The focus of this paper is firmly on unemployment. Underemployment, which is people working fewer hours a week than they would wish, is also a problem but generally is well correlated with unemployment. As is documented below, in the nineteen fifties and sixties even in periods when there was a major downturn in economic activity policy, unemployment was much lower than was the case in the last twenty years. In the 1950s and 1960s unemployment averaged about 2 per cent. The lowest level of unemployment in the last twenty years was more than double that figure. Moreover, long term unemployment was virtually unknown in the 1950s and 1960s but has been a severe problem in the last 20 years. In each period there were two major slumps. This paper examines the macroeconomic policy responses to each of the four slumps in order to search for reasons for the contrast.
The major conclusion is that the priority given to minimising unemployment, rather than restraining inflation, is the most important difference between the two periods. In the first period maintaining full employment was normally the priority in aggregate demand policy: in the second with few exceptions 'fighting inflation first' was the priority. The clear cut commitment to maintaining full employment in the first period was associated with greater optimism about future prospects among entrepreneurs. Surveys of business expectations are not available for this period, but the results of the optimistic outlook can be seen in the behaviour of entrepreneurs. In addition to this overriding finding, other principles emerge from mistakes as well as successes in each period.
Both 20 year periods (1) contained one very large slump and another slump which although smaller was still very significant. Section 2 describes the two biggest slumps and the policy responses they evoked and Section 3 does the same for the two smaller slumps.
Fighting inflation first was originally adopted when inflation was at a relatively high level due to supply side shocks culminating in the first oil price shocks, and continued with the invalid justification that if inflation was any higher than the current level, it would cause increased unemployment, though why this should occur was never clearly explained. The effect of inflation on unemployment is one of two issues that emerge when the policy implications of the different approaches are examined. This effect is discussed in Section 4 of the paper. The second issue is the importance, or otherwise, of an increasing public debt. This is examined in Section 5 of the paper. Finally, a concluding section draws the threads together.
2. The Slumps of 1951-53 and 2008-10
The 1951-53 slump occurred against a background in which there was a widespread belief that the government both could and would keep departures from full employment brief. At the end of the Second World War memories of the depression of the 1930s were still strong and there were fears that, unless policy measures were taken to prevent it, large scale unemployment might reappear. However, at least in English speaking countries there was confidence that economists now knew what to do to prevent this (Colander and Landreff 1996). A belief both in the importance of full employment and the ability to keep departures from it brief was manifest in the White Paper in Australia in 1945 (Commonwealth of Australia 1945). Unlike both the United Kingdom and the United States, Australia had no dip in real gross national product when the economy changed from producing for fighting a war to producing for peace, though there was a small blip in unemployment in 1946-47. (2) This uninterrupted growth in the Australian economy no doubt helped entrepreneurs and Australians in general to accept the view that the government could and would keep brief any departures from full employment.
The slump that occurred in 1951-53 was caused by an external shock to the Australian economy. …