Responding to the 2012 Federal Budget – Better Late than Never!

above:  Treasurer Wayne Swan looking very satisfied with the 2012-13 Federal Budget

In this 'Left Focus' article Labor activist Tristan Ewins examines what Labor got right in its Federal Budget; what it got wrong; and the what the Conservative Federal Opposition's response says about Liberal Party Ideology.  Debate welcome!

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Tristan Ewins, May 24th 2012

Recently at this blog we discussed what would be desirable for the 2012 Federal Budget.   A few weeks after we ask the question: Was this the ‘battler’s budget’ Swan and Gillard have claimed it to be?; and on the other hand – have there been missed opportunities?

Summarising the coverage in ‘The Age’ and elsewhere the following features were notable:

Firstly there was a threadbare surplus of $1.5 billion – with over $30 billion of savings – but nonetheless a surplus.  Whether a surplus was actually necessary or desirable at this point is open to question.  On the southeast coast there appears more of a need for stimulus rather than austerity.  Bringing forward infrastructure projects there would therefore seem advisable. Certainly achieving a surplus has loomed as a political imperative for Labor, and despite recent (and rare) questioning of this ‘imperative’ in the media, past coverage had consolidated the impression that consistent and continuous surpluses were equal to “sound economic management”.  Liberal claims that Labor had not delivered a surplus since 1989-90 were hurting in the wake of that past, basically uncritical media discourse.  On the other hand a balanced budget over the course of the economic cycle is desirable; with debt servicing weighed against growth, improved capacity and productivity stemming from social investments.

Some of the largest savings were made from Defence – “Cut by $5.5 billion over four years”.  Certainly this was preferable to savings in social programs and welfare; although a growing Australian nation holds the prospect of more self-reliance in Defence over the long term.  This also could mean the prospect of greater foreign policy autonomy.

The Government has also saved approximately $1 billion, cutting by half Superannuation tax concessions for income earners on over $300,000/year: which surely was welcome, but arguably did not go far enough.   

Indeed the Australia Institute has argued that the cost of superannuation concessions has blown out to about $30 billion a year; and Richard Denniss specifically has claimed that $10 billion of this goes to the top 5% of income earners. (!!!) This money could have provided a fair go for single parents; improved the shamefully regressive ‘Newstart’ unemployment allowance by $50/week, and radically improved the quality of Aged Care for those needing high intensity care; and those preferring low intensity care in a more social environment. It also could have been redirected into mental health services where the government has a record of “robbing Peter to pay Paul” rather than sufficiently expanding funding for all areas of real need.  Setting the ‘high income benchmark’ at $300,000/year is being far too generous for many who are on ridiculously high incomes: and yet single parents are singled out to be pushed on to the Newstart Allowance if they do not find work – with the welfare of their children cast into serious doubt.   The rationale is not to upset so-called ‘aspirationals’ – But arguably there is more to gain electorally by consistently and visibly assisting low to middle income groups.

(See: http://www.abc.net.au/news/2012-05-08/swan-scrapping-company-tax-cut/3998784 ;  http://www.tai.org.au/?q=node/277 ; and http://www.abc.net.au/pm/content/2012/s3499255.htm )

A key theme for Swan was ‘spreading the benefits of the boom’; and yet the mining tax was not expanded in scope or degree.  Previously the Greens had been on record claiming that the cost to the Budget bottom line, here, was in the vicinity of $100 billion over ten years.   This begs the question: What kind of social and infrastructure investments could have been gained through a revision of this policy?  And what kind of effective cross-subsidies could have been provided for manufacturing, retail, tourism, education – all sectors struggling in the wake of the high dollar driven by the mining boom?   (See: http://greens.org.au/content/mining-tax-needs-review-ensure-revenue-australias-future )

The projected cut in Company Tax has been deferred – but should have been shelved entirely.  By ‘trumping’ Abbott with a similar 1.5% levy on big business as planned with his own paid parental leave scheme,  Labor could redirect that money to further initiatives in Aged Care, mental health or further cost of living relief for low and middle income Australians.  This would ‘back Abbott into a corner’, making it hard for him to justify his priorities; and making it difficult for him to impose a further Company Tax levy on top of Labor’s levy. 

Money could also have been directed in future social finance and ownership of transport, energy and other infrastructure – with the savings from lower borrowing costs, productivity agreements with unions, and a non-profit footing – delivering very significant savings for consumers.

Meanwhile – though Foreign Aid is rising by $300 million, Labor’s promises to more radically increase aid have been reneged upon – at least for the time being.  This will save an approximate $2.9 billion annually. But the question nonetheless looms: with more far-reaching tax reform could Labor have avoided having to make such “Hard Choices” on Budget priorities?   (See: http://www.smh.com.au/opinion/blogs/the-party-line/should-a-promised-boost-to-the-foreign-aid-budget-be-deferred-for-a-year-to-help-return-the-budget-to-surplus-20120510-1yei6.html )

Other crucial policy areas included $1 billion over four years “to kickstart the National Disability Insurance Scheme (NDIS)” ; “$577 million over five years to help aged Australians remain at home” and additional payments “of up to $210 a year for unemployment and similar benefits.”  (‘The Age’, May 8 and 9 2012)  

Providing tangible results for the NDIS ahead of the next election could be crucial in establishing the credentials of the government as being based on more than just ‘talk and distant commitments’.  So bringing forward the NDIS as much as possible is a very welcome development.  Though as this author has also argued in the past: the proposed Aged Care reforms while welcome do not go nearly far enough to provide for the basic needs of some of our most vulnerable aged Australians.  More financial support is needed for Carers; and more funding is necessary for residental care for those who choose it – and those who require high level care and do not have a  choice.  Sustainable quotas are also necessary for aged care workers and nurses; and resources to improve quality of life for all kinds of aged Australians suffering social isolation, financial stress, difficulty with day-to-day living, and the indignities that come from an under-resourced, sometimes profit-driven and under-regulated residential care sector. 

Over at ‘The Conversation”, meanwhile, there has been the observation that the Federal Budget “includes $515.3 million dentistry package” with  “$345.9 million…used to treat patients on long waiting lists and providing other vital services to adults.”  See:  http://theconversation.edu.au/what-the-budget-means-for-dental-care-in-australia-6792    But the Greens were justifiably critical of Government plans to axe the Medicare Chronic Disease Dental Scheme,  and have argued for means-testing of the scheme instead. 

However the flagship programs of Labor’s 2012 Budget were definitely its Cost-of-Living initiatives.   The Labor website proudly proclaimed the following initiatives on May 8^th” aimed squarely at “low and middle income families”: 

• An expansion in FamilyTax Benefit A with an increase of the benefit to low and middle income families with two children to $600/year, and $300/year for families with a single child.

• A “Schoolkids Bonus” to help 1.3 million low and middle income families meet the costs of schooling: $410 for each primary school child, and $820/year for each child in high school.

• Support for “the most vulnerable Australians”; Cost of Living Assistance for a million Australians: “$210 a year for singles or $350 a year for couples”; with “lump sum payments will be paid twice yearly”

• “tax cuts will be delivered in 2015‑16 for all taxpayers with incomes up to $80,000” through an increase in the tax-free threshold”

In ‘The Age’ such new initatives were given a price tag of about $5 billion – So they are inarguably very significant!

The government also stood on its record of increasing pensions in past years, promising “a new Low Income Supplement of $300 per annum” for “Any low income households that do not receive enough assistance through tax cuts and increases to payments to cover their average expected price impact”. (presumably in reference to the Carbon Tax)   (See:  http://www.alp.org.au/federal-government/news/helping-households-with-the-cost-of-living/  )

Imaginably this could be the beginning of an ideological offensive by Labor on the issue of distributive justice.  For years now the monopoly mass media have reinforced the perception that redistribution equals ‘class war’; while attacks upon welfare and organised labour apparently do not!   Abbott and the monopoly mass media have directed salvo after salvo against the very principle of redistribution to correct injustices inherent in unregulated laissez faire capitalism.  Facing very little criticism or scrutiny in the media,  Abbott even begrudged the very basic social solidarity of the once-off flood tax – to assist those effected by the Queensland disasters. 

Meanwhile important social initiatives have been dismissed in the press with the loaded expression “cash splash” – the intent clearly being to infer economic irresponsibility in a blatant piece of popular-psychological manipulation.

Yet as against this cyncial and socially damaging political tactic this author remembers very clearly former PM John Howard supporting the principle of progressive taxation some time before being defeated by Kevin Rudd in 2007.

And a very different Tony Abbott seemed to emerge from the Opposition Leader’s book ‘Battlelines’.   The following observation was made at the ‘Left Focus’ blog in 2010:

Interestingly, Abbott raises the opposition between compassionate conservatism and the kind of ruthless neo-liberalism that cares nothing for the social consequences of austerity (pp.xii-xiii). Here the author juxtaposes the “[single-minded] cutting [of] public expenditure … striving to deliver smaller government” to “compassionate conservatism, stressing solidarity with those who are doing it tough” (pp.xii-xiii). By this reckoning the “social fabric … has to be respected and preserved”, while individuals should enjoy such circumstances that they are “empowered, as far as reasonably possible, to live the life that he or she thinks best” (p.xii).  (references from ‘Battlelines’ by Tony Abbott) 

(see:http://leftfocus.blogspot.com.au/2010/04/battlelines-whats-tony-abbott-really.html )

The Conservatives need to decide whether to pursue a mix of economic conservatism and political liberalism; or whether to adopt a ruthless neo-liberalism which cares little for the poor and disadvantged; and for the political and civil liberties of citizens.  It is important to observe, also, that ‘economic conservatism’ need not imply economic liberalism, but rather could accept Keynesian assumptions (in past accepted by Liberal governments) on the mixed economy and counter-cyclical demand management.  Yet Joe Hockey seemed to be quite clear recently on QandA that he cared little for the traditional Australian spirit of egalitarianism.

But for Labor stronger action is necessary to place class faultlines and class interests in clearer relief.  The principle of class struggle is seen by many as being discredited even on the Left – which has reverted to a kind of modest social liberalism. But when we speak of class interests and class struggle this need not imply terroristic Stalinism; or to begrudge citizens their human and civil rights on the basis of class.  Rather the purpose of democracy is at least in part to set free oppositions of interest and provide a framework for their peaceful resolution.  Or where this does not work, to contain conflict to forms of civil disobedience which do not descend into an escalating cycle of violence. 

It warrants the question:  What problem does Tony Abbott and the Liberal Party have with workers and disadvantaged groups organising industrially and politically to pursue their legitimate interests; Indeed – to pursue justice, compassion, and  ‘the fair go’?  

And if he desires an agreed class peace, how does Abbott suppose this is possible on the basis of ruthless neo-liberalism – as opposed to the kind of Centrist Catholic Social Welfarism (or a ‘Social Market’ such as exisited under the Christian Democrats in post-war Germany) this author had hoped (but not dared to believe) he may have been open to? * 

Further, if redistributive policies are nothing but a ‘bribe’ (as according to Abbott) what are we to make of the ‘upper middle class welfare’ of the Howard years: and of Abbott’s own paid parental leave which offers leave with full pay to workers on as much as $150,000/year?  (See: http://www.news.com.au/money/cost-of-living/paid-parental-leave-scheme-stays-abbott/story-fnagkbpv-1226286894077 )

For Abbott, though, this is ‘non-negotiable’ as the polls consitently inform him he ‘has as problem with women’…

Conclusion

Having to achieve more but with less can drive efficiency – so there is some benefit in a government operating under tight fiscal circumstances.  Indeed, a comrade in the Socialist Left of the ALP recently commented to me that rather than spending billions more in areas like Aged Care that we could achieve more ‘electoral kudos’ (my term) with well targeted and innovative initiatives.

But sometimes there is no getting around the need for an injection of greater resources.  Much of this year’s Federal Budget was just reprioritisation – with little new money. Again: In accepting this framework Labor will repeatedly find itself in the position of ‘having to rob Peter to pay Paul’.  In public education, aged care, mental health, welfare, public housing, disability support and services, and crucial transport and other infrastructure: ‘trying to do more with less’ can only take you so far.  For instance: the Gonski recommendations for Education simply cannot be implemented without billions in new funding; nor can a sustained introduction of Medicare Dental.

By comparison – moving initially from 100% to 75% Dividend Imputation, further cutting superannuation concessions for the wealthy top 5% of income earners, reforming the Mining Tax, and applying an ‘Abbott-esque’ levy on business via Company Tax – along with other reforms – could have grown social expdeniture by 1.5% of GDP – or approximately $22 billion in new and improved initiatives.

And yet with $5 billion of largely redistributive, social-justice, Cost-of-Living oriented policies - this is arguably a traditional Labor Budget.  It puts many of Labor’s core low to middle income constituencies first in way we haven’t seen so much in quite some time.  

Now, though, Labor needs to turn the to source of the Cost-of-Living crisis.  Firstly, this must include implementation of the Gonski recommendations – so low and middle income families can feel secure sending their children to State and poorer Independent schools – at peace in the knowledge they will not be disadvantaged, and that there is no need to ‘go beyond their means’ in providing a private school education.   And reversing privatisation, and promoting public housing and infrastructure for emerging new suburbs also need to find themeselves to Labor’s ‘policy radar’ with policies that attack Cost-of-Living pressures at their very root. 

(*though for the record this author supports an outlook of sustained class struggle; even though it is notable that the kind of semi-corporatist structures such as have existed in Sweden provided channels of mediation of interest to citizens across class lines)

Double Standards when its comes to talk of ‘Class War’

above: Prime Minister Julia Gillard

Increasingly - in the Murdoch press especially - there has been talk of 'class war' in response to even modest proposals for progressive economic redistribution.  But redistribution against the interests of the disadvantaged and ordinary struggling workers has been going on for decades; intensifying under Liberal governments.  In this article Tristan Ewins works to illustrate that point, showing such examples as the increasingly regressive tax mix, and falling minimum wages.  Ewins argues for Gillard Labor to be brave in pursuing distributive justice for the disadvantaged, and orindary struggling Australian workers.

Tristan Ewins

June 26th 2011

In a column appearing in both the Herald-Sun and The Daily Telegraph recently Miranda Devine has had another go at Julia Gillard and the carbon tax.

Condemning Gillard and the proposed tax, she characterises it as:

“Wealth redistribution, pure and simple. A year on, there’s no secret what Gillard stands for. It’s just no one can believe it.”   http://blogs.news.com.au/dailytelegraph/mirandadevine/index.php 

And this isn’t the first time Miranda Devine has used such language either.

For instance in the Herald-Sun on May 12^th 2011 she beats up the spectre of “class war taxes” in response to Labor’s Budget. ( see: http://www.heraldsun.com.au/news/special-reports/federal-budget-2011/story-fn8melax-1226054252544   )

 In response:

Briefly, the main aim of the carbon tax is to create market signals to drive changes in investor and consumer behaviour: to do our part (as all nations must) in reducing emissions .

But that established: it is possible that modest distributive goals could be pursued as a by-product of overcompensation. And why not?

This brief article will consider inequality, redistribution and the double-standards at play with language of ‘class war’ which has been so common recently.

It’s interesting, isn’t it, how attempts to tax the wealthy and relatively wealthy – to give a fair go for ordinary workers and the poor; or improve the wages and conditions of the most disadvantaged workers – is labelled “class war” in the right-populist monopoly media. And yet all these years that Australia has been drifting towards greater polarisation of wealth and income, and greater disadvantage for the poor: this has not aroused the same kind of ‘outrage’.

The wage share of the economy has been falling for decades; with an accompanying intensification of the rate of exploitation. 

Larvatus Prodeo reported this year that the wages share of national income was at its lowest level since 1964; slightly over 52%.  And to be fair the wage-share of the Australian economy had been contracting for decades under both Labor and Liberal governments; as the leadership of both parties accepted the notion that wages need be depressed to restore profitability.

See: http://larvatusprodeo.net/2011/01/06/labour-market-myth-busting/]  ;  And: http://mattcowgill.wordpress.com/2011/01/03/the-state-of-the-labour-market/

Yet if structural forces in the capitalist economic system were driving these changes; why then were workers not at least duly and properly compensated with collective capital share? 

 Even under Hawke in the 1980s, celebrated increases in the ‘social wage’ came in the form of tax cuts; and so necessarily led to a smaller pool of funds for welfare and services. A veritable ‘double-edged sword’.

But there is more. 

Under both Labor and Liberal governments – but especially under the Conservatives - the ‘tax mix’ has been restructured as to be less progressive. Income tax had been gradually ‘flattened’. Dividend imputation has reduced the proportionate tax burden of the wealthy; and the GST in taxing consumption has affected the poor disproportionately. Accompanying compensation for lower-income demographics, here, was largely neutralised by regressive restructuring of the tax and welfare mix elsewhere.

Meanwhile, concessions and incentives in superannuation for the relatively wealthy and the outright wealthy have come at the cost of potential social programs in health, education, aged care, infrastructure and welfare.  

Privatisation of retirement pensions may well lead in the future to the marginalisation of the public aged pension, with impoverishment for many women, and those disadvantaged whose labour market participation has been sporadic, or who have been trapped in ‘low-end’ jobs. 

It begs the question of whether the government should rather be pursuing a more progressive and democratic model of collective capital formation.

Furthermore for decades there has been increasing labour market deregulation, and an end to the old style of progressive cross subsidies for essential utilities as a consequence of privatisation – or of corporatisation in-anticipation of future privatisation.

Privatisation has also resulted in falling government revenues for vital social programs, and increased costs for everything from power and water, to the use of private toll roads.

‘User pays’ ends up having the same effect as regressive-flat taxation.  And demand for increased profit margins with privatisation have seen structural increases in the cost of basic necessities; while the added cost of borrowing for the private sector in order to modernise infrastructure has also been passed on to consumers.  And in these new markets – eg: for power – ‘small consumers’ are disadvantaged due to their limited purchasing power.

With regard to minimum wages, recently the ACTU has noted:

“While the average Australian income has jumped 21 per cent in real terms since 2000 and company profits have increased by 50% in the past five years alone, the real value of the minimum wage has increased just 7.1 per cent.” 

And also importantly during the Howard years:

“Average award wages dropped by around $30 a week and some award workers had their real wages cut by almost $100 a week.”

The ACTU has observed that falling minimum wages have affected over 1.4 million workers in recent years.  (See: http://www.actu.org.au/Issues/MinimumWagesCase.aspx )

And in addition to all this -  there are many workers – including on low incomes – who have faced reduced wages and/or conditions under the government’s ‘Award modernisation’ process – despite promises to the contrary.

Importantly: There are many who have no sympathy for the unemployed as a result of constant campaigns of vilification on the pretext that ‘dole-bludging’ is rife. And yet Australia has stringent active labour market policies, pursued under both Labor and Liberal governments, with provisions that could reasonably be described as ‘punitive’.

Under recent changes long-term unemployed will be compelled to work two days a week ‘for the dole’, and yet no corresponding increase in payments for these people has been announced.  http://thecourierpigeon.com.au/government-gets-tough-on-the-unemployed/851664/

The OECD has seen fit to criticise Newstart as woefully inadequate compared to unemployment pensions elsewhere.  Writing in late 2010 for ‘Inside Story’, Peter Whiteford reported how under Newstart “unemployed adults receive about $470 per fortnight”, and how  

“Since 1996 the level of Newstart for a single person has fallen from around 54 per cent to 45 per cent of the after-tax minimum wage.”  (despite the fact minimum wages themselves have fallen)

(see:  http://inside.org.au/why-unemployment-benefits-need-to-be-increased/ )

Finally, during the Howard years a number of programs sprung up that were lambasted as ‘middle class welfare’. Included, here, were Family Tax Benefits ‘A’ and ‘B’ – introduced to assist in the costs of child-rearing- and provided even to those on high incomes. http://en.wikipedia.org/wiki/Child_benefit

There has been confusion, here, on the Left, with some arguing in favour of ‘universalism’.  But while many of us (this author included) support in-principle Swedish-style social-democratic universalism, the facts ‘on the ground’ in Australia are those of a relatively tight social wage and tax regime.  With a limited scope to expand progressive taxation, and hence expand welfare and social programs - a higher degree of targeting and means testing is necessary in the Australian context.    

Interestingly, though, Bernard Keane notes at ‘Crikey’ how Labor has failed to markedly reform the Family Tax Benefits regime.  He concludes how:

“In [Labor’s recent]…budget…[Family Tax Benefit payments are] forecast to cost $18 billion in 2011-12.”

And thus

“…FTBs are now Labor’s as much as they are Howard’s, which makes the “war on the middle class” rhetoric from News Limited and its journalists even more risible.” http://www.crikey.com.au/2011/05/12/why-labor-now-owns-middle-class-welfare/

All these years ‘redistribution’ has been going on.

Redistribution from low and middle income earners to the wealthy, and to the upper middle class. 

Redistribution from workers to the ‘corporate bottom line’ as a consequence of eroding real wage share, labour market deregulation, privatisation (including ‘Public Private Partnerships) and user pays. 

And more redistribution from workers to big corporations with effective ‘corporate welfare’, as corporations no longer contribute adequately or proportionately towards the costs of education and infrastructure from which they benefit.

 There has been impoverishment of pensioners – and especially the unemployed. (again I reiterate: despite stringent and indeed punitive active labour market policies)

 And there has been vilification of trade unions and stigmatisation/criminalisation of industrial action even where only used as a last resort.  This has resulted in a greatly reduced capacity for workers to fight back in the face of these changes.

So amidst all these changes over the past thirty years or so: how often have we heard terms like ‘class war’ thrown around in the mass media as a response?  

The answer: Not often. Not often at all. 

And yet if there is the prospect of  even a mild degree of redistribution in the context of overcompensation for the proposed carbon tax, the ‘class war bogey’ is brought out just as it always is when it comes to the interests of the privileged, and the relatively privileged. 

If those on lower and middle incomes are to receive a ‘fairer slice of the pie’ in terms of the tax mix, provision of social services, and welfare for those in need, it is only reasonable that those in the top 20% of incomes demographic pay their fair share one way or another.  If those on low to middle incomes are to enjoy a ‘fair go’ it can be no other way.

That said, Prime Minister Julia Gillard has recently announced that families on incomes above $150,000/year will miss out on carbon tax compensation. That’s roughly 10% of Australian families. (‘The Age’ 25/6/11)  

 Unfortunately – as far as redistribution via overcompensation goes, the kind of strategy it seems Gillard is suggesting would provide a far shallower pool of funds to work with than would be the case were the top 20% incomes demographic excluded. 

Perhaps given this context pensioners will miss out on overcompensation even under Labor; and those on low to middle incomes won’t receive the more robust degree of overcompensation they deserve.  This could prove a missed opportunity for Labor – in maximising the reconsolidation of its ‘class base’.  Although doubtless Gillard sees it as a strategic choice to keep more voters ‘on side’.

Nonetheless, perhaps it’s not too late for compromise. Perhaps if pressured by the Greens and Labor’s Left Prime Minister Gillard could strike an agreement to withhold compensation for the top 15% of households, to be redistributed to those genuinely ‘doing it tough’.  A higher carbon tax rate in this context could be another option - an alternative to lower compensation 'cut-off thresholds' - to increase the total pool of funds available for redistribution from the top 15% to those in genuine need.

Regardless of the very cautious and modest nature of Gillard’s proposal, doubtless it still will not please critics such as Miranda Devine, and other Murdoch writers.  Devine seems to have an aversion for the very concept of progressive redistribution – no matter how mild.  But as far as this author can tell she has barely considered the situation of those who have been left disadvantaged by decades of “neo-liberal reform”; and the very real process of redistribution which has occurred to the detriment of workers and the poor.   Indeed: After all these years of redistribution from low and middle income groups TO the wealthy and the upper middle class, the modest forms of progressive redistribution suggested here should simply be seen as a tentative move towards some kind of 'correction'.

Yes Labor is struggling in the polls. Elements of Labor’s core class support base have been drifting away gradually for a long time under the perception that Labor no longer represents their interests.   But the prospect of progressive redistribution to the advantage of the vast majority of Australians who are on low to middle incomes is what the conservatives are scared of.  They’re afraid of a Labor Party which takes action to re-consolidate its class base.

By contrast when the Conservatives speak of cutting taxes to reward ‘hard work’, they’re usually talking of ‘relief’ for those on higher incomes. The underlying assumption is that ‘the market is just’: that those on higher incomes deserve increased benefits for their effort.  The implication is that they work harder than others. 

 But in an Abbott ‘tax reform’ package, you can be certain that it is those on low incomes – including some very hard working people – who would miss out in outright terms compared with upper-middle class and wealthy taxpayers. 

We speak here of people on minimum wage and thereabouts: cleaners, child care workers, retail and hospitality workers, textiles workers, and many manufacturing workers.  These are the same people who would suffer from a winding back of the social wage, or the effective introduction of ‘flat taxes’ with user-pays mechanisms in the context of Public Private Partnerships.  And Abbott’s proposed tax cuts must draw from the Budget bottom-line somewhere.

Too many people have been disadvantaged and suffered injustice in recent decades. And it is a process which always accelerates under Conservative governments.

Increasingly, though, there are those who once felt they could depend on Labor to defend their rights and interests – who no longer believe this to be true.  This is even undermining Labor’s membership base; its mobilisation as a social movement.   

Now, though,  is Labor’s opportunity to re-establish its credentials as a party with values; a friend of the disadvantaged, and true to its class base.

Recovery requires Redistribution

above: the author: Tim Bending

A post-Keynesian take on the causes of the crisis, and on hopes for recovery

"An orderly unwinding of today's massive debts and imbalances will only be possible through a recovery of demand, and one that is not fuelled by debt. "

by Tim Bending, 16 February 2010

The global economic crisis is popularly blamed on the recklessness of bankers, and on the financial de-regulation and loose monetary policy that allowed them to be so reckless. The cause of the crash is found to be human error in medium-term economic management. The characteristic position of the centre-left is therefore to demand tougher controls, to ensure that such an accident doesn't happen again.

If there is a centre-left ideal, in fact, it is perhaps to return to a happier period in Capitalism's history: the postwar years of social-democratic, Keynesian consensus, when unemployment was low and prosperity more widespread. The whole "Anglo-Saxon" model, from Reagan and Thatcher onwards, is seen as an unfortunate deviation from good economic management. We could, and should, just turn back the clock. But could we? And would the re-regulation of finance be enough?

There is a viewpoint that sees the "Golden Age" of capitalism as dependent on a number of conditions that created strong aggregate demand. The origins of the current crisis are seen in the passing of those conditions from the late 1960's to the present, leading to a long period of underlying stagnation, excessive savings and unsustainable bubble economics. Such an interpretation of post-war economic history would lead us to certain conclusions: that re-regulation will not restore demand and is not enough; that the key to restoring demand, and therefore to sustainable recovery, is the creation of an economically fairer society; and that, in the long term, we may face questions about the viability of our current financial system as a tool for managing ageing societies with increasingly saturated consumer markets.

Explaining capitalism's "Golden Age"

This viewpoint is exemplified by a recent book: The Great Financial Crisis: Causes and Consequences by John Bellamy Foster and Fred Magdoff (Monthly Review Press, 2009). It is a collation of articles tracking the latest crisis from 2006 onwards. Their work is based on that of liberal, "post-Keynesian" socialists, Paul Baran, Paul Sweezy and Harry Magdoff, from the 1960's through to the 80's. In 1966, while mainstream economics congratulated itself on having solved the problems of unemployment and instability, Baran and Sweezy argued (in Monopoly Capital) that such periods of relative prosperity are the exception in industrialised capitalist economies, rather than the norm. The "Golden Age" of capitalism – an "Age" that lasted a whole two decades – was created by a conjunction of conditions that sustained strong aggregate demand.

To an extent, these conditions were a hangover from the Great Depression and the Second World War. They sustained both strong state spending, and a what Keynes called a high "propensity to consume", which corresponds to a low relative desire for savings. These conditions included an accumulation of personal savings after the war years, state spending on the cold war, and relative financial security, thanks to economic stability and the welfare state. They also included relatively low income inequality thanks to low unemployment, high relative wages, and welfare state policies. Poor people tend to consume more of their incomes than rich people, so decreasing inequality takes money away from those most likely to save it (the rich) and gives it to those most likely to spend it. The "Golden Age" also followed a long period, since 1929, when consumption had been weak, but in which technology and production techniques advanced considerably. It was a time of lifestyle-changing consumption for ordinary families; a time when they bought their first car, their first suburban house, their first washing machine and television. The big difference people could make to their lives through consumption was arguably an important factor stimulating consumer demand. In Europe and Japan, the postwar years were also a time of massive rebuilding for both firms and households.

The "Golden Age" becomes leaden

In the late 1960's the situation began to deteriorate. The first critical change may have been the gradual saturation of consumer markets. People had their cars and suburban houses. Buying a second car, house, washing machine or television, just doesn't provide the same utility as buying the first one. This is the same reason why rich people tend to save more; the more stuff we have, the less we benefit from buying each new thing. Consumption, as a strategy for achieving happiness, suffers from diminishing returns. Another gradual change, not yet mentioned, is the ageing and increasing life-expectancy of populations in industrialised countries: Saving is encouraged by rising expectations of future retirement and care needs. As the "perfect storm" of demand-stimulating conditions subsided through the 1970's, the leading industrialised economies returned to a state of stagnation, what economist Joan Robinson called the "Leaden Age".

But why should an increasing desire for savings, relative to consumption, lead to lower growth? Foster and Magdoff rather gloss over this, yet it is the key point of contention between Keynes and neo-classical economics. The latter has a habit of assuming that increased savings must be converted into increased productive investment leading to increases in output, employment and demand. But it is not necessary to get into the circular arguments about Say's Law (that "supply creates its own demand") to see that savings can have other places to go, and must not necessarily contribute to growth.

A second possible outlet for savings is hoarding. Stuffing cash under the mattress is more an allegorical problem than a real one, but banks building up reserves is more significant. Theoretically, in the long term, this should have little effect on demand as monetary policy or deflation should be able to restore liquidity, but in the short-term it can hurt demand. Keynes, in fact, really focused on the short-run possibility of excessive savings and falling demand tipping and economy into recession, and the possibility that a market economy may not be able to correct such an imbalance for extended periods of time, as in the Great Depression. Hence he promoted counter-cyclical deficit spending by governments to prevent economies getting too far out of balance in the first place, and to dig them out a of hole when they did. But here we are talking about a long-term decline in the "propensity to consume" which is a different kind of problem. Hoarding does not seem to be the long-term "escape valve" for excessive savings that have built up.

A third possibility is investment that leads to a decline in output. Savings can be invested in increasing productivity to cut costs and protect profits, yet without increasing output. Such investment can absorb savings yet lead to a reduction in employment, demand and even output, fuelling a recessionary spiral.

A fourth is asset price inflation. Savings may be invested speculatively, inflating asset price bubbles (e.g. in real estate or shares). Cash savings are exchanged for a promise of future wealth. This promise turns out to be false for all those holding the assets when the bubble inevitably bursts. Demand can be expected to decline in the future when people find out they are not as rich as they thought they were, and as they increase saving to compensate for the savings they suddenly find they don't have. Asset price inflation thus has the effect of maintaining demand in the present (cash savings are returned into circulation), at the expense of demand in the future.

A fifth is consumer borrowing. This is closely linked to asset price inflation because of the use of assets such as houses as collateral. Lending for consumption converts one person's savings into the disposable income of another. Again, this maintains demand in the present at the expense of demand in the future, and is thus unsustainable. In the future, there must either be a shift from borrowing to debt repayment, impacting future demand, or borrowers must default. Default means that the promises of future wealth bought with cash savings turn out to be false, also impacting future demand.

A last outlet for savings is public borrowing. This is not a direct effect of increasing savings, but a knock-on effect of declining demand. It is almost automatic when tax returns fail to meet expectations, but deliberate when governments attempt to ride-out downturns they hope are merely cyclical. Again, the effect is to bring forward demand from the future.

There is thus no law that more savings will lead to more useful investment and more growth. This attractive scenario is theoretically possible, but arguably increasingly difficult for mature industrialised economies. It depends on growth being consistently high enough to absorb rising savings, irrespective of the rate of technological advance and population growth. There is little room for external shocks like the oil shocks of the 1970's. It also depends on a high degree of business confidence; "entrepreneurs" must play a "prisoner's dilemma" game in which they must base their decisions upon a prediction of what other entrepreneurs will do. In this game, the best outcome for all players occurs when all bet on growing demand, and therefore invest in expanding output. Yet in betting on such growth, players also risk ending up with the worst possible outcome: investing in expansion just before a slump. The outcome all depends on what the other players do. In this context, it is quite rational for all players to bet on decline and invest defensively in cutting costs and protecting profits without expanding output.

Demand is borrowed from the future

So what actually happened? Foster and Magdoff are at their best in tracking the long-term trends that followed, focused on the US. The key trend, taking-off in the 1980's, has been a massive accumulation of debt by households, firms, financial institutions and (in the case of the US) government. Total outstanding debt in the US rose from 154% of GDP in 1970, to 373%, or nearly $53 trillion, at its latest peak in Q1 2009 (http://www.federalreserve.gov/releases/z1/Current/, table L1; http://www.gpoaccess.gov/eop/tables10.html, table B-1).

This trend has been accompanied by the rise of the FIRE sector (Finance, Insurance and Real Estate). In the decade of the 1960's in the US, the financial sector accounted for an average 15% of domestic corporate profits. The 2000-2008 average was 35%, peaking at 43.8% (http://www.gpoaccess.gov/eop/tables10.html, table B-91). This period has also seen massive asset price inflation. The evidence for the systematic, unsustainable over-valuation of assets is the worsening series of crises. We can list the stock market crash of 1987, the US Savings and Loans Crisis (1989-91), the Asian financial crisis (1997-8), the dot.com crash (2000) and, of course, the "sub-prime" crisis. Each time, so far, governments and central banks have been able to play their function as lender of last resort and have re-floated/inflated the markets, principally through a monetary policy of providing ever cheaper credit.

It is clear that the leading industrialised economies have suffered from a persistent, long-term excess of savings over and above the amount that the weakly growing "real economy" has been able to absorb. Instead, these savings have fuelled asset price inflation and consumer borrowing. The effects have been felt differently in different countries. This has probably been partly due to differing and evolving cultural attitudes to saving and indebtedness. In the United States, the UK, and other countries like Spain and Ireland, this flood of excess savings has fuelled a debt-driven consumer boom. The rich in these countries have got a lot richer and have saved like never before, while well-off professionals have saved heavily for retirement. Meanwhile, lower income groups – groups who are still struggling with life-changing consumption milestones like owning your own home – have been encouraged to borrow to an unprecedented degree. Levels of personal debts that would have been culturally unacceptable as recently as the 1970's have become an everyday fact of life.

In Japan, by contrast, inflated markets in real-estate and shares burst terminally in the early 1990's. Since then, Japan has been mired in stagnation, with the state unable to curb savings and stimulate demand. In Germany, bubble markets never really got off the ground. Both Germany and Japan have suffered from persistent high domestic savings and weak domestic demand, and have only achieved moderate growth through export to the consumer-boom countries like the US. China is more paradoxical. Its level of development would suggest unsaturated consumer markets, yet development has been very unequal and its culture, like that of Germany and Japan, seems to promote savings. China, like Germany and Japan, has weak domestic demand, a high savings rate and export-led growth. All three have lent a large proportion of their savings to the US and other trade-deficit countries. The US and UK have seemed obsessed with consumption. Indeed, there was a consumption-led boom. But nonetheless, this consumption has simply been fuelled by the excessive savings of others. Demand has been high, but it has been demand brought forward from the future.

These trends are obviously unsustainable. So far, governments and central banks have always been able to
prevent collapse, but with interest rates at rock-bottom and unprecedented quantitative easing failing to provide much stimulus to the real economy, monetary policy appears to be running out of ammunition. The last remaining option for governments is deficit spending, though some, like Greece, are already facing difficulties financing their deficits. It remains to be seen how long markets will finance the deficits of the major industrial economies.

What is to be done?

If this viewpoint is correct, it will have three main implications:


1. Re-regulation is not enough. The current crisis is not a simple result of policy errors. It was not caused by the behaviour of financial institutions or the de-regulation of what they do. I think it is safe to suppose that this de-regulation took place because it was in the short-term interest of politicians and their backers to facilitate the emerging trends, with little understanding of the long-term consequences. Tighter controls of the financial sector, including measures to curb asset price inflation, would be desirable. They might increase the likelihood that future savings are invested in the real economy by reining in the alternatives posed by speculation. But even this would do nothing to ensure that the real economy offers attractive investment opportunities. Until that happens, non-debt-dependent growth will be elusive.

2. Recovery requires redistribution. An orderly unwinding of today's massive debts and imbalances will only be possible through a recovery of demand, and one that is not fuelled by debt. For three decades, demand has been stimulated by huge transfers of wealth, both from the rich to the poor and from savings-oriented countries to consumption-oriented ones. The problem is that the money must be paid back. But demand can just as well be stimulated by a redistribution of wealth that does not need to be paid back. While we cannot fully re-create the conditions that helped create capitalism's "Golden Age", we could turn back the clock on the growing economic inequality of recent decades. The tools for doing this include legislation (minimum wage, caps on bonuses, etc.) and a more heavily redistributive fiscal system. The latter could also seek to stimulate demand through state spending on infrastructure (e.g. a Green New Deal) and through seeking to create greater financial security in the face of old age, unemployment and ill-health, reducing the desire for personal savings. It needs to be emphasised that such measures cannot be financed by public borrowing, but only by more progressive taxation. We are not talking about a cyclical problem to be addressed by anti-cyclical deficit spending, but a structural problem requiring a structural response.

3. In the face of ageing populations and saturated markets, a more radical rethink may be needed. A fairer version of capitalism might yet breath life into the moribund economies of the West, but for how long? It would begin by helping the poor to catch up on consumption, but would end up making us all richer and all more inclined to save. The problem of ageing societies will not go away. It is not clear that our current financial system is well suited to managing this situation.

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