Ever-Hopeful

Book Reviews

Room to Manoeuvre:  Political Aspects of Full Employment
By Paul Boreham, Geoff Dow and Martin Leet
Melbourne University Press, Melbourne 1999, 249 + xii pages, $29.95

After the 30-year period (to 1974) of low unemployment rates of less than two per cent, the last 25 years have seen Australian unemployment rates in excess of six per cent and as high as eleven per cent.  Other OECD countries also experienced higher unemployment rates from the mid-1970s, but the unemployment rate varies from country to country.  In Room to Manoeuvre the authors argue that there are no technical obstacles to restoring full employment and that the solution requires significant changes in political institutions and rejection of neo-liberal policies.

In Chapter 4, Boreham, Dow and Leet outline their policy strategy to restore full employment, and at the same time improve job security and job quality.  A significant increase in government investment expenditure would provide a Keynesian-type stimulus to aggregate employment creation.  Three major institutional changes to facilitate social-democratic corporatised decision-making are proposed to co-ordinate public and private investment, to provide for societal control over wages and profits, and to oversee labour market programmes.  The proposal is unashamedly for bigger government and more corporatised control over the decisions of the remaining capitalist market sector.

Even if the broad outline of the proposal was accepted, and many will not, the book leaves many important questions of detail unanswered.  How low is full employment -- five per cent as noted in political targets or under two per cent as was the case in the long boom?  Is the boost in public investment to be tax-financed or debt-financed?  What criteria are the national investment board to use in choosing not only public infrastructure projects but also in guiding private sector investment?  The discussion of Chapter 6 indicates that there also are many options and considerable uncertainty about details of the required new extra-parliamentary organisations to co-ordinate investment, the distribution of income and labour market activities.  In fairness, the authors are more concerned about presenting a broad strategy rather than a detailed plan, but clearly much of the devil lies in the details.

An implicit assumption behind the proposed Keynesian government expenditure boost on public infrastructure to create jobs and reduce unemployment is one of no crowding-out.  In fact, the authors argue that extra public investment crowds-in more private investment.  The proposed corporatist income-distribution institution is to restrain inflation and ensure that extra nominal expenditure becomes extra real output and employment, and the enlarged labour market programmes are to smooth away bottlenecks.  No crowding-out effects of a larger budget deficit, or of increased taxation, are allowed for via the usual macroeconomic forces of higher interest rates, a higher exchange rate, or reduced private consumption and investment.  Again, the authors presume an omniscient and benevolent government which wisely chooses investment projects, and assume that there are available good projects.  (Given that Australian governments have, since 1976/77, financed non-capital spending by borrowing or asset sales to the tune of $91 billion, this really is a triumph of hope over experience).  Further, government is assumed to have the knowledge and the ability to bring forward investment in cyclical recessions and to delay projects during cyclical booms.  Empirical support for the assumption that extra government investment in net will reduce unemployment is based on cross-OECD correlations of a strong negative association between government investment and unemployment.

Debate on the relative merits of centralised or corporatist versus decentralised or market direction of investment and of the determination of wages, profits and prices is ongoing, contentious and unresolved.  While the authors eschew statist models of the former socialist economies and refer favourably to current social-democratic models of Sweden, Norway, Austria and Luxembourg, and perhaps the 1983-87 Australian Accord, their proposal for Australia of the twenty-first century is vague.  No mention is made of performance of the highly decentralised and competitive US model with unemployment now under five per cent, and better than the rates of the 1950s and 1960s.

Room to Manoeuvre comes in six chapters.  Chapter 1 sets the scene with comments on policy objectives towards unemployment and a general conclusion that achievement of low unemployment is no longer a dominant objective when compared with competitive efficiency and low inflation driven by liberalism.  Much of Chapter 2 involves comparisons of OECD countries, and particularly using two-variable comparisons of unemployment against government expenditure, investment, labour costs, inflation, importance of manufacturing, R & D intensity, and so forth.  Australian policy as a base for the proposed strategy to reduce unemployment is found wanting because of its small government and small manufacturing sector, and it is concluded that labour costs, inflation and economy openness have no effects on unemployment.  These simple correlations raise questions of direction of causation and effects of omitted third variables, although the regression model of Chapter 5 meets the last of these methodological concerns.

Chapter 3 on "Economic Limits" presents a critique of current, neo-liberalism policies for reducing unemployment.  It is argued that policies to push undifferentiated economic growth, to use contractionary monetary policy to reduce inflation and current account deficits, to reduce labour costs, and to dismantle assistance to manufacturing are either unhelpful or actually harmful to reducing unemployment.  Most of the evidence is garnered from cross-OECD country two-variable correlations.  On the labour cost issue, for example, no reference is made to the very large number of time-series studies in many countries finding significant negative labour elasticities of demand (that is, that demand for labour falls when labour costs rise).  And, if labour costs are unimportant, why do the authors argue for centralised income policies to set wages?

Chapters 4 and 5 set out and argue for the preferred policy package to reduce unemployment.  Most of Chapter 5 returns to drawing lessons from comparative government expenditure, particularly on investment, and of corporatist versus decentralised institutions of OECD over the 1974-94 period.  Of particular interest is an ordinary-least-squares regression of unemployment rates on ten explanatory variables using panel data for 16 OECD countries and 19 years, 1974 to 1993.  (The period after the end of full employment.) Unemployment is found to fall with higher government investment, higher private investment, a larger manufacturing sector, faster economic growth, and a more corporatist wage-setting system.  For example, on a scale of 0 to 10, Australia is rated at 2 in the 1970s and at 8 during the Accord period, and this increase in corporatisation is estimated to reduce unemployment by nearly four percentage points.  This effect exceeds that estimated by most Australian studies using Australian data.

A final chapter evaluates the likely prospects and challenges of the Australian polity moved towards the recommended strategy.  From the perspective of this reviewer, the good news is that the authors anticipate considerable hurdles.