Two remarkable opinion pieces appeared in ‘The Australian’ over the weekend.
One was by Noel Pearson, the other was by economist William Mitchell.
Pearson is well known for his connections to the Liberal Party. In 2009 he lobbied Rob Oakshot to support the formation of an Abbott Government. In 2011 he gave the Sir Robert Menzies Lecture entitled ‘There is nothing the government can do for you that you are unwilling to do for yourself’. He has long rallied against the Left for “inculcating a sense of victimhood’ and for supporting passive welfare.
Pearson’s article revealed that his Cape York Institute has been working with Mitchell’s Centre for Full Employment and Equity on a proposal for the Morrison Government to completely overhaul Australian employment and welfare policy by introducing a comprehensive national job guarantee. Pearson says this will make welfare redundant for all those who are willing and able to work.
The job guarantee would mean that the Commonwealth Government would provide the unemployed with a meaningful job through which they can build their skills and capabilities. In this way, they will be ready for when the private sector picks up and can take workers out of the job guarantee into new (higher-paying) jobs. The job guarantee would not be inflationary because it would be paid at the minimum wage. The scheme would be administered through local governments across the country. Councils would allocate job hosting functions to predominantly not for profit organizations within their communities. State and federal governments would need to support councils to work with host organizations to develop useful and productive jobs in social services, community amenity, and environmental care. Safety net payments would remain for those unable to work. Otherwise, it would be “no work- no pay’. (Not all proponents of the job guarantee agree with this part of the policy).
Pearson says that the job guarantee option is far better than proposals for universal basic income. These would be a costly disaster aggravating the effects of passive welfare. The job guarantee would end the days of work for the dole because pay would be at the minimum wage. Unemployment benefits would be history, as would the argument over the appropriate level for Newstart. Welfare to work policies would fall by the wayside. In short, the transition from Jobseeker and Jobkeeper to a full-employment scheme “would affect the most profound change to the country’s welfare system since..WWII”.
Whether Pearson will be able to convince Morrison and Frydenberg of the merits of the job guarantee remains to be seen. If however, he is successful, in my opinion, this will consign Labor to the Opposition benches for a decade.
Mitchell is an economist from a Marxist tradition who invented the term ‘Modern Monetary Theory’ (MMT). But MMT is not so much a theory that requires “adoption” as a different way of viewing how government spending currently works in the economy. It insists it is neither inherently left-wing nor right-wing in outlook. Its most basic premises can be summarised as follows:
- A vital distinction is whether a government is a currency issuer (EG Australia, USA UK) or merely a currency user (EG Eurozone countries);
- Where a government is a currency issuer and has no significant debt (denominated in a foreign currency) the only limit on its spending is inflation. Inflation will occur if spending exceeds the capacity limits of the economy (available labour, skills, resources, infrastructure, etc).
- Traditional economics teaches that taxation and borrowing precede spending. In fact, in operational terms, spending comes first. Once the Government passes legislation the Central Bank is authorized to credit the bank account of the recipient. In this sense taxes and borrowing do not ‘fund’ government spending.
- Government spending does not necessarily have to be offset by taxation or borrowing. There are a number of other good reasons for taxation. But the main reasons for taxation in MMT are to create demand for the currency the government issues (because of the requirement to pay the tax in that currency) and to check against inflation (by taking money out of the economy). The main reason for borrowing is to affect interest rates, which in turn, is also relevant to checking inflation.
- Government deficits necessarily result in surpluses in the non-government sector of the economy (households and businesses). Government surpluses result in deficits in the non-government sector.
Pearson supports Mitchell’s argument that, for at least fifty years, unemployment has been deliberately used as a buffer against inflation. This is the so-called NAIRU (Non-Accelerating Inflation Rate of Unemployment). It refers to a theoretical level of unemployment below which inflation would be expected to rise. In the USA this is regarded as 5 or 6%. In Australia, the NAIRU is estimated to have fallen from around 6% in the late 1990s to closer to 4% twenty years later in 2018. Mitchell rejects any NAIRU and argues that full employment, facilitated by a job guarantee at the minimum wage, can operate as a buffer against inflation.
MMT economists point out that, once established, a job guarantee will provide an automatic stabilizer for the economy. As the private sector slows, instead of being thrown onto unemployment benefits, workers will transfer into the job guarantee scheme. They will earn more there than they would receive on the dole which will help to maintain aggregate demand. They will maintain skills and work habits. As the economy picks up workers will transfer back into better paid private-sector jobs. The private sector will be advantaged by the existence of a pool of largely job-ready workers. The private sector generally prefers to employ people who are already employed rather than taking a risk on an unemployed person.
The private sector jobs will be better paid. They will have to be in order for those jobs to compete with jobs under the job guarantee. The job guarantee will put an effective floor on wages in the economy. Its competition will be a better form of insurance against wage theft from low paid workers than regulation which depends upon complaints and their investigation and prosecution.
So how far would the Coalition have to jump ideologically to accept Pearson’s proposal? Perhaps not as far as one might first imagine. The Coalition has been almost as obsessed with returning the budget to surplus as Labor. I say ‘almost’ because Labor promised a bigger budget surplus earlier than the Coalition did at the last Federal election. But Morrison may be more of a political pragmatist than those on the Labor side give him credit for. We all assume the Coalition will revert to type with policies resembling austerity come September. We might be correct. But we might get a rude shock.
Moreover, the costing outlined by Mitchell gives pause for thought. Treasury says that Jobkeeper required a government investment of $70 billion across six months to reduce the unemployment rate by five points (585,00 jobs). Mitchell says his modelling shows that a job guarantee which reduced the unemployment rate by six points would require a net investment of $53 billion over a year.
Mitchell says Japan is the first post-neoliberal economy. Its debt is 235% of GDP compared to Australia’s 26%. Mitchell says that for three decades now it has maintained low unemployment, low inflation, and strong demand for government debt.
There is a huge prize waiting for Labor if it engages in some new economic thinking. The advantage would extend beyond a job guarantee to other areas where government spending can lead to the development of the productive capacity of the economy.
But it is difficult for Labor economic spokespeople to accept that they may have been wrong in their thinking about public finance. That they may have been wrong in promoting the obsession with balancing the budget over the economic cycle. Part 32 of the current ALP platform claims that to balance the budget is ” an appropriate medium-term objective, as part of sound fiscal policy and economic management which takes the economic cycle into account”. This policy position is now totally redundant.
And yet if Mitchell’s costings are correct, neither the Coalition nor Labor need to accept all of the premises of MMT. They really only have to accept that a job guarantee compares favorably to the current system in terms of costs and benefits. And perhaps also that there is not the remotest chance that a job guarantee will fuel inflation.
Albo, Jim Chalmers, and Shadow Finance spokesperson Katy Gallagher might be well advised to invite Pearson and Mitchell in for a chat. And quick pronto.
Who gets there first is always important in politics.