Rural views to decide election outcome

Background

The role of three rural independents in structuring the outcome of the 2010 elections is generating substantial urban media attention. The main “beef” of urban journalists appears to be the Lazarus type resurrection of rural politics after indecent interment by the architects of structural reforms began by Hawke/Keating in 1983 and continued by Howard. The failure of these structural reforms measured against the original yard stick of full employment cementing the social fabric of society offers an explanation of rural frustration fusing with urban discontent to reject the major parties in the recent election.

Urban voters under the age of 50 are unlikely to understand the deep regional frustrations that have festered as rural communities helplessly watched as industry deregulation and competition policy impacted upon the sector. The fabric of regional communities crumbled as industries declined, employment contracted, communities shrank and young people left to build lives elsewhere. Regions became economically debilitated. Education and health services were systematically withdrawn while rural poverty increased and the incidence of rural suicides rose. Serious problems such as poverty and suicide became relabelled mental health issues to disguise policy failure.

Deterioration from structural reforms of the rural sector is easily demonstrated by a few simple comparative figures from 1983 to2009. In 1983, rural industry terms of trade index was 128.6 (ratio prices received to prices paid). By 2008-09, the index had fallen to 92.6 marginally above the historic minimum 91.1 in the previous year. The percentage of rural debt to output has risen from 50 per cent to 138 per cent. By any commonsense assessment, sectoral decline can be explained only in terms of failed policy or gross political incompetence. The fact that urban media chose to concentrate on their patch of dirt and ignore rural decline explains the hostility now evident among rural politicians in a position to publicly denounce 30 years of urban centric politics.

Employment and political stability

The importance of employment to political and economic stability lies in history. In 1965, the Committee of Economic Enquiry (Vernon Report) defined full employment as a range lying between 1 per cent and 1.5 per cent unemployment. Following the collapse of the international monetary system in 1971, worldwide economic dislocation prevailed for more than two decades. Australian unemployment steadily deteriorated from 1.8 per cent in 1973 to the 6.3 per cent in 1979. In his 1979 Boyer Lectures Bob Hawke described full employment metaphorically as the cement that binds the fabric of society together. Hawke described prevailing political instability as a sign of crumbling “cement”. The 1983 election was about the crisis in unemployment.

In 1961, Menzies almost lost office through contractionary policies that saw unemployment running over a quarter at the annual rate of 3 per cent unemployment. In March 1983, the electorate sacked the Fraser Administration with unemployment at 10.1 per cent of the labour force and rising. In 1996, the Keating Administration was sacked with unemployment stuck above 8 per cent. The Howard spin doctors dropped the Vernon definition of full employment and adopted Friedman’s monetarist natural rate of unemployment ranging between 4.5 per cent and 5 per cent unemployed. Given this historical backdrop, it is politically naïve to ignore the role of unemployment and underemployment in the 2010 election.

Drivers of structural reform

The 1983 structural reforms were made possible by the 1972 development of a general equilibrium (neoclassical) model of the Australian economy; and, three important reports commissioned by the Whitlam government. The 1973 Coombs Committee Green Paper on Agriculture recommended policy move to efficiency based agricultural policy. Inherent in the Coombs Green paper was a recommendation to devalue the currency and move to free trade.

Implicit belief in free agricultural trade by such eminent people as Nugget Coombs begs the question of economic theology triumphing over common sense. Looming large on the international agricultural scene was the European Common Market (EU) and its Constitution: the Treaty of Rome promulgated in 1956. Written into the Treaty of Rome are the rights of European farmers to enjoy rising living standards in line with the wider community. Protectionist’s instruments are laid down to stabilise markets, ensure supply and reasonable consumer prices through regulation of prices, production and marketing aids, storage and carry over arrangements, and machinery to stabilise imports and exports (Sec. 33 and 34).

The 1973 Crawford report recommended the establishment of the IAC. The IAC (Productivity Commission) was established in 1974 to assist in policy analysis and policy development. The IAC adopted the Evans general equilibrium model for policy analysis. Neoclassical economic philosophy became institutionalised in the Australian public service and policy development. Background support to the philosophical positioning of the IAC was the world wide search of a replacement philosophy to the interventionist policies of Keynes. Modern monetarism eventually prevailed.

In 1975, Whitlam had commissioned the Committee to Advise on Policies for Manufacturing Industries (Jackson Report) to examine the economic dislocation pervading the Australian manufacturing sector. Economists on the Committee were, Wheelwright and Brogan (Keynesians) and Rattigan (neoclassical). As could be anticipated by the differing economic philosophies of the economists, a major and minor report resulted. The major report (Jackson Report) found that the Australian economy was suffering a deep malaise that required corrective structural reforms.

The Minor Report (Rattigan report) found that the Australian economy was operating no differently to comparable overseas economies confronting protracted dislocation. Rattigan’s neoclassical philosophy identified information failure responsible for the Australian situation. This was consistent with an identifying characteristic of neoclassical purely competitive market theory: perfect knowledge.

The significance of the Jackson Report lies in his Procedural Recommendations for Structural Change:

• a hierarchy of Industry Councils to monitor industry performance;
• Industry Councils established at national level; and
• membership of industry councils to comprise equal representation drawn across national and state spheres

National Industry Councils

1. Firms (chief executives)
2. Trade Unions ( Presidents)
3. State Governments
4. Government Departments
5. Consumers and other groups

State Industry Councils

1. State Governments
2. Regional interests
3. Firms
4. Banks

That these recommendations would move the liberal democratic capitalist system to a new form of managed capitalism known as corporatism was never discussed. The Hawke/Keating Administration developed corporatism along the lines of the Jackson report. Under corporatism, the government organises sectoral leaders (elites) into consultative groups from which government develops policy through consultation and consensus. The elites then go back to their grass roots to sell and implement the policies. Discipline among the groups is achieved by threat of exclusion from the process.

The major problem with the system is that consensus outcomes are a furphy. Outcomes become dominated by the views of the economically and politically powerful. The excess profits tax negotiated by the government and three major miners is a classic example of the system in operation.

Enter economic philosophy

Contrary to traditional Keynesian Labor, Hawke and Keating embraced neoclassical economic philosophy. Although Parliament retained control over monetary policy direction, deregulation of the financial sector began in 1983. The Keating budget in 1988 began the introduction of free market policy to the real sector. Hawke’s 1991 Industry Statement continued the philosophy by further reducing industry protective measures. Efficiency, productivity and international competitiveness would be theoretical pathways to prosperity offered to Australian industry. While Keating formulated competition policy reform, implementation was by the Howard Administration. It was competition policy that finished the butchering of rural Australia.

The Howard Administration adopted monetarism in 1996 by granting independence to the Reserve Bank of Australia (RBA). This meant that monetary policy direction became determined by an unelected central bank pursuing monetarist economic philosophy. The Rudd and Gillard Administrations continued supporting the independence of the central bank and monetarist philosophy.

Meanwhile rural producers and manufacturing exporters were confronted with an unelected institution managing monetary and exchange rate policy based upon an unproven link between money and domestic prices. Contrary to the Coombs Report suggesting a lowering of the exchange rate in a move to free trade, the monetarist RBA uses the interest rate to influence domestic price movements and stabilise the currency to protect the current account deficit. This undermines international competitiveness of rural and manufacturing exporters.

Economic philosophy confronts Engle’s Law

The failure to recognise the role of Engel’s Law in rural policy questions the competence of professional advisors. This 19th century law states that as incomes rise in a mature growing economy, the percentage of income spent on food declines in relative terms. Implicitly, the Law underwrites the entrenched Constitutional rights of European farmers to share in rising living standards of the EU.

Engel’s Law offers an explanations why farm input costs rise faster than output prices. Farm input prices are determined by rising input costs such as wages determined in the wider expanding economy. Farm output prices and profitability are driven by international markets underwritten by either cheap labour or government protective measures. Australian farm policy naively underwritten by free market efficiency, productivity and international competitiveness has failed to defeat Engel’s Law in the real world of corrupt international agricultural markets.

Wider policy failure: employment

Structural policy failure can be measured by sectoral employment expressed as a percentage of total employment from 1983 to 2009:

• manufacturing fell from 18.4 per cent to 9.5 per cent;
• rural employment fell from 5.9 per cent to 3 per cent;
• services employment rose from 73.5 per cent to 85.6 per cent;
• mining rose marginally from 1.5 per cent to 1.6 per cent.

Structural change from industry deregulation and labour market reform has spawned another phenomenon - underemployment. In 1983, part time employment comprised 17 per cent of total employment. By 2010, part time employment is 30 per cent of total employment. Accompanying this phenomenon is under employment. The under employed are employed persons seeking more work than is available to them.

The ABS uses a recognised international labour market measure to consolidate unemployment and under employment: under utilisation of the labour market rate. By adding the unemployed to under employed rates, the underutilisation rate becomes a performance measure of two and a half decades of structural reforms. Underutilisation of the labour force bridges rural neglect, under employment, unemployment and political dissent.

From ABS Labour Market Statistics 6105, July 2009, p15

Reading from the graph, the lowest point on the graph is May 1981 at 8.4 per cent. In 1983, Fraser was sacked with the labour force underutilisation rate at 14 per cent. In 1991, the rate peaked at 11 per cent and Hawke was replaced by Keating. Late 1992 early 1993, the rate peaked at 18 per cent. When Keating was sacked in 1996, it was stuck at 14.5 per cent -15 per cent. From February 2009-2010, the national rate was stuck at around 13.6 per cent - 13.8 per cent.

In Queensland and NSW where the government received electoral retribution, the rates in February 2010 were 14.4 per cent and 14.1 per cent respectively. In May 2010, the national rate had fallen to 12.2 per cent while Queensland and NSW were 12.5 per cent and 12.8 per cent respectively. For these people, economic security, work opportunities, cost of living, and interest rates sharply focus political minds and views. Their electoral distribution becomes critical in the final seat count.

The situation

Over 25 years, simplistic economic philosophies have failed to deliver an equitable distribution of income, adequate employment opportunities, and rising living standards to a substantial percentage of the labour force. In rural Australia, policy failure is everywhere to be seen.
In a small number of rural electorates, independents have replaced the major parties. Three of these are in a balance of power position. Entrenched economic philosophies responsible for an inefficient use of the labour force and rural neglect must lie at the centre of sensible reform. These philosophies have simply transferred power, income and wealth from the politically powerless to the politically powerful. Any pretence to social justice has been exposed in the 2010 election for every one to see. Time for reform is here and the opportunity should not be squandered.