If there is one global political and economic lesson to be drawn from the Brexit experience and the rise of Sanders and Trump let it be this; we ignore the distributional outcomes of globalisation and unfettered market capitalism at our peril.



Distributional concerns are the traditional preserve of the political left but the political right should now be just as concerned. As Bank of England Governor Mark Carney has said: “just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself.”

The rise of rampant income and wealth inequality in the developed world and the lifting of millions of people out of poverty in the developing world over the past 30 years can be seen as two sides of the same globalisation coin. It is an economic phenomenon economist Branko Milanovic has called “the greatest reshuffle of individual incomes since the Industrial Revolution” – and one with clear social and political consequences.

To be sure, globalisation has also delivered huge efficiency windfalls in developed economies. But the rapid increase of wealth and income inequality and structural changes brought on by pro-globalisation policies has left large sections of the community behind in Europe and the United States.

Global inequality may be much worse than we think Read more

In their despair many have turned to extreme populists. Exhibit A is Donald Trump.

Thankfully in Australia we haven’t gone down the American road of a hollowed out middle class and army of working poor. Between 1995 and 2012 real median household incomes in Australia increased by 50%, a phenomenal result when you consider real median household incomes in the US actually went backwards over the same period.

But there are concerning trends emerging in the Australian economy.

Considerer this: since 2012 real median household incomes in Australia have stagnated. The Australian middle class is being squeezed. Now recent labour data confirms further wage stagnation and the casualisation of the Australian workforce – so this trend is likely to continue, and women and young people in particular will be worse off.

Another example: Australia has long maintained a very high level of intergenerational social mobility. In other words, parents’ income is not a strong indicator of children’s income later in life. However the newly released Hilda report shows that in recent years income mobility has declined.

While we are not yet seeing the mass public anger of the US and the UK, it is little wonder that many Australians are disillusioned and frustrated with their economic situation, and little wonder they are demanding that politics delivers change. As we are seeing in other developed countries around the world, if this disillusion and frustration is allowed to fester it will result in greater political instability and structurally constrain economic growth at a time when the global economy is already weak.

The Chifley Research Centre report, Inequality: the facts and the future, which was released this week takes these challenges head on.

The report advocates unambiguously for a wealth creation agenda based on a strong middle class.

This is not some wishy-washy third way Davos fudge in which we are told the only response to inequality and globalisation is world class education and training.

Instead the central premise of the report is that sustainable economic growth can’t be built on a shrinking share of GDP going to working people.

We need to enact policies that bring strong employment growth that brings discouraged workers into the labour force, lifts unemployed people into employment and raises relative wages for the lowset paid.

The report rejects the fatalism inherent in conservative arguments that nothing can be done about growing inequality of wealth and income other than shrinking the role of government and giving tax cuts to corporate and wealthy individuals – a concept described as trickle-down economics and unfortunately synonymous with globalisation.

The report recognises, as do the IMF and World Bank, that an economic plan based on claiming efficiency gains from globalisation while ignoring the adverse distributional impacts on large sections of the population is a recipe for weaker growth and greater political instability.

So how can growth be accelerated in an inclusive way?

Firstly, as the IMF recommends, Australia needs to increase quality investment in both physical and human capital to lift productivity and living standards. Our failure to invest in physical infrastructure and quality education is leaving a huge infrastructure deficit for our kids.

As the IMF has concluded, debt funding physical infrastructure at prevailing low interest rates can lead to faster deficit reduction through higher growth, rather than indiscriminate spending cuts across the budget. Investing in infrastructure and long-term investment in education is precisely the assertive fiscal policy, rather than monetary policy, that is required to lift demand and productivity.

We will rue the day we did not use this period of ultra-low interest rates to invest in infrastructure and put our people to work. Future generations will think us mad, and they will be right.

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Secondly, there must be a fundamental commitment to a decent minimum wage and a fair sharing of productivity improvements between wages and profits backed by a strong and progressive tax system and targeted transfer payments. These policies deliver real income growth to low and middle income households. Put simply the demand that flows from low and middle income households is a source of growth not a consequence of it.

Over the last 40 years the Labor vision of inclusive reform – market opening reforms, sensible fiscal and monetary policy in concert with a fair industrial relations system and a strong progressive tax and transfer system has been the dominant pathway forward.

The 2014 budget tried to smash this model through the camouflage of a budget and economic emergency. The Turnbull government remains committed to its trickle-down economic policies; massive tax cuts for wealthy and powerful corporates and huge cuts to the social safety net. There is no question that Australia needs budget repair in the medium term but that can be achieved in an inclusive way.

Put simply, we must grow together, not apart if the perils of rampant wealth and income inequality are to be avoided.