Keynes and recovery: Labor’s mixed up economics

Jean Parker looks at Labor’s muddled defence of its neo-liberal budget, and its abandonment of social democratic policies


“Keynesians in the recovery”, written for the Australian Fabian News (May 2011) by Treasurer Wayne Swan, is an attempt to use high theory to disguise the incoherence of Labor’s economics and the emptiness of any claim that its policies are social democratic.

Swan’s essay is a sequel to then Prime Minister Kevin Rudd’s article on the global financial crisis in The Monthly in February 2009. Rudd argued that the crisis was the catalyst for the “most spectacular failure of the entire neo-liberal orthodoxy”.  

Rudd’s essay came out as his government, which came to power insisting it was “fiscally conservative”, injected a record-breaking 25 per cent increase in government spending into the economy in the form of the $10.4 billion stimulus payments (“Economic Security Strategy”) and $42 billion “Nation Building and Jobs Plan”. Rudd’s essay justified this spending in grandiose terms: “Not for the first time in history, the international challenge for social democrats is to save capitalism from itself…” 

However the stimulus spending was all “saving capitalism” and no “social democracy”. Historically, social democracy was based on the recognition that capitalism is wracked by crisis and inequality, and that the role of Labor governments is to “civilise” and reform the system to protect workers. But Rudd’s stimulus spending was not directed at reforming the system. Rather, it was an exercise in managing capitalism. 

The stimulus package had two aims. Firstly the spending flushed cash into the retail sector (via the individual stimulus payments) and construction industries (via the home insulation, school-hall programs and social and defence housing). The government also cut interest rates and reinstated the First Home Buyers grant to maintain the housing bubble, protect bank profits, and stop a construction slump. They hoped these policies would counteract both falling consumer spending and the unwillingness of capitalists to invest.  

Secondly, a smaller portion of the stimulus promised longer-term infrastructure funding for roads and rail. But these projects were already on the books, to respond to long-running complaints by the mining industry and others that bottlenecks in Australia’s transport infrastructure cut into their profitability. 

Rudd’s historic stimulus spending however did nothing to address declining community infrastructure caused by 30 years of neo-liberal cuts to schools, universities and hospitals. There was no talk of building wind farms, expanding public transport or real job creation in Aboriginal communities.  

In October 2008 Swan put up $600 to $700 billion to guarantee the profits of Australian banks. But the question of nationalising the banks, as Labor’s Chifley government had proposed in 1949, was not considered for a second by Swan.

Just as it was in Rudd’s essay, Swan identifies totally with the economic rationalism of the Hawke and Keating governments. Swan credits Hawke and Keating with enacting, “…reforms to unclog the arteries of a sclerotic capitalism, freeing up economies and contributing hugely to rising living standards in the following decades”. But Swan says nothing of the social impact.

Like neo-liberal governments globally, Hawke and Keating attacked rank-and-file union organisation (through the Accord in 1983 and Enterprise Bargaining in 1992, and through smashing key unions such as Builders Labourers Federation in 1986, and the pilots’ union in 1989). They privatised state-owned companies like the Commonwealth Bank, removed tariffs to intensify competition and force productivity increases, and introduced user-pays to public services such as the charging of HECS to university students. 

Living standards suffered as the wealth-share of workers fell as Hawke and Keating presided over the dramatic reversal of the gains Australian workers had won during the post-war boom. The “success” of Hawke and Keating was to promote business profitability by increasing exploitation. This was exactly the point of deregulation and productivity reform, as Michael Pusey argues: 

“Economic reform has done what it always intended to do. It has reduced the share of the national income that goes to wages and salaries in which about 63 per cent of us depend directly for our livelihood. From 1980 to 2007, the wages share of gross national income fell from 60 per cent to 53 per cent as the profit share rose from 17 per cent to just over 27 per cent.” (See Table 1)

Swan makes it clear that the Rudd government came to power in 2007 with the desire to continue Hawke and Keating’s legacy, of which Swan is immensely proud. At the same time Swan wants to talk up his government’s response to the crisis as swift, decisive and effective. For this Swan, like Rudd, calls on Keynes.

Keynes was an ardent supporter of capitalism, but his economics stressed the importance of state spending to combat unemployment, and the need for governments to actively intervene in the economy to promote growth and stability. In the decades after the Great Depression Keynesian ideas became hegemonic internationally. They were, wrongly, credited with ending the Depression and creating the post-war boom that saw an unprecedented 30-year period of consistent, virtually crisis-free economic growth. 

Although Keynesianism was embraced by conservative governments (including by Howard’s idol Robert Menzies), social democrats had a particular affinity with an economics that considered unemployment to be a problem and which provided a respectable economic rationale for borrowing, taxing, and increasing state spending.  

Rudd cloaked his stimulus package in Keynesian rhetoric in order to distance himself from neo-liberalism, which was increasingly seen as the cause of the global financial crisis. But any social democratic quality associated with Keynesianism had little to do with Rudd’s stimulus package. 
Rudd’s $52 billion for shovel ready projects to boost capitalism are nothing like the reforms of the 1972 Whitlam Labor government. Amongst many other things, Whitlam fought the private medical industry to institute Medicare, funded bilingual education programs in Aboriginal communities and funded free education for university students.  

Swan now wants to invoke Keynes to justify the Labor government’s current drive to create a Budget surplus by 2012-2013. But Keynesian economist Geoffrey Harcourt accuses Swan of having a “getting back into surplus fetish”.  

But Swan’s obsession with a Budget surplus is a hallmark of neo-liberal fiscal concerns, not Keynesian economics. The drive to a Budget surplus is key to Swan’s attempt to position Labor as sound “economic managers” in the eyes of the bankers and business writers at The Australian

The consequences of Swan’s surplus-mongering can be seen in the May budget. On the one-hand the budget shaved $2 billion from the various family payments that Howard had handed to the rich. But another $20 billion in cuts means there will be no money to decrease public school class sizes, end the nursing crisis or reverse Howard’s cuts to university funding. The budget surplus obsession has also required that they levy tax-payers for the costs of recovery from the Queensland floods and cyclone Yasi. When the mining resources rent tax comes online next year this money will go straight into creating the surplus. 

The forecast surplus also requires that growth in government spending is capped to 1 per cent a year for the next four years. This in effect shrinks government services in relation to the growing economy. Hundreds of public servants will be thrown out of work. 

On top of this Swan is cutting corporate tax. In 1982 corporations paid 46 per cent tax. Hawke and Keating slashed this to 36 per cent, Howard cut it further and now Swan has reduced it to 29 cent. (See Table 2)

Budget doubts
The Budget estimates that have forecast this year’s $41 billion deficit becoming a surplus by 2012-13 is based on a best-case scenario that GDP growth will 4 per cent over the coming years. This indicates a further problem with Swan’s framework—he believes the economic crisis is over.

But Europe is on the edge of a second round of government financial crisis. Australia’s economic growth in the second quarter is likely to be negative, and there is a question mark over Chinese growth on which Australia’s mining boom continues to rely. The Chinese boom itself depends on markets in Europe, where the Greek debt crisis is deepening, and the US where private capital investment—the engine of growth in capitalism—is still more than 20 per cent below 2007 levels. 

But although non-mining business investment is flat, Swan’s argument is that government spending must be cut to make sure it doesn’t “crowd out” private capital:  

“This alternation of economic liberalisation, tight fiscal policy, and Keynesian demand management in times of downturn illustrates an important feature of Labor’s modern economic approach: our policies are based on an understanding of contemporary conditions and practical solutions, not on a dogmatic adherence to economic ideologies.”

This mix-and-match economics shows that far from being social democratic or consistently Keynesian, Labor’s actions are guided by whatever is best for profits. “Keynesians in the recovery” marries Keynesian rhetoric with neo-classical dogma and proposes that the result is an ideologically coherent basis for the Labor project. This is nonsense.

Swan’s first and last concern is to improve the competitiveness of Australian business:  
“If the party was to ever implement its hopes for the nation, it had to become a successful economic manager of capitalism…”

As Swan’s embrace of surplus budgeting and the Hawke/Keating legacy clearly prove, for Labor’s leadership any goals beyond managing capitalism were ditched long ago. 

ReferencesManne, R. & McKnight, D. 2010, Goodbye to all that? : on the failure of neo-liberalism & the urgency of change, Black Inc. Agenda, Melbourne.
Rudd, K. 2009, ‘The Global Financial Crisis’, The Monthly, February 2009.
Swan, W. 2011, ‘Keynesians in the recovery’, Australian Fabian News, May 2011, pp. 15-22,


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