investment
1960s 4.9 2.3 n/a 6.2
1970s 3.3 1.3 1.6 3.7
1980s 3.4 1.0 1.2 6.6
1990s 3.3 2.1 2.2 4.0
2000s 3.1 1.0 1.4 5.6
2010s 2.6 0.9 1.0 1.23
March 2020 1.4 -0.81 1.4 -3.6

The 1960s was the last decade of true full employment (unemployment below 2 per cent, no underemployment, no hidden unemployment) with high participation rates (for men), no youth unemployment, strong investment in public infrastructure, including state-owned utilities, strong investment in all levels of education, expanding public health, strong real wages growth, a widespread public sector apprenticeship system combined with occupational planning, and more.

Fiscal policy was most always in deficit supporting a household saving ratio up around 16 per cent of disposable income through the strong real GDP growth.

Household debt was low.

Housing affordability was high.

This was a nation building decade.

As the neoliberal deregulation agenda unfolded, all in the name of productivity growth, real wages started to lag badly behind productivity growth and national income was redistributed to profits as a result (a wage share in the high 59 per cent about to the lowest share now in history around 51 per cent).

The redistributed national income – achieved through deregulation of the wages system and other industrial relations legislation that weakened the position of unions – went to profits but not to capital formation.

It formed the basis of excessive executive salary increases (obscene is the word) and speculation in financial markets as the government deregulation went further.

Elevated levels of labour underutilisation became the norm as growth rates fell on average and labour productivity slumped.

Public investment was also cut and major shortages of social housing emerged.

The utilities were largely sold off to private buyers and service slumped and prices rose.

No wonder productivity growth was inferior.

Which should disabuse you of the idea that more of the same will provide the solution.

Productivity growth requires the government invest strongly in new public infrastructure to allow the private firms to leverage their own productive capacity growth.

We need cheaper power by nationalising the privatised utilities.

We need cheaper health care by eliminating the private insurance companies that can only survive because government allows them to hike charges in excess of CPI growth.

We need to stop cutting the training and higher education capacity – and stop pumping billions into fly-by-night private training providers.

In that vein the government might increase its current stimulus by:

1. Expanding public employment and improving service delivery across the range of government departments by offering well-paid, career positions.

2. Renew investment in large-scale public infrastructure to improve transport systems, bike transport capacity (which will become more important as we deal with the pandemic and beyond).

3. Nationalise water and power to stop the price gouging and lack of private investment.

4. Announce a major social housing construction phase and require all contractors to employ apprentice tradespersons as part of the deal. We need about 400,000 new homes, which will take some years to complete and will provide thousands of job opportunities for young people desiring to learn a trade.

5. Abandon plans to make the NBN pay for itself via excessive pricing. Make the broadband free and ensure it is fibre throughout rather than the cost-cutting hybrid of technologies that is already out of date.

6. Make child care free for all families below a certain income level to increase real wages and participation.

7. Investment heavily in research capacity development within the university system.

8. Invest heavily in apprenticeship positions via the TAFE sector.

9. Introduce a Job Guarantee for those workers than still are unable to get a job.

10. In the short-run, while the pandemic is wreaking havoc, pay all workers forced to isolate or to lose work due to lockdowns, their full wages to maintain incomes.

11. Pay all small business income for the same period.

12. Invest in renewable energy infrastructure – batteries etc to accelerate the closure of carbon-based electricity generation.

13. Eliminate tax incentives to invest in real estate (negative gearing etc).

14. Re-regulate the labour market to eliminate the gig economy – force employers to pay annual leave, sick pay, contribute to superannuation etc.

15. Restore all penalty rates to low-income workers.

16. Fund the states to ensure public transport becomes free to all users.

17. Create a public bank to reduce fees in the sector and channel investment funds into productive ventures. This will erode the 4-private bank cartel.

That set of initiatives is guaranteed to increase GDP growth rates, provide massive incentives for private savers to channel investment funds into productive capacity generation rather than financial speculation and real estate, and increase productivity growth.

Investing in people, in particular, is the best returning expenditure a government can actually engage in.

Gauging the extent of the collapse in work

One of the problems in working out how bad the labour market is relates to the impact of the JobKeeper wage subsidy program, which is distorting the Australian Bureau of Statistics figures.

Many workers are being counted among those officially employed even though they are not actually working.

In a recession, firms have two means of adjusting their employment numbers:

(a) Adjust hours worked.

(b) Adjust numbers employed.

We typically see hours worked adjusted first because it allows the firm to avoid expensive layoff and subsequent hiring costs when the recession is abating.

As a recession deepens, firms are forced to then layoff workers, as their sales do not recover and they encounter liquidity constraints.

The following table shows how these adjustments have played out relative to the peak in March 2020:

Month Employment Change (%) Hours Worked Change (%)
April 2020 -3.7 -9.5
May 2020 6.7 -10.4
June 2020 5.1 -6.8

The following graph compares the Total Hours Worked and Total Employment indexed at 100 in February 2008 (the peak before the GFC).

You see that the GFC was mostly handled through hours being cut and employment outstripped hours ever since.

That is because there has been a bias towards part-time work over this period.

Fundamental lack of leadership vision in Australia’s response to the pandemic

Increased government spending causes deflation

As an aside, we had a wonderful demonstration yesterday in Australia of how an increase in government spending can ’cause’ deflation, a falling price level.

Most economists consider that inflation is the process by which the growth in spending outpaces the capacity of the economy to match it with production of real goods and services, which on the face of it, is a reasonable proposition.

MMT economists do not contest that understanding – it is obvious that when the supply capacity is stretched beyond potential that increasing nominal spending, from whatever source, government and non-government, has to be rationed.

That rationing might take the form of increased order queues without any price movements.

But firms will also likely start pushing up prices to gain higher profits.

But MMT economists also stress that inflation can be driven by administrative processes – governments pushing up ‘user pays’ prices, over-100 per cent indexation rules, etc.

The latter is a particular issue in Australia with respect to health insurance premiums in Australia.

Yesterday, the Australian Bureau of Statistics released its quarterly – 6467.0 – Selected Living Cost Indexes, Australia, June 2020 – which is a very useful perspective on the way in which prices impact on different types of households.

This release follows last week’s – 6401.0 – Consumer Price Index, Australia, June 2020 – which reported a substantial deflation for the June-quarter.

The All Groups CPI fell by 1.9 per cent for the quarter and 0.3 per cent for the year to June 2020.

The ABS said that:

The most significant price falls in the June quarter were child care (-95.0%), automotive fuel (-19.3%), preschool and primary education (-16.2%) and rents (-1.3%).

Which gives you a hint as to what was going on.

Yesterday’s release provided more detailed information for the study groups the ABS has articulated for its Selected Living Cost Indexes (LCIs):

For the June-quarter, the following summary was provided:

  • Pensioner and Beneficiary -1.4 per cent
  • Employee -2.6 per cent
  • Age pensioner -0.8 per cent
  • Other Government Transfer Recipient -1.9 per cent
  • Self-funded Retiree -0.4 per cent

The main reason for these results is that the Australian government introduced free child care in early April, which impacted on “three of the five household types”.

They were initially intended to remain in place until June 28, 2020, but were extended until July 12.

The Government has now reinstated the ‘Child Care Subsidy and Additional Child Care Subsidy’ scheme, which will see significant increases in private outlays and a rise in inflation in the September-quarter.

The free child care should have been continued as part of a broader stimulus package. Cutting government spending, and, effectively cutting private sector real wages (as a result of the inflationary impacts of cutting that spending) during a massive economic crisis was not responsible government and will exacerbate any recovery.

But this clearly demonstrates that fiscal stimulus can, when ‘administrative pricing’ is involved, cause deflation.


Overall, we need leadership from government.

Neither major party is currently demonstrating that and the negative consequences will be long-lived.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.

Bill Mitchell
Bill Mitchell is a Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW, Australia. He is also a professional musician and plays guitar with the Melbourne Reggae-Dub band – Pressure Drop. The band was popular around the live music scene in Melbourne in the late 1970s and early 1980s. The band reformed in late 2010.

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