There has been much talk in the last few weeks and months about intergenerational fairness, in part because of the release of the government’s Intergenerational Report, which predictably details what young Australians already know: we have been shafted over the last two decades, and face an economic future much tougher than that experienced by our parents’ generation. The government’s report will identify the massive challenges ahead for our economy and indeed the very foundations of the social contract that we came to take for granted in the modern pre-global financial crisis era.
As detailed in my last post and the recent Grattan Institute report entitled ‘The Wealth of Generations‘, we have seen that for the first time since the Great Depression, this generation enjoys lower living standards than the last, as the long assumed inevitability of narrowing wealth inequality has reversed course in the last few decades, in particular since the GFC, and primarily thanks to our obsession with housing speculation and the resulting land price inflation. In announcing the report’s politicised findings, the Abbott government has predictably and falsely focused on a legacy of public debt as the “intergenerational theft” that we must be rescued from. But this narrow ideological perspective is of course complete rubbish.
As pointed out by many economists and commentators, though largely ignored in the mainstream, the intergenerational theft that is the legacy for Australian youth is not public debt, it is the mountain of private debt that is at the heart of our new banana republic. Like most countries in the wealthy industrialised West, we can no longer claim to have a mixed economy, with Australia now exclusively representing the resource rich, de-industrialised, finance driven, debt riddled, plutocratic Ponzi scheme that we built ourselves over the last two decades in service of the baby boomer generation. A two-horse political-economic system that “made way for mining” and massively gambled on inflated land prices has driven up the cost of everything in the economy, and the currency along with it, to the point where our own economic “success” has put us out of business, and made us grossly uncompetitive and unproductive. We have an extreme form of Dutch Disease that will be immortalised as the Aussie Ailment in future legend.
We no longer make things. Rather, through the harvesting of barely taxed mineral wealth and singularly unproductive speculation on land prices, we extract economic rent from the ground we walk on, privatising the value of community endeavour and public infrastructure around us, while diminishing the common wealth and leeching the real economy of productive capacity and value in order to enrich the few at the expense of the many. In this respect, the only difference between Australia and other backward economies, is that instead of the only beneficiaries of our system being a tiny ruling elite, the landed-gentry have also assumed the role of oligarchs, hoarding the wealth extracted from the land and the commons in something more resembling feudalism than social democracy.
Our feckless leadership and media now exist almost exclusively to maintain this teetering economic structure, and to convince us that we are exceptional, that we have a world class economy, and that rent-seeking is the natural order of things that will enrich us all. They serve this end above all else because they are literally on the payroll of the housing sector, with the big finance, real estate and development industries funding the activities of political parties and generating profits for print media. The ICAC proceedings in NSW last year proved that the primary sources of corruption in our democracy are the many and varied interests that circle land, its development, and the capture of its naturally increasing value in windfall gains to private ownership and corporate profits. It is also true that the only remaining profitable sector of large print media is real estate advertising. How can we therefore trust politicians and mainstream economic journalists to speak truthfully about our banana republic, when effectively they are all now in the real estate business?
Our broken economic model, the tragedy of youth
I’ve been saying it for a long time: there is no budget emergency, but there is an economic emergency, which in the near future will likely become a budget emergency, an unemployment emergency, an income emergency, a deflation emergency, and of course a housing market emergency followed by a possible financial emergency, as the once-in-a-century commodities boom unwinds and lays bare the harsh reality of our economic fundamentals (or lack thereof). The mounting challenges faced by our economy are structural in nature, not cyclical as usually argued by the body politic and the cheer-leading economic press.
It is not confidence and a balanced budget that our economy lacks, it is a means of generating viable, competitive and sustainable economic activities outside of mining, housing and banking. We literally bet the house on an assumption of endless demand for rare earth, proceeding under a special kind of cultural exceptionalism , as the misappropriated notion of the “lucky country” led our leaders, regulators, industry, media, academics and the wider public to believe that this time it really was different, that the boom would last forever as a “new normal”. A thoroughly discredited notion that thousands of years of economic history has not once failed to disprove.
Thus the tragedy of youth today is not unaffordable housing and an uneven share of wealth distribution, but rather our fast failing economic model. A model which is now built almost exclusively on leveraging the income from resource extraction and using it to borrow offshore funds to be pumped into housing and land, which is then paid forward into construction, consumer spending and employment, owing to the pyramid-like phenomenon of the “wealth effect”. An effect that only works as long as there are new entrants to the pyramid to maintain ever-escalating land prices.
A vast array of tax, monetary, political and regulatory settings must therefore exist purely to ensure these escalating prices and to keep the giant imbalanced behemoth propped up. And that really is it, the sum total of our economic system in this late neoliberal era. Almost all other economic growth outside of mining indirectly stems from the demand for mortgages and land, with recent figures showing that almost 100% of new credit creation since the GFC went to housing loans, rather than business lending for productive investment.
Worse still, (and little understood by the public and partisan commentators) is the fact that the government of the day is forced to work towards a balanced federal budget in order to maintain our AAA credit rating, which enables the price of offshore credit for housing to remain cheap. Without this implicit guarantee of bank funding costs, the house of cards comes crashing down, as will likely happen when the next global shock forces our public debt levels through the AAA cap of 30% of GDP. Our leaders and regulators know this, but dare not put a name to the beast, instead hiding behind the false claim that public debt is the disease, whereas the unprecedented private debts owed to offshore lenders to maintain escalating house prices are the real danger, and the real reason to be concerned about budget deficits. We have permanently altered our political economy in order to maintain this precarious balance, and thus delay the inevitable unwinding.
David Llewellyn Smith from MacroBusiness calls this new order the politico-housing complex. Our whole country is now utterly reliant on ever increasing demand for mortgages, a classic Ponzi scheme which is only held up by and in service of the rent-seeking actions of our complicit leaders, big business, regulators and land speculators, which like all Ponzi schemes, must eventually collapse under its own weight. Llewellyn Smith explains the fraying at the edges of this model that we are now experiencing:
“[John Pitchford’s] simple argument [that no good case has been made for government intervention to inhibit private debt-creation] became the talisman for three generations of institutional economists. So long as debt is in the private sector, resulting from decisions made by consenting adults, it does not matter. End of story.
Well, 25 years later, with a banking hegemony controlling much of the political economy via an incredible mortgage addiction, wider business utterly dependent upon this one source of demand, a budget held hostage to offshore bank borrowing guarantees, fiscal policy distorted around giveaways to sustain a vast asset quango, interest rates marching inexorably to an Australian ZIRP, households paralysed by the fear of asset-price retrenchment, generations of Australians locked out of housing, as well as competitiveness and productivity persistently, nay, hilariously low, I’m sorry to have to tell you gents, it does matter.
It is not “confidence” that is missing, it is a viable economic structure. Households can sense it (if not see it) in shaky savings overly reliant upon asset prices, and won’t support the model any longer by spending like yesteryear’s drunken sailors. This conservatism is so entrenched that not even the greatest mining boom in history, nor a subsequent house price boom, nor huge immigration, have remotely dislodged it. As a result business faces overcapacity and has no reason to invest.”
A real agenda for Australian youth
So where to from here, how do we fix the broken model at this late stage? How do we bridge the generational divide that puts young Australians at the mercy of the rent-seekers in control of our leadership, regulators and industry, who are determined to extract maximum possible benefits for themselves, until such time as the parasite kills its own host? My belief is that the mainstream left (eg. Labor and The Greens) can shake off the negative historical badge of being “anti-business” by actively targeting unearned income and rent-seeking in their economic and taxation policies, rather than allegedly (unfairly or otherwise) pitting labour against business.
Rather than exclusively talking about big-business paying their share and increasing the tax burden on labour, both parties could seize the political day by pushing for reforms that specifically target the economic “free-lunch” that has so massively distorted our political economy, whether originating from big business rent-seekers like mining companies, polluters and banking monopolies, or the baby-boomers clinging to their negative gearing and superannuation concessions for dear life, oblivious to the unsustainable and detrimental nature of rent-seeking in all its forms. It retards the real economy, inhibits socio-economic progress, worsens equality and living standards, and as described by the recent Murray Financial System Inquiry, places our whole system in perilously close proximity to financial and economic calamity. It takes us away from a dynamic, progressive, diverse, productive and competitive society to one of narrow parochial interests where unproductive middle-class speculation is the name of the game and Peter is robbed to pay Paul.
This is why I believe that there is currently no genuine agenda for Australian youth, indeed for the future of all Australians, until we face up to and reform our backwards economic model. Destroying rent seeking, land speculation and monopoly power in their many forms is the best way to save future generations from our broken political, economic and financial systems, and should have obvious appeal to the left and the right, were it not for their conflicted interests and demonstrable corruption. Its the only logical solution to this very real intergenerational theft.
Until we can remediate our political-economy to be open and dynamic, and rewarding of genuine endeavour and productivity, agreeing on a progressive middle ground, what hope have we for addressing the really big-picture intergenerational challenges? Climate change, environmental degradation, resource depletion, sustainable economies in a world with real limits to growth, ruinous and corrupt financial and monetary systems, loss of hard-fought freedoms and civil rights, severely degraded democratic institutions, poverty and the ills of globalisation, perpetual war? As proven in the fallout to the global financial crisis, progress towards these highest order priorities for human survival and prosperity are the first things to be cast aside when financial and economic crisis strikes. People reflexively hoard resources and disengage. Fear causes us to shy away from tough political issues, because the hierarchy of needs ensures that there is a necessary focus on survival and preservation of wealth in preference to the greater common good.
That is why addressing our addiction to land speculation and it’s many sponsors is the first step in restoring political engagement and progress. I have many well-researched recommendations to offer towards this end, but will save the listing of a full reform agenda for another time. Rather, I want to point out that we can create a genuinely progressive political manifesto by simply adopting the recommendations of the last tax system enquiry, the last financial system inquiry, the last housing affordability inquiry, the last climate change enquiry, the many economic studies on the end of the mining boom and for good measure, instituting a federal political corruption enquiry (ICAC). These detailed reports and their recommendations must be the bedrock of true reform, and it is criminal that they are completely neglected by our leaders and regulators. We have a mandate from our country’s foremost experts to deliver progress.
Yet our leaders are terrified of identifying the common narrative that the electorate and our collective experts are crying out for: the New Deal 2.0. We can start now, or have it thrust upon us by the inevitability of economic, financial, social and political breakdown, from which point the road to reform will be unthinkably challenging.
So where is the youth party who recognises the need for compromise and rational discourse? The small-l liberals looking out for young Australians in preference to rent seekers? The mainstream conservatives are a nepotistic, short-sighted species of cronies, while our mainstream left are wounded, gun-shy, and economically incoherent panderers. The left will not save us while they refuse to stare down the interests of the politico-housing complex and the exceptionalism borne of our staggering emergent wealth. The left and the right must both embrace genuine progressive reform to our taxation, economic, financial and political systems in order to once again represent the interests of all generations of Australians, not just those fortunate enough to have disproportionately benefited from the forces of financial deregulation and the largest economic boom in 100 years or more, both of which have now left us facing destitution.
We must question the assumption that the means and nature of our current wealth are fair, sustainable, productive, and even real. Only then can we define what the future looks like, and end the last 7 years of uncertainty and disintegration of our political economy and rediscover the country that once celebrated egalitarianism, shared sacrifice and hard work.
To that end, I believe that Australia needs a new mainstream political force to put forward a comprehensive and progressive true liberal agenda, a manifesto that would capture the voting force of a whole generation and more, and leave the mainstream parties for dust. And young Australians must take to the streets and the halls of power to create it, and finally stand up and demand change from the old guard, for everyone’s sake.