Treasurer Josh Frydenberg says the current economic situation requires ‘supply-side’ reforms like those undertaken by the Thatcher and Reagan governments in the 1980s. The relevant lessons from those years are really rather different, as are the current needs of Australian society.
Facing a prolonged Coronavirus health crisis and a long period of recession ahead – maybe a deepening depression – big thinking is surely needed about how to drive a recovery and what form it should take. To start on a point of agreement, job-creation clearly needs to be high on the agenda.
The official economic projections coming from the Treasury and the Reserve Bank look woeful. Unemployment is being kept in check only by policy measures like JobKeeper that the government has already signalled it will be scaling down. But does that really require turning the clock back to Thatcher and Reagan?
They governed at a very different time, when inflation was the most prominent concern in the capitalist nations and organised labour still had considerable strength. The situation is very different now. Inflation is not an issue: indeed most economists, including those at the Reserve Bank, think that it is now too low, making deflation a contributory factor to the economic stagnation that began long before COVID-19 appeared. Considerable labour market reform has taken place in the intervening years too and unions have much less workforce coverage. The big societal challenges that now have to be linked with job creation are dealing with climate change and economic inequality.
To try to pump up the engine of economic growth without regard to environmental constraints is out-dated and reckless. Job-creation therefore needs, wherever possible, to have a green tinge if not a deep green hue: otherwise the jobs will not be sustainable in the years ahead.
Job-creation policies also need to be implemented in tandem with strategies to reduce inequalities in incomes and wealth. In part, this entails a simple economic logic: poor people usually spend most of any additional income they get, thereby giving greater stimulus to aggregate demand than rich people who tend to save much more. Socially, more equitable nations also do better, as shown by a mass of social science research on physical and mental health, crime, educational outcomes, social mobility and social cohesion.
Policies like those pursued by Thatcher in the UK and Reagan in the USA during the 1980s created more deeply entrenched inequalities, the effects of which are still resonating. They focussed on making it harder for workers to take industrial action to get higher wages, while creating more favourable conditions for the owners and managers of capital to increase their profits and accrue capital gains. Stronger regulation for labour: deregulation for finance and business.
These were the policy prescriptions flowing from the then-fashionable ‘supply-side economics’, seeking to supplant the Keynesian theories that had underpinned previous policies of macroeconomic management.
Arthur Laffer, a previously little-known academic, was one of the supply-side economists who sought to give some theoretical legitimacy to Reaganomics. He famously claimed that cutting taxes on the rich would give so much stimulus to economic growth that the government’s total tax take would increase. In other words, lower taxes would produce more revenue. He is said to have originated his theory by drawing a diagram (subsequently known as the ‘Laffer curve’) on a paper table napkin while sharing a restaurant meal with some friends. The renowned political economist J.K. Galbraith later said, with characteristic wit, that it would have been better had Professor Laffer used that piece of tissue paper for a rather different purpose.
Concurrently, the Reagan and Thatcher governments did stimulate particular forms of economic growth through distinctive forms of public spending: Reagan’s administration spent prodigiously on military and space programs, for example, while Thatcher’s surge of spending on the police force was a small but significant illustration of the ‘free market: strong state’ dualism within neoliberalism.
The major legacy was more deeply divided societies. This was the period during which ‘trickle down economics’ – the belief that if you make the rich even richer we will all benefit – attained its pejorative reputation. Do we really want to revisit that divisive, class-based agenda?
We should not be surprised that the current Australian government’s leaders are predisposed to it. Having to implement massive Keynesian stimulus when the coronavirus crisis struck has been contrary to all they previously espoused and they would love to be back on a more neoliberal track. Pushing for more industrial relations reform is their natural first port of call, but income tax cuts are looming as an equally significant test. Frustrated by their inability to reduce the company tax rate for big business because of insufficient support for their legislation in the Senate, they remain firmly committed to pressing ahead with the second and third stages of their income tax cuts. Indeed, there has been much talk of bringing them forward. The effect would be to reduce the progressivity in the tax scale, a process that will deliver much the biggest tax cuts to the highest income households.
Promises of tax cuts generally have popular appeal, but many people must now be wondering whether now is really the time. For a government that has talked so long and loudly about the need to get the federal budget back into surplus, it seems bizarre to be cutting taxes when government spending has surged to an all-time high. Is the ghost of Arthur Laffer walking the Treasury corridors? Are we looking at Laffer curve 2.0, raising the expectation that cutting tax rates (especially at the top end) will increase economic growth so much that total tax revenue actually rises and the net budget situation improves?
Being bombarded with ideologies that dress up class politics as responsible economics is unhelpful at the best of times, and these are surely the worst of times. As a society, what we need now is some honest effort to develop a realistic, equitable and sustainable basis for economic recovery. We would learn more useful things from studying the lessons of President Franklin Roosevelt’s new deal policies during the Great Depression – or from Australian nation-building and post-war reconstruction in the late 1940’s – than from Thatcher and Reagan.
In a previous article on this site, I described the characteristics of what a coherent alternative policy package could look like – including industry, trade, incomes and workforce re-skilling policies – to restructure the economy for the energy, environmental and social conditions of the decades ahead.
Just to illustrate this different economic philosophy, consider a practical issue like housing. The problem of housing affordability has grown relentlessly during the period that neoliberalism has been in vogue. Giving a massive boost to the supply of social housing could create many jobs and meet social needs at a time when homelessness is now a looming prospect for very many people. Building social housing would be more directly job-creating than subsidising home renovations and it would tackle a major source of inequality, while embedding environmental, energy and ‘circular economy’ principles in the design process. Cooperative models of ownership and management could be encouraged too, especially since the usual business models are evidently floundering.
“Never let a crisis go to waste” is a familiar theme, but the Treasurer’s recent attempt to re-birth some of the far right’s agenda needs to be seen for what it is. It won’t contribute positively to jobs, but it would make our society more unequal and it would be yet another missed opportunity to address climate change and sustainability. While it is not surprising that old songs on the conservative play-list are getting a renewed hearing, the Australian people deserve better.