Doubts about jobs and growth

Greg Jericho posted a good article HERE covering the growing doubts about the policies that are being foisted upon us. The following is a shortened version  without the charts.

As developed economies such as Australia’s struggle to encourage growth, even the disciples of austerity are admitting that they might have it wrong. For Malcolm Turnbull the election is all about jobs and growth and a belief that a company tax cut and reducing government spending is the way to achieve both. But in light of the failures of such standard economic thinking after the GFC to provide economic growth, new research is finding that policies that fail to consider other aspects such as inequality are actually undermining long-term economic performance.

Prior to the GFC, the pervading view was that neo-liberal polices of lower regulation, more competition, budget surpluses, increased trade and lower taxes had delivered the economic sweet spot.

And then the world with low regulation, budget surpluses, open markets and low taxes was blown to hell.

And yet the same thinking continues. The Liberal party pledges to cut company tax (to encourage foreign investment), crackdown on welfare spending (to reduce the budget deficit) and encourage more open markets (mostly through the talisman of free-trade agreements).

And certainly such openness has led to benefits – cheaper products that lift overall standard of living and improved the efficiency of local producers. But the neo-liberal strain of economic thought is one that would have us believe the GFC didn’t happen (ALP inherited a surplus, and then the blew it), that pursuing austerity or more open markets has no downside and that the benefits should just be taken as a given.

It’s the same thinking that underpins the Treasury’s justification for the company tax cut: it will eventually improve productivity via increased foreign investment and thus real wages will go up (despite it having virtually no impact on employment growth).

Productivity is a wonderful thing – increasing it improves all economic outlooks. The problem is over the past decade productivity growth has been falling and no one is really sure why.

It’s a bit of a worry (OK, a great worry) that no one is really sure that they are able to accurately measure what is basically the foundation of most economic “reform”.

Perhaps it is little wonder then that in light of the hits to economies from the GFC and the subsequent continued adherence by governments to pre-GFC thinking that the neo-liberal path is being more and more questioned – whether it be by supporters of Bernie Sanders in the USA , or more surprisingly by economists at the neo-liberal heartland of the International Monetary Fund.

An article in the IMF’s latest issue of is journal Finance and Development notes that “instead of delivering growth, some neoliberal policies have increased inequality” and jeopardised “durable” growth.

The authors note that there actually scant proof that the standard policies of encouraging foreign investment and reducing deficits and debt levels has improved economic growth.

They found that it’s tough to actually establish “the benefits in terms of increased growth” from these polices but that the costs from “increased inequality are prominent”. Even worse for those who desire economic growth above all else, they found that the “increased inequality in turn hurts the level and sustainability of growth.”

The authors note that their study of economies found that “austerity policies not only generate substantial welfare costs due to supply-side channels, they also hurt demand—and thus worsen employment and unemployment”.

As I have noted (repeatedly) lack of demand is a massive issue for our economy. Right now Malcolm Turnbull would have you believe that it is an absolute given that more foreign investment and lower taxation and government spending will deliver economic growth. The reality is such belief is based on a model that struggles to deliver proof that is actually works and which crucially ignores factors such as inequality that can actually undermine their goal of economic growth.

Nearly a decade on from the GFC it perhaps it time to acknowledge the neo-liberal model might have a few cracks in it.