Hockeynomics Eats Our Safety Net


Good old Joe Hockey. Tony Abbott might be ruthless and disciplined on the campaign trail, but his Shadow Treasurer seems incapable of such finesse.

And so we woke up this morning to newspaper splashes reporting Hockey’s views about welfare entitlements, courtesy of a speech he gave to British free-market think-tank the Institute of Economic Affairs. Entitled "The End of the Age of Entitlement", Hockey’s speech is a wide-ranging philosophical assault on the welfare state, brought on, he says, "as a result of the recent financial crisis".

Hockey’s argument is a simple — or rather, simplistic — one. Big programs of welfare entitlements were constructed by western democracies in the years after World War II, but now we can’t pay for them. Therefore they must end, because otherwise we’ll all go broke.

"Government spending on a range of social programs including education, health, housing, subsidised transport, social safety nets and retirement benefits has reached extraordinary levels as a percentage of GDP," he claims.

"However an inadequate level of revenue has forced nations into levels of indebtedness that, in an age of slowing growth and ageing population, are simply unsustainable."

Hockey is speaking in London, in a region which is struggling to come to terms with a downturn that many economists are calling a "little depression". As Wayne Swan reminded us the other day, the British economy is actually smaller now than it was in 2007. The aftermath of the global financial crisis saw a shocking crash in the UK and Irish housing market, and the first run on a British bank in nearly a century.

And what is Joe Hockey’s response to this modern crisis in housing and unemployment? Welfare cuts. "Entitlement is a concept that corrodes the very heart of the process of free enterprise that drives our economies," he argues. Therefore, entitlements are bad. You can’t get a more succinct summation of the ethos of neoliberalism than that. It’s a great slogan. It’s also demonstrably wrong. To understand why Hockey is wrong, we’ll have to take a little detour through post-war economic history.

The three decades after 1945 in which western democracies built their welfare states were also periods of rapid growth. Many of the countries that embraced social democracy most warmly, like France, the UK, West Germany and Sweden, were also the countries that experienced the highest growth. According to Berkeley economist Brad DeLong, "European economic growth between 1953 and 1973 was twice as fast as for any comparable period before or since". So spectacular was the recovery from the ashes of total war that the period was given a name: thirty glorious years, or Les Trente Glorieuses.

The Thirty Glorious Years ended with the slow growth and galloping inflation of the late 1970s, a period that discredited Keynesian economic policies and ushered in politicians of a free-market and libertarian persuasion in the US and Britain. In Australia, the process of liberalisation was under-taken by the Labor government of Bob Hawke and Paul Keating. That period is often considered to have laid the foundations of Australia’s current prosperity, by opening up the Australian economy and making it more export-orientated and flexible.

But the period of deregulation that followed the freeing up of western markets in the 1980s had a number of unintended consequences. One was that finance and its related industries like insurance and real estate grew rapidly to become a very large proportion of many nation’s economies. As a result, financial bubbles and their resulting crashes become more common.

The US for instance, suffered a significant financial crisis among savings-and-loans institutions (the equivalent of Australian building societies) at the end of the 1980s. Then there was the bubble and bust in the early 2000s. Then, during the mid-2000s, the subprime mortgage bubble got going in earnest. When that imploded in 2007, the US housing bust spread quickly to US and global financial institutions, bringing on the global financial crisis.

In Europe, financial deregulation followed a slightly different path, but the end result was much the same. After the "big bang" reforms of the 1980s under Margaret Thatcher, the UK’s financial sector grew much faster than the rest of the economy. Housing bubbles also quickly inflated in Britain, Ireland and Spain. When the real estate and finance sectors tanked after 2008, the British economy was hit particularly hard.

At the beginning of the GFC, most countries responded by slashing interest rates and spending up on government stimulus. Australia was no different. However, in the US and Europe, the damage caused by the GFC was so bad that interest rates at zero and a modest fiscal stimulus simply weren’t enough to contain the downturn. Companies went bust, consumers stopped spending, and unemployment soared. As a result, tax revenues plummeted. The reason that big, rich economies like the US and Britain have debt troubles today is not because they have unsustainable welfare entitlements. It’s because they’ve suffered the worst economic shock since the 1930s.

As top US economist Christy Romer — a former advisor to Barack Obama — has noted, the policy response of governments to banking and housing crises can make a big difference in the severity of ensuing recession. "A 2009 study by the International Monetary Fund concluded that fiscal expansion can mitigate the impact of crises," she observes, pointing out that "in the current episode, China and South Korea have recovered faster, partly because they have taken more aggressive fiscal stimulus measures."

After Gordon Brown was defeated and replaced by the Conservative-led government of David Cameron, Britain responded to its downturn with a series of austerity policies, including big tax hikes, cuts in public spending and cuts to welfare entitlements. By nearly every measure, they have made the British recession worse.

The reason austerity makes things worse is obvious. In a depressed economy where interest rates are already at rock bottom, economic activity in the private sector is already anaemic. If the government adds to the misery by cutting back spending, laying off public servants and slashing benefits, this only decreases economic growth further. And so it has proved in the UK: four years into the crisis, the British economy is still shrinking. No less a neoliberal authority than the IMF believes that the answer is more, not less, government spending.

What all this demonstrates is that the current troubles of most rich western countries have nothing to do with unsustainable entitlement payments (leaving basket-cases like Greece and Portugal aside). A simple glance at the available data demolishes Hockey’s claim that Australia or Britain can’t afford our welfare payments.

And what about Australia? How sustainable are our welfare entitlements? Very sustainable, actually. Australia has one of the most targeted and miserly welfare systems in the entire OECD. Even Hockey acknowledges that welfare payments make up only around 16 per cent of Australia’s GDP. Because of low payment rates for things like Newstart and reasonably comprehensive means-testing for many welfare payments, Australia’s welfare system results in a greater percentage of welfare being paid to the poorest and neediest than almost any other rich country — as the Australian expert on this issue, Peter Whiteford, points out in this excellent article in Inside Story.

Not only that, but Australia’s welfare system is surprisingly efficient: according to Whiteford, Australia has the lowest level of churning of any OECD country except Korea. To take just one example, Centrelink dispenses around $90 billion in benefits annually, at a cost of around $3 billion. That’s much better performance than most charities achieve.

The saddest thing about Joe Hockey’s big picture attack on welfare is its hypocrisy. Judged by his policies, Joe Hockey and his party are scarcely a crew of small government zealots. It was the Coalition, for instance, that took a big new welfare entitlement to the last election in the form of paid parental leave scheme — a scheme far more generous than the one Labor has implemented.

It was the Coalition under John Howard that implemented big new welfare payments in the form of Family Tax Benefits — decisions that were taken when Hockey was a cabinet member with a senior economic portfolio. It was the Coalition that presided over Australia’s highest level of taxing and spending as a proportion of the economy. And it was the Coalition that cooked the books on its own costings during the 2010 election campaign.

It’s worth recalling today that Joe Hockey was, according to this article by Annabel Crabb last year, the very first male member of federal Parliament to take parental leave, after the birth of his third child. Parental leave is, of course, an entitlement. It’s also a policy that enables women to remain in the workforce, and thus a key measure in helping Australia’s lagging productivity.

That’s the thing about entitlements: they’re not just dead-weight costs on the economy. Entitlements like parental leave or the forthcoming national disability insurance scheme — another entitlement that the Coalition says it is favour of — can actually increase economic growth, by bringing people into productive employment that have hitherto been excluded from participating in the workforce. By doing so, these entitlements are making us all better off. Don’t take my word for it: believe the Productivity Commission, which rigorously analysed the issue last year.

But perhaps that’s not what Joe Hockey wants. He seems to prefer balancing the books to the well-being of ordinary Australians. As he said in his London speech: "reducing the provision of so called ‘free’ government services … is likely to result in a lowering of the standard of living for whole societies as they learn to live within their means."

What do we want? Lower standards of living! When do we want it? In 2013.

Ben Eltham is New Matilda's National Affairs Correspondent.