Contrary to the alarmist warnings from a mining chief, drastically cutting wages is not only unnecessary but would have the potential to smash our economy, writes Ian Verrender.

It's taken almost a month for a partial return to normal viewing.

Interest in federal budgets usually wanes after two days, a week tops. This time around, after the greatest political bungle since Kevin Rudd's ham-fisted attempt to introduce a resources rent tax on mining, each day has unearthed further fodder for ever more outrage.

Last week, however, we saw the return of the great wage debate. Rio Tinto's newly anointed Australian chief, Phil Edmands, took to the stage in the national capital, invoking the ghost of Hanrahan with his message to the nation: "We'll all be rooned."

The general gist of Edmands' alarmist warnings was that we are in danger of a "decline into mediocrity and obscurity" unless we reform Australia's archaic industrial relations system, the primary target being the abolition of Fair Work Australia.

Without urgent labour market reform - code for lower wages - Australian productivity would continue to decline, he said, parroting the common misconception among the business elite and politicians that the only way to improve productivity is to cut wages and conditions.

There's an odd irony here. Mining executives like Edmands bleat long and loud at how wages grew during a once-in-a-century resources boom, when they were they were the ones throwing everything into the pot to attract skilled workers.

It is an argument that not only conveniently ignores the facts but demonstrates an astounding shallowness when it comes to even basic economics.

For a start, it ignores the fact that real wages now are going backwards, that wage growth is the slowest on record and has been overtaken by inflation.

According to the Australian Bureau of Statistics, wages growth has fallen to 2.6 per cent while inflation now sits at 2.9 per cent.

For almost the entire first decade of the new century, nominal wages growth never fell below 3 per cent, peaking at 4.3 per cent in early 2008 as the mining construction boom was running at full pelt before the financial crisis.

Australia's labour market is far from perfect. But if wages rise only modestly when demand is running hot and then fall when demand drops, then surely that's a reasonable indication that things are working.

But just consider what would happen if Mr Edmands' wishes came true.

Because the Howard Government (and Rudd) handed back the windfall gains from the mining boom via consecutive income tax cuts, Australia became a high cost economy as consumption grew and our banks fuelled a near insatiable demand for housing by importing cheap cash from offshore wholesale credit markets.

According to the ABS, household debt in the seven years leading up to the financial crisis grew at almost 10 per cent a year but since has dropped back to about 2 per cent.

Total mortgage debt now stands at $1.35 trillion while collectively, Australians owe $1.8 trillion to our banks, making us one of the most heavily indebted nations in the developed world on a per capita basis.

It is a major factor in why it has taken so long for consumption to react to record low interest rates. We are already swamped with debt.

While it may be terrific for multinational miners seeking to boost short-term profits (never underestimate the capacity for self-interest), a drastic cut in wages would smash our economy. Consumption would shrink, putting the squeeze on retail and service industries and spell the end of our domestic manufacturing base.

But it would be our hopelessly vulnerable banks that would be most exposed. Imagine the carnage as rising defaults rippled through our financial system pushing bad debts higher and property values to slump.

Australian banks sailed through the financial crisis, not because they were run by a bunch of geniuses but because they were lucky enough to be on the other side of the great global banking ledger.

Rather than invest in offshore toxic assets, based on over-inflated real estate, our banks instead borrowed from offshore to invest in housing here that inflated our real estate. Should we heed Mr Edmands' advice, it would be our turn to have our very own home-grown financial crisis.

If Australia has a debt crisis, it is not the confected crisis conjured up by the Prime Minister, Tony Abbott, and his faithful Treasurer, Joe Hockey, during last year's election campaign and the great budget debate of the past month.

Australia's debt crisis is in household debt, largely borrowed from offshore, and secured against real estate. It equates to almost 100 per cent of our annual output as opposed to federal debt of about 14 per cent of GDP.

Australian wages will undoubtedly come under pressure in future as automation eliminates the demand for unskilled workers and as the internet and new technology break down barriers in cross border contract work.

In a speech in Sydney last week to the Macquarie Graduate School of Management, Nobel laureate Professor James Mirrlees predicted a gradual move towards global equilibrium in wages, as remuneration fell in the developed world and rose in developing countries.

China has seen dramatic rises in wages in recent years, reducing not just its regional competitiveness, but its ability to compete with a resurgent American manufacturing sector that has been boosted by the US central bank's manipulation of the currency markets.

As living standards rise, so too does the cost of housing, requiring greater levels of income to sustain debt repayments, maintain a healthy financial system and underpin economic growth.

Australian workers experienced real wage declines during the Hawke and Keating eras as the pendulum shifted towards corporate earnings. And earnings through the Howard era were kept in check despite a once-in-a-century resources boom.

The one area where wage controls completely broke down was in the corporate world. Executive salaries boomed through the '90s and then into the new millennium, barely taking a breather through the financial crisis as exorbitant bonuses were replaced by higher fixed salaries.

Professor Mirrlees, emeritus professor of political economy at the University of Cambridge, expressed the rather quaint belief on Thursday night that it would not just be lowly workers who would see salaries pressured.

According to his theory of economic equilibrium, skilled workers, professionals and even chief executives also would feel the pinch.

Somehow, I expect not. Free market assumptions seem to fly out the window when it comes to executive salaries.

Would Mr Edmands be content with the salary of a senior executive at Chinese government-owned miner Chinalco? Would Alan Joyce accept the same conditions as China Southern chief Tan Wangeng, who reportedly took home $153,000 two years ago?

Remember this little anecdote. During the height of the financial crisis, when Washington was begging for foreign banks to bail out Wall Street, Japanese bank Mitsubishi UFJ rode the rescue, snapping up a 21 per cent stake in Morgan Stanley.

Imagine their horror when they discovered John Mack, the chief executive who presided over the bank's debacle, took home $US41.4 million the previous year.

The Japanese institution paid its 14 (that's correct, 14) top executives a total of $US8.1 million during the same period, one fifth the amount Mack received.

Don't expect those minor facts to get in the way of the well-rehearsed story on Australian wages and conditions.

Ian Verrender is the ABC's business editor. View his full profile here.