Thanks for inviting me here today; it’s great to be back in Washington. A city I admire and draw huge inspiration from.
I haven’t been this relaxed in DC for years. I’ve made over a dozen visits to Washington during and after the Great Recession and I can really feel the difference. I’ve been here in the most dangerous of economic times. So it's great to see the US economy on the up, thanks to much good work over the years from public servants like Hank Paulson, Tim Geithner and Ben Bernanke.
For me, one particular Washington day is seared in my memory.
It was an ‘emergency meeting’ of G20 Finance Ministers here on the evening of October 11, 2008. As I recall, it was a Saturday night local time.
It followed an all-day meeting of the IMF. It was an unscheduled meeting.
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!
Two days earlier, I had stood on the floor of the US Stock Exchange as panic and chaos ripped through the very fabric of our global financial system.
The Dow fell by 7 per cent the next day – the biggest drop in a single day since the stock market crash of 1987. That evening in Washington there was even more work to be done following the meeting with President Bush.
That night, I returned to the embassy residence to participate – via secure phone – in the 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’.
I don’t know if anyone here knows it. If you do, feel free to join in.
“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”.
They were the thoughts running through the minds of many policy makers over the course of these traumatic days.
The Cabinet meeting I phoned into took two of the most important decisions of the post-war era - a bank guarantee for deposits, wholesale term funding and an initial $10 billion stimulus package.
My meetings in Washington had reconfirmed that we were facing the biggest threat to the global economy since the Great Depression.
That meeting effectively kicked off the beginning of the G20 as the primary vehicle for global economic coordination. The G20, by including the developing world, symbolises the radical shift of economic power from West to East in our modern globalised economy.
And the key to dealing with the crisis was recognising that both the developed and developing world were all in the same cart.
We understood then as we understand today that if we don't grow together we grow apart - and thats the reason for me being in Washington this week.
Tomorrow the Center for American Progress will release a report on Inclusive Prosperity. It has been co-authored by a diverse group of policy makers from across politics, academia, business and the trade union movement. Chaired by Larry Summers and Ed Balls it aims to address one of the central political and economic challenges of our time; the need for inclusive prosperity in the developed world.
As one of its authors, and a social democrat I’ve always had a fundamental belief that we create prosperity to spread opportunity. We recognise that economic growth is not an end in itself, but a precondition to the prosperity that we must create to lift people out of poverty and to support a broad middle class.
That’s our goal.
Our means come not just from active and effective government, but from a strong and innovative business community and a healthy and vibrant civil society, including a strong not-for-profit sector and active trade unions.
Today, I want to share with you some of my thoughts, experiences and lessons learnt during my six years serving as Treasurer of Australia.
Over the last 30 years, the Australian economy has become one of the most open in the developed world, and is now in its 24th year of recession-free economic growth.
I am proudly from a country that has done a much better job at matching strong growth with social equity than just about any other developed country over the past century, but particularly in the aftermath of the Great Recession over the last five years of the Rudd/Gillard Government.
Ours is a country where the overwhelming majority can gain a good education, valuable skills, experience the dignity of employment, feel that they have a stake in the character and direction of our national community, and have the resources to provide an even better life for their children.
This is a goal we aspire to for all of our global community.
As my book The Good Fight outlines, in government, over six years, we protected and enhanced this achievement. In our response to the Great Recession, we were guided by a determination not to repeat the mistakes of the Great Depression, when the economic orthodoxy was for harsh austerity.
As this graph shows, despite the headwinds of the Global Financial Crisis over the six years from 2007, the Australian economy grew by fifteen per cent – a spectacular result.
And while there’s been increasing concentration of wealth at the top, income growth during this period among low and middle income earners in Australia was higher than just about any other developed economy.
But to me the real indicator of the health of an economy and a society is the degree of social mobility and the clear expectation that irrespective, of your background or place of birth, you have the capacity to succeed.
This graph shows the extent to which a father’s income is a predictor of what his son will earn.
As you can see, the latest research suggests Australia is one of the more socially mobile countries in the developed world. This is one of our most significant advantages as we seek to maximise the opportunities for all Australians.
I believe the Australian experience and our policy framework is very much relevant to the current global debate about the role of government in securing strong economic growth and the importance of fairness in securing the structural reforms necessary for growth.
Whenever I travel internationally, I am always struck by just how fortunate Australia is to have a strong economy and a just society. As I participated in the preparation of this report, I was constantly reminded of this.
Following many years of strong growth in living standards, income growth in Australia has slowed in recent years.
And while our current headline estimates of our mobility look good, there remain pockets of significant disadvantage.
But most important to remember is that the good results we have recorded have been no accident. They are the result of thirty years of structural reforms which have made Australia more open to the world, and the world more open to Australia – reforms like floating the exchange rate, bringing down of the tariff wall, enterprise bargaining, a decent minimum wage, Medicare, a strong transfer payment system and safety net and universal national retirement incomes.
These reforms saw the Australian economy become the envy of the developed world and indeed, for ten years, Australia’s unemployment rate has sat below six per cent – even in the midst of the Global Financial Crisis – having only just crept back up to that figure again in January last year.
Despite Australia’s remarkable economic performance during the Global Financial Crisis, we continue to have the same fractious debate about the effectiveness and the need for fiscal and monetary stimulus as the rest of the world.
In Australia conservative critics continue to argue that we would have been better experiencing the cleansing power of a recession rather than intervening with substantial fiscal and monetary stimulus.
Australia’s economic stimulus packages ensured that we avoided at least three quarters of negative growth and, without it, we would have suffered the same skills and capital destruction that dragged down most other developed economies for the past four or five years.
Recently, Australian Reserve Bank Governor, Glenn Stevens, said of the Global Financial Crisis: “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. These initial interventions achieved what they were supposed to. We might not like the politics or the optics of it all – all the ‘bailouts’… but the alternative was worse.”
The use of extraordinary monetary policy by central banks in the developed world has come in for some stinging criticism in recent times. Yet this policy combined with the stimulus put in place by countries throughout 2009 saved the global economy from a Great Depression Mark II. As the Financial Times has commented: “levelling income and wealth with a colossal recession is no way to address growth or inequality.”
These central bank governors rightly put jobs at the centre of their agenda. But there is now a rear-guard action to demonise these strategies and argue for government to withdraw from the economic playing field.
As much as anything else that’s why Australia’s handling of the Global Financial Crisis will always matter. Because if we accept the 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.
This debate is just a proxy for the age old ideological battle 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 laissez-faire economics.
The recovery in the global economy following the Global Financial Crisis has been underpinned predominantly by growth in the developing world, largely Asian economies. However, as emerging economies slow, growth in the developed world remains tepid at best with output per capita in some developed economies ten to fifteen per cent below the pre-crisis trend.
This slow recovery is a product of complex forces. Profound technological change, ongoing impacts of globilisation, the hangover of crisis settings caused by political gridlock and growing economic inequality.
At the core of this conundrum is a lack of sustained demand to drive growth. While structural reforms, including supply side reforms, are required across the developed and developing world, they are not sufficient to deal with what Larry Summers refers to as “secular stagnation” - that is the difficulty of sustaining demand which would permit normal levels of output.
This challenge was at the core of the deliberations and decisions taken at the G20 Leaders Summit in my home town of Brisbane, just two months ago, held six years to the day after the first Washington summit in November 2007.
The Brisbane summit agreed to a two per cent growth target and member countries agreed to bring forward reforms that would drive it. This put the issue of structural reform on the international economic agenda and over nine hundred so called structural reforms were submitted by G20 countries.
Regrettably, there was no discussion of whether the 900 hundred structural reforms promoted inclusive prosperity, or whether some could result in even greater concentrations of wealth and income.
In recent years there has been an avalanche of analysis from the IMF, the OECD and many others proving that relative equality is good for growth and as Christine Lagarde has remarked, “growing inequality is casting a dark shadow over the global economy”
We are all familiar with the data showing that across developed economies there has been a hollowing out of the middle class and increasing concentrations of wealth and income at the top. Not only has this imposed a handbrake on growth, but is also leading to increasing political alienation and instability.
What was missing in the G20 discussion, and what is required now, is an informed and analytical global discussion of what we do to strengthen global growth and more fairly share its benefits. This challenge is what the inclusive prosperity report being released tomorrow confronts.
In the last few months we have seen landmark contributions from three of the most prominent global thinkers and economic policy-makers – Christine Lagarde, Janet Yellen and Mark Carney. All calling for a more inclusive capitalism. In Carney’s words: “Unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself.”
In other words “for markets to sustain their legitimacy, they need to be not only effective, but also fair.”
Statements like these may well anger the plutocrats around the world, who are looking towards more unregulated markets, ripping out social safety nets and lowering taxes as their elixir for global growth.
There is no greater driver of growing inequality than high and prolonged levels of unemployment. And of course high youth unemployment exacerbates its intergenerational impact.
So we require bold structural reforms if we are to achieve sustainable global growth to generate the jobs required for the two hundred million unemployed people worldwide.
There are two key requirements for a successful reform program: first people must understand the linkage between reform and the jobs that flow from it; and second they will only be implemented if the population generally can be convinced that the gains will be fairly distributed across the entire community, and not concentrated in a few hands.
Many of the policy prescriptions put forward by the laissez-faire brigade aren’t about wealth creation and maximising jobs growth, they are about wealth concentration.
As one of the longest serving finance ministers in the G20, I know that growth and higher living standards are driven by policies that lift productivity growth. By fostering gains in broad based productivity we lay the foundations for the long term prosperity we need to spread opportunity.
If we are to build more productive and inclusive economies we must acknowledge that inequality is not a fringe issue and combating its rise is essential to achieving sustainable economic growth and political stability.
That means our structural reforms are centred on an inclusive agenda where the benefits of growth flow through to the wider community in the form of jobs, decent incomes, and a fair social safety net.
Here I believe the Australian experience is particularly relevant.
In the 1980s, Australia opened up our economy to the world whilst maintaining the foundations of fairness through public investment in affordable health and education, underpinned by fairness in the workplace.
The policy reforms that have been a large driver of increased income growth in Australia were: collective bargaining based on a decent minimum wage; prudent fiscal and monetary policy based on a targeted progressive tax and transfer payments system; a strong public-private partnership that has strengthened the pension system and financial sector; and a series of reforms aimed at increasing competitiveness.
Central to the question of how the global economy can grow faster and more sustainably is demand.
To deal with inadequate demand we need much more private and public investment in productivity and capacity enhancing policies such as infrastructure and education.
If there is to be public support for substantial structural reforms be they in taxation, education, infrastructure investment and financing or carbon pricing there must be a more informed discussion about the importance of growing together, not growing apart.
Central to any government's role is its view of the generators of growth. We need to be reminded that nurses, builders, teachers, construction site labourers, hairdressers, shop assistants, waitresses are all generators of growth as are bankers, investors, businesses and multinational companies.
For too many years vested interests have argued that "wealth would trickle down" to working people and that austerity and unemployment was necessary to build a future for their kids. They smashed their industrial associations and weakened their job security and conditions in the name of labour deregulation and competitiveness. Working people watched the profit share grow but didn’t necessarily see the jobs and the living standards they were assured would follow.
But experience has shown that rising tides don't lift all the boats, that the trickle is more like a very slow drip that dries up half way.
We are in this together. A critical role for government is to acknowledge that fact and to see that every element of the economy has its part to play in generating growth and that the government is there to ensure every element shares in the growth they help to generate.
On that Saturday night in October 2008, the G20 did a remarkable thing, to come together to stare down the Great Depression Mark II. And now that same commitment is need by the world's leaders to ensure that we pursue the policies that will see us grow together. Because if we don't grow together we grow apart.
