A failure of collective intelligence

By Warwick Smith
An essay I wrote has won second prize in New Philosopher magazine’s latest writer’s prize and has been published in the magazine.

As I did with my last New Philosopher essay, I’ll probably publish this at The Conversation after the next edition of New Philosopher comes out. If you want to read it in the meantime, pick up a copy of NP.

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Mineral wealth, Clive Palmer, and the corruption of Australian politics – The Conversation

Warwick Smith, University of Melbourne

Clive Palmer is reportedly spending A$70 million of his own money on his party’s campaign.

How is it possible for one individual to command so much wealth and where did it come from? The sad and strange reality is that Australian governments gave him most of it by letting him dig up and sell natural resources that, by rights, belong to us not him.

We’ve a history of handing vast wealth to resource and mining magnates and companies and then watching them use that wealth to undermine our democracy in order to continue to get access to that wealth. Palmer is small fry compared to Gina Rinehart and Andrew Forrest or the corporate power of BHP, Rio Tinto and others.

So, what do state and federal governments charge for our mineral wealth? You would hope that they use state-of-the-art methods to get the best possible prices.
You’d be wrong, of course.

We barely charge for resources

The federal government relies primarily on company tax and then on extra tax from employment and consumer spending and other things that are boosted as an indirect result of mining.

But many of the big mining and resource companies use the holes in our tax system to avoid paying company tax. In addition, mining is being increasingly automated, with self-driving trucks and trains becoming the norm, and ever-larger machinery meaning that fewer workers are needed for each tonne extracted and refined. These days billions can be spent with relatively few jobs created.

State and territory governments collect royalties from land-based mining companies, which are charged per unit of product. It means that when the prices of our mineral resources go up during a commodity boom the royalties do not rise with them – the mining companies benefit, but not the people who own the resources.

How much we collect in taxes is just the beginning of the story.

We also spend vast amounts of taxpayer cash on building the infrastructure needed for resource extraction; things such as roads, railways and ports. We also often end up footing the bill to clean up after mines close and the big companies sell depleted mines and their clean-up obligations to shell companies that then file for bankruptcy.

We could (and should) seek more

We could fix the system to get a fairer price.

We already have a more effective tax system for offshore oil and gas. It is, in effect, what the Rudd government tried to do in 2010 when it proposed a mining super profits tax. Foolishly, the tax was announced more than a year before it was to come into effect, giving the mining interests plenty of time to campaign against it.

They spent more than A$22 million just on advertising. Rudd abandoned the original proposal and was removed from office.

The Gillard government consulted the miners and adopted a watered-down version – the Mineral Resource Rent Tax – that was so toothless it collected almost nothing. Even though it was worthless, the mining industry still saw it as enough of a threat to pressure Tony Abbott to kill it off when he took government, which he did with Clive Palmer’s vote in parliament.

But miners have muscle

A more radical idea would be to put out tenders for the extraction and refinement of natural resources and then have the government or an independent authority owned by the government allocate them. Such a “single desk” would have considerable market power – it could demand good payments.

The truth is that all of this has been public knowledge for a long time and the solutions are well known. The problem is politics, not knowledge. The mining industry is so powerful that our leaders rarely attempt to take it on.

Given that Palmer set the record for most absent politician in two out of the three years he was in the parliament last time, why is he so keen to go back? There’s no evidence that he’s a conviction politician, trying to make the country better based on some strongly held principles; quite the opposite given how regularly he has changed his positions.

Read more:
Now for the $55 million question: what does Clive Palmer actually want?

Could it be that what he really wants is political power in order to defend and increase the extent to which him and his mates rake in the cash at our expense?

In 2016 the government used it’s position as a creditor to seek the appointment of a special liquidator to look at the collapse of Palmer’s Queensland Nickel company and the actions of Palmer’s actions personally. The government’s Michaelia Cash said at that time it would use every power as it’s disposal to hold company officers to account.

On Thursday at the National Press Club Prime Minister Scott Morrison was asked how he intended to manage the conflict between pursuing Palmer in the courts and courting his vote in the Senate.

He replied that he would be able to.

We will continue to pursue that measure through the courts with full vigor – we are very confident in our ability to pursue that as we absolutely should

It is obvious that we need political donation reform to keep the influence of money out of politics but we need to go one step further and reform how we, the Australian people, sell our mineral resource wealth so that we don’t create mining giants like Palmer in the first place. He is just the tip of the iceberg.The Conversation

Warwick Smith, Research economist, University of Melbourne

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Labor wants to pay childcare wages itself. A perfect storm makes it not such a bad idea

This article was first published in The Conversation.

Warwick Smith, University of Melbourne

This article is part of an election series on wages, industrial relations, Labor and the union movement ahead of the 2019 federal election. You can read other pieces in the series here, here, here, here, and here.

Opposition Leader Bill Shorten has promised that a Labor government will work to increase the wages of Early Childhood Education and Care (ECEC) workers by 20% over eight years. That’s pretty conventional, but the method isn’t.

The government will directly fund the salary increases so that neither childcare providers nor parents bear the costs. These increases will be in addition to any changes to the award over these years.

Internationally, such interventions exist, but they’re rare. In Ontario, Canada, the government tops up the salaries of childcare workers by $2 per hour. For Australia, it’s a first.

Childcare workers are among the lowest-paid in the country, with more than 70% reliant on award rates that are not much higher than the minimum wage.

The perfect storm of market failures

There is also limited opportunity for career progression in childcare. These two facts combine to lead to an extraordinarily high turnover in staff.

As long as legal minimum wages and awards are being met, the fact that a job is poorly paid isn’t normally enough to justify government intervention.

But childcare is a special case in which multiple market failures coincide.

“Market failure” is a term used to describe a situation economists like to believe is rare – where the workings of the free market lead to bad outcomes. Classic examples include polluting industries where the costs of pollution aren’t borne by the polluter itself (an “externality” in economics speak), and street lighting, for which it is impossible to charge users (economists call that a public good).

In economic theory, a market failure will at least justify the consideration of government intervention.

Childcare’s benefits are direct, and indirect

The provision of childcare creates both private benefits and public goods.

Mothers who can earn more than the cost of childcare benefit from it because they can maintain and build their skills and careers. Society also benefits because it makes better use of the skills of women.

There is also clear evidence that quality early childhood education positively affects the prospects of children for the rest of their lives, particularly those from low socioeconomic backgrounds.

It’s good for them and their families, but it’s also good for the entire community as those children are more likely to make full use of their skills and talents in later life and contribute productively to society. They are also less likely to engage in antisocial or criminal behaviour.

Mothers can’t afford to pay good wages…

But if entirely left to the market, childcare would only be affordable to those who earn high wages (and whose children might be the least likely to benefit). The total costs of the staff, venue, and administration needed to provide childcare are beyond most parents’ means.

This is why we already have government intervention in the form of means-tested assistance, which subsidises the cost of childcare up to A$10,190 per year, per child.

However, despite the existence of this subsidy, most Certificate III qualified childcare workers still only earn about A$850 per week (A$44,000 per year), about half the average full-time wage.

Why aren’t they paid more, given that their work is so important?

…in part because they don’t get good wages

One answer could be that 96% of childcare workers are women, and about 95% of stay-at-home parents are women. The gender pay gap in Australia is currently about 14%. It’s the result of a combination of gender discrimination, gender role expectations in child-raising, and relatively low pay in typically “feminised” industries.

It means mothers cannot easily afford to pay for proper childcare from their wages, and that childcare workers come to accept low pay.

Subsidising quality childcare through both a rebate to parents and a direct increase in childcare workers’ wages addresses these dual aspects of the gender pay gap by helping more mothers maintain careers (that will enable them get paid more) and acknowledging and addressing the extent to which the market won’t pay childcare workers enough.

There’s a case for top ups, but they’re not ideal

While Labor’s commitment to increasing childcare worker pay is welcome and is addressing an agglomeration of genuine market failures, a specific government top-up for a specific profession leave its workers vulnerable to a change of government policy that cuts or abolishes it.

The long-term solution is to do something more systematic about the undervaluation of care work in Australia. It would be best dealt with by adjusting how the Fair Work Commission sets award wages in light of the public value generated by the industry and an understanding of the historic undervaluing of work performed by women.

Labor has announced policies that aim to do this, so presumably this wage top-up is a stopgap that provides much-needed pay rises in the short term while longer-term solutions are being put in place.

Read more:
Why Labor’s childcare policy is the biggest economic news of the election campaign

The Conversation

Warwick Smith, Research economist, University of Melbourne

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Memories. In 1961 Labor promised to boost the deficit to fight unemployment. The promise won


First published in The Conversation

File 20190415 147525 1tx2vbv.jpg?ixlib=rb 1.1
Arthur Caldwell almost defeated Robert Menzies in the poll in 1961, and won the debate about policy.
National Archives, National Library of Australia, Wikimedia

Warwick Smith, University of Melbourne

Lately, governments and oppositions have been obsessed with “returning to surplus” in order to balance the budget.

It hasn’t always been so. In the lead-up to the 1961 federal election, unemployment had climbed above 2% and was creeping towards 3%. (By today’s standards that doesn’t sound much, but for two decades since the onset of the second world war unemployment had been mostly well below 2%.)

The Labor opposition, led by Arthur Calwell, went to the 1961 election promising that:

Labor will restore full employment within 12 months, and will introduce a supplementary budget in February for a deficit of £100 million, if necessary, to achieve this.

From the end of World War II, there had been a bipartisan commitment to full employment in Australia. As laid out in the Curtin government’s 1945 White Paper, Full Employment in Australia, this was achieved by “stimulating spending on goods and services to the extent necessary to sustain full employment”.

The strongly held view, developed primarily by British economist John Maynard Keynes during the Great Depression, was that government could, and should, use its spending power to fill any gap left by private expenditure, ensuring there was always enough spending to keep operating near (but not above) capacity.

Spending stopped unemployment

The 25 years after World War II in which this happened are often referred to as the “postwar boom” because times were so good. This period had rapid economic growth, steadily improving material standards of living (for most), and falling inequality.

Involuntary unemployment was scarcely heard of. “Long-term unemployment” didn’t exist as a statistical category.

By focusing on keeping the Australian economy at or near full capacity and investing heavily in infrastructure, research and education to improve productivity, the postwar governments of both major parties were able to do what these days would be thought impossible: to run constant government deficits while overseeing a dramatic fall in the ratio of government debt to gross domestic product.

Source: Australian Federal Government deficits, debt and the stock market, Centric Wealth

What’s important to understand is that the postwar boom occurred, at least in part, because of the budget deficits, not in spite of them.

By always spending enough to maintain the economy at full employment, the government ensured a strong economy. Economic growth made the ratio of debt to gross domestic product shrink.

All of this was very much part of the public conversation back in the 1940s, 1950s and 1960s. Very little attention was given to the budget balance, with people instead focused on the level of unemployment. On the rare occasions the budget balance was mentioned, it was often in the context of pushing for greater deficits to reduce unemployment.

Calwell won the fight, if not the election

After the 1961 election Robert Menzies made Arthur Calwell’s policy his own.
National Library of Australia

Calwell’s Labor opposition didn’t win the 1961 election, but there was a massive swing towards it and the result was one of the closest in Australia’s history, decided by mere hundreds of votes.

The fact that unemployment had crept up towards 3% was a significant contributor to the Coalition losing 15 seats in the House of Representatives and control of the Senate.

Immediately after the election, to shore up his position, Menzies effectively adopted and extended Labor’s policy delivering a 1962-63 budget that focused squarely full employment and brought down a deficit £120 million, £20 million more than Labor had been proposing.

The debt burden shrank as GDP climbed

By the end of World War II, government debt was 120% of gross domestic product total. This means that total debt was 1.2 times the annual economic output of the country. By comparison, today’s federal government debt is about 18% of GDP, a mere one-fifth of annual economic output.

So, according to the modern political discourse on government debt, the postwar generations must have been terribly burdened by all of that debt, and governments must have had to show incredible fiscal discipline to pay it off, right?

The answer will surprise many who have fallen for the modern rhetoric. Although each loan was paid off as if came due, the total stock of debt didn’t shrink, but the economy grew strongly, allowing the debt-to-GDP ratio to wither to the point at which it approached zero.

Commonwealth Treasury

Australia’s budget history is one of modest deficits leavened with occasional larger deficits and occasional surpluses. It’s been entirely sustainable.

Our postwar governments lived by Keynes’s dictum:

Look after the unemployment and the budget will look after itself.

The economy has changed a lot since then and we can’t simply copy the policies that worked for Curtin, Chifley and Menzies.

But we can learn from them. The reality is that we don’t know how low unemployment could fall in modern Australia because we haven’t made any genuine attempt to push it below 5% for decades.

Read more:
Explainer: what is modern monetary theory?

A modern-day policy commitment to full employment, along lines inspired by what we did after the war, could lift wages, reduce inequality, drive increases in productivity and, most importantly, provide full employment for the more than two million Australians who are currently unemployed, underemployed or discouraged attempting to get work.

Treasurer Chifley summed up the goal this way in 1944:

Our objective is not primarily social security, but rather the much higher objective of full employment of manpower and resources in raising living standards.The Conversation

Warwick Smith, Research economist, University of Melbourne

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Posted in Australian politics, Economic theory, Inequality, Political philosophy | Tagged , , , | Leave a comment

The simple approach to carbon

By Warwick Smith

First published in The Canberra Times and other Fairfax newspapers.

What is fee and dividend carbon pricing?

Carbon fee and dividend is a model for pricing climate pollutants where a fee is charged on producers of emissions, then all money is given back to households as a dividend. The entire sum collected from the fee, minus administration costs, would be divided between all adult permanent residents, with an extra half share per child in the household. None of the money stays in government hands or is spent on government programs.

Most households would be better off under a fee and dividend model.
Most households would be better off under a fee and dividend model.Credit:Matt Davidson

This carbon pricing mechanism has recently been adopted by Canada and has just been modelled for Australia by academics at the University of New South Wales. It starts with a low carbon price, perhaps $10 per tonne, and goes up by $10 per tonne every year until reaching a sufficiently high price to drive decarbonisation. Perhaps $50 would be enough.

The key advantages over other schemes are simplicity, fairness, and the potential for broad political support.

Simplicity: With a high enough carbon price, there could be a rapid transition to a low-carbon economy with no need for complex regulation of industry or subsidies for renewable energy. A high carbon price is possible with minimal disruption or hardship because of the dividend. During the transition, businesses can pass on costs, but households are compensated for the higher prices. Both consumers and producers would have a financial incentive to switch to lower emissions products and services.

Fairness: In Canada and Australia, most households would be better off under fee and dividend than they are now. Many prices will go up, but dividend payments will be greater than price increases for lower-income households because they use less carbon-intensive goods and services than high-income households. UNSW research has found that, at a price of $50 per tonne, households in the bottom 20 per cent of income earners would be, on average, more than $1200 per year better off and average income households would be nearly $600 better off.

Potential for broad political support: Because the system is revenue neutral, there is no impact on government budgets. The capacity to do away with most regulation and subsidies also appeals to free market advocates who dislike government intervention, but acknowledge the problems caused by greenhouse gas pollution.

Response: Warwick Smith, Senior Economist at public policy think tank Per Capita and economics advisor to the Citizens’ Climate Lobby Australia. He tweets @RecoEco.

The Fuzzy Logic Science Show is on at 11am on Sundays on 2XX 98.3FM. Questions to AskFuzzy@Zoho.com Twitter: @FuzzyLogicSci

Posted in Australian politics, climate change, tax economics | Tagged , , , , , | Leave a comment

Video of speech for the Victorian Fabians

Here’s a speech I gave on the economics of inequality at the AGM of the Victorian Fabians. The speech notes are below the video.

Warwick Smith from Australian Fabians Inc. (AFI) on Vimeo.

The Economics of Inequality

This speech was given by Per Capita Senior Economist Warwick Smith at an event held by the Victorian Fabians on 18 April 2018.

I’d like to begin by acknowledging the tradition custodians of this land, the Wurrundjuri people of the Kulin nation and pay my respects to their elders; past, present, and future.

There can be no meaningful talk of inequality in this country without acknowledging and discussing the profound inequality between indigenous Australians and most of the rest of the population. I’m not only talking about economic inequality. Indigenous child mortality is still double that of the non-indigenous population and there are too many other damning statistics to rehearse them all here today.

Despite being an economist myself, I think it’s fair to say that pretty much every important economic question has a political answer. There are, however, a lot of economists out there who would deny this. They believe that economics is a hard science, like physics or chemistry; with laws and immutable facts. This couldn’t be further from the truth.

The economy is a social construct and economics is, therefore, a social science. This means that economics is inherently political.

As a social science, economics is not something you can really understand simply by studying the present. Just as it’s inherently political, it is also inherently historical. I have always found the most informative voices in economics to be economic historians because they understand why we do things the way we do them today.

It’s become very unfashionable to talk about class and power but, ultimately, the story of inequality is a story of class and power. As US billionaire Warren Buffet said; “there is a class war, and my side is winning”.

The capitalist class has won the class war so decisively that they’ve made discussing it seem like wild conspiracy theory and those who bring it up are accused of the politics of envy.

Let’s have a quick look at some historical trends in Australia before returning to the topic of class and power:

 [Slides showing inequality declining in the 20th century up until the 1970s then increasing from then until now]

This same trend occurred across much of the developed world during the 1970s and 80s.

So, what happened in the 70s and 80s that changed everything so dramatically? I’m not going to bore you with a story of neoliberalism and the rise of Thatcher, Reagan and… dare I say it here… Keating. We’ve all heard those stories before and I think perhaps they were symptoms, not causes. The more interesting story is why this transition occurred at around the same time across the globe.

This period of relative prosperity and progress, often referred to as the post-war boom, didn’t happen by accident. It was the result of a bipartisan commitment to avoid repeating the conditions that led to the Great Depression.

One of the clearest documented indications of this is the Curtin government’s 1945 White Paper on full employment — an extremely impressive political document (at least by today’s standards) that’s recommended reading for anyone interested in Australian politics.

The authors and instigators of the 1945 White Paper witnessed the Great Depression first hand. With unemployment averaging nearly 20%, and much higher in certain parts of the country, and among young school leavers, the depression left an indelible mark on those who lived through it. These policy makers — perhaps foremost among them in Australia, H.C. Coombs, then lived through World War Two. During the War, the economy was fully employed; indeed, there was such a shortage of labour that even married women were encouraged to work.

Towards the end of the War, Coombs and others, trained in the new economics of John Maynard Keynes, wondered, if the government, by stimulating demand, could bring about full employment during wartime then why not during peace? Thus, the White Paper was born and along with it came 25 years of low unemployment, shrinking inequality, rising material standard of living, and strong economic growth known as the post-war boom.

The core of the White Paper and related policy was that unemployment resulted from a lack of private demand for labour and that government could, and should, use its spending power to maintain full employment during economic downturns.

Unemployment was seen as an inherent part of a capitalist market based system and, if we wanted the positive elements of this system then we needed to take responsibility for the costs. In other words, unemployment was seen as a collective problem, not an individual failing.

By the 1970s most of the politicians, policy makers and intellectuals who had lived through both the great depression and the Second World War as adults were either retired or dead. Power had shifted to a new cohort of economists trained in a new brand of economics — neoclassical economics. The politicised version of neoclassical economics atomised society into individual workers, consumers and companies and reduced the role of government to the correction of “market failures”. Government run enterprises and services were privatised in the name of efficiency — which, for the most part, was code for cutting services and paying the workers less to make room for profit for business owners.

Neoclassical economics did not rise to dominance due to progress within the discipline or due to a better understanding of the economy but as an intentional response to the reduction in inequality. Here’s the important thing: inequality had been falling for more than 25 years. That is, the share of the economy’s output going to the wealthy had been falling for more than 25 years. Well, the wealthy fought back. They created entire economics departments at prestigious universities, primarily in the US but not only there. They built a complete and well championed alternative to the Keynesian economics that had dominated since WW2. Then they waited for an opportunity to undermine the bipartisan commitment to heavy government intervention in the economy.

Finally, in the 1970s, the OPEC induced oil shocks provided the opening they needed to claim that Keynesian economics had failed. Skyrocketing oil prices resulted in high inflation, high unemployment and floundering economic growth — stagflation. Traditional Keynesian economics had no response and was successfully painted as a failure. That this crisis had little to do with domestic economic management and was driven by external shocks was lost on most. This con, and it was a con, could only succeed because, by the 1970s, most of the policy makers who had lived through the great depression had either retired or died. Had Coombs and his colleagues of 1945 still been dominant, neoliberalism (the political sibling to neoclassical economics) would have been dismissed out of hand as the pro-business propaganda that it was. They’d seen this kind of policy making before and they’d seen it end with the Great Depression.

When it came to the unemployed, government policy shifted dramatically from viewing unemployment as an inevitable consequence of capitalism and, as such, a collective responsibility; to viewing unemployment as an individual failure. A new economic term was coined, a term that only an economist could come up with; the Non-Accelerating Inflation Rate of Unemployment or NAIRU. This was the level of unemployment, below which, labour would have too much power and would be able to demand wage increases above productivity increases. This in turn would cause inflation. It’s an entirely theoretical construct by the way, nobody really knows what the NAIRU is or how to calculate it — but that doesn’t stop them assuming a number and acting on it.

Don’t worry, you don’t need to fully get the economics of that to understand that this means we need a large pool of desperate unemployed people, clamouring for jobs, so that those in employment will be too scared to ask for a pay rise or for better conditions. This wage suppression effect of the unemployed will keep a cap on inflation — so we’re told. It will also, conveniently, create higher profits.

The most powerful bargaining chip that workers have is to walk away. If you are easily replaced and being on the dole is a living hell then your power as a worker is greatly diminished because your willingness to walk away is eroded. This is what the NAIRU is about and it’s built into our economic system and into government and reserve bank economic management.

There are many more unemployed people than there are jobs. That’s not a controversial statement. If every unemployed person was the exemplary job candidate, punctual and immaculately dressed, with the perfect CV, the unemployment rate would be — pretty much exactly what it is today. Unemployment is created by a lack of demand for labour, or a skills mismatch, not by the behaviour of the unemployed.

So, if that’s the case, why make the unemployed perform all these “mutual obligations”? Why do they have to constantly jump through all these hoops or face financial penalties?

They are made to do this so that the prospect of becoming unemployed will be so frightening to those who are in jobs that they won’t push hard for better wages or better conditions. Similarly, the unemployed will be so desperate to get out of the punitive “employment services” system that they will accept poor wages and poor conditions.

In turn, this has been made possible by painting the unemployed as bludgers and parasites on hard working Australians. Workers have effectively been turned against the unemployed as part of a program of wage suppression.

The pattern is the same everywhere, with the modern mantra of gain wealth, forgetting all but self. We’ve even privatised our retirement ambitions in the form of superannuation accounts. This atomising of the social contract is absolutely integral to the neoliberal project. Unions are among the few remaining barriers to the completion of this project, and their decline is another indicator of how the class war is going.

As I said earlier, this is ultimately a story of class and power. Our economic system is a construct and, as such, it can be reconstructed so that it works better for a larger proportion of society. The disconnect that has developed between economic output and wages is just one indication that power has shifted too far in favour of the holders of capital and away from workers. There is nothing inevitable about this shift — it’s not a product of unstoppable technological progress or of globalisation — these are just narratives designed to disempower — it’s a product of the inherent conflict between capital and labour.

Those who are winning the class war have tried to change the narrative to say that there is no inherent conflict, that we can work together toward shared goals. While this may be appealing and may be true within individual workplaces, the incentive structure of unregulated capitalism creates inherent conflict between the interests of workers and the interests of the owners of capital.

If we are interested in reducing inequality then we have to be willing to have these conversations and we have to be ready for the inevitable backlash as we are painted as communists, accused of prosecuting the “politics of envy” and of waging a class war.

Perhaps some of you have noticed that at the beginning of this talk I said that no serious discussion of inequality can be had without paying attention to indigenous inequality and here I am, near the end of my rant, having said no more about indigenous disadvantage.

Of course, we couldn’t do justice to the subject of indigenous disadvantage even if we spent the entire evening on it. However, in the context of this speech, indigenous policy was perhaps hit hardest by the rise of neoclassical economics.

Just as we, as a society, had matured enough to acknowledge indigenous disadvantage, measure it in the census and begin to make some token steps to acknowledging and addressing 200 years of dispossession and persecution, in came the economics of individualism. This provided the convenient excuse to write off indigenous disadvantage as a result of indigenous failure. As with the modern treatment of the unemployed, this is a complete abdication of responsibility from those with the power to do something about the problems.

The profound nature of indigenous disadvantage means that there is no simple fix. However, we can fly to the moon, we can make cars that drive by themselves through incredibly complex environments. Complexity is not an excuse for complacency.

There’s a similar story with respect to gender economics including the gender pay gap and the gender superannuation gap — two things I’ve spent a lot of time working on recently. We know what the problems are but we keep fiddling at the edges expecting “the market” to fix it. So steeped are we in the worship of economics that we dare not tell the truth — the system is broken and only profound political intervention can fix it.

The obvious place to start in addressing inequality is at the bottom. To me, this means giving homeless people homes; it means giving jobless people jobs or at the very least lifting the dole to a level that people can actually live on.

We are one of the richest countries in the world at the richest time in human history. Let that sink in for a minute. We could go to people in remote indigenous communities and ask them what they want for their communities — and then we could provide them with the resources, the training and the jobs to do those things — how’s that for a radical idea?

Today I’ve worn my economist hat, I’ve worn my historian hat and I’ve worn my social theorist hat. Now I’m going to wear my philosopher hat. I cringe a little bit every time I call myself a philosopher because it feels only one step removed from calling myself a wanker. Such is the victory of anti-intellectualism in this country — in fact across the anglosphere — that somebody who calls themselves a lover of wisdom is a wanker. What other discipline though, than philosophy, is really suited to addressing this issue of inequality?

Ultimately the modern inequality question is this: how much of our nation’s economic output should go to the workers, how much should go the owners of capital and how much to those who fall through the cracks? There is no mathematical formula or economic model that can answer that question. It’s a moral question that is in practice answered by the outcome of a contest of power. Those who don’t understand that, at least implicitly, have already lost the contest.

In the end though, if you want an explanation of inequality, look no further than those words of billionaire Warren Buffet; “There is a class war, and my side is winning.”

Posted in Inequality, Speech | Tagged , , , , , | Leave a comment

Governments haven’t always shirked responsibility for our low wages – The Conversation

File 20171129 28869 1ymu7fl.jpg?ixlib=rb 1.1
Post-war Australia experienced a boom with full employment and falling inequality.
State Library of Queensland

Warwick Smith, University of Melbourne

For the last four years or so average wages in Australia have barely kept pace with inflation, meaning no real pay rises. And all the while, the government has been betting on the market to improve things.

Treasurer Scott Morrison stated:

As the labour market tightens, that’s obviously going to lead over time to a boost in wages.

As the Treasurer asserted, economic theory says these conditions should lead to rising wages, but they aren’t. The country continues its record run of 26 years of economic growth and the banks and other big corporations continue to post record profits.

Read more: How market forces and weakened institutions are keeping our wages low

The Reserve Bank of Australia is at a bit of a loss, speculating at its latest meeting that maybe globalisation and technology are to blame.

However, to understand what’s really going on it’s helpful to look at something most economists and politicians ignore: history.

How past governments have dealt with low wages

There was a period in Australia, and much of the rest of the developed world, from the end of the second world war to the early 1970s, that is often referred to as the “post-war boom”. During this roughly 25-year period, unemployment averaged 2%, inequality fell steadily and economic growth was strong.

Australia’s unemployment rate, 1901 – 2001

Unemployment in Australia.
Treasury, Author provided

This didn’t happen by accident. Towards the end of the war, policymakers and economists began planning for the post-war period.

They had lived through the Great Depression with unemployment averaging 20% and then they had lived through the war, where the war effort resulted in full employment. They asked the obvious question: “If we can achieve full employment through government spending during the war, then why not during peace time?”

That question and the resulting policy answer, outlined in the Curtin government’s 1945 white paper Full Employment in Australia, resulted in the post-war boom with full employment and falling inequality for the next 25 years.

The 1945 white paper (a remarkable political document by today’s standards) tackled the complex questions of inflation, unemployment, wages and economic growth with mature nuance. Policy proposals weren’t made to appear win-win but weighed up costs and benefits, accepting that we must take responsibility for the costs.

One of the costs of a capitalist, market based system is unemployment. In this context, unemployment was not seen as an individual failing but as a collective responsibility. The paper stated the government should accept responsibility for stimulating spending on goods and services to the extent necessary to sustain full employment.

How far we have come from 1945. Today we blame and demonise the unemployed for not being in work, even though there are many more unemployed people than there are available jobs.

Rather than governments taking responsibility for full employment, they set up punitive “employment services” regimes that require the unemployed to jump through meaningless and often demoralising bureaucratic hoops or face financial penalties.

So, what happened in the 1970s to change our attitude to full employment so radically?

During the post-war boom, inequality had been steadily falling. That is, for 25 years, the proportion of the country’s output that was going to the rich was steadily falling. Unsurprisingly, the rich fought back.

Skyrocketing inflation combined with high unemployment (stagflation), caused by the oil shocks of the 1970s, allowed business representatives to claim that the Keynesian system that had given us the post-war boom was a failure.

Enter the age of individualism. Neoclassical economics and its political counterpart neoliberalism were all about individual choice and individual accountability.

To use the words of US billionaire Warren Buffett:

There’s a class war, all right, but it’s my class, the rich class, that’s making war, and we’re winning.

Andrew Leigh, Battlers and Billionaires

The current stagnation of wages we are seeing in Australia is no accident and no mystery. It’s the result of the intentional erosion of worker power (largely due to the successful campaign to demonise unions) and the end of the bipartisan federal government commitment to full employment.

The impact of full employment on wages is profound. The greatest bargaining chip a worker has is to withdraw their labour.

When it’s difficult to get a new job, unemployment benefits are well below the poverty line and the unemployed are demonised by politicians and the media alike, workers are much less inclined to push hard for improved wages or conditions.

I’m not arguing that we could simply adopt the policies of 1945 and magically return to the golden years of the 50s and 60s; Australia is a very different country and too much has changed. However, we can learn a great deal from the 1945 white paper in terms of ambition, commitment, and the embrace of complexity and nuance.

The federal government could restore its commitment to creating full employment in Australia, using its spending power to make up for any shortfall in private jobs as it did during the post-war boom. History demonstrates that the careful and coordinated use of both fiscal policy (spending and taxing), and monetary policy (interest rates) to manage the economy can create a more prosperous and egalitarian Australia.

The ConversationIt’s well past time for a 21st century update to the 1945 white paper on full employment.

Warwick Smith, Research economist, University of Melbourne

This article was originally published on The Conversation. Read the original article.

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