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Reaganomics is back, baby

Aug 5, 2020 • 14m 35s

As Treasurer Josh Frydenburg praises Margaret Thatcher and Ronald Reagan’s economic policies, a controversial recovery plan is gaining traction. In today’s episode, Mike Seccombe discusses whether Australia can spend its way out of the crisis.

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Reaganomics is back, baby

280 • Aug 5, 2020

Reaganomics is back, baby

RUBY:

From Schwartz Media I’m Ruby Jones, this is 7am.

As the Treasurer Josh Frydenburg praises Margaret Thatcher and Ronald Reagan’s economic policies, a controversial recovery plan is gaining traction.

Today, national correspondent for The Saturday Paper, Mike Seccombe, on the Treasurer’s economic inspirations, and whether Australia can spend it’s way out of this crisis.

RUBY:

Mike, you've been covering the economic impacts of the pandemic for many months now. Tell me what is driving the Treasurer, Josh Frydenberg’s response?

MIKE:

Well, frankly, it seems to be worn out ideology from 40 odd years ago.

Archival tape -- Unknown:

“Morning, thanks for joining us.”

Archival tape -- Josh Frydenberg:

“Nice to be with you, David…”

MIKE:

A number of times in the past week, Frydenberg has gone out spruiking the records of Margaret Thatcher and Ronald Reagan, who both came to power in the 70s...

Archival tape -- Josh Frydenberg:

“But I mean the reality is that Thatcher and Reagan cut red tape, they cut taxes and they delivered stronger economies…”

MIKE:

and even acknowledging that doing so might be controversial.

Archival tape -- Josh Frydenberg:

“Thatcher and Reagan are figures of hate for the left because they were so successful, one got two terms which was the maximum you could get in the United States…”

RUBY:

Ok so, the Treasurer is a big fan of Margaret Thatcher and Ronald Reagan then… but what are the specific approaches of theirs that he’s in favour of and how do they relate to our current economic situation?

MIKE:

Well, he lauded Margaret Thatcher for having taken on and defeated militant trade unions in Britain.

Archival tape -- Margaret Thatcher:

“They are the enemies of democracy they are not interested in the future of democracy, they are trying to kill democracy…”

MIKE:

There was a lot of strike action when she came to power.

Archival tape -- Margaret Thatcher:

“I will never negotiate with people who use coercion and violence to achieve their objective.”

MIKE:

She crushed the unions and the number of strikes reduced. That's not the problem at the moment, the current problem in the labor market. Now, it's not workers going on strike. It's workers going to work when they shouldn't because they can't afford not to and they can't afford not to because they have no entitlement to sick pay and they have no entitlement to sick pay because they have been casualised. Thatcher's record in particular was a disaster.

Archival tape -- Unidentified Reporter:

“By the end of 1980 unemployment had nearly doubled, manufacturing output had fallen by a sixth…”

MIKE:

When she came to power. Unemployment in the UK was 5.3%. It immediately shot up to almost 12.

Archival tape -- Unidentified Reporter:

“Britain was declining faster than even in the darkest days of the 1930’s, despite this the politicians were convinced they were right…”

MIKE:

In 18 years of continuous conservative government in the UK, under both Thatcher and her successor, John Major, unemployment averaged around 9%, which is, of course, what we're looking at that sort of order just at the moment in Australia and We think it's a disaster.

So you know it was a shambles on the employment front when Thatcher was in power. Reagan's record unemployment wasn't great either. Reagan came to office also promising to cut taxes on personal income and taxes on corporations and other taxes on capital like capital gains tax and reduced government spending.

Archival tape -- Ronald Reagan:

“Those who do work are denied a fair return for their labour by a tax system which penalises successful achievement and keeps us from maintaining full productivity...”

MIKE:

The personal tax rate fell from almost 70% when he came in to 28% when he left.

Archival tape -- Ronald Reagan:

“Our program brings down income tax rates 25%. At the same, we've been cutting costly wasteful government regulations and the rate of increase of government spending…”

MIKE:

But this didn't stimulate a lot of economic growth and it certainly didn't reduce government debt. It did quite the opposite. US government debt trebled. The US went from being the world's biggest creditor nation to being its biggest debtor nation.

RUBY:

So, given the poor track record of these kinds of policies, in terms of high unemployment and more debt, why at this moment in time, when we’re facing such a momentous economic crisis, would the Treasurer be looking towards Thatcher and Reagan?

MIKE:

Well, because the economic model that they ushered in, so-called ‘supply side’ or ‘trickle down economics’ is kind of an article of faith with conservative politicians.

Archival tape -- Josh Frydenberg:

“Well good afternoon and thank you Jane…”

MIKE:

And Frydenberg obviously believes in this as well, because at the Press Club, He gave a big plug for it...

Archival tape -- Josh Frydenberg:

“What we will continue to do is create incentives. When we put in place tax cuts or business incentives or try to cut red tape or go to the supply side of the equation, that's going to be critical…”

MIKE:

This idea of trickle down theory is part of a broader suite of neo liberal beliefs, you know, including privatization, deregulation of labor markets and cutting red tape generally.

Archival tape -- Josh Frydenberg:

“Thatcher, Reagan, that's an inspiration. Supply side can actually help create and strengthen the economy and that’s what we are determined to do...”

MIKE:

But the trouble is, when we look back at it now, we can see that it actually didn't work very well. Thatcher's tax cuts didn't create jobs. Reagan's tax cuts didn't fund the budget. The overwhelming evidence is that the one thing that trickle down theory does very effectively is increase economic inequality among the citizens.

The reality is that almost everything that Frydenberg says about his political heroes, Reagan and Thatcher in recent days has been either irrelevant or simply untrue. But he seems to be suggesting that the way out of the crisis is the same way that they did at 40 years ago in a quite different circumstance. Which is deregulation and tax cuts to get the economy going well.

RUBY:

Right, so if you’re saying this is an approach that won’t work - what will?

MIKE:

Well, lots and lots of government spending. Recovering from the Covid crisis is going to be very, very expensive. And the worry is that the government is already starting to argue that it simply cannot afford to keep spending as it has in the past few months. But there's a growing line of economic thought. I mean, it's in the zeitgeist I’ve got to say at the moment, and it relates to a theory that government can spend essentially as much as is necessary and it derives from something called Modern Monetary Theory.

RUBY:

We’ll be back after this.

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RUBY:

Mike, let’s talk about modern monetary theory. What is it?

MIKE:

Well, the essence of it is really quite simple. It's a matter of understanding that government budgeting is nothing like household or business budgeting for one simple reason, which is that governments can create money.

Archival tape -- Professor Bill Mitchell:

“We’ve be at it for 25 years, it's been my whole academic career and…”

MIKE:

I spoke to Professor Bill Mitchell, a professor of economics at the University of Newcastle, who was one of the progenitors of modern monetary theory, you know, decades ago,

Archival tape -- Professor Bill Mitchell:

“I'm an ... person, the government has no financial constraints. The whole idea that they don't have enough money. It's been blown out of the water right round the world by this crisis.”

MIKE:

And there’s no doubt that this has to be done carefully. I mean, history has also full of lessons of countries that have produced huge amounts of money, and the result has been runaway inflation. So there are constraints on the amount that you can create. You know, governments cannot generate money to compete for resources that are already being already being used. But what they can do is they can sop up slack in the economy. If that makes sense.

RUBY:

Ok. So how do its proponents, people like Bill Mitchell, say it would work? Can you give me an example?

MIKE:

Yeah. Yeah. Okay. So if we assume we have an economy that's running really well. Okay. Full capacity, full employment. And if the government were to decide in those circumstances that wanted to spend more money hiring people to work on a new program and created money to do that.

Right, well, then it would have to hire those people away from whoever was employing them already, which would bid up market prices for their labor and which would start an inflationary cycle. On the other hand, if you've got a big pool of unemployment, you're not hiring those people away from anyone so inflation would not be a consequence. So that's that's essentially the way it works.

Archival tape -- Professor Bill Mitchell:

“A government that issues its own currency like in Australia. What are the constraints? Well, the constraints are real resource constraints. And I can only buy whatever's available for sale, including all idle labor. That's, that's without a doubt. But if they then try to compete for resources that are already being used. Well, then we run into the inflation barrier.”

MIKE:

Mitchell says, you could introduce an unconditional job offer at a minimum wage, saying that anyone who wants to work can have a job and the government will pay for it. And, in a situation like this where there's a lot of people out of work it wouldn't generate inflation.

Archival tape -- Professor Bill Mitchell:

“You know, there's so many creative things that people could do that would add to social productivity and well-being.”

MIKE:

If, for example, you've got, cruise boat operators up on the Barrier Reef, no tourists are coming. They've got no business. Why not say to them, okay the government will employ you to go out, dive down, kill off lots of crown of thorns starfish that are killing the reef. This is a worthy endeavor. It's just not done at the moment. You know, there's an infinite, well, almost infinite number of jobs out there that can be done.

In fact, Bill Mitchell and his research center contacted 140 local governments around Australia as a kind of experiment and asked them to nominate programs that would meet unmet community needs, unmet environmental needs, unmet infrastructure needs. And they got in response, hundreds of thousands of what he says are really interesting job ideas that could be done if only the money were there to pay for them.

RUBY:

OK - and that is the key point I guess - you need the money. And under an approach like MMT - the government would, I suppose, just create more. But it is unlikely the current treasurer Josh Frydenberg would do that.

MIKE:

I suspect under the current government, probably even under the alternative government, it wouldn't happen. But it is starting to make inroads into the sort of left of politics. I mean, the greens here are interested in the United States. You know, Bernie Sanders, Alexandria Ocasio-Cortez, people like that on the left of the Democrats are very interested in modern monetary theory.

Archival tape -- Unidentified Reporter:

“An unconventional economic theory is gaining some traction thanks to the policy teams of Alexandria Ocasio-Cortez and Bernie Sanders. It’s called Modern Monetary Theory...”

MIKE:

And they look upon it as being an intrinsic part of their, what they call, the Green New Deal.

Archival tape -- Unidentified Reporter:

“A lot of what the green new deal is is about shifting our political, economic and social paradigms on every issue…”

MIKE:

There are real issues that people might consider and might worry them. For, like for a start, it would require politicians to essentially take back control of the money supply from central banks. And we would be relying on government to spend the money on worthwhile endeavors, you know, rather than just pork barreling and stuff that they do get up to. Monetary Theory of itself is not ideological. It's just a lens by which you can look at the way the economy works.

But it becomes very quickly political once you factor in what can be done under it. I don't see this current government going for it because, you know, like I said, the neo liberal model is an article of faith for them. My concern and I think the concern of a lot of people is that they will withdraw too much stimulus too quickly and will make this recession, or maybe it's even a depression now, that will make it longer and deeper than it need be simply as a result of their adherence to, you know, really quite an old ideology that didn't seem to be working particularly well, even in much better times.

RUBY:

Mike, thank you so much for your time today.

MIKE:

Thank you.

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RUBY:

Also in the news…

Individuals in Victoria who fail to self-isolate themselves when directed will face significant new fines under changes announced yesterday.

Premier Dan Andrews said that Victorians could receive an on-the-spot fine of $4,957 and those who repeatedly breached the rules would face court proceedings and fines of up to $20,000.

The government has also introduced a permit system to allow essential workers to move around without being fined or detained by police.

And a number of cruise ship operators who recently restarted operations have been forced to temporarily shut down again after passengers on board multiple ships tested positive for Covid-19.

Australia has imposed a ban on cruising until at least September 17.

I’m Ruby Jones, this is 7am. See ya tomorrow.

As the Treasurer Josh Frydenburg praises Margaret Thatcher and Ronald Reagan’s economic policies, a controversial recovery plan is gaining traction. In today’s episode, Mike Seccombe discusses the Treasurer’s economic inspirations, and whether Australia can spend its way out of the crisis.

Guest: National correspondent for The Saturday Paper Mike Seccombe.

Background reading:

Could Frydenberg ease this crisis by printing money? in The Saturday Paper

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7am is a daily show from The Monthly and The Saturday Paper. It’s produced by Ruby Schwartz, Atticus Bastow, and Michelle Macklem.

Elle Marsh is our features and field producer, in a position supported by the Judith Neilson Institute for Journalism and Ideas.

Brian Campeau mixes the show. Our editor is Osman Faruqi. Erik Jensen is our editor-in-chief.
Our theme music is by Ned Beckley and Josh Hogan of Envelope Audio.

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280: Reaganomics is back, baby