An ideological war will ravage Australia

A grand compact between unions and business is needed to usher in the economy's structural transformation, but such long-term vision is likely to be a casualty of ideological warfare.

Very different political battles are being fought on either side of the Pacific -- something the left of Australian politics has failed to grasp.

Yet if Labor, the Greens and the unions fail to understand the real situation, it's quite possible that they will win their local battles, but utterly lose the war for the nation.

To see why, we first need look east across the water.

In the US, firebrand Democrat senator Elizabeth Warren is winning plaudits campaigning for would-be senator Natalie Tennant in the normally conservative state of West Virginia. Her recent performances are gaining national attention.

Warren's speeches rail against big business, the Wall Street financial community, and complacent politicians, including those on her own side of politics.

In a speech two days ago, she passionately intoned: "We believe that no-one should work full time and live in poverty ... our job is to fight for the families of America."

Well that sounds reasonable enough. If the most advanced economy in the world can't lift its own workers out of poverty, there's a problem.

Actually, there is a huge problem with the working poor in the US. Around 30 per cent of American families have incomes below 200 per cent of the income defined by the US government as the poverty line, and around 10 per cent of families fall below the poverty line itself.

The US government defines the poverty line for a family of four as being an income below $US23,850 in 2014.

Australia is doing much better.

The Melbourne Institute of Applied Economic and Social Research publishes quarterly estimates of the poverty line in Australia. Its definition is substantially more generous than the one used by the US government. For a family of four, including housing costs, the December 2013 figure is an annual income of $49,192 ($US46,240) or excluding housing costs, $38,064($US35,780).

The Australian Council of Social Service puts the percentage of Australians living below the poverty line at 12.8 per cent, but that cannot be directly compared to the US figure of 10 per cent.

If Australian dollar-figures were used to measure the working poor in the US, roughly three times as many families would be considered to be in poverty as in Australia.

While that should not be a source of complacency over poverty in Australia, it shows clearly how different the US context is to our own.

Warren is advocating on behalf of American workers who have jobs, but can't live dignified lives on their incomes. She compares their measly incomes to the fat incomes of Wall Street and corporate executives whose collapsing businesses were bailed out during the GFC.

Those bailouts, though largely funded through government borrowing, were underwritten by the tax revenues of 'Main Street' businesses and workers. No wonder Warren is angry on their behalf. 

In Australia things are very different. We have not been through a property market crash. We did not need to leverage the government balance sheet to bail out our major corporations. And even our bank bailouts came at minimal cost.

And all the while, our resources sector, buoyed by demand flowing from China's 2008 half-trillion-dollar stimulus package, boomed.

In many cases, such as the building industry disputes highlighted by Robert Gottliebsen (Appeasing unions is taking its Toll, July 16), unions here are seeking not 'dignified' lives for workers, but incomes much higher than many other skilled workers -- teachers and nurses spring to mind.

That's a problem, because while present-day Australia is nothing like the US in terms of wealth creation, distribution and poverty, things will get tougher in the years ahead.

The 75 per cent boom in the terms of trade over the past decade (see chart below) must decline, and the economy must go through a huge structural transformation if we are to maintain real wages at anything like their boom-time highs.

Graph for An ideological war will ravage Australia

Economists know this, but both sides of politics pretend it isn't happening. The Abbott government has managed to get the entire nation fixating on the carbon tax and an imaginary 'fiscal emergency', when the real debate should be on how to develop new, competitive trade-exposed industries to help maintain our lifestyles.

Again, this is where we are very different to the US.  Fed chair Janet Yellen this week reaffirmed the Federal Reserve's continuing commitment to ultra-loose monetary policy, saying that wage growth "has been nonexistent. We have seen a steady shift of national income from labor to capital, and there is room for wage gains before we are worried [about inflation]".

But at least Yellen thinks there is real wage growth ahead. The US economy is not recovering as quickly as she'd hoped, but America's working poor should fare better over time.

Meanwhile, in the fantasy land on the other side of the Pacific, practically nobody heeded the warning of former AWU boss Paul Howes in February, when he called for 'grand compact' between business and labor to help us make the giant structural adjustments that lie ahead.

As described at the time, Howes was calling for the contemporary equivalent of the Wages and Prices Accord struck between business, government and the unions in the late 1980s, a compact that allowed unparalleled economic reform and productivity growth (Howes' grand compact is urgently needed, February 6).

For this he was pilloried by the left. Greens lower house MP Adam Bandt said said at the time: "Paul Howes should resign as union secretary and join the Liberal Party if he is going to just parrot Tony Abbott’s attack on people's wages."

What that view overlooks is that the attack on people's wages and jobs comes from outside Australia, not from the Abbott government or from the now rather bruised Mr Howes, who has recently taken a new role as a director of KPMG.

We are seeing jobs tumble in resources, auto manufacturing, aluminium smelting, retail, manufacturing more generally, and even in pockets of the banking and telco sectors. Much of that decline is hidden by the still-benign headline unemployment rate, but under-employment is rife.

It was heartening this week to see a 3.4 per cent bounce in the ANZ-Roy Morgan consumer confidence index -- it's now 'only' 6 per cent below where it was pre-budget -- which hopefully will bring some relief to the non-tradeable sectors of the economy.

However, it will not solve the longer-term problems described above. Many of the tradeable sectors are in trouble, and it is these we rely on to fund our strong appetite for imports.

Fixing those sectors -- or growing their replacements such as better food-processing or advanced manufacturing -- will require something like a grand compact between business and unions.

Howes' successor at the AWU, Scott McDine, already seems to be ruling this out, telling The Australian that "while the grand compact is a good idea, I am somewhat more of a pragmatist ... I don’t think practically at the moment we will be able to engage in this process".

Yep, that's right. The unions are digging in. Abbott's more blinkered IR warriors are digging in, and what fun the battle will be -- until we see the results.

When Howes made his very frank speech, which included noting "traitors" in the Labor movement that are being exposed during the royal commission into union malfeasance, I praised it as "historic".

I stand by that assessment. However, it is looking increasingly like a historic fork in the road, with the Labor leadership of Bill Shorten, the unions and Greens also staunchly refusing to take 'the road less travelled' --  the road Labor's greatest reformers took in the late 1980s.

And as the famous Robert Frost poem goes, we will look back one day and say -- in this case with great sadness -- "that has made all the difference".