Date created: 28 November 1996

Last modified: 18 November 1997

Maintained by: John Quiggin

John Quiggin

Jobless must be taken off policy back burner

The Canberra Times ,

7 Jan, 1995

1995 marks the fifth New Year Australians have celebrated with rates of unemployment above 9 per cent. Unemployment remains our biggest economic problem, with a total cost to the government budget (in terms of welfare payments and tax foregone) of around $20 billion a year, and a social cost much greater than this. Yet someone listening to the economic policy debate, or reading the economic commentary columns in our newspapers could be forgiven for failing to realise that unemployment even exists. Not since the publication of Working Nation, the White Paper on Full Employment has the government mentioned unemployment. The Opposition has not only failed to make anything of the issue but has opposed any measure that might help to reduce unemployment. A few voices, as politically disparate as Helen Hughes and John Langmore have continued to point out the need make full employment our central policy goal, but their arguments have been greeted with deafening silence from the policy establishment.

Although it is a cliche to refer to any given year as critical, or as the most important in the decade, the economy will indeed be at a pivotal point in early 1995. If the policy choices of the 1980s (summarised in the phrase 'medium-term economic strategy') are taken as a guide to policy for the 1990s, the stage is set for fiscal and monetary contraction in the attempt to achieve a 'soft landing' and forestall even more drastic contraction later in the decade. If on the other hand, the aspirations expressed in the One Nation and Working Nation documents are taken seriously, it is essential that expansion should continue at a vigorous rate for the remainder of the 1990s. This can only be achieved if the public sector takes an active and positive role.

In looking at the economic prospects for the year ahead, it is difficult to be optimistic. Yet the reasons for this pessimism relate not to our economic circumstances but to the way in which those concerned with economic policy have responded to those circumstances. On the whole, 1994 was a year of good economic news. Growth in output and employment was much stronger than expected, investment recovered from its sustained slump, and inflation remained very low. But the response of economic policy-makers to all of this good news was disheartening in the extreme.

The strong growth of 1994 could have laid the groundwork for a return to full employment. As well as contributing directly to higher employment, strong growth simplifies the governments budgetary position. In addition to the automatic effect of reducing the budget deficit, growth changes the political calculus of taxation and spending. With rising incomes for the community as a whole, it would have been possible to raise enough additional revenue to finance a substantial expansion of employment in vitally needed community services while leaving the great majority of the community with post-tax incomes higher than those of the recent past. Such a tax-expenditure mix would also have the effect of offsetting the tendency of the current account deficit to rise as the economy grows.

Instead, the policy establishment has seen growth as a threat, referring to it as unsustainable and potentially inflationary. It is of course, true, that an economic growth rate of 6-7 per cent is unsustainable in the sense that it cannot be maintained indefinitely. The same is true of an employment growth rate of 4 per cent. In both cases, growth can continue only there are sufficient unemployed workers and spare capacity that can be mobilised to generate the required increases in output and employment. On the basis of past experience, the underlying growth rates of the labour force, capital stock and total factor productivity are sufficient to sustain growth rates no higher than 3-4 per cent in the long term. But the fact that 6 per cent growth cannot be sustained indefinitely does not mean that it is undesirable now, let alone that the associated risks of an inflationary upsurge justify the kind of pre-emptive strike now being undertaken by the Reserve Bank.

The views of the policy establishment and particularly those of Reserve Bank, are premised on the self-serving assumption that the policies generating the recession were essentially correct. The tenor of much of this discussion is that the achievement of low inflation required the massive social losses of the recession and, conversely, that the benefits of small reductions in inflation rates are roughly equal to the costs that were incurred to bring those reductions about. It follows from this assumption that the maintenance of low inflation should be our top policy priority. Even when the risk of higher inflation is small, this approach suggests that the maintenance of high unemployment rates is justified if it reduces this risk a little. In effect, the rationalisation of past policy failures serves to perpetuate those mistakes into the future.

In the absence of a profound change in thinking, the most optimistic outlook for 1995 is that the policy establishment will hit their targets, pushing growth rates down to 3 per cent and maintaining unemployment indefinitely in the range between 7 and 10 per cent. At worst, as in most previous monetary contractions, the short sharp shock will turn out to be the precursor of a new recession, with unemployment rising off a base of 8 or 9 per cent.

John Quiggin is Professor of Economics at James Cook University and author of Great Expectations: Microeconomic reform and Australia, published by Allen & Unwin.

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