The 'Five Economists' Plan: The Original Idea and Further Developments

Abstract

In October 1998, I was one of five economists who wrote a letter to the Prime Minister, suggesting a suite of policies that could help to substantially reduce the unemployment rate to around 5 per cent. The other four were John Freebairn, Ross Garnaut, Michael Keating and Chris Richardson. This letter resulted from a period of discussion amongst the five, including at two conferences on unemployment, one hosted by the Melbourne Institute and one by the Reserve Bank and the ANU.2 Subsequent to this letter there has been much public discussion of the so called "five economists plan" and both the Federal Government and the Opposition have taken a considerable interest in the ideas put forward. Further, the Business Council of Australia endorsed the basic ideas its 'New Directions' paper on Rebuilding the Safety Net (Business Council of Australia 1999). There has also been a developing literature on the five economists plan in academia. This paper begins with a re-statement of the main features of the plan. Its main focus, however, is on the most publicised feature of the plan, a proposed wage tax trade-off, and the effect that would have on employment, unemployment and the distribution of income. Another important aim of the paper is to examine the main criticisms that the five economists have confronted. It is argued that having considered these criticisms the plan remains robust. It is conceded that there is a question-mark surrounding the political economy of the wage-tax trade-off proposal whether the institutional structures in Australia could facilitate its implementation. It is concluded that even this concern may be unfounded, but that some reform to the wage setting system may be beneficial.