The Australian economy’s dream looks to be over as the mining boom runs out of steam and living standards are squeezed. Peter Jones takes a closer look.
It was a “good outcome” according to Joe Hockey. Australia’s GDP growth came in at 0.5 percent for the December quarter; in line with expectations. According to the Treasurer, “Australia is still performing well by international comparisons”.
But beneath the headline GDP figure, the Bureau of Statistics also reported a decline in real gross domestic income, measured per person. Unlike GDP, this takes into account the fact that imports have become more expensive relative to exports, and the effect this has on how many commodities we can buy with each dollar. On this measure, Australia was in recession for three quarters of last year, and may still be.
The immediate causes of the income recession, and the apparent end of the mining boom, have been widely discussed. The extraordinary expansion of the Chinese economy has underwritten 23 years of uninterrupted GDP growth in Australia.
The global economic crisis passed this continent by because it had the right rocks and gases in the right places. It still does, but the investment boom has raised capacity enough to satisfy Chinese demand, which is itself weakening as growth in China also slows.
Now as commodity prices crash down to more “normal” levels (or lower) investment in new mining capacity is plummeting. Because it takes a long time to build mines and gas fields, some projects which were started when prices were higher are only now starting to produce output—pushing up GDP. But companies are getting less for each unit they sell, which tends to push down their income.
The iron ore price for instance has halved in the last year, dropping below $60 a tonne in March. And there are many fewer job vacancies in the resources sector because digging up and shipping out raw materials from existing mines is much less labour-intensive than building them (and the associated infrastructure) in the first place.
The lower cost producers of iron ore—BHP and Rio Tinto—are ramping up production to win market share from their competitors, adding further downward pressure to prices. This may lead to bankruptcies and job losses at some of the mines with less concentrated ore deposits or higher transport costs.
The Reserve Bank hopes that keeping interest rates low will stimulate growth and employment in other sectors. In February they cut interest rates to a record low 2.25 per cent, and most economists expect them to cut rates further.
This strategy has not really worked so far, either in Australia or the other advanced capitalist economies (where interest rates are near or below zero). Here, lower interest rates might have boosted residential construction, house prices and the stock market, but not much else. According to Deputy Reserve Bank Governor Phillip Lowe “it is difficult to escape the conclusion that changes in interest rates are not affecting decisions about spending and saving in the way they might once have done”.
The fall in prices for resources is also hitting the Federal budget. The Treasurer has stopped talking about a ‘budget emergency’ because the government has been forced to step back from implementing some of its most unpopular policies, for now. But the decline in the terms of trade (and its effect on revenue) has already been much larger than Treasury forecast. This makes the Coalition’s failure to sell its austerity agenda a serious concern for business, who had hoped for corporate tax cuts during this government’s term.
Squeeze on living standards
The income recession has also hit wages and employment. As usual, business wants the working class to bear the brunt of the economic downturn, as they move to protect their profits. Unemployment is now 6.3 per cent; just below the highest in 12 years (recorded in January) and a worse figure than for the US or the UK. It’s 20.3 per cent if we count everyone who wants more work. The paltry 2.5 per cent growth in wages last year was cancelled out by inflation (also 2.5 per cent).
Although they’ve made a small concession on pay for the military, Abbott and Abetz want to lock-in real wage cuts for the public service for the next three years, and are going after jobs. They’re offering less than 1.4 per cent per year to workers in the Department of Human Services and just 0.8 per cent to the Tax Office. And one in five public servants in the CSIRO can expect to lose their job over the next two years as the workforce is cut by 1300. Staff at Human Services and Veterans’ Affairs have voted overwhelmingly for industrial action, and ballots are planned at the Tax Office, the CSIRO, Agriculture and Employment.
Bosses in the private sector also want to take advantage of the weak labour market, and have been campaigning hard for changes to penalty rates and the awards system. It’s no coincidence that agreements for over one million workers are scheduled to be settled this year, including at Woolworths, Coles, the Commonwealth Bank and Telstra.
At the moment the government is too weak politically to go after penalty rates, and has instead announced a wide-ranging Productivity Commission review into industrial relations. This will almost certainly make business-friendly recommendations which the Coalition can use as ammunition later. The rallies called by the ACTU in response were an important indication of willingness to resist this agenda.
In the construction sector, where economic conditions are stronger (but worsening), the CFMEU have succeeded in extracting 5 per cent annual wage increases from around 200 contractors. This comes after a long industrial campaign against one of the companies involved (Boral) which included strikes and blockades. In spite of a legal challenge by Boral, and threats by the Liberals to change the building code to effectively ban companies from winning government contracts if they concede too much to workers, the CFMEU’s militant tactics worked.
Nevertheless, in the current economic climate, at many workplaces concerted industrial action will probably be required just to stop job losses and real wage cuts.
The deeper reason for the current malaise is that Australian capitalism is suffering from weak and falling profitability. Karl Marx argued that the best measure of this was the rate of profit. The underlying rate of profit measures how much value is available for capitalists to invest (or spend on their personal consumption) relative to the value of their assets.
The graph above compares rates of profit in Australia and the US, based on national accounts data translated into a Marxist framework. We can see that, during the 2000s, the two rates of profit went in different directions.
Spurred on by the mining boom, the Australian rate of profit increased quite steadily, while the US rate of profit fell catastrophically. But in 2013, as the mining boom came to an end, the rate of profit in Australia started trending downward quite sharply, while the rate of profit in the US has been recovering.
This has had major consequences for investment. Graph two compares the rate of accumulation in Australia with the underlying rate of profit. Generally, the underlying rate of profit determines how much capitalists invest relative to the value of their assets (the “rate of accumulation”); and, ultimately, the rate of investment determines how quickly output and employment grow. But the resources boom disrupted this relationship, as investment poured in lured by the possibility of super profits in the future.
With the super profits in mining now gone, investment is crashing back down towards levels more consistent with the low rate of profit.
The low rate of profit, in Australia and elsewhere, is not something which can be easily reversed.
Historically, major increases in the rate of profit have only come about due to major devaluations of capital which can be caused by economic crises, and the widespread and needless human suffering this brings. This has not happened since the Second World War in Australia, and the evidence we have suggests widespread devaluation has not happened elsewhere either (despite the crisis).
Other ways to boost profit rates include holding down wages, extending working hours, having people retire later and cutting government spending. These are part of the ruling class’ agenda throughout the advanced capitalist economies.
We must resist these attacks, but unless we get rid of capitalism itself they are going to keep coming.
Thanks for an informative article Peter.
The crisis hasn’t got deep enough in Australia, has it, to test the too big to fail thesis here?
And are major devaluations of capital the main way to restore profit rates?
Maybe the conclusion is that the current softer posturing from Abbott and co and actual and wanna be attacks on wages, jobs, hours and conditions is the less brutal stage of recession/austerity.
I like the way you paint these as rational approaches for capital and that is why these attacks will not disappear.
Nice article Pete.
1. Doesn’t a falling long term rate of profit (Chart 1) show, in a way, that capitalism works? I.e. that over time profits are falling as people compete? (Although it says nothing of distribution of those profits)
2. In Chart 2 to clarify you’re arguing that the rate of accumulation all other things being equal should rise if the rate of profit is falling (i.e. less attractive investment options) but actually fell due to the mining boom as people bet that the rate of profit would sharply increase in the future?
Hi Jason and John (sorry John, didn’t see your comment before),
First Jason: 1. The falling rate of profit is what leads to economic crises. Economic crises show one way in which capitalism doesn’t work because they leave large numbers of people with unmet needs and without any way of working to fulfill them (because it’s not profitable to employ them). If profitability didn’t call the tune then we wouldn’t have this crazy problem of potentially productive people who want to work being unable to.
2. I’m arguing the opposite relationship between the rate of profit and the rate of accumulation: they tend to be proportional. So a higher rate of profit means more profit relative to assets to invest, which means assets accumulate at a higher rate. Because of the promise of super-profits in the mining sector investment flooded into Australia from overseas, sending the rate of accumulation above the level it would have been if it had been proportional to the rate of profit.
John: I wouldn’t say there is an economic crisis in Australia. So no, no crisis deep enough to test the willingness of the state to bail out companies. The deposit guarantee during the GFC was an indication that bailouts are certainly not off-the-table in a crisis situation in Australia though.
Yes, historically major devaluations have been the only way to restore the rate of profit in a major way. Smaller recoveries are possible through other methods.
Not sure there is any one-to-one relationship between the depth of a crisis and the ferocity of austerity measures. The two are mediated by politics. The Coalition have backed off for the moment (and now seem to be looking for more revenue instead) because the situation isn’t dire enough to really force them to go harder and last year’s budget was very unpopular.
I have a concern with the graph on rates of profit. This chart (or rather data series) is often used and was published in; “Trends in Profitability” EPAC Council Paper 34, July 1988 (ISSN 0816-4991), Chart 1, p4. The problem is that this concept of profit (operating surplus) includes depreciation, tax, dividends and interest. EPAC describes the data as “rate of return” as a ratio to “estimates of capital stock at replacement prices” (page 3).
As I see it, this is not Marx’s: S/(C + V).
Marx’s rate of profit is better understood as:
(taxes, dividends, interest)/(non-labour cost including depreciation + wages, salaries and supplements)
This would make profit rates smaller and counterpose profits to wages. Capitalists make profits by struggling against wages.
I have come to this article quite late.
I would like to know the sources for the data in the 2 graphs. I assume ABS, but more detail please. (Also the author.)
I think its an important analysis and the ideas in it can be used to discuss and develop strategy for the broad left in the context of the 2015 Federal Budget. In particular, the discussion of profit is very useful.
Marx was spot on of course to focus upon profits and the rate of profit in capitalism. He developed really useful tools to help us (here in the early 21st century) see much more than the superficial dross of most contemporary economic commentators, although of course some of them have their small moments.
On a more practical and immediate note I do not believe an employer (or any of their executives) exists who do not regard profits and profitability, especially profit relative to assets and investment, as their prime concern. And, overwhelmingly, the workers they employ know this also. I make this point because the importance of profits and profitability in understanding what is going on in a firm and in an economy (and in a society) is generally lost in the dominant and most visible public discussion of the economy and things like the Budget and / or Reserve Bank decisions. What’s lost to the public pundits is critical to bosses and to workers.
One aspect of this article that I like is the brief go to explain the tendency for the rate of profit to fall. It is a tendency that employers, and their organisations like the Business Council and the AIG, pay close attention to: hence to reverse the tendency we have things like the Productivity Commission review of the Fair Work Act, the Fair Work Act’s repressive restrictions against workers capacities to use collective industrial action to advance their interests; the dodgy Royal Commission against trade unions, the escalation of common law actions against workers and unions and so on.