I might have mentioned before that I spend most of my days working on a PhD thesis, and have done for about four years now. It’s about time this thesis was done, and I do have drafts of almost every chapter in various states of completion, totalling well over the 80,000 word limit. Sometimes I think about it and think it could be brought up to scratch in a few weeks; other times I realise it needs to be completely rewritten from scratch.

Anyway I don’t think I’ve ever posted anything here from the thesis, for various reasons. But now that I’m confident the whole argument is settled I’m going to start posting bits and pieces. Partly because putting it out for an immediate and fresh audience (there are of course people who have been reading drafts all along) motivates me to clean up the messy bits, and the prospect of telling the story actually gets me excited about the whole damn thing again. I’m also going to use this space to exorcise offcuts that I know don’t fit into the structure but I still kind of like on their own merits. I’ll post in small chunks because I know people generally aren’t in the headspace to read thousands of words when they’re sifting through teh blogs. But I’m really interested to get feedback from anyone who feels like reading it.

It’s specifically about the politics of counter-inflation policy in Australia between 1945 and the mid-1980s. But that’s really a keyhole through which I tell a story about capitalism, the capitalist state, and what the hell happened between the post-war boom and what often gets thought of as the neoliberal turn of the 1980s. In the middle there, of course, is the crisis of the 1970s. It’s about Australia, but I think aspects of the story in outline are generalisable at least to the other Anglo countries. In some ways focusing on little old Australia opens up new angles, because we’re all so used to hearing the story of the post-war boom, stagflationary bust, and neoliberalism with regard to the US and UK, and it’s interesting to see what’s different and what’s not. Interesting quirks like monetarism making its first political appearance through the Labor Party, and the great transition of the 1980s coming through Labor’s Keating and the labour movement acceptance of the Accord, rather than the hard face of Thatcher or Reagan.

I also happen to think the story makes a pretty exciting narrative, which I try to do justice to even though I’m trying to explain rather than tell the story (that last bit is my supervisor talking). There’s the Battle of the Banks, an enormous media battle of propaganda and counter-propaganda over Chifley’s plan to nationalise the banks; a decade of financial innovation in which a tower of mindboggling new financial instruments and institutions is built on the back of consumer debt, collapsing in a credit crunch (the 1950s); wild boom and bubble years of mineral discoveries and exploitation; Milton Friedman arriving on a plane direct from Chile followed by camera crews on a speaking tour in shopping malls up and down the east coast; Joan Robinson arriving a month later (fewer camera crews); Fraser’s coup and the nation of bastards, carried up and down on a whiplashing exchange rate… and dumped into the 1980s.

Oh NAIRU don’t: part one


Raych always makes fun of me for being bad at explaining stuff. Like when someone asked me what ‘sub-prime’ meant and I said ‘less than prime’. But often arcane terms in economics hide something really banal or else something economists really can’t explain very well. So last week comes the question: what is the NAIRU? My paraphrase of the news reports: Shadow Treasurer Malcolm Turnbull asked Treasurer Wayne Swan what he thought the level of the NAIRU was, and isn’t it hilarious because what the hell is it? (As a former Fairfax subeditor I disapprove, but cheers Simon Jackman for saving the above image before it was dumped in posterity’s Recycle Bin. And you’re quite right, it’s the layoffs.)

NAIRU stands for Non-Accelerating Inflation Rate of Unemployment. It’s a very clumsy way of saying, well, that rate of unemployment at which inflation does not accelerate. Why so clumsy? Please, allow me to explain at great length over multiple posts.

The concept has its roots in the idea of the ‘natural rate of unemployment’, a term I think coined by Milton Friedman. This was the unemployment rate that would be “ground out by the Walrasian system of general equilibrium equations” – that is, it’s the rate of unemployment that would exist if every market were in equilibrium. Unemployment below that level would be possible only temporarily, because firms were fooled, interpreting increased money demand for their products as an increase in real demand rather than generalised inflation. To the extent that inflation is anticipated, this mistake will not be made. Therefore, further reductions in unemployment can be bought only at the expense of an increased rate of inflation, because only the unanticipated part of price rises will fool the markets.

The ‘natural rate’ should not be confused with ‘full employment’. This is not a term Friedman would use, but it was the goal of postwar macropolicy, and indeed pretty much achieved in many countries, including Australia. (It’s a complicated question how much policy was responsible however.) ‘Full employment’ is a non-technical term where the commonsense definition actually matched the economic definition for a few years in the 1940s and 1950s. To most people ‘full employment’ means that everyone who wants a job has one. Technically, full employment was never quite zero unemployment, because there were always people in transition between jobs. But in Australia it was pretty close, way closer than we are now. When unemployment topped 2 per cent in 1961 it was a political crisis and the Coalition was saved from election defeat only by spectacular disarray in the Labor camp.

Gradually, though, the economic meaning of ‘full employment’ departed from the commonsense definition. By the late 1950s in Australia it was not uncommon to hear economists talk about ‘over-full employment’. The idea that the price level could keep rising slowly but surely upwards – permanent ‘creeping’ inflation – was strange and slightly evil to a generation used to cycles of inflation and deflation. Since the war, prices had not fallen, and a number declared the situation fundamentally unsound – though, apart from a spike around the Korean War, inflation rarely topped 3 per cent. But Australia was plagued also by recurring balance-of-payments problems, which in those days meant something because the central bank had not built up enough foreign exchange reserves to sustain a deficit for too long. The Bretton Woods agreement had fixed exchange rates, and the Korean War price spike had affected Australia particularly strongly and left its price structure comparatively high compared with its trading partners. Policymakers were won over to the idea that prices and wages had to be held down.

Strange as it may seem, it was a great worry to business and government that the centralised industrial bargaining system seemed to be breaking down. No sooner did arbitration judgements begin to take inflation into account in setting wages (the precedent was set in the 1953 Commonwealth Basic Wage case, which ended the indexation of wages to inflaton) than actual wages began to break away from the awards. Workers were getting better wage deals at an enterprise level than the arbitration system was giving them, and this was quite a headache. Theoretically, a market system which ground out inflation could be in no kind of equilibrium, so the level of unemployment which caused this outcome must be ‘over-full employment’. ‘Full employment’ = zero inflation.

In the political environment of the late 1950s, though, this economic judgement was politically poisonous. We are as yet a long way from a Coalition government being able to declare war on inflation, much less the ALP, and woe to the government who allowed unemployment to rise above 2 per cent!

But the long ‘full employment’ honeymoon finally ended in the ‘credit crunch’ of 1960/61. It took another balance-of-payments ‘crisis’. Even more, it took a new weapon, which had been forged quietly and painfully over the previous 15 years – monetary policy. (That’s another post.) Monetary policy was believed to be weaker than fiscal policy, but, in the words of economist D. C. Rowan, it was “tactically agile”. Monetary policy was less well understood by the public, and did not need to be publicly announced and shepherded through caucus, Cabinet and Parliament.

Since the ‘political’ constraints affect mainly the use of fiscal devices, it is urgent to consider whether the admitted lags in fiscal policy cannot be partly offset by endowing our monetary techniques with greater breadth, precision and flexibility. This is not to deny that ‘political’ difficulties also exist in the monetary field as do constitutional obstacles. It is merely to suggest that, in this particular field, it may be possible to overcome them – at least in part. [Rowan, “The problem of economic policy”, Economic Record, November 1956]

There are differing accounts as to whether the government meant to provoke a recession, or even whether it actually did provoke that recession, but there is no doubt that it went down well at the Treasury, and stimulus was a long time coming. For a couple of years there was no inflation. 2-3 per cent unemployment was the price, and the Menzies government weathered it, just.

The rest of the decade was a reprieve. Macroeconomic policy was widely seen in the press as a mess: ‘stop-start’ was the popular term, and Menzies et al were lambasted for a failure to ‘plan’ – ‘planning’ being a buzzword equivalent to, say, ‘innovation’ these days. It meant different things to different people, and to the government it meant very little, or perhaps mainly the idea that wages needed to be restrained so that Australians did not “live beyond their means”. But meanwhile, the balance-of-payments constraint was fading away as foreign investment flowed into mining and exports flowed out, and as the dose of unemployment apparently really had held back inflation. The last phase of the world boom was underway.

To be continued…

By the way, this is based on a paper I wrote a year or two ago, where it is all put in slightly more detail with slightly less snark.

Published in: on 25 February, 2008 at 8:59 pm  Leave a Comment  

Redfern oral history

This looks fantastic: a website devoted to oral history of my neighbourhood, Redfern. I’ve only just started browsing through it. Some great stuff about the squatting origins of the Block:

Roberta Sykes: Well I suppose The Block was all boarded up and lots of the houses there had been gutted and there weren’t facilities available. There were a lot of people around at the time who had nowhere to sleep and they would prise the boards off the windows and climb in and sleep there. [That was around] 1970, 1971, 1972.

Mum Shirl always had a concern for people who had nowhere to sleep and they would start sleeping in empty houses. She would run around to make sure they were all right. There are all sorts of background things that I am not sure about, like what triggered off the police oppression against the people who were sleeping in there, whether the developers suddenly got it in their minds. All those buildings belonged to somebody, somebody had been buying them, some big company, with the intention of developing them at some stage but years in the future. Meanwhile there was a shortage of shelter for people in the inner city so people were taking the advantage of going into the boarded buildings because they had nowhere else to go. Then the police started targeting that area to harass people and that’s when Mum Shirl and myself and others got involved. At the same time there were other targets of harassment like the Empress Hotel and places like that, where we understood the Riot Squad was being trained there by running in and rounding up blacks and things happening, and it seemed to us like the same thing was happening with people even less able to defend themselves.

They were just thrown into police paddy wagons, were they?

Roberta Sykes: Sometimes they were, sometimes they were beaten up. Then it almost turned into like a small urban war between the people and the police. Once we started to become involved, they started to get even heavier and they seemed to be, from my perspective, being trained to act without compassion. Since I would say the overwhelming majority of those young white male policeman had never known an Aboriginal, it wasn’t difficult for them to be made afraid of Aborigines, for them to believe all sorts of fantastic things about them, that they were crazy, their heads are as hard as bullets so you are going to have to bang them to get some sense into them, that sort of attitude.

Mick Mundine: Well I started in 1975 and my brother was working in 1974. I came here and I got a job and I started as a painter. Now at the time there were about six houses was getting renovated, as you know, the company [Aboriginal Housing Company] was registered in 1973 and the reason why the company was set up was a lot of Aboriginal people found it very hard to get [into] private real estate. It was very racist in them day. So a group of ‘goomies’ [heavy drinkers] squatted in these three houses. Now at the time, Father Ted Kennedy used to help a lot of people up at the Catholic church in Redfern in conjunction with Bob Bellear and his wife, Kaye. They were the ones who really got together, got a good mob of people from the community and got the company [Aboriginal Housing Company] registered and it carried on from there.

Published in: on 12 January, 2008 at 4:19 pm  Leave a Comment