I’ve got two newspaper articles out today.

In the Australian Financial Review, a piece written jointly with Warwick McKibbin and Richard Holden, arguing that the Reserve Bank should dump inflation targeting and switch to targeting the level or growth rate of nominal GDP. Paywalled, but a near-final version is over the fold.

And, in Inside Story, a piece looking at the kinds of reforms we need once the lockdown phase of the pandemic is over. Rather than trawling over the remnants of the neoliberal reform agenda, I argue we need transformative changes such as a participation income.

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I was contacted by a Greek language newspaper with questions about the next steps in economic policy. On the assumption that most of my readers don’t read Greek, I’m posting my response here

The Morrison government’s economic policy response to the pandemic so far has been broadly appropriate, putting practicality ahead of ideology in general. There are numerous anomalies arising from the haste with which the program was developed and from some residual ideological constraints (such as hostility to the university sector)

The program should facilitate a rapid recovery from those economic impacts directly linked to lockdown measures as these are relaxed. However, there has so far been little recognition of the problems that will continue in the medium and longer term.  The economy will undergo a substantial restructuring reflecting the effective end of international travel, at least until a vaccine is developed and globally distributed.

To deal with these continuing problems the government needs to
(i) Convert the JobSeeker payment into a Guaranteed Livable Income, available to everyone unable to find paid employment and willing to make a social contribution in other ways, such as volunteering(ii)  Use the JobKeeper payment as the starting point of a Job Guarantee, in which the government commits to achieve full employment through a combination of wage subsidies, training programs and direct job creation.

Yesterday, I pointed out that the first instalment of the rescue package could be financed by cancelling the Stage 3 income tax cuts legislated for 2024-25. Today, the same suggestion is on the front page of the SMH. Morrison is apparently resisting the idea, but that can’t last long.

Trying to keep one day ahead, I’ve turned my mind to how the Reserve Bank should operate during and after the crisis. The first step is to abandon inflation targeting once and for all. The policy of using small interest rate adjustments to keep inflation in a range of 2-3 per cent made sense in the policy context of the (spurious) Great Moderation, when the target appeared consistent with maintaining unemployment at a stable level of 5 per cent or so, assumed to be the lowest the economy could sustain.

That all fell to pieces with the GFC. Inflation targeting, which did nothing to stop asset price bubbles, was a significant contributor to the crisis. Various ideas to address this problem were floated, but it ended up in the too-hard basket.

In the aftermath of the GFC, most central banks pushed their key interest rates down to zero. Even where this didn’t happen, as in Australia, inflation remained persistently below the target range, a problem that hadn’t been contemplated when the policy was first introduced in the 1990s, and the big concern was a resurgence of the inflation of the 1970s and 1980s.

It’s now obvious that we will never return to a world where inflation targeting makes sense. But what should replace it?

The first step should be a re-ordering of the Reserve Bank’s objectives to focus primarily on full employment rather than price stability. One way to implement this would be to target the level and growth rate of nominal income. My suggested target would be a 7 per cent rate of nominal growth, ideally made up of 3 per cent real growth* and 4 per cent inflation. The idea of the nominal target is that, if real growth falls below the target, the Reserve Bank loosens monetary policy and accepts higher inflation.

A 7 per cent growth rate would imply a doubling of nominal income over a decade. That in turn means that if we end the crisis with, say, debt equal to 60 per cent of national income, and balance the budget (on average) after that, the debt to income ration would fall to 30 per cent by 2030.

• In the longer term we should be looking at taking the benefits of technological growth in the form of more leisure rather than more output. But I haven’t had time to do the analysis on that.

I got a message from a student asking about examples of renationalisation in Australia. Here’s my response

There hasn’t been much explicit renationalisation of business enterprises in Australia. What we have seen is

(a) Public private partnerships (PPPs) being wound up and returned to the public sector. As well as Port Macquarie, some others are mentioned herehttps://grattan.edu.au/news/public-private-hospital-partnerships-are-risky-business/
and here on private prisons
https://www.theguardian.com/australia-news/2019/mar/26/queensland-to-end-private-jails-experiment-after-scathing-report
and social housing
http://www.newleafcommunities.com.au/

(b) The government has also re-entered areas of business it had previously privatised. The most important example is the NBN, but there is also the big Tesla battery in SA  https://hornsdalepowerreserve.com.au/ and other interventions by the state government there. The Federal governments proposed Snowy 2.0 is another example

It seems quite likely that we will soon see the introduction of a wage subsidy along the lines of that announced by Boris Johnson (himself now testing positive!) in the UK. That is, a payment to employers equal to 70 or 80 per cent of workers’ pre-crisis wages, in return for keeping them on for some period. That would be better than doing nothing beyond what has already been announced, but I have two big problems with it.

First, it is paid to companies rather than workers. The ACTU is touting this as benefit, on the grounds of administrative simplicity, but I suspect that there is lots of potential for abuse through complex corporate structures. Second, it creates essentially arbitrary distinctions between workers. If you happened to work for a company that closes and stays closed, or if you were already unemployed you are out of luck. A final issue (on which opinions may differ) is that the benefit depends on previous salary, rather than being the same for everyone.

I’m thinking about an alternative model. Rather than paying money directly to employers, we should allow recipients of benefits like Newstart to use their benefit as a wage subsidy, either with their current/most recent employer (this would be specific to the pandemic emergency) or with a new employer. This would give workers more freedom and more agency, and could potentially form part of a Jobs Guarantee, which is, I have argued, the natural complement to a Guaranteed Livable Income (the term now being used by advocates of BI/UBI/GMO schemes in Australia). In particular, it could be sustained beyond the current emergency, which is not the case for the wage subsidy ideas.

There are plenty of issues to be addressed in the long run version of the voucher idea, such as the problems of additionality and churning (ensuring that the employer is creating new jobs, rather than replacing existing workers with voucher-holders). But such issues have been addressed in other contexts, with some success.

The coronavirus crisis is very different, at least in its origins, from the Global Financial Crisis. Both differ in crucial respects from other crises in living memory, notably including the Great Depression and World War II, as well a string of severe but not catastrophic crises that have affected the global economy and society. But thinking about them all together brings home the point that major economic crises are quite common events. The crisis of the past took each took between five and ten years to resolve. Even if the current crisis is shorter, we can draw the conclusion that crisis of one kind or another is not an aberration, but a regular occurrence in a complex modern society.

What they have in common is that the result in a need for urgent government action. The greater the capacity and willingness of governments to act to protect society from the economic damage associated with such crises the better, in general, the outcome has been.

The most immediate requirements for dealing with a crisis are a strong and comprehensive welfare state, and strong protections for workers. In the aftermath, we need a substantial economic role for government, including control over infrastructure and financial enterprises and public provision of services like health and education. In short, we need socialism.

(More to come soon!)