John Curtin, Prime Minister of Australia 1941-45 Source: The National Library of Australia
Why public investment is urgently needed to boost the Australian economy
With five million Australians currently out of work due to a global downturn, and many others out of work without any Commonwealth assistance, the only option is to make government the employer of last resort.
Over the past three decades, politicians have pushed policy that steers wealth to a select few. Politicians have privatised assets to fund other assets. They’ve downsized the public sector, outsourced to the private sector, and transferred public funds to wealthy corporations.
Politicians have repeatedly beaten their chests about their fiscal prudence, including their aversion to government debts and deficits, which sounds very prudent to the budget- and debt-conscious citizen, right?
But here’s the thing: none of this has worked. All it’s done is to transfer money from ordinary people to the wealthy. Oxfam January 2019 reported that the “combined fortunes of the world’s 26 richest people is greater than all of the wealth owned by world’s poorest 3.8 billion people”. Bloomberg noted the planets wealthiest got richer by 25% in 2019.
In fact, to get our economy moving again, the government needs to start spending. When ordinary people have been financially drained trickle down is not working and things have to change.
The best-known example of how we’ve gotten our economy moving in the past. occurred in the 1940s. It’s known by its bureaucratic title: The White Paper on Full Employment. This commitment remained in place for three decades from 1945 to 1975 and acknowledged that the Commonwealth could guarantee full employment.
“Unemployment is an evil from the effects of which no class in the community and no State in the Commonwealth can hope to escape, unless concerted action is taken.”
For those unable to return to work, the Commonwealth government provided access to social security via a national welfare fund.
Then, in the 1970s, the Whitlam government dropped the policy. In the wake of the Organisation of Petroleum Exporting Countries (OPEC) oil shocks, we switched to inflation targeting. This is where the Reserve Bank of Australia (Australia’s central bank) sets the inflation rate. At the time, it seemed like sound policy, but it triggered a spike in unemployment and underemployment.
However, neither unemployment nor underemployment are choices made by most individuals. Governments make decisions that result in unemployment. If government pursued policies that spurred pro-growth strategies, we could over time reduce the rate of unemployment.
But here’s the thing: there’s absolutely nothing necessary about unemployment. There are millions of prime-of-their-lives Australians out of work. Collectively, five million Australians currently depend on government support. This support comes in the form of JobSeeker or JobKeeper.
While these support packages are essential during the pandemic, there’s a better way just requiring a logical strategy and targeted support.
Below, I’ve set out the steps that many economists acknowledge is a better way forward:
1. Expand the Clean Energy Finance Corporation to become our new government-owned bank. Once recapitalised, this government bank could lend to state governments to fund infrastructure. This would be more effective than asset recycling, which has benefited the rich at the expense of everyone else.
2. Nationalise privatised entities like CSL (formerly Commonwealth Serum Laboratories) to ensure that vaccines for future pandemics are available to consumers. The reality is that Pharmaceutical companies and biotechnology companies are only interested in developing highly profitable treatments; there’s little incentive for them to develop vaccines. The profit margin for private corporations simply isn’t large ‘enough’, according to Professor Peter Doherty.
“They live by profits and the rules of capitalism. And capitalism has no interest in human beings other than as consumers.”Professor Doherty quoted in Vaccine development is a case of market failure, Sydney Morning Herald, 13 April 2020.
3. Implement the Green New Deal. We urgently need to tackle the lack of public or community housing. We could do this by building 500,000 new houses to alleviate the housing crisis and deal with inequality.
4. Replace JobKeeper with a proper wage subsidy. The Morrison government’s JobKeeper is paid directly to employers, not to workers. This is strange way to pay a subsidy given that the Rudd government paid $900 into accounts in 2009 as part of their Global Financial Crisis response. The fact is that the Commonwealth has the power to authorise expenditure. All the government needs to do is arrange for the Australian Taxation Office (ATO) to pay directly to people’s personal bank accounts for the duration of the pandemic.
Another issue with JobKeeper is that the subsidy is due to run out towards the end of September 2020. The government seems to assume the crisis will be over by then, but that appears to be highly over-optimistic thinking. Given it has usually taken around a decade to develop past vaccine, the likelihood that there will be a vaccine within 12 months is remote. In reality, influenza is a different virus family Orthomyxoviridae. COVID19 is a Coronavirus the same family as the common cold and we still don’t have an effective cure for that, despite billions spent and decades looking for one. In reality our only option maybe to pursue a scorched earth policy and eliminate the virus.
5.If we eliminate it or develop a vaccine, we need to establish a job guarantee scheme for those workers who can’t return to the same job.
We also need to revise our training agenda and make it easier make faster transitions. According to economist Alison Pennington:
“A healthy skills system is going to be integral to us being able to pivot through this crisis and train up people, whether they be young people into new jobs, or retraining people out of jobs that are on the down.
“Our skills system is fragmented, haphazard, under-resourced and unco-ordinated. And it’s totally unfit for this challenge that we have coming up.”
Source: Depression-level crisis: ‘Official figures mask true extent of crisis in The New Daily , 18 June 2020
6. But before people can transition to other roles, we need to examine income support. Social security has been transformed into a bash the dole bludger sport over the past 45 years by some media outlets. And it’s not just the unemployed that they have attacked; they’ve also repeatedly labelled cancer sufferers (and others) as bludgers. The fact is that statistically, the overall number of malingerers is very small.
In a cornovirus world a larger number of people are likely to need income support for longer. So we need to remove the conditionality requirements placed on social security by successive Australian governments. And governments need to start telling the public how Social Security is funded. Hint: It’s not funded via taxpayer money.
We also need to start getting honest about the total numbers of people out of work. There are an awful lot of people who simply aren’t counted in the official figures– dispirited job seekers, those working as casuals and others.
7. Expand manufacturing so that Australia is not left without essential equipment and supplies. The coronavirus pandemic has exposed the risks of offshore manufacturing. For example, we have one manufacturer of personal protective equipment (PPE). This leaves us exposed in the event of a second wave or another pandemic.
8. Issue bonds to alleviate the rental crisis. These could be called coronavirus bonds. The proceeds would pay the rent or mortgages of those laid off because of coronavirus. It’s in everyone’s interest that the payments and credit systems don’t seize up. The banks simply aren’t going to offer a permanent amnesty to cash-strapped households.
9. Change the private-debt approval process and reduce debts to what can be repaid. This will encourage consumers to spend. Enhancing consumer confidence is absolutely necessary if we want to revive the ailing Australian economy.
10. Re-embrace the past. Thirty years ago, the Cain Labor government in Victoria demonstrated that it understood how to fuel economic growth. In doing so, they gave birth to some entrepreneurial success stories. The best-known success story was AMRAD Pharmaceuticals.
Sadly, many in the commentariat failed to grasp the link between public and private collaboration. Instead of focusing on how the government tried to build new industries, they instead focused on innovating which failed.
This was an incredibly small-minded approach to innovation and risk. The fact is that risk and failure are intrinsic to innovation. For innovation to occur, a venture capitalist has to be willing to invest in a product, knowing that it could be a success or a failure. So, if venture capitalists don’t try, they aren’t going to discover the next innovation.
Also, if venture capitalists don’t manufacture here, they’re narrowing the pool of jobs available to local residents.
“Capitalism itself can’t survive a crisis like this… It needs a centralised state response …to survive and re-start after the crisis.” Professor Steve Keen, Capitalism: closed for business, Renegade Inc.
Getting innovation and job creation underway requires sound policy and implementation. Regardless of the type of policy, the public service is supposed to play a role in implementation. Key to implementation is institutional memory, says Laura Tingle, a long-term Canberra press gallery journalist. Without institutional memory, a department or agency can’t draw upon a body of expertise to develop a compelling policy.
Tragically, this process has been undermined by the craze for contracting out (to save money, supposedly). And during the GFC, there were already clear signs that this shortsighted approach had bitten hard when some departments simply didn’t have the expertise to implement sound policy.
The case for debt, deficit, and publicly-owned banks
It therefore follows that if we don’t have the public service expertise, we might be hard-pressed to implement quality policy of any kind. And clearly this is of huge significance. If we can’t develop or implement sound policy, we simply won’t be able to work our way out of any sort of crisis.
Economies never spring out of recessions or depressions. There’s no secret elixir that can soothe the distress of people whose businesses have failed or whose partners have committed suicide.
We need a new social bargain, one in which the rich no longer fleece the public.
We also need to consider altering the structure of our economy.
Contrary to neoliberal orthodoxy, the only way to reinvigorate an economy is public investment. Pursuing business as usual (loading people up to the eyeballs with private debt) will crush so many more lives, as it’s crushed so many in the past.
To really understand why, we must look at the critical importance of public investment. We also need to look at the 1980s and 1990s and public-debt phobia.
This period saw the sale of the Commonwealth Bank of Australia and the State Bank of New South Wales in 1994.
State governments began financing projects using the discredited asset-recycling method. Asset-recycling is a fancy name for the sale or lease of public assets to the private sector, according to economist John Quiggin. Since then, Australians have looked on as many of our golden-egg-laying gooses have been butchered and sold at bargain-basement prices, only to see their value rise sometime later.
Where are the recycled assets from this discredited asset-recycling process? Where are the fulfilled promises of jobs and real growth, that is, asset growth?
Fear of public investment is also a disaster for a much-less-discussed reason. Every country needs its own public bank to fund significant infrastructure and projects. Australia is no exception. Publicly owned banks play a critical role in a functioning economy. A public bank, such as the Clean Energy Finance Corporation, could finance green infrastructure projects.
In the late 1990s, many saw bank nationalisation as unnecessary. Australians were told nationalisation would require taking money out of health and education. But nationalisation doesn’t require money being diverted from treasury coffers. It could be funded via debentures.
The mandate of the Clean Energy Finance Corporation is to assist in the transition to renewables to lower emissions.
The idea was originally the brainchild of former Greens Senator Christine Milne. Although the corporation’s focus is on clean energy projects, it’s mission could be expanded to turn it into a new national bank. The bank would also need to be recapitalised before it could truly assume the role of being Australia’s new government bank.
How do we pay for it?
Alternatively, the financing could come from bondholders. Wouldn’t this be too expensive for the Australian taxpayer? Not really, and not for the government. The reasons why are set out immediately below.
1. The government could roll over the debt and let economic growth and inflation reduce the debt ( not debt in the traditional sense. Government bonds are an asset swap).
2. The government could credit bondholder accounts.
3. The government could buy back bonds and use the proceeds to reduce government debt.
Unfortunately, the mere mention of the term government debt makes government-debt phobics break out into a sweat. A repayment secured debt, buying a solid purposeful asset isn’t scary at all, but logical.
“The debt our politicians, journalists and mainstream economists talk about are treasury bonds issued by the government to manage the bank overnight lending rate and to soak up excess reserves in the system.
They are not debt. They are like shares purchased on the stock market.
They attract an interest rate payable by the Reserve Bank twice a year which the bank creates out of thin air. It costs nothing. This is the great deception successive governments practice on an unsuspecting public.”
Source: John Kelly, The Mystery of Money or how I learnt to stop worrying about debt and deficits.
This government debt won’t produce a default on our debt. Just look at Australia’s history: in the wake of WWII and the full employment policy, we borrowed to keep our economy afloat. This debt didn’t crash the economy; the government like other governments chose to roll it over rather than pay it off; it was paid down through economic growth and inflation over time.
So how did this happen? We focused on employment and productivity, we didn’t obsess about debt repayments. As John Maynard Keynes said: “Look after the unemployment, and the budget will look after itself.”
Australia stands at a precipice. We can continue to assume the pandemic will be over in a matter of months. But history shows such a swift resolution to a long-predicted crisis is unlikely. To address this crisis, we must recover from our aversion to public investment.
We can pursue another way forward, or we can bury our heads in the sand.
Ultimately, our survival depends on us embracing a new pathway forward. This path involves using public investment to enhance the productive capacity of the economy. If we do that we stand some chance of getting ourselves out of a very deep economic downturn.
Of course, we can always keep on our current path which involves sacrificing the economy to keep the bad debt industry afloat and allowing the super-rich to profit at the expense of everyone else , but after our experience in the 1890s and the 1930s, and the human catastrophe of the early 1990s we know too much to keep repeating the same failed policy choices.
There’s nothing inevitable about the current direction of the Australian economy; our current course will only seem inevitable if we remain locked into dated and dangerous economic ideas that were never fit for purpose.