Two weeks ago in Sydney I gave a speech entitled 'The Case for Openness’, in which I argued that openness to trade and immigration has been vital to our economic success over the last quarter of a century and is going to be equally important to keeping our economic growth story going into the future. Around the world, openness is under attack from isolationists, opponents of immigration and people who don’t support freer trade and the benefits it brings. We need to continually point to the benefits of an open, outward-looking economy and society as vital for our continued success in engendering economic growth.
But today I want to talk about an equally important part of the equation for national success. The other side of the coin is to make sure that our growth is inclusive, our prosperity shared; that every Australian has the opportunity to contribute to our economic growth and, in turn, benefit from it. The case for inclusive growth is, in plainer terms, the case for the middle class, and the case against ‘trickle-down’ economics. It is an argument for middle-income earners who participate, work hard and contribute to our economic success, and yet are having their pay packets and economic opportunities squeezed in Australia and right around the world.
Even the mention of 'middle class' these days brings allegations of class warfare and Marxism. But the fact is, in Australia and across the developed world, middle-income earners are facing increased job insecurity as a result of the rise of technology and automation. And together with increasing income inequality, they are deciding that the system is no longer working for them. Or, as Warren Buffett has said, class warfare has been waged for 20 years. And his class won.
Menzies' 'forgotten people' are feeling more forgotten than ever before. In Australia, unemployment rates in parts of Queensland, in Tasmania and South Australia (and more and more in Western Australia) are seeing families left behind with little hope. National income per person, in other words our living standards, is under pressure and is around 2 per cent lower than it was just two years ago. Our national wages growth is the lowest it has been since records began. For the last few years, many Australians have grown progressively worse off, not better off.
Around the world, both income and wealth inequality are rising and middle incomes are being squeezed. We only have to observe what’s happening in other similar countries to get a sense of where Australia may be heading. The median income for those aged between 31 and 59 in Britain is less than it was in 2007. Around the world, 65 to 70 per cent of households in rich countries saw their real incomes decline or stagnate between 2005 and 2014. This compares with less than 2 per cent of households between 1993 and 2005.
Income inequality, on the decline for almost all of the 20th century, is back up to levels last seen at the beginning of the last century. In the US, the top 1% of income earners received 18 per cent of national income in 1915. This reduced over the next 70 years as governments installed safety nets and some modest redistribution. But by 2004, the top 1% of income earners had regained a 24 per cent share of total income. While this is a more extreme situation than the current experience in Australia, it is an emerging threat.
Now there are those who argue that this doesn’t matter, or even that increasing inequality is a price to pay for increasing economic efficiency. But support for this nonchalant attitude is based in ideology or prejudice, not in facts, and is non-existent among the serious institutions which spend their time and resources thinking of ways of spurring growth. The OECD, the World Bank and the IMF, together with many of the world’s most senior central bankers, have made the argument that inclusive growth is not a detractor from economic growth, but a central and vital feature of driving economic growth.
The moral case for the middle class
There are three in-principle reasons I want to put today as to why middle-income families are important. The ‘moral case’ for the middle class, if you will. These three reasons go to: 1) the middle class as a driver of economic growth; 2) the vital support of the middle class for pro-growth policies of openness; 3) the social dividend from investment in middle income families that has payoffs for our society.
Let me briefly deal with each of these before talking in a little more detail about what they concern means for practical policies in modern Australia. Firstly, Australia and the developed world are facing the need to find new drivers of economic growth. The fact is that middle-income earners who are confident and feeling secure are important investors and spenders. Middle-income earners have a high propensity to spend any income boost. Providing a buttress to middle incomes is a more effective pro-growth lever than any trickle down strategy ever could be, particularly given household consumption expenditure makes up more than half of all economic activity in Australia.
As the OECD has pointed out ‘growing inequality bears a cost on future economic growth, particularly where equality of opportunity locks in privilege and exclusion, undermining intergenerational social mobility’. And as a recent IMF paper has pointed out: ‘lower net inequality is robustly correlated with faster and more durable growth’; arguing forcefully that it ‘would still be a mistake to focus on growth and let inequality take care of itself, not only because inequality may be ethically undesirable but also because the resulting growth may be low and unsustainable’. More recently, even central bankers, typically more focused on achieving the objectives of price stability and full employment, are increasingly interested in how inequality contributes to economic growth and broader notions of welfare. The Governor of the Bank of England, Mark Carney, has made the point that 'inequality is one of the most important determinants of relative happiness and that a sense of community – itself a form of inclusion – is a critical determinant of well-being’.
Secondly, openness. As I have said, policies which support increased trade and solid immigration flows are under attack around the world. It is people of middle incomes who provide the key constituency for the eventual winners of this argument. People whose incomes have been stagnating provided the bulwark of the ‘leave’ vote in the UK. And it is not comfortable people of high incomes who are providing the support for the isolationist approach being put in the current US presidential election. In our recent election, large swings were seen in areas where the economic transition is not going well and people felt left behind. In South Australia and Queensland, some of that swing went to third parties presenting nativist populist solutions to the middle income squeeze.
Foreign Affairs magazine recently put it this way: ‘A general sense that reciprocity has broken down in recent decades has led to frustrations that have been exploited by extremist political movements in many developed countries – groups that direct their fire at privileged elites and poor migrants – both of whom are assumed to be taking advantage of the supposedly hard working and exploited middle and working classes.’ Or, as Christine Lagarde said just last week: ‘In major advanced economies, incomes for the top 10% increased by 40 per cent in the last two decades, while growing only modestly at the bottom. If we are to build support for open economies and open societies, we have to do better.’
Hawke and Keating understood that, while undertaking the opening up of the economy, this was only one part of the story. As they floated the dollar, deregulated foreign involvement in our financial system and brought down tariffs, they instituted Medicare, provided the social wage and lifted school retention rates. They understood that these were vital re-assurances in a time of rapid change and were integral elements to the embroidery of reform.
We can’t expect middle-income earners to support globalisation and outward looking policies when they can see scant evidence that it is working primarily for them. As Michael Cooney, executive director of the Chifley Research Centre has put it, ‘If only 10% of people win when the economy does well, 10% of people will care if the economy does well’. And in the aftermath of the recent election, Wayne Swan put it well when he said: ‘The near dead-heat of the 2016 federal election shows that Australians, like citizens of the UK and the US, remain deeply and justifiably unimpressed by the incessant drip of the trickle-down economics experiment however it might be sold to them’.
It’s not enough to dial up the rhetoric and urge a greater sense of excitement. There needs to be positive, tangible proof: good jobs, decent wages, and fair reward for effort. Scorn and condemnation won’t help win back people who feel the modern economy has let them down. We need a real-world counter-argument, a lived experience of greater opportunity and prosperity.
And thirdly, there is a social dividend. Lots of politicians talk about family values. But we rely on middle income families to invest in their children with a long term impact on our society. Middle income families feeling the squeeze, chasing extra hours and second and third jobs have less time to read to their kids, less money to invest in their education. Middle class families need more than lip service about family values and the family unit being the most valuable unit in our economy.
And so what does all this mean for policy in Australia in 2016? Let me make some observations. Much of the conversation inevitably and quickly turns to the redistributive impact of government budget policies and whether proposed tax and spending changes are progressive or regressive. This is understandable and valid. However, I want to deal with some other elements of the debate: fairness in the workplace and aspiration for home ownership.
Fairness in the workplace
Focussing on redistribution to deal with income inequality risks missing the point that income inequality arises first at the workplace. Let’s talk about trade unions. Since the 1980s there have been a series of attacks on trade unions, declining union coverage and attempts to sideline unions from economic debates. This has probably reached its nadir in Australia in the last couple of years.
Now I am not here to defend every union practice or to deny that some have abused their position in unions. But I am here to robustly defend a role for unions in resisting the slide towards increased inequality and lower middle incomes. It can be no co-incidence that the decline in income inequality and levelling out of wages that occurred between the early 20th century and the 1970s coincided with increased union organisation and union density around the world.
Likewise, the decline in trade union density since the 1980s has been accompanied by increased inequality. Union density has declined as income inequality has increased. It is churlish and disingenuous to deny any causality. In fact, studies here, in the UK and the US have shown that up to one-third of the change in inequality since the 1980s can be directly attributed to a decline in union membership.
Unions were formed to give workers a voice and power in a lop-sided power arrangement, to get better work and safety conditions, and better and fairer wages and conditions. It’s not fashionable to say it, but with income inequality rising and reaching levels last seen in unionism’s early days, the case for unions playing a role in ensuring better income equality is as strong as it’s ever been. Of course, we will never return to the old days of closed shops, and unions need to modernise to remain relevant, as much as every other organisation and institution. But those who demonise unions and wish them away are really attempting to engineer an environment of increasing, not reducing, inequality.
Three contemporary policy debates are case in point: the minimum wage, penalty rates, and the fact workers in many countries are not being remunerated in line with improvements in productivity. There are plenty in the political class who would like to see the minimum wage reduced and penalty rates abolished. But the Australian minimum wage is not in need of being reduced. Indeed, 20 years ago the minimum wage was 63 per cent of the median wage. Now it is 54 per cent. Australia is one of only four OECD countries where the minimum wage is falling in comparison to the average. In Australia, the term ‘working poor’ is one we associate primarily with the United States. We don’t want it to be a fair description of Australia’s minimum wage recipients.
And penalty rates. Now the prime minister has said that we are a seven-day economy and that penalty rates need to be dealt with accordingly. I know, as we all know, that times have changed and there is a greater expectation in the community to access to cafes, restaurants and shops over the weekend than there was even a decade ago. But until the parliament, cabinet, company boards and senior management teams regularly meet as routine on a Sunday, we are not a seven-day a week economy. People who work on weekends so that we can enjoy the flexibility of going shopping or eating out over the weekends do miss out on more than weekday workers: kid's birthday parties, family functions, friend's weddings. They deserve to be compensated for it.
My Dad was a shift-worker when I was growing up. I remember him regularly having to work Christmas Day and other holidays, as well as most weekends. I was used to it and we dealt with it well as a family. But it did mean that Christmas Day was a very different day for us than other families, and our weekends were not as easy to spend doing the normal family activities. I look at all the people doing now what Dad did 30 years ago and ask, why should they be compensated any less for their compromise than he was? The people who want to see penalty rates abolished or reduced argue the case for flexibility. But do they ever suggest that the base wages of impacted workers be increased to compensate them for the loss of their penalty compensation? No.
Attempts to water-down the minimum wage and abolish or reduce penalty rates amount to nothing more and nothing less than an attempt to cut the wages of middle-income earners. And this comes at time of record low wages growth, when the pay packets of families around the country are presently barely keeping up with increase in the cost of living; a far cry from the ‘wages explosion’ we were apparently at risk of just a couple of years ago, according to those on the Right.
We only need to look overseas to see the threats posed to workers and the middle class here in Australia if workers are not adequately compensated for their efforts. As the Economic Policy Institute has pointed out, in the United States from 1973 to 2015, net productivity rose 73.4 per cent, while the hourly pay of typical workers essentially stagnated — increasing by just 11.1 per cent over 42 years (after adjusting for inflation). This means productivity increased more than six-fold the rate of average worker compensation over the last 40 years; no doubt a reason why the IMF has observed that the US middle class has shrunk from 60 per cent of the total population to just 50 per cent over a similar time period.
Let’s put all this to the test against the three principles I outlined at the start of these remarks. Would cutting wages help middle-income earners spend and drive economic growth? Would cutting the minimum wage and penalty rates make middle-income earners more likely support openness and economic reform in an economy in desperate need of new sources of productivity? Would removing penalty rates or cutting the minimum wage make it easier for families with limited time and resources to invest more time and money in their children’s education and wellbeing? When the returns from increased worker output fail to flow through to workers’ wallets, does this engender support for reform and incentivise people to work harder and contribute to national prosperity? The answer to all these questions is no.
And then there is aspiration of home ownership. In Australia, perhaps more than any other comparable country, the middle class is built around home ownership. But it is an aspiration which, for far too many, is becoming a pipe dream. Overall home ownership in Australia is at a 60-year low. In 1982, 62 per cent of people aged 25-34 owned their own home. By 2012, this had collapsed down to just 42 per cent. This is not surprising given that over the last 25 years young people have gone from having to pay just five times to now having to pay up to 15 times their annual income to purchase a new home. Young people unable to crack into the housing market strips them of one of the most fundamental wealth drivers through their lifetime. No wonder the Grattan Institute has shown that falling home ownership rates for young people mean they now have less wealth than people of the same age eight years before.
And there is the important link with innovation and entrepreneurship. Home ownership is not just an end in itself, important as it is. For many, it is a means to a broader aspiration, of access to the capital which is built into the family home. With all the legitimate focus on entrepreneurism and innovation, let’s not forget that many early stage entrepreneurs borrow against their home when they can’t get capital elsewhere.
If young people can’t afford a home, then that opportunity for wealth creation in the future will be cut off as well. The inability of young people in particular to buy a home to accommodate them has reached, I say calmly and soberly, crisis levels. We are a nation that can no longer house its own children. It is not good enough for governments to shrug their shoulders and say ‘well, that’s the market in operation'. There are few areas of our economy more a feature of government policy settings than housing. And those settings are working against middle-income earners with an aspiration to own their own home.
At the federal level, our tax system continues to provide very generous tax concessions to property investors and zero assistance to first home buyers. In the last term, when considering policies to improve the budget bottom line, Labor looked to policies which had a positive social impact as well as a positive fiscal impact. Our policy to limit negative gearing to new properties puts first home buyers on a more level playing field with investors, provides a stimulant to new construction to add to supply and, together with capital gains tax reform, adds $37 billion to the budget over the next ten years. This is exactly the sort of pro-middle class policy that shows people who feel forgotten that, actually, they are front of mind. The kind of policy that is focussed on the people governments should be focussed on in these turbulent times, hard-working people of middle incomes, aspiring to provide themselves and their family with the security and stability of their own home.
But when it comes to government policy it’s not just about dealing with unfair tax concessions. It’s about ensuring that all government policy settings keep up and remain fit for purpose in a rapidly changing world. As the Chief Economist of the World Bank has put simply, in a world of increasingly automated production, the challenge is ‘to ensure that all income growth does not end up with those who own the machines and the shares’.
If there was ever a more important element of avoiding this and supporting the lives of the middle class, look no further than education and the accumulation of human capital. In an era of increasingly rapid technology diffusion and automation, and the disruption that goes with it, what is more important than giving young people today the tools to fare in an increasingly interconnected world? There is little doubt the surge in the gap between the haves and the have nots over recent years is a result of this new wave of globalisation and government policies which simply aren’t keeping pace. As the Technology Review has pointed out: ‘Simply put, as we getter better at automating routine tasks, the people who benefit most are those with the expertise and creativity to use these advances … workers with less education and expertise fall behind.’
Australia is not immune to this. We know from the Grattan Institute that disadvantaged students in Australia fall further and further behind with each year of school. Better educated young people are more resourceful and adaptable, and will be better equipped to confront and navigate the changes, and indeed the opportunities that are opening up in the Asian region. Unless we give our young people the tools to climb the ‘ladder’ to participate in a rapidly changing and increasingly interconnected world, the case for the middle class will be lost. I’ll have more to say about education and its importance for economic opportunity in another forum in the near future.
The Labor Party was formed to give people without a voice and without power in our political and industrial system a way to have their interests protected. The rise of progressive parties around the world together with the growing bargaining power of trade unions over the 20th century saw a levelling out of incomes, a great moderation of inequality. The 21st century has seen what Timothy Noah calls ‘The Great Divergence’. The task of Labor is as important as ever before, in fact more important, as the progress of the last century in ensuring that the economy works for all is under threat. The people who look to Labor to speak for them see growing inequality, automation and low wages growth threatening the progress and achievements of the last century.
The middle class feels increasingly forgotten because in some quarters they are forgotten. Inclusive growth is about making sure middle-income earners are included and feel included. As the New Statesman magazine argues: ‘The truth is that, for a while now, growth has failed to deliver its moral dividend alongside its economic one because the increased prosperity has not been shared fairly.’ It is incumbent on all of us to ensure the moral and the economic dividend of our economic growth is strong and growing.
Bowen, Chris, 'The case for openness', Evatt Journal, Vol. 15, No. 6, October 2016.<https://evatt.org.au/the-case-for-openness>