Abbott, Hockey and Cormann threaten permanent damage

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Even the pro-Coalition media are now alert to blunders and broken promises by Tony Abbott and Joe Hockey — but are they alert enough, asks Alan Austin.

MOST OF THE HURT the Abbott government is threatening – to the poor, the disabled, the sick, refugees and aid recipients – can be reversed should the electorate reject it at the next election. The victims will certainly have suffered. That suffering can then be ended.

But what if damaging changes are made to Australia’s society which cannot be reversed?

Such is the risk with cuts to the minimum wage proposed by the audit commission.

Superficially, it would seem that wages cut in 2014 can be restored in 2016. But what if the impact of this seemingly temporary reversal for low income earners becomes a permanent reversal for Australia’s economy?

First, let’s consider the concept of enduring, irreversible damage.

Spain was probably the nation affected most disastrously and permanently by inept decisions taken during the global financial crisis (GFC). Although now often referred to as a ‘basket case’ economy, Spain was travelling well in 2007. It ranked 23rd in the world on the IAREM measure of overall economic performance, ahead of South Korea, New Zealand, Germany and France.

Then came the GFC.

Spain’s long term unemployment rate rose from 1.5% to 5.5% by the end of 2009. It continued to soar to 13.1% in 2013 with no sign of declining yet.

With three years of negative growth in gross domestic product (GDP), Spain fell from 23rd place to 45th.

Ireland was an even more prosperous economy pre-GFC, ranked 14th in the world. It crashed to 32nd place, with three negative years of negative GDP growth also. The long term unemployment rate exploded from 1.3% before the GFC to peak at 9.6% in 2012. It remains at 7.7% today.

Asian tiger Hong Kong, with a completely different economy, also suffered badly through the GFC, tumbling from 6th ranking in 2007 to 18th by 2013. The economy contracted in 2009 by 2.46%, the jobless rose from 3.2% in mid 2008 to peak at 5.5% with sudden deflation followed by rapid inflation.

Hong Kong’s GDP growth has stabilised but remains about half pre-GFC levels.

In fact most countries that suffered severe reversals of growth, income and jobs in 2008-09 are yet to return to pre-GFC levels.

But not all.

Australia, Israel, Switzerland, Sweden, New Zealand and Chile all have stronger economies today than in 2007, despite the GFC.

So, clearly, government decisions matter and blunders can have long-term damaging effects.
Which brings us to the proposal to reduce Australia’s minimum wage. Evidence suggests this would not only be devastating for individuals, whose income would drop substantially, but disastrous for the economy.

Spain, Ireland and Hong Kong all cut wage levels during the GFC.

And the rest of the world? A few other countries cut wages, some kept them unchanged and others increased wages.

What were the outcomes on IAREM rankings? Do any patterns emerge?

They certainly do. Startlingly so.

That these correlations have not previously been highlighted suggests some ineptitude in Australia’s mainstream economics commentariat.

Wage data can be found at tradingeconomics.com at the wages page or, where unavailable, manufacturing wages.

IAREM rankings are accessible for 2007 and 2013. These are based on scores reflecting outcomes in eight measurable areas — income, growth rate, median wealth, jobs, inflation, taxation, net government debt and economic freedom.

Action on wages in the 2007 top 30 economies can be readily sorted into four categories: countries which cut wages, those which kept them level, those which allowed a gradual rise and those which boosted wages substantially.

(A fifth group – those with no wage data – comprises Bahrain, Kuwait and the United Arab Emirates.)

Only seven of the top 30 economies in 2007 applied wage reductions as a strategy. All seven suffered particularly badly through the GFC.

Spain, Ireland and Hong Kong we have discussed. Malaysia was ranked 29th then dropped to 42nd. Estonia fell from 27th to 34th. The United Kingdom fell from 21st to 27th.

Luxembourg – with all the advantages of a small, wealthy nation – fell from 3rd to 6th place.

Five nations kept wage levels substantially unchanged or allowed erratic fluctuations. Of these, Taiwan, Japan and Singapore rose in the IAREM rankings. The Czech and Slovak Republics both fell.

Nine nations in the top 30 allowed small wage increases through the GFC. Of these, Canada, Germany and Korea South rose in ranking. Three barely budged — Austria, Denmark and Norway. The Netherlands, Iceland and Finland fell.

Six economies allowed strong increases in wages. All six boomed.

China moved up from 15th to 11th. New Zealand rocketed from a lowly 25th to 10th. Sweden shot up from 18th to 9th. Switzerland zoomed from 10th place into the top five. The USA, which allowed an early sharp wage rise, moved up from 19th to 16th place. And Australia, as is confirmed by most independent analysis, rose from 9th to top of the global table.

The correlation between strongly increasing workers’ wages and continuing prosperity seems emphatic. There are no exceptions. The correlation between cutting wages and economic disaster seems equally emphatic. Again, no exceptions.

There is no clear correlation, however, with modestly rising or stable or erratic wages.

It has been argued here earlier that the key to Australia’s current ascendancy was its extensive stimulus implemented rapidly at the onset of the GFC. This further analysis suggests a vital component of that strategy was allocating part of the stimulus to rising wages.

Tony Abbott and Joe Hockey both taunted the previous government with the jibe that Australia was in danger of following Greece or Spain.

If they implement current audit commission recommendations, it may well be what they deliver Australia.

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