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Class and Inflation in Australia

Just as the slump in the US economy threatens to trigger a global recession, Australian authorities have pronounced inflation ‘public enemy number one’ and are trying to slow growth.  They tell workers to ‘exercise wage restraint’.

Australian Prime Minister Kevin Rudd, Industrial Relations Minister Julia Gillard and Treasurer Wayne Swan sing the same tune: workers should accept lower wages to bring down inflation.  Lower inflation, they argue, will mean lower interest rates, so everyone will benefit.  To share the burden, they will be slashing the budget so hard that there would be ‘screams and squeals’.  Another AU$4 billion will be chopped from government spending over coming years, beyond the AU$10 billion of pruning already promised.

The Labor Party won a landslide election victory against the conservative Coalition last November.  Opposition to anti-union laws was the key issue in the campaign.  But Behind the Rudd government’s demand that wages should be held down is an agenda that favours the rich.

The Australian economy has been growing rapidly for years.  There has been no recession since the early 1990s.  Businesses have thrived and executive pay has soared.  Sol Trujillo, imported from the USA to head Telstra, Australia’s privatised telecommunications giant, gets a package worth AU$11 million a year.

There have also been real increases (after taking inflation into account) in average wages.  But the lion’s share of the boom has gone to business.  The wages’ share of national income trended down under the Howard government, although the largest falls from their post-World War II peak in the mid-1970s happened under the Hawke Labor government.

If workers don’t fight for and win real wage rises while the economy is in the recovery phases of business cycles, their chances of winning them in the recessions that follow are much less.  Without gains made when the economy is prancing ahead, workers will suffer even greater pain as growth slows or goes into reverse, unemployment rises and it is easier for employers to cut pay or hold increases below the rate of inflation.

Marx put it this way in his pamphlet Value, Price and Profit

If, during the phases of prosperity, when extra profits are made, workers do not battle for a rise of wages, they would, taking the average of one industrial cycle, not even receive their average wages, or the value of their labour power.  It is the utmost height of folly to demand, that while their wages are necessarily affected by the adverse phases of the cycle, they should exclude themselves from compensation during the prosperous phases of the cycle.

So ACTU president Sharan Burrow is right when she insists that unions can’t go along with real wage cuts.  But she concedes far too much when she only talks about maintaining real wages while the economy is still rocketting along.

High inflation is a problem because it creates uncertainty that undermines levels of investment in the medium term.  It also hits people on fixed incomes particularly hard.

But currently inflation in Australia — still below four per cent — is mild.  The government’s and the Reserve Bank’s obsession with inflation has nevertheless led the Bank to increase official interest rates.  In the most recent rise a few days ago, the eleventh since May 2002, its cash rate reached seven per cent.  This has pushed up the market rates that determine what we have to pay for mortgages and consumer credit, already higher because of the international financial crisis that followed the collapse of speculative ‘sub-prime’ mortgage lending to poor people in the USA.

The Reserve Bank’s interest rate increases are designed to slow the Australian economy, by raising the cost of credit and consequently reducing borrowing for consumption and investment.

An alternative policy that tolerated the current moderate level of inflation would have some beneficial effects.  It would reduce the high level of debt held by Australian households, particularly if workers continue to achieve improvements in their real wages and, a big if, the government was more generous in deciding the level of and access to welfare payments like the pension and disability benefits.  But such an approach would see the value of loans decline and would hurt the profitability of banks and other financial institutions.

It is true that cuts in real wages would help to slow down inflation.  Such cuts would also boost profits.  But inflation is not caused by wages and workers.

Anwar Shaikh has offered a convincing explanation of inflation.  He argues that the more rapid the rate of growth of investment and the lower the rate of profit, the higher inflation will be.  This argument is confirmed by the performance of the US economy since World War II.

There is a long-term tendency, built into capitalism, for the rate of profit to fall.  More and more is invested in machinery, equipment and buildings compared to outlays on wages.  But it is only workers’ labour that creates new value that is the source of profits.  So competitive investment in the pursuit of profits gives rise to periodic crises and mass unemployment.

Low profit rates in productive industries also lie behind the flood of money into speculative activities, like sub-prime loans and the gambling in shares, currencies, complex derivatives and leveraged buy-outs of corporations that is a zero sum game.

Compared with the long boom of the 1950s and 1960s, profit rates have been lower since the 1970s.  They recovered somewhat from the 1980s, but not to the levels of the post-war boom.  In 1966-67, according to Jamie Doughney, the Australian private business gross profit rate was over 24 per cent.  It fell to 14 per cent in 1982-83 and then picked up to around 16 per cent in the early 1990s.

The rapid expansion of demand in Australia over the last few years, fuelled by the export of primary products, corporate and individual debt, and the flow of capital into Australia has stimulated productive investment.  But this has bumped into the limits on the expansion of productive capacity set by the rate of profit.  In the absence of sufficient supply, prices have been bidded up, in other words inflation has increased.

In Kevin Rudd’s language, there are ‘capacity constraints’.  His intention to use government funds to increase investment in infrastructure used by business will help to some extent.  But his ‘five point plan’ only tackles the underlying problem of the relatively low rate of profit by squeezing more out of workers: he wants to make us save more, including for when we retire, and consume less.  By forcing more people into the labour market and increasing vocational education, he wants to create more competition for jobs to push wages down.

Rudd’s fifth point is a big budget surplus, achieved by cutting back government spending to reduce demand in the economy.  Here, again, people on lower incomes are likely to bear most of the burden.  This is particularly true because Labor is committed to implementing $31 billion of the tax cuts John Howard promised during the election campaign.  The changes disproportionately favour the very well off.

Tax changes under the Hawke, Keating and Howard governments made the system less progressive, that is, increased the proportion paid by workers and reducing the payments by wealthy people.  There is a strong case for the government to break its tax promise to the rich and to make taxation much more progressive in order to reduce inequality.  By dramatically increasing the tax on companies and high income earners Labor could also expand the budget surplus.

There is also a massive area of the budget that is sacred, even though its contribution to human wellbeing is negative.  As Minister for Finance and Deregulation Lindsay Tanner put it, ‘We’ve made a commitment to maintain the totality of defence spending and we’ll honour that commitment’.

Given that the government’s tax and spending policies are biased against workers, they would be mugs to give up the struggle for better real wages.  The government’s fight against inflation as ‘public enemy number one’ is a cover for boosting profits.


Rick Kuhn is a Reader in Political Science at the Australian National University and won the 2007 Deutscher Prize for his Henryk Grossman and the Recovery of Marxism.



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