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Issue No. 161 | 15 November 2002 |
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From New Labor to True Labor
Interview: Life After Keating Industrial: That Friday Feeling Bad Boss: Begging to Work Organising: Project Pilbara Unions: Off the Rails International: Brazil Turns Left Environment: Brown Wash History Special: Learning from the Past Corporate: Will the Bullying Backfire? Technology: Danger Lurks For The Passive History: In Labour�s Image Politics: Without Power Or Glory History Special: A 'Cosy Relationship' Culture: Blood Stains the Wattle Satire: Iraq Pre-empts Pre-emptive Strike Poetry: The Executive Pay Cut Review: Time Out
Month In Review The Soapbox The Locker Room Indigenous Postcard Bosswatch
 Costello's Mad PlanBravo Costa!Deck Chairs on the Titanic
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Letters to the Editor Costello's Mad Plan
Government money markets and social security: Costello's latest and dangerous proposal Australians may be aware that the Treasurer's (Peter Costello) recently released a Discussion Paper on the future of Australian government bonds. He wants to get rid of the role of the government in this element of the capital market. Some of you would have seen the reports (eg Sydney Morning Herald 31/10/02) and / or read the discussion paper. Its tempting when we read or hear of these things, reported in some inadequate way in the commercial media, to dismiss them from thought because its about the arcane world of the financial markets. Costello was reported in the Sydney Morning Herald as follows: "Mr C said he was concerned that a government asset portfolio could incur large losses, give the government market-moving powers (oh no!) and create a pot of gold for future 'Labor governments' to raid." All 3 of his objections ring alarm bells to me, but I have missed any effective critique from progressive economists. Also, I don't have enough confidence in my own kitchen table economics to go with my own ideas. So, starting from the assumption that anything Costello is up to is no good for working people, I asked a number of Australian and overseas based economists some questions about what Costello's plans for the Australian bond market might mean. Two sets of responses came back (plus some advice on what to read and a public forum to go to - see below.) I have tried to distil these responses and toss in some extra thoughts. What are government bonds? And how do they work? And who controls them? Essentially, a bond is a promise to pay back periodically with interest or a set amount at a future date (eg borrow $500 by issuing a bond to pay $1000 in 10 years - about 7% compounded). Government bonds are the main way the government borrows money to fund its activities beyond the scope of the annual budget. People and institutions buy the bonds, which generally pay interest and are repaid after a term set out in the bond eg 3 years, 10 years, 25 years. What do they do? The main objective of the bonds is to finance government programs, especially infrastructure investments such as hospitals, schools, railways, ports, roads. The government earns money from these investments over a long period, and so it can pay back the bonds over a long period. Also, the interest rate on the bonds is generally taken as the measure for all sorts of other bonds issued by public sector enterprises and by private companies. This is one way the government bond market helps the operation of the larger capital markets.
What might they do to meet criteria associated with 'social need? So, bonds are quite important in meeting social needs such as hospitals, schools, universities, roads, ports, railways etc.
What are the implications of the government getting out of the bond market? Who gains from Costello's proposals? Who loses (or might lose) in the future? Taking away the government's right to do this is a way of denying the government the right to borrow money - ie to run a deficit of any kind whatsoever. Any expenditures have to be paid out of taxes. Since this will - if not now, later - come with calls for tax cuts, such cuts will then directly imply social service cuts. That's the issue. This is simply a vehicle to sharply reduce social programs. Especially during economic downturns, because that is the time when government revenues fall, but social need rises. Even in good times, it means even greater restriction on public infrastructure investment than we have now. It also means that the larger capital markets lose their convenient indicator, and reliable place to park money. This could lead to higher interest rates because it will be harder for private sector bond buyers to measure the risk involved in the Australian economy.
What other neoliberal governments have done or are contemplating the same thing? Both respondents did not know of any other government doing this. But others might know more. Even neo conservatives don't generally go this far since temporary deficits are unavoidable (eg sudden downturn). How does Costello's proposal fit into the neoliberal framework? This is extreme neo-liberal theory, which sees government investment as a bad intervention in the market. Governments should not intervene in financial markets, nor should they invest in infrastructure, according to the theory. Only private investor's decisions can allocate resources in the most efficient way, because they are driven purely by profit expectations. What, if anything, should unions say? What might our own proposals be? "Unions should be yelling out that this is theoretical madness which will really harm social services, and destabilise even the private sector and the jobs there," said one of the respondents The other developed the argument: "Since wanting a deficit is not a particularly intriguing political demand, and since in general we would agree that social programs have to be paid for, the response has to be carefully expressed - and exposed. For example, it's tempting to say that private companies always go into debt - its part of their business. Why not the government? The claim is that the private debt is an investment that will be repaid in profits. The best response is: a) This is about cutting social programs not discussing how to pay for them, and if that's the issue the government should just say so. b) Its absurd - as every country has recognized (including the neoliberal leading U.S. - to think a complex society can be run by tying its hands through rigid annual balancing. c) Of course social programs have to be paid for over time - that's why we call for fair taxation. d) This is a dumb way of debating our priorities and processes as a country. Assuming a more public debate is necessary, how might we promote that? We need a wide range of voices - including well known business people, perhaps from the union super funds - to say that this is a lunatic proposal from a fundamentalist, lunatic Treasurer. We should explain and repeat the relationship between this proposal and the life of the unemployed and those needing social security beneficiaries. Contemporary capitalism requires tight controls over the working class, especially controls that are more difficult to identify and explain. Managing the level of unemployment and underemployment and maintaining a state of desperation for work in this disposable workforce is the most powerful form of social control. Costello's proposal once again fulfill's his responsibilities to the richest and most powerful, the owners of capital. What about some proposals for action? Don Sutherland AMWU Ed's Note: The Evatt Foundation is hsoting a forum on the public debt issue this week - details at http://evatt.labor.net.au/events/32_20021021.html
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