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5 years ago
Good morning,
 Thank you for that introduction.
As a Queenslander, welcome to the Sunshine State I hope you’re enjoying our beautiful winters and golden beaches while you’re here (even if the water is a bit nippy).  
 A couple of years ago I was in New York attending a Bernie Sanders rally and an entertaining Texan by the name of Jim Hightower gave a speech endorsing the candidacy of Bernie Sanders. 
 Jim started his speech by declaring he was “as happy as a flea at a dog show”.
 It wasn’t clear to me whether this was much of a compliment, but the audience didn’t seem upset but hopefully I’ll be a bit clearer and just say I’m really pleased to be here!
However we're a few years on now and I know Jim wouldn’t be as upbeat about the prospects for his beloved United States and I know most people in our country are looking at the United States and saying “"how the bloody hell did they get there and what does it mean for us?"

Well today I’ll try to provide some answers to that question.
 I’ve split my remarks into two sections; the first section looks outward at the current international state of affairs politically; the story of the populist revolt and the death of the age of reason. I’ll use the second section of my remarks to look at us; the story of Australian economic exceptionalism.
 It’s hard to think of a period in my lifetime in which the tectonic plates of Anglo-American politics and economic order have had the potential to shift so dramatically so it’s only appropriate we start our discussion there.
 Why has Australia done so much better both politically and economically than some of our closest friends in the United States and United Kingdom? Two countries that we share so much with yet our paths have become so divergent.
 However in Australia the fragmentation of the party duopoly, the resurgence of the hard right within the Liberal Party, the rise of Pauline Hanson’s One Nation and the rise of other minor parties means we may not be as far behind the US dystopia as we would like to believe.
 Over the past couple of years I’ve been lucky enough to visit the United States at fairly regular intervals and meet with various business leaders, politicians and commentators who are experiencing the populist revolt first hand.
 Through these meetings it has become clear to me there are two distinct views on the current state of affairs; the first viewpoint (which has become more pronounced recently with the victory of Macron in France) argues the current state is a temporary malfunction.
 The second viewpoint is that we are witnessing the structural decline of Western liberal democracy.
 This is the view Edward Luce espouses in his new book the Retreat of Western Liberalism in the Trump Era and I would recommend anyone who is interested pick up a copy. 
 I’ll just show you a short clip of him discussing his new book where I think he articulates this point really well. 
 It’s a pretty sobering analysis isn’t it? 
 I read Edward’s book on my most recent trip to America in June and on the flight home I was jotting down a few notes that built on some of his words but also incorporated the frustration which had been conveyed to me about the political system in America but I couldn’t quite find the right words.
So I decided to clear my head by watching House of Cards and I realised Frank Underwood’s monologue couldn’t have said it better.
 I know there’s probably a considerable fan base for House of Cards here and you’ve probably seen the last episode of this season, if you haven’t maybe cover your eyes and ears for the next two minutes in the grand finale Frank Underwood delivers this monologue.
 You don’t have to walk down the street for long here before you hear similar sentiments about rigged systems and the corrupted nature of the ruling elites.
 The frustration (and consequences of that frustration) with political systems both abroad and at home is clear for all to see but I think two of the world’s most famous investors and corporate leaders in Ray Dalio and Jeff Immelt have been able to quantify and qualify this frustration best.
 Firstly this graph from Bridgewater (Ray Dalio) confirms what we all know (or suspect) – support for populism and anti-establishment parties in advanced economies is at its highest levels since the Great Depression.
 [As a side note all populism isn’t right wing Facism – the populism index includes Franklin Roosevelt’s New Deal package prior to World War Two along with the rise of the Nazis in Germany]
That’s the quantifying of voter frustration.
The second measure of voter frustration is this piece of advice made by outgoing General Electric CEO Jeff Immelt for the next generation of corporate leaders. 
“I agree with the first five minutes of a Bernie Sanders speech”.
Immelt is by no means a Bernie Sanders disciple but he recognises that the financial crisis of 2008, its aftermath and the political upheaval that followed has changed the paradigm for business in profound ways.
He goes onto urge business leaders to spend more time in factories and less time in Davos and to understand the impact of their business decisions on local communities. 
If businesses here don’t recognise and adjust accordingly to the new paradigm we will also succumb to the same populist uprisings that have occurred in the United States and the United Kingdom.
 We have the advantage of looking outward to understand the two types of populist uprisings we have seen over the past two years.

The first type is left wing populism where the system is framed as being rigged against the middle and lower class by the wealthy elites.
The second is right wing populism which blames outsiders (typically migrants or other minorities) for the anguish of the middle and lower class.
In the US, Trump and Sanders, as candidates for the Presidency were the poster boys for these movements. As I hope you’ve gathered from how I introduced the concepts, they are nothing like the same thing, and we should always be very cautious indeed of people who lump them together.
 But nine months on from the election I’m worried the US political class still hasn’t learnt from Trump’s rise. 
 Unfortunately both moderate Republicans and Democrats are still confused about where their respective parties are going and lack a unified plan for their country (although the reasons for this confusion and disorder is quite different for each party). 
 I had always thought the election of President Trump would be a wakeup call but I have to confess my recent trip to the US left me wondering if this is just the beginning of a long nightmare of political polarisation and conflict not dissimilar to that which erupted in the 1930s.
 So the challenge we face is real, structural and quite likely to persist for some time - but how do we address this challenge? 
 Well addressing this challenge requires us to understand the structural causes of the populist uprisings we have witnessed.
 There are a couple of interesting features to this graph which charts voter behaviour in US Presidential elections since 1980.

 Just let this number sink in – a record 70% of white, less- educated Americans voted for Donald Trump, a margin of 39% over the Democrats.

 Among all voters higher educated Americans favoured Democrats by a margin of 9% (53.5 - 46.5) whereas less educated Americans favoured Trump by 8% (54 - 46).
 In the 1980s and right through till the early 2000s there was little difference in voting patterns based on educational attainment. However by 2016 there was a 35 percent difference in white voting patterns based on educational attainment.
 You don’t get such a large powerful demographic like that voting in such a uniform way unless there is a serious structural problem occurring in your country.
 Let me put a marker down here. I’m basically talking about economics in this speech, and that’s important not just because it is my area of expertise, but also because it is one of the key underlying causes of the revolt we’re seeing.
 At the same time, you can’t look at the close relationship of Trump’s support and racial background and not see something going on. It’s true of politics everywhere that racial resentment plays a larger role than we would like. It’s always been doubly true of the United States. It’s not something I’m addressing today, but that’s not to say it doesn’t matter.
 But back to the economics:  we can see a serious structural problem thanks to a graph developed by economist Branko Milanovic.
 Let’s look at who has benefited, in terms of increases in real income since the globalisation revolution began in the late 1980s. 
 If you were in the lowest 20% of the global income distribution you’re income probably grew by between 20 and 40 percent, we’re looking primarily at Africa here.
 And look what’s happening as we move into the middle of the global income distribution, there are groups with 60 and even 75 percent gains in income, this is the rising Asian middle class.
 But here’s where the story turns bad – if you’re in the 75th, 80th or 85th percentile you basically went nowhere during this time period. 
 And then income gains accelerate rapidly for the top 10, 5 and 1 percent. 
 So who is this group in the 75th, 80th or 85th percentile that has basically gone nowhere? It’s the US & Western lower &middle class; a demographic which is primarily white and with less education and that just put Donald Trump in the White House. 
 For the past thirty years this demographic were told that globalisation would deliver higher wages and cheaper goods. Instead wages have stagnated and the promise of more jobs has evaporated. And you can see the effect of this income stagnation on a country by country basis as well.
 This graph shows income growth of the bottom 90 per cent by decade of some advanced economies – if you exclude Sweden and Australia income growth for the bottom 90 per cent has stagnated and declined over the past thirty years in Canada, France, Japan, the UK and the US.
 These two graphs show you what I believe is the key economic challenge of our time; how do we provide the well paid jobs for the Western middle class who have been the biggest losers from the growth of the global economy over the past thirty years.
As we enter the 4th industrial revolution there is no guarantee that the jobs created by automation and digitisation in the years ahead will in anyway match those that have been destroyed. 
 This graph from the IMF shows that the decline in labour share of income between 1995 and 2009 through technological change and it shows globalisation has disproportionately affected middle skilled workers. 
 And another wave of disruption, associated with robotics, artificial intelligence and biotechnology is on its way. 
 That’s why rising inequality is such a red hot economic and political issue.
 Inequality has risen rapidly in advanced economies since the 1980s – as you can see in the United States the Top 1% possesses almost 50% of income – in Australia it’s just under 20%.
 We are now experiencing the highest levels of income inequality since the Great Depression.
 Across the developed world there has been an increasing concentration of wealth at the top and the hollowing out of the middle class, most particularly the United States and this is increasingly a handbrake on global growth which is reducing living standards.
 One of the reasons why inequality is a handbrake on growth is very, very simple. You give more money to those who are already well off, and they are much more likely to save rather than spend it. It’s what the economists invented the crowd-pleasing phrase “marginal propensity to save” for!
 And as Jeff Immelt has observed, in economies such as the United States (and most Western economies) where the majority of economic activity is linked to consumer spending - when wages stop rising and more money accrues to the top the maths stops working and the social contract on which our economies are built breaks down.
 This graph shows the savings rates for income groups – if you’re in the top 1% you’re saving 40% of your income and when more and more money goes to the top 1% the money pumping through the economy dries up. 
 When the global economy became engulfed by the financial crisis in 2008 and the elites who had created such a highly risky economic system escaped punishment, the lower and middle classes were filled with a burning sense of injustice and finally decided they had nothing left to lose and voted to bring the entire system down.
This is the economic and political story of Trump’s populist revolt and why business should care about economic inequality, because it could happen here too. 

Despite the political turmoil abroad Australia appears set to enjoy its 26th year of uninterrupted economic growth and the international economy is probably the strongest it has been since the Great Recession.
 The latest World Economic Outlook update issued by the IMF only a couple of weeks ago slightly lowered growth expectations in the United States but this was offset by strong growth forecasts in Europe and Japan. 
 In Emerging Markets & Developing Economies growth remains strong and China’s growth is holding up, creating more confidence that we can expect a soft landing into the future. 
 Despite Australia’s ongoing economic strength and the improved international economic conditions we do face significant economic challenges.   
 In the year where we mark ten years since the beginning of the GFC we need only to remember how quickly international economic conditions can deteriorate. 
 Just ten years ago the global economy entered the worst economic downturn since the Great Depression. 
 The Great Recession hit output across 23 high-income countries so badly it was the equivalent of the entire German economy simply disappearing.
 But as you can see the Great Recession never happened here and instead our economy continued to grow to the point where since 2007 our economy has grown by over 25%.
 The Great Recession led to huge spikes in unemployment in advanced economies and caused enormous capital and skills destruction.
 In Australia we avoided that fate and as a result our economy emerged as one of (if not the) strongest advanced economies in the world after the Great Recession.
 Not only have we accumulated 26 years of uninterrupted growth we have shared the fruits of that economic growth more fairly.
 As you can see from the graph, there is a stark contrast here between wages in the United States and Australia. 
In Australia, since 1995 median household incomes rose by over 50%.  In the United States, in the same period, there was no growth in median incomes – a dramatic comparison.  
 And, as you’ll have gathered from the points I made earlier, a fairer distribution of growth – all other things being equal – will result in higher growth overall.
 This ability to balance growth with greater fairness is the story of Australian exceptionalism.
This is why I’m an optimist about the Australian economy because for the past twenty six years we’ve got the big economic decisions right and if we continue to get the big economic decisions right there is no reason we can’t make it to 30 years and avoid the populist uprisings we’ve seen abroad. 
 But these kinds of outcomes are not inevitable and there are several concerning economic trends occurring in the Australia economy which are driving disillusionment with politicians and business leaders – and if these trends are not corrected there is a very real risk that we will follow the United States down the populist road. 
 While the headline figure of economic growth remains just below trend this conceals disturbing undercurrents of a much weaker, casualised and insecure labour market.
 This graph shows you the underemployment challenge we are facing. 
 Average weekly hours worked by full-time workers have now declined to levels not seen since the 1990s recession. 
 Underemployment has hit a record high of almost 1.2 million people (8.6%) and total labour under-utilisation has hit nearly 2 million people or roughly 14%.
 40% of the workforce is in non-permanent forms of work and this means people are facing fewer rights at work and less economic security.
 However the challenges in our labour market run deeper than just the amount of jobs and availability of hours.  
 Wage growth is at its lowest since 2001 and has been on a fairly consistent downward trend since around 2013.
 As a result of this wage stagnation the wage share of the economy is at a 53 year low.
 This graph shows that the profit share claimed by corporations has essentially doubled since 1961.
 In 1961 the profit share of income was 22.3 per cent and rose to a peak of 39.7 per cent in 2009.
 Meanwhile the wage share of income has collapsed from a peak of over 60 per cent to 51.5 per cent - the lowest wage share in 53 years.
 These data sets prompted a senior government minister to quote (the day after the 2017 Budget) that “What Australia needs is a wage breakout” and when a Liberal Minister says that about wages you know it’s a problem.
 The twin evils of weak consumption and the squeeze on low and middle incomes are in no way countered by the government’s feeble infrastructure package (which unveiled in the 2017 Budget actually cut infrastructure spending by $1.6 billion from a promised $9.2 billion to $7.6 billion). 

While there has been some increase in public infrastructure investment, this has primarily been actioned by the States.

The Commonwealth will rue the day we didn’t use this period of record low interest rates to substantially increase investment in infrastructure most particularly urban public transport.
 We are not seeing the substantial increase in private sector investment required to assist our transition from mining sources of growth to non-mining sources of growth.
 The insistence by the Business Council of Australia and the Turnbull Government that their $65 billion corporate tax cut is the answer to this challenge has been met with considerable public resistance and scepticism. 
 This brings me to the title of my speech today, the Trumpification of business. 
 Last year prominent members of the Business Council of Australia (BCA) gathered at the Australian Financial Review for a round table discussion. 
 During the discussion the former Chief Executive of the Australian Stock Exchange, Elmer Funke Kupper, reportedly lamented of Australia’s current economic climate: “it’s almost a shame we didn’t have a deeper downturn to wake us up to the heavy lifting we’re going to have to do.”
 Just consider that for a moment, one of Australia’s most senior business figures just wished a recession on the Australian economy and its people.
 Earlier this year the leadership group of the Business Council of Australia, with a combined salary of $65 million gathered at parliament house to lobby the parliament into accepting the Turnbull government’s proposed $65 billion corporate tax cut.
And doing this simultaneously with calls for lower wages…

Imagine being a forklift driver, or shelf packer or a waiter who is at risk of having their penalty rates cut and you turn on the news one night and see a group of individuals who earn more in a day that you do in a year arguing for a corporate tax cut and lower wages.
Imagine the rage and frustration which must fill those people when they see that.  
 Again last week the BCA round table said there should be no wage increases without corporate tax cuts.
 As Bernard Keane wrote this was “give us a tax cut or the puppy gets it” approach to public policy.
 At a time of record low industrial disputation, falling real wages, cuts to penalty rates for our lowest-income earners and growing labour productivity, there remain business leaders who think the problem is the government not trying to gut unions savagely enough and not driving wages down aggressively enough.
As a solution to Australia’s current jobs and growth challenges, a corporate tax cut doesn’t make it even into the top ten sensible policy responses.
The Treasury's own modelling predicts the government's five per cent corporate tax rate would increase household income by between just 0.7% and 0.1% in the 2030s. 
 The major beneficiaries from the company tax rate cut will be foreign investors, who are excluded from dividend imputation.
 The near dead-heat in the 2016 Federal Election shows that Australians are not impressed by the incessant drip of trickledown economics from the Government’s 2014 budget and beyond. 
 In the face of this public revolt the tactics of the Business Council of Australia have at best been ineffective and at worst thrown kerosene on the fire of public indignation. 

Recently I asked an American friend, a 40 year veteran of the US political process, whether the rise of Donald Trump would eventually lead to a more moderate and balanced political discourse in the US.  He said “No, it will only get worse.” 
He went on to explain that increasingly we are seeing leading business figures lazily adopt positions based on populism and ideology rather than evidence-based economic analysis. 
 Sadly, Trumpification has taken a firm hold in the arguments made by leading members of the Business Council of Australia who would do well to take Jeff Immelt’s advice that globalisation can’t just be about outsourcing and low wages and, that when it comes to the success of business, public goods matter.

Australia’s historical economic success and exceptionalism lies in our boldness to tame the market.
We’ve deployed fiscal and monetary policy in tandem and we didn’t go down the American road of unfettered market capitalism.
We’ve championed structural reforms—a strong social safety net, HECS, Medicare, a world-leading superannuation scheme, a fair industrial relations framework, and strong population growth — which has driven a strong economy and upwardly mobile society. 
 Our audacity to seize the best of market capitalism while shielding ourselves from the worst of its excesses and imbalances means, among other things, that children from working- and middle-class backgrounds have greater social mobility.
 These pillars have provided the foundation for Australian exceptionalism and have thus far shielded us from a populist uprising.
But at a certain point, the privileged insisting on ever greater rewards and an ever greater share of the spoils will bring the system crashing down.
 It’s hard in a capitalist system to set limits to the constant accretion of income and wealth. I don’t mean technically hard – a decent and effective tax system isn’t that tough a thing to design. But it is politically tough as hell. 
 Privilege has power, and with more privilege comes more power, and apparently ever diminishing responsibility. It is this power to keep squeezing ordinary folks to the margins that we must resist, firstly because it is morally wrong, but if that doesn’t do it for you, how about “because it will blow up the whole system?”
 It’s not too late in Australia. While there are concerning trends in the Australian economy there is no reason we can’t continue to grow and prosper. 
 As former Reserve Bank Board member, John Edwards argues “Australia cannot control what happens in the rest of the world, but with sensible policies to enhance the value of its human capital Australian living standards can grow a little faster than those of the United States, Europe, or Japan over coming decades” – for anyone who is interested John has two excellent pieces on the Lowy Institute and Inside Story on Australia’s economic future.
 But if we are going to continue to prosper we need to get the big policy calls right.
 There is an economic reform agenda that Australia should be progressing which drives growth and spreads opportunity.
 For me that means using active fiscal policy to boost investment and increase aggregate demand to move towards full employment. This isn’t saying that fiscal policy is a recipe to simply expand the expenditure side of the budget with lots of goodies for various constituencies.
In fact, activist fiscal policy and the promotion of inclusive prosperity are entirely consistent with budget repair, especially if it focuses on restoring fairness and efficiency in the tax and expenditure systems with measures such as abolishing negative gearing for existing homes.
 We need increased investment in both physical and human capital to lift productivity and living standards. Our failure to invest in physical infrastructure, quality education and training is leaving a big infrastructure deficit for our kids.
 There has been a lot of debate about reforming our trade unions and parts of the business community speak of little else but I’d suggest parts of the business community need to get their house in order. 
 Trust in business is at an all-time low and reckless behaviour has been exposed while a distinct lack of competitiveness has taken hold in our boardrooms. In board elections, the average incumbent ASX 200 directors get 96 per cent of the vote. 
 It is the safest electoral office on the face of the planet. Not only do board nomination committees shut out workers they largely elevate the old boys club. Shareholders who vote for directors are left with few alternatives but the status quo. 
 I would like to see a Swedish model where the shareholders take control of the nomination committee where the top four shareholders propose a shortlist and put it forward for consideration at the AGM – this may bust up the directors club quick smart. 
 The grotesque enlargement of executive pay and packages over the past decades has fuelled the resentment of working people towards the business community. 
 We should be aware that the rapid rise in executive pay has come at the expense of shareholder returns – both in terms of the straight cash take but also in an economy wide sense when there is underinvestment in businesses to maximise short term returns and cash payouts to CEOs. 
 Incentives do determine executive behaviour.
 One approach could be a binding vote on executive pay where shareholders approve in advance a policy and total budget that the company can pay out in each year to the top five executives. Similarly shareholders fund the political lobbying by big business with zero accountability all under the cover of “it’s in our shareholder’s interests”. Why not ask shareholders to approve this activity in advance as in the UK?
 I’ll finish with this quick story; just over two years ago I was in New York working with Larry Summers preparing a report for the Center for American Progress on inclusive prosperity. 
 One morning I had the opportunity to walk along the abandoned industrial railway; the High Line and on the side of an old brick building was a large advertisement, which read, “The French aristocracy never saw it coming either.”
It was yet another reminder of the groundswell of support sweeping around the world for a more inclusive form of prosperity and it’s been an image seared in my mind ever since.
 I don’t find it politically comforting that growing inequality is now more openly analysed and discussed but it’s the discussion we need to have because we have seen what happens when a blind eye is turned to inequality.
 Occasionally business leaders ask me “No one is listening to us - What do we do?” Well there are a lot of things but here’s one: take Jeff Immelt’s challenge and listen to the first five minutes of a Bernie Sanders speech with an open mind, it won’t kill you but it might just save capitalism and democracy. 

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