Speech - Reflections on the Great Recession: Lessons and Challenges for the Future




"Reflections on the Great Recession: Lessons and Challenges for the Future"




I’ve titled my address tonight “Reflections on the Great Recession: Lessons and Challenges for the Future” but on indulgence I’m going to take a quick trip down memory lane because UQ is where my political involvement began in earnest.

It’s 40 years since I became President of the UQ Labor Club in 1975. As a 21 year old I lived in a rambling house just down the road in Mitre St which was both Labor Party central and party central rolled into one. On many occasions we treated our neighbours to some great music into the early hours of the morning; a tradition I’m reliably informed by some of my staff has been continued in recent years at the Millroys’ house on Sir Fred Drive.

As often happens one song in particular can capture the mood of the time; for me that song was Bruce Springsteen’s Born to Run. It was a song we listened to during the dismissal in November of 1975 and a song we listened to in the bitter election campaign that followed. The song has never left me and is a constant reminder that big and daunting responsibilities are just around the corner.

Springsteen never stopped singing for the people he grew up with. As a member of the Baby Boomer generation who was raised with the horror stories of the Great Depression I, like him, always felt a sense of accountability and responsibility to the people I grew up with.

This sense of accountability and responsibility was my driving motivation during the tumultuous times of the Great Recession. I, like every other member of the Federal Labor Party was willing to do whatever it took to spare the people I grew up with and 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 response to the Great Recession (or as it’s known here in Australia, the Global Financial Crisis).

So tonight I’m going to do two things; the first is I’m going to go back and talk you through some of the stories and events of the Great Recession. Secondly, I’m going to talk about the central generational economic challenge of our time, economic inequality.

Looking out over the audience tonight I can see the vast majority (if not all) of you are from Generation Y (1980 – 1997). This means that some of you will at best only have vague memories of the last time Australia was in a recession in the early 1990s and few of you would have had contact with grandparents or great grandparents who experienced the Great Depression.

This means that for your generation, the Great Depression is at times relegated to an economic ghost story or something that is studied in a modern history course, but let me assure you the Great Depression was very real and it very nearly happened again.

I’ve started with this brief history lesson for two reasons; firstly because we are gathered not far from the Forgan Smith building which was one of the many expansive public works initiated by the man this lecture is named.

On becoming Premier during the height of the Great Depression Forgan Smith rejected the economic orthodoxy of the day and engaged in an expansive Keynesian stimulus. This was in stark contrast to the Federal conservative government that pursued harsh austerity and condemned Australia to a lost economic decade.

Secondly, there is now, as there was in the Great Depression, a clear ideological battle taking place in the global community between those who see government as a positive force for wealth creation in a market economy and those who would wish to shrink its role and move towards a winner-takes-all bear pit.

This alternative winner-takes-all bear pit is exactly what Abbott Government Ministers continue to argue for. They say we would have been better experiencing the cleansing power of a recession rather than intervening with substantial fiscal and monetary stimulus.

The simple fact is that because of our stimulus programs not only did the Australian economy avoid the deepest global recession since the Great Depression, we actually outperformed every other advanced economy on virtually all relevant indicators.

And as this graph shows, in the six years after the GFC erupted in 2007, the Australian economy grew by 15 per cent.  Now eight years after the onset of the crisis the Australian economy is almost 20 per cent larger – a spectacular result.

It was a Treasurer’s worst nightmare and it was all happening less than a year after we had been returned to government after over a decade in opposition.

It’s important to understand what happened.

In March 2008, the fifth biggest investment bank in the world, Bear Stearns, collapsed and was subsequently rescued. From that day on, we began privately preparing for the worst but hoping for the best.

Until Bear Stearns, our first Budget was being framed to fight Peter Costello’s inflation genie which had escaped the bottle.

In April 2008, I was in Washington for the IMF meetings and took the opportunity to meet with investors and one meeting stands out.

One leading investment banker said to me:

“It’s not the end, it’s not the beginning of the end, it’s the end of the beginning”.

I was shocked and surprised; the consensus at the time was that we had seen the worst of the crisis. With renewed caution I returned home and we recalibrated our Budget, deciding not to proceed with some spending cuts, even though the IMF had upgraded global growth forecasts.

Four months later our decision was vindicated when Lehman Brothers imploded.

From that point on things moved so fast it was difficult to keep up with.

In Australia, we confidentially started preparing a fiscal stimulus package, as the RBA cut interest rates by 100 basis points on 7 October – an unprecedented decision.

On the following Friday, there was a beginning of a run on banks and Armaguard ran out of money.

In the middle of this, I left for the United States and some of the most important meetings I’d ever attend in my life.

During this period one meeting in particular stands.

It was an ‘emergency meeting’ of G20 Finance Ministers in Washington on the evening of October 11, 2008. It was a Saturday night, Washington time. 

It followed an all-day meeting of the IMF. It was an unscheduled meeting. And it will forever be etched in my memory.

Such was the fear about global events, the United States President, George W. Bush, decided to attend. 

President Bush opened by apologising to everyone present for the consequences of the US sub-prime mortgage crisis and the collapse of Lehman Brothers.

He assured us that the United States stood ready to work with both the developed and developing world and to do whatever it would take to meet the challenge head on.

Just before President Bush was due to speak, the Brazilian Finance Minister, who was chairing the meeting, apologised for his poor English.

President Bush leaned over and whispered in his ear “that’s okay; my English is not very good either”.

The problem was, President Bush didn’t realise the microphone was live.

His statement was broadcast to the world’s top 20 Finance Ministers and Central Bank Governors.

Not the best way to instil confidence at the height of the Global Financial Crisis!

There was more work to be done the night following the meeting with President Bush. 

That night, I returned to the embassy residence to participate in – via secure phone – a special cabinet meeting taking place in Canberra on the morning of Sunday, 12 October, Australian time.

As is often the case, the most serious of decisions can sometimes be taken in the strangest of circumstances.

It was 10pm Saturday night, Washington time.

The embassy was only able to set up a secure phone-line in the basement bedroom of a teenage child of a senior embassy official. I kid you not.

Sitting there on the bed – briefing the Cabinet on the international outlook and my meetings in Washington, and talking them through our yet to be announced stimulus package, and our bank guarantee due to be announced later that day – I looked up at the wall and thought “it can’t get any more bizarre than this.”

There I was staring at this Jimi Hendrix poster, and being the mad rock and roll fan I am, I couldn’t get out of my head his version of Bob Dylan’s ‘All Along the Watchtower’.

“There must be some way out of here.

“Said the Joker to the thief

“There’s too much confusion

“I can’t get no relief”.

These were thoughts running through the minds of many policy makers over the course of these traumatic days.

Now I don’t need to tell this room how important the decisions taken in the Cabinet Room back in Canberra that morning were.

Decisions like the bank guarantee and the first and second stimulus packages, three of the most important decisions taken in the post-war era.

Our first and second stimulus packages saved Australia from recession and with that we avoided the skills and capital destruction that dragged down most other developed economies.

What drove me, what drove the government was a determination not to repeat the mistakes of the Great Depression. To this day, there are a lot of people who argue we shouldn’t have done it, including our current Prime Minister and Treasurer. But I think Reserve Bank Governor Glenn Stevens summed it up best when he said this of the Great Recession and our stimulus package.

“Had it gone on, we can be sure that tens of millions more people would be unemployed. But it didn’t go on. It was arrested. As a result, we talk about the Great Recession, but we don’t talk about the Great Depression Mark II.”

Eight years on from the crisis and the world has changed dramatically. The harsh austerity policies implemented elsewhere in the developed world following the Great Recession had the effect of drawing attention to growing wealth and income inequality in the developed world, a structural trend that spans some decades.

In my view this is the central economic, political and social issue of our generation.

Such is the gravity of the economic inequality in the United States Larry Summers has calculated that if the same income distribution in the United States prevailed today that did in 1979, the top 1 per cent would have $1 trillion less today, and the bottom 80 per cent would have $1 trillion more. That works out to be about $700,000 a year less for a family in the top 1 per cent, and about $11,000 a year more for a family in the bottom 80 per cent.

To give these numbers some scale in order to redress inequality in the United States you would need to redistribute an amount equal to two thirds of Australia’s GDP. 

This pattern across the developed world is the result of trickle-down economics which has delivered increased concentrations of wealth and income, hollowed-out middle classes and armies of working poor.

While Australia has avoided this fate, the radical agenda of the Abbott Tea Party Liberals is attempting to take us down this American road at precisely the same time we have leading American economists and politicians looking to Australia as a road map for achieving a more inclusive economic growth.

No graph illustrates our success in matching strong growth with social equity than this one.

This graph shows Australia’s median income growth since 1995 compared with the United States median income growth since 1995. As you can see median incomes in Australia are well over 50 per cent higher than 1995 levels. By comparison, median incomes in the United States have been virtually stagnant since 1995 with the GFC wiping out what little median income growth had occurred.

Such is the gravity of economic inequality in the United States the Democratic Party’s think-tank the Centre for American Progress established the Inclusive Prosperity Commission to shed light on what policy settings progressives must implement to ensure growth with equity. I was privileged to contribute as a commissioner with the IPC and join the likes of Larry Summers and Ed Balls in writing the report.

The IPC reports finds these outcomes in Australia and globally happened by choice, not by chance. Here in Australia we made a conscious decision to put in place policies to ensure that we grew more strongly by growing more fairly.

Many of these equity drivers are now being challenged by the Tea Party Right of the Abbott government. If they succeed in bringing down these reforms greater economic inequality and greater political inequality will follow.

As the IPC report concludes: Increasing concentrations of wealth and income “threaten to become a (serious) problem for the political systems of the developed world and for the idea of democracy itself.”

This brings me to our current political outlook and the power of vested interests. The dishonesty of the Liberal Party at the last election and their assault on our social safety net has had one positive by product. We are now having a much more open discussion about the role of fairness in the economy and society. 

These issues have been at the forefront of my activity in the Labor Party since I joined in 1974. As Treasurer and Deputy Prime-Minister I again took up the inequality cause in February 2012 in my Monthly essay entitled “The 0.01%: The rising influence of vested interests in Australia” which prompted predictable screams of class warfare from the usual suspects.

I was accused of being unfit to be Treasurer of this country and told that I was siding with the wealth consumers not the wealth creators.

This cartoon from the front page of the Australian is one small example of the vicious campaign mounted against the Gillard government. In the 2012 Budget we didn’t proceed with a one percent cut in the company tax rate, a cut which was opposed by the Liberal Party! For this Julia Gillard and I were presented as time travelling Soviet agents.

During this period our efforts at tax reform, carbon pricing, banking reform, Gonski, NDIS and media policies became pretexts for powerful vested interests to throw their weight around. A vocal and powerful minority decided to oppose all of these reforms, no matter how necessary and no matter how obvious the benefits to the whole nation.

This policy battle was overlaid by a new development in the Australian political system, the Americanisation of the Right in this country. Quite plainly, they are obsessed with defending the wealthiest in our society, and sadly, sticking up for them alone has become their primary cause.

These powerful vested interests, working through the first 18 months of the Abbott government have attempted to dismantle the social safety net, to shift the tax burden onto working people and away from corporations, and to dismantle universal health and education services.

There are a minority in the business community who only look to the immediate consequence of an economic reform on their own business, and while they preach competiveness and productivity for the economy as a whole they’ll never support reform if it has a negative short term impact on their bottom line.

Their agenda is one of wealth concentration, not wealth creation.

The best of example of their selfish behaviour is seen in the decision of the Abbott government to dump some important 2013 Labor budget measures (which included $109 million in funding to the ATO) to stop rampant tax minimisation by multinational corporations.

During the period 2011-2013 our government worked hard to close loopholes in the tax system that Treasury and the ATO identified were introduced under the Howard-Costello government. It took some time for the full consequences of these measures to become apparent, all the while billions of tax revenue were foregone. Some of these loopholes weren’t just a picnic for tax avoiders, they were a feast!

Privately, the Coalition told their supporters in the business community not to worry; they wouldn’t proceed with these measures if they were elected. So it wasn’t surprising when they dumped critical measures straight after the election at the same time they were planning a budget with deep cuts to health and education while giving billion dollar gifts to multinational corporations.

Some business figures such as Tony Shepherd, the head of Tony Abbott’s Commission of Audit, continue to fight tooth and nail against the great enablers of equal opportunity and social mobility, which I mentioned earlier.

If they win this debate it’s a recipe for deepening political division and widening social inequality, and unfortunately permanent reform failure. As Bernard Keane pointed out last week “there’s a reason Australian voters are resistant to this type of reform, it’s because they won’t benefit from it and never will”   

What I see more and more in our public debate is what Americans refer to as the “blindness of affluence”. Many of the winners of our prosperity just don’t see poverty and injustice anymore let alone the persuasive case that a fair society produces a more prosperous economy. They believe we live in a corporation, not a community.

In the Labor Party we have a different view. Our belief is that the wealth of our country is created by every Australian. You can create wealth by owning a business, but you can also create wealth by working for a business. You can create wealth by working on the top floor of an office tower, but you also create wealth working down a mine, in a factory, in a shop, in a hospital, in a music studio, a kindergarten, a school, a TAFE college and a university. We are all wealth creators and contributors to the community.

That’s what Forgan Smith knew in the 1930s and that’s what we know now.

In our debate we have a small group of oligarchs, who are increasingly throwing their weight around. To combat this we have to stand up and be heard, because when the massively wealthy buy the loudest megaphones, the voices of the people are drowned out.

From the Labor Party’s perspective there are some clear lessons for the future. We must not despair, nor let vested interests divert us from the core message. We must be courageous, stand our ground and never operate under the illusion oligarchs operate in the national interest. They plainly don’t.

Equally, we have to stand up to the most hostile organisations and their media backers by outing their underlying intent. By never cowering when they come at us.

Most importantly, we have to work together with unity of purpose. In recent years the far Right has been far more disciplined. In our policy debates too frequently progressive groups get locked into arguing an all or nothing approach in terms of an agenda, and if they don’t get precisely what they want from the Labor Party they fail to fight the Right at all. Politics is seldom perfect. But surely we’re better together than we are apart?

And in the Labor Party itself, it is the ideas we are fighting for that are just as, if not more, important than the organisational structures and methods that we are sometimes consumed by. That’s why I was keen to talk here tonight, as university students have a vital role to play in developing the ideas for the future. You have been on the vanguard of progressive thought for generations, and may you be right there once again for many more.

Last year I had the opportunity to walk the high line through New York and on the side of an old brick building was a large advertisement which read “the French Aristocracy never saw it coming either”.

It was yet another reminder of the groundswell of support sweeping around the world for a more inclusive form of prosperity.

IMF Managing Director Christine Lagarde recently put it more starkly, noting that the world’s 85 richest people control more wealth than the world’s 3.5 billion poorest people, and that this degree of inequality is casting a dark shadow over the global economy.

What we do to stem the growing tide of inequality in the developed world, at home and abroad, is the central economic and political challenge of our age.   

It’s what drew me into politics in the first place, and it’s what will dominate the political and economic debate in Australia in the years ahead. It will be a debate that is led by the Australian Labor Party. 

Thank you for the opportunity to speak here tonight.