My opinion piece in yesterday’s Fin was about unemployment. It’s over the fold.
Unemployment hasn’t been frontpage news for some years now. The main labour market story in the last couple of years has been the emergence, for the first time since the 1980s, or significant labour shortages for some classes of skilled worker.
Despite these shortages, the number of people who are unemployed or underemployed remains very high. The official rate is above 5 per cent, but when various forms of hidden unemployment are taken into account, the true rate exceeds 10 per cent. It seems to have been accepted that a headline rate of unemployment of 5 per cent is the best we can possibly do, though such a rate would have been considered disastrous in the 1950s and 1960s.
But a run of disappointing statistics in recent months should remind us how fragile even that rate might be. Employment has been flat for about six months, and the unemployment rate is rising again. A prolonged slowdown could easily push the rate back up to 7 or 8 per cent, wiping out all the progress made since the Howard government was elected. A severe recession could push the rate all the way back up into double digits.
A characteristic feature of labour markets is that unemployment rates spike rapidly upwards, but decline only very gradually as the economy recovers. When the last boom ended in 1989, the unemployment rate had inched downwards to around 5.5 per cent over six years. It took less than three years to double to 11 per cent during the ‘recession we had to have’.
Although the economy stopped contracting in 1991, unemployment did not even begin to decline until 1994. After a reasonably promising start to recovery, the labour market performed poorly. The reduction in unemployment was significantly slower in the 1990s expansion than in that of the 1980s. Between 1995 and 2003, the headline unemployment rate dropped by only two percentage points, from 8 per cent to 6 per cent.
Fortunately, even slow improvements mount up if they are given long enough to work, and it’s been fifteen years since the end of the last recession. Most discussion of economic policy seems to be based on the premise that Australia is no longer subject to the cycle of boom and recession.
It’s not that hard to identify the crucial difference between the current expansion and previous cycles. In the past, when the economy expanded, it usually wasn’t long before a balance-of-payments deficit emerged. Governments responded by tightening fiscal policy or raising interest rates, and external balance was restored, at the cost of a domestic slowdown. If the tightening was overdone, as often happened, the slowdown turned into a recession.
By this stage in the expansion, on past experience, we should have expected a blowout in the current account deficit, followed by a contractionary policy response and an upward ratchet in the unemployment rate. This time around, the current account deficit has behaved much as usual. If anything, the blowout has been even bigger this time, though its magnitude has been masked by favourable shifts in the terms of trade.
The difference has been in the policy response. Governments and central banks now adopt the ‘consenting adults’ view under which the current account deficit (and its mirror image, the gap between national savings and national investment) is the aggregate of the individual decisions of households and corporation.The current account deficit is merely the flipside of negative household savings and massive investment in residential housing. So, rather than adopting a contractionary policy, the Reserve Bank has assumed that borrowers and lenders are responsible for their own choices.
The ‘consenting adults’ view may well be right, but if the growing imbalances in the Australian economy are not resolved by policy, they will be resolved by market forces. Perhaps this will go smoothly, but we have little recent experience to go on.
If we do experience a recession, and a resurgence of unemployment, the long expansion of the last fifteen years will look, in retrospect, like a wasted opportunity to achieve permanent reductions in unemployment.
The government’s answer, presumably, will be that its WorkChoices reforms will provide the flexibility that has long been missing in Australian labour markets. Yet WorkChoices seems to be at least as much about settling scores with unions as about improving the operations of labour markets. What has been missing for the last decade, and more, is any acceptance of a government responsibility to achieve full employment and any sustained focus on that goal.
John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland.
John Quiggin 
John, I read this and it sounded negative and a bit prejudiced. You just couldn’t say anything positive about an economy that has been expanding for 15 years consecutively or for the Government that has helped (or at least not hindered) in bringing about these changes.
5% is a great improvement over past measured unemployment rates. Unmeasured unemplyment is a problem and should be addressed but the fact that there are labour shortages in skilled areas does not seem a bad sign from the viewpoint of labour markets. Investment is strong throughout the economy.
Yes unemployment could go higher? A severe recession would make it worse, yes. What is this saying that is not almost a truism?
And would you have wanted the current account deficit to be met by contractionary monetary policy? How would that have helped employment? Hasn’t the Government’s performance been reasonably good in this respect? Alternative policies that might improve things please. You can’t just ask for a ‘commitment to full-employment’. What would you do and how would you improve on current outcomes?
Is increasing labour market flexibility bad for employment outcomes even if it does ‘target unions’? I don’t get it.
Harry, on the macro issue, the standard Swan-Salter response to a combination of external imbalance and internal balance would be demand-switching. I’ve argued in the past that expansion of human services is the most effective way of doing this. On the converse side, I think the huge expansion in housing I mentioned has added to the deficit problem by diverting investment away from the tradeable sector.
On the labour market in general, the combination of skill shortages and 5 per cent unemployment suggests to me that the market is not working that well. The government’s main responses over the last decade have been Work for the Dole, which is basically a stunt, and the Jobs Network, which has been redesigned many times and remains ineffectual.
I don’t think WorkChoices really does increase labour market flexibility – it just shifts the balance of regulation in favour of employers and against workers and unions.
I think it’s pretty widely accepted that there is a high level of underemployment in Australia, and that if classical economic theory actually works, the WorkChoices legislation will lead to some of this underemployment being soaked up. The big question is why on earth we’re actually happy to accept that one in twenty people in the workforce are not employed at all. If this were the fifties, there’d be hell to pay. So what’s in the way of returning to the ‘old days’ of 2-3% unemployment?
Let’s also make clear what this under-employment and hidden unemployment means:
– For the first time in my (not-so-short) life we can find in Australia, people whose main income comes from activities that we would normally only find in the developing world and at a level that is/was illegal under Australian law.
That is, a really extremelly precarious living rellying only on tips/charity/free food, for example: street/train vendors, street boot/shoe shine, maids, waitressing, foreign labourers/seasonal workers, sweat shops and worse kinds of exploitation, where even their ID or travel documents are retained, to keep them under a constant state of servitude.
Some of this might unfortunately have occurred in the past, but never in this scale and never before in such a concerted and organised way.
PrQ,
I notice that you missed answering Harry’s request for alternative policies and also his question “Is increasing labour market flexibility bad for employment outcomes even if it does ‘target unions’?”.
I, for one, would be very interested in some responses.
Don’t forget that Australian statistics now count anyone working as little as one hour a week as “employed”. With that kind of leeway, no wonder the figures are looking rosy.
(Clarification): rosy compared to “past measured employment rates”, as suggested by Harry Clarke.
Here are a just a few references:
– Workers treated like slaves
– Downward “benchmarking” of conditions and pay to third world standards
Most of this is not even included in the statistics, and by the time it starts to show it will have had a huge effect on our society.
And this is now becoming more and more common, to the extent that whole industries (garments, restaurants, fruit picking, some construction and trades) are being targeted by mafias that that profit by specifically import “guest workers” for such illegal purposes. The situation is so bad it is now creating such ilegal “business” opportunities.
This is the not-so-hidden intent of the IR laws: across the board strong downward pressure on working conditions and standards, and increase in income differential, where 200% salary increases are justified for those same boses carrying out these shameful despicable attacks on our living standards and all because of their repugnant greed.
Meanwhile, with all the rethoric on immigration, terror and security, this could not possibly be happening without ministerial approval, or without the gov. turning blind eye and leading the slide…
Andrew R, here’s some proactive and positive suggestions:
Compete up, not down. As any good salesperson will tell you, you do not discount for nothing (nothing is really free), and doing it for volume selling is a dangerous road, as our retail indutry is finding out. Upsell, upsell, upsell! Then cross-sell!
At a business leadership level this means looking to grow and expand rather than just take the axe and cut the fat over and over and over, even if no fat remains to be cut… Drucker used to say it was despicable that the markets “reward” the value destroying option of simply sacking people! It’s all short-termism gone crazy.
At a policy level this means playing to our strenghts now someone elses, it means investment in training and education not the lazy and innept degrading of some our world-leading advantages.
It means making it easier to start new small businesses that employ a lot of people (%wise) and not have (or at least decrease) policies/taxes that impede such transitions, eg: payroll taxes, red-tape, monopolies (telstra, awb, etc), government tendering processes that favour big donors /MNCs, etc. it means facilitating Organisational innovation, R&D, etc.
To pretend that attacking unions will invigorate the economy is simply dishonest and a lame stupid argument.
Show us proof.
I agree with Harry – the piece is long on what’s wrong and short on how to fix it.
But I can’t let Helen’s thing about unemployment pass. Helen, we have followed the ILO definition of “unemployment”, which includes the bit about one hour’s work in the last week, since the late 1960s. Whether you think that a good or bad definition, it does mean we are comparing apples with apples. Figures before the late 1960s *understated* unemployment as they were based on (post 1948) CES registrations and even (pre 1948) union records.
This (totally unfounded) suspicion that the ABS’ figures are somehow “fixed” is in the long run very dangerous to good public policy. By all means criticise, but take the trouble to learn why they are the way they are first, and don’t groundlessly impugn the honesty of the many hard-working professional statisticians who really are trying to make a better country (and no, I do not nor have I ever worked for the ABS).
As for underemployment, it’s true that it’s existence argues for more inefficiency in the labour market than the unemployment figures alone would say, but as comparable data for this from earlier periods is just not available we just don’t know whether it’s got worse or better. F’rinstance, as a boy growing up in the bush I knew people who lived on dribs and drabs of seasonal work – some of them semi-nomadic aboriginals. I doubt that their situation was accurately recorded in the stats of the time.
Carlos – when does the revolution begin Comrade and where do we sign up??
Perhaps you would be more at home in Cuba or the Peoples Democratic Republic of Korea because things aren’t going to change in a hurry here.
I don’t think that unemployment figures are apples for apples at all over the years (let alone across countries), even if the same definition of employment is used, since they don’t include other hidden unemployment schemes that have been on the increase for years, like people getting disability pensions. A better comparison would be participation rate corrected for changes in the age structure of the population.
I thought my views on alternative policies were reasonably well-known, but I’ll be happy to restate them in a full-length post soon.
One of the difficulties I feel is trying to identify all the factors in a relatively short piece (ie anything shorter than a book). For example, competing up, not cutting costs as a first response, etc, draws immediate reaction from analysts whose time horizon is three months – makes the political cycle seem positively infinite! Executive compensation tied to short term KPIs, especially the share price, prevents longer term planning to all except those companies with very deep pockets, I would think.
Do you have a paper on that human services argument, John? Meanwhile, since someone mentioned the word macro, a comment:
A combination of trade deficit and unemployment locates us in the southern region of the Swan diagram. For simplicity, let’s suppose we’re due south of the intersection, implying that aggregate domestic spending is about right, and all we need is a real devaluation to fix both imbalances. This will work by partly by increasing exports, and partly by switching demand from imports to nontraded goods (and services). I guess this is where the ‘human services’ come in: instead of buying imported Scotch whiskey we will take more karate classes, at the same time creating jobs for idle middle-aged men as instructors.
In either case, however – and this is my point, if anyone is wondering – our incomes go up and our total consumption stays the same (assuming we don’t want to cut back on investment). So whatever schemes one might devise involving devaluation and a renaissance in human services, we still need to raise the saving ratio. One way to achieve this is to kill two birds with one stone and use the devaulation to depress average wages, redistributing income to the rich, who have a higher propensity to save. But if this is not the favoured outcome, it becomes tricky. A higher superannuation contribution might be in order, or at least a higher default rate as suggested by Nicholas Gruen, which people could opt to reduce if sufficiently motivated.
The bottom line is just that any macro strategy to reign in the current account without pushing unemployment back up to 10 percent, has to deal with the saving issue. Otherwise we just hold our breath and hope the consenting adults theory is right.
I think the basic way to deal with high unemployment is via wage subsidies for the unskilled or (almost equivalently) a negative income tax.
Abolish all minimum wages and tell Ian Harper to throw his job (and his Christian religious-babble attitudes) in the rubbish tin. His position (and those pious attitudes) are unnecessary.
Training schemes and so on are useful as longer-term strategies. I support them.
I would prefer to eliminate unemployment at this stage than tax cuts but, if I have to pay taxes, I think it is better for everyone if $100 dollars to an unskilled worker is given as a $100 wage subsidy or tax allowance than an uncommitted handout.
Add these onto the Howard Government’s policy agenda and you would have the strongest developed country economy on the planet.
I think that the change to unfair dismissal laws will help. The change to the way in which the minimum wage is set probably won’t help for a long time. By law it can’t move down and welfare continues to be indexed upward, increasing the perversity of incentives.
The two things we had in the “old days” of the 1950s and 60s were:-
1. A gold standard. ie stable money. The 1970 & 1980s certainly had no such discipline.
2. Low taxes. People who worked hard could reasonably expect to fend for themselves successfully.
If full employment is the same as the natural rate of unemployment, how close is Australia to it? Can the unemployed in Australia find a job if they want one? Not necessarily the job of their dreams (how many people have that to begin with?).
James, I wrote a whole book on this, back in the 90s Work for All with John Langmore. I must admit though, it didn’t attract much attention, at least from the economics profession.
I haven’t got a fully worked out answer to your point about saving. At least in part the answer is that karate teachers don’t need much capital equipment (this is true of human services more generally) so that required investment doesn’t increase in line with income. But I think there is also some equilibrating process inherent in the shift from imports to domestic non-tradeables that I haven’t worked through yet.
“A better comparison [than unemployment] would be participation rate corrected for changes in the age structure of the population.” – conrad
I agree 100% with you on this Conrad. You will no doubt be delighted to learn that most age-specific PRs have been rising for the past decade – some of them very strongly. The main exception is prime-aged (15-44) males; that’s a bit of a worry, but it is coming off a very high base. All others are at record or near-record highs.
Harry,
the fair wage commision is not allowed to get rid of minimum wages!
Lay off Harps!
John Langmore. A great favourite of Paul Keating as I recall for good reason
Your right Homer I’ll lay off Harps. Of course I wasn’t suggesting that the Fair Wage Commission could abolish minimum wages and I doubt the Govt would see this as politically desirable/feasible anyway.
Still the idea of a lay cleric determining what are ‘fair’ wages riles me.
The people who make sense to me on this issue are those like John Freebairn calling for simultaneous reform of the social security system with something like a negative income tax. We need to protect the interests of poor workers and give them incentives to work and this does that.
DD, I’m surprised at the implied claim that participation rates for older males are near record highs. This ABS study suggests a steadily declining participation rate across cohorts, along with rising unemployment by cohort.
Maybe I’m misunderstanding the treatment of cyclical effects here, but it’s my impression that participation rates for males are well below those of the last cyclical peak in all age groups.
Income taxes and service taxes are a major trade barrier for human services.
For instance lets say your hourly rate is $40 per hour and your marginal tax rate is 50%. And lets say you are in a job (eg your a karate teacher) that allows you to work extra hours for extra income.
Now lets say it takes you 5 hours to do your tax return (which you hate doing) and you would like to outsource this to a tax accountant who can do it in 2 hours. So logically you might choose to outsource this task and work the the spare 5 hours.
5 hours earns you $200. So if the accountant charges $100 per hour its an okay deal. Until you allow for you marginal income tax rate which would mean that you actually need to work 10 hours to pay the accountants bill compared to the 5 hours you would expend if you just did it yourself.
Lots of human services such as investing, car cleaning, home cleaning, food preparation, renovating, gardening, child minding, tax accounting, car repair, education and entertaining (to name just a few) can all be done in house. We will only outsource these tasks (and hence employ others) if the terms of trade are attractive. So whether we do these things ourselves or trade our specialty service for the services of others is at the margin very dependent on the marginal tax rate we endure.
Older male participation is really interesting. The PR for 45-54s has stayed pretty flat since the mid 90s, while the 55+ PR has risen. I reckon the key to understanding this is, for the 45-54s, to look at what’s happened to the 35-44 PR (which has fallen). So the 45-54s should be seen as cuaght between the delcining PR for prime age men, and the rising one for 55+s.
On the 55+s, the interesting thing is the EP ratio. All through the 1980s and into the 1990s, the unemployment rate for this group was higher than the population average. Its now lower than the population average. Combined with a moderate rise in the PR for this group, this means the EP ratio has shot up strongly. There just aren’t anywhere near as many old men looking for work as there used to be. Rather it seems that a much bigger proportion of early retirement is now voluntary – arguably still a serious public policy problem, but a very different one from that of the 80s and early 90s.
I haven’t seen the ABS pub before (slack of me to have missed it), but on the face of it I can’t see how you can support a *monotonically* declining cohort effect from the actual cohort PRs. So I’ll read with interest.
Terje says:
You do realise, don’t you, that the accountant’s bill is tax deductible? And that the tax-deductibility kinda invalidates your argument?
I wouldn’t say Work For All was ignored. Why, I remember our friend Tom Valentine rating it ‘by far the least silly’ of three books in the mid ’90s on how to fix unemployment. One of the others was by Brian Toohey, but I forget what the third one was (did Clive Hamilton put out something then?). Anyway, I have WFA on my shelf somewhere in Sydney. I’ll dust it off when I get back.
Yes a very fair point and obviously an serious oversight on my part.
A better example instead of tax accounting might then be fixing the plumbing in the back toilet. So the example would read:-
Now lets say it would take you 5 hours to fix the plumbing on the back toilet (which is a task you would hate doing) and you would like to outsource this to a plumber who can do it in 2 hours. So logically you might choose to outsource this task and work the the spare 5 hours.
5 hours earns you $200. So if the plumber charges $100 per hour its an okay deal. Until you allow for your marginal income tax rate which would mean that you actually need to work 10 hours to pay the plumbers bill compared to the 5 hours you would expend if you just did it yourself.
I guess I am part of a small minority in thinking that it will be a grand day when Government’s no longer have “fixing unemployment” as an objective.
If anthroplogists are to be believed folk in some hunter-gatherer societies met their needs and wants through only a couple of hours labour each day.
I look forward to a time when shrinking employment and expanding leisure becomes the major Government- and community- objective.
Terje, your argument boils down to: If I didn’t have to pay tax, I could buy more goods and services.
Yes, we know that already. If you’ve got some deeper point to make, make it.
Terje,
Your theory of employment generation through outsourcing.
Each couple incorporates 2 teeth brushing businesses. Corporation A1 brushes the teeth of Corporation A2 at a price and with conditions as described in their AWAs. Teeth brushing services provided amount to 1 hour per week. Unemployment would converge to zero. Now, you say this job creation through entrepreneurial activities that involves outsourcing is prevented (‘market distortion’) because of personal income tax and services tax (GST).
Please let me know where I have violated any one of your conditions in your theory.
Now, lets look at your example for motivating income tax cuts and cuts in services tax. I’ll take the government sector out (ie zero taxes)
Your example of someone working an additional 5 hours (possibly at an extraordinarily boring job) to buy 1 hour of accountancy services brings out a problem with ‘services’ – some of them are too expensive relative to others. Those on relatively low incomes (and potentially very boring jobs) might act exactly contrary to what you want, namely instead of working an additional 5 hours, as you want, they may wish to work fewer hours than what they are currently working ‘in the market’ to have time to provide services ‘in-house’. (elementary economics: opportunity cost).
I wonder how long it will take for business lobby groups to learn that the optimal strategy is not to lobby.
James Farrell Says:
This is the experiment currently underway in the US. I can’t say that I think it’s been successful so far. It’s a novel variation on the “trickle down” and “Laffer curve” stuff, but it still falls in the “voodoo economics” camp.
“I look forward to a time when shrinking employment and expanding leisure becomes the major Government- and community- objective.”
I believe that’s how it works in Germany.
Avaroo, the USA (and the Allies) deserve credit for having written or approved or both (details are left to the historian) a constitution for the Federal Republic of Germany that reflects the humanity and rationality of the prevailing social, economic and political thinking at the time. Perhaps the USA would like to look at this constitution to remind itself of the advanced thinking it used to show to the world and to reorientate itself for the better of its citizens and the rest of the world.
SJ
Premise 1: Richer people in general save a higher proportion of their income than poorer people. Premise 2: The rich get a higher proportion of their income from profits than do the poor. Conclusion: A redistribution of income from wages to profits raises the aggregate saving ratio.
Which part of this reasoning is related, even remotely, to the Laffer Curve?
(The Laffer Curve, insofar as it is a proposition, says that a reduction in the income tax rate, via its stimulus to effort, will increase the tax base by a greater percentage. As for the trickle down effect, I never really knew what that was. )
And which part of it is voodoo economics?
No one thinks that the distribution of income is the only thing that affects the saving rate. The recent decline in the overall US household saving rate is largely a consequence of reduced saving by the very rich. This doesn’t alter the fact that more is saved from profit than from wage incomes.
Ernestine, Germany’s unemployment situation isn’t something the US would want to emulate.
Wouldn’t the removal of payroll taxes (replaced, say, by a carbon tax) do immediate good things for employment?
From those who think that the IR changes will make a difference to employment, I’d like to know why this is so, in contradiciton of the BCA and Treasury, who try as they might couldn’t find any convincing evidence for such an effect.
Avaroo, contrary to your apparent understanding, there is nothing in the German constitution which says that Germany has to have unemployment. On the other hand, if the USA is happy having working poor then this is presumably fine with those who don’t have to live there.
Who is talking about the German consitution? The subject is unemployment. And the fact is, we wouldn’t trade places with Germany when it comes to unemployment. Nor , I would guess, would Australians.
So, everybody is happy.
And, Milton Friedman has acknowledged (in the last paragraph) that things aren’t quite the way he used to say they are. Does anybody know why Friedman thinks the problem he has discovered hasn’t been discovered by others quite a while ago?
http://www.digitalnpq.org/archive/2006_winter/friedman.html
>So what’s in the way of returning to the ‘old days’ of 2-3% unemployment?
For one thing, the fact that on average people are more affluent and more highly skilled and therefore quite rationally choose to be more selective in the jobs they accept.
“So what’s in the way of returning to the ‘old days’ of 2-3% unemployment?”
I would give a different answer than Ian. Those rates of unemployment were the exception rather than the norm. High unemployment has been commonplace since the start of industrialisation.
My bet is that technology, like computerisation, will destroy old modes of employment faster than new modes of employment can be created.
Factors that will delay- but not curtail- this trend include an aging population and the ongoing creation of low pay, low security, casual and part time McJobs. Howard’s IR “reforms” will ramp up the latter of these two factors.
James Farrell Says:
Well, like I said, and as you ackowledge, the current US experience doesn’t support your premises or conclusions.
The definition of Voodoo Economics is “Based on unrealistic or delusive assumptions”, so that part fits.
The relationship between your statement “redistributing income to the rich, who have a higher propensity to save” and the earlier versions, variously termed “voodoo economics”, “supply side economics” and “Reaganomics” should be obvious.
“The supply-siders were influenced strongly by the idea of the Laffer curve, which suggests that lowering taxes can raise revenue by causing faster economic growth. They pointed to the tax cuts of the Kennedy administration in justification. [2]
This led the supply-siders to advocate large reductions in marginal income and capital gains tax rates to encourage allocation of assets to investment, which would produce more supply (Jude Wanniski and many others advocate a zero capital gains rate). The increased supply would then lower inflationary price pressures because of competition and an improved goods to money ratio, hence the term “Supply-Side Economics”.”
You use the word “savings”, they used the word “investment”. But the basic theory is the same in both cases: reduce taxes on the rich, and magical results will appear. The experimental evidence is also the same in both cases: it refutes the theory. The actual result is increased consumption, not savings or investment.
P.S., James, it’s worth noting that the Wikipedia article I linked to is in dispute, and has been for about two years.
The dispute is due to none other than our homegrown economic genius Terje.
Comrade Razor, did you wrongly asume I was a communist because I quoted (or paraphrased) that famous marxist, neo-chavista and anti-corporate fanatic Peter F. Drucker ?
You could not be further from the truth. I know a little bit about capitalism as I’ve managed many stores and businesses, from retail, to hi-tech, to luxury goods and hospitality, hence a few of my suggestions. Go back and read!.
If my humble suggestions are not original or not applicable at a policy level, at the very least all came from actual business experience.
Or can you dispute the simple references I provided. Or the fact that fot the very first time in my life I saw in the last week: street shoe-shine men outside 2 different Sydney train stations (City and West), saw people selling pens and another one selling lighters, for a few bucks in the street (CBD). Late last year I even saw someone singing in a trains for tips, and onother fellow selling nick nacks, etc.
That only used to happen in poor developing countries, not in Australia.
SJ
The reasoning connectng profit income and saving has absolutely nothing to do with supply side economics or the Laffer Curve. It’s an absolutely standard argument dating from Adam Smith and the classical economists, revived in the 20th century by development economists, and famously applied to the analysis of advanced economies by Keynes, Kalecki and Kaldor. These three are the polar opposite of supply side economists – they thought that wage cuts would cause unemployment by reducing aggregate demand.
You are simply mistaken. If you really want to persist, then at least address the analytical question itself. Tell me what you think is the effect on average saving of a regressive shift in income distribution. Please don’t just say it’s obvious – that’s exasperating.
James Farrell, I just re-read your discussion with SJ and it all seems a bit unclear.
Your premise seems to be: just pass more of the pie to the rich since they will eat less of it and save more of what’s left. Then the average of that across the whole economy should be greater savings. – Please explain again if I didn’t get it.
That’s almost standard “trickle down” economics. Saving rates are a bit more complex than that, depending not just on income levels or rates of return but also on many other things like cultural factors, average age of population, policy settings, like compulsory super funds, etc.
John,
I think your response to James Farrell is a bit weak. Savings need to rise to deal with the imbalance. Karate teachers’ capital equipment indeed! Sounds like a fairly weak effect – even if it’s generalised over human services.
Meanwhile, here’s what Howard’s workplace reforms really are trying to achieve, more of this: CEO pay up 564%
And here’s the BCA’s laughable BS reply: CEO wages boom healthy: BCA
best talent? bwaaahaahaahaaaaaaaa!
Shorten’s beautiful comeback to the BCA is also a must read, from same article:
Yes, Carlos, you’ve got it, which is not surprising, since it’s a very straightforward proposition.
By contrast, trickle down economics is so vague and mysterious (to use SJ’s term) that I wouldn’t waste any time discussing it. Supply side economics, on the other hand, is pretty simple too: it’s about cutting taxes (and maybe wages too) to boost incentives and stimulate supply. But nothing I said had anything to do with supply. It was about reducing consumer demand. The context, you may recall, was the problem of how to reduce unemployment without aggravating the current deficit. I did not actually advocate the strategy of cutting real wages, if that’s what you’re worried about. I’d rather increase superannuation contributions.
And yes, the average household saving rate depends on lots of other things too, which is why it’s been falling in the US despite the worsening income distribution. That’s what I said in my first reply to SJ.