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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The Crisis Down-Under - Joseph Stiglitz

Above: Renowned Economist, Joseph Stiglitz

In this article Joseph Stiglitz praises the efforts of the Australian Labor government in warding away recession as a consequence of the Global Financial Crisis. (GFC)   Stiglitz is one of the most respected economists in the world; and his endorsement ought mean a lot for Australian voters considering economic management as a key issue in deciding their vote.

With permission I am linking to this article.  After an introductoruy excerpt I am providing a link to the full version at pre-eminent opinion website 'Project Syndicate'.  'Project Syndicate' owns copyright rights to the article.  For permission in reproducing this article write to:  distribution@project-syndicate.org.

Although not given permission to reproduce the article in full, I believe is it critical to 'get the message out': the Liberals' fear campaign on debt and spending is deceptive to the core.  Their policies would have seen Australia into recession.  I encourage readers to follow the link at the bottom of this excerpt to have access to the full version.


CANBERRA – The Great Recession of 2008 reached the farthest corners of the earth. Here in Australia, they refer to it as the GFC – the global financial crisis.

Kevin Rudd, who was prime minister when the crisis struck, put in place one of the best-designed Keynesian stimulus packages of any country in the world. He realized that it was important to act early, with money that would be spent quickly, but that there was a risk that the crisis would not be over soon. So the first part of the stimulus was cash grants, followed by investments, which would take longer to put into place.

Rudd’s stimulus worked: Australia had the shortest and shallowest of recessions of the advanced industrial countries. But, ironically, attention has focused on the fact that some of the investment money was not spent as well as it might have been, and on the fiscal deficit that the downturn and the government’s response created...
 
For the rest of this article follow the URL below!
 
http://www.project-syndicate.org/commentary/stiglitz128/English
 
nb: Joseph E. Stiglitz is University Professor at Columbia University and a Nobel laureate in Economics. His latest book, Freefall: Free Markets and the Sinking of the Global Economy, is now available in French, German, Japanese, and Spanish.

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Reflecting with Joseph Stiglitz - Addressing the Recession; and Measuring social and economic progress

Earlier this September I happened upon an interesting article in ‘The Age’: a critique by Professor Joseph Stiglitz on the question of what kind of measures we ought use to measure social well-being. The most common measures referred to here is Gross Domestic Product: GDP. As Stiglitz noted, world leaders feel pressured to pursue growth in GDP – but this also “causes conflicts”.

There are environmental factors, and then there are issues of quality – rather than just ‘quantity’ of output. An important example, here, is US health care – where the sector comprises a greater proportion of US GDP – but quality and outcomes are inferior. And GDP masks real inequality – where concentration of wealth is not reflected in a single indicator of national wealth.

Such insights also sit well with post-materialist critiques of GDP. GDP - as a measure - obscures inequality. Again: it reflects quantity rather than quality. Do we really need to upgrade our cars every second year: or would we be better off allocating our resources – including our time and labour - elsewhere? What about time for family, social circles, or civic activism? And if the consequence of reshaping our priorities is that we need to increase tax as a proportion of GDP to ‘keep up’ with the provision of infrastructure and social services – is this so bad? If the consequence is that free human development and social connectedness flourish – surely the ‘trade off’ can be worth our while.

In another article from ‘The Age’ back in August 2009, Stiglitz also puts the case for economic stimulus in these difficult economic times.

Some might suggest that the case for stimulus is at odds with the project of reshaping the economy for human need. Rather they aim beyond economic measures which are concerned with only quantity – rather than quality of human life.

The pace of such change, however, is slow. In the interim people need jobs. And tax receipts must be supported here and now to provide for infrastructure and services: social wage and welfare provision. Furthermore: the case needs to be won for a readjustment of economic priorities – and in the meantime we must address the problems we face in the immediate term.

All this considered, Stiglitz contends that President Obama’s economic stimulus measures have not gone far enough. He observes that the aim of Obama’s policies was to “create some 3 million jobs more than would otherwise be the case”. Despite the effect of stimulus the unemployment rate in the US at the time of writing is still 9.6 per cent, http://www.bls.gov/cps/

This translates to 14.9 million US citizens officially unemployed – with a contractionary flow-on effect for the world economy. http://www.bls.gov/news.release/empsit.nr0.htm

There are many dimensions to the problem: but Stiglitz notes the emphasis in the US on tax cuts. Burdened with personal debt – and in fear of job loss: Stiglitz holds that only a fraction of the US tax cuts have flowed on to consumer expenditure. This has frustrated attempts to buoy the US domestic economy. In the face of this conundrum – further (better targeted) stimulus is required.

The crisis – if unaddressed – could lead to exponential economic deterioration: and so Stiglitz insists that if we don’t spend now “we risk spending much more later”.

These circumstances must be addressed by the Obama administration – but the lessons must be heeded in Australia and elsewhere as well.

Conservative Australian Opposition leader Malcolm Turnbull especially needs to face facts – rather than ‘beating the drum’ on government debt and inflation.

Any minor difficulty with inflation later down the track is no reason to ‘take the axe’ to economic stimulus: including expenditure on economic and social infrastructure. Such programs provide for human well being: and may expand economic capacity into the future. Again in ‘The Age’, Tim Colebatch has quoted Max Corden: “One is not causing a flood by hosing down a fire”. Powerful words indeed.

And indeed – the qualitative improvement in living standards which might follow with some programs of expenditure – such as Australia’s ‘National Broadband Network’ – is greater than any purely quantitative economic indicator can express.

Further: some areas of public spending comprise a genuine and important human need - while requiring only a 'one off' major investment. Investment in social housing especially addresses a critical problem in Australia of homelessness. Cutting back on such programs under such circumstances - to reduce the budget deficit - does not make sense.

Without sustained stimulus, the world economy could again nosedive. Hence Stiglitz has also suggested the possibility of a “W-shape’ recession. Without sustained stimulus recovery could be temporary – followed by a lapse back into recession.

Now is not the time to withdraw economic stimulus. In Australia, the US and elsewhere – we need continued and decisive action to support the world economy. But we also need to address qualitative concerns which relate to the economy – not deceptive readings based purely on economic quantity.

The struggle for health care reform in the US is precisely one such issue – and we should all support the Obama administration in its endeavours to achieve change. If anything we need to revisit the kind of mobilisation achieved by the Obama team in its election campaign: to ensure that as comprehensive a public health care program as is possible is achieved in the United States.

I welcome all readers to discuss these issues here at the blog. Hope to hear from you. :))

Tristan Ewins (Moderator, Left Focus)

Not Time for Champagne Yet

By Jim Stanford

Financial headlines around the world herald the seemingly happy news that “recovery” is here. Global stock markets have surged 40 percent or more. Business confidence has shifted quickly from gloom to boom.

But hold on a moment. The world economy is still suffering through its worst downturn since the 1930s. World GDP is still declining, for the first time since the end of World War II. Unemployment rolls are still growing, not shrinking.

So why is the champagne being uncorked in financial centres around the world? More importantly, will the rest of us get to share in this good cheer, along with the bankers and brokers? Unfortunately, not likely. In reality, for working people, the effects of this crisis will linger for several years to come.

And that’s why governments, including Australia’s, need to stay on an active recession-fighting footing. Far from turning off the tap of job-supporting stimulus measures, governments’ efforts to spur real recovery (not just a financial bounce) need to be intensified in the tricky months ahead.

The financial party began back in March, when Citibank and other U.S. banks began reporting positive profits (largely thanks, of course, to $1 trillion in government handouts). After months of doom and gloom, the prospect of renewed financial profits set the markets on fire.

But before getting too carried away with this good mood, let’s remember there’s much more to economic recovery than profitable banks and roaring equity markets. True recovery requires getting people working again, producing actual goods and services. And on that score the world economy is still going backward, not rebounding.

Much confusion over the arrival of “recovery” arrived stems from the narrow terminology used by economists. For them, it’s not a recession unless real GDP (that is, the total value of economic output, adjusted for inflation) declines for at least two consecutive quarters. Then recovery simply constitutes the point when real GDP stops falling, and starts to grow again – no matter how fitfully.

So even if unemployment is growing and poverty is getting worse, the recession is “over” once real GDP is growing (as it is in Australia now). But this narrow terminology utterly misses the point. If people are losing their jobs and their homes, and living standards are falling not rising, then the economy is in trouble – regardless of whether GDP is rising or falling. Australia’s self-congratulation for narrowly avoiding “technical recession” this year is small comfort to the tens of thousands of Australians who continue to face tough times – tough times that are sure to last for some years to come.

It is typical for unemployment to continue to rise for months and even years after economists officially declare “recovery.” GDP growth must get up enough steam and generate enough jobs to offset lay-offs incurred during the downturn (let alone absorb new entrants to the labour force). So the unemployment rate will continue to rise right through 2010. Then, unfortunately, it will stay at very high levels for at least two or three years after that. That’s the human reality of the global financial crisis – in contrast to the all-to-easy rediscovery of irrational exuberance in the realm of high finance.

So don’t be fooled by the headlines celebrating imminent recovery. The brokers and speculators inhabit a hyperactive, surreal world. Only they could speak of “recovery,” when so much hardship and fear is plainly visible outside in the real world.

For most Australians, insecurity and austerity will prevail for years to come. And government must continue to actively address the social consequences of this crisis, without being sidetracked by reports of this so-called “recovery.” Stimulus will be required for some years to come. If anything, the existing recovery package should be expanded – to include active supports manufacturing and other productive sectors, funding for training programs (an alternative to continuing redundancies), and protection for workers’ accrued entitlements (like annual leave and sick leave) in order to underpin purchasing power despite rising unemployment.

Jim Stanford is economist with the Canadian Auto Workers, and author of Economics for Everyone (www.economicsforeveryone.com).

He is speaking in several Australian cities this month.

(see the earlier post immediately below for details)

The Global Financial Crisis – What can we do about it?

Originally published by Australian Options – a quarterly journal for social justice and political change.  (Please copy and distribute)  To contact Australian Options email Frank Barbaro – filef@tne.net.au

Written by Patricia Ranald

The share market crash of October 2008 sent shock waves though the global economy, with unemployment growing in many countries. We hear the same people who caused the problems, the bankers and major employers, calling on governments to bail them out with public money, and to put off urgent environmental measures needed to address climate change.

At the same time workers are losing jobs, and pensioners and superannuants are struggling just to keep going. We need to understand why this has happened and what can be done to stop it happening again.

We must ensure that workers and others on low incomes do not bear the main burden of the crisis through unemployment and reduced incomes.

Why did it happen? Deregulation and growing inequality

The immediate causes of the global financial crisis lie in the US banking system, but the longer term causes arise from policies implemented by governments around the world

over the last twenty years. Called economic rationalism, neoliberalism, or the Washington Consensus, these policies have removed social regulation designed to protect consumers

and workers, have redistributed income to the rich, and promoted huge growth in both corporate and consumer debt. These policies also assumed that economic growth could

be endless, ignoring the history of boom and bust cycles in capitalist economies over the last two centuries. Global inequality also increased, with over two billion people living on less than US$2 per day.

Governments have cut company taxes, wealth taxes and income taxes for high income earners, and have introduced consumption taxes like the GST, which fall most heavily on

low income earners who spend most of their income. There have also been cuts in government spending on health, education and welfare, and privatisation of many services.

But private profits have been guaranteed by continuing government subsidies, as we have seen in services ranging from childcare to toll roads.

 

Legislation like Howardʼs Work Choices reduced basic working standards and allowed employers to impose individual contracts on workers, while restricting their rights to join unions and bargain collectively.

 

The justification for these policies was that redistributing wealth to the rich would result in higher levels of investment and employment, and that benefits would “trickle down” to

lower income groups. But they were based on a culture and practice of greed which undermined community values and increased inequality. As the late American journalist Studs

Terkel remarked, “The only thing trickling down from the top is meanness.” 

In their recent book Who Gets What? Analysing Economic Inequality in Australia (Cambridge University Press 2007), Frank Stilwell and Kirrily Jordanʼs detail the falling share of wages as a share of total income, and the increase of profits as a share of total income particularly over the past two decades.

 

Executive pay has reached obscene levels.  A recent survey by the Australian Council of Superannuation Investors showed that chief executivesʼ fixed median pay increased by 96.4% from 2001 to 2007, compared with a 32.3% increase in average adult weekly ordinary time earnings over the same period. For the 69 chief executives surveyed, average total pay

in 2007 was $5.53 million, up from $4.56 million in 2006 and $3.77 million in 2005.

Growth of the finance sector, ʻcasino capitalismʼ and the environmental crisis

Following the Great Depression of the 1930s, in which unemployment reached 30%, many banks collapsed and millions lost their savings, governments introduced regulation to ensure that banks had adequate funds and would not engage in high risk loans or investments. Government-owned savings banks provided for low income savers. Since the 1970s, privatisation and deregulation of the banks, and the finance sector more generally, removed these safeguards.

Mergers have created giant global banks focused only on short term profits. This led to the “financialisation” of the economy, or “casino capitalism”, in which the finance sector as a whole has grown much faster than the rest of the economy, driven by highly profitable but complex financial products involved in currency trading, futures markets and corporate and consumer debt.

The growth of consumer debt through credit cards, personal loans and mortgages has been highly profitable. Falling real wages and casualisation of work have meant that consumer

debt can be the only option for low income earners to maintain living standards.

The growth of all forms of debt enabled huge increases in production and consumption which

accelerated the global warming that had been developing over the last two centuries of industrialisation.

The US sub-prime mortgage crisis

The immediate cause of the crisis was the massive growth of high risk or “sub-prime” mortgage loans in the US housing market, which began after interest rates fell in 2001-2. Falling real wages and casualisation of low paid work in the US increased the numbers of working poor, often depending on more than one part time job without earning a living wage.

Millions of low income Americans, often from Afro-American and Hispanic communities, had no access to affordable housing as governments cut public housing programs.

Lending to people who cannot afford to repay is known as predatory lending, and had been illegal in some US states. But these laws were repealed in the name of deregulation.

US banks offered mortgages to low income people at initial low interest rates. But hidden in the fine print was a shift to higher interest rates that they could not afford. The banks knew that many people would not be able to continue payments, but they gambled that rising house prices would cover the cost of defaults.

The banks then converted the risky loans into securities, which were promoted and sold as investments with acceptable risks but high interest returns. Ratings agencies like Moodyʼs and Standard & Poors rated these securities as good investments.

The deregulation of global financial markets meant these securities could be sold to other banks, local government and pension funds all over the world, including Australia, creating contaminated time bombs in the global banking system.

By 2007, the highest risk sub-prime mortgages were 14% of the total US mortgage market, with a further 10% of the market classified as risky. As the higher interest rates kicked in over

2007-8, millions defaulted, flooding the US market with millions of houses for sale, leading to sharp falls in house prices. Families were left homeless as their houses were sold.

The ratings agencies downgraded the value of the securities. Banks and other investors

throughout the world suffered huge losses, leading to bank failures in Europe and the US. Banks stopped lending to each other and to their customers.

With less money available to buy shares, share markets plunged in value, leading to losses for superannuation schemes and retirement incomes. Economic growth has slowed, unemployment isrising, and the US and European economies are now officially in recession.

The Australian economy was boosted by the resources boom, but growth is now slowing We are now seeing rising unemployment and layoffs in retail, mining,manufacturing and other industries.L FINANCIAL CRISIS

Government responses

The crisis has undermined the myth of self-regulating markets. Governments are now discussing how, not whether, to regulate markets and use government spending to prevent a worsening of the recession and to create jobs.

Government spending is essential when private investment is paralysed. Priority should go to job creation in health, education, public transport and environmental projects, and to assist workers and low income people who will otherwise bear the brunt of the crisis through unemployment, homelessness and loss of retirement incomes.  Maintaining these incomes also creates demand for goods and services in the economy, and helps economic recovery.

Some business interests are trying to use the economic crisis as an excuse for delaying urgent action on climate change.This is nonsense, since green jobs can be part of the solution to the crisis.

A new report Green Gold Rush issued jointly by the Australian Council of Trade Unions and Australian Conservation Foundation shows that 500,000 jobs could be created in renewable energy, energy-efficiency, sustainable water systems, biomaterials, green buildings and waste recycling if governments provide the necessary support   

see http://www.unionfiles.com/green/Green_Gold%20_Rush_final.pdf).

 

Similar proposals for a “Green New Deal” have been made in Europe and the US.

Globally, governments have said that they will guarantee bank deposits. This does not involve immediate spending, and has prevented the disastrous runs on banks of the 1930s which meant millions lost their savings. 

Governments have also agreed to introduce stricter global regulation of financial institutions, but the details remain to be seen. The European and Chinese governments have also announced massive government spending programs.

Direct government support in the form of payments to particular banks, especially investment banks that have made and lost super profits, is more controversial. In Britain and Europe, governments have invested in or nationalized some banks, meaning that they will eventually get a return on their investment, and have introduced stricter regulatory frameworks.

In the US, in the dying days of the Bush Republican government, the conditions for banks to access $700 billion of government funds were unclear. There is strong public opposition to public money going to investment banks without any assistance for the millions who are losing their homes, while bank executives walk away with massive payouts. The new Obama Democratic government will have to address this challenge.

Although Australia has a much lower level of sub-prime loans (called “low doc” loans here), Australia has a high level of overall consumer debt (including mortgages, credit cards and personal loans).

Sydney economist Steve Keen estimates this consumer debt is 156% of the gross domestic product. We are now seeing increases in mortgage defaults with rising levels of homelessness. (see Deeper in Debt: Australiaʼs addiction to borrowed money, at www.cpd.org.au)

The Rudd Government has guaranteed bank deposits and paid an initial government assistance package of $10 billion to pensioners, carers and families with children in

December 2008. This both helps those on low incomes and boosts consumer spending, helping employment in retail, manufacturing and services industries.

The bringing forward of government capital spending of $5.5 billion on local government infrastructure, larger infrastructure projects and renewable energy will also help to boost employment.

But as the global crisis has worsened, the government has introduced a second, much larger package totaling $42 billion.

Again many of its proposals are welcome, especially expenditure on schools, public housing, energy efficiency and other infrastructure. But there are questions about the equity impacts. There is no rise in payments for unemployed people, wealthy private schools may receive the same assistance as more needy public schools, and more investment is needed in public transport.

There were some improvements to means tests for unemployment benefits, green energy investment and investment in the Murray-Darling basin environment made by Greens and independent Senators, as the Government needed their support to pass the package in the face of Liberal-National Party opposition.

 

Proposals to create jobs and make Australia fairer and more environmentally sustainable

•   Re-regulation of the financial system to prevent such a crisis in the future. This would include much stronger regulation and transparency rules for all financial instruments and institutions, outlawing of all forms of predatory lending, regulation of lending for stock market trading and regulation of ratings agencies

•   Regulation of senior executive incomes, and removal of bonuses that reward risky behaviour for short term profit

•   A uniform national tax on all properties over $2 million to discourage speculation and property booms,

•   A small Tobin tax of a fraction of one per cent on international currency transactions, to discourage speculation and provide a fund for development assistance in the poorest countries

•   A publicly owned savings bank to provide low cost banking for consumers and small business as real competition with other banks

•   Publicly funded consumer credit education programs for schools and the community

•   Increased public spending on public housing, including cooperatives and local social housing projects, and incentives for private investment in affordable housing,

•   Public investment and incentives for private investment to create green jobs in renewable energy, energy-efficiency, sustainable water systems, including industry and household water recycling, biomaterials, green buildings and waste recycling.

•   Increased spending on public transport, in cities, between cities and in rural centres

•   Increased spending on public hospitals and health care, and restore bulk billing and dental health coverage

•   Increased spending on public education at all levels (preschool, schools, TAFE and university) to reduce class sizes, and upgrade school buildings and equipment.

•   Following the failure of ABC Learning, government should fund good quality, accessible and affordable community-based childcare

•   Public investment to close the gap for Indigenous health outcomes, and encourage biodiversity conservation and environmental management on Indigenous lands

•   Boost pensions and benefits to provide a living income

•   Use the new industrial relations law to implement Australia’s commitment to fair workplace laws under the International Labour Organisation Conventions, including freedom of association and collective bargaining rights.

•   Clearer obligations on employers to consult and negotiate with unions about proposed layoffs, including paid training days as an alternative