By Wayne Swan – Federal Member for Lilley & President of the Australian Labor Party
INTRODUCTION – AN ERA OF STUNNING INEQUALITY
An election is almost upon us.
We have an economically right-wing government dissolving before our very eyes like an Aspirin in a glass of water.
And an economically redistributive Labor opposition potentially on the verge of victory.
What, apart from Coalition incompetence and division, on a colossal scale, is the cause?
And what does it signify beyond the usual swings and roundabouts of parliamentary democracy?
The cause, in short, is rising inequality.
And what it signifies is the end of trickle-down economics.
The era of tolerating the rich getting richer at everyone else’s expense is over. A new approach to economic policy is needed.
The shorter-term consequences of this situation lie in the Global Financial Crisis of 2008. It was an earthquake whose shockwaves shattered the foundations of modern capitalism that had already been loosened by forty years of rising inequality.
From the end of the Second World War until the election of Margaret Thatcher and Ronald Reagan, the gap between rich and poor narrowed as prosperity grew.
It was the pay-off for the defeat of fascism. The thirty glorious years, as the French called them.
Forty years later, the world is place of stunning inequalities.
In that time, the bottom 50 percent has captured 9 percent of total income growth, while the top 1 percent has captures 28 percent of total growth.
Take the United States – an extreme example, but one that is instructive. The New Yorker writer George Packer has described what has happened as ‘the great unwinding’. Industries closed. Working class jobs gone. Unions smashed. Methamphetamine use rife. Communities forgotten. Lives destroyed.
As I have remarked before, the sorts of things Bruce Springsteen’s songs are about.
This age of extreme inequality has created an age of extreme politics.
A dodgy property developer in the White House.
Brexit in the U.K.
Fascists returning to the parliaments of Europe.
You see the pattern: 1930s economics brings 1930s politics.
The world has woken up.
The people are getting angry.
And even the economics profession can see the problem.
THE REVOLUTION IN ECONOMIC THINKING
In the last seven years there has been a revolution in economic thinking.
I want you to consider the extent of that revolution.
Not long ago, if you suggested, as I and some others did, that the answer to our economic problems was not to cut taxes to already well-off to boost incentive, you were howled down as a class warrior and an economic wrecker.
Now saying such things is considered mainstream.
In 2012 Joseph Stiglitz published his The Price of Inequality in which he argued that rising inequality leads not just to rising crime, health problems, educational failure and lower life expectancy, but also to lower levels of growth. A Nobel Prize winner rejects the dominant orthodoxy!
In 2014 Thomas Piketty published Capital in the Twenty-First Century, in which he argued that the increasing accumulation of wealth in the hands of fewer people will stir discontent and undermine our democratic values. Two years before the election of Donald Trump! Three years before the Brexit vote!
In that same year the Governor of the Bank of England Governor Mark Carney said in a speech that “just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself.” And just last year he said that mass job losses caused by advancing technology could lead to a rise of Marxism. The head of the Bank of England quoting Karl Marx! Who but Marx himself would have thought that possible?
The world’s premier economic organisation, the International Monetary Fund, is now arguing for an international agenda of inclusive growth. The Washington Consensus rejected by its very creators!
And here, the Governor of the Reserve Bank now says that the most substantial threat to economic growth isn’t militant unions or the urgent need for big corporate tax cuts. It’s our stagnant wages and our growing levels of income inequality. The RBA? Hard to believe, isn’t it!
Why have such previously conservative institutions started sounding like economic radicals?
I believe it’s this. As humans were apt to ignore trends and stick to existing explanations. We watch trends get deeper and think them temporary aberrations. We assume they will reverse themselves. All the time, being boiled slowly like the proverbial frog in the pot.
That is, until a sudden shock wakes us.
That shock was the Global Financial Crisis.
It awoke us to a salient truth: We are no longer living in a post-war economic world temporarily off track; we’re living in a new economy that functions as its makers intended it should: as a machine for the generation of inequality, to the advantage of wealthy, at the expense of everyone else. An economy failing to deliver good secure jobs for working people and replacing them with less secure ones.
The starting point for correcting this is the rejection of the idea that economics is a special case that exists outside the legitimate jurisdiction of democracy.
The need for this has long been recognised.
In his 1944 masterwork The Great Transformation, Karl Polanyi wrote that “democracy cannot survive in an excessively free market and containing the market is a task of politics. To ignore that is to court fascism”.
To court fascism. That’s a big statement, and I’ll come back to it later.
What this means is that we can no longer allow the market to let rip, free of our oversight or direction. Social democrats can no longer think their job is simply to redistribute the bounty of an unrestrained, trickle-down economy, because the unrestrained trickle-down economy is now the very thing holding our economy and our society back.
A PERSONAL LEARNING CURVE
Understanding this has involved a learning curve for me as for everyone else.
In my first speech to parliament in 1993 I spoke of a previous decade of trickle-down economic policies under Presidents Reagan and Bush Senior. Back then the people of America were waiting eagerly for the first few drops to fall on them. They are still waiting.
In 2004 I again stressed the growing threat of economic inequality in my first book, Postcode: The Splintering of Nation. Back then I regarded tackling inequality primarily as social policy – damn good social policy, but social policy first and foremost – I now regard it as absolutely central to good economic policy.
What switched my thinking to another gear was my experience as Treasurer between 2007 and 2013. It led me to conclude that Australian politics suffers from essentially the same sorts of vested interests you find in countries like Russia and the U.S.A. Just like in Russia and the U.S., Australian vested interests are on a campaign to re-distribute wealth upwards to themselves through the accumulation of ever-more political power in their own hands.
In 2012 I wrote in The Monthly that ‘the market system is still the best mechanism for generating prosperity for more people but we could not afford to let it be undermined by excessive greed of a widely irresponsible few’.
And in 2015 I co-authored a report with Larry Summers and Ed Balls for the Centre for American Progress warning that the primary challenge facing western liberal democracies today is neither military nor philosophical but economic. More precisely it is inequality.
The conclusion of that report was that the dangerous tectonic shifts in wealth and income inequality that have happened over the last forty years and were exposed by the Great Recession now threaten not only economic growth, but confidence in democracy itself.
THE AUSTRALIAN EXPERIENCE AND LESSONS LEARNT
Let’s move from the global to the local.
It’s true that Australia is a far more economically equal nation than the United States.
We have far greater social mobility. Social mobility refers to the relationship between the socioeconomic status of parents and the status their children will attain as adults. Put differently, mobility reflects the extent to which individuals move up (or down) the social ladder compared with their parents.
As you can see in Australia a lower bar shows a son’s income is less determined by his father’s . Economic (or social) mobility is twice as great in Australia as it is in the US and UK.
And our minimum wages are among the highest in the world – something we’re proud of and want to continue.
What this shows is that inequality can be countered by energetic policymaking. There is an alternative.
But those who argue that we have no problem of inequality or that inequality is not widening, are simply wrong.
While the gains of economic growth have been more fairly spread in Australia then the United States over the past 30 years, inequality has continued to accelerate, with an increasing concentration of wealth and income at the top.
Now, unlike just about all other western nations, Australia skipped a recession after the Global Financial Crisis.
It was the greatest and most enduring achievement of the Rudd Government and I will always be proud to have been the Treasurer who avoided the great recession.
The thing that shocked Australia out of its complacency about inequality was the 2014 Coalition budget. That budget of broken electoral promises ruthlessly and vigorously pursued a set of American style extreme trickle-down economics policies that have widened inequality in Australia ever since.
Look at Slide 5 and notice where the median household income trend started to fall. 2014.
If you’re looking for an explanation in a single graph of why Scott Morrison’s government can’t get anyone to listen to it, here it is. Even talking up a fake refugee crisis won’t work.
It’s happened because since 2014 we have faced trickle–down economics – “American style”.
The Liberal Government has squeezed pre-tax income through wage suppression and attacked post-tax income through regressive taxation, a refusal to unwind unaffordable tax breaks, and savage cuts to the social safety net.
Take the government’s approach to taxation.
More than 60 per cent of the benefits of their new income tax cuts go to the top 20 per cent of earners, as the slide shows.
This new income tax schedule will see a nurse earning $41,001 pay the same as rate of tax as someone earning $200,000.
At the same time, the Morrison Government is wanting to slash the corporate tax rate for big business – a package that includes a $17 billion handout to the big banks.
All up, it’s a quarter of a trillion dollar smash and grab on our future capacity to fund health, education and vital public services.
Meanwhile in the labour market, the government has pursued penalty rate cuts, the stacking of the Fair Work Commission, the decimation of public sector workforces, and the outrageous behaviour of employers in enterprise bargaining.
Producing the lowest wage share of income in recorded history.
And flatlining wages.
Yet another graph illustrating why Australians aren’t listening.
TRICKLEDOWN IS DRIVING DOWN GROWTH
You simply can’t have a prosperous economy while there’s a declining share of income going to working people. The reason why economic inequality is a handbrake on economic growth is very simple.
If you give a tax cut to big business, they’re not going to automatically invest in extra capacity, or expand their workforces, or raise wages particularly when demand is weak.
As we’ve seen in the United States, Donald Trump’s corporate tax cuts aren’t going towards higher wages.
Overwhelmingly, big companies are using the extra cash to buy back their own shares, boost boardroom bonuses, and increase dividends for investors.
In fact, stock buybacks soared after the Trump tax cut, from around $130 Billion in 2016/2017 to just under $190 billion in the first quarter of 2018 an increase of 46% from the 2017 average.
It’s similar story for individuals.
If you give a tax cut to the top 1 per cent or the top 10 per cent, they’ll save a large part of it, rather than spend it back into the economy. This slide shows the high saving rates of these high-income earners.
Now, it looks like there’s a bar missing on this chart – what about the bottom 90 per cent? How much do they save?
The bar isn’t missing – it’s actually zero.
If you give a tax cut to the bottom 90 per cent of income earners, next to none of it is saved. Almost all of it is spent back into the economy.
Cut working people’s penalty rates and you’re only penalising yourself, through lower spending and lower sales.
And as Jeff Immelt has observed, in economies such as the United States (and most Western economies) where the majority of economic activity is linked to consumer spending -- when wages stop rising and more money accrues to the top, the maths stops working and the social contract on which our economies are built breaks down. This is something Henry Ford worked out a century ago, but the zombies refuse to understand.
This is why the trickledown agenda kills growth and grows inequality.
The trickledown claim is that if you give the most to those who need it least – the so‑called ‘wealth creators’ in their mahogany‑lined boardrooms – then a grateful and prosperous working and middle class will follow.
But they’ve got it exactly backwards. A prosperous working and middle class is a source of growth, not a consequence of it.
Economists like all experts are currently on the nose with working people. If they want to get back in their good books they need to start talking differently. They could start by explaining how nurses, builders, truckies, teachers, hairdressers and shop assistants are just as much wealth creators as bankers, investors and multinational companies are. And why they need to be rewarded.
Because one worker’s spending is another worker’s income, we can create a virtuous cycle – from decent wages, to more spending, to more jobs, to decent wages, and so on.
Clearly, this alternative to trickledown isn’t an “anti-business” agenda. It’s an anti-plutocrat agenda.
It’s not an anti-wealth agenda. It’s anti-wealth concentration agenda.
The trickle-downers respect wealth for its own sake. The rest of us need to respect – and reward – the hard work involved in creating that wealth.
AN INCLUSIVE ECONOMIC AGENDA
The trickle-downers like to tell us “there is no alternative” to their scorched-earth agenda – or more accurately, their flat-earth agenda. But of course, there are many alternatives.
And our alternative is one of inclusive prosperity.
Our sustained response must be to lift demand in the economy and raise the bargaining power of the Australian worker.
We need to invest in our human and physical infrastructure to lift productivity, to build a more progressive and growth-friendly tax system which provides incentives for work and investment. And finally, reduce the political clout of the wealthy elite.
As The IMF has stated: “To get growth going through supply side measures and deal with distributional issues later is a dangerous gamble and policy makers should focus simultaneously on the size of the pie and its distribution”.
That’s what the next election is about.
There has seldom been a bigger difference between the economic policies of Labor and the Coalition.
On the one side more of the same. More inequality. More attempts to mask it with appeals to social and cultural division.
On the other:
Like I said, there is an alternative. Australia’s comparatively equal society can be preserved. You choose.
I said I’d come back to the issue of fascism, so let me conclude by saying something on that.
Over thirty years Australia has done a far better job than most of mixing strong growth with social equity, to achieve greater economic and political success.
The difference between Australia having a Hanson in the Senate and the United States having a Trump in the White House is as simple as the difference between the US having thirty years of wage stagnation and Australia having thirty years of wage growth.
But we live in a troubled world.
A number of other Western liberal democracies have been brought to the brink.
I’ve mentioned the U.S. and the U.K. already. But think of the yellow vests in France, the AfD in Germany and the Orban government in Hungary.
This month marks the 11th anniversary of the collapse of Bear Stearns, the world’s fifth biggest investment bank. This was the first in a series of the seismic shocks which culminated in the rolling earthquake of the Great Recession.
I know some people might be saying – this was all ten years ago, why is it relevant now?
In September 1939, discussion of the Wall Street collapse of 1929 might have generated the same query. But events, namely World War II, soon provided the answer.
The crash of 1929 led directly to the triumph of fascism.
And ten years later the triumph of fascism led to total war.
The lesson of history is that big economic shocks have big political consequences.
And that the resentments and anger caused by unemployment, poverty and widening inequality are dangerous for democracy.
The worry for us is that the aftershocks of the Great Recession have yet to stop. The idea that we can act as it’s the 1980s all over gain is a folly. It is also a betrayal of the lessons of history. It is foolish and dangerous.
May fascism result again in Europe or elsewhere?
It’s not as if we haven’t forgotten the lessons of economic crises before.
In fact, one might say that the Great Recession began in 2008 because we foolishly and dangerously forgot the lessons of the Great Depression which began in 1929.
This debate isn’t a ten-year-old debate, it’s an 80-year-old one that began with the Great Depression and the publication of Keynes’s General Theory. It is a debate about what role should government play in the economy to tackle a recession and what sort of society we want: an equal one or an unequal one.
That makes it a highly political debate.
And, I might say, a legitimate debate to solve at the ballot box maybe eight weeks from now.