As the US applauds the success of Australian economic policy, former treasurer Wayne Swan is sitting on a commission that may yet become a ginger group for Labor. By Mike Seccombe.

Wayne Swan’s focus on wages

Former federal treasurer  Wayne Swan.
Former federal treasurer Wayne Swan.

People deal with life’s setbacks and miseries in different ways. Immediately after the 2013 election, Wayne Swan went to America looking for comfort.

And he found some, in a place few would think to look: the annual meeting of a body called the Institute of International Finance, whose members include most of the world’s major commercial and investment banks, as well as big insurance companies and funds managers.

He well recalls sitting in the audience that October, as a freshly minted former treasurer, listening to a discussion about the slack demand afflicting the world economy, driving down growth.

“The conversation was going round in circles,” he recalls. “Then Mike Novogratz piped up.”

Novogratz is a former partner at Goldman Sachs, and now runs the giant hedge fund Fortress Investment Group.

Swan had met him on a number of previous occasions, notably at the height of the global financial crisis, when Swan was planning the stimulus package that buffered Australia from the worst of the carnage.

“So Novogratz bobs up and says no wonder there’s no demand when there are so many millions of people living on the minimum wage. And he said – not knowing I was in the audience – ‘Look at Australia; they seem to be doing all right and they have a high minimum wage. Why don’t we try that?’

“What really surprised me,” says Swan, “was that no one, none of these lords of finance, really arced up.”

On that same trip, Swan dropped in on an influential Washington think tank, the Centre for American Progress, and was promptly recruited as a member of a commission it was forming to study the same problem and propose policy solutions. It was to be jointly chaired by former US treasury secretary Larry Summers and former chief adviser to the British treasury and shadow chancellor of the exchequer Ed Balls.

Swan was unsure how it would go. After all, Summers had just been forced to withdraw under pressure from the progressive wing of the Democratic Party, who saw him as being far too close to Wall Street and far too sympathetic to the neoliberal economic orthodoxy.

But again he was pleasantly surprised at how receptive they were to learning from the Australian economic model in a range of areas: including tertiary education, healthcare and, particularly, industrial relations.

“I thought getting that sort of stuff up in the report would be nigh-on impossible, given the attitudes in America, the make-up of the committee and that the Centre for American Progress is a very centrist organisation in the Australian context,” says Swan.

But the final report of the Inclusive Prosperity Commission, released earlier this year, is replete with endorsements of the Australian way of doing things.

“I think I made a contribution,” says the former treasurer.

But really it was not Swan; it was the evidence.

“A wonderful graph in the report shows that over the last 30 years median incomes in the US have increased by zero. That’s the extent of the hollowing out of the American middle class. Here they’ve increased by 50 per cent.”

1 . Wages and growth

The fact is the United States, indeed the whole developed world, is relearning a truth forgotten several decades ago.

“It is very simple,” says Swan. “If you deny a large sector of the population a decent living wage, then what drives demand?”

The result, as the commission’s report says, is that: “Across the advanced economies, the underlying rates of growth have slowed.”

The income that has been generated has been distributed increasingly unequally, the report says. “Middle- and low-income families across the developed world face downward pressure on wages and incomes. As growth has slowed, most economies have seen a bifurcation between growth in productivity and growth in income from labour.”

A little economic history underlines the point.

During the 25 golden years of postwar capitalism, between 1948 and 1973, according to official data assembled by the Washington think tank the Economic Policy Institute, productivity in the US grew nearly 97 per cent. Average compensation per hour for workers grew more than 91 per cent. That is to say, the benefits of economic progress were almost equally shared.

Then, first in the US, and later in other places, there began a great divergence. The gap grew modestly at first but, under Ronald Reagan’s presidency, it accelerated. And it has not slowed since. In the 40 years from 1973, the rate of American productivity halved, but productivity still grew a further 74.4 per cent. But hourly wages grew barely 9 per cent. And bear in mind that is average wages, and the average is distorted by the huge gains of high-income earners. For most US workers, as Swan notes, they grew not at all.

Between 1979 and today, Larry Summers says, US income distribution has changed such that the top 1 per cent receive $US1 trillion more and the bottom 80 per cent $1 trillion less. Each year.

The same thing has happened all across the developed world, in roughly proportionate measure to the extent that countries embraced the small-government, deregulationist neoliberal economic model. It happened in Australia, too, this split between productivity growth and wages growth, although it started about a decade later and has not been nearly as pronounced.

Why did it happen? The Summers commission cites various factors. The increased “offshoring” of jobs to low-wage countries, technological change that put a premium on skill – the commission report speaks of a “race between technology and education” – and changes in the structure of labour markets so that “employment is less likely to be stable or long term [and] increasing numbers of workers find themselves in contractual relationships that do not guarantee hours worked or provide benefits such as paid vacation, sick days, or pension benefits.”

2 . Workers' protections and conditions

What it comes down to, though, is a decline in the bargaining power of workers.

Notes the report: “Nations that have robust minimum wages and protections for workers … have not seen such a strong divergence between worker productivity and worker pay.

“Indeed, Australia’s workers face the same global trends, yet its switch to collective bargaining over and above a strong set of minimum conditions has helped workers keep more of their productivity gains in take-home earnings.”

This is very gratifying to a union man such as Wayne Swan. “To get these outcomes you need a fully functioning trade union movement,” he says. “People elsewhere are looking at the story here.”

But the commission report also noted numerous other potential mechanisms for counteracting the growing disparities in incomes and wealth. These were policy options Australia has not contemplated, or has abandoned: tighter regulation of financial markets and salaries, strengthened transfer payments systems by which governments might top up declining market incomes, more progressive tax systems. Germany, for example, has recently made tertiary education free.

The potential policy responses are many and varied, because the problem is complex. But at least, says Swan, there is now broad agreement that greater equality is good economics.

Forty-odd years of experience has shown that so-called trickle-down economics, where capital is freed to do as it will and increasing inequality is seen as an inevitable corollary of dynamic capitalism, has been found to be counterproductive.

“This is the coming consensus,” Swan says. “You’ve got the likes of Summers and [Nobel prize-winning economists] Stiglitz and Krugman not quite but almost on the same page, more so than they’ve ever been in their lifetimes.”

He cites others, among them Christine Lagarde of the International Monetary Fund, Bank of England governor Mark Carney, the OECD, the G20, all advocating a new model of “inclusive capitalism”. “I don’t think anyone yet knows the real answer to it, but you’re not going to find one until you start talking about it in this frame,” Swan says.

Thus he will co-chair a commission modelled on the Summers commission, set up in April through the Labor-aligned think tank the Chifley Research Centre, with a diverse membership of political, academic and business representatives.

The media release announcing the commission said it would conduct public meetings and hearings, and produce research and recommendations that would result in a formal public report to be released before the federal election due in August 2016.

The suspicion must be that the commission is a means of second-guessing the parliamentary Labor Party’s own internal policy review process, now also in train.

Swan insists the commission is about the bigger picture, “dealing with the long-term challenges in the global economy”.

But he also says: “To win this debate, proponents have got to acknowledge that wealth creation is just as important as wealth distribution. There is a tendency – in the Labor Party, too – to miss that. We talk about all the good things we are going to do, but not about how we are going to actually create the wealth.”

3 . Why Swan remains

Make of that what you will. But whether or not the commission turns into a policy ginger group for Labor, Swan minces no words in describing his real targets, the real reason he is sticking around in public life.

It’s to protect and enhance “our strong industrial relations system, minimum wage, universal health and education, a progressive tax system and a targeted transfer payments system.

“In short, the things that make Australia great, that are currently under attack by Abbott and company, who are essentially running this Tea-Party, trickle-down agenda. All the propositions for structural change that are coming through now are by the rich, for the rich. They’re proposals for wealth concentration, not wealth creation. We don’t want what’s happened in America to happen here.”

Indeed the US is now moving to be more like us. Just this week California joined the growing number of US jurisdictions to increase its minimum wage, voting for a huge boost from the current $9 an hour to $13 by 2017, and to index future rises. In contrast, here in Australia, the Fair Work Commission increased the minimum wage by less than the rate of inflation, leaving it at the lowest-ever level relative to average wages.

And this week’s figures from the Australian Bureau of Statistics showed wages and salaries down again in the last three months of last year, even as GDP and business profits grew.

This article was first published in the print edition of The Saturday Paper on June 6, 2015 as "Swan wages his own war".

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Mike Seccombe is The Saturday Paper’s national correspondent.

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