Finance Finance News What would really help our economic recovery? Not failed dogma
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What would really help our economic recovery? Not failed dogma

A respected former bureaucrat believes the government is going for ideology over effectiveness.
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Federal government ministers are adept at hiding advice they don’t want the public to hear.

One of Australia’s most respected former bureaucrats suspects they’re doing it again on post-emergency economic policy, going for ideology over effectiveness.

Dr Michael Keating is a former head of the departments of Prime Minister and Cabinet, Finance, and Employment and Industrial Relations.

He is one of the small band of top-flight economists who played key roles in modernising Australia and delivering its golden decades of growth and prosperity.

He has written he would be “surprised” if the official advice the government is getting is the company tax cuts, industrial relations reform and deregulation being pushed by the Prime Minister and the conservative media.

His reason: Such an agenda simply wouldn’t deliver.

It doesn’t address the underlying economy’s key weakness and the most important path for improving productivity.

In reports for the Pearls and Irritations newsletter, Dr Keating wrote that the suggested Morrison agenda was not new.

“Rather it would represent an attempt to resuscitate a failed agenda from the past,” he said.

Treasurer Josh Frydenberg has opened the door to big business tax cuts. Photo: AAP

“Business investment depends primarily on increasing demand for the products of businesses.

“As we have seen without that increasing demand, the extra revenue from a company tax cut will just be paid out to shareholders through more share buybacks and increased dividends.

“For example, in the first six weeks after Trump’s company tax cuts took effect, US companies announced a record $171 [billion] of share buybacks – two and a quarter times as much as in the whole of the previous year.

“Equally, there is no need for more so-called industrial relations reform, and regulation is not what is holding the economy back.

“As Stephen Bell and I show in our book, Fair Share, Australia now has a very flexible labour market – even more flexible than America – and the calls for more industrial relations reform are just camouflage for lower wages, which is the last thing this economy needs right now.

“Indeed, as Professor Borland – one of Australia’s leading labour market economists – found, the reforms of industrial relations since the introduction of enterprise bargaining 25 years ago have achieved nothing of substance, having little discernible or no impact on wages growth, labour market adjustment, labour productivity, earnings inequality or industrial disputation.

Similarly, the Productivity Commission in its last major review in 2017 about how to improve Australia’s productivity growth rate never mentioned either industrial relations or deregulation.

“Instead, the focus of that report was on how to improve the quality and effectiveness of government services.

“What the government needs to appreciate is that the recent poor growth record of the Australian economy, and most other advanced economies, is not because of a lack of supply.

“Instead, the problem has been a lack of demand, and that lack of demand is because of the increase in inequality of incomes and the pressures on household incomes from low wage growth.”

Last week, the two conservative national daily newspapers continued to push the Morrison agenda by making headlines out of the Reserve Bank governor repeating his regular comments about the desirability of broader reform to reinvigorate the economy.

Governor Lowe deployed his usual broad brush to the big picture, given that it is officially outside his monetary policy remit.

Dr Keating reminded readers of another regular comment by the Governor: “The real crisis is in real wage growth.”

“Both the IMF and the OECD have found that increasing inequality has been bad for economic growth,” wrote Dr Keating.

IMF debunks trickle-down myth

“The IMF found that: If the income share of the top 20 per cent increases by 1 percentage point, GDP growth is actually 0.08 percentage point lower in the following five years, suggesting that the benefits do not trickle down. Instead, a similar increase in the income share of the bottom 20 per cent (the poor) is associated with 0.38 point higher growth.

“While the OECD found that: ‘Rising inequality by 3 Gini points, that is the average increase recorded in the OECD over the last two decades, would drag down economic growth by 0.35 percentage point per year for 25 years: a cumulative loss of GDP at the end of the period of 8.5 per cent’.”

The strange thing about the policy focus of the government, the BCA Journal (aka the Australian Financial Review) and the LNP Gazette (aka The Australian) is that it is unfair to the Business Council.

Yes, the BCA is trying to use the coronavirus crisis to push its usual barrows of lower corporate taxes and industrial relations reform. Leopards/spots, bears/woods, Pope/Catholic etc.

The case has been made for that particular productivity focus making our economic recovery worse.

But the BCA also in part agrees with Dr Keating’s prescription for productivity growth, albeit for perhaps different reasons.

He argues that the key to encouraging businesses to invest and for the nation to obtain better economic performance is to accelerate the increase in household incomes.

Some of that can come from the tax-transfer system – “it is inconceivable that income support for unemployed people will be halved again” – but Dr Keating blames technological change as the main reason for the stagnation of wages in recent decades.

“A significant and lasting increase in the rate of wage increase and the distribution of earnings will require a better adaption to technological change, so that we maximise its advantages and minimise its disruptive effects,” he wrote.

“We also know that this better adaption to technological change is most dependent on more and better investment in education and training, and especially life-long learning.

“Furthermore, it is technological change that has driven the increase in productivity ever since the Industrial Revolution.

“Therefore, improving the ability of people to adopt and adapt to new technologies not only represents the best way to increase aggregate demand, it is also the best way to increase productivity.

“However, the funding for vocational education and training (VET) has been cut, and universities also are going to need a new funding model now that they can no longer depend upon overseas students.”

Skills and education crucial

And the BCA at least partly agrees.

Writes CEO Jennifer Westcott: “On skills and education, our priority is a system that enables people to rapidly upskill as the world of work changes and where they have a portable account to easily access life-long learning. We need to urgently simplify the system so people can study in modules or micro credentials when, and how, they need to quickly learn new skills.”

The BCA talks the talk in other areas that receive less endorsement from the obvious suspects: “Every dollar we invest in energy should be a dollar towards a lower carbon economy and lower cost energy bills.

“When we spend money on housing, we should think about investing in social and affordable housing.

“Unemployed people need a system that assists them to rebuild their confidence, re-skill and retrain so they can reconnect with the workplace and experience the dignity of work.”

The government and conservative media are skilled cherry pickers, hence the headlines reduced to the failed trickle-down agenda.

Just as Scott Morrison used fig leaves to keep secret Barnaby Joyce’s drought envoy “report” and Philip Gaetjens’ official (minor) #sportsrorts inquiry.

Just as Angus Taylor refuses to release his expert panel’s findings on emissions reductions policy, or where his forged Sydney City Council document really came from, we are left wondering what the professional economic policy advice to the government might be, as opposed to the simplistic dogma being trotted out.