Outsourcing: what we pay for is what we get

Ross Gittins makes some obvious, but important, points about what is lsot when vital public services are contracted out. As he says, economists have known this since the work of Oliver Hart, last century, but it’s only now penetrating the policy establishment. In the UK, which led the charge for outsourcing under Thatcher, insourcing is the New Big Thing.

Unlike Hart, I’m not in the running for the Economics Nobel, but I’ve spent much of the last thirty years supplying empirical support for his theoretical analysis.

To get the economy going, we’ll need more than hard hats

That’s the headline for my latest article in Independent Australia. Opening paras

WITH THE economy in recession as a result of the COVID-19 pandemic and depressed conditions likely to continue for a year or more to come, attention has turned to strategies to promote recovery.

Unsurprisingly, most participants in the policy process have turned to the kinds of strategies they have always favoured.

High on the list for many is increased investment in physical infrastructure projects and particularly transport infrastructure. Such projects, always announced with an impressive-sounding number of associated jobs, lend themselves to images of legions of workers toiling with picks and shovels (the term “shovel-ready” is commonly used for projects ready to be implemented rapidly). And the announcement of such projects gives rise to media-friendly images, mercilessly satirised by the ABC program Utopia, of politicians in hard hats and hi-vis vests, busily engaged in building the nation.


the biggest investments we need to make are in people, not concrete. The pandemic has exposed huge weaknesses in our social infrastructure, from aged care and public health to university education. These are the areas that desperately need more investment if we are to make the economic transformation we need.

End oil imports

One of the consequences of the pandemic has been the realization that reliance on the ready availability of imported goods may be a problem in a crisis. This isn’t new, particularly in relation to oil, which plays an outsized role in geopolitics. The supposed need to protect sea lanes, and particularly oil supplies against disruption has been a major part of the rationale for naval defence spending. And we have repeatedly been criticised for failing to maintain stocks of refined petrol.

I’ve been underwhelmed by some of these arguments, but it seems as if it’s time to take them seriously, particularly in relation to oil. If we are to decarbonize the economy, we need to reduce our consumption of oil, ultimately to zero. The obvious place to start is by reducing imports of oil, with a medium-term goal of self-sufficiency.

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Would freezing minimum wages help recovery ?

I’ve just responded to a poll of economists, run by The Conversation and The Economic Society of Australia on this question. Here’s my response

No There has been extensive debate on the effects of minimum wages on labor demand. Over the last 25 years, the general conclusion has been that these effects are relatively small.

However, these questions are irrelevant in the current context. The pace of economic recovery will be determined entirely by macroeconomic conditions, including fiscal and monetary policy, continued success in suppressing the pandemic, developments overseas and consumer confidence. In this context, an increase in minimum wages will have a modest positive effect in bolstering demand.

In the longer term, the costs of the pandemic will have to be shared across the community. The crisis has shown that the work of lower-paid people is vital and undervalued, while much (not all) highly recompensed activity turns out to be of marginal importance in a crisis. Those on higher incomes should bear all or most of the cost of recovery.

Results of the poll should be out next week, I think

MWW on MMT (from Twitter via Spooler)

Mitchell, Wray and Watts Macroeconomics p 323, give a the correct version of the #MMT position on budget aggregates .

Taxes create real resource space in which the government can fulfil its socio-economic mandate. Taxes reduce the non-government sector’s purchasing power and hence its ability to command real resources for the government to command with its spending.

Take a situation where the national government is spending around 30 per cent of GDP, while its tax revenue is somewhat less, say 27 per cent. The net injection of spending coming from the national government is thus about 3 per cent of GDP. If we eliminated taxes (and held all else constant) the net injection rises towards 30 per cent of GDP. That is a huge increase in aggregate demand and could cause inflation.

(I’d say would rather than could, but otherwise spot-on)

Ideally it is best if tax revenue moves countercyclically, increasing in an expansion and declining in a recession.

(This exactly matches Keynes’ position “the boom, not the slump is the time for austerity at the Treasury”)

3 per cent average deficit over the cycle is consistent with debt averaging 60 per cent, nominal growth g and nominal bond rate r averaging 5 per cent. In this case, primary deficit is zero on average.

But if r<g (desirable), can run a primary deficit as well as a total deficit.

Universities and the pandemic

As I foreshadowed a while ago, the financial effects of the pandemic have been reflected in an agreement for university staff to take temporary pay cuts in order to save the jobs of casual workers. Lots of people are unhappy about this, but it’s hard to see an alternative, and the deal seems to be the best that can be reached, with the requirement that senior management take the biggest cuts and (I think) the cuts for academic staff being scaled to protect the lowest paid.

The primary cause of all this is the big reduction in overseas student numbers arising from travel restrictions and the pandemic. But the more immediate cause is the federal governments decision to exclude universities from the JobKeeper scheme, even though they would qualify under the loss of revenue .

This decision is due in large measure to the government’s culture war hostility to the university sector. It’s disappointing to see them pursue this kind of vendetta at a time when we ought to be looking for national unity. But given that this is the case, there is no serious alternative for universities but to share the pain as evenly as possible.

The fundamental problem is the quasi-NGO (quango) status of universities. Even though they are mostly funded by the federal government, universities are (mostly) organized as independent statutory bodies under state legislation. As a result, they engage in wasteful competition among themselves. Indeed, the ACCC watches for signs of anti-competitive behavior, a concept that would immediately be recognised as nonsensical in the case of schools and universities.

Education is a fundamental responsibility of government, and universities ought to be organized as a unified national system, with the responsibility of providing education to all students who can benefit from it. If that were the case, the government would have had to meet the gap in funding just as has happened in public transport and other services where revenue has fallen.

Coming back to the cuts, the NTEU-universities deal ought to be a model for the economy as a whole in important respects. Dealing with the pandemic is going to be hugely costly, and those at the top of the income distribution, in both private and public sectors, should bear most of that cost.

Supporting a Livable Income Guarantee

Some responses I gave to a student journalist asking about universal basic income.

There are two main approaches to implementing a universal basic income.

One is to introduce a universal payment to everyone in the community, funded by taxation, and gradually increase this to a “livable income”, that is, one sufficient for people to meet their basic needs on a sustainable basis.

The second is to focus on those who currently don’t receive a basic income and provide it to them. This can be done by first increasing existing benefits, such as NewStart to a livable level and then expanding access to those benefits by removing punitive work tests. This would lead to a “participation income”, where everyone who contributed to society through paid work, volunteering, study or child-rearing received a livable income. I favour the second approach, for reasons set out here.

The government’s response to the pandemic has moved us much closer to a livable income guarantee, at least temporarily.  The JobSeeker allowance is twice the amount of NewStart, and compliance testing such as the requirement to make 20 job applications per month has been dropped (at least officially – some case managers haven’t got the message on this). And JobKeeper implies a willingness to intervene to prevent involuntary mass unemployment.

Since this is very much at odds with the government’s policy position before the pandemic, it is unsurprising that they are seeking to ’snap back’ once the immediate crisis is over. But this neither feasible (because the economy will take a long time to recover) nor desirable (because of the benefits of a livable income guarantee).

In print today

I’ve got two newspaper articles out today.

In the Australian Financial Review, a piece written jointly with Warwick McKibbin and Richard Holden, arguing that the Reserve Bank should dump inflation targeting and switch to targeting the level or growth rate of nominal GDP. Paywalled, but a near-final version is over the fold.

And, in Inside Story, a piece looking at the kinds of reforms we need once the lockdown phase of the pandemic is over. Rather than trawling over the remnants of the neoliberal reform agenda, I argue we need transformative changes such as a participation income.

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What Morrison should do next

I was contacted by a Greek language newspaper with questions about the next steps in economic policy. On the assumption that most of my readers don’t read Greek, I’m posting my response here

The Morrison government’s economic policy response to the pandemic so far has been broadly appropriate, putting practicality ahead of ideology in general. There are numerous anomalies arising from the haste with which the program was developed and from some residual ideological constraints (such as hostility to the university sector)

The program should facilitate a rapid recovery from those economic impacts directly linked to lockdown measures as these are relaxed. However, there has so far been little recognition of the problems that will continue in the medium and longer term.  The economy will undergo a substantial restructuring reflecting the effective end of international travel, at least until a vaccine is developed and globally distributed.

To deal with these continuing problems the government needs to
(i) Convert the JobSeeker payment into a Guaranteed Livable Income, available to everyone unable to find paid employment and willing to make a social contribution in other ways, such as volunteering(ii)  Use the JobKeeper payment as the starting point of a Job Guarantee, in which the government commits to achieve full employment through a combination of wage subsidies, training programs and direct job creation.