POPULAR ECONOMICS SERIES
Fiscal policy refers to the use of government spending and the tax system to influence the economy. The last popular economics article looked at these policies as they related to the budget, taxation, and debt. This instalment continues the discussion, examining the broader economic effects of fiscal policy.
One aspect of fiscal policies can be called demand-side policies. These policies attempt to influence the overall level of demand in the economy. When demand increases, the economy will tend to grow.
The figure below illustrates demand-side flows in the economy. Total demand can be thought of as being made up of consumer spending by households, investment spending by businesses, public spending by government, and spending on exports by foreign countries. When these categories of spending grow, so does the economy and employment opportunities. But the system is not air-tight. Resources leak out of the system, reducing domestic demand. Imports from other countries, taxes which reduce the amount of income available, and saving instead of spending all reduce the demand for domestic goods and can slow economic growth. Likewise, there are certain injections which can increase demand and push the economy forward. These include such items as public investments, direct foreign investments and transfer payments to individuals (for example, welfare payments, poverty relief, and redistribution policies).
Increases in government spending, the expansion of transfer payment programs, and public works all can stimulate economic growth. Fiscal policies often have a multiplier effect.
For example, suppose the government created 1 000 new jobs through a public works program.
These 1 000 workers would receive a salary and would use that salary to purchase goods and services. The increased demand for goods and services would further stimulate economic growth and even more jobs would be created. Workers in these new jobs would receive wages which would further increase demand ... and the cycle continues. An initial stimulus has been multiplied providing a bigger boost to the economy.
Another important aspect of fiscal policies is their impact on the supply side — the ability of an economy to produce goods and services. Increased demand, by itself, has only a limited ability to move the economy forward. A more long-term approach involves looking at the supply side and the capacity of the economy to meet future demands.
Fiscal policy can play an important role in developing the supply side of the economy. Financing public investment, training and education, and public research and industrial policies all have a critical role to play on the supply side.
Investment is particularly important since it is a key component of both demand and supply side policies.
Increased investment impacts on the demand side by increasing expenditures on capital goods (for example, plant and equipment). Increases in investment also impact on the supply side by expanding the economy's capacity to produce.
As pointed out in the last popular economics article, using fiscal policy to stimulate the economy can run against budget constraints. The extent to which the budget is actually a constraint is subject to extensive debate.
The debate revolves around the use of deficit financing — in other words government borrowing — to increase spending and to take advantage of the multiplier effect. Opponents of increasing fiscal spending argue that deficit spending increases the burden of the public debt and reduces resources which could be used by the private sector.
The problem with this argument is that it ignores the positive effect such spending can have on growth.
The increase in growth can create new resources which could be used to pay back the borrowed money. Furthermore, higher levels of growths due to public spending can encourage greater, not less, private spending.
Nevertheless, it is important to manage public debt properly in order to prevent the build-up of unsustainable interest payments.
Naledi’s Glenn Adler reports on a workshop of Cosatu affiliates which pulled together some of the lessons learnt in unions’ daily engagement with capital and the state at workplace, industry and national levels.
"The economy is as strong as a horse," the then Minister of Finance Derek Keys once said after the 1994 elections, "but it’s got too many jockeys at the moment." Indeed, South Africa’s democratisation brought new possibilities to increase worker control over economic decision-making at the national, industry and workplace levels.
If capital is uncomfortable sharing the saddle with workers, the arrangement is no easy ride for labour, presenting as many risks as opportunities. Developments such as Nedlac and involvement in industrial policy came about through workers’ hard-fought struggles to check unilateral economic restructuring. Others, like forms of workplace participation, appeared to be driven by the state and capital to increase competitiveness and undermine unions.
Cosatu’s 6th national congress gave guidance to union practices that have emerged in recent years. A crucial resolution called for the development of "strategies that engage both the state and capital for the improvement of the material conditions of the majority, while developing a long-term vision of a socialist society".
The key question is how the goal of engagement and its long-term vision relates to workers’ actual practices of engagement with the state and capital.
This is not an abstract issue. Workers are daily learning the opportunities and challenges these practices present and how to respond to them. It is therefore important to locate this question in unionists' direct experience of engagement.
At the end of March, more than 30 shopstewards, national negotiators and office bearers from 14 Cosatu affiliates participated in a two-day workshop on "Experiences of Engagement" organised by Naledi and the Friedrich Ebert Stiftung.
The workshop’s aim was to discuss and debate workers’ strategic and tactical innovations; to learn from each other’s successes and failures; and to take this knowledge back to their organisations to enrich their approaches. Naledi made available findings from its long-term research project on co-determination and tripartism.
Engagement is a broad term; even capital is comfortable with many of its aspects. However, inputs from union participants clustered around a strategic understanding of the concept. They emphasised that engagement involves organised use of workers’ power to achieve "active" and "fundamental participation in decision-making" at all levels. It is not consultation or a junior partnership, but "equal and effective involvement" through which workers can "impose their own agenda on the strategic process of restructuring".
There was considerable — and unresolved — debate as to whether this agenda was limited to union members, the working class more broadly, or society as a whole. But the general view was that while it was based on immediate interests, engagement should be informed by a transformative vision that speaks to the needs of society more broadly.
Clearly engagement implies a different relationship with capital than the historic pattern of adversarialism. But opinions differed on whether this was possible. Some stressed that there could be no trust in the relationship, which in the end boiled down to a "head-on" clash of class interests.
Others emphasised that trust was important, but not fundamental: one could deal with capital without being co-opted, and that conflict was always combined with forms of cooperation. Labour’s relationship with the state received less attention. Most agreed to a distinction between the ANC government and the state, and that the ANC is an ally in transforming the state.
Participants agreed that engagement grows out of South Africa’s democratisation — which opened new spaces in which workers can operate — and out of a fundamental crisis in the economy. While restructuring presents real threats to workers’ livelihoods, it has also opened a debate over future directions for the economy onto which workers can stamp their own vision.
For all participants, engagement thus has both "defensive" and "offensive" dimensions. It means "getting involved" to stop job loss and worsening conditions of employment.
But it also means advancing a proactive agenda: transforming the work process; increasing economic democracy; creating quality and sustainable jobs; building worker solidarity. In the words of one participant, engagement means a delicate balance between destroying institutions and ideas hostile to workers’ interests, preserving what protects their interests, and creating new institutions to advance their interests.
For some this means developing a clear understanding of and exploiting contradictions between different segments of capital — especially local and foreign capital — to win space to pursue workers’ agenda.
Others stressed that, through engagement, workers can gain access to resources in the economy, and begin to take control away from capital.
Much of the workshop was taken up with three parallel commissions in which workers’ shared their experiences of engagement at the workplace, industry, and Nedlac levels.
Many workers’ commented that this was the most useful part of the event as it enabled them to share their practices with comrades from other affiliates. This kind of "cross talk" — one of the explicit aims of the workshop — does not happen frequently enough. As a result, workers in individual affiliates are, in one participant’s words, left to "reinvent the wheel". Better communication between affiliates would allow an organisation to learn more readily from another union’s advances.
Though there were specific successes and failures discussed in each commission, there were important common themes.
Participants felt that labour had done a good job in "defensive" engagement, but were weaker with "offensive" strategies. Labour had played the leading role in promoting engagement. But over time, labour’s role became largely reactive. This was most clearly emphasised in the discussion of Nedlac, where it was felt government has been in the driving seat. But it was also pointed out that, in the workplace, engagement often degenerates into management’s schemes for "employee involvement".
Participants in each commission emphasised that a key factor contributing to this reactive approach was the profound lack of capacity for engagement. In contrast to traditional "war-fighting" defenses of worker interests, engagement depends not simply on power but on research and education, and both are in short supply on the ground.
Participants stressed that, where these skills do develop, they are often bottled up in one or two individuals. And when these people move on, their skills move with them. Participants insisted that such skills should be more widely distributed in the unions: the organisation, rather than individuals must be the focus.
Labour’s inability to integrate engagement at the three levels, and to prioritise strategic goals was identified as a major weakness. This was evident when participants looked at the goals they had identified at the outset of the workshop, which included everything from cooperating with capital to building socialism. There was no clear guidance around prioritising these or linking them to the everyday practice of engagement.
The workshop did make some useful recommendations for improving engagement. These included:
At the end of the workshop, participants were calling for more input on the issue of engagement. The proceedings and the Naledi research that fed into the workshop will soon be reproduced as a union resource book. Perhaps this will ensure that labour will be able to remain "in the saddle" with its hands more firmly on the reins of the economy.
