It seems quite likely that we will soon see the introduction of a wage subsidy along the lines of that announced by Boris Johnson (himself now testing positive!) in the UK. That is, a payment to employers equal to 70 or 80 per cent of workers’ pre-crisis wages, in return for keeping them on for some period. That would be better than doing nothing beyond what has already been announced, but I have two big problems with it.
First, it is paid to companies rather than workers. The ACTU is touting this as benefit, on the grounds of administrative simplicity, but I suspect that there is lots of potential for abuse through complex corporate structures. Second, it creates essentially arbitrary distinctions between workers. If you happened to work for a company that closes and stays closed, or if you were already unemployed you are out of luck. A final issue (on which opinions may differ) is that the benefit depends on previous salary, rather than being the same for everyone.
I’m thinking about an alternative model. Rather than paying money directly to employers, we should allow recipients of benefits like Newstart to use their benefit as a wage subsidy, either with their current/most recent employer (this would be specific to the pandemic emergency) or with a new employer. This would give workers more freedom and more agency, and could potentially form part of a Jobs Guarantee, which is, I have argued, the natural complement to a Guaranteed Livable Income (the term now being used by advocates of BI/UBI/GMO schemes in Australia). In particular, it could be sustained beyond the current emergency, which is not the case for the wage subsidy ideas.
There are plenty of issues to be addressed in the long run version of the voucher idea, such as the problems of additionality and churning (ensuring that the employer is creating new jobs, rather than replacing existing workers with voucher-holders). But such issues have been addressed in other contexts, with some success.
The coronavirus crisis is very different, at least in its origins, from the Global Financial Crisis. Both differ in crucial respects from other crises in living memory, notably including the Great Depression and World War II, as well a string of severe but not catastrophic crises that have affected the global economy and society. But thinking about them all together brings home the point that major economic crises are quite common events. The crisis of the past took each took between five and ten years to resolve. Even if the current crisis is shorter, we can draw the conclusion that crisis of one kind or another is not an aberration, but a regular occurrence in a complex modern society.
What they have in common is that the result in a need for urgent government action. The greater the capacity and willingness of governments to act to protect society from the economic damage associated with such crises the better, in general, the outcome has been.
The most immediate requirements for dealing with a crisis are a strong and comprehensive welfare state, and strong protections for workers. In the aftermath, we need a substantial economic role for government, including control over infrastructure and financial enterprises and public provision of services like health and education. In short, we need socialism.
(More to come soon!)
The Guardian has a number of short pieces from economists on the likely economic effects of the coronavirus, and what should be done about it. Here’s mine
The government has finally recognised the correctness of the Rudd government’s response to the GFC
The Australian economy was slowing even before the bushfire catastrophe and the arrival of coronavirus. The economic costs of the bushfires, including damage to property and infrastructure, long-term health effects of smoke exposure and ecosystem destruction were massive, but the main effects on GDP will be felt by the tourism sector. The damage to Australia’s international image from widespread vision of the fires, accompanied by critical commentary to the effect that, as a climate laggard, we have brought this on ourselves, will be long-lasting.
The arrival of the coronavirus, just as the last bushfires were extinguished will have a greater short term impact on economic activity, almost certainly resulting in two or more quarters of negative growth. With an underlying growth rate of 0.5% per quarter, a 5% contraction in the 10% of the economy most exposed to the effects of coronavirus would be sufficient to reduce growth to zero.
It appears that the government has finally recognised the correctness of the Rudd government’s response to the GFC, and will follow that path, with some marginal attempts at product differentiation. It is likely that the effect on the budget balance will be substantially greater than the $10bn currently being discussed, and that the recent decline in the ratio of public debt to GDP will be reversed. In these circumstances, the massive tax cuts for high income earners, legislated for 2024-25 will probably prove unaffordable.
Scott Morrison’s total paralysis in the face of the bushfire emergency gave rise to the most convincing excuse for his recent disappearance – he wasn’t doing anything anyway, so why shouldn’t he go?
Part of his problem is that any serious discussion of the problem involves climate change, and even one pull on that thread would risk unravelling the shroud of deception he and the rest of the right are sheltering beneath.
But surely Scotty from Marketing could come up with a campaign that appeared to take action on the bushfires themselves without doing anything about the underlying cause. There’s another factor that hasn’t been mentioned, as far as I can see.
What credibility the government has is tied to its claim that this is the year we will return to surplus for good. The mid-year outlook makes this pretty shaky, projecting a $5 billion surplus this year and $6 billion next year.
The economic impact of the fires is going to be at least as big as that, and the cost of a comprehensive program to respond to them even more. Property damage must be well into the billions (for comparison, the 2011 floods in Queensland were estimated to cost $10 billion), and the loss of business, particularly in tourism, much more than that.
Think of what would be needed for a basic program responding to the new normal (that is, normal, until things get even worse in the future). That includes payment of volunteer firefighters, massive new purchases of firefighting equipment, reequipping the defence forces to make them more useful in emergencies like this, and replacing damaged public infrastructure. It’s obvious that $5 billion a year would be little more than a down payment.
Until this particular element of reality penetrates Scott and Josh’s bubble, nothing serious will be done.
Looking for a different story in the business pages of The Guardian, I happened across a headline stating The men who plundered Europe’: bankers on trial for defrauding €447m. That attracted my attention, but the standfirst, in smaller print, was even more startling
Martin Shields and Nick Diable are accused of tax fraud in ‘cum-ex’ scandal worth €60bn that exposes City’s pursuit of profit
For those without a calculator handy, that’s about $A100 billion.
I think of myself as someone who pays attention to the news, but I had missed this entirely. Google reveals essentially no coverage in the main English language media. There’s a short but helpful Wikipedia article and that’s about it. The scandal has been described as the ‘crime of the century’, but it’s just one of many multi-billion dollar heists, with the GFC towering abover them all.
It remains to be seen how the trial will turn out, but it’s already clear that, as usual, the banks have got away with it. The bank most closely involved in the scam, HypoVereinsBank in German has set aside €200 million euros to cover its potential liability. That’s less than 1 per cent of the tax avoided or evaded (the lawyers will be fighting out which, for some time, but the effect on ordinary citizens is the same).
The crucial point here isn’t the failure of the law to punish wrongdoing.
What matters is that crooked deals of this scale suffice for a complete explanation of the growth of the global financial sector since the 1970s. The point of the financial sector is not to allocate capital more efficiently, but to undermine the regulatory and tax systems that are supposed to make the economy work properly. Unsurprisingly the huge financial boom has been accompanied by miserable productivity growth, repeated business collapses and massive growth in inequality.
The only way to fix the problem is to shrink the financial sector to a tiny fraction of its current size, and tightly regulate what remains. The rational route to achieve this would start with the kinds of reforms being proposed by Elizabeth Warren. But we may be stuck with a messier path, in which courts tire of giving slaps on the wrist to recidivist banks and start shutting them down.
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I wasn’t expecting much of a reaction to my submission to two Parliamentary inquiries into nuclear power, in which I advocated imposing a carbon price (set to rise to $50/tonne over time) and, conditional on this, repealing the existing legislative ban on nuclear power.
Over the weekend, though, I heard that Aaron Patrick of the Fin was asking a few people about it. Given my past history with Patrick, I was expecting a gotcha hatchet job, or worse.
When today’s Fin came out, I was surprised to learn (via Twitter and email, as I don’t subscribe), that the Fin had run not one, but two articles about my submission, both by Patrick. The first that came to my attention was the expected gotcha, focusing on the recommendation to repeal the ban, while softpedalling the carbon price to the point of near-invisibility (just enough of a mention that he could deny having ignored it altogether).
The second, though, was a reasonably accurate and supportive summary of the proposal (a few digs at me, but I have a thick skin). Money quote:
A carbon price would delight the left, and would be unlikely to upset most of the business community. Small-scale nuclear reactors could be framed as a nascent technology that might not ever happen – giving its opponents a short-term political victory in the long-term national interest.
A confident and pragmatic centre-right government could seize the opportunity to alter the path of Australian economic and environmental history – from one of the worst emitters of carbon, based on population, to among the lowest.
As I’ve said previously, anyone who seriously believes that nuclear power should be adopted as a response to climate change ought to endorse this proposal. I find it hard to imagine that the nuclear boosters in the LNP are in this category, but if they are, here’s their chance to put their hands up.
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That’s the headline for my latest piece in The Conversation. Probably a better choice than the one I supplied.
I’ve been busy for the last week doing events for Economics in Two Lessons, so I didn’t have time to take part in the discussion arising from Harry’s post on alternatives to Sanders’ proposal to wipe out college debt.
In one way, that’s a pity because the key point of the book is the idea of opportunity cost – the true cost of anything, for us as individuals, and for society as a whole, is what you must give up to get it. More precisely, it’s the best alternative available to us.
Harry’s post was all about opportunity cost – what would be the best use of $1.6 trillion in public funds. However, the discussion was inevitably enmeshed in the complexities and inequities of US education, while comments making broader arguments about opportunity cost reasoning weren’t discussed in detail.
One of those broader arguments is the idea that, thanks to Modern Monetary Theory, there’s no need to worry about such questions. In the “chartalist” reasoning underlyng MMT, the fact that governments can issue their own sovereign currency means that there is no need to “finance” public spending by taxation; rather taxation is a tool used to manage aggregate demand so as to keep the economy fully employed but not at a point where excess demand creates inflation. That (essentially correct) position can easily slide into the (only subtly different, but radically mistaken) view that governments can spend money on anything they like with no need for any increases in taxes or cuts in other spending.
As I will argue over the fold, a correct version of MMT makes no such claim. Unfortunately, while avoiding the error themselves, a lot of MMT theorists have not shown much willingness to set their more naive followers straight.
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I’ve got quite a few events coming up in the next couple of weeks.
* On 13 and 14 May, I’m running a workshop at the University of Queensland on Epistemic & Personal Transformation:
Dealing with the Unknowable and Unimaginable. Details here.
* On Thursday 16 May, I’ll be at ANU for the official Australian launch of Economics in Two Lessons. Details are here. If campaigning permits, Andrew Leigh will say a few words about the book. There will be a launch at Avid Reader in Brisbane in late June (date tbd), and in Sydney and Melbourne a bit later
* On Wednesday 22 May, I’ll be delivering the Keith Hancock lecture for the Academy of the Social Sciences in Australia, at the University of Queensland. Topic is The Future of Work. Details here.
* I’m doing a number of radio interviews related to Economics in Two Lessons. I talked to Radio SER in Sydney yesterday. On Saturday 18 May, at 7:45 am, I’ll talk to Geraldine Doogue on Saturday extra, then on Wednesday 15 May to Steve Austin on ABC Radio Brisbane Drive.
That’s the headline for my latest piece in Inside Story, along with the short version of my answer. The long answer is that, even with dubious modelling choices and extreme parameter assumptions, Brian Fisher of BAEcon* comes up with estimates of about 2 per cent of GDP, trivial compared to the potential cost.
So, he uses the same presentational trick he’s been using since the first ABARE modelling exercise back in 1996, turning an annual flow into a present value over ten years to make it look bigger.
The truth is that the economic impact of reducing emissions by 45 per cent relative to 2005 levels by 2030 will be so small as to be lost in the noise of statistical revisions and exchange rate effects. By contrast, the costs of doing nothing about climate change are already visible and are only going to get bigger.
Considered in terms of opportunity cost, action to mitigate climate change is a no-brainer, which is why so much intellectual and rhetorical energy has to be used to mount any kind of case against such action.
- BAEcon is a play on the title of the Bureau of Agricultural Economics, precursor of the Australian Bureau of Agricultural Resource Economics (ABARE) where Brian was Director and I was Chief Research Economist in the 1980s and 1990s. It’s now ABARES having absorbed the Bureau of Rural Sciences.