Friday, 8 November 2019

The workers' shrinking pie

The current anaemic growth in wages will have far reaching effects. Our economy is structured around large levels of consumption spending. Our State government’s precarious fiscal position is largely dependent on GST receipts which are directly impacted by slower wages growth.

Yet most of the discussion about low wage growth glosses over the fact that labour’s share of national income, as distinct from the share going to the owners of capital, has been in decline for years. Sharing the spoils was a feature of the 1950s and 1960s as labour’s share of the national pie grew. However, over the last 40 years, labour share of the pie has fallen by almost ten percentage points.

It’s not a uniquely Australian phenomenon. It’s happened everywhere. At best, economists can spot what is happening. But they do not know why, or if they do, they’re not saying with any confidence. Hence, we’re a long way from taking corrective action.

What exactly constitutes ‘capital’? Back in the 1960s when the writer was introduced to economics, capital mainly consisted of investment goods, including plant, machinery and factories, used to make goods and services, hopefully for sale at a profit, which in turn would provide the means to acquire more capital and continue with the process. The logic of capitalism requires capital owners to be compensated for their capital investment. What remained after labour’s share was the return to capital owners.

Turn the clock forward 50 years and the picture has changed. Capital is increasingly fictitious capital, not tangibles like machines and buildings, but bits of paper, licenses and permits for example, plus a myriad of other rights created to channel future income to the owner of those rights. Much of the fictitious capital that abounds in today’s world are simply claims over future wealth. Wealth that is yet to be produced. More and more of the national pie ends up with the owners of fictitious capital.

The supreme irony of the noisy anti red tape brigade is that much of the fictitious capital which has benefited them has resulted from red tape.

Take a simple case of a taxi business. Over the years the advent of tradeable taxi licenses enabled financiers and investors to gradually appropriate an increasing share of the taxi pie to themselves to the detriment of drivers as the suppliers of labour for the industry. Who has benefited? Drivers? Consumers? The economy? Or maybe just the financiers and investors? The Uber revolution doesn’t represent progress. It’s a takeover. The ‘sharing economy’ is a term fabricated by PR consultants.

The same pattern has been repeated across many industries. Permits, licenses and quotas ostensibly designed to bring market discipline to industry regulation has instead resulted in a greater portion of the national income pie ending up with financiers and investors again to the detriment of the suppliers of labour. In many cases, say in the case of our water and fish resources, additional regulation has also failed to prevent the tragedy of the commons. Financiers and investors are robbing us of future wealth.

Transferring public monopolies to private ownership has also been a boon for financiers and investors. From airports to electricity companies, from prisons to roads, a massive clearing sale under the guise of economic efficiency has not resulted in lower prices, rather a larger share of the pie ending up with those holding the rights to guaranteed regulated income for eternity.

It could be worse. Chicago sold the rights to 75 years of the city’s parking machine income to an Abu Dhabi sovereign wealth fund and other funds domiciled in tax havens. The buyers are expected to recoup their investment after only 13 years.

Back in Tasmania, the Government is about to create a series of rights to operate poker machines (EGMs). These will be gifted to pubs and clubs which operate EGMs on behalf of the current sole licensee Federal Hotels, notwithstanding the State government is desperately short of funds and the licenses may be worth up to $250 million. Pubs and clubs argue increased profitability will result in more investment in hotels, but why should a few hotels in a highly competitive industry receive a preferential handout? More to the point, there’s little evidence that what happens in other industries won’t occur here. A lot of the newly minted licenses will be sold to financiers and investors leading to subsequent profits leaving the industry rather than retained for further investment. Federal Hotels with twelve EGM pubs, stand to receive one quarter, or $60 million, of the expected largesse from the State government.

Another common occurrence is to develop, say, a successful restaurant chain, before selling it to investors and financiers for a value representing future expected profits. Our poorly designed taxation system encourages converting future profits into a lump sum capital gain with a 50 per cent discount compared to the rate applying to income received over time. With financiers and investors reducing the size of the restaurant pie, wage theft has become even more prevalent. Essentially the same happens with franchise arrangements, 7 Eleven for example, where excessive financier and investor demands have again opened the door to massive wage theft.

Is it any wonder wages are flat and retail sales growth sluggish? Lower than expected GST revenue to States is inevitable. Labour’s share of national income has consistently fallen as the financialisaton of the economy has gradually shifted income to capital owners.

The Hayne Banking Royal Commission revealed an industry motivated by wilful self-interest. Yet governments are constantly told they need to live within their means, that money doesn’t grow on trees. Which is untrue judging by the finance industry. Loans have been created to finance residential mortgages and fictitious capital which in boom times are self-sustaining like any well-designed Ponzi scheme. But when the good times end, loans can only be serviced by extractions from the real economy. Which is what we are now witnessing. Our future economic health and the fiscal sustainability of the State government is under threat.
(Published in The Mercury 8th November 2019)

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