Debora Cardenas on Unsplash
Why public investment is urgently needed to boost the Australian economy
With five million Australians currently out of work due to a global downturn and many others out of work without any Commonwealth assistance, the only option is to make the government the employer of last resort.
Public investment is critical to supercharge a sluggish economy. Despite what critics say, public investment isn’t a problem; rather, it’s the solution to Australia’s biggest problem: unemployment.
Over the past three decades, politicians have pushed policy that steers wealth to a select few. Politicians have privatised assets to fund other assets. They’ve downsized the public sector, outsourced to the private sector, and transferred public funds to wealthy corporations.
Politicians have repeatedly beaten their chests about their fiscal prudence, including their aversion to government debts and deficits, which sounds very prudent to the budget- and debt-conscious citizen, right?
But here’s the thing: None of this has worked. All it’s done is transfer money from ordinary people to the wealthy. In January 2019, Oxfam reported that the ‘combined fortunes of the world’s 26 richest people are greater than all of the wealth owned by the world’s poorest 3.8 billion people’. Bloomberg noted the planet’s wealthiest got richer by 25% in 2019.
In fact, to get our economy moving again, the government needs to not only keep spending, but widen the fiscal safety net to include the underemployed, visa holders, staff excluded from JobKeeper, and Australians stranded overseas. When ordinary people have been financially drained, trickle-down economics is not working, and things have to change.
Governments choose the level of unemployment
The best-known example of how we’ve gotten our economy moving in the past occurred in the 1940s. It’s known by its bureaucratic title: The White Paper on Full Employment. This commitment remained in place for three decades, from 1945 to 1975, and acknowledged that the Commonwealth could guarantee full employment.
“Unemployment is an evil from the effects of which no class in the community and no State in the Commonwealth can hope to escape, unless concerted action is taken.”
For those unable to return to work, the Commonwealth government provided access to social security via a national welfare fund.
Then, in the 1970s, the Whitlam government dropped the policy. In the wake of the Organisation of Petroleum Exporting Countries (OPEC) oil shocks, we switched to inflation targeting. This is where the Reserve Bank of Australia (Australia’s central bank) sets the inflation rate. At the time, it seemed like a sound policy, but it triggered a spike in unemployment and underemployment.
And this highlights a highly significant, yet rarely acknowledged point: governments choose the level of unemployment.
If governments pursued policies that spurred pro-growth strategies, we could, over time, reduce the rate of unemployment. There’s absolutely nothing necessary about unemployment. There are millions of Australians in the prime of their lives who are out of work. Collectively, five million Australians currently depend on government support. This support comes in the form of JobSeeker or JobKeeper.
While these support packages are essential during the pandemic, there’s a better way that only requires a logical strategy and targeted support.
Below, I’ve set out the steps that many economists acknowledge constitute a better way forward:
JobSeeker and Youth allowance and other payments need to be raised permanently. This is necessary to ensure that the economy, which was soft prior to COVID-19, doesn’t plunge into an even deeper recession or depression.
As for cries about the government being unable to afford higher Social Security payments, the reality is that the government can afford to pay a decent rate of Social Security, but they choose to hide behind the neoliberal lie of your taxes paying for welfare. This is rubbish! The government CHOOSES how much it spends on each portfolio area.
So, what does this mean for the economy and for recipients? As the economy and revenue continue to tank, they’ll use this as an excuse to hold down Social Security payments. And while not raising Social Security may sound prudent to some, it’s the economy which will suffer.
The economy will suffer now that JobKeeper has been reduced. The government could replace JobKeeper with a proper wage subsidy. The Morrison government’s JobKeeper is paid directly to employers, not to workers. This is a strange way to pay a subsidy given that the Rudd government paid $900 into accounts in 2009 as part of their Global Financial Crisis response. The fact is that the Commonwealth has the power to authorise expenditure. All the government needs to do is arrange for the Australian Taxation Office (ATO) to pay directly to people’s personal bank accounts for the duration of the pandemic.
Another issue with JobKeeper is that the subsidy is due to run out in March 2021. This is months before a cure for coronavirus will be found. Contrary to government talk about a comeback, the Australian economy is not resilient, nor was it prior to coronavirus, and it will require high-levels of government support until after the crisis abates.
And if you’re worried about treasury coffers running dry: don’t be! The government collects revenue from many different sources, including the future fund, bonds, and other sources. Also, contrary to mythology spread by politicians, taxes are NOT the only form of revenue. Furthermore, governments decide how much to spend on a given policy area; they can do this because governments do not run a household budget and are NOT constrained like households. This doesn’t mean that the government should splash the cash irresponsibly, merely that it’s disingenuous and dangerous for them to reduce their spending on priority areas during a recession.
The economy also requires support because in the past, it has usually taken around a decade to develop a vaccine, so the likelihood that there will be a vaccine within 12 months is remote. In reality, influenza is a different virus family, Orthomyxoviridae. COVID19 is a Coronavirus, the same family as the common cold, and we still don’t have an effective cure for that, despite billions and decades spent looking for one. In reality, our only option may be to eliminate the virus.
Another thing we need to eliminate is dole-bludger bashing by some media outlets that, over the past 45 years, have attacked the unemployed and the chronically ill. They’ve repeatedly labelled cancer sufferers (and others) as bludgers. The fact is that the actual number of malingerers is very small.
This conscious cruelty aimed at recipients by some members of the media flies in the face of an avalanche of inequality caused by neoliberalism.
One may wonder why these forms of inequality are now more common. To put it simply, the labour market stands utterly transformed since the 1970s. It is much, much harder for the younger generations to establish themselves in the workforce. Generation X found it hard in the 1990s, and it’s likely that many in successive generations will never establish a foothold in the labour market unless we intervene to help them.
These people are likely to need income support for a longer time than in the past. So, we need to remove the conditionality requirements placed on social security by successive Australian governments. Also, governments need to tell the public how Social Security is funded. Hint: It’s not via taxpayer money.
We also need to be honest about the number of people out of work. Many people simply aren’t counted in the official figures—dispirited job seekers, those working as casuals and others. Social security must also be extended to those who are underemployed.
While income support is crucial to get us through the crisis, long term, it’s very obviously NOT a desired career outcome for most. To expand employment, we need to:
Expand the Clean Energy Finance Corporation to become our new government-owned bank. Once recapitalised, this government bank could lend to state governments to fund infrastructure. This would be more effective than asset recycling, which has benefited the rich at the expense of everyone else.
If we eliminate the virus or develop a vaccine, we need to establish a job guarantee scheme for those workers who can’t return to the same job.
We also need to identify key occupations whose skills will be needed and ensure that we increase the level of graduate and entry-level placements. Supporting professions like nursing and sections of the Commonwealth public sector, as well as providing jobs for Social Security lawyers, legal aid and community legal lawyers, setting up a tutoring program for school students, and expanding jobs for careers and improving healthcare, should be key areas of focus for further investment.
We also need to revise our training agenda and make it easier to make faster transitions. According to economist Alison Pennington:
‘A healthy skills system is going to be integral to us being able to pivot through this crisis and train up people, whether they be young people into new jobs, or retraining people out of jobs that are on the down.
‘Our skills system is fragmented, haphazard, under-resourced and unco-ordinated. And it’s totally unfit for this challenge that we have coming up.’
Source: Depression-level crisis: ‘Official figures mask true extent of crisis’, The New Daily, 18 June 2020
Furthermore, the data on Job Outlook, the government portal related to occupational prospects, needs a major revamp. Many occupations that have been on the decline for decades are still listed as having ‘steady’ employment prospects. The government must focus on jobs, not skills.
Increase the stock of public housing
Implement the Green New Deal. We urgently need to tackle the lack of public or community housing. We could do this by building 500,000 new houses to alleviate the housing crisis and deal with inequality.
In the meantime, there is another crisis brewing. Australians are some of the most highly indebted people in the world. To add to this worry, there is also a cascade of rental evictions and mortgage defaults down the pipeline, unless we elect a government prepared to avoid a monumental housing crisis.
A good way—and a proven approach—to avoid economic disaster would be to issue bonds to alleviate the rental crisis. These could be called coronavirus bonds. The proceeds would pay the rent or mortgages of those laid off because of coronavirus. It’s in everyone’s interest that the payments and credit systems don’t seize up. The banks simply aren’t going to offer a permanent amnesty to cash-strapped households.
And for those worried about a monumental build-up of government debt, you have to ask yourself this: How many individuals can borrow at very low interest over ten years?
Private debt holders, eat your heart out.
Enforce responsible lending laws
But the solution to avert a housing crisis does not end there. We also need to change the private-debt approval process to ensure that banks aren’t loading consumers up with eye-watering levels of private debt. To do this, the government must enforce responsible lending laws. Currently, the government proposes making it easier for businesses to obtain credit. To do this would be a dangerous mistake. Making credit easier to obtain at this time would ensure that Australia continues its gold-winning streak to become the nation with the highest level of private indebtedness. This would only sow desperation, all manner of social ills, including skyrocketing bankruptcy, divorce, higher suicide levels and economic stagnation.
One good way to avoid this would be to grant all Australians 100K, which they can use to pay down their private debts. According to Professor Steve Keen, this will encourage consumers to spend. Enhancing consumer confidence is absolutely necessary if we want to revive the ailing Australian economy.
Another way to resuscitate confidence is to expand innovation. Expand manufacturing so that Australia is not left without essential equipment and supplies. The coronavirus pandemic has exposed the risks of offshore manufacturing. For example, we have one manufacturer of personal protective equipment (PPE). This leaves us exposed in the event of a second wave or another pandemic.
Re-embrace the past. Thirty years ago, the Cain Labor government in Victoria demonstrated that it understood how to fuel economic growth. In doing so, they gave birth to some entrepreneurial success stories. The best-known success story was AMRAD Pharmaceuticals.
Sadly, many in the commentariat failed to grasp the link between public and private collaboration. Instead of focusing on how the government tried to build new industries, they instead focused on innovating, which failed.
This was an incredibly small-minded approach to innovation and risk. The fact is that risk and failure are intrinsic to innovation. For innovation to occur, a venture capitalist has to be willing to invest in a product, knowing that it could be a success or a failure. So, if venture capitalists don’t try, they aren’t going to discover the next innovation.
Also, if venture capitalists don’t manufacture here, they’re narrowing the pool of jobs available to local residents.
‘Capitalism itself can’t survive a crisis like this . . . It needs a centralised state response . . . to survive and re-start after the crisis’. Professor Steve Keen, Capitalism: Closed for Business, Renegade Inc.
Getting innovation and job creation underway requires sound policy and implementation. Regardless of the type of policy, public service is supposed to play a role in implementation. Key to implementation is institutional memory, says Laura Tingle, a long-term Canberra Press Gallery journalist. Without institutional memory, a department or agency can’t draw upon a body of expertise to develop a compelling policy.
Tragically, this process has been undermined by the craze for contracting out (to save money, supposedly). And during the GFC, there were already clear signs that this shortsighted approach had bitten hard when some departments simply didn’t have the expertise to implement sound policy.
The case for debt, deficit, and publicly-owned banks
It, therefore, follows that if we don’t have the public service expertise, we might be hard-pressed to implement quality policy of any kind. And clearly, this is of huge significance. If we can’t develop or implement sound policy, we simply won’t be able to work our way out of any sort of crisis.
Economies never spring out of recessions or depressions. There’s no secret elixir that can soothe the distress of people whose businesses have failed or whose partners have committed suicide.
We need a new social bargain, one in which the rich no longer fleece the public.
We also need to consider altering the structure of our economy.
Contrary to neoliberal orthodoxy, the only way to reinvigorate an economy is public investment. Pursuing business as usual (loading people up to the eyeballs with private debt) will crush so many more lives, as it’s crushed so many in the past.
To really understand why, we must look at the critical importance of public investment. We also need to look at the 1980s and 1990s and public-debt phobia.
This period saw the sale of the Commonwealth Bank of Australia and the State Bank of New South Wales in 1994.
State governments began financing projects using the discredited asset-recycling method. Asset-recycling is a fancy name for the sale or lease of public assets to the private sector, according to economist John Quiggin. Since then, Australians have looked on as many of our golden-egg-laying geese have been butchered and sold at bargain-basement prices, only to see their value rise sometime later.
Where are the recycled assets from this discredited asset-recycling process? Where are the fulfilled promises of jobs and real growth; that is, asset growth?
Fear of public investment is also a disaster for a reason that is much less discussed. Every country needs its own public bank to fund significant infrastructure and projects, and Australia is no exception. Publicly owned banks play a critical role in a functioning economy. A public bank, such as the Clean Energy Finance Corporation, could finance green infrastructure projects.
In the late 1990s, many saw bank nationalisation as unnecessary. Australians were told nationalisation would require taking money out of health and education. However, nationalisation doesn’t require money being diverted from treasury coffers. It could be funded via debentures.
The mandate of the Clean Energy Finance Corporation is to assist in the transition to renewable energy for lower emissions.
The idea was originally the brainchild of former Greens Senator Christine Milne. Although the corporation’s focus is on clean energy projects, it’s mission could be expanded to turn it into a new national bank. The bank would also need to be recapitalised before it could truly assume the role of being Australia’s new government bank.
How do we pay for government debt?
Alternatively, the financing could come from bondholders. Wouldn’t this be too expensive for the Australian taxpayer? Not really, and not for the government. The reasons are set out below.
1. The government could roll over the debt and let economic growth and inflation reduce it. (Note that this not debt in the traditional sense. Government bonds are an asset swap).
2. The government could credit bondholder accounts.
3. The government could buy back bonds and use the proceeds to reduce government debt.
Unfortunately, the mere mention of the term ‘government debt’ makes government-debt phobics break out into a sweat. Repayment of secured debt, via buying a solid, purposeful asset, isn’t scary at all but logical.
‘The debt our politicians, journalists and mainstream economists talk about are treasury bonds issued by the government to manage the bank overnight lending rate and to soak up excess reserves in the system.
They are not debt. They are like shares purchased on the stock market.
They attract an interest rate payable by the Reserve Bank twice a year, which the bank creates out of thin air. It costs nothing. This is the great deception successive governments practice on an unsuspecting public.’
Source: John Kelly, The Mystery of Money or how I learnt to stop worrying about debt and deficits.
This government debt won’t produce a default on our debt. Just look at Australia’s history: In the wake of WWII and the full employment policy, we borrowed to keep our economy afloat. This debt didn’t crash the economy; the government, like other governments, chose to roll it over rather than pay it off. It was paid down through economic growth and inflation over time.
So how did this happen? We focused on employment and productivity and didn’t obsess about debt repayments. As John Maynard Keynes said: ‘Look after the unemployment, and the budget will look after itself.’
Australia stands at a precipice. We can continue to assume the pandemic will be over in a matter of months. But history shows such a swift resolution to a long-predicted crisis is unlikely. To address this crisis, we must recover from our aversion to public investment.
We can pursue another way forward, or we can bury our heads in the sand.
Ultimately, our survival depends on our embracing a new pathway forward. This path involves using public investment to enhance the productive capacity of the economy. If we do that, we stand some chance of getting ourselves out of a very deep economic downturn.
Of course, we can always keep on our current path, which involves sacrificing the economy to keep the bad debt industry afloat and allowing the super-rich to profit at the expense of everyone else, but after our experience in the 1890s and 1930s and the human catastrophe of the early 1990s, we know too much to keep repeating the same failed policy choices.
There’s nothing inevitable about the Australian economy’s current direction; our current course will only seem inevitable if we remain locked into dated and dangerous economic ideas that were never fit for purpose.