Australian conversation about economic policy is marked by tension between the complexity of the data and uncertainty about how to proceed on one hand and the anxious desire for a simple solution on the other. That solution is often sought either in old orthodoxies or in new theory. In such a situation it can be helpful for amateur economists, as all of us necessarily are, to recognise the limitations of our knowledge, to name the large features of our situation and to reflect in general terms how it should be addressed.
The current economic situation in Australia, about which economists and politicians disagree as to its nature and to the intended and unintended consequences of government action and inaction , is marked by inflation, high debt, rising interest rates and strain on public services.
One of the most striking features of our present situation is the number of voices that appeal for Government financial support. They include nurses, teachers, transport workers, doctors and nurses, people in aged care, hospitality and cultural workers, as well as non-government agencies offering emergency support through emergency housing and food, and advocating for higher benefits to people who are vulnerable.
These pleas receive general support and suggest that people generally expect that governments and their agencies should actively take active responsibility for education, health and welfare services. The ideal of hands-off, small government lacks appeal. As does the recourse to privatisation in human services. The personal accompaniment central to the welfare of people who are vulnerable has too often been drowned by the desire of businesses to increase profits for the benefit of shareholders. The demand for adequate services implies greater expenditure by governments, whether by raising taxes or by incurring debt.
Both these options are made more complex by two other features of current economic life: debt and inflation. Government debt, already rising for some years, has increased sharply during the restrictions caused by COVID. Though not disastrous in the short term, debt repayment will make borrowing more expensive and make it more difficult to fund ambitious social programs.
The debt incurred by private companies and individuals, however, is more significant. In Australia, as in China, the health of the economy has been tied to the health of property and particularly to home building. First-home buyers commonly borrow heavily to buy their house. In this they compete with people buying second or third homes which tax concessions make profitable. As a result of the exorbitant pricing of property anything that sharply devalues it can flow easily into the capacity to pay mortgages. It can then affect employment and stability in the building industry, the stability of the financial system, and so people’s lives.
'The perverse result of raising interest rates to reduce inflation will then be to exacerbate the inequality that allows the wealthy to increase inflation.'
The effect of inflation is to increase prices of food, clothing, rental, equipment, services and fees. It also effectively lowers the value of wages and benefits. It increases the pressure for government action to enlarge its programs to support higher wages and provide services. If unchecked it leads to higher unemployment and to acute poverty. To reduce inflation most governments encourage or tolerate higher interest rates that put even more pressure on household budgets.
In this complex situation the crucial feature of the Australian economy is inequality. In an economy where wage rises lag behind the cost of living, people with little wealth and large debts are under pressure to keep their jobs and to repay their debts. They must reduce their expenditure on holidays and entertainment, for example, accept low wages, and so take the pressure off inflation. Those who own houses, have company cars and are shareholders in profitable companies, can spend more freely, contribute to rising inflation and so their wealth. And employers and large corporations can increase their own wealth by keeping wages low and prices high. The perverse result of raising interest rates to reduce inflation will then be to exacerbate the inequality that allows the wealthy to increase inflation.
It is easy to diagnose the deficiencies in the Australian economic settings and those of nations similarly afflicted, and to demand measures to reduce inequality. It is more difficult, however, to prescribe reforms that will serve the common good. Economies are ultimately sets of relationships, like the mobiles that hang from the roof. To increase or decrease the weight on one string will affect all the others in often unforeseen ways. And in the case of inequality there are many aphorisms that say that the wealthy will subvert the best laid plans to curb their greed. ‘The rich get rich and the poor get poorer’ in the song ‘Ain’t we got fun?’, for example, and ‘the children of this age are more shrewd in dealing with their own generation than are the children of light’, if you prefer a Biblical quotation.
The fear of unintended consequences and the power possessed by vested interests over the economy can argue against dramatic government action to reduce inequality. But we should look for commitment to a steady program of incremental reform that will strengthen the power of workers in relation to employers, will ensure that governments can collect equitably sufficient revenue to fund services for people who are vulnerable, for education and for health care, and reduce the privilege of wealthy interests through their privileged access through lobbying and through loopholes in legislation. Such measures will face opposition, of course, but the task of governments is to govern for the common good.
Andrew Hamilton is consulting editor of Eureka Street, and writer at Jesuit Social Services.
Main image: Piggy bank on car. (Getty images)