By Jason Cheng
MELBOURNE — While most economists and economic commentators are still singing the tune of "economic rationalism", Age economics editor Kenneth Davidson remains an outspoken "Keynesian". Davidson delivered the May Day address to the Victorian Trades Hall Council on April 29.
He rejected the economic rationalist view that trade unions cause unemployment by demanding excessive wages and thus fixing the real wage above the "market-clearing" level of employment, and by causing "inflexibility" in the labour market.
Davidson argued that unions have a positive role to play in actively pursuing a higher standard of living and increased leisure time for all. As well they ensure that full employment is a goal of the government, thus maintaining high standards of productivity and competitiveness for Australia.
However, his analysis of the Australian economy revealed the contradictions that afflict Keynesians. The Accord, he said, involved a massive transfer from wages to profits in the hope that productive investment would pick up as a result, but it had to be acknowledged that this did not happen. Instead, the increased profit share went into a speculative binge and asset inflation which we are all paying for in higher interest rates, unemployment and a depreciated exchange rate.
But while laying the blame squarely on capital, Davidson refused to conclude that investment should be placed under wider public control. Instead he advocates that government pursue a more interventionist economic strategy.
Davidson blamed deregulation as the main cause of our economic ills. In his view, deregulation reduces the ability of the government to guarantee full employment and reach economic objectives. He calls for re- regulation and the government playing a more active
role in the economy to "redistribute demand" by increasing expenditure on the public sector and thereby increasing employment.
In particular, he calls for a renewal of the centralised system of the Accord. He believes that it will ensure that the government has sufficient control over the labour movement when the economy booms and wage demands increase. He opposed the 1989 pilots' strike because it threatened the Accord.
Davidson provided considerable insight into the Victorian economy's problems. He debunked the common media myth that Victoria's main problem is its state budget deficit and debt, which has been used to justify slashing the public sector and has been the rationale for labour market "reforms".
In his view, the current government debt is not excessively larger than under previous governments, and a large part of it is cyclical (due to the boom-recession cycle), not structural. Indeed if the Kennett government was so worried about debt, why would it be increasing it by $2.1 billion to pay for 23,000 redundancy packages?
Davidson says the Victorian economy is suffering from the previous Labor government's bad policy decisions with regard to the finance sector. He blames the Reserve Bank and the state government for lack of action on Pyramid, Tricontinental and State Bank of Victoria collapses. In his view these firms were not making atypical losses compared to other financial institutions, and more government intervention to bail them out and prop them up would have improved Victoria's competitive position.
Keynesian and "rationalist" economists agree that high profitability in the finance sector is a prerequisite for economic stability. However, how do government guarantees of profitability — which increase the scope of bad debts and risky loans — benefit the Victorian taxpayer? What is needed is not more stable profits and guarantees but greater public accountability of financial institutions.