Speech - Beyond the GFC: Foundations for Prosperity and Inclusion








Good afternoon,

Thank you for that introduction Vice Chancellor.

A quarter-century ago Western liberal democracy was riding high:  communism had collapsed, Europe was uniting; and a new global economic consensus led by the United States had been established.

This New Consensus dictated that free markets -- uninhibited by government regulation, lower taxes and reliance on monetary policy to fine tune an economy -- would deliver sustained economic growth and rising living standards and that the wealth created at the top would trickle-down.

For some time the New Consensus seemed to work – liberalised international trade helped power a strongly growing global economy.

But concealed by the strong global economy and a new age of consumerism, dangerous undercurrents were emerging in the developed world including: technological displacement, aging populations, and growing income and wealth inequality.

Finally in 2007-08 the Global Financial Crisis catalysed the Great Recession – an economic tsunami that exposed the dangerous undercurrents which had been submerged.

The new post-GFC global economy was characterised by failed austerity programs, anaemic economic growth, persistently high unemployment, low and even negative interest rates, and even greater wealth and income disparity.

In Australia we have done better at distributing wealth. 

It’s clear an almighty economic and social cloud has formed over the developed world from what I call politically inspired inequality.

And this cloud now threatens the very political stability of the developed world.

To this point, global economic leadership from bodies like the G20 and domestic political leadership have been woefully impotent in meeting the challenges posed by these trends.

In the United States in particular, this failure of leadership has allowed radical populists to seize the initiative.

As Presidential candidates, Trump and Sanders were the poster boys for anti-establishment movements.

While this story has some way to run, it seems undeniable we are witnessing the most significant shift in the tectonic plates yet of the European-American political and economic order.

And more aftershocks are on the way.

For all of Australia’s similarities and connections with United States, we have mostly warded off populist uprisings. But, the rise of One Nation shows that: (1) we are not immune and (2) complacency in the current political climate is a very dangerous thing.

In reality we may only be four or five years behind the United States – a delayed onset, but a similar journey nonetheless.

What I want to impress upon you is that this is not a time for “business as usual” in this political and economic climate.

The sources of growth are not the same and they are dramatically weaker in the developed world.

The structural reforms required to kick start growth and reduce inequality are the opposite of the trickle-down agenda being pushed by the powerful plutocrats and pundits on the right.   

Policy makers need to implement new reforms to kick start inclusive growth.

The trend towards rampant inequality has to be reversed, and economic growth must be reshaped to deliver benefits for all.

So let’s look beyond the GFC and talk about the role government has to play in this challenge.

But dealing with future policy challenges requires a deeper understanding of the Great Recession (otherwise known as the Global Financial Crisis), the defining economic event of our time.

Part 1 - The Global Financial Crisis (Labor’s Response)

This year will mark the tenth anniversary of the onset of the GFC.

For many in Australia, paradoxically, the GFC is the crisis that never was.

Judging by the audience today I’m guessing the majority of you are Generation Y, born roughly between 1980 and 1997.

So, some of you will at best only have vague memories of the last time Australia was in a recession in the early 1990s.

Maybe a handful of you will have personal stories of the 1930s’ Great Depression passed down from grandparents or great grandparents.

For your generation the Great Depression is largely relegated to an economic ghost story, studied in a modern history course. But let me assure you in late 2008 it appeared very much that we were on the verge of the Great Depression Mark II.

As former US Treasury Secretary, Tim Geithner recently said

“Financial shocks are dangerous and policy makers cannot escape the reality that survival requires extraordinary intervention by the state and much of what determines the severity of the outcome is the quality of the policy choices made in the moment.

Ironically the success of our intervention and lack of severity in terms of economic consequences has allowed the Liberal Party and vested interests in the business community to perpetuate a series of myths to undermine future fiscal stimulus - but I’ll speak to this point a little later in my speech.

As the crisis unfolded it became increasingly clear it was no ordinary financial crisis. We quickly realised we were staring into the economic abyss.

Such was the severity of the reduction in output across 23 high-income countries (over the period 2008 – 2015) it was the equivalent of the entire German economy simply disappearing.

I, like every other member of the Federal Labor Party, was willing to do whatever it took to spare the wider community from the horrors of another Great Depression.

In that sense there is no event or action that defines our modern Labor Party’s values and motivations more than our internationally acclaimed response to the Great Recession (or the Global Financial Crisis).

Our willingness to embark on two significant stimulus packages, totalling just over $50 billion in the face of significant domestic political and economic opposition set Australia apart from most other advanced economies.

And we knew that the political fallout would see us held hostage to Tea Party scaremongering particularly from the Liberals and their allies in the Murdoch press.

Daily we faced the confected fear campaign about higher debt and the inevitability that there would be implementation issues associated with the roll out of such a large number of construction projects.

But we were determined to challenge the 30-year-long trickle-down economic consensus that laissez-faire would see us through.

Without these two significant stimulus packages Australia would have suffered at least two significant negative quarters of economic growth during the crisis and seen unemployment skyrocket.

To give you an idea of the severity of the downturn that could have occurred in Australia, the second of these negative quarters – the June quarter of 2009 – would have seen GDP contract by 1.4 per cent had the government not intervened.

This contraction would have been worse than the worst negative quarter of the early 1990s recession of -1.3 per cent in March 1991 when unemployment hit double digits.

By comparison unemployment peaked in Australia during the GFC at 5.7 per cent without experiencing a recession.  

Other economies with similar characteristics such as New Zealand and Canada both experienced significant recessions, shrinking by more than 3 per cent over several quarters.

Our response was built on the recognition that governments have typically acted too timidly and too slowly in response to significant downturns.

We were determined not to repeat those mistakes and set about ensuring that our stimulus was timely, targeted and effective.

The results speak for themselves.

Our actions created close to a million jobs over our tenure of government and meant that our economy avoided the skill and capital destruction wrought on other countries that condemned their economies to a lost decade.

Australia’s policy program and economic results through 2008 and 2009 created a new template for future economic management.

It wasn’t luck that saved Australia – it was the collective efforts of the Australian community and Australian businesses, led by their Government, that saved our economy.

As the immediate threat of crisis subsided, the Liberal Party and sections of the business community immediately embarked on a campaign to demonise fiscal policy and rewrite history.

Unfortunately the success of our stimulus package has made stamping out these politically inspired myths exceptionally difficult.

As my colleague Jim Chalmers has argued:

“It is not always easy for Australians to put a finger on the 'counterfactual' which is lower GDP, higher unemployment, and much more red ink than would have been the case without dramatic government intervention into the economy.”

Put simply; humans struggle to comprehend what might have been when they live through what was.

You don’t feel the bullets you dodge.

There are three common myths that continue to be repeated to this day:

It was the mining boom that saved us;

I’ll leave this one to former Treasury Secretary Ken Henry.

As he said in 2009 the Australian mining industry entered quite a deep recession while the Australian economy didn’t

Labor’s stimulus was too big;

Australia’s economy grew just 1.7 per cent from September 2008 to December 2009 while unemployment rose by 1.1 percentage points – for this argument to hold we would have seen above average growth or accelerating inflation, neither of which occurred.

Labor’s stimulus was ineffective or unnecessary

There are a couple of elements to this myth: the first element is that for Labor’s stimulus to have been ineffective the fiscal multiplier in Australia would have to be as small as 0.18 when even the lowest estimates of Australia’s multiplier are twice that.

The second element is much more disturbing and dangerous.

To this day we still hear the whisper emerging from musky boardrooms that Labor’s stimulus was unnecessary because what we needed was the cleansing power of a recession to rip through the Australian economy.

These Tea Party inspired whispers aren’t just the third-rate Reaganite rantings they might seem.

Just last year during an AFR round table discussion the former chief executive of the Australian Stock Exchange, Elmer Funke Kupper, lamented Australia’s current economic climate, saying “almost a shame ... we didn’t have a deeper downturn to wake us up [to] the heavy lifting that we’re going to have to do.”

That a leading member of the Australian business community would openly support such a morally hideous idea left me astonished.

But it really should not come as that much of a surprise.

This thinking was built into Abbott’s Commission of Audit report, written by the 1 per cent, for the 1 per cent

Those wishing recession upon us are not the ones who would find their jobs in danger.

They advocate pain for others in the service of some illusory benefit.

Dangerous, irresponsible comments like these show there is a very clear ideological thrust from sections of the business community that aims to delegitimise the concept of a government actively intervening in the economy, when required, to protect its people.

I’ll leave the final word to Glenn Stevens.

If we accept this conservative narrative - a fundamentally and demonstrably false narrative that laissez faire would have seen us through the crisis - then the next economic crisis (and there is always a next economic crisis) will result in mass bankruptcies, mass unemployment and mass human misery.

So Australia came through by choice, not by chance.

Telling the story of what happened during the GFC is as relevant now as it was in the heat of the political battle in 2009 which is why I’ll be releasing a set of educational materials about what happened and why.

The lesson of our response is fiscal policy remains central to our economic wellbeing and that over reliance on monetary policy to quote Ben Bernanke “is like a duck trying to fly, but only flapping one wing.”

Part 2 - The Economic Role of Government in the 21st  Century (Fiscal Policy)

Given what would seem to be the obvious success of fiscal policy during the GFC, the real question is why has there been such a staunch and concerted effort to discredit fiscal policy? 

Why on the 10th anniversary of the onset of the GFC did the Turnbull government reissue a discredited paper by Griffith University Professor Tony Makin arguing fiscal policy was ineffective?

Because in Australia, just as there is in developed countries across the world, there is a fierce debate occurring about what role government should play in driving economic growth and ensuring that the benefits of growth are fairly shared.

We have the lived experience of using all the tools in the arsenal, a tandem deployment of fiscal and monetary policy to prove that rapid and forceful policy efforts are worth all the effort and political controversy.

But elsewhere in the developed world governments have been reluctant to deploy fiscal policy to strengthen growth and lift living standards.

The consequence has been greater inequality and lower living standards.

Inequality eats away at the heart of society breeding distain, resentment, envy, suspicion, arrogance and callousness.

As Martin Wolf has observed this has rendered politics surly and dysfunctional.

If you have 19th century levels of inequality, you can’t pretend to be surprised when you get the 19th century politics that comes along with them.

This sign on the side of a New York warehouse captures the challenge political and economic leaders across the developed world now face - how do we reverse the trend towards rampant inequality?

A challenge made all the more difficult by the rise of populist demagogues willing to say and do anything to gain power.

The answer to this question requires a far longer discussion than time allows for today but I want to look at a couple of essential building blocks for inclusive growth.

Wealth Isn’t Just Created In Mahogany-lined Boardrooms

Central to combating populism is government and society’s view of the generators of growth. 

We need to recognise that nurses, builders, teachers, construction site labourers, hairdressers, shop assistants, waitresses and truck-drivers are all as much generators of growth as bankers, investors, businesses and multinational companies are. 

As the IMF has shown increased inequality erodes the spending capacity of the middle class who support the demand necessary to drive economic growth.

Historically Australia has maintained strong income growth for the middle class but this is not the case elsewhere.

For too long in parts of the developed world working people have watched the profit share grow while the jobs and improved living standards they were assured would follow have evaporated.

For too many years vested interests have shouted through a megaphone that "wealth will trickle down" to working people and that austerity and unemployment were necessary for growth.

As you can see over the past 30 years income growth for the bottom 90 per cent in many developed countries has trended downwards and this has hollowed out the middle class and created armies of working poor.

At the same time these vested interests have done their best to smash labour unions at every turn in the name of labour deregulation and competitiveness.

All the while they have cried foul when there is even a hint of a policy which might adversely affect their bottom line or market power.

Society and government must recognise that every person in an economy has a part to play in generating growth and higher living standards.

And that government has a responsibility to ensure every person shares the benefits of the growth they help to generate.

Here fiscal policy is critical.

And as Andrew Leigh pointed out dealing with inequality means that equity has to be at the heart of tax policy.

Progressive Taxation Is The Pillar Of Inclusive Growth

A progressive tax system that provides the incentive for people to work hard and for capital to invest is essential.

Such a system underpins rising living standards, market dynamism and a fair distribution of income and wealth.

In Australia our targeted and progressive tax and transfer system along with sensible and credible fiscal and monetary policy and a fair industrial relations system ensured that we have done a better job than most developed countries in matching strong economic growth with social equity.

However what has recently become apparent is that aggressive tax evasion and minimisation by multinational companies and wealthy individuals is rampant.

This is fundamentally undermining the progressive nature of our tax and transfer system.

We now know, thanks to tax transparency legislation enacted by Labor, that one in three private companies pay no tax and one in four public corporate entities pay no tax.

The average tax rate for public companies is 24 per cent while private companies pay an average of 19 per cent.

To contextualise this for you, if we assume 10 per cent of corporate tax collections is lost through these practices, the cumulative cost to the budget is $26 billion over four years.

Paradoxically, the current Liberal government’s answer to this challenge isn’t to crack down on tax evasion.

Instead it is to further erode the progressiveness of our tax system by cutting the corporate tax rate and floating the case for higher regressive indirect taxes.

Not only does the erosion of our progressive tax system limit the government’s ability to invest in health, education and infrastructure, it is one of the primary reasons public faith in democratic institutions has been trashed.

Everyday workers have the sense that the economy is an inside outside game in which the wealthy play by different rules and everyone else is denied opportunity.

And unfortunately at the moment they’re dead right.

The political right has shown a strong reluctance to restore the integrity of tax systems and crack down on multinational tax evasion because of  their smaller government mentality which aims to slash public expenditure to “starve the beast”.

It is ironic that corporate Australia makes strident calls for deficit reduction to ease the public debt burden while simultaneously trailing their coat for corporate tax cuts and cuts to social safety net spending.

The temper tantrum from the Business Council of Australia insisting their $50 billion unfunded tax cuts is the elixir for growth and should be delivered come hell or high water is indicative that voodoo economics in the form of trickle-down is alive and well.

Fiscal Policy and the Need for Full Employment

Despite Labor’s successful use of fiscal policy during the GFC the conservative side of politics has continued to be reluctant to use fiscal policy.

To reverse the squeeze on middle incomes and to power economic growth the case to boost public investment through the use of active fiscal policy is irrefutable.

Australia should embrace the use of fiscal policy to get to and stay at full employment.

Pushing the economy back to full employment would restore the bargaining power of workers and repair the broken link between labour productivity and wages.

And when we talk about full employment we’re talking about secure ongoing jobs.

In doing so governments must not only direct their emphasis on job training and re-skilling initiatives but must also be willing to contemplate more ambitious programs of public investment and direct employment.

Such an embrace of activist fiscal policy would also act as a natural countercyclical buffer against unbridled market forces.

Having said this, fiscal policy is not a recipe simply to expand the expenditure side of the budget with lots of goodies for various constituencies.

If that were the secret to inclusive prosperity, John Howard and Peter Costello’s “big government conservatism” spending explosion of the 2000s would have led us to nirvana a long time ago.

In fact, activist fiscal policy and the promotion of inclusive prosperity are entirely consistent with budget repair, especially if it focuses on restoring fairness and efficiency in the tax and expenditure systems.

Labor’s decision to scale back negative gearing for future investments and tackle capital gains concessions is also a critical part of making our tax system fairer.

This is a good start but we do need a through discussion of a Buffet rule to give people confidence that wealthy individuals are paying their fair share.

On the corporate tax side we need strong action against transfer pricing and debt dumping and we need to fix the PRRT.

Both sets of measures would go a long way towards repairing our budget bottom line.

Prior to the election of the Abbott government Australian economic exceptionalism lay in our boldness to tame the market. We’ve deployed fiscal and monetary policy in tandem and we didn’t go down the unfettered market capitalism road.

We’ve championed structural reforms—a strong social safety net, Medicare, and a world-leading superannuation scheme—which have underpinned a relatively fair and upwardly mobile society.

Our audacity to seize the best of market capitalism while shielding ourselves from its excesses means children from working and middle-class backgrounds have greater social mobility.

But now we have reached a crossroad.

There is now a clear contest between a Labor model of inclusive growth and a conservative model based on trickle-down economics.

I believe the lopsided trickle-down version of reform which has been paraded before us day after day has run out of policy credibility.

There is a consensus amongst key economic institutions like the IMF (some of whom were staunch proponents of trickle-down economics) that action must be taken to redress economic inequality.

That’s why Labor’s Chifley Research Centre recently released a report on inequality in Australia.

The report advocates unambiguously a wealth creation agenda.

It’s not some wishy-washy third way Davos fudge in which we are told the only response to inequality and globalisation is world class education and training – important at they are.

The report is built on our view that a sustainable economy can’t be built on a shrinking share of GDP going to working people and puts forward a range of frameworks to create wealth more effectively and inclusively.

Growth with equity requires an understanding that a strong working and middle class is a source of growth, not merely a result of growth.

The report goes on to talk about policy measures for a ‘high-pressure’ economy – by that we mean strong economic growth that brings with it strong employment growth.

Australia desperately needs increased quality investment in both physical and human capital to lift productivity and living standards.

Our failure to invest in physical infrastructure and quality education is leaving a big infrastructure deficit for our kids.

Active fiscal policy means broadening the conception of public investment and focusing finance on those ends that promote truly inclusive growth.

The aging of populations combined with large scale technological displacement and disruption through the 4th industrial revolution may well mean the public sector will have to contemplate more ambitious programs of public investment and direct employment.

It may well be that the optimal size of the public sector in 21st century will need to be larger than the optimal size of the 20th century public sector.

However none of these goals will be achieved unless we (1) make our tax system more progressive and fair; (2) raise the bargaining power of the Australian worker and (3) reduce the political clout of the wealthy elite.

Our future political and economic stability depends on replacing politically inspired inequality with a comprehensive plan for inclusive growth.