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The government’s economic record

September 28th, 2004

Here’s a piece I did on the government’s economic record, first published at New Matilda

The Howard government’s claims to re-election rest largely on its economic management, and many assessments have been positively glowing. However, a closer examination reveals a rather less impressive record.

As a starting point, it’s useful to look at the numbers most commonly cited in assessments of the government’s record. Over eight and a half years of the Howard government, the official rate of unemployment has fallen from 8.6 per cent to 5.7 per cent. Total employment has risen from 8.3 million to 9.6 million an increase of more than a million jobs.

What can we say about this? First, we’ve had an exceptionally long period without a recession, and there’s no reason to expect one soon. This can be attributed in part to luck and in part to good judgement by the Reserve Bank. Still, the Howard government must get some credit, if only for leaving the Bank to do its job without the kind of ad hoc interference practised by Paul Keating as Treasurer.

On the other hand, given the length of the expansion, the performance of the labour market has been poor. The increase in employment during the first six years of the Hawke government, from 1983 to 1989 was much greater, and the reduction in unemployment much steeper. The unemployment rate fell from 10 per cent to a low of 5.2 per cent in a little over six years, before rising rapidly in the ‘recession we had to have’.

Even a modest recession any time in the next couple of years would wipe out all the gains realised under the current government.

Looking at the labour market figures in more detail, they are generally less impressive than at first glance. The reduction in measured unemployment is, at least in part, the result of continuous pressure to push people off unemployment benefits (although the unemployment statistics are based on surveys rather than claimant counts, people who go off unemployment benefits frequently leave the workforce altogether).

To see the effect of this, it’s useful to look at employment-population ratios. The employment-population ratio has risen slightly under the current government, from 58.3 per cent to 60 per cent, but all of this increase has been in part-time jobs. The proportion of the population engaged in full-time employment has actually declined. And for males, the decline is substantial, from 59.6 per cent to 57.8 per cent. By contrast, during the expansion of the Hawke-Keating period, full-time employment increased fairly strongly.

Some of the decline in full-time employment is due to benign developments, including increased participation in education and voluntary early retirement. But more of it is due to adverse developments in the nature of employment which began in the aftermath of the 1989-92 recession and have been exacerbated.

Traditional full-time jobs, with a work week of 35 to 40 hours per week, and standard leave conditions have virtually disappeared. Instead the workforce has been polarised into a core permanent workforce, whose members are expected to work long hours routinely, and a peripheral workforce of part-time casual and contract employees.

In the short run, the pressure created by this process has increased productivity. However, the long-run effect is to drive people out of the workforce either through burnout or through the scarring effects of job loss.

Another important influence has been the abolition of the Commonwealth Employment Service and its replacement with the privatised Job Network. The government has produced a regular series of reports claiming the Job Network as a great success, and an equally regular string of announcements that the Network is being reorganised to cope with unforeseen difficulties.

The real test is in the aggregate performance of the labour market. Not only has a fairly strong economy failed to produce much employment growth, but there is an increasing mismatch between growing job vacancies and a large pool of unemployed and underemployed workers.

Assessment of the Howard government’s record will in the end depend on macroeconomic outcomes. If a recession can be avoided for another few years, we will in effect have enjoyed a complete cycle with no downturn, and the benefits will be substantial.

On the other hand, even a modest recession would wipe out all the gains that have been achieved in one of the longest expansions on record.

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  1. September 28th, 2004 at 10:43 | #1

    The major economnic reforms that has helped the government weather any economic shocks over the past decade have been floating exchange rates, floating-lower interest rates and flexible wage rates. These were Keating era reforms.
    Lower AUD exchange rates let our exports be more competitive after the Asia crisis. This has kept demand for our exports at a reasonably high rate.
    Lower interest rates have come through increased competition in the financial credit industry, which have halved banks gross wholesale
    interest rate margins. THis has fuelled a construction boom in housing and related industries.
    Flexible wage rates flowed out of enterprise bargaining, contract labour and has allowed the growth in part-time/casual work. This has kept the total employment of AUS labour force on an upward growth path.
    The only sound bit of economic management that the govt did was to pay down govt debt with the proceeds of asset sales and higher tax receipts. But even this good work has been squandered now.

  2. Fyodor
    September 28th, 2004 at 10:50 | #2

    Good points, Jack. Compared to the Hawke-Keating era, the Howard administration has been a period of stagnation on the reform front.

  3. September 28th, 2004 at 11:00 | #3

    The Govt does deserve half-credit on tax reform. The GST, with exemptions, is an effective tax policy, which has broadened the tax-base.
    But Costello lost a lot of credit with his cut in CGT. THis violates the level playing field assumption for factor taxation. And it has led to a wasteful real estate bubble.

  4. Dave Ricardo
    September 28th, 2004 at 11:44 | #4

    “Traditional full-time jobs, with a work week of 35 to 40 hours per week, and standard leave conditions have virtually disappeared.”

    Presumably you mean that there are no more of these kinds of jobs than there were pre-Howard, not that there aren’t any of them at all.

  5. Paul Norton
    September 28th, 2004 at 13:14 | #5

    “Traditional full-time jobs, with a work week of 35 to 40 hours per week, and standard leave conditions have virtually disappeared. Instead the workforce has been polarised into a core permanent workforce, whose members are expected to work long hours routinely, and a peripheral workforce of part-time casual and contract employees. In the short run, the pressure created by this process has increased productivity. However, the long-run effect is to drive people out of the workforce either through burnout or through the scarring effects of job loss.”

    I would also add that the easily quantified and much-publicised benefits of increased productivity from labour market change need to be weighed against the less easily quantified but real (and increasingly discussed) negative externalities in the form of stressed relationships, mental health issues, declining rates of family formation and civic engagement, etc.

  6. Stephen Ziguras
    September 28th, 2004 at 13:21 | #6

    To add to Paul’s list, another negative externality (if you want to call it that) is the continued cost of social security payments to those who can only get scraps of work (about a quarter of people on unemployment payments also have some work. And while employers benefit from casual labour in terms of flexibility, they are certainly not contributing to the costs of social security payments – in fact corporate tax rates are decreasing.

  7. wilful
    September 28th, 2004 at 13:26 | #7

    I’d be interested in analysis of how he’s done fiscally. Ken Davidson provided some figures to show that the entirety of the debt reduction has been through asset sales. Now it may be a good thing that some of these things were flogged off, but the simultaneous growth in the tax take doesn’t seem to have resulted in much in the way of additional services. Basically, where’s the money gone?

  8. Albatross21476
    September 28th, 2004 at 15:09 | #8

    I was listening to the Beeb last night and there was a chap on extolling the virtues of the government because they had achieved the best growth in the economy whilst avoid boom/bust cycles and had reduced interest rates to the lowest level in 40 years. Except this fellow dodn’t have an Oz accent but a Lancashire one and he was a minister in the Blair Labour Government in the UK speaking at the Labour Party conference.

    The Howard-Costello don’t deserve much credit other than for not being too profligate (at least up till now. Basically they have reaped the benefits of a reasonably strong US economy and China (and to a certain extent India) going gangbusters.

    Given that oil prices seem to be heading seriously northward and if Bushjr wins, conflict with Syria and Iran this might be a good election to lose.

  9. September 28th, 2004 at 22:33 | #9

    The other meta-aspects of economic development that have aided this governments economic performance in the nineties are the post-Cold-war:
    globalisation: free trade enabled growth of Asia and America;
    demilitarisation: demobbed standing armies;
    technologisation: internet
    managerialisation: down sized corporations

  10. Irvine Salter
    September 29th, 2004 at 18:13 | #10

    There are some pretty good points in the article.However there are a few problems coming and are to some extent related.Most major oil contracts are up for negotiation in the months around January 2005..Watch business suffer if prices are at present levels at that time..The hand-outs in the coalition election campaign are nothing less than “Whitlamesque” watch interest rates if the handouts are effected following a coalition victory and oil prices continue high..Also watch the levels of non-government borrowings– an almost certain rise in interest rates will ensure that no coalition government will be in power for some years !!

  11. Danny Russell
    September 29th, 2004 at 20:55 | #11

    And another thing …

    I’m no economist, but in the mantra about this government’s ‘strong economic management’ are we forgetting that they sold off the family jewells to swell the coffers?

  12. Bathsheba
    September 29th, 2004 at 22:38 | #12

    To true, too true. I think that the ‘economic management’ of the Coalition will only be seen in its true light after we have the next downturn. What is evident is that the ‘market provides’ ideology of the Coalition has failed to deliver real jobs and real job security. The high interest rates of the PJK years have gone, but so has housing affordability (and those rates were bloody good for some folks, like self-funded retirees and arch-capitalists).

    What I don’t understand is how they can be so immoral as to squander a recession-cushioning surplus just to get themselves in again, without offering a single example of future planning. Who do they think they are?

  13. Alan Luchetti
    September 30th, 2004 at 15:43 | #13

    Not Howard’s doing so much as his neglect of prevention (or, as he might prefer, neglect of “disincentivation”)…

    So much “cost control” in both private and public sectors is really cost externalisation. And where does this trumpeter of “user pays” stand in relation to road use pricing, water pricing? (Yes, state responsibilities I know, but so are health and education — theoretically)

    Future conservatives will revile this government’s economic performance every bit as much as this government reviles Frazer’s economic performance.

    About the only tick I give Howard is microeconomic reform in the stevedoring industry. It wasn’t pretty, but it worked. Similar courage in other areas was needed, but lacking.

    Don’t get me started on halving capital gains tax, not phasing out the home-owner’s exemption and perpetuating negative gearing and accelerating the widening gap between haves and have-nots. How do you begin to cost the social externalities involved there?

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