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Setting the record straight about Labor's record on unemployment
Gerard Jackson
I sometimes wonder what the hell is going on in our places of higher learning. A while ago I received an email from a student whose lecturer had asked her to write an essay on Facts still speak well for labor, an article by Stephen Koukoulas (The Financial Review, 15 October 2001). The lecturer assured the student that the article was "a first rate piece rate of economics writing" that deserved her full attention. And he was right, too — about the attention, that is.
I've dealt with this one before and now I have to do it again. Bluntly speaking, the article was just another example of the dreadful state of economic commentary in this country. Some people I know believe that Koukoulas' political prejudices led him to make a comparison in favour of the Labor Party. Now I don't know whether he is politically prejudiced or not or even what his politics are, my belief is that he came to his conclusion through faulty economic reasoning, the root of which is Keynesianism.
Koukoulas claimed that "average GDP and employment growth" were stronger under Gough Whitlam than under 13 years of Fraser and Howard rule. True but grossly misleading. From Whitlam's election in December 1972 to his defeat in November 1975 M3 averaged nearly 20 per cent per annum leaping by nearly 60 per cent during his rule. (The Reserve Bank's site relies on M3 up to February 1975 when it began to post the monetary aggregates M1 and bank deposits). By April 1975 his monetary policys had driven inflation to over 17 per cent per annum. It's vitally important to keep these figures in mind because they completely destroy Koukoulas's favourable opinion about Whitlam's economic record.
The initial effect of Whitlam’s reckless monetary policy was to stimulate economic activity. Interest rates were forced way below market clearing rates, credit exploded, profit margins widened as factor prices lagged behind the monetary value of their products. Now this is the key to Keynesianism: raising product prices faster than wage rates.
So long as you can do this unemployment can be kept at very low levels, though not permanently. (Unemployment was 2.6 per cent when Whitlam was elected and had been slowly creeping up from 1970). Eventually Keynesian policies impose visible costs as prices rise and the effects of monetary induced malinvestments make themselves felt. Moreover, workers quickly catch on to how inflation reduces their real wages, and tend to act accordingly.
The result of Whitlam's policies was not just a bloated government sector but a high level of unemployment because unions, the industrial relations club and the Labor Party refused to endorse policies that would allow labour markets to clear. And yet the likes of Koukoulas still can't see any of this, looking, as they do, only at certain aggregates. Therefore he concluded that overall Whitlam's economic management was superior to Frazer's and Howard's.
When we turn to the Hawke government's economic record, we find on closer inspection that it too has been greatly overrated. The hidden irony of Labor's "proud employment record" is that it confirms the orthodox view of labor being priced out of work. We have to start with Keating's fiscal policies to grasp the relationship between our unemployment and labour costs.
Keating's first budget increased spending by $9.5 billion and his 1984 budget added another $6 billion. His first two budgets, therefore, saw spending jump by nearly $17 billion. This looks very much like a "dash-for-growth" policy. Tragically slack monetary policy paid for Keating's Keynesian disaster that became "the depression we had to have." From Labor's win in March 1983 to Howard's victory in March 1996 M1 increased by a stunning 342 per cent and bank deposits by 400 per cent.
The connection between Keating's monetary explosion, falling unemployment and rising output seems too obscure for most mainstream economists to grasp. The Keynesian assumption upon which the policy was based is simple enough: aggregate demand needs to be pumped up to reduce unemployment. However, as I've already pointed out, monetary expansion only reduces unemployment by cutting the cost of labour relative to the value of its product.
A very simple example will illustrate the point: if the cost of labour is 105 and the value of its product is 100, then monetary policy can eliminate the overpricing by raising the price of the product to 105 or higher. The process is complicated by the fact that monetary expansion could initially unlock resources in a way that would reduce the cost of labour with little or no effect on real wages. This, I believe, was not the case in Australia.
By putting a floor under real wage movements, Labor's "Accord" with the unions ensured that widespread unemployment would be a permanent feature of the Australian economy for some time to come. This policy of pleasing unioncrats also resulting in large-scale suboptimal work as many of those excluded from full-time employment took up part-time and casual work, and even self-employment where possible.
For instance, from 1966 to 1984 part-time employment rose from 10 per cent of the workforce to 24 per cent and from 1986 to 1993 most of the growth in employment was part-time and casual. The period from March 1993 to early 1995 brought this point home when out of the 436,200 jobs that were created 236,500 were part-time, i.e., 52.2 per cent.
Koukoulas's article did have the effect of bringing one particularly happy little dingbat out of the intellectual woodwork who provided readers at Crikey with his regurgitated version of the new economics, as it used to be called, and how he had been personally converted to Keynesianism. Hallelujah!
Now this intellectual giant, who called himself Percy Pump-primer, doesn't have an economic clue — nor any other kind of clue, I suspect. A fact that was painfully brought home by his praise for the 'economics' of Jack Lang and Ted Theodore, both of whom were a pair of monetary cranks and appalling economic illiterates.
Mr Dingbat asserted that Keynes got it right when he said reparations would cause the German economy irreparable damage. Really? Keynes was largely a lonely and erroneous voice on this issue and was challenged by a number of continental economists, among them Bertil Ohil (Sweden), Jacques Rueff (France), Ludwig von Mises, Gottfried Haberler, Fritz Machlup, (Austria), Etienne Mantoux, etc. Ludwig von Mises was able to show that Germany was capable of paying reparation without suffering the economic harm that Keynes predicted. Looking at the period from 1925 to 1930:
If Germany could not have easily made these payments, perhaps Keynes' supporters will care to tell us how she was able to quickly rearm and spark off World War II and then fight ferociously for six long years? (And please spare me any drivel about the "transfer problem"). The truth is that von Mises blew Keynes out of the water. Etienne Mantoux's refutation of Keynes' thesis was even more devastating:
He [Keynes] predicted that in the next thirty years, Germany could not possibly be expected to pay more than 2 milliard marks a year in Reparation. In the next six years preceding September 1939. Germany, by Hitler's showing, had spent each year on rearmament alone about seven times as much. (Etienne Mantoux, The Carthaginian Peace: Or the Economic Consequences of Mr Keynes, Charles Scribner's Sons, 1952, p. 163).
Albert Hahn also produced evidence that completely refuted Keynes:
During those six years from 1933 through 1938 the capital produced for domestic investment was as follows (in billions of marks):
Therfore,
Hitler's statement that Germany spent 90 billion marks on her armament from March 1933 to the outbreak of the war in 1939 is corroborated by estimates made in Great Britain and in this country [the US]. (Albert Hahn, The Economic of Illusion: A Critical Analysis of Contemporary Economic Theory and Policy, Squier Publishing Co., Inc., 1949, p. 29).
That the Percy Dingbats of this world really have no idea as to what Keynes was really about is self-evident. So let us turn from Dingbat the monkey to Keynes the organ grinder. On page 9 of the General Theory Keynes writes:
Whilst workers will usually resist a reduction of money-wages it is not their practice to withdraw their labour whenever there is a rise in the price of wage goods [consumer goods].
In plain English, use inflation to price people back into work by cutting real wage rates. And that is what the smarter Keynesians, of which dingbat is not one, really mean by "increasing demand".
Gerard Jackson is Brookes' economics editor
BrookesNews.Com
Monday 28 January 2008
Year
Per capita income in Reichsmarks
Per capita reparations in
Reichsmarks
Reparations as a per centage of income 1925
961
16.25
1.69 1926
997
18.30
1.84 1927
1118
24.37
2.18 1928
1185
30.75
2.60 1929
1187
38.47
3.24 1930
1092
26.10*
2.39 Reparations per capita: figures obtained by dividing reparation payments by 65 million. As the population of Germany was increasing slightly during that period, the proportion should be slightly lower than that given above. (Ludwig von Mises Omnipotent Government: The Rise of the Total State and Total War, Arlington House, 1981, p. 213).
1933
5.1
1936
13.8
1934
8.2
1937
16.0
1935
11.6
1938
19.0