Budget Austerity and Small Government not the Answer – A response to Wayne Swan

above:  Australian Treasurer and Deputy Prime Minister Wayne Swan

The following essay is a response to Australian Treasurer, Wayne Swan - who has recently written a Fabian Essay - whose obvious significance concerns the coming Australian Federal Budget for 2011-12.  While the author is highly sympathetic with the Treasurer's defence of Labor's record fighting the Global Financial Crisis (GFC), he nonetheless insists that - with the recovery - 'small government' is not the answer.  Tristan Ewins responds that rather, a government committed to human need - and facing the consequences of an expanding and ageing population - should further reform tax, invest in necessary infrastructure and incrementally expand the social wage...

By Tristan Ewins
23/04/2011

In a recent Fabian Essay, ‘Keynesians in the Recovery’, Australian Treasurer and Deputy Prime Minister, Wayne Swan, has defended the Labor Federal government’s legacy in preventing recession at home, and contributing to a global recovery in the wake of the Global Financial Crisis. (GFC) It is a crucial narrative for Labor to contest: restoring a practical Keynesian orthodoxy in striving towards an implicit social-democratic consensus, and achieving generational change in perceptions of Labor on economic management.

And it is all the more important in wake of other policy failures and forced back-downs which have harmed the government, and left behind an impression which obscures and detracts from Labor’s very significant achievements.

With the Resource Super Profits Tax (RSPT) Labor had ‘bitten off more than it could chew’: taking on the mining giants close to an election. Combined with Labor’s back-down on its original CPRS (Carbon Pollution Reduction Scheme), these presented an impression of a government in retreat. That on its own shook – and continues to shake - public confidence.

And while compared with the scale of other major initiatives the real level of waste in the government’s home insulation rebate program was minor, nothing can make good the loss of life which followed the lack of sufficient regulatory oversight.

But where would Australia have been had the Conservatives been in government with the onset of the Global Financial Crisis? (GFC) Most likely a Conservative government would have implemented deflationary policies which would have sent the economy into freefall, with an ever-escalating toll of human misery.

In 2008 the world teetered upon the precipice of a potential economic Depression. In his Fabian Essay
Swan refects upon Australia’s position at the time as follows:

“It is too easy to forget just how exposed Australia was to the crisis. Eight out of ten of our major trading partners went into recession. Our banks faced dislocated global capital markets and calls from bank customers flowed into my office. The decline in production, investment and exports affected jobs, with unemployment rising by 175,000 within months. Our economy contracted by almost 1 per cent in the final three months of 2008.” (p 5)

In the face of this looming catastrophe, Swan defends the government’s response:

“Underpinning our policy response were the principles of fiscal and monetary action to boost aggregate demand set out by Keynes in his General Theory and his activist publications of the Great Depression era: immediate stimulus measures to boost consumer spending and confidence; useful public works to create employment; lower interest rates to boost investment and spending; and concerted international action to strengthen the world financial system.” (p 5)

“Labor, guided by Keynes, is driven by a morality that regards unemployment, ruined businesses, foreclosed mortgages and myriad other signs of economic distress not as part of an inevitable and desirable cleansing process for the economy, but as the symptoms of a recession that should and can be avoided with the necessary will. (p 8)

How the government gets this message out to the public is a different matter, though. How can Labor contest and ultimately determine the narrative – that is, ‘popular wisdom’ - on its response to the Global Financial Crisis?

Part of the answer is rebuilding Labor as a social movement; a mass party which promotes the activity and real policy influence of its members; and so remobilising its base, places itself on a permanent campaign footing on a wide variety of fronts.

But there’s another side to the story Swan is trying to sell on the economy. With the 2011-2012 Federal Budget about to be passed, it seems he’s preparing us for austerity.

Swan writes of the importance of being “Keynesians in recovery” as well as in the downturn.

“With private demand strengthening, unemployment falling and our economy pushing towards capacity, we need to restrain public spending, and stay the course back to budget surpluses. Just as it was the right thing to step in and support demand during the GFC, the right thing to do is to take a step back as private activity recovers.” (p 1)


[This means] “making room for the private sector when economic growth is strong.” (p 1)

And he takes the argument further:

“[The very] phrase ‘counter- cyclical’’….implies the opposite of the critics’ claim that Keynesian policies constitute a recipe for ever-increasing rates of public spending as a proportion of GDP. (p 7)


“[While] governments have a responsibility to increase public spending going into a recession, once growth and prosperity have been restored, they have an equal responsibility to restrain public expenditure, budget for surpluses and reduce debt in climbing out.” (p 7)

Finally Swan indicates his preference, now, to promote:

“reforms to strengthen and broaden our economy by cutting business taxes, investing in infrastructure and boosting national savings.” (p 8)

While Swan’s message on counter-cyclical demand management is crucial to Labor’s intellectual armoury, and its credibility on the economy, there are other aspects of his account that need to be challenged. This is regardless of Swan’s (correct) assertion that ‘big government’ is not the necessary or inevitable counterpart to Keynesian counter-cyclical demand management.

Specifically: Swan’s concern to keep taxes low – and hence ‘government’ ‘small’ has real-life consequences. His call to government to ‘make room’ for the private sector seems reminiscent of old Conservative claims that the welfare state and social wage were ‘crowding out’ private economic activity. But the services in the firing line are so often in the realm of social necessity, and are most efficiently provided through the public sector or other forms of collective consumption in any case.

Meanwhile the investment in infrastructure that Swan champions is difficult to achieve except in the context of maintaining and expanding the tax base. A growing population, and an ageing population will mean increased pressures on transport infrastructure, housing and health services now and into the future.

Even considering the current (modest) correction in the housing market, thousands of families experience housing stress, which is a drain upon their incomes and other areas of the economy. The situation is exacerbated by rapidly growing populations – such as in Melbourne – where young families are driven to the urban fringe; but once there have inadequate access to public transport. There is a cost to the economy in terms of transit expenses including petrol. But there is a hidden social cost also, including to families, where transit times detract from time for recreation, including time with spouses and children. Less time for recreation resulting in obesity and ill health could flow on to the Health sector over the long term as well.

More investment in social housing and transport infrastructure – including urban consolidation - is essential for economic and quality of life purposes; but requires a commitment of resources inconsistent with ‘small government’.

The ‘ageing population’ also demands a rethink by policy makers, including by Wayne Swan, on the theme of Aged Care and welfare, and how this relates to restraining the size of government – partly for Ideological purposes.

Social democrats once stood indignantly against demands under capitalism that workers continue in sometimes alienating, monotonous or physically demanding jobs practically until their grave, or to physical and mental ruination. (whichever came first)

A key social-democratic tenet was the placing of real life quality for workers ahead of the abstract-economic; ahead of profits outside the context of real social benefit. Yet now in pursuit of ever lower taxes, less welfare and ‘smaller government’, Labor seems itself resigned to raising the age of retirement, and in so doing denying older Australians the opportunity for fulfilment with cultural participation, civic activism, education for life, and time with family and community. This at a time in people’s lives where ‘every year’ of relative good health can feel precious.

What is worse, the Productivity Commission is promoting a user-pays agenda for the Aged Care sector: a move which Ben Spies-Butcher, a lecturer in sociology at Macquarie University, argues will actually deter the less-wealthy from accessing services for which they may have an acute need. And Charmaine Crowe of the Combined Pensioners and Superannuant’s Association (CPSA) has pointed out that Australia already only spends only 0.8 per cent of GDP on Aged Care compared to 3.5 per cent in the Netherlands and 3.6 per cent in Sweden. http://www.agedcareinsite.com.au/pages/section/article.php?s=News&idArticle=19979

This cannot fail to have a devastating impact on the quality of life of our most vulnerable Australians. We are a wealthy nation and can afford to do better. It is a matter of priorities.

As a basic question of humanity we must make the necessary commitment to ameliorate suffering as much as possible, and provide opportunities for life quality. This must include outings, pleasant surrounds including gardens, opportunities for personal and social interaction; provision for privacy and personal space, access to medical (including dental) care, air conditioning and heating, and into the future access to information technology including internet.

And as this author has argued elsewhere: quality aged care must involve sufficient nurse to patient ratios, and decent conditions for aged care staff. (this dovetails with the Australian Services Union campaign for fair wages – mainly for women – in the sector) Many residents need acute care whether for showering, dressing, eating, being turned regularly to prevent bed sores, or using the toilet. For many such circumstances will continue for years, and it simply is not good enough to ‘let the market sort us out’.

Even for less-robust ‘Third Way’ interpretations of social democracy such standards for inclusion and protection of the vulnerable are core. And by comparison with progressive funding, ‘user pays’ would act like a regressive flat inheritance tax anyway, hitting overwhelmingly low and middle income families, while eschewing a more direct and formal inheritance or wealth tax - which would affect the more affluent.

To improve quality of service – and quality of life – requires a commitment of resources. And to meet the scope of commitment made by the Netherlands and Sweden would require new money (perhaps an extra twenty billion a year) out of an economy valued somewhere over $1.2 Trillion This has to start somewhere.

Meanwhile increased demand upon the Disability Support Pension (DSP) is partly the consequence of a genuine mental health crisis, and also cannot be addressed in the context of small government. And in light of recent debate it is worth noting that extensive and punitive active labour market policies already exist for Newstart recipients. The DSP and other pensions remain in need of extension to meet a rising cost of living without further ‘punishing the victim’.

For the chronically-ill, and for their carers - especially those without any prospect of steady, decent-paying employment – there must be provision for a decent material quality of life. Easing of income/means tests for recipients, and introduction of incentives for employers – without effective discrimination against the disabled themselves on wages and conditions – could be part of a constructive government response. And a National Disability Insurance Scheme (NDIS) which provided significant new money to address these and other areas of concern - could also secure support from a public not only on compassionate grounds - but with the realisation potentially every individual and every family can be vulnerable.

So where should Labor start in addressing these issues in the process of framing the 2011-12 Federal Budget?

As noted at this blog recently - The Greens have already provided research demonstrating “that at 30 per cent, the current company tax rate is still below the Organisation for Economic Co-operation and Development's (OECD's) "weighted average" of 36 per cent.” Where business stands to share in the gain from necessary infrastructure investment (eg: transport) surely it should continue to ‘pay its fair share’. The 1% Company Tax cut has to go. http://au.news.yahoo.com/thewest/business/a/-/national/9091822/greens-want-to-restrict-company-tax-cut-to-small-business/

Apart from this, Gillard Labor could aim to increase social expenditure in the critical fields mentioned in this essay by around 1 per cent to 1.5 per cent of GDP (not including Carbon Tax compensation) over the course of the current term. (the first step of a long-term plan for reform)  In the context of an economy valued at over $1.2 Trillion, this would provide a starting pool of approximately $12-$18 billion annually which could be gained via reform of income tax or dividend imputation, a wealth tax, or a National Disability Insurance Scheme.  (or a mix of these options)

If the government still has to find savings over the relative-short term, with a new Senate it could realistically implement means-testing of the existing private health insurance rebate. This could be combined with means testing child care rebates to exclude families with combined incomes over $150,000 – which despite complaints is a threshold beyond what most families can aspire to.

Meanwhile national savings should be promoted through democratic collective capital formation amongst the great mass of citizens and workers - rather than further ‘incentives’ for the wealthy in Superannuation and elsewhere. Further tax reform could also help fill any void left by removing superannuation concessions for the wealthy, redirecting monies into a public pension fund.

To be competitive at the next Federal election Labor needs to restore its status as a ‘can do’ government after successive retreats on several fronts. National Broadband Network (NBN) rollout and Carbon Tax ‘overcompensation’ could form part of this picture, but funds for social housing, transport, welfare and aged care could finally establish solid credentials for Gillard Labor as a government of genuine reform.

There is a particularly noteworthy quote from Swan’s recent ‘Fabian Essay’ that is worth reproducing here to put in an interesting context.

Swan writes:

“…in contrast to our opponents – we understand that economic policy must bend to the needs of the times, not the other way around.” (p 4)

This could be interpreted in the sense that the economy must serve human interests first: not some abstract logic or goal. In this sense attacking pensioners or neglecting the aged, the mentally ill, or the disabled in pursuit of a surplus reminds the author of the Vietnam War-era statement that it was ‘necessary to destroy the village in order to save it’.

There are political reasons for pursuing a record-fast return to surplus - hence the scepticism of some with regard to the government's amitions here.   Although allowing deficits to consistently spiral out of control over the course of the entire economic cycle will bring ruin in the end.  But if we are pursuing the kind of economy that serves truly human needs and purposes, surely a narrow and timid Ideology of ‘small government’ is not the answer.


Nb: The full version of Wayne Swan’s essay can be found at the URL below:
http://www.fabian.org.au/1140.asp

Tristan Ewins is a freelance writer and grassroots Labor activist based in Melbourne, Australia. He maintains and publishes the 'Left Focus' blog



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Movement for a Democratic Mixed Economy

What is the Movement for a Democratic Mixed Economy?

see: http://www.facebook.com/group.php?gid=152326549326&ref=nf#

What is the Movement for a Democratic Mixed Economy?We’re a network of progressives in dialogue with each other – working to contest the dominant economic paradigm – and to promote an alternative which is democratic; involving mixed forms of ownership. We believe there is a substantial role for the public sector.

We accommodate many positions ranging from the restoration of a “traditional social democratic” model of the ‘mixed economy’ (inspired by the ‘Keynesian Golden Age’) – to more radical positions envisaging extensive public and democratic ownership and control.

We also believe strongly in promoting democratic forms of non-state ownership – co-operativist, mutualist, collective capital formation, participatory economic (PARECON) models...

We believe there is a place for co-operation and competition: planning and markets. And we support discussion of other economic issues of interest to progressives. (eg: principles of post-materialism)

We aim to provide a forum for both radical and more mainstream positions – with a shared objective of challenging the ‘common sense’ of neo-liberalism.

We endeavour to establish the ‘democratic mixed economy’ as ‘common sense’ – and to refashion and contest the relative political and economic ‘centre’.

And though our positions are many and varied – we endeavour to support each other – that all our voices are heard in an inclusive and rational exchange of views.

Again: we support both radical and relatively moderate interpretation of the ‘democratic mixed economy’.

We do not, however, include perspectives which are authoritarian: which deny our liberal human rights.

We seek to include socialists, social democrats, liberals, Greens and libertarian leftists – co-operating and in dialogue with each other.Finally: We are seriously in the business of promoting social change.

To begin we need to build our Facebook Group as an extensive network. But once we are in dialogue with each other – hopefully we will provide a real forum for members to organise and co-operate in pursuit of real social change.

If you are sympathetic with these principles and objectives PLEASE JOIN.

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Tristan Vaughan Ewins (Movement for a Democratic Mixed Economy Moderator)

World Financial Crisis - Where to from here?

Origins of the crisis

Now, as the world teeters on the brink of what might turn out to be the most profound economic crisis since the depression of 1929, a reappraisal is necessary in the face of neo-liberal shibboleths.

Around the world massive stimulatory packages and financial guarantees, even nationalisations, are in the process of implementation, to buoy consumer confidence and demand and also to encourage liquidity and fortify investor confidence.

Amongst Keynesians, and the Marxist and radical Left, there is an aura of vindication.

Most immediately, the crisis has been traced to the sub-prime mortgage debacle in the United States.

To summarise, overly-complex financial instruments were devised with the aim of minimising risk. According to John Bellamy Foster, writing for The Monthly Review, the idea was:

… that geographical and sector dispersion of the loan portfolio and the “slicing and dicing” of risk would convert all but the very lowest of the tranches of these investment vehicles into safe bets.

The efficacy of such instruments, however, proved to be illusory.

Those most vulnerable - including millions of working class Americans - were encouraged into the market through a variety of mechanisms regardless of their credit history, income or wealth. Such “mechanisms” included low interest rates as well as “teaser” rates which were only temporary. Other devices included low reserve requirements.

This sector of the mortgage market became known as the “sub-prime”.

In a scenario which should be familiar to Australians, these circumstances led to an extraordinary “housing bubble”: a process which has been referred to as “speculative mania” and “hyper-speculation”.

According to Australian blogger, Sean Carmody, between 2004 and 2006 more than 20 per cent of new US mortgages were taken out by “sub-prime” borrowers. Enormous amounts of money were diverted into the housing sector, in wave after wave, under the assumption that asset appreciation would somehow continue forever.

In Australia, a housing bubble had the effect of enriching existing home owners on paper, while making home ownership impossible for many younger investors. Efforts to help first-home-buyers in Australia were simply exploited and fed into the vicious logic of the property bubble. The appreciative effect was particularly great under Australia’s specific circumstances of undersupply. Regardless of low interest rates, the Australian housing bubble ensured that “over the past 10 years” houses became “nearly twice as expensive relative to income”.

Correction in the housing market especially has become necessary but such is the nature of the system that it will inevitably be painful.

In the US, the property bubble was burst with an increase in interest rates, and as upward speculation in the market was reaching its limits.

In the aftermath, Glenn Dyer, writing for Crikey supposes that foreclosures will surpass 2 million by the end of the year 2008: hundreds of thousands driven from their homes with nowhere to turn. And the flow-on effect of defaults on credit has led to despair and uncertainty.

The natural consequence of these events, then, was a crisis of consumer and investor confidence. Following a surge in bad debts, the gears of liquidity for the world financial system threatened seizure. This in turn is leading to global recession. World finance centres were exposed in their relations with US finance; and looming recession in the US has spread worldwide.

Neither Australia, nor Europe nor China are immune. Such are integrated markets in the age of “globalisation”.

Other symptoms of the crisis

Many economic commentators believe that current economic circumstances are symptomatic of a deeper crisis in the broader capitalist world economic system. For others it is merely capitalism’s “neo-liberal variant”.

Most immediately, the initial reaction to the crisis for some is to return to Keynes. In reality, both the Marxist and Keynesian traditions have much to say on the current crisis: and there is no need to pursue one line of criticism to the exclusion of the other. Keynesian policies of demand management and counter-cyclical expenditure have now found their way back into the economic policies of governments all over the world.

Thirty years of crude Thatcherite neo-liberal ideology have been “put on hold” in an astounding display of practical thinking. Counter-cyclical expenditure and socialisation of failing financial interests deemed “too important to fail” seem to be the best world governments have at their disposal to limit the decline in investor and consumer confidence.

And without public intervention in the broader credit system: the alternative is collapse.

In Australia particularly, there is a clear need to invest in education and training and in infrastructure which will overcome “capacity constraints”. Rudd Labor is intent on stimulating the Australian economy even, in the process, bringing the Budget into deficit.

The recessionary spiral must be cut short - lest it know no end.

But not all aspects of the Keynesian compromise would sit well with today’s dominant economic elite.

To begin with, the legacy of the Keynesian “golden age” is associated with a period characterised by a rising wage share of the economy for labour, full employment and an expansion of the social wage. Powerful elements of the economic elite, however, could be accused of preferring the disciplinary effects of a maintaining a “reserve army of labour”. And among this elite, there are those who view the social wage as “crowding out” private sector investment.

Indeed, the Keynesian project may well have found its “historical moment” has come once again. But a full and sustainable return to an effective social democratic settlement will require ongoing mobilisation by the forces of social reform.

Rarely is any significant progressive social reform gained without demand “from below”.

Briefly: growth of the finance sector - decoupled from “the real economy”

Financial markets need to be restructured to relate to the real economy, and provide for real human need.

Ramas Vasudevan notes in Dollars and Sense that “The profits of the financial sector” (in the US) grew from “14 per cent of total corporate profits in 1981” to “nearly 50 per cent” in 2001-02.

The finance sector, here, is increasingly decoupled from the “real economy”. Investment decisions, many leading to job losses, are made to maximise share value: not in pursuit of human need. Instead “players” in the finance markets pursue short term return, often through speculation.

And importantly, because of the dominance of financial markets, “renters” - as Vasudevan refers to them - have become the dominant socio-economic force.

The massive relocation of power, here, provides the economic elite with the leverage they need to apply constant pressure to reforge policy in its favour.

In Australia we need only look at the preference for Public Private Partnerships: dubious finance methods that channel money from the public purse to the socio-economic elite.

While these developments cannot simply be “undone”, development of public pension funds or “Meidner style” wage earner funds could provide a strong measure of democratic input. Providing a new national public bank; fully regulated and providing financial services to vulnerable Australians “at or below cost”, could also aid in warding away collusion and instability over the long term.

The aim must be to democratise the sector; minimise risk exposure for the economically vulnerable; set higher prudential standards in the loan market; harness capital for human need; and make it socially accountable.

Is Marxism relevant?

Even assuming a renaissance in Keynesian ideas, most associate Marxism with an unbearable connotation of oppression. It is an unfair assumption, though, which ignores the instance of Marxists, and those who draw eclectically from Marx, who also wed their analysis with ideas of the liberal and democratic Left.

Today we need discussion of radical ideas more than ever. The Keynesian golden age might never have happened without the radical culture of working class “demand from below” emerging after World War II. Furthermore, the Marxist tradition, and other related traditions of critical theory, still have much to offer, even if in opposition to their historic Stalinist variants.

The time is ripe for a pluralist “reinvention” of the socialist and social-democratic movements. Criticising the dynamics of 19th Century capitalism, Marx identified several tendencies which remain today. We will consider two:

The rate of profit

A most important tendency of capitalism is that of the rate of profit to fall. As technology improves the productivity of labour, the “constant” component of capital rises in relation to its “variable” component.

Put otherwise, there is a rising “organic composition” of capital, comprising “the value of the materials and fixed costs”. 

This stands in contrast to the “variable” component, comprising of wage labour. Because any expropriated surplus comes from the exploitation of labour, the relative decrease of capital’s “variable” component causes the rate of profit fall. This dynamic is overcome by increasing the rate of exploitation- either directly or indirectly.

Wages can be cut as a proportion of GDP (Gross Domestic Product); or workers can provide for corporate welfare - taking collectively upon themselves the costs of education and infrastructure.

Similarly, social programs and welfare can be cut to provide scope for further corporate subsidy.

Overproduction

Another tendency noted by Marx is that of systemic overproduction: supply beyond demand. Here, the capitalist system is seen to be constantly expanding the boundaries of its markets: to maximise the realisation of surplus value.

Production is for profit: it is distributed in keeping with market dynamics - not directly in response to human need. But this process inevitably involves waste.

Despite production beyond the scope of realised market relations, the poor and needy go without - even while in relative terms there is “plenty”.

For a renewed social democracy

There are many lessons, here, for social democracy.

Importantly, falling wage share - in response to the “falling rate of profit” -contributes to lower consumer confidence, and a contraction of local markets.

As we have seen, many in advanced capitalist economies have responded to this crisis with a turn to credit. Credit can expand a market beyond its usual confines. And debt finance can be well justified when leading to increased production over the long term, and the sustainable provision for human need. But beyond sustainable means, reliance on debt cannot be depended upon forever. Indeed, it can provide a “financial prison” for the needy: a vicious cycle of indebtedness.

Welfare and social programs, including public housing, education and health, and also progressive taxation and labour market regulation must free people from the desperate circumstances that lead to the unsustainable, downward spiral of credit-dependence.

And over the long term, through democratic and industrial struggle, citizens and workers must achieve a much more even spread of wealth and economic power. Lifting incomes and living standards at the lower end of the spectrum, here, can assist the broader economy: boosting consumer confidence while providing social justice at the same time.

Within the confines of capitalism, though, the falling rate of profit continues to erode the wage share of the economy, and also the social wage: as hyper-exploitation is entrenched. Even as real wages fall in relative terms, though, improved productivity can lower the cost of consumables; while new technology can greatly improve the quality of human life.

And in cases of overproduction, surely it is not impossible for government to intervene to redistribute goods not traded through “the market”.

Take, for instance, the provision of free information technology goods from the developed to the under-developed world. Or consider the free provision of pharmaceutical technology to under-developed countries.

Further, unoccupied housing could be nationalised to provide for the poor and homeless. As Ken Davidson writes: “about 11 to 12 million houses throughout the US are empty and about 20 per cent of people live in streets where houses are simply boarded up.”

Even in a social democratic society there must be a role for innovative and responsive markets that can provide qualitative improvements in material living standards. Any alternative economic model must be both mixed and democratic.

But in response to hyper-exploitation it is also reasonable for workers to fight for “a greater share” of the economic pie. Even while maintaining profitability, this could be achieved through subsidy and support of co-operatives, and winning of collective capital share through pension funds, wage-earner funds, or other such vehicles.

And until workers and citizens are so organised as to make a greater process of redistribution viable, then wealthier workers ought stand in solidarity with the most poor and vulnerable. (Again - through the tax transfer system, and social wage.)

In the wake of the current disaster, we are not “locked into” the neo-liberal model ever more. Assuming civic mobilisation, and the alignment of organised labour with social movements - including environmental movements - we have the potential to win real change.