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Short and sharp ?

January 15th, 2009

Writing in the Oz, Alan Moran begins a case for wage cuts as a response to recession with the claim

Until the 1930s, recessions tended to be short and sharp, and financial ruin was largely confined to the speculators whose exuberance had diverted capital into ventures where it was less than productive.

Much the same assumption appears to underlie the thinking of those who propose a return to the macroeconomic policies of the 19th century, such as the gold standard. Economic statistics for this period aren’t exactly comparable to those available today, but, such as they are, they don’t support the claim. In the US, for example, the longest-ever recession, according to the National Bureau of Economic Research was that of the 1870s (following the Panic of 1873, which in turn followed the US shift from bimetallism to a gold standard). As the NBER data shows, 19th century recessions commonly lasted for more than a year.

In Australia, the long and deep depression of the 1890s, and the substantial wage cuts imposed during that depression (with employers getting the full backing of governments) were a major factor in the formation of the Labor Party and the shift to a parliamentary, as opposed to a purely industrial strategy, for the labour movement.

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  1. charles
    January 15th, 2009 at 07:08 | #1

    I think you could easily argue that both the 1930 and this recession were/are debt driven, that is not enough money to consume the stuff that can be produced.

    Wage cuts and tariff protection are both examples of bugger thy neighbour. Short term, short sighted attempts to improve things locally that will fail. We no longer have local economies.

    What Alan Moran doesn’t seem to be able to see is simple, workers are also part of the economic system, in the end the economy is about producing goods to consume, no consumers no market.

  2. MH
    January 15th, 2009 at 08:03 | #2

    Moran’s argument is a mercantilist view of the world that argues for the self interested benefit of reducing costs to pass to the firm but the outcome of which peversely ignores the aggregate result of reducing wages, reduced demand and hence reinforces the downward spiral of an increasing real debt burden and as a result increased instability and unrest in society. As the monetary policies being followed at the moment have sought to balance the volume of money available and hence to ensure that market gyrations from reductions in wages and hence demand is offset by government and central banks guaranteeing the liquidity required to ensure that money is available to invest or produce, reducing wages will only reduce demand. So we either have the full Keynesian solution applied which requires Government assuming strategically the position of entrepreneur by public works to bring the system back into functioning balance or socially acceptable equilibrium of employment and investment or we do not (The extreme moral hazard view). The option is of course to merely allow the violent swings as the production of goods and services adjusts abruptly to changing demand and costs and live with the social consequences. History suggests the consequences may be unpleasant and unintended. The proposition of Moran and others always neglects the broader community interest and as JQ has succinctly pointed out is why political parties are formed who actually understand and apply principles and policy that benefit the many not the few.

  3. Nick K
    January 15th, 2009 at 08:29 | #3

    There is a good argument to be made that during a recession wages should be allowed to fall to some extent in order to keep more people in work and minimise the legacy of unemployment.

    It makes no sense for wages to remain constant in a declining economy, any more than it would make sense to never have any wage rises during periods of strong economic growth.

  4. January 15th, 2009 at 08:51 | #4

    John, It seems that you see Labor in the current situation as saving workers from injustice and a long recession by preventing wage cuts. This puzzles me.

    Do you support the maintenance of real wages at Rio Tinto where the firm is cutting 15,000 jobs globally?

    Or do you support the recent move by the CFMEU for 30% wage increases for some workers at Rio? After all if adverse movements in Australia’s terms of trade do not create a case for wage cuts in resource-intensive industries maybe even wage increases are warranted. They will boost aggregate demand but presumably, by your implied reasoning, do not have significant cost effects.

    Ripley-believe-it-or-not positively-sloped or flat labour demand curves do not, in my view, provide a sensible basis for macroeconomic policy though they did provide Card et al publishable economics in a Freakonomics sort of sense. Who would ever have believed it? Not me.

  5. sean
    January 15th, 2009 at 09:07 | #5

    I think its going to happen one way or another, don’t you think?

    China(mainly) and the rest (emerging markets) distorted the mirror (sorry market) for about 6 years, so throw 6 years of gdp growth in the bin and work from there.

    You cannot avoid gravity.

  6. TerjeP (say tay-a)
    January 15th, 2009 at 09:51 | #6

    Much the same assumption appears to underlie the thinking of those who propose a return to the macroeconomic policies of the 19th century, such as the gold standard. Economic statistics for this period aren’t exactly comparable to those available today, but, such as they are, they don’t support the claim. In the US, for example, the longest-ever recession, according to the National Bureau of Economic Research was that of the 1870s (following the Panic of 1873, which in turn followed the US shift from bimetallism to a gold standard). As the NBER data shows, 19th century recessions commonly lasted for more than a year.

    Adherance to the gold standard can’t be blamed for this recession because there was no gold standard in operation at the time. The yankee greenback was not on a metalic standard from the time of the civil war until 1879. During that time it was a floating currency.

    There also arose during this era a political party that opposed a return to the gold standard. It was called the Greenback Party.

    For a good history of floating and metalic currencies try “Gold – The Once and Future Money” by Nathan Lewis.

  7. TerjeP (say tay-a)
    January 15th, 2009 at 10:23 | #7

    For a graphical account of what I just said above see the following chart which shows the applicable US dollar price of gold during the period. It entail a huge inflation followed by a massive deflation. Blamming the gold standard for the recession is perverse and I hope John Quiggin is merely ignorant rather than deceptive.


  8. OZtrian
    January 15th, 2009 at 11:06 | #8

    Contentless and gratuitously offensive comment deleted.

  9. Alanna
    January 15th, 2009 at 11:12 | #9

    Is there any time, recessionary or otherwise when those who clearly advocate employer interests are not calling for wage cuts??? May I suggest employers start with salary cuts from the middle of the organisation upwards?

  10. jquiggin
    January 15th, 2009 at 11:52 | #10

    Terje, the dramatic bit of your graph appears to show the inflation and deflation associated with the Civil War and its aftermath. The Coinage Act of 1873 put the US on a gold standard, with a promise to restore full convertibility of greenbacks to gold by 1879. That promise was, as you noted, carried out.

    Please try to avoid comments such as “ignorant rather than deceptive” – they do nothing to improve the tenor of discussion and encourage unwelcome participants like OZtrian.

  11. Mick
    January 15th, 2009 at 12:20 | #11


    Do you not think the long trend of central banks being able to inflate at will has gone some way to cause this problem? I am not calling for a return of the gold standard, but I believe that by setting a level of inflation (2-3%) you are actively discouraging market participants to save, and pushing them into making riskier investments. There has to be a better way.

    The 19th century was a morass of poor labour laws, no welfare and rotten class structures. Russia was still mired in serfdom for much of it. Most European countries had empires, others had revolutions. War was a constant theme in the 19th century, much more than the 20th (despite the horrors of the first half).

    What worries me is the post hoc ergo propter hoc fallacy that creeps into economic thinking. It goes somewhat like this:

    The 19th century had minimal government intervention and a gold standard and had horrible depressions. The 20th century had Keynesian intervention and fiat currency and had fewer.

    Perhaps there is a causal relationship, but there is no possibility of telling.

    It is even more concerning that so many are instantly prescribing Keynesian solutions today when they can’t be sure they ever worked in the past. Yes, the US eventually worked its way out of depression after embracing Keynes’s ideas. This was after a war consumed and then destroyed much of the world’s industrial capacity. One might say that a mixed economy brought about the long post war growth period. Or did it?

    There were two other massive innovations in the 40s that could claim more credit:

    1. The invention of antibiotics
    2. The green revolution.

    All of a sudden if you got sick with a bacterial infection you could be cured and food could be produced for a marginal cost. You could feed and heal the world for next to nothing!

    In fact, these revolutionary developments are somewhat understated in importance. People starved in the Great Depression. Even an equivalent downturn in economic production now would not lead to that in Australia or the US.

    So the rush to embrace Keynesian ideas, or any economic solution, is perhaps not grounded in the facts when looking at history. That is not to say that the government shouldn’t at least try to ameliorate the problems. But so far, most Keynesian solutions seem determined to maintain the status quo (cf. the Rudd government’s attempts to prop up inflated house prices via the FHOG boost). The liquidationists were most certainly discredited in the Great Depression for abandoning the economy, but I’m not sure Keynes would have prescribed what our current government and others have.


  12. TerjeP (say tay-a)
    January 15th, 2009 at 12:23 | #12

    John – they abandoned the gold standard and then returned at the pre war price. The process of returning at the pre war price meant a huge deflation to unwind the inflation that happened after abandonment. The correct response in hindsight would have been to either avoid abandonment in the first place or else to return to the gold standard at a new gold price that took account of the intermediate inflation.

    WWI led to a similar problem that occured in Britian (and all the Commonwealth nations such as Australan that were fixed to the Pound Sterling). In WWI Britian left the gold standard and inflated. In 1925 Churchill returned Britian to the gold standard at the pre WWI gold price. Once again the itermediate inflation was reversed with a grinding deflation. Once again the better response would have been to return to the gold standard at a gold price that took account of the inflation that had occured.

    In both the case of the USA following the civil war, and Britian following WWI the return to the gold standard entailed a grinding deflation that took years to work it’s way through the economy. Contracts struck at the inflated price now caused cripling conditions for the borrowers (the principle value of the loans increasing in real terms). These processes take years to unwind and borrowers (often enterprises) get destroyed in the process. However in both cases the deflations did ultimately work their way through the economy and things eventually returned to normal.

    Of course in both instances those that were lenders at the height of the gold price (eg for instance those that bought war bonds) would have been major winners as a dollars worth of debt became more valuable in terms of gold (and in real terms).

    I think the world should return to a gold standard. However it would be naive in the extreme to think that the USA today should suddenly fix the dollar to gold at the pre-1970 price level. It would be massively deflationary and in turn massively contractionary. Eventually the price level could be forced back to the level of the 1960s but at massive social and economic expense. This wouldn’t be a problem with the concept of a gold standard, it would merely be an example of a gold standard with some really stupid parameters being imposed on it. If instead the US fixed at a price of US$800 per ounce the outcome would be very, very different.

    The recession in the USA during the 1870s was, if not the product of severe deflation, certainly not improved by it. Perhaps ingorant and /or deceptive are terms that are too inflamatory, however to blame this recession on the gold standard, given the ample evidence of monetary manipulation from the time, is in my view seriously misguided.

  13. TerjeP (say tay-a)
    January 15th, 2009 at 12:43 | #13

    p.s. I may have implied that the deflation effect is just on financial contracts. It fact it impacts all long term contracts.

    If you sign a 10 lease on a building when the dollar is worth 1/30 of an ounce and then need to pay that dollar rent when the dollar is worth 1/20 of an ounce the debt can be crippling. That represents a rent increase of 50%.

    Likewise if you agreed to pay Harry a salary based on dollars worth 1/30 of an ounce and then need to keep paying him the same nominal salary when dollars are now suddenly worth 1/20 of an ounce it will eventually catch up with you.

    If the USA today fixed the dollar to gold at $35 dollars an ounce it wouldn’t just be a problem today. It wouldn’t just be a problem this year. The negative impact of such a policy shift would be felt for many, many years to come. Not because gold standards are bad for the economy but simply because that gold standard would be bad for the economy.

  14. MH
    January 15th, 2009 at 12:49 | #14

    Mick#11 et al, Keynes never suggested that wages should not decline or that his analysis was to keep the status quo, his General Theory addressed the issue of under-employment and liquidity. Keynes makes clear that money wages v real wages are separate considerations, as was the issue of investment and money velocity. The argument of the mercantilists is a logic trap and based upon simplistic deduction, the real world suggests more complex dynamics in the decisions by consumers and producers but when that all fails, as it has now, then government can and should ensure that the supply of money and of confidence by providing direction (programs) was of more importance for social stability and political stability than sitting by and riding the wild swings that disaggregation and disequilibrium produce.

  15. Mick
    January 15th, 2009 at 13:17 | #15

    [email protected],

    As I said, I believe Keynes would disagree with many of the prescriptions that are being embraced. Nevertheless they are being embraced under the banner of Keynesianism – which is now simply the term for government intervention in the economy.

  16. BotanyWhig
    January 15th, 2009 at 16:00 | #16

    I am also sceptical about the comparison between the 19th and 20th centuries, given the vast changes in all aspects of society over that period. (Though I note a previous commenter’s contention that wars were more common in the 19th century than the 20th is certainly wrong.)

    My view on the post’s subject is that cutting wages on a macro level is unhelpful, as it would encourage deflation and be de-motivating for workers. For the individual firm making such a decision, the morale effect would certainly be catastrophic. The best way for a firm to cope with falling revenues is undoubtedly forced redundancies (voluntary ones decimate the more talented ranks).

    As such, policy-wise, governments should make it easier for firms to shed staff through retrenchments. Not that they will, or are—quite the opposite—but what can you do, huh?

    (PS, the argument that retrenchments reduce aggregate demand is probably quite true, but I doubt the effect is anything like as great as mass corporate bankruptcies.)

  17. mp
    January 15th, 2009 at 16:13 | #17

    We are seeing mass sackings at various companies. This puts almost all the burden for business downturn on those that lose their jobs. If instead there were wage cuts at those companies, the burden would be shared much more equitably.
    Therefore, those who support social welfare should support wage cuts in preference to job losses.

  18. Hal9000
    January 15th, 2009 at 16:28 | #18

    I’ve learnt from rightwing economists that you can’t have wage rises in a boom because they cause inflation and you have to cut them in a recession to save jobs. Except for executives, that is. Bangla Desh would appear to be the economic model we should all strive to emulate, apparently.

    The remarkable thing, given this well-rehearsed ‘we’ll all be rooned’ chorus, is that so many of you seem inclined to believe the most fancifully optimistic musings about the environment, GW etc.

  19. TerjeP (say tay-a)
    January 15th, 2009 at 16:59 | #19

    Clear cases when economy wide wage cuts may make sense;

    1. In a sustained deflation. However reflation would seem like a better option.

    2. Following the destruction of a significant amount of capital. Such as might happen during a severe war (think Japan WWII). The current financial crisis doesn’t qualify because it’s about who owns the capital (creditors or otherwise) not about the actual destruction of physical capital.

    In both cases I think the market can figure it out so long as there are no significant price controls in place.

    If you actually believe in government mandated price controls for labour (ie minimum wages, awards etc) then do you also believe these prices should only every be adjusted in one direction?

  20. Boy from Flynn
    January 15th, 2009 at 18:37 | #20

    hc @ 4

    I live in a town in which Rio Tinto is the biggest employer.

    I think the company is not overly interested in workers accepting lower wages – it wants job cuts.

    Demand for it’s products is collapsing. If demand falls by say, 50% and the workers accept a 10% pay cut, the company will still be paying half it’s workforce to stand around and do nothing.

    It doesn’t want cheaper workers (well it does, but anyway) – it wants less workers.

    It cannot use the same number of workers, however cheap if they only require half the amount of ore to be mined because they can only sell half the amount of ore they recently were.

    Lower wages are unlikely to save miners jobs, though I have little doubt that the company will push for that as well.

  21. Alanna
    January 15th, 2009 at 19:25 | #21

    I question how many people really benefitted from the boom? There was rising inequlity and a hollowing of the middle. If most of the boom accrued to upper levels it may not make sense to reduce wages. Unemployment should now be the focus of government policy and there needs to be a shift away from focus on inflation through the use of monetary policy. I dont think wage cuts at lower levels or further seeking of productivity gains (without capital investment) are going to be the answer this time around – it may well depress demand further. You can only push people so far for wage reductions and productivity increases before companies need to examine where else in the organisation they are being profligate with profits. Workschoices had a wage depressing effect (or a greater casualisation effect which should have had a wage depressing effect). We have higher underemployment now, higher casualisation, less job security. Wage cuts on top will make things worse. We need investment and jobs and if it has to come from the public sector – so be it. The market is clearly seeking to depress wages further and it may take twice as long for demand to recover from this.

  22. Alanna
    January 15th, 2009 at 19:32 | #22

    Any lower wages should be negotiated with employees before they cut jobs – they should be given a chance to keep their job (collectively – this is where unions can be helpful). Too often companies dont think of this strategy.

  23. BotanyWhig
    January 15th, 2009 at 19:39 | #23

    Boy from Flynn highlights an important aspect of economic downturns, that different employers are affected differently. This supports the view that labour market flexibility is important.

    Terje’s points about when wage cuts may be necessary are true — but they are obviously particularly extreme examples!

    In real life, actually cutting wages is very rarely likely to be a sensible option.

  24. Alanna
    January 15th, 2009 at 19:45 | #24

    They implemented widespread wage cuts early in the great depression. Did it help? No. WWii helped. Massive government investment helped. Keynes should be here to help these people out. Monetarism will be next to useless.

  25. Alanna
    January 15th, 2009 at 19:54 | #25

    Thats nice Botany. The upper deciles get to gamble us into a black hole but as usual labour is called on to flexibly bail them all out. Harsh and unnecessary had they been prudently minding their own business in the first place. Capital makes the blunders and labour bails them out. Cruel and unfair but was it ever any different? Only with Keynes. So if the government (whats left of it) could put 2 and 2 together – they hold the only solution here. Depression relief projects and a bigger government. Its about time they looked at their responsibilities front on. Thos in the private sector who were making hay while the sun shone wanted to strip government down to nothing so they could pay less taxes. The government went along for the ride thinking it could save itself some costs. Do either of these groups have their eye on the economy? If they dont, they will soon be calling for the same action I am suggesting here.

  26. TerjeP (say tay-a)
    January 15th, 2009 at 20:48 | #26

    Whats left of it? The government we have today is bigger in every regard than it has ever been. It spends more per capita than it has ever spent. There are more rules than their have ever been. In what way can anybody say “whats left of it?”.

    WWII did not fix the great depression. It just allowed unemployed people to spend time shooting at eachother. Not a very productive activity.

  27. Alanna
    January 15th, 2009 at 20:53 | #27

    Terje – the government as a percentage of GDP? Do you you have the numbers as a percentage of 30 years ago? What about the proportion of people emplyed in the public sector 40 years ago versus now???? I know there were thousands of people employed as – wait for it bus conductresses. Everywhere you went on public transport you saw governmant workers. What about the migrants – they tell me when they came after the war and couldnt soeak english – they went to State rail or Sydney Waterboard or Roads to get jobs. Where are these large public employers TerjeP?

  28. Alanna
    January 15th, 2009 at 20:57 | #28

    I will look it up Terje (paricularly the employment numbers in the public sector). You may mistake the obsecne salaries and supperannuation benefits they have been paying themselves to run small committees in the public sector Terje P. Thats not public service nor is it public employment. Look at NSW state website – they proudly boast – we have over 1000 committees (and no jobs get created).
    Wow. Im afraid that has me really annoyed.

  29. Alanna
    January 15th, 2009 at 20:59 | #29

    I have a sister that has been working in the public sector for 30 years. No new young people are coming in or being hired. Yet older people are taking redundancy and coming back and double dipping by taking contracts which get rolled over. It sounds like universities Terje P.
    This isnt public sector investment at all. Its rorting the system.

  30. Smiley
    January 15th, 2009 at 21:35 | #30

    I think Terje has a point but in Australia, asset values (I’m mainly thinking about house prices here) have not come down to the extent that they have in the US. I would only agree with a cut in wages if there was a commensurate reduction in the value of assets.

    Mind you if we were to extend that sort of logic, one would also have to argue that wages should have increased at the same pace that asset prices did? From what I’ve read they didn’t?

    So to be fair, wages shouldn’t fall at the same rate that asset prices do.

  31. Nick K
    January 15th, 2009 at 22:03 | #31

    Claiming that wages should not fall in the event of a declining economy is a stubbornly obtuse position to adopt.

    If GDP declines, but wages stay the same, then wages as a percentage of GDP would be increasing. But it doesn’t make sense that wages should make up a lower percentage of the economy during stronger economic times, but a greater proportion during weaker economic times.

    Is there any time at all where wage cuts could even be considered? Ever?

  32. Smiley
    January 15th, 2009 at 22:15 | #32

    Um… didn’t you just contradict yourself Nick K?

  33. Smiley
    January 15th, 2009 at 22:18 | #33

    Unless your suggesting that there is some subtle difference between “should not fall” and “wage cuts”.

  34. jquiggin
    January 15th, 2009 at 22:29 | #34

    As regards the gold standard, Terje, I think your position is subject to the same problems as the claim that “free markets haven’t really failed, they haven’t been tried”. Maybe not, but the actually existing policies of free-market advocates have been tried and failed (my language here is an illusion to the term “actually existing socialism” used by defenders of the Soviet Union against those who argued for an alternative model of socialism).

    All actually existing gold standards have been subject to the problem that, in war and other emergencies, governments are forced to abandon gold convertibility, and then face the problem of either ratifying the inflation by converting back at a higher price or seeking to restore the previous parity. As you say, the latter choice has been a fairly reliable recipe for recession, but the former also has some severe difficulties, I think.

  35. Nick K
    January 15th, 2009 at 22:35 | #35

    Smiley, my meaning is quite clear. By “wages should not fall” I mean ‘according to people arguing here, wages should not be allowed to fall. That is, they shouldn’t be cut under any circumstances’.

  36. January 15th, 2009 at 22:43 | #36

    We also have a natural experiment that happened when the 19th century gold standard took off. Certain countries couldn’t adopt it or chose not to (see the Fall of the Rupee, which Oscar Wilde described as “sensational”). Granted, these countries were selected for being economically weaker, but by modern reasoning they should have gained external and internal trading advantages that were more than enough to compensate by remaining on a silver standard. Yet clearly they did not, over a span of several decades.

    For what it’s worth, it didn’t need hindsight to suggest reverting to a gold standard at new values. In his “The Economic Consequences of The Peace”, Keynes thought that Britain’s not doing so was a mistake, and he contrasted it to what the French had actually done, going back on values that embedded a twofold accumulated inflation. That is, it wasn’t just the young Keynes’s view, it was something that the French had already taken on board and acted on. By doing so, of course, they acknowledged past wealth transfers under inflation and didn’t reimburse the losers by reversing them, but c’est la vie.

  37. Jill Rush
    January 15th, 2009 at 22:57 | #37

    #29 Alanna you make an interesting point. During the Howard years there was some talk about reducing the size of the public service. Certainly those that delivered services to the public have been cut. However those that manage contracts for private firms delivering public services have burgeoned along with the now private staff who previously would have been classified as public servants.

    It is this latter group of people who are in great danger of losing their jobs along with workers such as described by #20 Boy from Flynn. I cannot see those at the top volunteering for this themselves.

  38. Smiley
    January 15th, 2009 at 23:08 | #38

    Nick K, so since you seem to be an expert in the rate of change in GDP and wages – during the period that GDP and wages were rising, did the increases in wages keep up with or exceed the increase in GDP?

  39. January 15th, 2009 at 23:10 | #39

    I should mention, that by now we know how to restore normalcy after wartime restrictions without disruptions and dislocations: the way Britain phased out rationing without causing huge price shocks. That involved simply increasing the ration for each item steadily until it was meaningless, and only then formally abolishing it for that item. That did require increases in actual production, of course – it was only a shock absorber, not an engine, so to speak.

    By the same token, it is probably “practical” to reinstate a former gold standard by allowing only rationed gold withdrawals and gradually increasing the limit as gold production/imports allowed (keeping going with printed money getting its value from its acceptability for tax and the multipliers on all that in parallel during the interim). It would probably take generations to get back to the old values of something like US$20 per oz and US$5 to the pound sterling (i.e. 240 Australian cents), and there is no real point since the former losers are by now long gone (“in the long run we are all dead”), but it could be done.

  40. January 15th, 2009 at 23:45 | #40

    A year or so is not a long time for a recession. It’s about the same time it takes for malinvestments to be liquidated, so that the country can get back to work with more productive ventures. So the pre-1930 recessions can accurately be described as “short and sharp”.

    On the other hand, the present economic troubles will certainly last longer than a year, partly because unproductive investments are being propped up, government is crowding out private investment, inflating the money supply, and is changing the rules every three days. These measures will only delay the pain, whereas if we had cut spending, cut taxes, stopped inflating and provided rule certainty, then the downturn would perhaps have only lasted 12 months.

  41. January 15th, 2009 at 23:49 | #41

    The real problem with Alan Moran’s piece is his advocacy of the “irrational exuberance” theory of what causes recessions. I probably prefer J.Q’s Keynesian “collapse of aggregate demand” explanation to the Moran-type explanation. At least the Keynesian approach has some grounding in economic logic.

  42. TerjeP (say tay-a)
    January 16th, 2009 at 07:37 | #42

    All actually existing gold standards have been subject to the problem that, in war and other emergencies, governments are forced to abandon gold convertibility, and then face the problem of either ratifying the inflation by converting back at a higher price or seeking to restore the previous parity. As you say, the latter choice has been a fairly reliable recipe for recession, but the former also has some severe difficulties, I think.

    Governments were not “forced” to leave the gold standard during wars. If they were then who forced them? They left the gold standard because they regarded excess currency printing (inflation) as a superior way to fund the war effort. Britians bad experience during WWI meant that in WWII they didn’t bother trying that trick. Essentially because devaluation / inflation, call it what you will, didn’t achieve the objectives that it’s advocates suggested. When you leave the gold standard the cost of borrowings actually increases because lenders now need to factor in the new uncertainty.

    It is argued often that Nixon was forced to abandon the gold standard due to the cost of the vietnam war. However he could have just given the French some gold. For some reason Nixon thought gold was more important than the gold standard.

    And your suggestion that my position is like claiming that the gold standard has never been properly tried is simply poppy cock. You chose to cherry pick a point in the 1800s when the gold standard had been abandoned and then re-estabilished at a highly disruptive price point. You have nearly a century to work with but you chose the most severe example of monetary policy failure (ie gold standard abandonment) during that century to try and make a negative point about the gold standard as a policy. This merely demonstrates bad faith on your part, not on mine.

    Other than nearly a century of experience in the USA you could also take a look at Britian from 1775 until the early 20th century so long as you took care to exclude the years 1810-1830 (approximately) where once again the gold standard policy was disrupted by abandonment.

  43. TerjeP (say tay-a)
    January 16th, 2009 at 07:55 | #43

    p.s. for the interested reader;

    Floating currencies and the gold standard (and other monetary options) have been tried on and off as policy choices for thousands of years. The notion that floating fiat currency is a modern idea is not correct. Just as the idea that the gold standard is an antiquated idea is not correct.

    If anybody wants to know when various countries and empires were and were not on a gold standard, from antiquity to modern times, then the following book is well worth reading.


  44. Chris Warren
    January 16th, 2009 at 08:07 | #44

    If you believe in the circular flow then obviously – cutting wages, cuts consumption, which only makes matters worse.

    On the other hand, increasing wages and cutting debt (the same amount), makes things better.

    Only capitalists seeking to protect their credit driven madness, propose to cut wages.

    Here they only propose to cut their own throats.

  45. Mick
    January 16th, 2009 at 09:13 | #45

    [email protected]:

    Perhaps I am in error about there being less wars in the 20th century, although my reading of history suggests that major economic powers went to war with each other and internally more often than they did in the 20th century. Maybe it is easier to look at it as pre and post-1945?

    As for wage cuts – it’s a nonsense. There are fair arguments that the cause of this crisis is precisely because of stagnant wages, where the average employee was not being paid enough to afford the level of consumption required to keep major economies going. Into the breach stepped cheap credit, which allowed people to purchase everything from overpriced homes to overpriced shoes (how can a shoe that costs $1 to make end up costing $200?).

    My theory (perhaps not a good one as I am not an economist) is that the causes of this downturn are very similar to the GD. Workers were not being paid enough to purchase the products or services they made. Capital owners placed huge markups on products and services. They then reinvested the difference in the form of credit to consumers, such that they could then buy what they were making. Simple concept, perhaps not accurate. Ultimately this would not have been achievable without compliant central banks.

  46. jmh
    January 16th, 2009 at 10:23 | #46

    “Bangla Desh would appear to be the economic model we should all strive to emulate, apparently.” – Hal9000

    Well exactly. The Third World model. AKA neo-liberalism. AKA neo-feudalism. Limited regulation, low taxes, poor infrastures, low wages for the majority, vast wealth for the few, limited support for the poor, the tired, the hungry. It’s what’s made the US the thriving economy it is today. Oh wait…

  47. Marginal Notes
    January 16th, 2009 at 10:54 | #47

    Going back to Mick at #11 (sorry I’ve been out of action), the green revolution was really a phenomenon of the 1960s and after, not the 1940s. Certainly it is true that the expansion in supply of foodgrains and fall in prices due to the GR averted mass starvation. However, as Amartya Sen has taught us, famine is a function of both food availability and access to food. Recent rising prices (e.g., due to competition for biofuels) and now rising unemployment puts the world’s ultra-poor again at risk of starvation. Fewer of the world’s poor now have direct access to food production but are tied in to employment in the global economy.

  48. Alanna
    January 16th, 2009 at 11:04 | #48

    Just got some stats for Terje

    “The profits share (based on Gross operating surplus for Financial and Non-financial corporations) of Total factor income reached 26.5% in 2007-08 and this represents the highest share recorded since 1959-60. The profits shares recorded since the early 1990s are at a distinctly higher level than those at any time since 1959-60.”

    “The wages share of total factor income remained relatively stable during the 1990s, at levels similar to those during the 1960s. The highest recorded value of the wages share of total factor income was 62.4% in 1974-75. In more recent times, the wages share has been trending down to be 53.7% in 2006-07 and 53.4% in 2007-08.”

    Some actual numbers of people employed in the public sector (then and now) would be good. So Ill look for those Terjep.

  49. Ernestine Gross
    January 16th, 2009 at 11:08 | #49

    Re gold standard and other monetary systems:

    The current financial crisis is not, in the first instance, a crisis of the international monetary system, but a problem of the instability of financial systems of which monetary policy is only an element (ie the issuance of financial securities, particularly those issued by private organisations).

    19th century economics, which has been revived in the latter part of the 20th century (eg Friedman, v.Hayek, and advocates, eg Moran) is uninformed by 20th century theoretical research in economics.

    20th century theoretical research includers but is not limited to Keynes. In previous comments I referred to research by Radner and subsequent economists in the area of ‘Walrasian general equilibrium models’. Keynes’ writings inspired what is known as ‘non-walrasian general equilibrium theory (or ‘fixed price equilibria models’).

    Furthermore, I fully concur with MH @2: “The proposition of Moran and others always neglects the broader community interest..”, adding that this is a reflection of general (Walrasian) equilibrium theory up to about 1900. From the 1930 (Wald)onward but in particular since the 1950 (Arrow-Debreu), all general equilibtrium models (Walrasians and non-Walrasian (eg Benassy)) make it quite explicit that it is the ‘interest’ (preferences) of all members of a society which count, together with natural resources (ie only 2 primitives). The distribution of ‘initial endowments’ (‘wealth’, ‘income’) matters in all these models.

    Moran seems to suggest that it is ‘sticky wages’ which are the problem of the current economic crisis.

    In my reading of historical economic data, limited as it may be, it is ‘sticky wages’ which result (only) in a local short and sharp disequilbrium (significantly inconsistent relative prices), marked by unemployment and some business failures.

    I do not know of one instance of a ‘global economic downturn’ (‘panic’, ‘prolonged and severe recession’, ‘depression’), which is not a financial market instability problem, often marked by increasing income inequality preceeding the collapse.

    It seems to me Moran is proposing a solution for a problem we don’t have at present.

  50. Alanna
    January 16th, 2009 at 11:12 | #50


    Thats the point I am making. John Howard made it possible for those in positions of control in the public sector to effectively “retire” enter redundancy, take their superannuation, and then come back on contracts (you can work as long as you want) which simply is stopping new young people entering the public service and effectively one person is being paid a double salary, whilst another is prevented from being employed at all.

  51. Alanna
    January 16th, 2009 at 12:20 | #51


    There are only 30,000 more public service employees Australia wide (wage and salary earners) than there were in 1983 (total in 1983 approx 1632000) whilst the population has increased from 14.6 million in 1980 to 19.1 million in 2000. There are lots of prior government industry sectors that have just vanished (Id bet at the ordinary worker end (eg the old bus conductresses or train station guards or ticket sellers) whilst middle managers are likely paid more to run committees and shuffle paper and costs, invent and implement user pays charges, and deal with media spin, that actually achieves very little in the way of helpful service provision to individuals or businesses). NSW state government accounts for almost all the 40,000 increase in public sector employees (and they cant get the transport sorted or the trains to run on time!).

    I note Mr Costa today in the Australian says a key thing to give back confidence is for NSW State Government to maintain its credit rating.
    I would like to ask Mr Costa – a credit rating is useful only if you intend to borrow – what better time to borrow and spend is there than now when unemployment is rising after a global financial meltdown? Its unbelievable, this mentality. But oh no – Mr Costa has his opinion piece in the Australian (perhaps Windschuttle should give him a job on with Quadrant), writing complete nonsense and probably collecting superannuation from his prior job of committee sitting.

  52. charles
    January 16th, 2009 at 13:02 | #52

    I really really can’t understand people going on and on over a gold standard. There just isn’t enough gold to underwrite the current money supply. It take very little thought or research to work that out.

    Perhaps they have a little gold at home and would love to see the price skyrocket as the limited resource is locked up in vaults.

    I have long failed to understand why anyone believes economic activity should be restricted to the availability of a scarce metal, why not ask for a currency based on Iridium and really slow things down.

    “Sorry mate; can’t do that for you because you have no Iridium back currency to pay me with”. Sound a bit silly doesn’t it, but it’s no sillier than saying things can’t be done unless you have a gold backed currency.

    The greens should take the whole thing up as a policy, they don’t mind the slightly irrational and the reduced economic activity would cut down green house gas production, probable work better than a ETS.

  53. sdfc
    January 16th, 2009 at 13:36 | #53

    The major problem with the proposal to cut wages is it is borne of the misconception that a recession means a cut in GDP. It does not. It refers to a decline in economic output, or real GDP. Outside of war Australia has not seen a decline in nominal GDP since the early 1930s.

    Why advocate cutting nominal wages in response to a decline in real GDP, all it would do is reduce community spending power with a resulting detrimental impact on demand. This is the last thing you want in a recession.

  54. TerjeP (say tay-a)
    January 16th, 2009 at 14:10 | #54


    Whilst you are looking at numbers please figure out the per capita real (ie inflation adusted) cost of government in earlier decades and then look at what we pay today. If we are paying more per capita then show me where we are getting more. If we are paying less then I’ll eat my hat.

    If the rising cost of government is due to increased public sector salaries then we should expect a reduction in headcount (ie higher productivity). However if wages rose and headcount dropped so that wages were justified through productivity then we would not expect the overall per capita cost of government to rise but merely remain static. The only real explaination for more expensive government (as measured by the per capita real cost) is that they are giving us more (ie we simply have bigger government) or they are wasting more (not a very favourable proposition). So which is it?

  55. Alanna
    January 16th, 2009 at 15:25 | #55


    You are missing my point. I was counting the physical number of jobs in the public sector then and now. I am not suggesting we immediately hire another 100,000 public servants if they are going to get dressed up in suits, pay themselves in excess of 100,000 and sit on a committee inventing new key performance indicators for underfunded overcrowded understaffed underresourced hospitals. But by all means – hire nurses, teachers, road construction crews, bus drivers (and add the capital to replace the worn out bits). The government has abrogated its role to actually run in total (not PPS style disasters) decent services and its historically important role as an employer.

    The answer is wasting Terje – because they sacked the people at the bottom not themselves.

    But Ill check those other numbers.

  56. Alanna
    January 16th, 2009 at 15:32 | #56

    Terje – really are we getting more? Go to a uni classroom. How many in it? How many back then? Whos paying (the student)?. How about the Lectuer – does he have any help? Go to a hospital – if you can get a bed. Go to train – if one comes that isnt full it will be late and graffitied and shabby. Try to catch a bus – oops full again, and again and again. Try to catch a bus in a suburban street – no services there anymore. Try to catch a ferry – oops fast ferries gone. Find a non one hour parking spot to park a mile away from bus stop to catch a bus to work.

  57. Alanna
    January 16th, 2009 at 16:00 | #57

    here is my response from 1901 to 2000 (from abs)
    as suspected declining since 1973 (about the time the mad monetarist / free market theorists started dominating economic policy which an OECD report says are not working that well


    BUT which they seek to blame on the tyranny of distance – a problem – as far as I am aware – we have always had?.

    Unlike real GDP dollar values industry percentage shares should do the job Terje just as well (from abs).

    Government administration and defence

    The contribution of the government administration and defence industry to GDP has been relatively consistent at around 3.5% to 4.5% of GDP for most of the period covered. Government’s contribution peaked at 5.8% in 1930-31, around the start of the Depression (although data are not available for the World War II years where it can be expected to be higher still). Government’s share rose steadily from 3.4% in 1960-61 to over 5% in the period 1973-74 to 1982-83. From 1983-84 the Government share of GDP fell consistently to 4.0% in 1988-89. It has remained in a narrow band between 4.1% and 4.5% since then.

  58. TerjeP (say tay-a)
    January 16th, 2009 at 16:27 | #58

    Alanna – your focused on what we are getting and concluding that government is smaller. I’m looking at what we are paying and saying government is bigger. In theory it is possible that we are both correct.

  59. Alanna
    January 16th, 2009 at 16:30 | #59

    You get me some numbers on the cost then Terje – maybe we are?

  60. Nick K
    January 16th, 2009 at 16:45 | #60

    Alanna @ 48,

    It is true that in recent decades the share of GDP devoted to profits has increased, while the share of GDP accounted for by wages has declined. But there are a number of things that would account for this, including:
    – the aging population. As more people get older and leave the workforce they no longer are earning a wage, but they may have savings invested in the economy.
    – as more work is outsourced to independent contractors, this would increase the share of the economy devoted to profits and reduce that devoted to wages.
    – the share of the economy devoted to wages during the early to mid 1970s and early 1980s was artificially high, as this was during a period where sustained wage breakouts led to a recession. So the base point is at a time when wages were artificially, and unsustainably high.

    I would also point out that these statistics actually underestimate the real returns to labour as a share of the economy. Suppose someone who owns a small shop also works there to help save on wages and keep the business profitable. The money they make counts as profit. Yet much of it is actually a return on the labour they have invested in their business.

    So some of what statistics measure as profit is, in reality, actually a return on labour rather than a return on capital.

  61. MH
    January 16th, 2009 at 17:02 | #61

    “Experience from the age of Solon at least,and probably, if we had the statistics, for many centuries before that, indicates what a knowledge of human nature would lead us to expect, namely that there is a steady tendency for the wage-unit to rise over long periods of time and that it can be reduced only amidst the decay and dissolution of economic society.”

    J M Keynes – The General Theory of Employment, Interest and Money, page 340.

  62. Nick K
    January 16th, 2009 at 17:31 | #62

    Alanna, one of the things not fully considered in your belief that government is getting smaller is the growth of the welfare state.

    In the early 1970s spending on social security and welfare represented about 22% of Commonwealth expenditures. Now they represent about 45% of Commonwealth expenditures. (I will try to find sources to verify this, but I think these are approximately right).

    So you have a situation where nearly half the federal government is now accounted for by simply redistributing incomes between different groups in society, rather than actually delivering services.

    If the welfare state continues to consume greater resources, it will tend to ‘crowd out’ other areas of government expenditure.

  63. TerjeP (say tay-a)
    January 16th, 2009 at 17:34 | #63

    Alana – not quite the timeframe that we need but take a look at the chart at the very bottom of the following webpage.

    http://www.abs.gov.au/AUSSTATS/[email protected]/mf/5506.0

  64. TerjeP (say tay-a)
    January 16th, 2009 at 17:35 | #64

    Actually I meant table not chart.

  65. TerjeP (say tay-a)
    January 16th, 2009 at 17:49 | #65

    The following webpage has some raw data from 1970-2000. See table A2. I think it is actuals rather than inflation adjusted. Assuming this is correct then you would need to inflation as well as for population to get a per capita figure.

  66. Nick K
    January 16th, 2009 at 18:06 | #66

    @ 53, I understand the difference between real and nominal GDP is that real GDP takes into account inflation to measure overall economic output whereas nominal GDP simply measures the GDP figure without adjusting for inflation.

    But I don’t see how this changes the argument about whether wages should fall in an economic downturn. If real GDP falls but nominal GDP increases, then wages should perhaps grow more slowly than inflation (i.e. real wages should fall, but nominal wages would still rise). Or if nominal GDP falls, then nominal wages should also fall.

    I don’t see how this actually changes much.

  67. Alanna
    January 16th, 2009 at 18:15 | #67

    Nick#62 says
    “Alanna, one of the things not fully considered in your belief that government is getting smaller is the growth of the welfare state.

    In the early 1970s spending on social security and welfare represented about 22% of Commonwealth expenditures. Now they represent about 45% of Commonwealth expenditures. (I will try to find sources to verify this, but I think these are approximately right).”

    Well Nick – that is a major concern of mine – if so many people need welfare it could well be because there arent enough jobs or enough hours of work available (even if they have a job).
    That is precisely my point. The government has turned its back on its previous role of being an active employer at lower levels of the labour force. If so many are needing welfare what is the economy (and economic policy) doing – sitting on its hands? Already unemployment is five times what is was in the three decades post war (five times – and that doesnt even take into account the large rise in underemployment and casual employment). Im not surprised at all the welfare bill has blown out.Id also like to know the amount of public capital formation over the past four decades.

  68. Alanna
    January 16th, 2009 at 18:22 | #68

    I also just read a survey of businesses by the ABS asking them to name the biggest impairment to innovation 2007 – overwhelming response “cant get skilled employees in any location” – overwhelmingly by a large percentage – but look what how the Government has starved Tafes and Unis! It is completely illogical. If you asked me for a policy to damage Business – Id suggest starve Tafes and Unis.

  69. Alanna
    January 16th, 2009 at 18:35 | #69

    Nick K # said
    “the share of the economy devoted to wages during the early to mid 1970s and early 1980s was artificially high”

    I know that Nick – wages multiplied in the 70s because of that horrible inflation and some wage pressure (real wages though? This is where it gets tricky) but even so wages dont seem to have benefitted from the 1990s on boom the way profits have.

  70. P
    January 16th, 2009 at 18:36 | #70

    Could not the point of reducing wages be to allow the payment of increased incentives to CEOs.

  71. Alanna
    January 16th, 2009 at 18:45 | #71


    I saw the data Terje and it looks bad but they were the boom years and we would expect a rise in tax receipts but its not long enough (the time frame). I found this link. Can you see anything more useful in here?


  72. Alanna
    January 16th, 2009 at 18:49 | #72

    Well I had a quick look Terje – I think the word is wasting – taxing us more and spending less as a percentage of GDP over time and as for public net investment (its rather pathetic).

    As I suspected.

  73. Alanna
    January 16th, 2009 at 18:57 | #73

    P#70 – I think yes – and this can come about by bigger businesses exerting pressure for de-regulation of labour markets on compliant governments by promising job creation in the future but instead rewarding managerial staff excessively (rent seeking behaviour at the top of the labour market). It all comes down to getting the blanace of economic policy right and I dont think we have had it right for two almost three decades.

  74. Alanna
    January 16th, 2009 at 18:58 | #74

    But the damage has a had a slow insidious cummulative effect.

  75. Ian Gould
    January 16th, 2009 at 19:42 | #75

    “If we are paying more per capita then show me where we are getting more. If we are paying less then I’ll eat my hat.”

    Haven’t we had this discussion repeatedly?

    – Higher expenditure on aged populations due to an ageing population;

    – more expenditure on higher education because more people are attending unis and TAFEs.

    – higher expenditure on medical services to provide for new procedures and medications (and for the ageing population)

    – higher defence spending because front-line military equipment is rising in price faster than inflation.

  76. nanks
    January 16th, 2009 at 20:02 | #76

    I’d be stunned if the government per capita expenditure had risen for higher ed (taing into account income earned) – academic salaries have fallen considerably (relative terms) over the last thirty years. Also staff student ratios have gone the wrong way (well, wrong if you care about education). A typical story would be three full time academic staff replaced by one part time staff member with an increase in student numbers.
    Of course I’m not taking into account the enormous increase in admin staff – whose job is to develop adminstrative tasks for the academic staff.

  77. Alanna
    January 16th, 2009 at 22:04 | #77

    Nanks – you are absolutely correct. larger classes, casuals in the teaching role by a large percentage, C’wealth grant expenditure has declined whilst students have risen something like 4.3 percent a year since 1988. Student staff ratios increased but still grossly understated for high volume subjects as averaged across lower demand subjects (furphy) Academic Wages down five percent over past almost decade as a percentage of uni expenses. Its ugly and the students mostly pay for these overcrowded poorly staffed noisy classrooms. Why dont they just re open the Hordern Pavilion and push them all in there with a screen. Thats the way higher ed is going. Awful.

  78. Alanna
    January 16th, 2009 at 22:06 | #78

    Ian#75 sa- more expenditure on higher education because more people are attending unis and TAFEs.ys ”


  79. Alanna
    January 16th, 2009 at 22:14 | #79

    Nanks#77 here is the link – go to time series at bottom of page for student growth


    and this link also


  80. Alanna
    January 16th, 2009 at 22:15 | #80

    link incorrect – here is correct one (go to time series to get student growth and type since 1949)


  81. Alanna
    January 16th, 2009 at 22:25 | #81

    Nanks – the sorry state of C’wealth funding of unis is here along with the decline in academic salaries (and this with substantial – huge actually – increases in students numbers when you compound it at 4% growth a year since two decades ago).


  82. nanks
    January 17th, 2009 at 06:57 | #82

    Thanks for the links Alanna – leaving academia is one of the few successful ‘big’ decisions I’ve made.

  83. Alanna
    January 17th, 2009 at 09:00 | #83

    Nanks, Commonwealth funding as a proportion of university revenue time has fallen over time – in other words universities are getting more of their revenue from overseas students and hecs and fees and charges and less from the Government but its still nowhere near enough especially (given the growth in student numbers) when class instruction overhwelmingly turns to casualisation and class sizes expand. Its disadvantageous to the student, does nothing to promote teaching experience, does nothing to attract young people into academia . Accreditation has a lot to answer for in this regard by overvaluing the research function of universities and undervaluing the teaching function and not finding the right blend between the two eg supporting new graduates into academia by providing a decent job with the right blend of teaching and researching roles while they complete their own postgradstudies (rather than casual insecure twelve week teaching stints on a breadline wage). This sort of support for further quals is the norm in many other government departments where employees are given (financial or time) support for studies whilst they are in full or part time employment . This was the case in unis pre 1990s. I believe this has contributed to increasing bifurcation between the teaching (casual) and research (employed) functions and increasingly removed researchers from the classroom (where casuals are) and acts as a disincentive to new young entrants . Its barrier to brains!

    (and as for admin expansion I wont go there – a costly layer of inconvenience that keeps academics with too few staff further sidetracked by trifles).

  84. Ian Gould
    January 17th, 2009 at 11:58 | #84

    I am about to spend some time looking for stats on Federal government expenditure on higher education.

    Before I do so, I’m goign to throw out soem general questions and observations about the reported increase in “welfare” (to employ an American expression whi9ch I’m pretty sure doesn’t actually appear in Australian budget papers and is fairly obviously used pejoratively) as a percentage of Federal government expenditure.

    1. Unemployment has fallen dramatically over the past forty years, hence any increase in “welfare”
    is either attributable to vastly higher payments to the smaller number of unemployed people or to increases in other forsm of welfare – such as aged pensions, invalid pensions and the baby bonus etc. There is at least soem anecdotal evidence that long term unemployed have been shifted onto invalid pensions.

    2. One of the major components of public expenditure back in the 70s and 80s was interest and principal repayments on the public debt. With the privatisations and debt repayments in the 1990’s and 2000’s, this component has effectively disappeared. That in itself would cause welfare tO increase as a percentage of public expenditure.

    3. Speaking of privatisation, some of the government agencies which have subsequently been privatised would probably have been included in government expenditures forty years ago. I’m sure
    Qantas and the Commonwealth Bank weren’t, I’m not so sure about other agencies like Medibank Private. for that matter, when was the Post Master General corporatised and turned into Australia Post?

    4. Another question: the Federal government claims the GST is a state tax which they collect on behalf of the states and pass on to them. AS such are GST transfers to the states included in Federal government expenditures. If not, then where GST revenue has replaced Federal payments to the states that were included in Federal revenues this would also have the effect of reducing reported Federal expenditures compared to the 1970’s and increasing the percentage of such expenditure attributable to welfare.

  85. El Mono
    January 17th, 2009 at 12:27 | #85

    While i would agree that there no point in waisting money on the middle (and up), i don’t think that there is any need for waist down the chain either. Trains run fine without ticket sellers at every train station and conductors on every chain. If we are gonna have bigger governement market -esque principles of marginal benefit should still apply. I am still sure their is plenty useful things which need to be done.

  86. Alanna
    January 17th, 2009 at 12:46 | #86

    Ian Gould. Unemployment average 1% in the decades following WW2. It rose with the inflation shock of the 70s. It rose with the depression of 81 – 83. It rose with the recession of 90-91. How can you say it has fallen over fgour decades and when the rate of underemployment (yes underemploymnent and casual positions accounts for less of a weeks work for many). To claim it has fallen for four decades is a nonsense.

  87. Alanna
    January 17th, 2009 at 13:03 | #87

    The unemployment numbers need to be considered in light of the rise in underemployment (the ABS developed a new series for this) and the way it is counted is deceptive and if you measure it as fallen for four decades – you are measuring it from the period of a high unemployment in the 1970s arising from the inflationary shock. The unemployment rate was 2% in 1967 (1% in the 1950s) rising to 5.4% in 1975 and 7.2% in 79, 10% in 1983follo9wing early 80s recession, falling again and rising to 10.9% in 1993. It has been reasonably volatile over the decades since 1970 only falling from 10.9% in 1993 to 5.1% in 2006 (but this ignores the rise in underemployment) and was much much lower than currently in the postwar period to 1970.

  88. January 17th, 2009 at 13:08 | #88

    Thanks Alanna (27, 48, 54, 58, 50, 29, 51, 55, 56, 57, 59, 67) and Jill Rush (37) for having finally challenged Terje’s incessant carping complaints (26) throughout the years about our supposedly bloated public service.

    These claims have certainly flown in the face of my own experience since I lost my job as a research programmer at the ANU in early 2004. If the public service had indeed been as bloated as Terje had claimed I would have had no problem getting a public service job by now.

    These days hundreds of thousands of formerly skilled and valued employees no longer have the openings that the public service would have once provided if other careers come unstuck. So, instead, they must languish in unskilled and low-paid occupations until their retirement.

    It is evident that defenders of our extreme ‘free market’ system will lie about the reality in order to convince those, who have been made to pay the costs of the failed ‘free market’ ideology, will blame themselves.

  89. Alanna
    January 17th, 2009 at 13:12 | #89

    El Mono
    Trains might run fine without ticket sellers and train station guards but you forget that there are two less people in a job who earn income, spend money on private sector goods and pay taxes and may be on welfare. If unemployment and underemployment is trending up over the longer term with more people earning less income from less hours in the labour force, there are negative implications for growth and demand. I dont necessarily see the train guards and ticket sellers as waste. I see the ticket machine vandalism or assaults on train stations as an external cost of not having a train guard that could be prevented by paying an income which then returns as demand for goods and services. Once paid for, the ticket machine does not go shopping each week.

  90. Alanna
    January 17th, 2009 at 13:26 | #90

    I love JQs blog but Im new. Ill get over it soon. I just would really like it if economic policy advisers actually looked at the long haul (not 10 years, not 5 years, not 2 years but actually over 40 and 50 years to see if their policy settings are working). We have shrunk the range of industry contributions to GDP. The main industry that dominates all others (financial sector) at around 50% of GDP I think (someone check) and thats the one that has just taken a king hit from the GFC. How can that be good?

  91. January 17th, 2009 at 13:38 | #91

    Apologies for the grammatical error in my last post. The concluding sentence should have been:

    It is evident that defenders of our extreme ‘free market’ system will lie about the reality in order to convince those, who have been made to pay the costs of the failed ‘free market’ ideology, that they are at fault.

    A goal for any humane decent society should be to provide everyone with a fulfilling and adequately paid occupation.

    However, contrary to what Allana writes, I wouldn’t necessarily defend every job that once existed on the railways. As an example, I would advocate free public transport in order to do away with the unnecessary expense of enclosing railway stations, ticket machines, the inconvenience to travellers, etc, etc.

    If we threw off the shackles of neo-liberal ideology, we should be able to find ways to divide the necessary work amongst the people available to do the work. So, people who lost their livelihoods selling tickets and enforcing the fare system could be offered gainful employment elsewhere.

  92. Alanna
    January 17th, 2009 at 13:49 | #92

    Terjep#65 – you never put that second link in for per capita taxation from 1970. Ive got inflation rates. Population wouldnt be hard – we could look at a few points.

  93. Nick K
    January 17th, 2009 at 13:50 | #93

    Ian Gould says “Before I do so, I’m goign to throw out soem general questions and observations about the reported increase in “welfare” (to employ an American expression whi9ch I’m pretty sure doesn’t actually appear in Australian budget papers and is fairly obviously used pejoratively) as a percentage of Federal government expenditure.”

    I have to say that it becomes a bit tiresome when people want to nitpick over the most minor details of posts, or scrutinise every word for signs of evil intent. If I had used terms like “bludgers”, “scroungers”, “parasites”, “welfare queens” etc. then I could understand others objecting. But the phrase “welfare” is a reasonable term to use.

    I believe the official term is “Social Security”. Yet this is somewhat misleading, as in most countries Social Security usually refers to programs where there is some relationship between contributions and eligibility for benefits. On this basis, the only programs in Australia that could be classed as Social Security are perhaps workers compensation schemes. The term welfare is usually used to describe programs where there is no relationship between contributions and eligibility for benefits. In Australia, eligibility for most payments (like unemployment, disability, aged pensions, sole parent benefits, carers payments) is in no way tied to contributions or previous work history. Hence they are essentially welfare handouts, rather than social insurance programs.

    “One of the major components of public expenditure back in the 70s and 80s was interest and principal repayments on the public debt. With the privatisations and debt repayments in the 1990’s and 2000’s, this component has effectively disappeared. That in itself would cause welfare tO increase as a percentage of public expenditure.”

    During the early to mid-1990s the federal government ran substantial budget deficits and government debt increased.

    In the early 1960s only around 3% of working age people relied on government income support for most of their income. Today that figure is around 17%. Yet even this figure doesn’t include all those people who receive additional top-up payments from government (such as family allowances). It also doesn’t include the increasing number of elderly, and the costs of pensions and other support.

    That the welfare state has increased dramatically in size over the past few decades (but especially since the Whitlam government) is just a basic fact. It is not something that is reasonably up for dispute or interpretation.

  94. Ian Gould
    January 17th, 2009 at 13:50 | #94


    This Business council of Australia paper appears to provide a useful overview of long-term trends in Federal government spending in Australia.

    I haven’t read the whole thing and would be skeptical of the BCA’s policy prescriptions but the overall snap-shot is interesting.

    Between 1962 and 2006 Federal government spending per person roughly doubled from ca. $6,000 per person to circa $12,000 in constant dollars.

    (Interestingly, the rate of increase went up significantly after the election of the Howard government in 1994 -see the graph on page 5.)

    In my next post I’ll look at where that additional money has gone.

  95. January 17th, 2009 at 14:06 | #95

    Is that figure correct, Allana?

    Except in tiny countries like Singapore or Hong Kong, how can a sector which contributes nothing of tangible worth, such as the finance sector, contribute 50% to a nation’s GDP?

    I suspected that the Australian finance sector was bloated, but that figure is insane.

    It seems self-evident to me that an economy that produces nothing, except for digging up ready-made mineral wealth from underneath is unhealthy and unsustainable in the long term.

    In 1942, Australia was one of the most technologically advanced countries in the world. As a consequence the Japanese Army vetoed plans by the Japanese Navy to invade in March 1942 even before their setback at the Battle of the Coral Sea (“Armed and Ready – The industrial development and defence of Australia 1900-1945” (1995) by Andrew T Ross pp408-409). (See also “Can Australia ever be self-reliant for national defence?”, “The myth of the Howard Government’s defence competence”.)

    We have since lost that technological edge, it would seem to suit the narrow, short-sighted selfish agendas of land speculators, financiers and other members of Australia’s growth lobby who have gained control this country’s destiny. (See Masters Thesis by Sheila Newman of 2002 “The Growth Lobby and its Absence : The Relationship between the Property Development and Housing Industries and Immigration Policy in Australia and France” (PDF 2.6MB) downloadable form candobetter.org/sheila and from the Swinburne University).

  96. Alanna
    January 17th, 2009 at 14:07 | #96

    I dont defend every job Daggett. I was using the example of train guards to illustrate how such a job adds more than the ticket machine at a time jobs are needed and can actually help the economy (there will always be those who dont work in their job Daggett). I do defend the need for job creation by governments as well as the private sector (jobs to actually help the private sector) and I have never subscribed to the theory that either the public sector or the private sector has any greater claim to efficiency.

    But I do quite like the idea of free public transport. So if the government wants to do something really useful now it should start employing newly unemployed construction workers and get to and build it (not 5 years announcing it and 3 years trying to get a private operator and then 5 years arguing in court with the private contractor) after which we will pay double for it.

  97. Ian Gould
    January 17th, 2009 at 14:12 | #97

    “In the early 1960s only around 3% of working age people relied on government income support for most of their income. Today that figure is around 17%.”

    Do you have a source for this or is it just one of those self-evident facts?

  98. Alanna
    January 17th, 2009 at 14:14 | #98

    Dagget#94 Ian should source data from the ABS. I wouldnt take the Business Council of Australia’s word on what the government is spending per capita. ABS or government statistics more reliable. Business lobby groups push for smaller government and less regulation and more privatisation (without delivering sufficient of the eternally promised jobs) and thats part of the problem.

  99. January 17th, 2009 at 14:23 | #99

    In regard to the supposedly increased welfare budget, it needs to be acknowledged that much of the money spent is of little value to the recipients of social welfare payments.

    An example is the stupid courses that they force unemployed people to attend about how to write resumes and attend job interviews.

    One person who ran one of these courses years ago confirmed what I suspected, that is, that the true purpose of such courses was simply to make the experience of receiving unemployment benefits so unpleasant and demeaning as to cause many to think twice before approaching Centrelink.

    On top of that there is money wasted on punitive harassment of unemployed people in order to make them go through the motions of appearing to apply for 10 jobs per fortnight.

    There have been two occasions in my life, where, as a consequence, I have not approached Centrelink and, instead, lived off my own savings.

    Let’s also not forget that the rental subsidy of social welfare payments is, in fact, largely a subsidy to landlords and not the welfare recipient and (like the first home-owners’ grant) serves to increase housing hyper-inflation.

  100. Nick K
    January 17th, 2009 at 14:25 | #100

    Ian, I never claimed that every specific figure I quoted was a self-evident fact. I merely claimed that the more general reality that the welfare state has been increasing significantly in the past few decades is a self-evident truth.

    Hence, your comment @ 97 is an irrelevant snark.

    If you don’t believe me, a quick Google search should bring up approximate figures for levels of welfare dependence then and now.

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