The fallout

Back in November, I observed that Australia’s economic situation felt something the opening of Nevil Shute’s 1957 novel, On the Beach, where a nuclear war has devastated the Northern Hemisphere. Australia has not been hit, but a lethal cloud of fallout is gradually drifting southwards.

The fallout has certainly hit now. Huge job losses are being announced across the board, but particularly in the mining sector, which was booming only a few months ago. The government is already contemplating radical action to respond to the likely withdrawal of most foreign banks from our financial markets, and it needs to be similarly radical in its response to the imminent collapse of the labour market. For now, I’ll restate what I wrote in November, hopefully with more to come on this topic

Job creation gets a bad name from silly projects exemplified by the (apparently apocryphal) case of ‘painting rocks white’, so they tend to be a last resort. But the alternative of wage subsidies is least effective during the initial contraction phase of a recession, when employers are cutting back or freezing their staff numbers.

It’s precisely at this time when some well-timed projects could do a lot of good. In this respect the recently-announced assistance to local governments looks like a good idea.

Finally, while there are good reasons for governments to pick up the private sector slack as regards infrastructure investment, it’s important to remember that the days of large gangs of workers swinging picks and shovels are long gone. Physical infrastructure projects have many potential merits, but large-scale job creation is not among them.

The biggest employment gains nowadays come from expanding the services sector, and particularly human services such as health and education. The financial services sector has also been an important source of growth since the 1970s, but the jobs being cut there now are unlikely to return for some years, if they ever do.

24 thoughts on “The fallout

  1. The most compelling argument for undertaking more public works projects during an economic downturn is the fact that a lot of infrastructure projects have to be undertaken at some point anyway.

    Given that is the case, it makes more sense for governments to undertake these projects at a point in time where there is some excess labour supply, rather than undertaking them at a time of strong economic growth and labour shortages when any increased demand for labour is likely to fuel inflation.

    A combination of tax cuts and some infrastructure spending would probably do more good in terms of helping the supply side of the economy than the government’s recent handouts.

  2. John,
    I’m very interested in your claim that “the biggest employment gains nowadays come from expanding the services sector, and particularly human services such as health and education”.

    Is it possible to expand on this point? On what basis can you claim that a dollar spent in the services sector will have greater implications for employment?

    Note: I want this to be true, I’m just trying to chase some sources in order to use this argument on behalf of my employer

  3. John, according to the Couriermail today your average Joe Blow is now worth about $231,000 down 9% from a high of $250,000 in September 2007. If this goes unchecked then we are no more a lucky country.

  4. Matt, I supported this claim using ABS data in

    Quiggin, J. (2000), ‘The public sector as a job engine’, in Bell, S. (ed.), Unemployment Crisis: Which Way Out?, Cambridge University Press, Cambridge. Key para (dollar values will be out of date, but qualitative result won’t)

    ” The human services sector is more labour-intensive than the economy as a whole. Between 75 and 80 per cent of final expenditure in the human services sector is allocated to wages and salaries, compared to only around 40 per cent of private final consumption expenditure. Given an increase of $1 billion of expenditure in the human services sector, about $750 million is allocated to employment, generating about 25 000 additional jobs at average wages of $30 000 per year. (Average wages are somewhat higher in the public than in the private sector. However, this difference is primarily due to the higher proportion of full-time jobs in the public sector.) By contrast, each $1 billion of private final consumption expenditure is associated with about 13 000 jobs. Hence, an increase of $1 billion in human services expenditure, and a corresponding reduction in general consumption expenditure, would be associated with a net gain of 12 000 jobs.”

  5. Re
    “Job creation gets a bad name from silly projects exemplified by the (apparently apocryphal) case of ‘painting rocks white’, so they tend to be a last resort.”

    Well actually there is case for making direct job creation first resort. Didndt Keynes suggest the government could pay people to dig holes in the ground and fill them in again in circumstances like this (a collapse of employment).

    What really mattered is not what they were employed to do but how they spent the income from the wages. The income went to someone else and perhaps kept another business afloat that may have been facing collapse. Its the multiplier effect of wages paid for digging holes that counts.

    However, if you are going to employ people to help the economy why not make them socially useful jobs eg a recreational park at Lane Cove was depression relief project. It has roads and stone walls and picbnic areas levellled along the banks of a river. It provided about 40 years ofr intense recreational use and a some other business like park maintenance and a canoe hire and shops along the river and charged entrance fees for use. It proved immensely poular UNTIL the Lane Cove River became pulluted from factories in the North Ryde Area and runoff from urban development.

    How about a clean up the river project and get the kids back in the water (swinging from tyres and ropes and trees – oh lord – cant you just see all the bureacrats hiding and ducking and weaving at the thought of public liability insurance?)

    I hate the insurance companies – they are complete killjoys.

    Well its a good example of what would have seemed like “painting rocks white” anyway. It would still work.

  6. Gday Professor Quiggin.

    That’s an interesting point you raise about infrastructure. That would be correct, a single D12 now does the work once done by a hundred men.

    The thing that I can see though is that that is precisely the type of work that large numbers of jobs are currently being lost from. Hundreds of thousands, perhaps half a million jobs in the mining and resource sectors and the many industries that service them employ labourers, machine operators, plant attendants, electricians, welders, fitters and mechanics, manufacturing workers etc. These jobs are being lost hand over fist and these are exactly the type of workers needed for infrastructure projects.

    I doubt that many of these would ever slot easily into the service sector.

    I certainly do agree with expanding the services you mention though.

    Just a thought.


  7. I don’t understand it. If a million dollars is spent on a project, where does it go if it does not go into employees’ pockets?

    Suppose one $1m infrastructure project employs rows of men swinging picks and another $1m project employs digger robots. Who gets most of the dough in the second case? Presumably the robot supplier – who employs people building digger robots. So what’s the difference?

    If the robot was built in Japan then the expenditure is stimulating Japan’s economy, not ours. So does that mean that high-labour expenditure is a sort of disguised “buy Australian” program?

    I have an uncomfortable feeling that there will be a simple answer to this simple query – and I won’t be able to understand it.

  8. #7 the robot supplier may be one man making most of the profits but if he eg plonks the surplus in his safe or in an empty holiday house what profit is it generating? ie not being ploughed back into new business or direct job generation. Surpluses can be removed and be relatively idle (I wont say completely idle because nothing is eg the money paid for nan artwork goes to a gallery owner) but its a question of the percentage that will be consumed and the percentage that will be saved (leaked). We all know the poorest have the highest average propensity to consume and this is the powerful effect of job creation for the unemployed or at direct service levels.

  9. #7 Mike – in theory yes the imports will stimulate Japans economy and shrink ours but in a globalised economy its supposed to work out for the best in the long run and we (instead of making robots) grow wheat instead in which we may be more efficent assuming all potential robot manufacturers can easily switch to being wheat growers (its that part of the global argument I have problems with – we could just end up with a lot of sticky unemployed robot manufactuers who have no clue where to go, dont want to move because their kids are in school, cannt move because they are unemployed and cant afford to take on the necessary new risk of being a wheat farmer and anyway the bank wont loan them the money because they have no income). Its the last part IM hazy on as regards free market economies and sometimes I think the long run would be a very long time coming.

  10. Yes. On reflection I suppose the robot maker will not employ anyone but just reduce the size of the inventory of surplus robots and use the money to pay down debt. If the money is to stimulate it has to go where it will be spent.

  11. 12# And fearing the bankers Robot Boss is perhaps going to Hawaii instead of a round world trip this year, drinking more moet and less grange, and tucking any profit away for the dreaded call.

  12. Alanna at #5, your Keynesian anecdote reminds me of the time I saw two workers (blond males), one of whom was digging holes while the other followed behind filling them in. When I questioned them they explained that there used to be three of them in the team but the guy who planted the tree seedlings had been sacked. Does this suggest another form of public investment with high job-creation potential – environmental restoration works?

  13. Well Marginal as Keynes seemed to imply, even though the two blond diggers and fillers were useful, it would have been enhanced by the addition of a tree supplier and the positive externalities of some greenery making others feel better on their way to look for jobs.

  14. Hmm, the prof must be too busy to answer.

    Marginal notes @ 13,

    Forgive my bluntness but that little anecdote sounds like marginal horsesh*t to me.

  15. The problem with using deficit financing as a means of stimulating the economy is that ultimately the deficits have to be paid for in the form of higher taxes or reduced expenditure sooner or later. So any economic stimulus must be paid for by an economic contraction down the track.

    This is not to say that budget deficits are never warranted. In some situations they are. But overall they are over-rated as a policy tool.

    One question to ask is whether the government in future is going to be in a stronger position to produce surpluses to pay for today’s deficits. Given the aging population, there will be a negative impact on future national budgets of reduced tax revenues and higher expenditure liabilities. So it will be even harder for future governments to deliver a strong bottom line.

    The problem with using large deficits to stimulate the economy is that it creates the illusion that governments can simply prop up the economy without anyone really having to invest more effort in getting things going, when in reality this kind of economic stimulus is unsustainable because governments can’t keep borrowing forever.

  16. Boy from Flynn, you may be right about the anecdote but the question remains – is there scope for increased environmental expenditure that would be relatively labour intensive? For example, the Queensland Government has assessed that the impact of land-based pollution on the Great Barrier Reef is still critical. Is there a swag of projects (gully stabilisation, riparian replanting, etc) that could receive increased funding and achieve desirable environmental outcomes while absorbing some of the semi-skilled rural labour you mention?

  17. I actually think its a good idea Marginal except for the fact that we have health systems in disarray and and education system starved of funds. But – we will need jobs on the ground and government expenditure should shift now from pouring yet more money into a liquidity trap to, as you suggest labour intensive strategies. If there is abundance of semi skilled unemployed regional labour then your solution sounds sensible to me. In fact I could think of a great environmental in itiative. Buy back and re dig the Cubbies and similar operations, channelled off water allocation back into the river.

  18. Currently we create new money by lending money we do not have. We could create new money after we create a new asset.

    Currently we redistribute money by taxing profit then distributing benefits from some of the taxes.
    We could redistribute wealth by giving zero interest loans to be invested in infrastructure assets and pay the loans off from taxes on profits.

    So why not give a fiscal stimulus by giving frugal users of mains electricity and/or the poor zero interest loans that must be invested on renewable energy infrastructure.

    This will create new money that is backed by a new asset. It will distribute the money efficiently through a market place. Enough loans and it gives the required fiscal stimulus.

    It will make renewable energy cheaper than fossil burning energy because it removes interest and repayment financial costs. $20 Billion per year for 10 years gives Australia zero net emissions.

    This will solve the credit crisis as it creates new money for the rest of the economy without the need to create more credit. It will reduce greenhouse gas emissions without increasing the price of energy.

  19. Relying on the service sector is a nice idea but for complicated reasons will not work.

    However it has a placebo effect for public policy makers and labourite politicians (and their mates in the unions).

    While there is to be an expected development to a service economy, this reduces the balance between work and investment. Service workers tend to have very low wages at one end (nurses aides) and very high wages at the professional end (architects).

    Government modelling (Bureau of Industry Economics) found that the amount of new jobs was very poor compared to new revenues. For example $18 billion (1994) dollars equated to 254,000 jobs.

    “Intelligent Exports”, AUSTRADE, 1994, pg14, isbn0642216010

    $18 billion of new revenue should have created over 300,000 manufacturing and agricultural jobs.

  20. 6 and 16, As I said, there are some good reasons for pursuing infrastructure projects. But I think the recession will hit jobs across the board over the next year.

  21. About that anecdote, the Italians have a saying “se non è vero, è ben trovato”, which very freely translates as “if it isn’t true, it ought to be”.

  22. I found under your Environment section while surfing your blog the following gem and can’t understand why it didn’t occassion any discussion, considering the importance of the topic. If the contentions made are valid then this available technology would solve our emission problems, not least the Yallorn Valley smog.

    Danny Stewart Says:
    November 24th, 2008 at 6:28 pm
    John Quiggin,

    I am a retiree with an interest in the energy debate. Your blog was mentioned on the radio so I had a look. Here is my reaction to the brown coal debate it you are interested.

    The history of coal is that it has been burnt for centuries. In the latter part of the 19th century it powered steam ships and the railways, drove industry, heated homes and provided gas for heating and light. When the automobile industry started, petrol was made from coal. Coal made pharmaceuticals, fertilisers, dyes, tars and industrial chemicals. Coal has many, many applications but when it came to burning coal the process has been the cheapest and easiest. This lead Professor Striner to say………

    “Coal, as it is and has been consumed, is a waste of a natural resource. Coal should not be burned in its raw form but should be so processed that it is utilised in the most efficient and economic manner possible”

    These words were first penned in 1951 by Professor Herbert E. Striner and appear in his 1979 book An Analysis of the Bituminous Coal Industry in Terms of Total Energy Supply and a Synthetic Oil Program. Arno Press at page 184.

    Coal was used efficiently in England in response to a tragedy.
    London had more than 4000 deaths due to smog in 1950 and responded in 1956 with the Clean Air Act.

    In compliance with the Act a smokeless fuel based on Thomas Parker’s Low Temperature Carbonisation Process developed in 1906 was produced. It was called Coalite and I believe is still available. There were different brands of smokeless fuel. I do not think pre-cleaning coal was practised elsewhere although British smokeless fuel was exported to many countries.

    Other similar processes have been devised. The cleanest and most efficient method from available information is the Karrick Process from the United States. The various technologies are available but not used.

    Burning coal directly to produce electricity is about 30% efficient. There are many ways to increase the efficiency, and it is quite possible to double, if not treble, the efficiency. This does not reduce the CO2 output per ton of coal, but halves the CO2 output per unit of power, and allows other toxic emissions and particulate matter to be captured.

    Strangely there seems to be no interest in the efficient use of coal as an interim method of reducing CO2. There seems to be no realisation that we could half our fuel bill, increase the value of our exports, and provide China with not clean but smokeless coal which would make their cities smog-free. We could do all this and incredibly obtain oil as a by-product. Oil that can be refined into a cheap reliable supply of petrol, aviation fuel and diesel.

    Coal, even brown coal, is the eighth wonder of the world. We have not yet learnt the value of its efficient use. Instead we invest in schemes that burn coal in pure oxygen and try to sequester CO2, both horrendously expensive and neither sustainable.

    Coal is not the problem, we are. If we used simple proven methods of burning coal efficiently we could meet the 2050 targets in 2020.

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