
Issue No 63		21 July 2000

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Economics

Edge of the Abyss

Political economist Frank Stilwell argues that a constellation of events gives good reason to be worried about the Australian economy.

Economic predictions are notoriously unreliable. One jibe is that God created economists in order to make weather forecasters look good! To anticipate our collective economic future the best we can sensibly do is to assess recent trends and current conditions. On that basis, there are sound reasons to be worried about the prospects for the Australian economy at the moment.

A particular constellation of events has created significant economic uncertainty. These include the changes in the value of the currency, the introduction of the GST, raised interest rates and, the effects of the Olympic games and its aftermath. As always, capitalism produces winners and losers, but these are circumstances in which workers in general need to understand what is happening in the economy.

What could cause a resurgence of inflation? One factor is the value of the Australian dollar. This plunged earlier this year, although there has been some recovery since. A lower dollar value is not in itself a problem - indeed it helps exporters of Australian products - but it does mean upward pressure on the prices of imported goods. That fuels inflation, unless consumers switch to buying local products. In some cases these local alternatives are not available because government policies have reduced tariff protection on local industries and accelerated the processes of structural economic change. Further moves towards 'free trade', favoured by many senior ALP politicians as well as the Liberals, would accentuate this tendency.

The introduction of the GST now adds to the inflationary pressures. The latest Yellow Pages survey of small business intentions indicated that prices rises are likely to be well in excess of the Treasurer's official estimates, on which next year's Federal budget is based. So far the picture looks very mixed, with some small businesses actually closing down because of the GST, and great variability in the way in which firms are responding to the new tax. What remains particularly uncertain is whether a GST-induced inflationary surge will be temporary or on-going. If it becomes factored into wage demands and into consumer and business expectations, then there are grounds for expecting a considerable flow-on over the next year or two at least.

What about the prospects for economic growth, employment and unemployment? The stance of monetary policy is one important factor. It has been tightened as a result of the Reserve Bank raising official interest rates four times over the last eight months. This is nothing like as severe as the situation a decade ago when the higher interest rates precipitated what Paul Keating called 'the recession we had to have'. However, there are some echoes of that calamity here. The higher interest rates are having adverse effects on the housing sector, which is typically quite responsive to such changes in the cost of borrowing. Approvals for new house constructions have already hit the lowest level for three years. More worrying still is the likely long-term impact on productive investment in Australian industry.

A tight monetary policy has notoriously uncertain economic effects. It is regionally insensitive, reining in the growth pressures in booming areas like Sydney but simultaneously depressing economic activity in already economically stagnant regions. A higher cost of capital is the last thing rural and regional Australia currently needs.

More generally, the problem with monetary policy is that it runs the risk of causing a significant economic downturn. The Olympics surge is feeding the economic growth process at the moment, particularly in Sydney, but this is by its very nature temporary. An economic slump after the Olympics is a real possibility, as the Carr government implicitly acknowledged in its last budget when announcing the timing of future government infrastructure projects.

Bringing all these considerations together raises the spectre of stagflation. This is the dreaded s... word whose mere mention sends fearful tremors through economic and financial circles. But it is important to face up to this unappetising prospect if the necessary corrective steps are to be taken.

Stagflation is the economic problem which emerged in the 1970's when simultaneous inflation and high levels of unemployment came to be the dominant feature of the Australian economy, and most other capitalist economies world wide. The redress of this stagflation problem became the principal concern of economic policy over the next two decades, usually taking the form of restraint on wage increases and on government expenditure. These were policies that shifted the burden of adjustment mainly on to workers. The policies were successful in combating inflation but they had adverse consequences for economic inequality and it left us with a persistent problem of unemployment.

The expansionary inflation-free economic environment of the 1990's may now be changing into an environment in which the re-emergence of stagflation is a real possibility. It depends on what happens in the international as well as the national economy, of course. Whether the USA can maintain the economic growth which has been underpinning buoyant conditions in the world economy looks increasingly doubtful. A substantial 'correction' to its overvalued stock market is regularly predicted: according to many financial commentators it is already overdue. And when the USA sneezes, we are all likely to catch cold.

These are circumstances in which caution demands consideration of policy measures to deal with the problem of growing economic instability. In the short term that means no more tightening of monetary policy. It needs vigorous policing of the potential for extra profiteering arising from the introduction of the GST. It also needs a stronger commitment to using government expenditure as a tool of macroeconomic stabilisation and job creation - a policy approach to which the Liberals are fundamentally opposed.

There is also need for consideration of policies to give Australian economy a sounder foundation for its longer-term development. This is especially so because the necessary interventionist policy measures can take a long time to come on-stream.

Industry and regional development policies are obvious examples. We need an industry policy that doesn't leave our economic development vulnerable to the whims and fluctuations of the international marketplace. Targeting industries for strategic development through partnerships between government, business and unions is necessary. One particularly attractive possibility is promoting the development of ecologically sustainable industries, including solar power technology where Australian scientists are at the international cutting-edge. Australia could develop a reputation for its specialisation in that field, much as Switzerland did for watches, Sweden for furniture, Italy for fashion shoes, Japan for electronic goods, motor cycles and so forth. But it won't happen without a consciously interventionist industry policy.

Regional development policies are a necessary adjunct. The growing regional inequalities within Australian society are becoming increasingly of concern to the politicians, of course, but there is an obvious reluctance to embrace the interventionist policy measures that are needed to deal adequately with the situation. There is no easy 'quick fix' solution, but government expenditure on infrastructure projects could be an important source of targeted job creation. That process tends to be substantially self-financing to the extent that it reduces unemployment costs and helps expand the flow of taxable incomes.

The more effective channeling of workers' savings currently in superannuation funds into productive investment in Australian industry also warrants careful consideration. Of course, workers' primary concern, as individuals, is with the management of those funds to maximise their pensions, but there is a broader collective interests in having the money used in ways that foster economic development and create jobs. There is no necessary tension here. Coordinating the process through a National Investment Fund could direct the finances into the most productive economic uses. Public sector employment strategies also warrant careful consideration as means of stabilising the economy and distributing its fruits more equitably.

These are just a few examples of how an alternative economic strategy could be constructed. The basic problem is that these options cannot even get on the policy agenda while the ideologies and practices of 'economic rationalism' reign supreme. But 'economic rationalism' is not rational. It has brought us again to the edge of the abyss - the possibility of a return of stagflation.

Frank Stilwell is Associate Professor in the School of Economics and Political Science at the University of Sydney

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Issue 63 contents

Interview: Paul Keating's Big Picture
The former Prime Minister is still painting on a broad canvass. He talks to Workers Online about the new economy, fair trade and political chi.

Unions: War in the West
Only six months after signing individual staff contracts, the gloss has worn off for some of BHP's Pilbara iron ore workers.

Environment: Farmers Fudge DNA Dangers
Farmers have missed the chance to have a meaningful debate into the use of genetically modified crops.

International: 'Dot Union' Proposal on the Table
ICANN, the global governing body of Internet domains, has released the following expression of interest in proposing a top-level domain for trade unions

Economics: Edge of the Abyss
Political economist Frank Stilwell argues that a constellation of events gives good reason to be worried about the Australian economy.

History: Taming the Tigers
Prominent labour historian, Dr Ming Chan, is visiting Australia to report on how workers are faring in the new Hong Kong.

Review: Music is Crap
It's already the second half of the first year in the new millenium. Who would have ever predicted a crisis in the popular music industry when we are at such an advanced stage ?

Satire: Last Kosovars Found Behind Couch
State Emergency Services personnel were called to a house in Brighton this morning, where the last five remaining Kosovar refugees have been found wedged behind a couch.

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