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Wednesday, April 1, 2009

Can We Learn Something from the Aussies?

Early in 2008, I was chatting with a colleague from Australia on my way to a sales meeting in Asia. I don’t quite recall how the conversation got started, but apparently signs of trouble in the U.S. economy had already started to spread in the international news, and my colleague asked me about it. Somehow the subject of unemployment came up.

“You don’t have services in the States for people who are unemployed, do you?” she asked.

I was a bit surprised to hear that, and clarified that we do indeed have an unemployment compensation system to help people who have lost one job through no fault of their own get through until they find a new one.

“But it’s very limited, isn’t it?” she replied.

“Well, yes,” I said. “It’s normally around three months, but in a particularly bad economic situation it’s sometimes extended.”

“It’s indefinite in Australia,” she said. “Some people even live off the dole.”

The conversation then, understandably, switched around to taxes, and she said that their heavy tax rate was what they sacrificed in exchange for a measure of security in Australia. She said that she understood that we don’t pay very much in the way of taxes in the U.S., but I responded that, when you add up our sales taxes, income taxes, fuel taxes, property taxes, state and local taxes, etc., our tax burden ends up being pretty heavy. I told her about our “Tax Freedom Day” concept which, last I heard, held that we all have to work until sometime in May before we can finally call our income our own.

“My tax bracket last year was 47 percent, by the way,” she said, which does translate to somewhat more than 5/12 of the year … but not a lot more.

It makes you wonder. Australians pay somewhat more in taxes than we do, but perhaps not a whole lot more. But seemingly they provide a better safety net for those who are having trouble. Is it a good tradeoff? Conservatives in the U.S. would argue that a huge social welfare system in the U.S. would be devastating to the economy.

But if the compared GDP growth rates for the past five years in Australia vs. the U.S. (see chart, data source indexmundi) are any indication, maybe this isn’t the case. Although Australia recently declared that its economy, as a result of the global crisis, is projected to shrink this year, they are doing better than we are on the unemployment front, with a jobless rate of 7 percent. And for the last five years, they beat us by a small margin in average annual GDP growth – 3.24 percent for Australia as opposed to 3.18 percent for the U.S.

Maybe a “welfare state” isn’t such a bad thing economically as the conventional wisdom in the U.S. leads us to believe. Is it possible that a larger and more expensive social safety net amounts to a form of “permanent stimulus?” Here in the States many of us don’t like the idea of handouts, and that’s understandable. But perhaps giving the poor a consistent level of money to spend and a reasonable minimum standard of living can have a beneficial and stabilizing effect on the economy, and a moderating effect on fluctuations driven by the booms and busts of business cycles.

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