We need to talk about the economy
For decades we have talked about the size of the economy, but it is time we talked about its shape. For decades we have been told that if the economy grew faster it would solve all our problems, but it’s time we talked about which parts of the economy we want to grow faster and which parts we want to see decline.
Few people would ask an architect to design an extension for their house but express no opinion about which parts of the house they want bigger. But when it comes to managing the economy, all we are promised is a bigger economy; never a better one or one that better suits our needs. Bizarrely, those who take responsibility for “managing our economy” never even ask what we would like from that economy. They just promise to grow some unspecified parts of it.
The usual explanation for this silence about the shape of the economy is that it is “the market”, not governments, that makes such decisions, but that’s rubbish. It’s not “market forces” that explain why Nordic countries have big public sectors and high-quality services, and the United States does not. It’s political forces. Nordic voters demand free health and education from their governments and they get it; US voters don’t – and Australian voters can’t decide.
But in the aftermath of the biggest recession in modern history, it is simply impossible, even for conservatives, to deny that it’s government spending and taxation policies that drive the shape of the Australian economy. This year alone, the Morrison government has announced an additional $189 billion worth of new policies, and the recent budget committed to an extra $500 billion worth of new measures in the next few years alone.
So, should our billions be spent on a “gas-fired recovery” or should we invest in renewables, public housing or the arts? Should we give tax cuts to high-income earners in the hope the money might trickle down to the unemployed, or should we double unemployment benefits in the hope their spending will bubble up through the rest of the economy?
All of these decisions are being made by men, not markets. The prime minister, the treasurer, the deputy prime minister and the finance minister are overseeing the largest expansion of the public sector since World War Two, and it is their personal preferences, not the “invisible hand” of the market, that will shape Australia’s society and economy for decades to come. The power of political preferences is usually hidden behind a thick veil of rhetoric, but the enormity of the COVID recession and new stimulus spending mean that, for the first time in decades, people are asking hard questions about the shape of the government’s response.
The size of the Australian economy is measured in terms of gross domestic product (GDP), which is simply the total value of all the stuff that was produced in Australia in the past year. And in the past year, the size of the Australian economy has taken a beating, shrinking about 7 per cent since COVID-19 hit. While everyone agrees the government should “stimulate” the economy to create “jobs and growth”, there is no consensus about the best way to spend half a trillion dollars, perhaps because no one has been asked.
Like a waiter handing out overcooked chicken at a wedding, the Morrison government clearly thinks Australians should be happy to get a feed at all. But it is our half a trillion dollars he is spending, not his. And it is our preferences that should matter. It’s true that spending $500 million on expanding the Australian War Memorial will create jobs, but so would building $500 million worth of crisis accommodation for women fleeing domestic violence. It’s true that spending billions on coal-fired power stations or dams in Queensland would create jobs, but so would building renewable energy and improving health services in regional communities. The question is, what do we want more of?
Creating jobs is easy, but creating a better country takes vision, resolve and administrative skill. Just as spending money on a house extension will inevitably create jobs for builders but won’t inevitably create value for the owners, spending half a trillion dollars pouring concrete and giving tax cuts to high-income earners will inevitably create some jobs but it won’t necessarily leave anything of lasting benefit. Even in the deepest recession in modern history it’s possible to waste money. And there is nothing in the economics textbook that suggests all attempts to create jobs will also create wealth.
Nearly 100 years ago, Charlie Chaplin made a silent film that still speaks volumes about the contradictions at the heart of capitalism.
In The Kid, a young boy walks around “creating demand” for new windows by throwing rocks through old ones. Chaplin plays a glazier who shows up soon afterwards to repair the damage. What better way could there be to create jobs than breaking things?
Companies make profits by selling things for more than they cost to make, and there’s a big difference between creating profit and creating a better society. If the things we buy keep breaking, that’s good for the people who sell the things. And if someone breaks things, that’s good for the people who sell things as well. But what if the people who sell us things are also the people breaking our things? You guessed it – that’s good for the people who sell (and break) things too. The modern idea that whatever is “good for the market” is good for society has no basis in economics. None.
The term “planned obsolescence” was first used by an American real estate broker named Bernard London in an essay entitled “Ending the Depression Through Planned Obsolescence”. While it’s not clear if he saw Chaplin’s film, he clearly got the gist. Why wait for people to need things when it’s so easy to create the need yourself? According to London, “Furniture and clothing and other commodities should have a span of life, just as humans have. When used for their allotted time, they should be retired, and replaced by fresh merchandise.” It’s hard to fault his logic, if you accept that our goal should be to make and sell more stuff whether we need it or not.
London wasn’t alone. In Brave New World, Aldous Huxley drew the same conclusions. Set in AF632 (After Ford), Huxley’s dystopian classic explores the consequences of the symbiotic relationship between mass production and mass consumption. Where it was once understood that “a stitch in time saves nine”, Huxley foresaw that if factories and workers were to be kept busy then “ending is better than mending”. Indeed, not only was the idea of repair heretical in a society geared towards production, the manufacture of low-quality goods that wouldn’t last long was seen as good for the economy. As Huxley put it “the more stitches, the less riches”.
While Huxley’s novel was set far in the future, there is nothing far-fetched about companies making crap in order to boost future sales. One of the most infamous cases of planned obsolescence was the Phoebus cartel of light-bulb manufacturers, which was formed in the 1920s to shorten the life of light bulbs and, in so doing, significantly increase the demand for, and profits from, selling new bulbs. More recently, in 2018, Apple was fined €10 million for using software upgrades to deliberately harm the performance of phones they had already sold.
The Productivity Commission recently announced an inquiry into the impact on consumers of the inability to repair some products. In announcing the inquiry, the commission stated that “consumers or [repairers] are prevented from being able to repair the products due to a lack of access to necessary tools, parts or diagnostic software” and that, as a result, “premature product obsolescence and a lack of competition in repair markets remain. The expense of repair and product design accelerate the transfer of consumer goods into waste.”
So, what have light bulbs, mobile phones and crappy furniture got to do with the shape of the economy, fiscal stimulus and the importance of democracy? In short, everything.
GDP measures economic activity, not economic progress.
It measures how busy we are, not how much we achieve. But while the national accounts don’t distinguish between going somewhere fast and going somewhere good, most people do. Most people think it matters if they spend money fixing a window someone smashed or getting themselves a massage. Most people prefer to spend money on a holiday than spend money repairing a crashed car. That’s why most people instinctively feel that GDP is a poor measure of progress. And they are right. In the words of former US senator Bobby Kennedy:
“[ T ]he gross national product does not allow for the health of our children, the quality of their education or the joy of their play.
It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.
It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything, in short, except that which makes life worthwhile.”
Because GDP measures what we did, not what we have, the veneration of GDP leads to some weird conclusions. Just as planned obsolescence ensures we can stay busy making new things, war and natural disasters are extremely effective at “creating demand”. Indeed, anything that requires us to remake something we already have will inevitably “create jobs” and “grow the economy”, but of course there is a big difference between growing the economy and improving people’s lives.
A good-sized natural disaster is obviously good for the economy. Think about the jobs created and economic activity associated with recarpeting and repainting huge swathes of Brisbane after the 2010 floods. Think about the new houses, new appliances and new furniture sold as a result of last summer’s bushfires. Back in 1995, an enormous earthquake hit Kobe in Japan, killing more than 6400 people and causing $100 billion worth of damage. While initially economic activity fell, the Japanese economy surged the following year once the rebuilding of roads, bridges and buildings began in earnest. Christchurch had a building boom after its earthquake as well.
And, of course, it’s not just governments. Whenever we rip out “old-fashioned” bathrooms and kitchens and replace them with marbled new ones we create jobs for builders, and whenever we throw out perfectly functional appliances or furniture we create jobs in shops and factories. Likewise, in the lead-up to Christmas, buying gifts that will never be used will grow the part of the economy that makes and sells things no one wants.
But does waste really create wealth? Is destruction really good for the economy? And when we buy things we don’t need, are we really “helping the economy” and “creating jobs” or are we just wasting money, time and natural resources?
Everyone knows it’s possible to spend a fortune hotting up a car or sprucing up a house and wind up with less to show for it than when you started. But GDP doesn’t know that. GDP simply adds up everything we spend.
But the problem isn’t measuring GDP, it’s obsessing about it. The problem isn’t the numbers, it’s the leaders who pretend boosting GDP and building a better country are the same thing. Just as you can’t tell if someone is healthy by only measuring how many calories they eat, you can’t possibly determine the health of an economy by focusing on the growth of GDP alone.
Ripping out a three-year-old bathroom and replacing it creates jobs; so does blowing up the Juukan Gorge and replacing it with a new iron-ore mine. Likewise, replacing old wetlands with new coalmines, and farmland with gas wells. There is no debate that building new things creates jobs, but we need to debate which new things we should be building and which new things cause us harm as well as create jobs.
Paying people to smash windows would create jobs too. The important question isn’t “Does spending money create jobs?” but, rather, “Of all the things to spend money on, which things create the most jobs in the short term and the biggest benefits in the long term?”
As Christmas approaches, millions of Australians will be grappling with the most first-world of all problems:
How much money should I waste buying things that people don’t need or want? If $20 seems a bit stingy for Aunty Judy, but $100 seems a bit rich, maybe a $70 gift would be okay? Having decided how much to waste, the next big issue is what to waste it on. Maybe some kitchenware that won’t be used or some clothes that likely don’t fit? Perhaps some novelty items that aren’t that funny? It’s a big decision.
Christmas is supposed to be all about helping the poor – indeed, the Bible makes clear that generosity to the poor and hostility to the bankers lie at the heart of Christ’s teachings. But just as many modern economists have abandoned any concerns about waste, many modern Christians have embraced the idea that wasting money is actually a good way to help the poor. As Sarah Palin once said, “Christmas helps to employ millions of people and props up our entire retail economy.”
Whereas priests once had a monopoly on offering absolution for those guilty of the “deadly” sins of gluttony, greed and envy, these days economists offer that service as well. “So, if you are shopping for last minute bargains, or splashing out on Boxing Day or New Year sales, don’t feel too guilty. Your seasonal spending spree provides vital support to the retail sector and the wider economy,” soothed Nelson Blackley of Nottingham Business School. Phew.
The shape of government spending matters more than its size, and the same is true for individuals. Spending $100 on an imported foot spa will create far fewer jobs, and far more landfill, than spending the same amount buying them a massage, taking someone out for a meal or signing them up for a singing lesson.
Some economic activities are more “labour intensive” than others, some use up more natural resources than others, and some take up a lot more room in our landfills. If the purpose of wasting money at Christmas is to create jobs, then buying services rather than stuff delivers obvious benefits. But despite being the engine room of job creation in Australia, the service sector gets a bad rap. In Australia, everyone knows that “real jobs” mean people in hard hats and high-vis digging stuff up, chopping it down or moving it around in trucks.
Does anyone lying in a hospital’s emergency ward think a doctor, a nurse, or the paramedics who transported them there aren’t doing real jobs?
The idea that those who work in mining, construction and manufacturing do “real jobs” and those who care for our parents with dementia or teach our kids to read are doing something less “economically important” is as common as it is confused.
Our political class has become so obsessed with the idea that real jobs are ones where people (mainly blokes) wear high-vis to work that they find it impossible to talk about “creating jobs” without wearing a hard hat themselves. Indeed, when Scott Morrison belatedly announced some government support for the arts industry, he was at pains to point out that: “This package is as much about supporting the tradies who build stage sets or computer specialists who create the latest special effects, as it is about supporting actors and performers in major productions.”
But while the location of prime-ministerial press conferences signifies that construction is a “real job” and that aged care isn’t, economists haven’t cared about the distinction between goods and services for centuries. Indeed, not only is there no list of “real jobs” produced by the Australian Bureau of Statistics, there is no mention of the idea of “real jobs” in any economics textbooks – for the simple reason that it’s meaningless.
Did Charlie Chaplin’s glazier have a real job? It might look like he was working in “construction”, but in reality his job was in the service sector. He didn’t make the window, he just installed it.
What about a builder? In order to create jobs in the building industry, Morrison announced $25,000 grants to people who build a new home or renovate their existing one. While it is obvious that smashing up old kitchens and bathrooms and replacing them with new ones creates jobs, it is less obvious whether such jobs are “real jobs” or, indeed, if they are any different to the job held by Chaplin’s glazier.
There is a good reason that economists don’t try to define “real jobs”: it’s impossible. You might think that someone who grows crops has a “real” job. One of the biggest crops we grow in Australia is our lawns, which we carefully plant, water, fertilise and “harvest” with our lawnmowers. Are jobs in the lawn industry more or less real than those in healthcare?
And then there is food processing. You might think that the people who turn wheat into flour have real jobs, but what about the people who turn the flour into bread? And if baking is a real job, does that mean pastry chefs who turn flour into fancy cakes is a real job too? And what of the croissant? Is it bread or a cake?
Beyond a prime minister’s press conference, the line between “goods” and “services” is very, very vague. Does the cook who makes dinner for farm labourers work in the service sector or in agriculture?
Luckily there is no need to debate which jobs are real and which are not. It’s not a worker’s fault if the end result of their labour is wasted.
But it is the government’s fault if it’s spending hundreds of billions of dollars paying people to do things that aren’t that useful. Rather than debate what a real job is, we need to debate what we need more – and less – of.
Simon Kuznets won the Nobel prize for economics for helping to create GDP, but he was never a fan of using it as a measure of progress. In his initial report to the US Congress on the creation of GDP he was adamant that “The welfare of a nation can scarcely be inferred from a measurement of national income.” Decades later, despairing of the way his indicator was being abused, he tried to remind politicians that “Distinctions must be kept in mind between quantity and quality of growth, between its costs and return, and between the short and the long run. Goals for more growth should specify more growth of what and for what.”
So, what would we like to grow, and which jobs would we like to create?
Should we create jobs by subsidising the destruction of our bathrooms and installing new ones, or should we build public housing for pensioners and key workers, so that teachers and nurses can afford to live near those they help?
Should we subsidise the construction of new gas pipelines and coal-fired power stations, or should we instead invest in more renewable energy?
It never has been, and never will be, the role of the market to answer such questions. They are answered by our members of parliament every time they vote for or against a proposal to spend money on the pet projects of the government of the day.
It’s not the market that is spending $250 million to send religious chaplains to our public schools or $200 billion for 12 new submarines. It is our democratically elected government. And it wasn’t “the market” that decided to give those earning more than $200,000 per year a $10,000 tax cut. That was the Morrison government as well.
Back in the Great Depression, state and Commonwealth governments wanted to create jobs, but luckily for us they wanted to create lasting benefits for the community as well. While the art deco ocean baths spread along our coast started out as job-creation projects, today, nearly a century later, they still provide us with joy.
It’s often said that good leaders never let a crisis go to waste, but when it comes to the Morrison government’s stimulus spending it seems they are determined that we waste it.
Not all spending delivers lasting benefits. And not all the problems we face as a nation are equally urgent. Australia is one of the richest countries in the world, it still has one of the lowest levels of public debt and, thanks to a world-class public health system and a strong dose of government intervention, one of the lowest rates of COVID-19 spread anywhere in the world. But despite the fact that the Coalition is committed to spending hundreds of billions of dollars on tax cuts and new projects to grow the economy, we are yet to have a conversation about which parts of the economy we should grow. That’s no accident.
The last thing governments want Australians to realise is that it is members of parliament, not abstract market forces, who are the driving force in shaping our economy as we emerge from recession. It is up to our MPs whether we build new bathrooms for the middle class or crisis housing for mums fleeing violence. It’s up to our MPs whether we support coal or renewables. It’s up to our MPs whether we spend billions on tax cuts for the wealthiest or on health, education and aged care. And, of course, it is entirely up to us which MPs we elect to our parliaments.
Will the increased spending of the rich create jobs in their favourite shops and restaurants? You bet. Would spending the same amount on more teachers and nurses or renewable energy create jobs as well? You bet.
We need to talk about the economy, not in terms of its size, but in terms of the shape of the one we want to live in. And we need to talk about the priorities of the MPs spending all of our money. If this crisis doesn’t teach us how central politics is to the shape of the economy, then that really would be a waste.
Richard Denniss is the chief economist at the Australia Institute.