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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RRR Uncommon Sense interview on full employment


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.


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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Listen up, Scott Morrison. It’s time to bust the myth of the budget surplus – The Guardian

Originally published at The Guardian on Jan 6 2017.

A fetish of recent decades, budget surpluses lead to private sector debt and are unsustainable in the long term. The current obsession could lead us to recession.


On Facebook, Malcolm Turnbull’s announcement of Treasury’s mid-year economic and fiscal outlook began with this flawed statement:

The Turnbull Government understands that like a household budget, when you are trying to pay off debt, you can’t spend more than you save.

Let’s be generous and assume that Turnbull meant “you can’t spend more than you earn” as the literal meaning of his sentence is obviously ridiculous. A quick look at the period directly after the second world war, when Australia’s public debt was at its highest, makes a mockery of Turnbull’s excuse for budget austerity.

Australian federal government debt and deficits since federation
 Photograph: A Owen/Philo Capital

As shown in the chart above, governments during the second world war ran massive deficits to fund the war effort and built up government debts totalling over 120% of GDP. The post war period saw that level of public debt steadily decline to about 10% by the end of the 1960s.

How was that mountain of debt paid off? It wasn’t. If it had been paid off Australia would have been an economic basket case during the 1950s and 60s. Menzies was prime minister for most of those years and his governments ran modest fiscal deficits every year.

To make sense of a shrinking debt burden during a time when government is spending more than it is taxing we need to understand that, despite what Scott Morrison and Malcolm Turnbull say, government finances bear absolutely no resemblance to household or business finances.

Government spending is such a significant part of the economy that it can determine national economic outcomes. By deficit spending in the 50s and 60s, the Menzies government stimulated economic growth and built up non-government financial assets. This growth increased government tax receipts and reduced the size of the debt burden without paying off the debt.

Add inflation to the equation, which reduces the real value of the debt, and you can understand how the debt-to-GDP ratio can fall so dramatically while the government continues to run deficits.

This clearly makes a mockery of Morrison and Turnbull’s stated reasons for cutting government expenditure. Recurring modest government deficits are sustainable in the long term. Government surpluses, by contrast, are not sustainable in the long term.

To demonstrate this, there is one basic accounting concept that needs to be explained. Somebody’s surplus is always somebody else’s deficit. This includes the federal government.

For a moment, imagine that Australia is the only country in the world. Imagine that the non-government sector in Australia has $100 in net financial wealth. That year, the federal government spends $45 on goods and services and taxes $50. That’s a federal budget surplus of $5. At the end of this period the non-government sector in Australia has $95 (the government spent $45 into the private economy and took $50 out in taxes). This is a non-government deficit precisely equal to the government surplus of $5. This is a simple accounting identity; it must be true. There is nowhere else for that government surplus to come from.

Adding the foreign sector and trade back in doesn’t change this picture, it just complicates it a bit. Imagine the government continues with the same budget the following year. The non-government sector now has $90 – and the year after $85. I presume you’re starting to see the problem if this continues.

So, the first key thing to understand is that a federal government surplus must be accompanied by a non-government deficit.

Let’s look at Scott Morrison’s fiscal strategy spelled out in Myefo:

The government’s medium-term fiscal strategy is to achieve budget surpluses, on average, over the course of the economic cycle.

What Scott Morrison is really telling you is:

“The government’s medium-term fiscal strategy is to achieve non-government deficits, on average, over the course of the economic cycle.

In the absence of persistent trade surpluses (we mostly run deficits), the only possible outcome of this is increased private sector debt (that’s Australian businesses and households) and, if sustained, eventual private sector bankruptcy.

Private sector debt in Australia is currently about 210% of GDP, compared to government debt of about 30%. What Scott Morrison needs to explain to the Australian people is why he’s so keen to increase the private debt they hold over their homes and businesses when it’s already so high.

With a background of massive government debt incurred during the second world war, the 1950s and 60s are often referred to as the “golden years”, when unemployment was around 2%, economic growth was high, wages grew strongly and inequality was falling. This was not despite persistent government deficits but partly because of them.

Recent decades have seen the quest for budget surpluses become a kind of fetish. It’s important to understand that this is relatively new and that it has no sound basis in monetary economics.

If Scott Morrison and Malcolm Turnbull get their way and run budget surpluses over the business cycle they will cause a recession – simple accounting tells us that, short of some sort of export miracle, there is no other possible outcome.

Warwick Smith is a research economist at progressive think tank Per Capita

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