The Global Financial Crisis: Ten Years On – my speech at the Australian National Press Club

Thank you very much indeed for inviting me today – what a great honour it is to speak to this National Press Club. In the drinks reception beforehand, it was very humbling to see the pictures on the walls of the very distinguished Australian, and also international, speakers that you’ve had here in this club over, now, very many years. Although in this pantheon of speakers, having been both a Cabinet Minister in Britain and a former professional dancer I suspect may make me unique!

Thank you very much indeed to the press club and also to Wayne Swan MP, the Australian Institute and the Chifley Research Centre for inviting me to come to Australia. Our tour, talking about the financial crisis and the lessons we have learned and must learn, is important for the reasons that Wayne has talked about today and that I’ll now expand further upon.

Wayne is right to say that both of us have had long and varied Treasury careers and have worked closely together over the years. He is the third longest serving Labor Treasurer in the history of this country, with more than six years at the Treasury. I managed more than eight years at the Treasury in the UK as a Minister and Chief Economic Adviser. Gordon Brown, when he was Chancellor of the Exchequer in Britain, used to joke about the Latin American Finance Minister addressing his Cabinet colleagues during a crisis and saying ‘friends we’ve come to the edge of the abyss and now it’s time for a bold step forward’. It’s often the case if you are a Finance Minister that you are faced with rather unpalatable choices. And we have both experienced both rich political lives and the political death of losing our seats.

 

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If you’d said to me in 2015, when I lost my seat, that within two years I would be nominated for a BAFTA Television Award for the Television Moment of the Year – dancing Gangnam salsa with a 26 year old Russian professional woman dancer – I wouldn’t have believed you. On the other hand if you’d told me that Jeremy Corbyn would twice be elected leader of the Labour Party, David Cameron would lose a Referendum and Britain would be leaving the European Union, George Osborne would become editor of the Evening Standard and Donald Trump would be President of the United States I wouldn’t have believed you either. It’s been quite a destabilising couple of years. Although unlike Donald Trump, I like to think I understand very well that reality TV is rather different from governing – and I hope that this is a lesson he will eventually learn as well.

What turbulent times – a Prime Minister under real pressure, being driven day to day by destabilising events; a coalition in trouble; and a party divided, trying to resolve issues through public plebiscite because you can’t get a consensus in your caucus. So it’s very good to put British politics aside and come to the relative stability and tranquillity of Australian politics as I have been experiencing over the last few days!

The very first time I came to Australia was at the beginning of the 1990s. I was a journalist at the Financial Times and already working with Gordon Brown, and I studied firsthand the work which had been done here by the Hawke-Keating period of Labour Government – the era of the Accord. It was a very important period because, in contrast to the Thatcher-Reagan approach of that time – often called the Washington Consensus, the view that a smaller state, privatisation and deregulation was the right way forward – what you had here in Australia was different. The Accord embodied the view that you could work with the market economy and deliver stability in the economy but that you could also make the economy work for working people; that you could have a welfare state and pensions which people could rely upon; and that government working with business and with trade unions could deliver rising living standards for all. And those lessons from the Accord shaped the

early period of the UK Labour Government after 1997 as we tried, through central bank independence and a national minimum wage, tax credits, investment in the health service and our welfare to work policies, to learn from that Australian experience. We had some marked success over ten years in terms of delivering stability and rising living standards.

And then ten years ago we had the Global Financial Crisis, which Wayne has already talked about, and which unleashed a period of slow growth, stagnation in wages and rising inequality – not just in Britain, but in America and many developed countries. And it has spawned a negative political reaction to politics and to politicians resulting in political instability and uncertainty and some of the unexpected events I referred to earlier, not least the Referendum defeat which we saw in Britain last year over our membership of the European Union.

 

 

It’s been a very difficult and destabilising time and the effects of the crisis continue to challenge us. And as Wayne says, it is important that we learn the right lessons. I believe he is right that we learn by challenging our assumptions. Wayne asked ‘what were the things I thought about the world, and where were those assumptions wrong?’ I’m going to take up Wayne’s challenge and try to prove that I can learn and am not one of his charlatans.

There was three different assumptions I had about how the world works when I came and studied the Australian economy in the early 1990s – assumptions which were shared not just by progressive governments but by many politicians of left and right – about how our economies worked throughout the 90s and the 2000s before the financial crisis.

Assumption one was that the main source of instability in our economies came from governments making mistakes – too much inflation, too much deficit spending – and that if you had a sound approach to monetary policy and got your fiscal policy right that was the best way to ensure stability in the economy. The second assumption we had was that, with globalisation accelerating but also with technological change, our challenge was going to be stopping people on the lowest incomes, people with lower skills, falling behind – that most people in the middle would be better off, but the unskilled would fall behind in this world of new technology. And third, that globalisation, which in the 1970s had been about the movement of money around the world, was going to be about the movement of goods – that trade would be challenging because companies would move their production from Britain or America or Australian to India or China, and the issue was how would we deal with that off-shoring.

I believe that the political reaction in the last 10 years, which we are still dealing, comes from our misunderstanding of all of those three assumptions. First of all, and most simply, we had a global financial crisis at a time of low inflation and relatively low national debt. We were all pursuing pretty sound monetary and fiscal policy and we didn’t see the instability which came out of the financial sector in American and also around the world. We didn’t see that it was regulation and the lack of tough regulation which would be the source of instability rather than inflation or fiscal mistakes. The consequence of that was a Global Financial Crisis.

The second thing that we didn’t see was that inequality wasn’t going to be, as we thought, simply about the bottom falling behind. In Britain from the early 2000s, from America from before that and maybe Australia more recently, the issue has been that people on the highest incomes have seen their incomes shoot ahead while medium earners, people in the middle, have seen their wages

stagnate as well as people on the bottom. And in terms of jobs and technology we’ve seen an absolute increase in unskilled jobs, an absolute increase in high skilled jobs and an absolute fall in middle skill, middle wage employment. If you think of a bank, today it will have as many top paid executives and as many cleaners, drivers and security guards as twenty years ago, but many fewer people doing middle skill, middle wage jobs which are being displaced by sophisticated technology. And the biting of technological change into middle incomes was a surprise to all us.

Thirdly, in the case of the UK certainly, globalisation turned out to be not only about money and trade but also about the movement of people. We’ve seen migration of people on a much, much bigger scale than any of us expected in the 2000s. And when you look in Britain and in America – at the election of Donald Trump or the Referendum on the European Union – the top issue was people believing there was insufficient control and management of migration. Again it was an issue we didn’t foresee.

The question is how do we respond to all of these pressures? Because the reality is that the governing elite didn’t deliver stability; people who thought they worked hard and played by the rules on middle incomes saw their wages stagnate; and globalisation has often got the blame, sometimes because of trade and off-shoring but certainly in Britain and America with blame aimed at migration.

 

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I think there are two mistaken reactions you can take to these challenges. One mistaken reaction, which you still hear quite a lot, is that if we just put our heads down and wait it will all be okay in the end and we can get back to the way things were before. I don’t think that’s going to work. You can see the direction our politics has taken in Britain. Simply hoping that right of centre governments can go back to a more free market view isn’t going to work, it’s not going to solve that wage stagnation and that discontent.

But the opposite reaction, which is to think let’s swing to nationalism, turn away from globalisation, embrace populist solutions, is also a catastrophe. That is the route to low productivity, to low wage growth and rising global poverty. So turning away from working with business and trade and the rest of the world isn’t going to work either.

This goes to the crux issue about Britain’s relationship with the European Union. There was a problem in Europe, we did need to sort out the issue of free movement because migration was a problem, and telling voters they had to accept more of the same was not going to work. But if the alternative comes down to turning our face against our major trading partners, that’s clearly a pretty catastrophic thing to do. And that’s what the British Government is now attempting and struggling to avoid in its negotiations.

I think instead, looking at those three things we got wrong, that there are three important positive lessons we should instead learn.

The first is that you’ve got to make sure that you have policies which deliver stability and growth for the future. And as Wayne said here in Australia, and in Britain too, back in 2008 we did take action to sustain growth at the time of the financial crisis. Wayne’s fiscal stimulus was the right thing to do, he was right to carry it on. We made the mistake in Britain if stopping it prematurely in 2010. Wayne stuck to it at a time when it was a difficult and unpopular thing to do. And it’s very interesting to me now, coming to Australia now and reading on the plane, reports this year from the IMF and

from the OECD both telling Australia that if your economy slows down this year the government should stand ready to use active fiscal policy to support growth. So here in Australia in 2017 and 2018 it does sound to me that – perhaps belatedly – Wayne Swan is winning the intellectual argument about the importance of fiscal activism. But the reality is there has not been enough action since 2010 by governments together to sustain and promote growth in our economies. And without growth, it’s very hard to deal with political discontent.

 

Second, we’ve got to find ways in which we can increase the earning power of medium as well as lower skill workers. We’ve got to find ways in which we can make our economy work more fairly. We need to make sure our tax systems, our welfare systems and labour market rules, our education and public services, support wage growth of people on middle and lower incomes and make our economies fairer. I’m very encouraged by the speech that Labor leader Bill Shorten made a few weeks ago, putting this issue of inequality at the centre of the debate here in Australia. I think it’s vital that we do so.

Third – and is where I take a different approach from the populism and the policies which are being put forward in America and sometimes in Britain as well from the hard right and hard left – I believe we can only do this by international cooperation. If we turn away from the global economy we will be cutting off our nose to spite our face. The way we will solve issues of fair multinational company taxation, climate change, sustained growth and fair trade is through international cooperation – countries working together rather than standing aside and saying one nation first is the right approach.

So this is my concluding point.

Australia and Britain have always been societies and economies which are open and outward looking and internationalist, embracing of trade and new ideas and people coming to our countries to work and contribute, and that’s got to continue. We’ve also been countries which have always taken seriously our obligations to the rest of the world, and in particular to developing and emerging market economies who need to become more part of the global economy to proper and reduce poverty. And third, we’ve always been countries which knew we had a responsibility to our own people to deliver fairness and social justice.

And those three attributes must be keep at the centre of our thinking as we face up to the challenge of the global financial crisis ten years on. I believe that without international cooperation between our countries, we won’t be able to solve these problems and rise to that challenge. That’s why I was really proud to be asked to come here with Wayne, the Australia Institute and Chifley Research Centre to start talking about how we navigate a progressive course between neoliberal stagnation and inequality on the one hand and destructive, nationalist populism on the other. Let’s make sure we deliver in the years to come.

This is an edited version of Ed Balls speech to the Australian NPC. A full transcript of this speech, the speech by Wayne Swan and the Q and A is available here.

Posted August 17th, 2017 by Ed