Swan’s speech meaningfully right but technically wrong

Former Australian Treasurer Wayne Swan recently delivered a speech at the Australian workers’ union national conference that has attracted a fair bit of commentary. You can find a full transcript here: https://swanmp.org/news-media/speeches/speech-restoring-class-balance-bargaining-power-and-full-employment-in-the-21st-century/. 

I broadly agree with the thrust of the speech, but some of the technical details struck me as quite wrong and indicative of deep misunderstandings among the left (though everyone is muddled on this stuff, including if not especially, the right) regarding what needs addressing in contemporary economic trends. The below is basically an endorsement of the political message of the speech and a bunch of caveats about the technical analysis in it.

First, a quick list of some of the things in the speech that I think were bang on. First, the notion of wage-led growth is something I wholeheartedly endorse. Obviously, investment is a critical headline figure, but jobless investment is pretty pointless from a welfare enhancing and/or Rawlsian point of view, and wage growth drives broad-based consumption growth, which is critical for economic development that is felt by society broadly. If you care about healthy communities then you care about wage growth, not GDP growth.

Second, greater accountability on capital and the corporate sector seems a no-brainer, especially as far as competition policy is concerned. I’m quite fond of capitalists, but they should be exposed to competition like anybody else, and we are increasingly struggling in Australia on that front. Andrew Leigh and my PhD colleague Adam Triggs have done some great work on this recently. Check it out in pop form here and academic form here.

Tax reform to ‘defend and advance our world-leading progressive tax system’ is something I can get behind, especially viz. the Henry tax review, Leigh’s work on corporate tax, and policies to encourage sensible long-term investment decisions on the part of firms rather than riskier short-term profit maximising behaviour.

As I said, I broadly agree with the thrust of the speech that it is critical that Australia remains a worker’s paradise and an exemplary ‘market-disciplined welfare-state’, which is what I think we are—the best in the world. (Note though, that we are a workers paradise because we always have good jobs going, not because we privilege labour over capital. France does the latter and it is not a workers' paradise because unemployment is rampant and huge numbers of outsiders can only find irregular work). 

That said, there were some points in the speech that I thought were dumb and troubling insofar as they suggest the labour movement is pretty far behind the times.

First, the discussion of underemployment is a red herring, one that the left seems to be fixating on a lot at the moment. Very few underemployed people are actually looking for more work. Here’s the data from the first 12 waves of HILDA to 2012 (the effect got stronger in the next 3 years, but I don't have the data to hand). The graph shows all the people who work less than 30 but more than 0 hours per week. ‘1’ means you want to work less, ‘2’ means you are happy with your hours, and ‘3’ means you want to work more. More than half of the people here don’t want to work more, and indeed, a large number want to work even less. What we need to do is make it easier for people to match their preferred hours to a job, not just increase the number of full-time jobs available. This is especially true for parents, see below.

Second, Swan suggests we should target an unemployment rate of 3%. This is weird given that the RBA and treasury both see the natural rate of unemployment as 5% these days. The reason for the natural rate rising over time is the growing causalisation of the workforce and the greater use of contracts rather than permanent positions. This has resulted in greater churn in the labour market, with people being between jobs more frequently. As a result, the headline unemployment rate is higher at any one time, but people are not spending much time unemployed, so it’s not a bad thing, especially as they earn more this way. What would be more appropriate to target would be the long-term unemployed rate, which is rising. It would also be helpful to see whether they are any notable frictions in the labour market that make it hard for contract workers to find new jobs. My understanding is that we don’t do a great job of reducing information shortfalls in the labour market in Australia.  

Now of course the labour movement sees contracts and causalisation as bad things for the most part. This to me seems excessively black and white. For a start, much of this is driven by women’s greater participation in the workforce. They need such work arrangements to manage parenting and work commitments. Causal and contract formats also make it easier to work less by going freelance and working when you want to. What I would need to see to convince me that we actually have a problem is some data showing that many people doing casual and contract labour would prefer permanent contracts and don’t get them even after some reasonable period of time, say 12 months.

I find the emphasis on full-time, permanent jobs a little old fashioned and a little weird. It’s old fashioned because it doesn’t reckon with changing household dynamics (i.e. labour-left have an implicit concept of a single-breadwinner household) and because it assumes that the kinds of jobs available these days can be made permanent (and with only minimal cost in terms of efficiency). It’s a little weird because I would have thought the long-term goal of the labour movement would be to reduce work hours. So why are they concerned about people working less and happy about it? I presume it’s just because they are missing that ‘and happy about it’ part.

Third, while I fully endorse having not just private sector people on the RBA board, putting Sally McManus on there is absolutely batshit crazy. It should be a basic requirement of board membership that you think capital has a marginal product.

Fourth, the constant use of ‘trickle-down economics’ and the as-always offhand use of ‘neoliberalism’ makes me nauseous. On the former of these two notions, I direct the reader’s attention to Thomas Sowell’s essay ‘“Trickle-down theory” and “tax-cuts for the rich”’, available here: http://www.tsowell.com/images/Hoover%20Proof.pdf. There are two main things to take away from this essay. First, no economist (or even right-wing politician) ever has endorsed something called ‘trickle-down economics’. It is a rhetorical invention of the left. Second, the Reagan and Bush era tax cuts dramatically increased total tax receipts from the rich. This is because prior to the tax cuts, the wealthy were storing large portions of their wealth in tax-free, low-interest governments securities. After the tax cuts, they moved their capital to higher-yielding but also taxed assets because even with the tax, they made more money this way. So inequality increased, but the wealthy were also paying heaps more tax that could fund transfers. Now of course, Reagan spent the extra government revenue on bombs and Bush on war in the middle east, but the point stands that you have a difficult trade off here between more inequality and more government funds for transfers. If the money is spent on transfers, you’re basically looking at either a higher gini coefficient or a higher bottom-decile to top-decile ratio. It strikes me as difficult to choose between the two within left-wing ethical paradigms, but personally I’m much more inclined towards more transfer payments (and I’m Rawlsian, which I’d say it pretty bloody left).

That’s just looking at tax-receipts. There is also the fact that the rich invested their money in higher yielding assets, which means more growth and, probably, more jobs. Now I’m not saying that concessions to the rich are good for growth, but I am saying that concessions to the rich can be good for growth. You need to take these things on a case by case and see what the data says. I’m of course sceptical of most complaints on the part of the wealthy that they are being taxed too much, and I am of course always wary of the power of money and lobbying. But my concerns either way are going to be influenced by data and not by ideological rhetoric.

Fifth, concerns about 2% wage growth seem misplaced when GDP growth is 2%, especially as not all of that growth would be the marginal product of labour. In this regard, I am constantly struck by the ham-fisted engagement (if there even is any) with technological change on the part of labour movements in the rich countries. Information and coordination technologies (ICT) and automation are buttressing the marginal product of capital such that capital is not becoming cyclically more expensive than labour the way it did in the past, hence the greater capital share in growth and flatlining wages. Certainly, the decline of labour power is a part of this declining wage share, but it’s also true that the decline in labour power is substantially a function of exogenous technological change, not endogenous changing institutional structures. What’s needed in this context is adaptation on the part of the labour side of labour market institutions to assist labour in benefitting from technological change. I am thinking in particular of much more sophisticated structures for lifelong learning, like what they have in Scandinavia (those thoroughly market economies that have a strange reputation for being socialist). Instead, most of the thrust from labour groups seems to be directed at bargaining platforms (i.e. the French model). This would result in greater extraction of profits even as labour’s contribution to those profits declines, which to me seems a politically untenable long-term position, and liable to incite the fury of anyone with a proportional view of equity (i.e. anyone right-wing). For a thoroughgoing analysis of these things from a famously left-leaning economist, see Atkinson’s last book Inequality: what can be done, especially chapter 3.

So to sum up, I broadly support this message, insofar as I correctly perceived that it is in Swan's speech: we need to strengthen, advance and refine our market-disciplined welfare-state model to meet the challenges of a very capital-friendly 21^st century and ensure continued broad-based growth in Australia. But Wayne is way off on the wrong-paddock when it comes to his technical analysis, and this makes me worried about what kind of policies we are going to see championed by left-wing parties over the next decade or two, especially as what I hear from the Labor right doesn't strike me as particularly switched on either (not to mention the Liberals and Torys).