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Tag: Economics

  • Pandemic Shows Australia Needs Domestic Manufacturing

    In this commentary, Centre for Future Work Economist Dan Nahum reviews the qualitative reasons why manufacturing retains a special strategic importance to the overall economy, and discusses the potential synergies between the development of sustainable energy resources and a revitalisation of manufacturing.

    Rebooting the Australian Manufacturing Sector in the Era of Coronavirus and Climate Change

    Since the COVID-19 crisis emerged, Australians have been starkly reminded of the importance of being able to manufacture goods domestically. International shortages of, and restrictions on, the export of medical equipment and personal protective equipment have given us all a fright. While thankfully critical shortages have not yet emerged, the crisis has confirmed that being able to domestically produce a full range of essential manufactures is a matter of national wellbeing.

    For many years the conventional economic wisdom was that as a high-wage, resource-rich economy, Australia was unable to competitively manufacture — nor did it need to. Between digging up raw materials and shipping them to Asian trading partners (subsequently paying a premium for reimported manufactures made from those resources) and our pivot to a ‘service economy’, we could somehow sidestep the need to produce what we materially use. Even Treasurer Josh Frydenberg has now conceded that unbalanced strategy is not viable.

    It’s true the extraction of our extraordinary mineral endowment made some Australians wealthy, but in a lopsided way: unbalanced reliance on resource extraction, combined with the long decline of manufacturing, has made Australia far more unequal — indeed, we are now more unequal than most OECD nations. Additionally, this myopic economic focus has put us at the mercy of boom-and-bust cycles in global demand for our resources.

    There are many core reasons why Australia needs a healthy, proportionate manufacturing sector:

    • Australians are buying more manufactured goods over time; and manufacturing output is growing around the world. The absolute decline of manufacturing in Australia is an exception to the experience of other industrialised countries.
    • Manufacturing is the most innovation-intensive sector in the whole economy. No country can be an innovation leader without manufacturing.
    • Manufactured goods account for over two-thirds of world merchandise trade. A country that cannot successfully export manufactures will be shut out of most trade.
    • Production costs in Australia are not expensive relative to other industrial countries (now that the Australian dollar is once again trading in normal range).
    • Even small remote countries (like Korea, Ireland, New Zealand and Israel) are increasing their manufacturing output, and preserving and creating manufacturing jobs. Their experience demonstrates that we cannot blame geographic isolation for our deindustrialisation.
    • Manufacturing anchors hundreds of thousands of other jobs throughout the economy, thanks to its long and complex supply chain. A myriad of supplies and inputs are purchased by manufacturing facilities.

    There’s another key reason to be optimistic about Australian manufacturing — if we create an appropriate policy environment for it. Australia is poised to take advantage of our bountiful renewable energy endowment to reinvigorate manufacturing, on the foundation of plentiful, competitive, and reliable power.

    Read The Centre for Future Work’s report Powering Onwards: Australia’s Opportunity to Reinvigorate Manufacturing through Renewable Energy, which considers the potential and actual connections between renewables and manufacturing in detail.

    The following core policy levers would help to ensure that Australia’s manufacturing sector thrives in decades to come, enhancing our prosperity and our national security:

    Targeted Tax Incentives: No-strings-attached tax cuts for corporations do not stimulate investment, innovation, or employment. Rather, fiscal incentives are more effective when they are linked directly to investment. Examples include accelerated depreciation provisions (allowing companies to write off the cost of new investments faster), investment tax credits, and public co-investments in specific strategic projects.

    Investing Public Funds in Key Industries: International experience confirms that public financial assets can effectively lever greater capital investment in key industries. These include state-owned development banks (as in Japan and Korea) or other forms of sovereign wealth (as in Singapore, the UAE, and Norway). Public investment vehicles have been used successfully — indeed profitably — in numerous applications in Australia (for example, the CEFC to finance sustainable energy projects). The same principles can apply in manufacturing investment. Additionally, industry super funds could play a larger role in financing the development of strategic products and sectors.

    Innovation: Empirical evidence shows successful innovation must be embodied in the hands-on process of ‘learning by doing’. And there is no other sector more directly connected to the innovation process than manufacturing. Government needs to provide tangible, direct support to innovation in manufacturing. We need better systems for linking public innovation activity with commercial applications. And we can emulate successful public equity investments in innovation-intensive businesses in other countries (like the effective methods for financing innovative firms used in Israel, Finland, and Ireland).

    Sector Strategies: Government needs to identify manufacturing sub-sectors with the right criteria for success, and then co-ordinate investment and growth. These sector strategies must engage all relevant sector stakeholders (business, unions, educational institutions, research organisations, state and local governments). Even businesses which compete with each other can benefit when the whole sector succeeds. Criteria for identifying high-potential sectors include innovation, export orientation, productivity, and strong supply chain linkages.

    Networks, Eco-Systems, and Clusters: Successful modern industrial policy relies centrally on connections and collaboration among players from different firms, agencies, and stakeholders. Research shows that spillovers among these diverse sector participants, and the sharing of knowledge between them, are crucial to the development of ‘critical mass’ in any high-tech industry. Often, these networks and clusters are geographically concentrated. Government cannot simply ‘create’ clusters, but it can facilitate their emergence.

    Industrial Infrastructure: Government investments in public capital assets of all kinds will play a crucial role in fostering manufacturing growth. Infrastructure investments help to offset the sustained weakness of private investment, and improve weak macroeconomic conditions. One key focus of infrastructure investment should include facilities and services which support manufacturing: ranging from transportation infrastructure, to utility connections (especially renewable energy), to modern training facilities (to help better integrate TAFE and university training with industry). We should maximise the use of Australian-made manufacturing content in those (and all other) infrastructure projects.

    Connecting Renewable Energy Investment to Manufacturing: Given Australia’s superabundance of renewable resources, Australia should position itself as the world’s renewable energy superpower. Renewable energy is appropriate for most industrial applications, including heavy industry, and now offers lower costs than fossil fuel sources (including gas). To expedite the transition to renewable energy, the manufacturing sector requires stability in energy policy, industrial strategies to take advantage of Australia’s renewable energy endowment, and government partnerships with firms that can benefit from and add value to Australia’s renewable energy endowment.

    Skills and Capacities: Enhancing the future skills and capacities of workers must be a vital component of future sector strategies. Consistent funding for skills training at all levels is essential, as are efforts to more closely link training programs with future workforce needs in strategic sectors. Germany’s apprenticeship system is perhaps the most outstanding international role model in this area.

    Leveraging Procurement: Australian governments are massive purchasers of manufactured goods. An obvious way to support domestic manufacturing is to ensure those expenditures generate the maximum possible boost to domestic industry. This also helps to reduce the final net cost of the program: since the government collects additional revenues through the new work spurred by domestic procurement decisions, offsetting the public expenditure. Other countries regularly utilise domestic content targets in procurement to support domestic producers. Australia can do the same.

    Trade that Goes Both Ways: International trade is essential to the viability of most manufacturing due to the importance of economies of scale in production. Australian trade negotiators need to do far more than mutual tariff reduction to stimulate Australian manufactured exports. And Australian agencies (like Austrade) can be much more proactive in promoting Australia’s exports, through initiatives like expanded credit financing, initiatives to leverage Australian participation in global supply chains, and government support for international marketing.

    A thriving manufacturing sector confers important benefits across the whole economy. Even more importantly, a large and adaptable manufacturing sector offers resilience against periodic crises such as COVID-19. If Australia does not add value through the expansion of our manufacturing sectors, we can anticipate that our relative standard of living will decline, and our vulnerability to future supply disruptions and health crises will only increase. We can and must build a manufacturing sector that is economically and ecologically sustainable, and that adds complexity and resilience to Australia’s economy.

    See the Centre for Future Work’s previous research on the Australian manufacturing sector:

    Manufacturing Still Matters (2016) shows that manufacturing, far from being inherently doomed in Australia, is quite viable. Similar countries manufacture successfully. It provides an agenda of policy recommendations for support of the sector.

    Manufacturing: A Moment of Opportunity (2017) demonstrates that while the Australian public underestimate the size and therefore strategic economic importance of the sector, it enjoys strong popular support. Furthermore, the report identifies some promising signs of future growth in the sector.

    From Consensus to Action: Report from the First National Manufacturing Summit (2018) summarises the key findings of the first National Manufacturing Summit, including areas of strong policy consensus reached among the business, industry peak bodies, trade unions, government departments, academic institutions and vocational training providers and other summit delegates. The report also identifies several priorities for further policy research.

    Advanced Skills for Advanced Manufacturing (2018) argues that Australia’s present vocational education and training system, damaged by years of underfunding and failed policy experimentation, is a weak link in meeting the needs of the industry. High-skilled, high-paid jobs rely on a strong VET sector, and this report identifies twelve key reforms to achieve that.

    Auto Shutdown Another Economic Blow (2016) analyses the causes and impacts of the closure of the Australian car manufacturing industry. It notes that secondary job losses will be several times larger than the direct jobs eliminated at the car plants.

    Penny Wise and Pound Foolish (2016) analyses the impact of the NSW government’s decision to source railroad rolling stock manufacturing work to Korea rather than taking advantage of the opportunity to procure domestically. Governments need to account for the full range of potential costs and benefits of their procurement decisions (job creation, industry development, government revenues, and so on), not simply minimise the up-front purchase cost.

    The post Pandemic Shows Australia Needs Domestic Manufacturing appeared first on The Australia Institute's Centre for Future Work.

  • 93 Economic Experts Back Govt Wages Subsidy in Open Letter

    Signatories to the open letter include Bernie Fraser, former Secretary to the Treasury and Governor of the Reserve Bank; Professor Roy Green, former Dean of Business at UTS; Professor Andrew Stewart, Professor of Law at the University of Adelaide; RMIT Distinguished Professor Sara Charlesworth; Professor John Howe, Director of the University of Melbourne School of Government; and Rae Cooper, Professor of Gender, Work and Employment Relations at the University of Sydney.

    The open letter states, in part:

    “The coming recession will be unprecedented in Australian history – in both its speed and its depth. Without immediate action, we expect that 1-2 million workers, or even more, could lose their jobs in coming weeks. That would drive unemployment to 15% or higher, overwhelm income support programs, and leave hundreds of thousands of businesses unable to function – even after the immediate health danger passes.

    “We recommend that the Commonwealth government immediately implement a large-scale wage subsidy scheme, similar to those already enacted in several other industrial countries.”

    “The breadth of support we received on this open letter confirms the proposal is supported by a broad cross-section of Australian stakeholders. The Government needs to move quickly now to implement this measure, and ease this pandemic’s devastating economic effects,” said Dr Jim Stanford, Director of the Centre for Future Work at the Australia Institute, and author of the open letter.

    The wage subsidy proposal has also been supported by many Australian unions, business peak bodies, and other stakeholders.

    Bernie Fraser, former Secretary to the Treasury and Reserve Bank Governor said, “Australia’s post-corona economic resurrection requires the on-going preservation both of the skills and self-esteem of our workforces, and of our business and entrepreneurial talents. If Australia is serious about ensuring the readiness of our work-forces to spring into action when the time comes, it should provide appropriate support direct to those workforces, as several other countries appear to be doing.”

    Professor John Howe, Director of the Melbourne School of Government, said, “Wage subsidies are a longstanding and legitimate form of government support for job creation and retention. In the context of the current crisis, an urgently implemented wage subsidy program will help workers retain income and stay in employment, unlike direct welfare payments. And they are more accountable than boosting cash flow to employers, which may or may not be used to save jobs.”

    Professor Roy Green, former Dean of Business at UTS, said, “The duty of the Australian Government in these extraordinary times is to ensure that a short term crisis does not become a long term disaster for the nation. In fact, the Prime Minister has referenced the need to build a ‘bridge’ to a better, stronger economy. For this to happen, the bridge must include substantial wage subsidies to retain workforces for the recovery and provide them with an income as they reskill and reposition our industries for the future.”

    The full open letter and list of signatories can be viewed here.

    A catalogue of international initiatives to support workers, compiled by the Centre for Future Work, is available here.

    The post 93 Economic Experts Back Govt Wages Subsidy in Open Letter appeared first on The Australia Institute's Centre for Future Work.

  • Public Sector Pay Freezes Could Push Economy From Recession to Depression

    Governments are devoting unprecedented resources to protecting Australians against the health and economic effects of the pandemic, but a contradictory push to adopt fiscal austerity measures is also becoming apparent. Leaders of governments at all levels — federal, state and local council – have already announced plans to freeze wages and cancel previously agreed pay raises for public servants.

    Key findings:

    • At least 35% of the purported ‘savings’ from freezing public service pay is offset by the loss of direct tax revenues that would have been collected as a result of higher income and spending by public servants. And considering other tax revenue losses from the resulting slowdown in broader wage growth, even more of those ‘savings’ are never realised.
    • Pay freezes in the public sector spill over into weaker economy-wide wage growth through three key channels: a composition effect, a demonstration effect, and a macroeconomic effect.
    • Freezing pay for even short periods reduces the lifetime income and superannuation savings of public sector workers by tens of thousands of dollars, because it permanently reduces their lifetime wage trajectory.
      • A 6-month pay freeze for a typical federal APS worker will reduce career earnings by an estimated $23,500, and superannuation accumulations by another $4000 or more. The longer 2-year freeze contemplated for Brisbane local council workers would reduce career earnings by over $100,000, and superannuation accumulations by $17,500.
    • Misguided public sector wage restraint in the aftermath of the GFC short-circuited an initial recovery in private-sector wage trends in 2010-11, and helped lock in a lasting deceleration of national wages after 2013. Since then Australia has experienced the slowest sustained wage growth in the entire post-war era.

    “Pay freezes are being imposed at the very moment when public sector workers such as healthcare workers, first responders, teachers and social service providers are performing vital tasks, at personal risk to themselves, to support Australians through the pandemic. Freezing pay for these essential workers is not just morally questionable — it’s also a major economic mistake,” said Dr. Jim Stanford, Director of the Centre for Future Work.

    “The motivation for public sector wage austerity seems more ideological than fiscal or economic: pay freezes are justified with appeals to ‘shared sacrifice,’ and a symbolic desire to ‘tighten the purse strings’ at a moment when governments are about to incur their largest deficits in history.

    “However, our research shows these arbitrary pay freezes are both unfair and economically counterproductive. Government policy should be driven by economic reality, not political optics.

    “Public sector wage austerity imposed after the Global Financial Crisis helped ‘lock in’ historically slow wage growth in the private sector in the years that followed. Since then, wages in Australia have grown at their slowest sustained rate in the post-war era.

    “Australia cannot tolerate a further deceleration of wage and price inflation. Inflation was already close to zero, chronically falling below the RBA’s inflation target, even before the economy was hit by the double shock of bushfires and COVID-19.

    “Economy-wide deflation is associated with long-term depression. Australia cannot risk letting any COVID-19 recession turn into a depression. At this pivotal moment, governments’ priority should be anchoring price expectations, supporting nominal incomes, and contributing to aggregate demand. Normal wage gains should be implemented in the public sector and encouraged in the private sector.”

    The post Public Sector Pay Freezes Could Push Economy From Recession to Depression appeared first on The Australia Institute's Centre for Future Work.

  • 81% of Australians support JobKeeper for all Casual Workers

    More than eight in ten Australians support extending JobKeeper to all casual workers.

  • Webinar: Protecting Jobs and Incomes During the Pandemic

    Jim titled his presentation “Off the Cliff”, highlighting that the immediate shutdown of so much of Australia’s work and production is producing an economic contraction unlike anything experienced in history.

    Comparing Recessions

    Watch a video recording of the webinar:

    And/or download Jim’s slides below.

    This webinar was part of the Australia Institute’s weekly pandemic webinar series.

    The post Webinar: Protecting Jobs and Incomes During the Pandemic appeared first on The Australia Institute's Centre for Future Work.

  • Open Letter From Economists and Policy Experts: Wage Subsidy to Protect Jobs During Pandemic

    The letter and the full list of signatories is reprinted below. It has been forwarded to Prime Minister Morrison.

    Public Statement from Economists and Public Policy Experts:

    A Wage Subsidy to Protect Jobs During the Coronavirus Shutdown

    The unprecedented public health measures required to deal with the COVID-19 pandemic are causing a dramatic shutdown of work and production in several key sectors of Australia’s economy. Immediate full or partial closures of activity are occurring in several consumer-facing industries (such as hospitality, retail, airlines, recreation and personal services). But before long, spillover losses will be experienced in other sectors, too: including wholesale trade and logistics, manufacturing, business services, education, and others. Consumer and business confidence has been deeply shocked, and that will magnify the negative economic effects of the pandemic.

    The coming recession will be unprecedented in Australian history – in both its speed and its depth. Without immediate action, we expect that 1-2 million workers, or even more, could lose their jobs in coming weeks. That would drive unemployment to 15% or higher, overwhelm income support programs, and leave hundreds of thousands of businesses unable to function – even after the immediate health danger passes.

    This is a dangerous and dramatic moment in Australia’s economic history. It is imperative that the federal and state governments act immediately and powerfully to protect Australian workers and businesses from the worst of the coming downturn. Important steps have been taken to expand access and benefit levels for income support payments to Australian workers (including casuals, contractors, and gig workers) losing work because of the pandemic. This is a helpful, but on its own inadequate, response. Government must also act forcefully to prevent mass job losses in coming weeks – not just provide support to those who do lose work.

    In this regard, we recommend that the Commonwealth government immediately implement a large-scale wage subsidy scheme, similar to those already enacted in several other industrial countries (including, variously, the UK, Denmark, New Zealand, the Netherlands, South Korea, and Ireland). Under these programs, government directly pays to employers (for a limited period of time) a majority portion of wages (between 70 and 90%) to cover the wages of workers who would otherwise be stood down from their positions. The measure can apply to non-standard workers (including contractors and self-employed). It can also be integrated with measures to support short time working as an alternative to complete redundancy. The wage subsidy is paid to firms experiencing severe losses of revenue and business (beyond a specified threshold). It would cover most of the wage bills for workers who can no longer work for economic reasons, up to a specified ceiling (perhaps the level of full-time median earnings). This program will be expensive – but governments everywhere have recognised that this unprecedented crisis requires them to do everything in their power to protect people, jobs, communities and the economy.

    To date, Australia’s response to the pandemic has been uncertain, inconsistent and inadequate. Immediate, powerful action to keep millions of Australians in their jobs, instead of pushing them into an overloaded and complex Centrelink system, would significantly ease the pandemic’s painful economic effects. It would underpin financial stability for millions of households through the coming terrible weeks or months. And it would preserve the viability of hundreds of thousands of Australian businesses, allowing them to resume work and production as soon as the health restrictions are eased.

    We the undersigned support the proposal for a strong wage subsidy program to keep workers in employment through the coming downturn, and we urge the Commonwealth government to implement such a policy quickly.

    Download full list of signatories below.

    The post Open Letter From Economists and Policy Experts: Wage Subsidy to Protect Jobs During Pandemic appeared first on The Australia Institute's Centre for Future Work.

  • Responding to the Economic Emergency

    That’s the core message of new analysis by Centre for Future Work Director Dr. Jim Stanford, published today by the Australian journal New Matilda.

    Stanford’s article outlines the immediate economic measures needed to both confront the health emergency and prevent households and firms from collapsing:

    • Immediate mobilization of resources to protect health: including more staff at health facilities, quick deployment of off-site and mobile testing capacities, home support for people quarantined or recovering, and quick expansion of equipment and facilities where possible.
    • Income protection for workers: including for casuals, self-employed, gig-workers, and many part-timers who don’t have effective access to sick pay. Incomes must be protected for all workers (regardless of employment status), through mandated special payments (as proposed by the ACTU).
    • Other direct income supplements: similar to the one-time payments distributed in 2009, as well as more targeted aid (like higher Newstart).
    • Debt relief and business assistance: emergency financing will be needed to keep firms viable in many industries (including airlines, other transportation, tourism, and hospitality). Other parts of society also need protection from creditors; foreclosures and evictions should be prohibited, and other personal and credit card debts deferred.

    But Stanford also discusses the longer-run challenge that will face the Australian economy: the pandemic is imposing a shock that is far too powerful and all-encompassing for private market players to autonomously recover from. The economy will need unprecedented and lasting investments by government to repair and expand public infrastructure and services, and directly put Australians back to work:

    “There is enormous need for urgent rebuilding required in our economy and our communities. Repairing and strengthening health care infrastructure comes first, but other priorities, too, are urgent: like sustainable transit, green energy, non-market housing, aged care and early child education. The case for mobilising resources under the leadership of governments and public institutions, and employing millions of Australians to do that work, is compelling. We can repair the damage of this crisis (and better prepare for the next one), deliver valuable services, and create millions of jobs. All we need is the willingness to imagine a different model of organizing and leading economic activity.”

    Please read the full article, We Need Wage Guarantees And Radical Restructure, Not More ‘Stimulus’, published by New Matilda.

    The post Responding to the Economic Emergency appeared first on The Australia Institute's Centre for Future Work.

  • Gender Inequality in Australia’s Labour Market: A Factbook

    The factbook compiles evidence on over 60 different statistical indicators of gender inequality in Australia, organised into 18 different subject groupings. It paints a composite picture of how women are blocked from full participation in work and economic activity, experience greater precarity in employment, are paid less for their efforts, and experience other forms of exploitation (including violence and sexual assault in workplaces).

    Some of its more startling findings include:

    • The true wage gap between women and men is much larger than often reported. The commonly-cited gender wage gap of 14% only applies to women working in full-time positions, and excludes bonuses and overtime payments. However, women have less access to full-time jobs, and receive far less bonus and supplementary income than men. The gender gap in total wage income is 32% – more than twice as wide.
    • Women are much more subject to precarious and insecure work arrangements than men. They are far more likely to be employed in part-time, casual, and temporary positions than men. Only 43% of employed Australian women work in a traditional full-time permanent job with normal entitlements (such as paid sick leave, holidays, and superannuation). The rest all experience one or more dimensions of precarity in their jobs. That compares to 57% of men in permanent full-time jobs with entitlements.
    • Women who undertake self-employment are especially vulnerable. The report shows that 47% of self-employed women are in vulnerable business positions: working part-time, and working either without incorporation or without any other employees (or both). That compares to 19.% of self-employed men.
    • Women are now more likely to be members of a union than men, and make up more than half of union members. Women who are in a union earn 29% more per week than women who are not in a union. For part-time workers, the union advantage is even bigger: women union members earn 44% more than non-members

    “The statistical evidence is overwhelming that women are a long way from achieving equality in Australia’s workplaces,” said Alison Pennington, Senior Economist at the Centre for Future Work and co-author of the factbook.

    “These systemic and structural barriers to full participation and fair compensation are holding Australian women back and our economy is weaker for it.

    “Australian women need to be able to work and earn to their full potential. This requires powerful measures to support women workers in all aspects of their lives; from quality affordable childcare to much stronger protections against violence and sexual harassment.”

    The post Gender Inequality in Australia’s Labour Market: A Factbook appeared first on The Australia Institute's Centre for Future Work.

  • Financialisation and the Productivity Slowdown

    Financialisation and the Productivity Conundrum

    by Anis Chowdhury

    There has been much angst at the slower or stagnant productivity growth experienced recently in Australia. Ross Gittins, the Sydney Morning Herald’s much respected Economics Editor, summarised some of the discussions reflecting on the causes and remedies of the productivity problem in his recent piece, ‘Productivity problem? Start at the bottom, not the top’ (SMH, 2 March 2020).

    The phenomenon of slow productivity growth is neither unique to Australia nor recent. It has been observed globally over the past few decades, especially in the developed world, as highlighted in recent reports on global economic health (e.g. United Nations, World Economic Situation and Prospects 2020, and the World Bank’s Global Economic Prospects 2020). The trend accelerated since the global financial crisis (GFC) of 2008-2009, as emphasised by Maurice Obstfeld, IMF’s former Chief Economist, at the joint BIS-IMF-OECD conference on weak productivity (10 January 2018).

    The UN report notes that “as firms around the globe have become more reluctant to invest, productivity growth has continued to decelerate.” It attributes much of the slowdown to significantly lower contributions from capital deepening (investment in machinery, technology, etc.). Subdued productivity growth is also proposed as one of the reasons for slow growth of real wages and falling share of labour income in GDP, contributing to rising inequality – although even more rapid productivity growth is no guarantee, of course, of rising wages or greater equality.

    The World Bank report observes that to rekindle productivity growth, a comprehensive approach is necessary for “facilitating investment in physical, intangible, and human capital; encouraging reallocation of resources towards more productive sectors; fostering firm capabilities to reinvigorate technology adoption and innovation; and promoting a growth-friendly macroeconomic and institutional environment.”

    While similar observations can also be found in the OECD and IMF reports, none offer explanations as to why this is happening, that reach beyond orthodox excuses – like uncertainty due to Brexit and US-China trade tensions. The Bank of International Settlements (BIS), OECD and IMF also included such factors as unconventional monetary policy (very low or negative real interest rates) and financial frictions (e.g. firm-level financial fragilities and tightening credit conditions) as possible causes of weak investment and the productivity slowdown since the GFC.

    Financialisation

    However, one can trace the deeper cause of the long-term declining trend in productivity growth since the 1970s to financialisation: that is, the dominance of finance over the real economy. This is visible globally in the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies.

    Beginning with the collapse of the Bretton Woods system in August 1971, when President Nixon unilaterally withdrew US commitment to gold convertibility of currencies, the process of financialisation gathered pace in the 1980s. This coincided with the neoliberal counter revolution against Keynesian economics, and the coming to power of Margaret Thatcher in the UK and Ronald Reagan in the US. All this ushered in an era of multinational corporation-led globalisation. In turn, this led to rapid growth of international trade, foreign direct investment and capital flows – all mutually reinforcing – and the consolidation of finance’s domination over the real economy.

    Several features of this era of financialisation have direct implications for productivity. They include:

    • Rapid expansion of financial markets, and the proliferation of financial institutions, instruments and services with the de-regulation and liberalisation of the financial system, blurring the distinction between speculative and patient investors;
    • The banking sector becoming more concentrated, less regionalised and more internationalised with the decline of mutual, co-operative and State ownership of banks and financial institutions;
    • Financial intermediation shifting from banks and other institutions to financial markets, thus the axiomatic ‘invisible hand’ of supposedly anonymous, self-regulating financial markets replacing the ‘visible hand’ of relationship banking;
    • Nonfinancial corporations increasingly deriving profitability from their financial as opposed to their productive activities;
    • Financial institutions increasingly becoming owners of equity, and real decision-making power shifting from corporate boardrooms to global financial markets pursuing shareholder value;
    • Managerial remuneration packages increasingly becoming linked to short-term profitability and share price performance rather than to longer-term growth prospects.

    These features, by and large, have adversely affected levels of real capital investment and innovation, due to the inexorable pressure of financial interests for the pursuit of short-term profits and dividends. Shareholders (most of whom are financial institutions) demand from corporations a bigger, faster distribution of profits. The lower retention of profits ratio, and share buybacks to boost share price together imply reduced internal finance for real investment, R&D, and technology upgrading.

    Corporate managers act in the interests of the financial sector as they too profit personally from increasing stock market valuations – often linked to reduction of employment. This has meant chronic job insecurity and underinvestment in on-the-job training. Increased insecurity also discourages workers to invest in their own skill upgrading.

    Thus, the overall effect of financialisation on investment, technology adoption, skill upgrading has been negative, with adverse consequences for productivity and decent jobs.

    Misallocation

    An overgrown financial system also costs the economy on a daily basis by attracting too many talented workers to ultimately unproductive careers in the financial sector. Talented students are disproportionately attracted to finance courses in preference to liberal arts or social sciences; moreover, bright engineering and science graduates are increasingly engaged in the financial sector, where they can earn many times more. Research at BIS shows that when skilled labour works in finance, the financial sector grows more quickly at the expense of the real economy – disproportionately harming R&D intensive industries.

    In his Fred Hirsch Memorial Lecture (15 May 1984), Nobel Laureate James Tobin doubted the value of “throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services, into activities that generate high private rewards disproportionate to the social productivity.”

    Rent seeking

    Luigi Zingales titled his 2015 presidential address to the American Finance Association, ‘Does finance benefit society?’. While acknowledging the need for a sophisticated financial sector, he doubted whether the growth of the financial sector in the last forty years has

    been beneficial to society. He argued on the basis of both theory and empirical evidence that a large component of that growth has been pure rent seeking.

    According to Gerry Epstein and Juan Antonio Montecino, the US financial sector captured rents “through a variety of mechanisms including anticompetitive practices, the marketing of excessively complex and risky products, government subsidies such as financial bailouts, and even fraudulent activities… By overcharging for products and services, financial firms grab a bigger slice of the economic pie at the expense of their customers and taxpayers.”

    Robert Jenkins listed more ‘misdeeds’ of UK banks. These range from mis-selling (e.g. of payment protection insurance, interest rate swaps), manipulation of markets (e.g. precious metals markets, US Treasury Market auction/client sales, energy markets), aiding and abetting tax evasion and money laundering for violent drug cartels, collusion with Greek authorities to mislead EU policy makers on meeting Euro criteria, and more.

    All this sounds too familiar to us in Australia after the Hayne Royal Commission into misconduct in the financial services industry.

    A drag on the real sector

    The power of finance has become a drag on the development of the real sector in a number of ways.

    First, the manner in which the financial sector has grown has not been conducive for

    real investment and savings. Finance has failed to act as an intermediary between savers and investors, and to allocate and monitor funds for real investment.

    Second, the growth of financial markets and speculation have diverted resources into

    what are essentially zero-sum games.

    Third, the rush to financial liberalisation and the failures of the regulatory systems produced more frequent financial crises, with increasing depth and width. An over-abundance of (cash) finance is used primarily to fund a proliferation of short-term, high-risk investments in newly developed financial instruments, such as derivatives — Warren Buffett’s ‘financial weapons of mass destruction’ that blew up the global financial system in 2007–08.

    Thus, real capital formation which increases overall economic output has slowed down, as profit owners, looking for the highest returns in the shortest possible time, reallocate their investments to more profitable financial markets.

    With financial speculators now panicking in the face of the spread of the COVID-19 virus, in the context of inflated and debt-heavy financial valuations, we could be poised for another chapter in this repeating saga.

    Way out

    No amount of corporate tax cuts or suppression of labour rights in the name of structural reform will solve the productivity conundrum. What is really required is the taming of finance.

    Finance can positively contribute to economic progress, but only when the ‘ephor’ is ‘governed’ and ‘directed’ by State regulation to structure accumulation and distribution into socially useful directions.

    The earlier era of financialisation during the late 19th century and early 20th century ended with the Great Depression. John Maynard Keynes wrote in ‘The Grand Slump of 1930’, “there cannot be a real recovery . . . until the ideas of lenders and the ideas of productive borrowers are brought together again . . . .”. He thought, “seldom in modern history has the gap between the two been so wide and so difficult to bridge.”

    Fortunately, the policymakers listened to Keynes and regulated finance to serve the real economy. This produced nearly three decades of the ‘golden age’ of capitalism, ending in the 1970s.

    But the gap between finance and the real economy is now even wider and more difficult to bridge. It will require a lot of political will and courage to confront the very powerful finance capital which has changed the rules of the game to facilitate rent-seeking practices of a self-serving global elite.

    Dr. Anis Chowdhury is an Adjunct Professor at Western Sydney University (School of Social Sciences) and the University of New South Wales (School of Business, ADFA), and an Associate of the Centre for Future Work.

    The post Financialisation and the Productivity Slowdown appeared first on The Australia Institute's Centre for Future Work.

  • Meet the New Boss, Same as the Old Boss

    Stanford highlights seven ways in which the nature of work and employment is demonstrating a fundamental continuity, despite changes in technology and work organisation: ranging from the predominance of wage labour in the economy, to employers’ continuing interest in extracting maximum labour effort for the least possible labour cost.

    “I have started to conclude there is more constancy than change in the world of work. In particular, the central power relationships that shape employment in a capitalist economy are not fundamentally changing: to the contrary, they are being reinforced… As a result, I suspect the future of work will look a lot like its past, at least as it has existed over the past two centuries. Where work is concerned, it is truly a case of ‘back to the future.’”

    Stanford rejects the common assumption that changes in employment relationships (such as the rise of “gig” jobs, and other forms of precarious work) are driven primarily by technology–stressing instead the importance of discrete choices within enterprises and society as a whole about what kinds of technology are developed, and how they are implemented. Improvements in work are certainly possible, but only when workers are able to exert active, organised pressure on employers and governments.

    Please read Stanford’s full commentary, Meet the New Boss, Same as the Old Boss (‘Who’ soundtrack optional!).

    The post Meet the New Boss, Same as the Old Boss appeared first on The Australia Institute's Centre for Future Work.