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.”

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


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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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RRR Uncommon Sense interview on full employment

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I was interviewed by Amy Mullins on Uncommon Sense following the publication of my report on the history of unemployment in Australia. The interview is about 40 minutes long which allowed us to really delve into the topic of unemployment. Thanks Amy for a really enjoyable conversation.

Listen to the podcast here.

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Report launch: Unemployment policy in Australia: a brief history

This report was launched at a post-budget event where I was on a discussion panel with Wayne Swan, Stephen Koukoulas and Emma Dawson on May 16.

You can listen to a podcast of the event.

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Executive Summary

Maintaining full employment in Australia was once considered a top priority of state and federal governments. For more than two decades, between the end of World War Two and the early 1970s, unemployment in Australia was around two percent.

Keeping unemployment low was seen as a collective responsibility. There was explicit acknowledgement of the fact that capitalism, by its very nature, produces winners and losers, and that if we want the benefits of a market-based capitalist economy then we must also take responsibility for the casualties.

In the 1970s and 80s all of this changed. Liberal free-market ideas rose to dominance across most of the world in what is now often referred to as neoliberalism. Instead of viewing unemployment as a collective problem, neoliberalism painted unemployment as an individual responsibility. The public focus shifted from ensuring there were enough jobs for all to a dialogue around individual employability. Tellingly, it was in the mid-70s that the term ‘dole-bludger’ entered the Australian lexicon. Ever since then successive governments been increasingly punitive in their treatment of the unemployed.

The focus today is, in effect, on punishing and stigmatising the unemployed for being unemployed even when there are many more job seekers than there are jobs. The mutual obligation framework that currently underpins unemployment benefits rests
on an assumption that the unemployed need to be pushed to look for work and that many would not apply for jobs if they were not forced to. To some extent this may be true, but only because many know that there are no jobs for them. Thus, mutual
obligation activities become pointless and degrading bureaucratic hoop-jumping exercises.

The technocratic justification for the shift away from full employment policy was inflation control. Executive Summary The theory says that there is a natural rate of
unemployment below which wage pressures drive inflation. What’s never stated explicitly is that the decision to prioritise inflation over employment in public policy was a political victory of capital over labour. Inflation is often referred to as a tax on capital
and has always been viewed with much greater fear by the capitalist class. Similarly, the presence of a pool of desperate unemployed people, who are kept at or below the poverty line, undermines the power of labour by making the withdrawal of participation
much costlier. The result has been a substantial shift in power from labour to capital since the 1970s and a corresponding shift in the allocation of national income. The post-war years saw a marked decline in inequality in Australia, a trend that was sharply
reversed from the 1970s onwards.

Australia operates under a theoretical policy framework that makes use of a buffer-stock of unemployed people to maintain price stability. Within this framework there is a strong argument for supporting unemployed people with much higher welfare payments, in recognition of the fact that they are casualties of our public policy decisions.

However, at Per Capita, we believe that an even better approach would be to pay attention to the flaws in our current policy framework and shift our priorities back to creating full employment. It’s much better for everyone if we create employment for the
unemployed rather than compensate them.

You can download the full report here.

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There is a fix for house prices – but Victoria has missed its opportunity again

By Warwick Smith

This article was originally published at The Age on 2 May 2017.

Victorian Treasurer Tim Pallas’ 2017/18 budget contains a handful of measures aimed at improving housing affordability, including exempting first home buyers from stamp duty for properties under $600,000 and doubling the first home buyer’s grant to $20,000 for purchases in rural and regional Victoria.

Both of these measures might help some first home buyers get into the market but they do nothing to actually address housing affordability (in fact they will drive up prices). Similarly, while initiatives in the budget aimed at increasing the provision of social and affordable housing are commendable, they also do nothing to address the broader problem.

 

 

Everyone acknowledges that house prices are too high but governments of all levels and all stripes are reluctant to take action that risks deflating or popping the housing bubble. This leaves them tinkering around the edges – as the Victorian government has done in this budget.

This year the Victorian government expects to raise more than $6 billion from real estate stamp duties, now the single biggest source of tax revenue for the government. Stamp duties are notoriously bad taxes, increasing the cost of purchasing a home and acting as a financial barrier to moving house. Federal treasury examined all major taxes in Australia and found stamp duties to be the most inefficient of the lot.

The ACT is proving that state and territory governments do have an option for maintaining revenue while getting rid of inefficient stamp duties. They’re replacing stamp duties with land taxes. The same review by Treasury that showed stamp duties are our most inefficient taxes found that land taxes are the most efficient. The problem with land taxes is that they will actually improve housing affordability and that’s probably not a palatable outcome.

Improving housing affordability can only be done if house price growth falls below income growth. Federal tax settings including negative gearing and concessional treatment of capital gains have made housing investment in Australia artificially attractive and drawn in millions of middle class and higher investors. None of them would be too pleased if house prices fall or even if the government was seen to be reducing their investment return. We’re stuck in a difficult place with house prices too high and bringing them down seemingly unachievable.

The ACT, once again, has the answer. They’re taking 20 years to very slowly and incrementally replace stamp duties with land taxes. The slow transition means that the impact on prices in any one year will be almost too small to notice but the cumulative effect will be to greatly improve the efficiency of the ACT economy, including improved housing affordability and more efficient use of existing housing stock as it will cost so much less to move house. We’ll get lower prices relative to incomes but it will happen slowly enough that investors won’t realise until it’s too late (shhh, it will be our little secret).

This Victorian budget was a great opportunity for some bold tax reform aimed at breaking the deadlock on housing affordability. Next year will be an election budget, not usually a place for bold reform. Maybe whoever is Treasurer in 2019 could do a study tour of the ACT and bring back some sensible tax reform and some much-needed relief from endless commentary on house prices.

Warwick Smith is a research economist with Per Capita.

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3AW interview on the banks making a killing from PayWave and PayPass

I was interviewed on 24 March on 3AW in response to my New Matilda article on the banks taking a slice of every purchase we make when we tap or wave our cards.

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The banks make a killing every time you swipe your card

The banks are the big winners every time you tap or swipe or insert your card. Photo: AAP

By Warwick Smith

This article was originally published by New Matilda and republished by The New Daily.

The banks are rubbing their hands with glee as they now get a cut of almost every purchase we make.

PayWave and PayPass are changing the way we buy things. The latest figures from the Reserve Bank of Australia saw yet another fall in ATM use and an increase in the number of Australians who don’t carry any cash.

It’s worth pausing to take that in. Every time you tap or swipe or insert your card, the banks are getting a slice … every time you buy something. Now, admittedly, it’s a small percentage (around 1 or 2 per cent) but when it’s every transaction, it sure adds up.

This isn’t to pay for the machines. That’s covered in a separate rental charge. The question is, is it worth it? Are they providing enough of a service to make that worthwhile for you and the retailer?

There’s another thing we’re losing when we tap – our connection with our money and our budgets. This too is good for the banks – who really start to make money when we spend credit.

At the risk of showing my age, my earliest memories of banking involved a little book I would hand to the bank teller. In it would be printed all of my transactions and my current balance. The teller would put it in a little printer that would add my current transaction and the updated balance and I would leave with my cash and my bank book.

There was a clear and direct connection between income and money spent. You handed over your cash and saw how much was left in your wallet and the little number in your bank book told you how much was left in your account. While it’s true all of that information is now available on your phone, the connection is voluntary; it’s one step removed.

Sometimes you only find out there’s no money in your account when “declined” comes up on the machine. Often enough though, this isn’t a sign that you’ve run out of money – that happened long ago – it’s a sign you’ve run out of credit.

Who wins? The banks.

The banks are raking in huge revenue from our financial transactions.

As well as having some of the most profitable banks in the world, Australia currently has the highest level of debt in the world – no, not the much-hyped government debt, that’s very low. I’m talking about private debt.

Australian households owe a total of $2 trillion. That’s over $80,000 for every man, woman and child. This is primarily driven by the outrageous cost of housing or, more accurately, land. Who’s the biggest winner from ever-growing land prices and ever-growing private debt? You guessed it; the banks.

Starting to see a pattern here?

In my opinion, modern economies are vastly over financialised. The financial sector has moved well beyond the provision of beneficial goods and services to become a parasite that drains scarce resources from productive economic and social activity. Just like any host-parasite relationship, the bigger the parasite, the more the host suffers.

Think about those overinflated land prices. That’s essentially free money for the banks. Almost every purchase of a house involves a contract to hand over a very substantial proportion of household income every month to a bank – for decades. Where do they get the money to lend to you? They create it out of thin air. That’s another topic for another day but a banking licence is effectively a licence to print money.

Think also about superannuation. Every pay, 9.5 per cent of every person’s salary is compulsorily acquired by the financial sector who very happily look after it until we retire (for a price, of course).

Every time we spend money at the shops using a card, we hand over a cut to the banks. Add to that our mountain of credit card debt and you get a raging torrent of money flowing into the banks every day.

From a big picture perspective, we need to do something about overinflated land prices so that those resources can be put to more productive use. We need to stop seeing housing as a way to accumulate wealth and start to see it as … well, housing. This is largely a government policy responsibility and not something we can do as individuals.

However, we can claw back a little bit of control and cut out the banks as middle men by using cash when we spend. This is particularly useful for the small local businesses where we shop.

It could be the difference between them surviving and going under – or being able to pay staff versus working 12-hour days themselves. Those staff could be your kids or your friends.

Not only does it restrict the financial benefit to the purchaser and the seller, it also puts you more in touch with your spending and your budget.

Unless you’re a bank or an international credit card provider it’s a win-win scenario.

Warwick Smith is a research economist with progressive think tank Per Capita. His article first appeared on New Matilda and is republished here with permission.

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