Critical Times

Rick Kuhn

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 $4 billion will be chopped from government spending over coming years, beyond the $10 billion of pruning already promised.

The government’s demand that wages should be held down is outrageous. So is the implication that it will press the Fair Pay Commission to keep a tight lid on minimum wages in its decision this July.

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, the Telstra boss gets a package worth $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 were under the Hawke Labor government.

If workers don’t fight for and win real wage rises while the economy is in the recovery phase 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 bosses to cut pay or hold increases below the rate of inflation.

So we can agree with ACTU president Sharan Burrow 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 rocketing 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 the current inflation – still below four per cent – is mild. The government’s and the Reserve Bank’s obsession with inflation has led the Bank to increase official interest rates. 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 speculation in subprime mortgage lending to poor people in the USA.

Raising interest rates is designed to slow the Australian economy, by raising the cost of credit and consequently reducing borrowing for consumption and investment, just as the slump in the US economy threatens to trigger a global recession.

An alternative policy that tolerated current inflation would have some beneficial effects. It would reduce the level high level of debt held by Australian households, particularly if workers win improvements in 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.

US economist Anwar Shaikh has offered a more 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. It does not apply to hyperinflation, like that in Germany, Austria and Poland in 1922-1923 or Zimbabwe today, where governments just printed money to finance their spending.

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 profits rates in productive industries also lie behind the flood of money into speculative activities, like subprime 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 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 solution to inflation that challenges rather than reinforces the crisis prone nature of this system based on profits. It is to massively redistribute income from the capitalist class to workers and the poor, and to plan the priorities of production so that they satisfy human needs rather than being driven by the logic of profit-making.

That would involve workers winning large increases in real wages and an overhaul of taxation so that the its burden was on the rich, through very high corporate and top marginal income tax rates, excises on luxuries consumed by the rich (including their houses) and punitive taxes on speculative activity.

At the same time governments could take the pressure off prices by directing resources away from uses that serve our rulers. In terms of its own outlays, governments could eliminate spending on war-making, welfare payments to business and subsidies for private education. This would free up money and resources to expand public health, education and transport services and the construction of public housing.

Capitalists and their supporters would, however, do everything in their power to prevent and sabotage such policies. We can press for elements of this kind of alternative now. But it could only be fully implemented by a government based on the power of the workers in their workplaces, rather than a parliamentary administration operating within the framework of existing Australian state institutions.
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* A long overdue apology. Now compensate the stolen generations and end the NT intervention * Economic turmoil is fruit of a long term crisis * The rich profit while workers lose homes * “Public enemy number one”: inflation or profits? * Suharto: the mass murderer the West loved to love * More than just the oil: war and global capitalism today * Will the US election end the war? * It was a riot! 30 years since Australia’s first Mardi Gras * ABC of Socialism: A is for Alternative * What do Marxists mean by class? * Hasn’t socialism been tried and failed? * Tearing down the wall in Gaza * More than just the oil: don’t dredge the bay * Heroes of our movement: John Brown * Understanding Marxism: historical materialism * Reviews * Letters and reports

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