Living in poverty can be like driving a car without shock absorbers. When unexpected things happen—a major appliance breaks, a relationship ends or a family member falls ill—the consequences are much worse for those living on the edge.
An iron rule of recessions is that they hit the poor harder than the rich. Those with the least experience are often the first to be laid off. Jobseekers find that there’s suddenly a lot more competition for vacancies. The less you have in the bank and the more limited your social connections, the harder it is to cushion the downturn.
They say that life at the bottom is living like an impoverished ninja: no income, no job, no assets. One vivid reminder comes from a survey showing that 19 per cent of Australians are unable to raise $2000 for something important within a week, while 5 per cent report that their household could not raise $500 in a week.1 That’s 1.25 million people living in households that couldn’t raise $500 in a week.
At the other end of the spectrum, people are flying high. When COVID-19 hit, there was a sudden surge in demand for private planes as the super-rich sought to find alternatives to regular flights. According to one industry analyst, private jets that carry eight passengers typically cost US$5000 an hour to hire,2 but in April 2020, passengers were willing to pay up to three times that. Aviation charter firms such as PrivateFly, Jettly and Luxury Aircraft Solutions reported being inundated by demand from affluent customers. As often happens, if you had enough money, you could skip the queue.
For those who carry $500 in their wallets and don’t check the prices in supermarkets when they shop, it can sometimes be easy to forget the extent of deep disadvantage in Australia. While the richest fifth of our population own more than 60 per cent of Australia’s wealth, the poorest fifth own less than 1 per cent. Since the mid-1970s, earnings have risen three times as fast for the top decile of earners as for the bottom decile. The labour share of the economy has fallen while the profit share has risen. Any way you cut it, income inequality is considerably higher today than a generation ago. Australia is a less socially mobile country than many European nations, meaning that parental income is more likely to determine a child’s outcomes.
The COVID-19 crisis has had especially pernicious effects on inequality. Analysing which jobs could be done from home, Australian-born Harvard student James Stratton found that two-fifths of jobs could be done from home, but there was a gulf between the lowest-paid and highest-paid occupations. Less than one-fifth of jobs paying under $800 a week permitted telework, compared with more than three-fifths of jobs paying over $1600 a week.3 Lawyers could work from home; the people who vacuum the floors of law offices couldn’t.
The shutdown also hit employees harder than capital owners. The share market and housing market have fallen, but nowhere near the same extent as the labour market. At the time of writing (mid-2020), the Australian share market is back where it was three years before the crisis, while the US stock market is back where it was just one year ago. To the extent that firms have suffered, small businesses have felt more pain than larger firms.
It’s not just this particular pandemic that has widened the gap. Analysis by the International Monetary Fund, looking at 175 countries over more than fifty years, estimates that pandemics increase the Gini coefficient, a commonly used measure of inequality, by 1.5 points.4 For Australia, this represents about a 5 per cent increase in inequality. In developing countries the cost could be worse still, with the World Bank predicting a rise in global poverty rates for the first time in two decades and forecasting that half a billion people may be pushed back into poverty.5
Part of the reason that recessions—including those induced by pandemics—can hurt the most vulnerable is through what labour economists call a ‘scarring’ effect. Skills atrophy, motivation falls, and workers find themselves settling for jobs that don’t make the best use of their skills. One United States study found that even a 3 percentage point increase in unemployment at the time a worker enters the labour market lowers their wages by 6 per cent a year for a decade.6 While this is at the upper end of estimates on scarring, it’s a frightening thought that the scars of a recession might still be visible on workers a full decade later.
The economic pain of the COVID-19 crisis has been widespread. The Australian Bureau of Statistics found that almost a third of Australians reported that their household finances had worsened, while around one in ten were unable to pay a bill.7 Loneliness spiked from 6 per cent to 20 per cent. Optimism fell from 60 per cent to 45 per cent.8 Millions were helped by the JobKeeper wage subsidy program, but millions more were left out, including casuals with less than twelve months’ tenure, temporary migrants, arts workers and university staff.
This represents a failure of public policy. There is no reason a government-mandated shutdown should have led to insolvencies and layoffs on such a scale. In past downturns—the Great Depression, the 1980s recession, the 1990s recession—unemployment took about twice as long to fall as it did to rise. As anyone who has built a business knows, it takes a lot longer to grow an enterprise than to shut it down. And as anyone who has ever hired people knows, it takes weeks or months to find the right person for a job but just minutes to end that job.
Rebuilding the Australian economy should involve a commitment to three principles: school’s back, reconnect, and kill your darlings.
1. School’s back
Attempts to forecast the labour market of the future generally end in tears. Some years ago I wrote a book titled The Economics of Just About Everything, in which I took a government document called ‘Workforce 2005’, published in the mid-1990s, and compared it with reality. The projections were hopeless.
What we do know about the workforce of the future is that it will reward higher skills, and that the returns to a generalist education are likely to be greater the more that technology advances.
Recessions are a perfect time to boost education, because the opportunity cost of not studying has fallen. In the 1990s recession, the Year 12 completion rate soared. Thousands of young people who might have dropped out in a strong labour market decided to stay on at high school rather than join the growing numbers of unemployed youths. A generation on, the equivalent to Year 12 completion is undertaking a university degree. If universities judge that a young person is capable of completing a degree, and the young person is willing to pay half the cost of their education through the HECS-HELP system, then it seems only fair that the taxpayer should provide a Commonwealth-supported place—especially if the alternative is that the same person would otherwise be on unemployment benefits.
At the same time as increasing the quantity of university places, it’s essential to improve the quality of the schooling system. This starts with the recognition that the Australian schooling system has been found wanting. Over the past two decades, the OECD has regularly tested a representative sample of fifteen-year-old students on maths, reading and science. Each time the boffins from Paris administer their PISA test, they find that the school performance of Australian teenagers has slipped backwards. Since 2000, that decline amounts to about a year of school performance, meaning that Grade 9 students of today perform at about the same level as Grade 8 students of two decades ago.
Improving school performance requires a strong focus on teacher quality, ensuring that Australian schools are able to attract and retain the most talented people into the teaching profession. At present, we recruit teachers who performed at about the 60th percentile of their grade. Incoming American teachers performed at about the 50th percentile of their class. Finnish teachers performed at the 90th percentile or above. Raising salaries, reducing paperwork, improving status and learning from successful programs such as ‘Teach for Australia’ are all critical to ensuring that teaching is a top career choice among young people.
2. Reconnect
Like any good progressive policy wonk, I am happy to suggest dozens of ways that the government might reduce inequality. Competition reform to protect start-ups from predation by monopolies. Shifting from stamp duty to land taxes to reduce the share of the state tax borne by young homebuyers. Adopting a US-style earned income tax credit to subsidise low-paid work. Delivering on the promise of free child care. Creating an environment in which union membership grows rather than shrinks.
But after a decade as a member of parliament—most of that time holding the Charities portfolio for the Labor Party—I’ve also seen the extraordinary power of local communities to help people who are down on their luck. We need more social entrepreneurs like Nic Marchesi and Lucas Patchett, who founded Orange Sky Australia in 2014 to provide mobile laundry services to homeless Australians and used their enterprise to reconnect their clients to the community. As COVID-19 spread, thousands of local groups sprang up across Australia’s suburbs as neighbours spontaneously reached out to those who were self-isolating. As most measures of wellbeing were dropping, Australians reported an increase in their sense of solidarity with one another.9
Building community spirit isn’t a middle-class luxury but an essential aspect of creating a more egalitarian Australia. Whether it’s mateship or ‘Solidarity Forever’, the ties that bind us are integral to reducing inequality. As Robert Putnam points out in The Upswing, America has moved from a ‘we’ society to a ‘me’ society over the course of the past two generations. A reconnected Australia—in which we have more friendships, volunteer more in our communities, and join more community groups—will also help deliver a stronger democracy and a fairer economy.10
3. Kill your darlings
The three biggest boom industries of the COVID shutdown were toilet paper, streaming video, and opinion pieces saying, ‘Here’s why the virus proves I was right all along’. If the largest economic shock since the Great Depression hasn’t changed your thinking, it’s a clue you’re not thinking very hard.
Naturally, it’s easiest to dismiss this tendency when it comes from the other side of the political fence. Calls for cutting company tax rates and deregulating the labour market have predictably flowed from those who have been banging this drum for decades. Yet many companies will now be carrying forward losses, making the headline company tax rate even less salient to investment decisions. As for industrial relations, it’s hard to see how anything about this crisis should lead us to doubt the Productivity Commission’s 2015 assessment that ‘Australia’s labour market performance and flexibility is relatively good by global standards, and many of the concerns that pervaded historical arrangements have now abated’.11
But it’s also important to apply the same discipline to one’s own thinking. From a personal standpoint, I’m less attracted to regular air travel and bustling cities than I was in the pre-COVID era. On the policy front, the crisis has changed my view on immediately meeting a target of spending 2 per cent of GDP on defence, a level not attained by most advanced nations. Whatever the value of this as a long-term aspiration, the case for it must surely be weakened by the challenge of debt reduction. I’m also warier of complicated reforms, noting Jeff Borland’s warning about the ‘IKEA fallacy’—the principle that things that look great in the store may be trickier to assemble than you imagine.12 We might sometimes wish we had a policy that works in another country, but we shouldn’t underestimate the adjustment costs.
As the war against fascism drew to a close, John Curtin commissioned HC (‘Nugget’) Coombs to lead a team to write a white paper on full employment. Produced in 1945, the document is striking for its breadth and boldness. It reminds the reader that for two decades, from 1919 to 1939, ‘more than one-tenth of the men and women desiring work were unemployed’; and it commits the nation to full employment as ‘a fundamental aim of the Commonwealth Government’. Such employment, the white paper points out, should not be in ‘schemes designed to make work for work’s sake’: it should be in areas that are critical to the economy, and they should make full use of new technologies and high-skill work. The white paper emphasised the need for a flexible economic system, and the need to harness the ‘spirit of enterprise’. It focused on ways of raising productivity and the importance of ensuring that workers received ‘a fair share of increased output flowing from the growing productivity of labour’.
These weren’t just words. For the next two decades, unemployment remained below 2 per cent. A housing construction boom helped raise the home ownership rate from 53 per cent in 1947 to 63 per cent in 1954—a remarkable 10-percentage-point increase in just seven years. Australia helped resettle thousands of European migrants: the moral equivalent of America’s Marshall Plan, but a program focused on helping people rather than rebuilding cities.
Today, some of these same challenges remain. In recent years, some in Silicon Valley and on the far left have been advocating a shift to a ‘post-work society’, in which the focus is on providing a universal basic income rather than enabling productive work. This is a prescription to abandon full employment. We have just had a massive society-wide experiment on the social effects of cutting back on work, and the results are not pretty. The COVID-19 shutdown was a reminder that decent jobs are a source of dignity as well as income. To give up on work would be to permanently lock in the costs of ongoing joblessness.
Instead of settling for double-digit unemployment, we should aim for full employment. Before the crisis, Germany, Britain, New Zealand and the United States had unemployment rates around 4 per cent—a full percentage point lower than Australia. Research by the Reserve Bank suggests that such a level of unemployment was possible without causing inflation to rise.13 Four per cent unemployment doesn’t just mean more jobs, it also places upward pressure on wages. The lower the unemployment rate, the harder it is for employers to discriminate against women, people with disabilities, older Australians, Indigenous Australians, migrants and people with unusual personalities.
Just as progressives should be pro-work, we should be progrowth. Growth allows living standards to increase and creates the potential for Australia to be more generous to the most disadvantaged. Economic growth does not guarantee fairness, but it is difficult to see how we could generate a fairer society without the gains from growth. And economic growth need not damage the environment. In an economy where most production is weightless, higher productivity need not devour more physical resources. There are plenty of nations in the world today with rapidly growing economies and rapidly falling carbon emissions. Australia could choose to join this club.
Coming out of the crisis, the Australian economy of 2019 should not be the pinnacle of our aspiration. At the end of World War II, my grandparents Jean and Roly Stebbins built their own beachside house near the Melbourne suburb of Altona, making the bricks by hand. As a teacher and a railway worker, they raised four children in a society built on the promise that the 1950s would be better than the 1930s. Today, the same vision that animated Curtin’s full employment goal can help us to build a smarter, fairer, reconnected Australia.