Are Thatcherism and Reaganomics your best answers, Josh?

by | Jul 28, 2020 | Comment Analysis, Finance

Reaganomics and Thatcherism were characterised by huge transfers of income and wealth from the poor to the rich, writes Roger Beale. Even such august institutions as the Productivity Commission argue that there’s little to be gained by going down the road of labour market flexibility.

Treasurer Josh Frydenberg has suggested we look to the Reagan and Thatcher legacies for inspiration to climb out of the Covid-19 recession – i.e. supply side economics. In his terms, this means bringing forward tax cuts, increasing workplace flexibility and reducing green tape.

Thatcherism and Reaganomics were characterised by huge transfers of income and wealth from the poor to the rich. During Margaret Thatcher’s 11 years in power the spending power of the poor actually fell while that of the top 10% increased strongly. Lower income groups only maintained their spending by borrowing. Household debt went from 37% to 73% of GDP. Unemployment rose from 4.2% when Thatcher took office to 6.1% when she left. In short there was no “trickle down” of prosperity and growth from her concentration on the supply side of the economy and cutting social services.

Meanwhile in the United States Reagan claimed that cutting tax rates, particularly for high income earners and on capital gains, would unleash so much growth that government revenues would rise, not fall, and public debt would shrink. His huge tax cuts of 1981 had exactly the reverse effect. As common sense would suggest, revenue plummeted and debt soared. The same thing happened when Bush cut taxes in 2001. Conversely when Bill Clinton raised the top marginal tax rate a few percentage points in 1993, tax collection soared.

The evidence suggests that Frydenberg is sadly mistaken if he genuinely believes cutting taxes for the already better off will unleash growth and repair the budget.

Hard yards already done

Some 40 years ago all the hard work was done to open up the economy, to cut tariffs, quotas and subsidies, and break up self-regulating monopolies. A floating exchange rate was introduced, and a national competition policy embraced, and a combination of industrial relations reforms and the increased competition in the economy drove greatly enhanced workforce flexibility.

There is little evidence from recent Productivity Commission reports that there is a lot to be gained by continuing to attack the supply side of the economy.

In the last comprehensive review of workplace relations, the Productivity Commission (2015) concluded: “Contrary to perceptions, Australia’s labour market performance and flexibility is relatively good by global standards, and many of the concerns that pervaded historical arrangements have now abated.”

On the ABC Insiders program on Sunday, Frydenberg also pointed to Thatcher’s success in increasing productivity by massively reducing strike action. But as the Productivity Commission noted in its 2015 report, “Strike activity is low, wages are responsive to the economic cycle and there are multiple forms of employment arrangements that offer employees and employers flexible options for working.”

Such statements suggest the Treasurer is going down a rabbit hole if he thinks increased workplace flexibility will unleash growth, increased productivity and higher incomes.

What is needed is the hard work to lift productive efficiency – the speeding up and broadening the implementation of new technologies and deepening and extending the skills of the labour force.

Weak position pre-pandemic

Australia entered the COVID-19 lockdown in a relatively poor position. For years, growth had been low and real wages stagnant; inflation was almost non-existent and productivity growth was poor.

The GDP growth Australia had experienced since the global financial crisis was essentially underpinned by high immigration rates and strong prices for our minerals export. The one bright spot was the nation’s relatively low debt as compared with almost all other OECD nations. This meant we had, and have, room to borrow at historically extraordinarily low rates.

Much of the debate before COVID-19 struck was about whether our poor growth was due to supply side economic failings or to inadequate demand flowing from depressed real earnings.

I, along with many Australian economists, think the latter was the issue. Low-income growth depresses demand. Relatively high effective tax rates (which include the relatively sharp tapering of welfare benefits) for low-income earners and women with children, in particular, could deter participation in the workforce and/or inhibit hours worked.

The government is proposing to cut taxes for those in the top half of income earners, but little change is on offer for those whose taxable income is below $45,000. The government proposes to lift the top tax threshold to $200,000, while those earning between $45,000 and $200,000 would pay a flat 30% on this portion of their income. This will principally help those in full-time employment and will be a major windfall for the middle to third quartile earners, and considerably more so for households with two middle-income earners.

Increase Newstart for biggest stimulus

Yet the biggest stimulus bang lies clearly with increasing the disposable incomes of those on the lowest incomes. A sustained increase in the JobSeeker/NewStart benefit and rental assistance for pensioners and benefit recipients, and tackling the effective marginal tax rates for those on lower incomes, is important both on equity grounds and to maintain demand.

The COVID-19 crisis has underlined the vulnerability of those on the lowest incomes, the highest levels of workplace flexibility and the lowest levels of job security. It is no coincidence that the resurgence of COVID-19 infections in Victoria has been linked with security staff, abattoir workers, aged care workers and the hospitality sector.

Job insecurity and the lack of sick leave are reportedly key factors in the failure of workers who are unwell to self-isolate. The last thing we need to do is extend into the broader economy the uncertainties of the gig economy and what these low income sectors are experiencing. COVID-19 has proved that to be resilient we need a cohesive society and you do not build that by creating more uncertainty.

Top 10% doing very nicely

Incomes and wealth in the top 10% of earners, and particularly the top 1%, in Australia have increased more rapidly than across the rest of the income spectrum.

There is a very strong argument that people earning more than $500,000 are being paid far more than is necessary to attract their labour, and earning more than can be explained by competitive markets for talent. This suggests there is little to be gained in terms of productivity improvement by increasing their disposable income by bringing forward the Stage 2 and Stage 3 income tax cuts.

Conversely, increasing the marginal tax rates on the highest earners would not result in a loss of productivity. However, it would send a powerful message that we are all contributing to the recovery and would help us maintain social cohesion – thereby avoiding the appalling divisions that are so evident in the US and across Europe.

More workplace flexibility, environmental deregulation and tax cuts for the top half of income earners are not the answer.

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ABOUT THE AUTHOR

Roger Beale

Roger Beale

Roger Beale is an artist who was formerly a senior public servant. He received an AM for his contribution to microeconomic reform and was Secretary of Environment and Heritage from 1996-2004.

12 Comments

  1. Avatar

    I’m faintly surprised, that we Quiet Australians are even allowed to import, the surrender-monkey Piketty titles. If only Josh could absorb them. Instead of just thumbing his Hayek & Friedman For Dummies.

    Depressingly, he channels kitsch economics of the 1950s “the more children that we have across the country, together with our migration” or 1980s “Thatcher and Reagan … were so successful”. With Scotty set to govern for five more long years, you’ll forgive me for drowning in Aldi merlot, a little more often than usual.

    • Avatar

      Your usual pithy and pertinent comment Mr Saunders is always a welcome reading.
      Perhaps the roosters are all coming home to roost Stephen!
      It was the Hayek/Friedman doctrines that caused us to deregulate the banks and sell the CBA, the cornerstone of the retail banking sector that the public could hold to account through the ballot box as Nugget Coombe’s had designed……. rather than selling it to a bunch of unethical alley cats as our RC found
      It was the Hayek / Friedman doctrines that led to the deregulation and privatization of most of the Aged Care sector who are now in the midst of solving our demographic challenges of an aging population according to the Vic Gov Premier while demanding further favorable tax treatment.
      It was the Hayek and Friedman doctrines and teachings that led to the deregulation and privatization of much of our electricity sector who now thumb their noses at climate change science while milking the taxpayer’s troughs to the best of their ability.
      The Fossil fuel miners and morons represented by the coal and the Minerals Council associates frequently demand the Hayek and Friedman principles to support their destruction of a living planet at their bottom line’s and banksters demand. Ironically many of them are prepared to desert the LNP now Albo has fallen into lockstep with McPharlane and the Mineral Council’s catechism to guarantee their Queensland fraternity another ten years of vandalism with impunity.
      I do seem to recall the Minerals Council and Queensland Coal miners led the charge to the half a billion dollars the tax payer had to invest in their Carbon Capture and Storage proposal only a decade ago, that we are still waiting to see the results of their expenditure with an actual process or at least an itemized account. Just like the 60 mill we gave to Chevron to install a similar CCS project at Gorgon that we are awaiting an itemized statement of their expenditure of our moneys, or proven engineering concept in practice. How impertinent we must be to politely ask for some accounting principles from the arch -angels of GAAP and Tax Law obfuscations and manipulations!

      Hayek and Friedman are really the genesis of MMT ……… the art of avoiding responsibility and kicking the problems down to the next generation.

      https://wolfstreet.com/2020/07/26/nobody-knows-how-to-ever-get-out-of-this-mess/

  2. Avatar

    And what happen to unemployment in USA at the same time?
    What happen to “misery index” thank to Reagan?

    Who not to include those numbers in the article? Doesn’t fit the narrative?

    And rhetorical question – iIs it a coincidence that IT boom in USA started after Reagan reduced taxes?

    • Avatar

      is it a coincidence that IT boom in USA started after Reagan reduced taxes?

      Yes. Semi-conductor revolution was on the way courtesy of the Apollo programme, all the IT boom took was Bill Gates seeing the opportunity for personal computing and not trying to lock it all up with patents.

      • Avatar

        Bill Gates… right… 1975.

        Do you believe that competitive taxes had nothing to do with the boom in entrepreneurship US experienced starting from Reagan?

        And it is quite telling that you’ve chosen to ignore non rhetorical questions.

      • Avatar

        USA has a long history of technological innovation that long preceded Ronny Raygun, it’s part of the same sunny optimism that has always guided them.

        The 1980’s were always going to be better than the 1970’s. Vietnam, oil shock, Watergate, all had a bigger influence on US spirit of optimism than anything else, somehow they even forgot that they’d landed people on the moon.

        Biut if money’s all you want, if money’s the only thing that motivates you to do anything, then go for your miserable little life.

      • Avatar

        Considering what you did with the name you don’t like and you last paragraph – rational discussion is not your strength.
        Enjoy you big life free of rational in full knowledge that societies that discarded money as a motivation had to rely on fear along. But History is not your thing either, isn’t it?

      • Avatar

        Your blinkered obsession with tax cuts also neglects the huge deficits Reagan ran up, eh? In your world that sort of Keynesianism has no place, does it?

        Ronnie Raygun only pretended to be a disciple of Friedman, in reality he was more a Modern Monetary Theory man.

        History may not be my thing, but I’d add Peter Francopan and Judith Brett to my reading list than cleave to the opinions of Niall Ferguson. Like Ferguson, you have no conception of the serendipitous nature of technological advance and its economic effects.

      • Avatar

        I think the real driver was US military requirements funding companies like Motorola.

      • Avatar

        Thanks Mr B; Gates & colleagues made a consumer revolution from public sector (DoD/NASA/NOAA) requirements by making their technology accessible to competitors; electronic arcade games (remember Space Invaders?) plus movies plus recorded may have contributed to creating consumer awareness/demand).

        Other comment-posters here seem obsessed with tax cuts.

  3. Avatar

    Neoliberalism as promoted by Thatcher & Reagan is simplistic inhumane brutality, the sort of ideology that might appeal to simple minds. Funny how they both died of Alzheimer-related conditions.

    When Margaret was still young enough to not be afflicted with Alzheimer’s, she learned about the Greenhouse Effect. At least that lesson stayed with her.

  4. Avatar

    Roger
    History shows us trickle down economics does not seem to work, I entirely agree.
    Giving tax cuts to mid and high income earners does not result in money recirculating into the economy. Any monetary gain is more likely to be saved in times of uncertainty such as we see with Covid at present, or put into a mortgage, or even put into trinkets such as a new car which now of course will be an import and that will definitely not be recirculating back into our economy.
    Support is needed right now at the bottom end of the income scale where money will most likely be spent back into the economy and benefit stability of our society in the longer term. Plus support for local social housing where there is still a shortage, and that money will rapidly recirculate into the local economy through support of multiple trades of local workforces. Further there is clear evidence that social housing makes sense in the long term for governments, the economy and broader society.
    I recall that Maggie Thatcher believed there was an economy but did not believe there was any such thing as a society!
    Lets hope that Frydenberg is not around when he has to deal with a declining coal industry and turns to the book of Thatcher for guidance. Her personal battle with Arthur Scargill was a prime example of how not to successfully transition a coal industry.
    Regards

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