Hillary, Hanson and the Economics of Our Political Predicament

14 November 2016

This wonderful campus here at Gardens Point is built on Turrbal and Jagera land so I begin by acknowledging country and paying respect to their elders and traditions.


I thank you for the opportunity to join you again today at QUT.  I spend time with the students and lecturers in your teaching school who are doing great work in my electorate; I’ve accompanied Bill Shorten to the Cube; and I’m looking forward to visiting your robotics lab after our discussion this afternoon.


Before I get into it I have so much to thank Peter [Coaldrake, Vice Chancellor QUT] for: the invitation to join a very distinguished list of speakers at this Forum; his kind introduction; his friendship over some years now; his policy leadership in higher education.  And for not mentioning how badly I fared in the US election tipping competition he organised again this year.


There’s no comfort or consolation in knowing nobody else really picked it either.  Like many of you I expected a very different outcome and I thought I’d be delivering a pretty different speech.  But the surprise result actually makes my topic today more important, more pressing, than when I first chose it a month or so ago.  Now the topic’s chosen us.


Like many of you here I’m deeply concerned about what’s going on.  In the US of course, but in Europe too and here as well – right around the advanced democracies.  And I don’t just mean the challenge to established political parties like mine.


I’m worried that the problem is being misdiagnosed and misunderstood.  Not by everybody – there’s been some very smart commentary about the role of economic forces in Trump’s rise, including from a number of my colleagues in federal Labor, and I will reflect some of that today.


But in some quarters and including here in Australia in respect to One Nation, there’s an over-reliance on the dark and disgraceful cultural, racial and religious elements of the populist revolt which obscures its fundamental economic underpinnings. 


I’m worried that this failure to understand the underlying problem jeopardises our ability to respond effectively.  I’m worried the Turnbull Government shares in this failure.  Because for as long as Governments like our own ignore, or even exacerbate and accelerate, the undercurrents convincing people they have no place in the modern economy – that they have nothing to lose – extreme and populist parties will thrive.


“Basket of Deplorables”


That’s what this speech is all about.  I’ve called it “Hillary, Hanson and the economics of our political predicament”. 


It’s been a difficult one to write.  Partly because I admire Hillary Clinton and her election would have been the best available outcome for Australia and Asia.  Partly because, as someone who represents a multicultural community and spends a lot of time with disability groups, I found the views and statements of her opponent so disturbing.  But mostly because, with a little daughter due four weeks after Trump’s inauguration, I don’t know how I will explain to her one day how a person who treats women that way was elected President of a global superpower.


I know as a nation we play the cards we are dealt, we make the best of a bad situation, and we work with the new administration because the Alliance matters so much more to us than the personalities on the other side of the Pacific.  But there’s no point pretending we never had a problem with the President-elect’s views.  I’m proud of what Bill Shorten said in this respect, in the parliament on Thursday and subsequently. 


And we learn the lessons.  One of them is how, and how deeply, we engage with people who see themselves as economic and political outsiders. 


We now know what not to do.  We know how counterproductive it is to dismiss or demean them.


In that regard I wonder if the moment Hillary lost the election wasn’t with the intervention of the FBI but with her own words about putting, and I quote, “half of Trump's supporters into what I call the basket of deplorables”. 


The clarification that followed and her references to the economic desperation – not quite a “basket of desperates” – did not salve the wound she had opened up.


We need to understand those who supported Trump and why, and what that means for us here in Australia.


Already there’s been so much written and spoken about Trump supporters so let me just go with this picture – think of it as a finger painting a thousand words.


Trump’s supporters are angry. They’re typically male, white, often poor and don’t have a college education. CNN exit polling last week indicated Trump was getting seven in every 10 votes from white men without a college degree. The surprise came in the support he received outside of this group, but this was the foundation of his victory.


It’s a group that feels trampled by the impacts of globalisation and technological change on low-skilled and manufacturing jobs. A group that doesn’t trust the establishment and feels the economy has left them behind.


The rest of the world watched on with some sort of smug and self-satisfied amusement at the circus surrounding Trump, and his supporters, in the lead up to the US election.  But this is a global problem, and a deeper more problematic disillusionment. 


The Post-GFC Economy


One of the most interesting attempts to explain what’s going on comes from three German political scientists – Manuel Funke, Moritz Schularick and Christoph Trebesch.  Last year they mapped the political fallout of financial crises in 20 advanced economies over 140 years.


They found that, after a crisis, voters seemed to be particularly attracted to the political rhetoric of the extreme right and its habit of attributing blame to minorities and foreigners. In fact, they found that, on average, extreme right-wing parties increased their vote share by 30 per cent after a financial crisis.


As they put it, “politics takes a ‘hard right’ turn” after financial crises. Far-left parties had a small but negligible increase in voter support compared to the gains of the right.


In another study in 2010, researchers Markus Brückner and Hans Peter Grüner looked at how economic growth impacted political extremism. Again, little evidence of increased support for left-wing and communist parties. But they estimated that a one percentage point drop in real per capita GDP growth would, on average, increase the share of extreme right-wing political parties by about one percentage point.


Brückner and Grüner drew on a conclusion made by economist Benjamin Friedman to explain their findings. Friedman argued that people were only content with a more open political system if their own living standards improved. Individual well-being was linked to income growth – not just the level of income.


There were some limitations in the first study from an Australian point of view, given it only considered our banking crisis in 1893 and the early 1990s recession – two events a century apart. And the second study looked at 16 OECD nations, not including Australia.


But they beg useful questions: what does the post-GFC economy look like, where do people fit in it and why are they driven to extreme political alternatives? 


The United States


To properly diagnose the problem in the US and then here, we need to go beyond the headline measures of GDP and unemployment to the measures that go to workforce change and where people fit – or don’t fit – in that change.


In the US, many people’s experiences just don’t match up with the overarching state of the economy. US unemployment is below five per cent – back around pre-GFC levels – and the 2.9 per cent headline GDP figure is not especially weak.


That’s all well and good for those securely employed and well-paid, who have a full-time job or who are reaping the benefits from the recovery. But it means squat for those who were mobilised to vote for Trump – the factory worker in Michigan who’s never fully recovered after the factory closed and took his job with it; the parent in small-town Ohio struggling to put food on the table, or the part-time receptionist in Florida who has no hopes of a pay rise or getting enough hours to pay the bills.


These are the people behind Trump’s victory. And while they will all have their own unique reasons to back him, and yes there are some racial and religious factors too, they are united in the fact they don’t know where they now fit in the economy.  For them, the link between effort and reward has been severed. 


There’s been no improvement for them in the post-Crisis economy.  They are victims of America’s changing work force; they are unemployed or underemployed; they are impacted by stagnant wages and income; they are bearing the brunt of increasing inequality and their living standards are falling.


There are so many ways to illustrate this and there’s so much analysis already. So let me just run through a few key numbers and charts before I get to Australia.


The first shows the decline of manufacturing jobs as a symbol of the decline in blue collar work and the changing composition of the workforce.  This has had a significant impact on US men in particular and especially in the rust belt states where Trump performed so well.


The participation rate for men in the prime working age of 25 to 54 has fallen sharply since the 1950s.  There are a few reasons for this – some men are staying at home to be caregivers, going to school or retiring early. But as a White House research paper from July pointed out “much of the long-run decline in prime-age male labour force participation may reflect a concerning trend of reduced labour market opportunities”. That includes difficulty re-entering the labour market after a recession and employers not giving job seekers a chance if they’ve been out of work for a while.


That’s before we get to those who do work, but don’t work the hours they want to. While the headline unemployment rate is relatively low in the US at 4.9 per cent, the U6 measure, is almost double that at 9.5 per cent.


This measure, often referred to as the “real unemployment rate” is a US proxy for underemployment. It takes into account discouraged workers, all other marginally attached workers and those who are part-time purely for economic reasons.  On that measure, underemployment is still worse than before the GFC.


One of the key grievances from Trump’s supporters was that they weren’t getting reward for effort – their wages were stagnating.  The Economic Policy Institute in the US indicates that nominal wage growth since mid-2009 has been low and flat – bad news for workers and for the economy. The think tank suggests the annual year-on-year growth figure of 2.8 per cent needs to be more like 3.5 to four per cent to meet the US Federal Reserve’s two per cent inflation target and help improve real wages growth.


There are also distinct pockets of people in the US who aren’t seeing their wages grow as fast as others. Whether that’s because of their education level, where they lived or whatever other reasons, it was enough to drive them to back Trump.  This is partly (but not exclusively) a story about those without a college degree.


This Pew Research Center graph shows that in 1979, people who only had a high school diploma typically earned 77 per cent – about three-quarters – of what a college graduate made. By 2013, that had fallen to 62 per cent.


That’s one aspect of the inequality stalking the US economy.  Another is what can be seen in employees’ wages as a share of gross domestic income, where there’s been a steady decline since the mid-1970s and real median household income is no better than it was at the turn of the century.


Harbingers Here


We like to think we’re insulated from the extreme political polarisation seen in the US and Europe, because of certain safeguards in our political system like compulsory voting, 25 years of continuous economic growth, and a current headline GPD figure of 3.3 per cent.  Our extraordinary performance during the GFC means we didn’t have the skills and capital destruction the Americans experienced – a policy triumph.


But there is enough in the Australian data about people’s place in the economy, beyond these headline figures, to sound a serious warning that the economic preconditions for Trump’s victory are showing up here as well.


Our workforce is changing in similar ways to the US, especially when it comes to manufacturing jobs. 


Our headline unemployment rate ignores the fact that more than 1.1 million people can’t get the hours they want at work.


Our underemployment ratio sits at 8.7 per cent – the highest level on record since the data series began in 1978. This is in line with the latest jobs figures, which showed there were 53,000 full-time jobs lost in September – the most in a month for five years. That brought the total number of full-time job losses this year to 112,100.


In its latest Statement on Monetary Policy, the RBA highlighted concerns about this, finding part-time work accounted for all of the increase in jobs this year and more than two thirds since 2013, and that people were likely being forced into part-time work because they couldn’t find a full-time job.


Wages growth for those in work is at record lows. The Wage Price Index is only growing by a little over two per cent annually, down from highs of more than four per cent from 2007 to 2008 and the worst since this stat has been kept.


Real Net National Disposable Income Per Capita, a proxy for living standards, grew in Australia by 0.2 per cent in the March quarter but remains 1.9 per cent below the level it was at the 2013 election.  So living standards have declined.


As has the labour share of national income. The Chifley Research Centre has done lots of great work on inequality and I encourage you to read the material from Wayne Swan and Michael Cooney. In a recent report they adapt ACTU research to show middle Australia is missing out on a growing share of income growth. And separately Andrew Leigh has found that inequality here is at a 75-year-high after you account for the spike around the wool boom of the 1950s.


Underpinning all of this research is the fact people who are being left behind by the economy don’t feel like they are getting a good deal.  Now let’s take one measure and graph the US and Australia together.


Consider that since the early 1990s, the top 20 per cent of US households have been receiving a greater share of aggregate income than the middle 60 per cent. And it’s only been getting worse since.

Now consider the same measure in Australia. For us, the crossover point only occurred recently – in 2013/14. But the latest data shows the top 20 per cent now has 48.5 per cent of income, while the middle 60 has a per cent less than that, having held more than half the total share in the late 1990s. 


We are twenty years behind a troubling American trend, but we got there.


Three Paths


In Australia the main beneficiaries of all these economic developments are in the Senate and especially One Nation.  People forget Pauline Hanson is a serial political candidate who was unsuccessful in nine elections before being elected this year. Her national support is in the single digits, but the fact she entered the Senate with three colleagues is enough to trouble us all.


When it comes to One Nation there’s a clear and necessary distinction between understanding the motivations of the follower and not excusing the behaviour of the leader. 


Hanson’s entire political career has been built around finding scapegoats to explain peoples’ anxieties. In the 1990’s, it was Asian immigration. Now it’s Muslims.


But the people who are drawn to her hateful rhetoric share the same economic fears for themselves and their families as those who backed Trump in the US.  And, while there isn’t as much analysis done on Hanson’s supporters as Trump’s, we know they are similar – typically older, whiter, less educated and more likely to be displaced workers.


That goes to the core of my contribution today, which is this: If you care about the economics I’ve described, and if you understand the deeper disillusionment driving people to political alternatives, we have three options.


The first is the sneering, snobby disdain for Trump and Hanson supporters we get from the Greens and the far left.  This is a trap that candidate Clinton fell into as well with her “basket of deplorables” gaffe. 


Our problem is with Hanson, not her supporters. We can understand their frustrations and reach out to them without excusing her hatred, vitriol and racism.


Arrogantly attacking people with real fears and real economic concerns will make things worse. And it won’t address what I consider the economic basket of deplorables – that collection of troubling data I ran through. Things like stagnant wages, like rising inequality, like rising underemployment, and more.


So that’s the first response and it’s counterproductive. 


The second strategy – to try to imitate or out-do Trump or Hanson on race – is equally so. 


This is the strategy the Turnbull Government has adopted with that unnecessary lifetime ban on asylum-seekers who try to come to our shores by boat. No wonder Hanson was so quick to point out in this tweet that the Government was marching to her party’s tune.


Neither of the first two choices – sneering disdain or focusing on race and religion – will work because they ignore the fundamental drivers of this problem. The third strategy might and it’s the one we in the Labor Party are focused on.


It’s the only reasonable and sensible response – to do more to understand and address the economic reasons behind support for Trump and Hanson and those like them and to find a place for them in the open economy articulated and defended so well in recent weeks by Penny Wong and Chris Bowen.  Not to put up walls, or to turn inwards, but to make that open economy work for more Australians.


Not just to say to those who have been driven to the fringes that we know they are hurting; not just letting Hanson’s supporters know that they have a right to be angry, that they have a right to feel let down. Not just saying to Pauline Hanson’s supporters: “we hear you loud and clear.” 


It begins but does not end with understanding.  It requires us to fill the leadership vacuum the Government has created. 


It was the economist John Kenneth Galbraith who said that “all of the great leaders have had one characteristic in common: it was the willingness to confront unequivocally the major anxiety of their people in their time.”


We know what the anxieties are. We know there’s enough in the data in Australia to trouble us that we could be seeing the harbingers of the economic conditions that led to Trump’s shock rise.  Less dramatically and later, but they’re there.


Historically we’ve been protected by a strong social safety net, by means-tested transfer payments and a decent social wage and health and education services. Our industrial relations settings, including solid minimum conditions, penalty rates and employment standards, have buttressed us.


But each of these pillars is now under attack. 


It’s bad enough that the Government isn’t addressing the economic undercurrents that are driving people to One Nation. But what’s worse – and inexcusable, really – is that it’s actually accelerating and exacerbating the problem.


With these alarm bells ringing in our ears, the absolutely worse things the Government can do is hollow out health and education, attack penalty rates, go soft on tax avoidance, and push through with a $50 billion tax cut for big business that we can’t afford.


Governments needs to make decisions that underpin the right kind of economic growth – that which is inclusive, which creates jobs, which encourages participation in our economy from all demographics and attacks inequality and social mobility.


If we don’t listen, if we don’t learn, if we don’t put all our energy into this task, if we don’t find a place for them in the economy, if we don’t get closer to those we represent, more people will head for the polar extremes of politics, there will be more Trumps and more Hansons, more supporters with nothing to lose.


It’s for us to decide how far down the American road we go – economically and politically.  It will be difficult enough to explain to our kids how Trump and Hanson came to dominate the politics of 2016.  But harder still to say we misdiagnosed the problem or did nothing about it or had choices and made the wrong ones.