If to do were as easy as to know what were good to do ...
-- Shakespeare.
RISING PRICES
Wages, prices, and the value of money are very different things now from what they were before the War. None of us can help seeing that. And, especially over the last three or four years, since the end of wage-pegging, wages have been rising steadily. The basic wage has gone up 2/-, 3/-, or 4/- a week every quarter. Last December there was a special jump of 19/- or £1, and the quarterly rise this February has been 8/-, the largest ever. This should be a good thing for the worker, it would seem; yet many workers, and trade-union leaders, too, are growing more and more unhappy about it. No sooner does the basic wage go up 3/- or 4/- (less tax) than the grocer's, butcher's and other bills between them go up 4/- or 5/-. Prices seem to rise faster than wages, and many of us shudder at the thought of where they will get to during this year.
This is how inflation strikes the average man and woman, and it is therefore no wonder that anti-inflation policies are increasingly called for; that most of us feel the need for "putting value back into the pound".
WHO SUFFERS FROM INFLATION?
Although most people suffer from the effects of inflation, especially rapid inflation, some groups of people suffer more than others.
If inflation means a continuous rise in the general level of prices, this is the same thing as a continuous fall in the value of money. As prices rise more and more, a pound note will buy less and less, so that its real value is becoming less and less.
That is why the greatest sufferers from the process are people whose money-incomes are fixed or rise very slowly, for their incomes are growing less and less in real values. Such people are superannuated public servants, owners of fixed-interest investments, old-age pensioners, small landlords and some of the professional classes with relatively fixed fees.
For the same reasons, inflation is to the disadvantage of people who hold their property in the form of money, or money-equivalents such as bank deposits, bonds, insurance policies, etc., rather than in the form of real things such as land, buildings and durable goods. The real value of their possessions keeps on declining. Thus inflation hits the owners of Australia's 5½m. savings bank accounts.
Salary and wage-earners suffer relatively less than these groups in so far as their incomes rise along with rising prices. Salaries tend to rise more slowly than wages, and therefore most salary-earners are more affected than wage-earners. While wages are tied to the cost-of-living, a mild degree of inflation does not affect the wage-earner, but he suffers increasingly as the price-rise becomes more rapid. The time-lag in cost-of-living adjustments keeps him always one step behind, and that step is growing longer each time.
At the other end of the scale, many businessmen, buyers and sellers, agents and middlemen gain from rising prices, and one group in Australia has been gaining very much from the process over the past few years -- primary producers, especially the sheep farmers. Their incomes have been rising-much faster than the general level of prices, simply because the prices of the things they sell for an income (wool, wheat, etc.) have risen much more than most other prices -- see Table 1 (page 2a).
Because of this inequality of the impact of inflation, some groups of people fear inflation and its continuance much more than others, and more actively demand anti-inflation policies. Also, though a mild degree of inflation may do little harm to most people and even be beneficial to some groups, as it becomes more rapid the inequality of suffering is increased and large-scale "social injustice" creates increasing social and political instability and can lead to dangerously hasty "crisis" measures.
How rapid then has the Australian inflation become?
HOW MUCH INFLATION HAVE WE GOT?
One way of answering this question is to look at the index numbers which attempt to measure price levels. There is a difficulty here because there are many different sets of prices, some of which move up more rapidly than others. There are retail prices, wholesale prices, import prices, export prices, and so on, and there is no "general" level of prices to which we can attach any precise meaning.
To the ordinary Australian the important prices are retail prices of the general run of things that make up the cost of living, and the "C-series retail price index number" attempts to measure changes in these prices (covering food and groceries, fuel, housing, clothing and miscellaneous expenditure).
This index shows that prices rose about 20% in the first couple of years of the war and then remained stable until the end of the war. By the middle of 1947 they had risen by another 5% and since then have been rising at the rate of about 10% or 12% a year, so that three-quarters of the way through 1950 they were about 75% above pre-war level. Later figures are not available at the time of writing, but indications are that the rise was slightly more rapid in the last quarter of 1950, and will be more rapid still during 1951 (very largely as a result of basic wage increases in December and February).
When compared with the "galloping inflation" of some other countries since the war, with China, Greece, and a number of European countries where price rises have been of astronomical proportions, Australia's experience seems scarcely to merit the name of inflation at all. Yet there are two obvious reasons for concern. One is that our prices have been going up more rapidly since 1947 than in other major countries such as Britain and (until recently) U.S.A., where they have tended to level off since then. Another reason is that the retail price index number probably understates the extent of the rise that has actually taken place, largely because of the limited range of goods which it covers. Most people's experience would probably reinforce this latter point, for, wages having risen on the average almost 100% since 1938-9 (see Table 1 -- below), if prices have really risen only 75%, then the average worker should be able to buy about 14% more now with his wages than he could then. And few wage-earners or their wives would agree that this is the case.
We shall see later, too, that there are other reasons for urging that some steps should be taken as soon as possible to counter the increasingly inflationary trends in the Australian economy. In the meantime, we can get a little more insight into the position by looking at the relationship between money and goods.
TABLE 1. Australian Wage and Price Index Numbers.
(In all cases, 1936-39 = 1000)
| Wage Rates | Retail C-series | Exports | Wool Exports | Wheat Exports | |
| 1938-9 | 1044 | 1029 | 819 | 793 | 656 |
| 1945-6 | 1343 | 1278 | 1477 | 1165 | 2130 |
| 1946-7 | 1423 | 1309 | 2087 | 1734 | 3046 |
| 1947-8 | 1565 | 1393 | 2955 | 2872 | 4195 |
| 1948-9 | 1757 | 1528 | 3481 | 3649 | 4131 |
| 1949-50 | 1913 | 1669 | 3994 | 4727 | 4002 |
| Jun., '50 | 1976 | 1730 | 4705 | 5921 | 4345 |
| Sept., '50 | 2025 | 1773 | 6285 | 8900 | 4211 |
Note: As distinct from wage-rates, average earnings (per male unit) have been calculated since 1942, and are as follows: -
| 1942-3 | £6 | 8 | 6 |
| 1946-7 | 6 | 14 | 3 |
| 1947-8 | 7 | 11 | 0 |
| 1948-9 | 8 | 11 | 6 |
| 1949-50 | 9 | 9 | 0 |
| Jun., '50 | 9 | 19 | 6 |
| Sept., '50 | 10 | 4 | 6 |
(All figures from Commonwealth Bureau of Census and Statistics.)
WE HAVE MORE MONEY THAN GOODS
The reason for generally rising prices is broadly that there is more money about than goods, or that the amount of money we have to spend, and are seeking to spend, is increasing more quickly than the volume of goods and services available for us to spend it on.
Roughly speaking, the total of Australian incomes is now nearly three times as great as it was before the war. The National Income (the total of all incomes) was £814m. in 1938-9, £1248m. in 1946-7, and £2265m. in 1949-50.
Again, the volume of spendable money, consisting of notes in the hands of the public, bank deposits and savings bank deposits, has grown to more than three times its pre-war level, as follows: -
| June, 1939 | £ 660m. |
| June, 1947 | £1550m. |
| June, 1950 | £1994m. |
| Sept., 1950 | £2115m. |
Though not all of this constitutes an immediate spending pressure, it is probable that the major part of it does.
As against this growth in the volume of spendable money, it is doubtful whether the quantity of goods on which it can be spent has increased even a quarter as much. There is no adequate measurement of changes in the total of goods and services produced, but some individual typical items are significant (these show a comparison between quantities in 1949-50 and in 1938-9): -
| Refrigerators | 400% more |
| Beer | 85% more |
| Houses, coal, sugar, tobacco and cigarettes | 25% more |
| Flour | 10% more |
| Boots and shoes | 9% more |
| Meat | 8% more |
| Pig-iron, steel, bricks | slightly less |
| Butter | 14% less |
It is not suggested that these are a representative sample, but they certainly would not lead us to think that production of goods in general has gone up by anything approaching 50 per cent. Even on this unlikely assumption, however, we would have three times as much money to spend on one-and-a-half times as much goods -- a somewhat greater degree of inflation than is suggested by the 75% price rise referred to above.
WHY HAVE WE GOT INFLATION?
A number of forces have contributed to Australia's present inflationary pressure by increasing the volume of money available for spending, and limiting or hindering a similar expansion in the volume of goods and services to spend it on.
First of all, some degree of inflation is an unavoidable effect of our present attempts at energetic economic development, population growth, and defence preparedness.
Secondly, there are other inflationary factors such as high export prices and incomes, high government spending, devaluation, our wages-system, industrial conflict, low productivity, and management and labour inefficiency. We shall look at these forces in turn, and see what steps could be taken to reduce their inflationary effects.
ARE DEVELOPMENT AND IMMIGRATION AIMS BEYOND OUR CAPACITY?
The Australian economy is attempting at the present time an unusually high rate of investment.
As economists use the term, "investment" means the production of capital goods, goods designed not for current consumption but for increasing our future productive power. These include such things as houses, factories, machinery, shops, schools, hospitals, roads, bridges, railway tracks, trains, cars, trucks, planes, silos, dams, water supply schemes, electricity plant, etc.
In normal times something like 15 per cent. of our total output consists of capital goods in this sense. At the present time we are aiming at a level of investment of about 33⅓ per cent. of our total output. This is unusually high, but there are good reasons for aiming so high: -
We are still suffering in this matter from a hang-over from the war period, during which we allowed our capital equipment to run down, both by failing in many instances to maintain or replace worn-out capital (buildings, machinery, transport equipment, power plants, etc.), and also by failing to make the regular annual additions to our total stock of equipment which are essential in a living and progressive economy.
This hangover is apparent both in private industry and in government works. Both have large present and future investment programmes designed to make up the backlog. It is especially apparent in the basic sections of our economy (coal, fuel, steel, transport, power), where the deficiencies have caused "bottlenecks" in the supply of many things which are basically necessary to the efficient working of all other industries.
Population growth also makes high levels of investment necessary. Our population did not stop growing during the war period when we were failing to increase our capital equipment along with it. In the last two years immigration has greatly added to its growth, to the extent of over 150,000 a year. And immigration policy aims at an annual addition to our population from this source of 200,000 people.
The efficiency and productivity of industry generally, and consequently the standard of living which we can enjoy, depend very significantly upon the amount of capital equipment and power we have available. Broadly speaking, if we want to maintain standards of living, it is necessary to increase our total capital equipment at about the same rate as our population grows, as well as maintain our existing stock of capital. It has been estimated that every immigrant creates the need for £1,000 worth of additional capital (housing, transport, public services, tools, machinery, etc.) if our average standards of living are not to decline. This means a need for £150,000,000 to £200,000,000 worth of new capital a year because of immigration alone.
Current defence requirements reinforce the need for a high level of investment created by these war-caused backlogs and by rapid population growth. Defence means additional investment in works, stores, equipment, vehicles and other materials, and expansion in these cannot be neglected in the tension of the current international situation. Indeed, decisions made at the recent Commonwealth Conference of Prime Ministers will lead to an increase in our plans for defence expenditure.
SOME DIFFICULTIES
Now, aiming at an unusually high level of investment for the reasons we have discussed leads to several very important difficulties.
First of all, the full employment which we have enjoyed since the war period means that there are practically no unused resources of labour and materials which can be brought into use. Consequently, any great increase in capital production can only be at the expense of other production, by withdrawing resources from the production of consumers' goods. The only other way of adding to our capital equipment is by importing it (either paying for it with exports, or borrowing from overseas), and such imports are at present becoming increasingly difficult and expensive. To a limited extent our labour resources, also, could be increased by seeking ways of drawing further upon the pool of aged workers and married women.
Secondly, we are unfortunately unwilling to let the necessary diversion of resources to capital production take place, because we are unwilling to save enough of our current incomes. A3 governments and businessmen, we are trying to spend 33⅓ per cent. of our total income on capital goods, but as consumers we are trying to spend 80 per cent. or more of our incomes on consumers' goods (in 1949-50 we succeeded in spending about 75 per cent. of them on current consumption). In short, we are trying to do two incompatible things at once: -- to build for the future, and to spend high in the present, in a situation where we have not enough resources to do both as fully as we want to.
Again, it is a special economic feature of investment that it creates additional incomes without at the same time creating additional consumers' goods on which the incomes can be spent. The men engaged in making machines and building factories get their wages now, but it is only after a lapse of time (often quite long) that the machines and the factories turn out the goods we can buy.
Thus a high level of investment is a powerful inflationary force, increasing the amount of money we have to spend without in the present adding equally to the total of things we can spend it on. In the full employment situation it also tends to force up prices and wages through competitive bidding for limited supplies of materials and labour, both in investment industries and in consumption goods industries.
Policies of rapid capital expansion, immigration and defence are widely accepted as desirable and necessary in Australia at the present time, and a measure of inflation resulting from them must, I think, be viewed as healthy and inevitable, so long as it is not too rapid. It can well be regarded as an automatic mechanism helping to reconcile the incompatibles referred to above -- it forces some reduction in present consumption, without which investment cannot expand rapidly; and it prevents the investment programme from being too rapid by raising prices of labour and materials and enforcing some economy in the selection of investment projects.
SHOULD WE CUT DEVELOPMENT AND IMMIGRATION PROGRAMMES?
Our present position rather resembles having a cake weighing 15 ounces and trying to divide it into two slices, one of 5 ounces (investment) and the other of 12 ounces (consumption). As things stand, we cannot do it. In order to solve our problem we must either make the cake larger, make one or both of the slices smaller, or do both these things.
The possibilities of large increase in total production in the short period are severely limited by the shortages inherent in full employment. Working harder, and more efficiently, using incentive schemes and improved managerial techniques, could help to some extent (and we shall consider them later), but by far the most important factor in high production is capital equipment and power. Thus we can't cut down the 5 oz. slice very much or there is little hope of making the whole cake larger for the future.
There are, however, some ways in which the investment programme can be reduced without too serious effects.
Those forms of investment which aim to produce luxury goods and less essential goods, and those which are likely to come into production only after a longer period of time should be pruned in preference to those producing essential goods in the relatively short period.
For this reason it is worth considering seriously how far a developmental project like the Snowy River Scheme should be slowed down or postponed. A sound suggestion might be to proceed only with that small part of the scheme which will give us hydro-electric power within four or five years, and to abandon the rest for the time being. The proposal is even worth discussing that the Scheme should be carried out for us by American firms, under charter or with a franchise, thus giving us our development scheme without making big inroads upon our own resources of capital and labour.
Again, in N.S.W., it certainly seems that the principles we have expressed would favour such railway developments as the Singleton-Muswellbrook and the Nattai-Thirlmere lines (which will carry coal) in preference to the costly Sydney City underground railway extensions.
In private industry it would seem necessary to limit the extent to which the less essential industries could obtain finance and materials, by control over credit and capital-raising, and over important raw materials and supplies.
Machinery exists for preparing and applying this kind of policy in the recently established National Security Resources Board, the credit powers of the Commonwealth Bank, and the renewed Capital Issues Control. I believe the Government has been far too slow in setting up the latter control, and it still remains to be seen in what ways and how promptly it will act upon the suggestions of the N.S.R. Board.
Again, if a good part of the pressure for high investment comes from our high intake of immigrants into Australia, this pressure could be reduced by cutting down our immigration targets. If we aimed at 100,000 a year instead of 200,000, this would perhaps be nearer to our economic capacity to absorb them without too great an inflationary pressure. On the other hand, this result may well come about without such a change of policy on our part, by a drying up of the stream of suitable migrants.
As for cutting down consumption, we have seen that the people are peculiarly unwilling to take steps in this direction. Half-hearted propaganda in favour of savings over the past few years seems to have had little effect, and I doubt if much could be expected from a full-scale, high-powered "savings campaign" such as the Government seems to have in mind.
We should not, of course, ignore the possibilities of increased public subscriptions to government loans, or purchase of savings certificates, if higher rates of interest were offered. But it is also a fair comment that governments are pursuing incompatible policies when they seek to encourage thrift on the one hand and in practice discourage it on the other hand by giving such social services as old age pensions to the thriftless and denying them to the thrifty.
Probably the most effective policy reducing the pressure of consumption demand would be a high taxation policy, linked with budget surpluses. Higher income taxes leave the taxpayer with a smaller proportion of his income to spend on current consumption, and budget surpluses subtract more from the volume of spendable money in the community than they add to it by government expenditure.
The important thing here is the budget surplus, and it is necessary, though difficult, to avoid the danger that higher government revenues would simply encourage higher expenditures instead of the surpluses.
It is never politically popular to increase taxes, and it is understandable that in both the 1949-50 and 1950-51 Commonwealth Budgets, when increased taxes would have been wise from the point of view we have been discussing, the Governments concerned did not increase them. In the first case, an election was due in two or three months; in the second case, a double dissolution seemed not unlikely.
I believe that tax increases will have to come. It takes, however, an unusually courageous government, a high level of public education in the effects of government finance and taxation, or a widely acceptable pretext, such as war and defence (note the higher taxes promised in Britain in connection with the stepping-up of defence), to make significant tax increases possible.
It would take, too, a government firm in its resolve to conquer inflation and in its resistance to pressures for further spending sprees, to produce the vitally necessary budget surpluses out of the increased revenue.
In general, then, it seems necessary to examine critically our development programmes in Australia. Both government and private investment plans should be pruned of less essential projects, and perhaps immigration targets should be reduced. If, better still, we can educate ourselves as well to the need for budget surpluses and higher rates of income tax, then the degree of inflation due to development and immigration should not be unduly high.
DANGERS FROM OTHER INFLATIONARY FORCES
Other factors, however, are strongly speeding up the inflationary process, and if it becomes much more rapid there are dangers of most undesirable consequences.
An over-rapid rate of inflation intensifies the "social injustices" of the unequal incidence on different sections of the community, and can lead to hasty crisis measures which may do more harm than good. It can also, as it becomes more rapid, lead to the panic and complete loss of confidence in the currency which usher in "galloping inflation" and collapse.
Furthermore, unless the process can be reasonably controlled, it brings about a progressive distortion of the pattern of the economy which makes the achievement of the investment goals less and less possible. It does this by over-stimulating the industries producing luxury and non-essential consumers' goods, these being more profitable in a situation of plentiful money and basic shortages, and by drawing resources away from investment and essential industries. Over a growing range of industry also, easy profits remove the spur to efficiency in production and help bring about a spreading decline in efficiency whose only result, if we return to our earlier image, is to reduce the size of the whole cake.
This distortion also brings the danger of unemployment as the solution for inflation. Indeed, in some industries, through shortages of basic materials and power, or through a process of "pricing themselves out of the market", we are perhaps already perilously close to the unemployment which, as it spreads, brings the traditional "depression" remedy for inflationary booms. That remedy is a more bitter medicine than any of the policies suggested in this article.
To avoid these consequences we must examine the present inflationary forces which lie outside our development and immigration programmes. These forces are progressively hastening the inflationary process in Australia, and in relation to them we must frame and apply anti-inflationary policies with the least possible delay.
I shall make, as I suggested earlier, a somewhat artificial division into (a) forces which have increased the volume of spending money, and (b) forces which limit the expansion of the quantity of goods and services. And as we look at the causes, we shall look also at the appropriate cure in each case.
TOO MUCH MONEY
Where it comes from and what we should do about it.
A series of forces has operated strongly during and since the war to increase greatly the total amount of money we have available as purchasing power.
ACCUMULATED SAVINGS
During the war period about half of our labour and material resources were being used for war purposes and not producing goods and services for ordinary consumption; yet everyone was receiving wages or other forms of income. This was the characteristic inflationary situation, but price-rises were largely prevented by a high rate of saving and a rigid system of wage-pegging, price-control, rationing and subsidies. The inflation was thus suppressed until after the war, when we emerged with large personal savings, and with an outsized pent-up demand for consumption and other goods that had been unavailable during the war (houses, furniture, motor-cars, clothes, etc.) and with a too-early removal of some of the controls.
There is little that can be done to reduce the inflationary force of these accumulated savings. A capital levy would wipe some of them out, but there are many moral and economic objections to such a remedy; increased taxation would help to absorb some of them; steps aimed at producing more goods would help gradually to work off some of them. And it may be that on the whole people will want to keep more of them in the form of money-savings now than they did before the War.
HIGH GOVERNMENT SPENDING
During the war the level of government spending sky-rocketed, and this largely created the increased incomes without creating things on which they could be spent. And the level of government spending has remained high ever since, and is a continuing inflationary factor. It is true that for several years now governments have not been spending more than they have taken from the people by taxes, other charges, and relatively small borrowings -- there has not been inflationary deficit-finance. The inflationary effects of present high government spending arise from the high proportion of that spending which creates incomes without providing goods and services on which they can be spent. This is especially the case with increased social services, and with large public works programmes.
I have urged before the need to prune public works programmes of less essential and less immediately-fruitful projects. The government's efforts in this direction could well be more speedy and definite.
Reductions in social services, which would be theoretically valuable as anti-inflationary measures, are socially and politically out of the question (though it is well that we should realise that an increase in inflationary pressure is part of the price we have to pay for the increases we have made in our social services).
Also, further extensions of social services should, in the present situation, be approached with great caution.
RAPID WAGE RISES
Wage-levels have been rising in Australia since the abandonment of wage-pegging in 1946-47, and increasingly fast over the last half-year or more. Three factors have contributed to this -- the strong bargaining position of trade-unions in a period of full employment; the bidding up of wages by employers and industries anxious to obtain and keep workers; and our system of automatic cost-of-living adjustments to wages. This last factor must bear a considerable share of the responsibility for the familiar rising spiral of prices and wages. Besides their inflationary effect in increasing the quantity of spending money, continual wage rises have a direct effect in raising the price-level because wage-costs are the most important element in the costs of most things.
The appropriate policy here would be a "wage-freeze" agreement (such as that which was so effective in Britain for two or three years, until quite recently), or a temporary abandonment of automatic cost-of-living adjustments. Although the need for such a policy has recently been expressed by political Labour in two of the smaller States, and by one of our largest trade-unions, I see little chance of its being generally acceptable to organised labour as a whole, particularly in the highly industrialised States. It would certainly be impossible for psychological reasons, without an associated policy of profits limitation (and this would be as strongly opposed by businessmen and employers) and of price-control (which is completely ineffective in keeping down prices unless wages and other costs are kept down).
HIGH EXPORT EARNINGS
Since the war, and especially since 1947, there has been an enormous expansion in the incomes of exporters because of high world demand and record world prices for primary products such as wool, wheat, metals and meat (again, see Table 1 -- page 2a). Besides creating high spending pressure within the Australian economy, these high prices have had a direct effect on the price-level by raising the prices in Australia of meat, woollen goods, and wheat products, all important items in our cost of living.
Furthermore, our expenditure on imports has not risen to the same extent as our income from exports, and a surplus of exports over imports means a net increase in the money in the country not balanced by an increase in imported goods to spend it on.
DEVALUATION IN SEPTEMBER, 1949
This brought about further increases in export incomes (mainly through the increases it caused in world prices of our exports), and also higher prices, in Australian money, for some of the things we import. It thus gave a further fillip to inflationary forces. Even more important, perhaps, was the failure on Australia's part to seize this appropriate opportunity to appreciate the Australian pound against sterling and many other currencies, a step which would have had valuable anti-inflationary effects by reducing high export incomes and lowering the prices of almost all our imports.
These inflationary effects of our trading and financial relations with the rest of the world could be countered by several lines of action: -
Freezing a part of high export incomes so that it could not be spent at present but was kept in reserve against a possible future drop in those incomes. The wheat stabilisation scheme does this, and the stabilisation scheme recently enacted for the wool industry has the same effect, though the size of the levy (7½%) is too small to have significant anti-inflationary force. Such schemes might be extended to other primary industries. A more important and effective slice has been taken from woolgrowers' incomes as pre-payment of income taxes, though the form of this deduction is, in my opinion a poor second-best compared with a larger stabilisation levy. It is, moreover, at the time of writing, under challenge in the High Court.
Such anti-inflationary steps are strongly opposed by those whose incomes are affected. And the argument against singling out one section of the community for special sacrifice is a strong one.
Another line of action in the sphere of trade would be to increase the level of imports. This does nothing, of course, to reduce the money-pressure from export incomes, but by bringing more goods into the country, it increases the volume of goods on which our incomes can be spent. A considerable import surplus for a year or two might help greatly to reduce the inflationary drift in Australia.
There are growing difficulties in increasing our imports, however, in the face of other countries' growing needs of their own output, and their increasing diversion of resources (and shipping) to defence purposes.
Revaluation of the Australian pound would be deflationary in effect by reducing the incomes (in Australian money) of farmers and exporters; by reducing the price in Australia of some important commodities such as wool and meat, and of all imports. Thus it would be probably the most effective single anti-inflationary step we could take. On the other hand, there are strong political pressures exerted against revaluation, by groups who would suffer by it. These include farmers and exporters (whose incomes would fall), and a number of Australian manufacturers who would suffer stronger competition from cheaper imports.
Again, with rising costs and prices in Australian industry, the longer delay there is in revaluing the greater will be the adverse effect of such competition, the more industries will suffer from it, and consequently the greater will be the political pressure against it. From this point of view it was a mistake not to appreciate against sterling in September, 1949, or again in the 1950-51 Budget.
WHY HAVE WE FAILED TO PRODUCE ENOUGH GOODS?
Other factors have limited in various ways the increase in the volume of goods and services available to satisfy our vastly increased total of purchasing power.
BOTTLENECKS AND INDUSTRIAL UNREST
Probably the greatest limitation on expansion of production of goods and services has been lack of production in the basic industries, especially the coal industry. Output of coal has increased, but far from enough to meet the growing demands of industry and consumers. This has led to shortages and idle capacity in industries directly dependent on coal, such as iron and steel, transport, gas and electricity, and a consequent hampering of many further industries dependent on them for materials, fuel and services, for their own production and expansion. Part of the reason for these bottlenecks lies, as we have seen, in the distortion arising from the growing inflationary process, a large consumers' demand stimulating consumption goods and luxury goods industries, so that it is more profitable to devote men and resources to them than to the basic industries. The dependence of so much consumption-goods industry on the basic industries make this a vicious circle. Another reason for the narrow bottlenecks is that the basic industries, especially coal, are those in which strikes and extensive industrial unrest have had such serious effects on production.
Because the coal-mining industry is vital, reduction of stoppages, easing of industrial frictions, acceptance by the miners of increased mechanisation, installation of machinery at a faster rate, expansion of open-cut mining, would be valuable contributions to the struggle against inflation. The Joint Coal Board has had a measure of success in some of these matters over the past two or three years, but has had little success in others. There is no doubt of the harmful effect of communist-inspired industrial action in this industry (as in several other basic industries), and effective measures to combat Communist influence would at the same time help to combat inflation.
THE 40-HOUR WEEK
The introduction of the shorter standard working week since 1947-48 has added to inflationary pressures by directly reducing output through the working of shorter hours (in some industries and occupations), or by raising incomes and costs through the working of overtime at higher rates of pay.
An increase of the standard week to 44 hours again would add greatly to our total production. It would add, other things being equal, the equivalent of 250,000 workers. Opposition from trade-unions and the likelihood of widespread industrial conflict over such a step make me regard it as impracticable -- unless it were accompanied by a wage-increase sufficiently large to make it acceptable to organised labour, and this would certainly be itself an additional inflationary force.
LOW PRODUCTIVITY
The standard way of measuring productivity in an industry is quantity of output per man-hour, or per man-week, or even per man-year. It is often difficult to measure productivity in this sense, especially to make comparisons between different times, when a number of factors (nature of the task, types of machines, management methods, etc.) may have altered.
But Colin Clark's investigations and calculations show clearly that in some industries (especially building, transport, manufacturing and mining) productivity is lower in Australia than pre-war. In building, for example, product per man is nearly 30% less than it was before the war.
It is clear, too, that Australian industry as a whole has shown relatively small increase in productivity (about 3% above 1938-39), and compares very badly in this respect with many other countries, especially Britain (35%), America (74%) and Canada (76%).
There seem to be some fairly obvious reasons for this low productivity. When jobs are easy to get the pressure is not on workers to work hard, and when goods are easy to sell the pressure is not on management to increase its efficiency. Bottlenecks in supplies frequently keep workers idle on the job. The increasingly frequent changing of jobs by workers lowers efficiency by using up time training and retraining for new jobs.
We must beware, however, of thinking that harder work and more efficient management would lead to startling increases in productivity. In the modern economy, high production is primarily a matter of the amount of capital equipment and of power available per worker, and this underlines again the desirability of a high level of the right sort of investment in the Australian economy.
But there is scope, with our existing level of capital resources, for considerable stepping-up of productivity in industry, and the following would be of value, and should be persisted with: -
The dropping of "go-slow" policies by some sections of organised labour, and the removal of various forms of limitations of the "daily task" of workers in some industries;
the introduction or extension, where applicable, of "incentive" schemes, particularly well-designed and acceptable incentive-payment systems. To have any change of acceptance by many unions, such systems would have to contain water-tight safeguards against abuse by employers.
To both these types of policy there is widespread opposition in many trade-unions. Some regard "going slow" and limitation of output as necessary in order to maintain full employment, on the rather curious theory that working harder leads to unemployment. For these reasons also, as well as through fear of sweating and intensified exploitation of workers, many unions (though frequently not the rank and file of their members) strongly oppose incentive payment schemes. Notice the use of this argument in the attempt by the Miners' Federation to gain the support of trade-unions generally for proposed coal stoppages (end Jan. 1951).
Considerable increase in output could often be secured by improvements in management efficiency, especially in cases where management has become slack through the existence of a sellers' market, easy profits and little need to worry about costs. In this matter, as well as in trade union attitudes, we could well follow Britain's lead in attempting to learn from American industry through the work of the Anglo-American Productivity Council.
SUGGESTED REMEDIES
It is clear that there are difficulties and obstacles in the way of all the various measures suggested above. Each of them would adversely affect some section of the economy or some group of people, and the attempt to put any one into effect would meet political difficulties and opposition from pressure groups.
In such a situation, inflation can only be combated by a complex pattern of compromises acceptable to a large number of groups in the community. One single type of measure applied in isolation is politically difficult, if not quite impracticable. A comprehensive policy must contain a number of measures and must embody some rough equality of sacrifice. If exporters are expected to sacrifice some of their present high incomes, then businessmen must accept some squeezing of profits, and trade-unions must accept a halt or slowing down in wage increases.
In the present situation, I suggest that the most practicable and effective steps would be: -
pruning of our investment programmes, governmental and private, as suggested on pages (10-11).
appreciation of the Australian pound, and budget surpluses by the Commonwealth Government.
These two would be highly anti-inflationary in effect, and are both indubitably within the constitutional powers of the Commonwealth.
The first might need to be supplemented by tariff revisions, and perhaps subsidies, in the interests of certain industries (though we could well sacrifice some of the least efficient).
The second, in view of the difficulties of reducing the current expenditure of governments, would almost certainly involve appreciable tax increases.
a wage-freeze and profits limitation, in conjunction with the above steps, would greatly strengthen the equality of sacrifice demanded, and would be highly anti-inflationary. They meet, however, two formidable obstacles. First, neither the Commonwealth nor the States can legislate effectively in these matters because of constitutional limitations. (The Commonwealth can do so under its defence powers in time of war; or it could seek such powers by means of a referendum -- my own view on the latter being that if the government sought power to control prices, wages and profits, it should be for a limited period only). Second, even if the constitutional limitations could be overcome, the practical difficulties of arriving at an equitable system, and the practical oppositions from different groups appear to be insuperable. These items may thus have to be regarded as theoretically most desirable but politically impracticable.
pressing on with other policies.
a continuous attack on the problems of low productivity and industrial unrest;
attempts (in the face of growing difficulties) to raise the level of imports, not only of capital goods, but also of consumers' goods, even at the cost of borrowing from overseas.
perhaps a deliberate reduction in our immigration target.
CHAOS AND UNEMPLOYMENT IF WE DON'T ACT PROMPTLY
Australia, with its programmes for industrial development, population growth, and economic progress, is aiming high and bravely. The aim must be kept high, even though limitations or resources make it impossible of full achievement and force us to accept a slower rate of progress and a lower present level of consumption than we seek to maintain.
We cannot have development and progress without paying for them by working harder and consuming less, and a moderate degree of inflation is probably less harmful than beneficial in the adjustments we have to make between our investment and consumption aims.
There are signs that other forces are now increasing the pace of the inflationary process so that we shall be increasingly compelled to make the adjustments in a way that will cause greater sacrifices in present standards of consumption, in political and social stability, and in economic development for higher future standards of living, and may well lead to a solution by widespread unemployment, the least desirable alternative.
The need, therefore, for an adequate anti-inflation policy is growing daily, and the dangers of delay are increasing.
