Pearls and Irritations

In July an Economics Nobel Prize winner took the time to visit Canberra to meet the new Australian Treasurer, Jim Chalmers. Joseph Stiglitz was visiting Australia as a guest of the Australia Institute.

Stiglitz has had a stellar career. He was Chief Economist at the World Bank before moving to Columbia University in New York. His Columbia research led to him being awarded the Nobel Prize.

One of the many virtues of Stiglitz is the fact that his theoretical model differs sharply from the current dominant neoclassical theory. Neoclassical economics is a theory that prioritises individuals maximising their self-interest. It is a framework that eschews any consideration of institutional setting and historical circumstances. Economics is a treated as a separate sphere, and the world is seen through the prism of a collection of individuals engaged in combining their own resources and instruments of production in market transactions. Individual behaviour is emphasized at the expense of examining social structures and power relationships in the workplace. A competitive self-regulating market sets prices and profits is the mantra of neoclassical economists.

Stiglitz is a political economist who understands that economic relations penetrate social and political relations. He is a critic of free market fundamentalism. He understands that giant corporations sidestep the laws of the market and set prices. He follows in the tracks of a Galbraith rather than a Friedman. In brief, Chalmers was privileged to have someone blessed with Stiglitz’s sophisticated level of economic analysis pay him a visit.

Stiglitz’s visit to Canberra was timely. It coincided with a global economic crisis. Inflation is soaring and price hikes are disrupting economic life. Central banks are busy hiking interest rates to lower inflation, whilst striving to avoid crunching economic growth and slipping into recession.

Chalmers has been left bemoaning the role of the war in Ukraine raising energy prices, and supply chain issues sparked by Covid. Waiting for the war in Ukraine to be resolved, and supply chain bottlenecks to dissipate, whilst pushing down aggregate demand by raising interest rates sums up his strategy for fighting inflation. Rate rises suppress demand and soften price increases.

Stiglitz walked into Chalmers’ office singing from a different hymn sheet to the dominant paradigm on how to tackle the bugbear of inflation. Stiglitz would have lifted the intellectual tone in Treasury. But whether his formula would change the mandarin’s policy on treating inflation was a different kettle of fish. Chalmers is flanked by legions of advisers from Treasury. This department played a fundamental role in entrenching the supremacy of neoliberal economic policies in Australia. Stiglitz would have read the room, and knew he had a hard sell, but he is aware economic history is replete with examples showing that when the facts change even the most dogmatic policymakers must adjust their doctrinal standpoint or confront cataclysmic forces.

Stiglitz pulled no punches with Chalmers. He bluntly told him that companies were an important factor in driving inflation. They had made mouthwatering profits during Covid, and they were using their monopoly powers to price gouge. Energy companies were singled out as a prime example of leapfrogging prices producing monopoly profits that turbo charged inflation. And Stiglitz noted their booming position was a product of the Russian invasion of Ukraine. This was a subtle point. It was not the case that the energy companies had lifted productivity and cut costs which are the conventional factors in boosting profits. In brief, their stratospheric profits were not the result of introducing measures to achieve lean production. Instead, they were profiteering along with monopolists in many sectors from high inflation.

Stiglitz’s prescription was that a windfall profits tax needed to be applied. This policy would put a fetter on companies exercising monopoly power and be a disincentive to companies increasing prices. It was a masterstroke. Stiglitz was providing an important recipe to stem price rises, depress inflation and give a fillip to state coffers. Expanded revenue could be spent on any number of public policy initiatives including Medicare, assistance with soaring gas and electricity costs and provide aid to vulnerable households squeezed by high inflation.

At least you have to say Chalmers was honest with Stiglitz. He told him that a windfall profits tax was not on the agenda. Chalmers stated a multinational tax would be implemented and that was the only revenue raising policy under consideration. Stiglitz drew his own conclusion, and it was not flattering. He left Canberra noting large companies had a hegemonic role in politics in Australia. Stiglitz believed Chalmers turned a deaf ear to his tax proposition because he feared a backlash from business. Stiglitz could have observed he had just been given an object lesson in how the Australian state has been captured by big business.

Stiglitz would know any multinational tax will have more holes than Swiss cheese. Multinationals buy the best tax brains in Australia. The major law and accountancy firms advise the multinationals on how they can legally pillage this country by channeling their super profits to overseas shareholders. The dividends of foreign shareholders are swollen by revenue withheld from the Australian tax system.

Major law and accountancy firms have a plethora of tax avoidance schemes to serve up to their clients. One ploy is to shift debt between holding companies and subsidiaries spread around the globe. The pea and thimble games they play are endless. A manufactured debt taken on by an Australian company to its US headquarters results in interest payments that can then be claimed as tax deductions to the Australian Tax Office. Or there is transfer pricing where fabricated intra-trading arrangements between global enterprises create the space for the setting of prices that ends up minimising tax bills.

A multinational tax based on taxing the location of manufacture or where the sale occurs will lead to the tax specialists claiming it is impossible to locate the production of a commodity in any one country as design, value-added work and manufacture occur in numerous countries. Given multi-platform production the tax specialists will claim sale points are as numerous as the cycle of production. And cross-border cooperation will prove illusory. Multinationals will play off governments and nations against each other and threaten disinvestment and relocation to any country that wants to engage in surveillance of their commercial practices. The result will be tax avoidance will continue largely unhampered.

A windfall profits tax may not be loophole free, but it offers less scope for multinationals to make a monkey out of local tax laws. The aim should be to make it watertight. The focal point must be on identifying excess profit levels. Not only those like the gas companies on the east coast merrily profiteering from price-fixing, but all those companies lifting prices to reap super profits and stimulate inflation need to be caught in the windfall profits tax net. Stiglitz was a prophet who was armed with a great idea―and that he was given short shrift in Canberra is a blot on the national landscape.

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