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The Economy Is Balanced On A Knife Edge

Trickledown economics will lead to further inequality and must be soundly rejected.

24/10/2016 11:09 AM AEDT | Updated 24/10/2016 11:09 AM AEDT
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"Simplistic solutions peddled by right-wing populists are likely to worsen workers’ economic prospects."

Donald Trump's reprehensible personal behaviours have been roundly and rightly rejected across the political spectrum, but his economics, which are just as pernicious, have been somehow normalised.

When the Liberal party installed Malcolm Turnbull as leader in 2015, many voters were hopeful that Tony Abbott's survival-of-the-fittest policies attacking unions, and low- and middle-income earners, were to be reversed. Instead, they were supercharged, with a $50 billion unfunded corporate tax cut.

Australia's progressive tax and transfer system is rightly the envy of most developed economies. And while the United States has been the engine of global growth for much of the past 70 years, its redistributive record has rendered it one of the most divided and unequal societies on the planet.

Since 1995, while median incomes in Australia increased by 50 percent, median incomes in the United States have flat-lined. As the Inclusive Prosperity Commission has recently argued, the Australian economy now sits on a knife edge, and policy choices will determine whether we fall towards greater inequality or shared prosperity. Seeking to emulate the policies of the United States would simply be wrong‑headed.

In Australia, two pieces of evidence from this year alone indicate that working people are justified in demanding a 'fair go'. The first is the release of Australian Tax Office reports which revealed that up to one third of private and public corporate entities in Australia paid no tax in 2013, joining 56 untaxed millionaires who didn't even pay the Medicare levy.

The second is the fall in wage growth to its lowest level on record. While the divergence between falling wages and rising productivity hasn't yet reached US proportions, it's a gloomy portent.

Without question, the blind pursuit of trickledown policies generates vicious economic cycles: from lower wages, to lower demand, to lower business profits, investment, and employment. But it also bleeds into vicious cultural cycles.

Workers who are unrecognised economically and whose concerns are quashed by a political mentality that declares 'there is no alternative' are understandably turning towards populists.

Sadly, the simplistic solutions peddled by right-wing populists are likely to worsen workers' economic prospects. The Brexit result looks like it will spend every one of the next 20 to 30 years proving that.

An alternative exists. While progressives must openly reject the simplistic view of protectionism and the xenophobic elements embodied in many populist causes, they must also address the legitimate foundations of the populist surge. This means promoting policies which exploit the benefits of globalisation for the improvement of society, and repudiating those which exploit the majority of society for the benefit of a dogmatic globalist ideology.

Harvard economist Dani Rodrik calls this 'rescuing globalisation from its cheerleaders'. Rodrik notes that economies like China's, which overlaid their trade 'window to the world' with a 'flyscreen' of employment protections, have fared much more favourably than economies like Mexico's, which engaged enthusiastically with free trade deals without regard for domestic safeguards. That the Hawke and Keating reforms preceded 25 years of real GDP growth is as much a testament to the wisdom of redistribution as to an enthusiasm for open markets.

Formerly unapologetic free-market advocates are coalescing around this view. The IMF has tempered its evangelism for free trade, suggesting that unpredictable swings in speculative capital flows and the blind pursuit of fiscal austerity have soured the fruits of globalisation. At a time of record low interest rates, the IMF now joins the OECD in recommending that governments increase their borrowing to invest in human and physical capital that delivers for all citizens.

By recognising inequality as a policy choice, and not an inevitability of open societies, the inclusive prosperity alternative gives voice to the concerns of populist voters. The Chifley Inclusive Prosperity Commission offers concrete policies to establish a virtuous cycle of growth beginning with a decent industrial relations system with strong unions to ensure fair wages and conditions, which in turn promote sustainable household expenditure, which in part funds a tax system that provides affordable health, education and housing.

These policies, in conjunction with public expenditure on infrastructure, complement private sector investment and promote full employment.

Across the Pacific, the Center for American Progress has found that countries with lower corporate tax rates experience lower productivity growth, contrary to the wisdom -- such as it is -- of the Business Council of Australia. Rather than shoring up capital's share of income with tax cuts, the progressive alternative is to increase basic wages, particularly in the current climate of near-zero inflation.

The historical record supports the inclusive prosperity approach as a superior means of achieving economically and socially sustainable growth. Malcolm Turnbull's skin-of-his-teeth election result and Labor's campaign for a more inclusive economic program demonstrated the vulnerability of conservatives in this country to a full-throated campaign against growing income inequality and lower social mobility.

In order to save globalisation from its cheerleaders, progressives must shun the elitist attitude and technocratic, alienating language preferred by our opponents, and aggressively prosecute the alternative agenda.

Fundamental economic changes will never be achieved by a pining for consensus, because they involve a fairer share of wealth and income going to working people. Since the 1980s, nearly all progressive reforms to fairly share the fruits of our prosperity have been opposed by conservatives and powerful vested interests.

Thomas Piketty's breakthrough book Capital in the 21st Century was not just some summer publishing sensation from three years back. At its core is the vital insight that the last 40 years of economic policy have driven inequality in many parts of the world back to 19th century levels.

Which leads me to this very simple point: if you want 19th century inequality, you can't be surprised when you get 19th century politics too.

Trickledown economics, however it is introduced, and on whatever grounds the government denies its existence, remains the undeniable ideology and policy choice of conservatives -- and one that must be soundly rejected.

To supplant trickledown economics with inclusive prosperity as the dominant economic narrative, we need to be not just loud and clear about the flaws in the existing framework, but to advance vigorously our compelling alternative.

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