A social democratic response to the Great Depression of 2008

To understand what is required for Australia to not only survive the Great Depression of 2008 but to emerge with a stronger and more vibrant society it is necessary to understand our recent economic history.

To quote George Orwell “Who controls the past controls the future”.

Some may question whether or not we are in a depression particularly when the technical definition of recession has not been met (two successive quarters of negative growth).

I am in no doubt that when the cascading economic crisis reaches its peak future historians will label the crisis as the greatest depression in history. We are staring into the abyss while deluding ourselves that the world’s economists will conjure up some magic in a Harry Potter manner.

The survival of the International Monetary system is dependant on the purchase of trillions of dollars worth of sovereign bonds. This is meant to occur when the financial institutions that are meant to absorb these bonds are collapsing and facing massive sovereign defaults from Eastern Europe.

To quote Darryl Kerrigan “tell them they’re dreaming”.

Who controls the past controls the future

The Howard/Costello cheerleaders such as Ackermann, Bolt and Milne will argue that the economic discipline of the Howard/Costello team has ensured Australia has the best opportunity of emerging relatively unscathed from the economic crisis. Debt was repaid allowing the government greater fiscal flexibility than other nations in the western world.

Is this assessment valid?

The alternative theory is that the resources boom provided a revenue windfall that has masked the deterioration of the basic economic fundamentals.

I will argue the second case and argue further that the Howard/Costello years will go down in history as the Rip van Winkle years. The failure to implement fundamental structural reform will undermine Australia’s ability to successfully emerge from the economic crisis. Furthermore the blind pursuit of ideological agendas as part of the wider 20th century cultural wars has created fault lines in our economic structure that threatening to send a tsunami to engulf future generations.

The Howard/Costello years saw the culmination of the cultural wars in Australia between the right and the left, which saw the right gain ascendancy on economic matters and the left on social issues. This manifested itself in the Liberal Party’s dominance in the federal sphere and the Labor Party’s dominance in state governments.

Quite simply the general population did not trust state-based conservatives to run the education system or the health system but on the same hand did not trust Labor to run the nation’s finances.

Labor on the national scene through partial acquiescence did not challenge the Liberals, they were like footballers stopping play to appeal to the referee about a foul in backplay that no one cared about and complaining about the penalty that never came while the Liberals crossed the line and were allowed to improve their position to make the conversion easier.

The conservatives adopted a more sinister strategy on the state scene: rather than moderating their unpalatable social views they embarked on a policy of fiscal starvation of the states to create a climate of financial mismanagement to aid their state counterparts.

In essence the “Shadow” raped the future of our nation.

The windfall revenue from the resources boom rather being reinvested in economic infrastructure either physical or human was squandered on welfare transactions to the middle class. In essence, bribes to swinging voters in marginal seats.

What is the social democratic alternative?

As mainstream economists rediscover Keynes, should the social democratic response be to simply increase aggregate demand by increasing government expenditure?

If that is all social democrats come up with we will fail future generations. Social democrats must also come up with supply side reforms that are social democratic not simply watered down neo-liberal reforms.

The failure of social democrats to advance integrated supply side and demand side economic policies led to the dominance of neo-liberalism, it is incumbent on social democrats to pursue supply side reforms and develop an integrated reform agenda. It is not good enough for social democrats to abandon the advancement of social justice via economic reform and pursue only social policy reform as the vehicle of advancing social justice.

This paper will focus on industry policy reform, social democratic investment reforms and housing supply side reforms.

Industry policy

Economic policy under Howard/Costello has focused on the enterprise as the vehicle for reform. The basis of this philosophy has come about from the Business Council of Australia. It was modeled on the Japanese system of the 1970s and 80s. However there are stark differences between the industry structure of Australia and Japan. The Japanese model that was examined comprised large enterprise or related ventures.

Therefore enterprise agreements would have impacts on large proportions of the workforce, furthermore the training and other infrastructure to support changes at the enterprise level had the benefits of economies of scale.

Contrast this with the nature of the Australian business community where on international comparisons the vast majority of employees are employed in small business or at best medium-size businesses.

The cost of infrastructure to support business change is significantly higher due to loss of economy of scale. To illustrate this, if in a Japanese firm there was a classification restructure that changed the mix of skills that affected 200 employees the training institutions are more able to adapt because of the volume of throughput. A similar change in the Australian context may only affect four to six employees. For training institutions to design new training arrangements for such a limited throughput significantly increases the cost and thus is a limiter to change.

Furthermore, many Australian businesses simply do not have the specialist expertise to negotiate or undertake workplace reform. Hence, there are a significant proportion of businesses whose labour relations strategy is to avoid enterprise bargaining and attempt to implement a wage freeze to maintain competitiveness. Thus labour productivity also freezes.

Australia must recognise that the utilising the enterprise model has failed and must embrace industry policy, not only in labour relations but also in providing the infrastructure to support business change.

This should not be mistaken to be a return to protectionism or as hand outs to inefficient business. Industry settlements in wage bargaining provide the vehicle for labour productivity improvements not only to flow through the industry for the settlement but to have a wider impact on the economy as a whole.

To illustrate this, in the early 1990s I was involved in enterprise negotiations for the brick manufacturing industry and one of the outcomes was changes in work practices that enabled significant energy cost savings. As these negotiations were on an enterprise level only one company accessed this benefit. Therefore this would have led to reduced input costs for the housing and construction in some markets, if there had been an industry-wide settlement this would have led to an industry-wide reduction of input costs.

Investment

Linked to the focus on industry as the vehicle for change, is the need to establish industry investment funds as a safeguard against the potential of a future collapse in the international finance sector or limited access to investment for Australian industry.

The funds would enable corporations to invest up to 20 per cent of pre-tax income in industry funds. The trustees would be representatives of the workforce and businesses in the industry.

There would be no tax on contributions, earnings or withdrawals. Individual corporations would have access to their contributions plus a default return rate equal to official interest rates plus 2 per cent.

To access their funds, the proposed investment would need to be for expenditure in Australia for the purpose of generating employment, investing in new capital, or research and development. As this fund enjoys tax free status, monies would not be available for corporate jets and the like.

Assuming a return at some point to normal investment returns, the funds would generate returns in excess of the guaranteed holdings for individual corporations. The funds would be required to keep an additional reserve to ensure liquidity, the excess would be available to support infrastructure associated with the industry.

This infrastructure could include supporting industry training, research and development and physical infrastructure that well assist the development of the industry.

Furthermore, we must never again allow the revenue from a resources boom to be wasted again. To this extent we need to replace the current royalty regimes with a resource rent tax administered by the Federal Government.

Essentially the current royalty regime of a flat rate/volume of mineral overtaxes small projects and undertaxes large projects. I refer to the ABARE paper for a full explanation of this situation.

The revenue from the resource rent tax would be placed into an investment fund. The states would be fully compensated for handing this power to the commonwealth with untied grants from the investment fund reflecting the revenue that they would have gained under the pre-existing royalty regime.

There would be more revenue collected under this scheme as projects that would have not be viable under the previous royalty regimes could proceed and projects that generate super profits would generate additional revenue.

This additional revenue could be used only for national or state significant infrastructure projects. Thus the investment windfall would be used on transport, energy, telecommunications, water or education infrastructure to provide increased productivity across all economic sectors.

Greater access to sovereign bonds

As we see state and local governments struggling in the current environment to raise funds from financial institutions we need to rethink how we raise these funds. Financial institutions used to issue bonds with prohibitive transaction costs for all but institutional investors. I propose that Australia leads the way in bringing the finance sector into the 21st century by allowing retail investors access to sovereign bonds without the prohibitive transaction costs.

Just as mortgage brokers provided necessary competition into the house lender sector so could allowing licensed financial advisers to directly sell sovereign bonds in smaller parcels to retail investors. Competition would ensure that commissions would not be a prohibitive barrier to retail investors.

As we see consumer sentiment change and savings increase what would be better than those savings be directed to funding the government stimulus packages.

Housing policy

Housing affordability in Australia has been steadily declining. The taxation system is a major contributor towards this. The negative gearing arrangement is creating an asset bubble that is creating a divided society. Investors and speculators are competing in many cases with first home owners and the current taxation system is ensuring that competition is not on a level playing field.

The solution I propose is to change the taxation arrangements for future investments. I propose that the current negative gearing arrangements would only be available to new investments that result in  new housing stock thus removing new investors from competing with the average family trying to secure their first home.

These comprehensive reforms are needed to create a viable and fair Australia.

The test now is will national interest be able to defeat vested interests.