Economy needs stimulus and attention to the underlying problems

Contributed by Joe Montero

Forty-nine eminent economists have called for a budget that provides stimulus to the economy and for the tax cuts, mainly going to the richest Australians, to not go ahead.

This as their response to The ConversationEconomic Society of Australia pre-budget survey.

Interestingly, among the stimulus options in the survey, more spending on social housing topped the list. This was followed by permanently boosting JobSeeker, more funding for education and training and infrastructure projects.

Most economists belong to variants of either the Neoclassical or Keynesian schools, and their responses come through the lens of their school.

What is remarkable, is that there seems to be broad agreement on direction and priorities. Perhaps this is the result of growing uncertainty within the profession, its ongoing failure to come up with answers, and acceptance that the economy is in trouble.

Stimulus spending has become fashionable once again, and it has brought forth the re-emergence of Keynesianism, and its Modern Monetary Theory offshoot, is gaining some renewed respectability.  

There is one certainty. The unhindered capitalist economy is failing. Once this is recognised, the need for a way to correct this failure a mechanism becomes obvious. If private investment does not provide the answer, the intervention of the public sector is important.

A good practical example of the Keynesian approach was shown during the Great Depression. Neoclassicism, an earlier variant of what is now known as neoliberalism, made a thorough mess of things. Keynesian stimulus created jobs and helped to ease some of the worst of the impacts of the depression on society.

Australian Kids often had to sell firewood or find other means to survive the Great Depression

Although the stimulus played a positive role towards overcoming the crisis, it is too easy, especial almost a century later, to over-exaggerate the extent to which it was responsible for turning the corner.

Stimulus did not cure the depression. Depression continued until World War Two, and in the long run, it was war that proved to be the greatest stimulus.

War enabled the resources of society to be mobilised and commanded into the war effort, the production of armaments and their consumption. Destruction of war destroyed much of the global over capacity and opened space for reconstruction and the rise of a new economy. aided after the conflict had seized by the Marshall Plan.

No sane person would suggest war as a fix for economy today. The cost is horrendous. Even so, there is no good reason hide from the lessons of that time. There is a lot we can learn from it.

At the base of the economic collapse, was the failure of the productive side of the economy. A revolution in production, with the introduction of the mass production assembly line, and the associated explosion in consumerism, led to two problems.

One was the replacement of human labour by machines. Per unit cost declined. The price of consumer goods went down. It also meant a falling rate of return on investment. This drove a expansion in the size of operation, war for market share, and monopolisation of the economy, which in turn, led to relative over production and the separation of finance form the real economy, till it began to operate counter to it. These forces led to the Wall Street Crash in 1929.

In short, the economy was structured and operating against the needs of society.

The first problem led to the second one. Output outstripped effective demand. The Keynesian answer helped to solve this second problem, in part, through a measure of redistribution of income downward. This was mostly affected through the creation of the welfare state and limited nationalisation of some formerly private industries.

At the end of the war, a population that had lived without for a long time, was demanding consumer goods, except that they didn’t have the income to get them. The Marshall Plan and other forms of Keynesian stimulus worked well to enable this demand to be realised.

War, the subsequent returning of the economy to civilian use, and stimulus, were the engines behind the post war boom.

War destruction in London provided an opportunity for economic reconstruction

Today’s situation shares a lot with the conditions that led to the Great Depression. There are also significant differences, and we need to understand both what is the same and what is different to arrive at answers for our own challenges.

Like then, stimulus spending can address a part of the problem. Like then, It does not resolve that part associated how the economy operates and gives rise to economic dysfunction in the first place.

The post war boom had ended by the late 1960’s and the problems of the earlier era began to re-assert themselves. The turning point was about 1968, when the use of the gold standard came to an end.

The shift towards downturn around the so-called oil crisis of 1973. which was a major symptom of the growing dislocation of the global and national economies. This deepened still further, during the stagflation crisis, and then again during the stagflation crisis a few years later, and yet again during the 1980’s, when neoliberalism came into fashion.

The twentieth century has seen the financial crisis of 2009 and now we have a new deepening of the problem, exacerbated by the arrival of the Covid-19 pandemic.

All these events are connected and a continuation of the same underlying failures that led to the Great Depression.

The first difference is this time it has been drawn out over a longer time and the long term decline has been slower up till now. A greater capacity to absorb the problem through global integration and the transfer of crisis to the poorest nations, aided by a quickened pace of monopolisation, and an incredible rise in the use of credit, are the major reasons for this.

We may now have reached the point where this has run its course, and there is no doubt that climate crisis and the Covid-19 pandemic have aggravated an already sick economy.

A stimulus response is needed. It can help to resolve the problem of insufficient demand. but the significant difference between the great Depression era and now, is that didn’t have a credit crisis. We do, and this means a large part of any stimulus directed at increasing consumption will be absorbed by the debt crisis.

If stimulus is going to work effectively, it must be accompanied by measures to overcome the credit crisis, and one good measure would be to take on the cost of housing, which is the major source of household dept.

To resolve the contradictions in the productive side of the economy, the dysfunctional relationship between this and finance, and the economy working against the needs of society, must be overcome.

The private sector will not do this. If it had the capacity, we wouldn’t have the problems of today. Investors would have used the market mechanism to correct everything. This hasn’t happened.

Public sector intervention is necessary. In addition to its role in the redistribution of income, it must operate as to set national priorities, mobilise resources, regulate finance, initiate projects that rebuild a new foundation for jobs and a more successful and fairer economy,

The economists drew attention to some priorities. Increased spending on social housing can assist the overcoming of the credit crisis, as well as provide more disposable income for other uses. This should be a major priority.

Another major priority is the creation of jobs. This is the big reason why the economists put forward increased spending on education and training as their second priority. It is part of the answer.

But it won’t provide sufficient jobs on its own. for this to happen some old industries must be revitalised and new ones built. This requires a comprehensive plan or a restructure of the economy, centred on harnessing financial resources, rebuilding manufacturing and its linkages, and meeting other key priorities, especially shifting to environmental sustainability.

Attention must be paid to reforming the taxation system to meet these priorities and do so around two principles. Activity that runs counter to the priorities in the plan must be discouraged, and sufficient funds to cover the cost of change in a fair way must be guaranteed.

Even then, it is not enough. Human beings must be mobilised into a national effort. This is not going to happen unless the majority see it in their interest to take part. It means that they must have sufficient reward and a voice in building the future.

Reward for effort must be shared fairly. It means the proportion of national income going to wage earners wage earners be increased. Those depending on Centrelink benefits must be increased, to both increase the economic drag of poverty and encourage participation. Everyone must have a sufficient income to provide a reasonable standard of living.

Support for a national effort requires the building of a movement for change from the ground up. It means people coming together to implement initiatives and creating new solutions. It means extending their say in in existing workplaces, by building democratic structures, where total power in the hands of a few is transferred to the majority.

A collaborative alliance of the public sector, community and private enterprises operating democratically is possible. This alliance can be the engine to meet economic, social, and personal priorities.

What is the alternative? Risk heading to an economic precipice and ensuring the catastrophic climate change? Risk heading towards war, when the means for destruction are so much greater than they ever were before?

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