With the world currently in the process of tearing itself apart piece by piece as the failed Western neoliberal project succumbs to the internal contradictions and terminal imbalances of unfettered globalisation, finance capitalism, and residual and covert imperialism, you’d be forgiven for missing the devastating and cynical betrayal of young Australians that recently happened right under our noses. It escaped the attention of our myopic and clueless presstitute media for nearly four months.
But before I discuss that betrayal, which at first glance seems to be just garden variety political neglect and bastardry, let’s first remind ourselves of the report released earlier this year by the University of Melbourne into the state of income and wealth equality, retirement outcomes and home ownership in Australia. The HILDA (Household, Income and Labour Dynamics in Australia Survey) report, which rightly garnered a huge amount of attention in the media and commentariat, laid bare exactly how far down the path of class warfare that Australia has travelled.
Almost by stealth over several decades, short-sighted, self-interested and often corrupt decisions have been made in all offices of power in this nation to restructure our entire economy and society toward the extreme and nearly exclusive benefit of landowners, rentiers, and those that seek to extract unearned windfall gains from the fruits of our considerable prosperity. We have created a system wherein the tax burden for land speculators is less than that for workers, innovators and savers. Far less. Indeed, the tax burden on land is often negative. We actually reward landowners and speculators while punishing workers, innovators and savers.
This is a balance that has striking similarities with the Gilded Age of the late 19th century, wherein landowners, monopolists and creditors (the modern equivalent of the medieval ‘Robber Barons’) bled economies dry to such an extreme extent, that capitalism itself was reinvented, giving birth to the Progressive Era, which attempted to save the world from the grip of rentiers. Few today would recall that the origin of the term Progressive, as used in political context, was this tumultuous moment in the history of industrialisation. The leftwing or so-called progressive parties in today’s world have all but abandoned any pretence to protecting society and the economy from contemporary Robber Barons and rent-seekers.
The progressive reinvention of capitalism was only possible after decades of resistance by the rentier class to classical economic reform, just as we are now witnessing the resistance by central bankers, global finance, mainstream economists and the landed gentry to fundamental and overdue economic reforms. Numerous economic shocks were required before their strangle hold on society was destroyed. This series of shocks finally culminated in the Great Depression, where an unprecedented destruction of wealth saw the old rentier capitalist temporarily consigned to history. The undeniable conclusion being that as effective as such resistance is, it is ultimately self-defeating owing to the instability it creates.
Many alternative readings of history have made prescient comparisons between the social, economic and political imbalances in that era that eventually led to two world wars, and the defining imbalances and geopolitical forces in the current neoliberal era. The dividing lines in the great class war of the Gilded Age and the Progressive era may differ from today’s more subtle breakdown of ‘winners and losers’, but it is nonetheless the same principles of economic rent and it’s capture that define who belongs to which class.
In Australia, the debate about class and wealth inequality has been more recently framed in generational terms, and as the HILDA report shows, there is undeniable proof that economic and political inequality has a significant intergenerational aspect. But there can be no mistaking that just as in the late 1800s, this is a set of inequalities that fall along class lines, as they ever did, and which must be understood as a new manifestation of an old class warfare – the war between the landed gentry and the landless proletariat, and the closely associated war between the new creditor aristocracy and the enslaved debtors.
We now have greater proof than ever that growth in wealth (and therefore overall living standards) in the last several decades has almost entirely flowed to Australians over the age of 50, with the youngest cohort’s net wealth actually going backwards during the same era. This is hardly news to most, and has already been confirmed by many other recent reports. But the real proof provided in this particular report is that falling rates of home ownership, in particular amongst the younger demographics, is directly correlated with falling levels of relative wealth.
This is a crucial and entirely unsurprising relationship in a country where the notional value of our housing stock is roughly 3.5 times our entire GDP, almost the highest in the world despite being a country with the lowest population density in the world. This shameful fact should finally put to bed any denial of the growing wealth divide in Australia, and it’s undeniable demographic manifestation.
The normalisation of political betrayal is class war
Home ownership in this age has become a near universal prerequisite to wealth accumulation, and is thus a proxy for wealth inequality. Before we further explore the causative relationship between home ownership and wealth inequality, lets return to the cynical betrayal that I mentioned earlier, being on the specific subject of home ownership.
Last year, the Australian House of Representatives established an inquiry into home ownership, one of innumerable similar inquiries over the last few decades to attempt to understand exactly where Australia’s housing policy, like much of the developed world, is going wrong. The inquiry received comprehensive and broad ranging submissions from across public, private, academic and industry sectors. I personally submitted my barnstorming thesis on the housing crash we had to have, an entitled Millennial rant that drew much interest from the committee members. I asked the oft ignored question in this debate: “Who will teach young people about risk?”.
In total there were 65 published submissions and 7 public hearings into this nation-defining issue. This inquiry had the sufficient terms of reference, and contributions from a broad and deep enough level of expertise and analysis, for it to reveal all kinds of uncomfortable truths about Australia’s giant social and economic fracture, and the innumerable but politically unpalatable solutions. Even the conservative chair of the inquiry John Alexander expressed disappointment at it’s discontinuation, or more accurately, the failure for its existing findings and report to be published.
This craven excuse for a government has therefore chosen to suppress the findings and recommendations of what amounts to the only inquiry into the state of wealth inequality in this country, for fear that it would be compelled to act. This is not just about the now widely acknowledged and generation-long lip service paid to solving housing affordability in Australia. This is about the great unspoken class war that has snuck up on Australia in much the same way as it has in the rest of the developed world over the last three or four decades.
So where are the landless masses marching in the streets? If only the new Australian underclass collectively understood and organised against the conscious decisions being made day after day in the halls of power to continue waging this war, in order to preserve our newfound class structure. The insidious nature of this particular class war is such that as the ranks of home ownership change over the years, so do the ranks of warriors trying to stand up to the inequities. Unlike labour class struggles of the past – wherein members would sign up for life and fight for worker’s rights, whether or not their labour was employed – with few exceptions, those that join the hallowed ranks of home ownership become instant political converts in the war against unaffordable housing and debt slavery.
Such is the magnitude of financial risk and commitment in undertaking a mortgage in modern Australia, that understandably one’s values and priorities must shift in order to justify such a change in financial circumstances and the usually severe increase in debt leverage. It becomes very much in the interests of the new landowner / debtor to support any and all efforts to prop up the wealth choices of their newfound social and economic class, even if not openly admitted or pursued.
Some modern political economists refer to this new class of landowners / debtors as ‘The Precariat’. A whole section of the former ‘Proletariat’ so indebted and reliant upon the existing system for their living standard and paper wealth, that they dare not rock the boat politically. There are once again stark parallels here with the labour movements of the Progressive Era, where fear of losing one’s job mostly consigned labour movements to the fringes, and labourers suffered appalling working conditions for much longer than they otherwise might have. Fear of an inability to service one’s mortgage does wonders for political complacency.
This pernicious fact makes Australia’s record long housing bubble a particularly tenacious political beast, but not a unique one in historical terms. Nearly two whole generations have helped pass the political torch onto those still ‘unfortunate’ enough to be locked out of home ownership and a secure retirement. By the time the younger members of this underclass realise how stacked against them the odds are, and how deliberate the choices are to maintain inequalities as they are, a large proportion of the older or more experienced campaigners have moved into the hallowed ranks of those the system serves.
Even the so-called party of the youth, the Australian Greens, and the traditionally progressive Australian Labor Party are just as leveraged into landed wealth as any political force in the country. And thus there has never emerged a large and experienced enough cohort to truly organise in the interests of this new underclass. There are many exceptions to this observation – economists, academics, journalists, bloggers and even the odd politician who fight the good fight and call a spade a spade, a bubble a bubble.
But for the most part, the vanishing class consciousness of the newly minted home owner or property investor has created a political and media culture of looking the other way as wealth inequality and economic imbalances threaten to tear the system and community apart. It is so ingrained in the every day Australian cultural psyche, that it has become a truly rarified exceptionalism, wherein any person of influence or power who dares to question the path of the great Australian Housing Bubble is patronisingly reminded that history does not apply to Australia, and that genuine reform is for doomsayers and bankrupt European states.
Indeed, our exceptionalism has morphed into full a blown collective denial of the very same imbalances that brought half of the modern world to its knees only 8 years ago. That somehow these forces do not apply to the economic miracle that is Australia, and that income inequality is only a matter of a few mega-rich corporations evading their tax obligations. As long as you are enfranchised as a participant of the ‘Great Australian Dream’ – no matter the cost – then tinkering around the edges is all that is expected and required. No more class struggles, no more sweeping economic reforms, just props for house prices.
This is how bald faced political betrayal has been allowed to thrive term after political term in the last few decades of stalled reform efforts and lip-service to housing affordability. Few would care to admit it, owing to the collective myopic mentality created by such a rancid mix of exceptionalism and denial. But most of us just don’t care enough. We have come to expect political betrayal, and as long we can make mortgage payments, we have no need for boat-rocking. It gives us something to complain about without having to actually put skin in the game fighting against it.
Systematic and repeated political betrayal has become nothing more than a badge of honour worn by the Left and Right pretenders in their petty squabbles about how to divide up what’s left of Australia after the mining boom. It is the standard modus operandi of a political system in which vague complaints about lack of reform and a growing political disconnect are a convenient way of alleviating that class guilt and the nagging suspicion that it’s all a giant castle made of sand. The embarrassed paper millionaires who need to feel like they still have political values, and would be on the right side of history in any class struggle.
But there is a gaping hole in the logic of the newly home owning, the newly indebted. The advent of the neoliberal era drove an unprecedented rise in the level of household debt across the developed world. And all that paper asset wealth that defines the new Precariat class is not real wealth. It has not enriched them. It has not uplifted a class of people onto the next metaphoric rung. There is no housing ladder. There is simply wealth inequality on a scale not seen since the last time we were this indebted – in the 1920s and 30s leading up to the greatest debt deleveraging the world had ever seen.
As explained by the greatest living economist Michael Hudson, debt is not wealth. It is virtual wealth, and a claim on future prosperity. On an aggregate level, too much debt causes inequality and impoverishes the entire economy and society, driving the falling living standards that we are now witnessing. The only class that elevates their relative position in society under the modern explosion of household debt are the bankers, the real estate agents and the political operators who serve them. The winners are the financial overlords, who in the last 40 years have set about destroying the world economy and returning us to the Gilded Age, with the vestiges of feudalism restoring a very old class struggle with a modern cosmopolitan twist.
Finance is not the economy, it is the cause of rising inequality
Over-financialisation of the economy is the true cause of contemporary inequality, and at the heart of financialisation is household debt. By extension, 30 years of exponential growth in household indebtedness has been the primary driver of growing inequality, and in turn, the economic decline and financial instability witnessed in the past ten years. Let me spell that out for those playing at home. The growth in unproductive debt in excess of the growth of incomes required to service it, is the primary cause of rising inequality.
The diversion of ever greater proportions of disposable income in service to unproductive debt, chasing capital returns on asset prices instead of the formation of productive capital, transforms our prosperity (economic surplus) into dead-weight interest payments while destroying the economy’s productive capacity. Labour exploitation, yes. Tax avoidance, yes. Estate inheritance, yes. Political corruption, yes. But debt saturation causes greater concentration of wealth than these other important issues, because it represents the ultimate form of rent extraction, as explained by Michael Hudson in his recent thesis ‘Finance is Not the Economy‘:
This raises a vital question for today’s economies. Can debt-financed rising asset prices make economies richer on a sustainable basis? If the aim of raising asset prices is to increase the capitalization rate of rents and profits by lowering interest rates, can pension funds, insurance companies, and retirees save enough for their retirement out of current earnings, or can they live by capital gains alone?
Asset prices can rise only by debt creation or by diverting current income. The recognition that such debt-fueled inflation of asset prices is a form of rent extraction is central to our analysis of its unsustainability. By contrast, the now conventional economic models give us no handle to even start addressing these phenomena. By viewing capital gains as transfers instead of as income, we define the long-term sustainability of capital gains and asset prices in terms of trends in disposable income plus debt growth. Just as a Ponzi scheme must collapse with mathematical certainty (even though the timing of the collapse is uncertain), so it is with asset markets that expand faster than income growth. The divergence between income growth and rent extraction (asset price growth and financial transfers) is unsustainable, although, by going global, asset markets can be kept inflated over decades.
What obscures this dynamic is a micro-macro fallacy. Homeowners thought they were getting rich as real estate prices were inflated by easier bank credit. According to representative-agent models, the nation was getting rich as new buyers of homes, stocks, and bonds took on larger debts to sustain this price rise. Alan Greenspan applauded this as wealth creation. Individuals borrowed against their capital gains, hoping that future gains would pay off the new debt they were taking on.
This is not how classical economists described the profitability and accumulation of capital under industrial capitalism. Gains were supposed to be achieved by “real” growth, not by asset-price inflation. The financial drive for capital gains has become decoupled from tangible capital investment and employment.
On the individual micro-level, it may be of little concern whether gains are made by higher asset prices or from direct investment to produce and sell goods. To the corporate manager or raider, speculator or entrepreneur, the financial returns appear equal. But on the society-wide macro-level, there is a micro-macro paradox or “fallacy of composition.” Capital gains via asset-price inflation must be fueled by rising indebtedness of the overall economy. Prices for assets will rise by however much a bank is willing to lend, and asset price gains over and above income constitute debt growth in the economy.
In the end, “wealth creation” in the real estate market was fueled by mortgage loans larger than the entire GDP. Each loan was a debt: total mortgage debt doubled relative to the economy in 25 years. That was the cost of “wealth creation.” It is not real wealth. It is debt which is a claim on wealth. It derives not from income earned by adding to the economy’s “real” surplus, but is a form of rent extraction eating into the economy’s surplus.
I highly recommend reading Hudson’s thesis in its entirety. Like his many other works, it provides the key to understanding the current trajectory of Western society, including rapacious asset bubbles, economic decline, financial instability, rising inequality, and of course, political instability. The conventional leftwing / rightwing lens through which we view today’s class struggle is meaningless unless we come to understand the nature of debt, economic rent and the difference between earned and unearned income. Rising household debt is the reason that home ownership rates have collapsed and wealth inequality is growing.
Furthermore, there is an emerging consensus that wealth inequality is a leading cause of economic stagnation, debt deflation, and the rise of populism, anti-globalisation and economic protectionism. It is therefore reasonable to conclude that financial engineering, the resulting explosion in household indebtedness, and the concomitant hyper-inflation in fixed asset prices are the most significant causes of the world’s current economic and political breakdown.
This is because modern finance capitalism and the neoliberal political structure (otherwise known as neo-classical economics) have been winding back the classical era economic reforms that destroyed feudalism. To that end, they have come to share similar outcomes to the feudal era, by ensuring that any and all gains in prosperity (economic surplus) are accrued to land (landowners) and further still to the owners of credit owed on the land (financiers).
It’s not capitalism that is the problem, it is the type of capitalism that has become the world’s defining pathology. The original classical economists of the progressive era (such as Henry George, who’s book ‘Progress and Poverty’ made him the world’s first ‘rock-star economist’) sought to free society from this economic-rent, the so-called ‘free-lunch’ enjoyed by landowners, bankers, monopolists, resource extractors, patent-hoarders, lobbyists, politicians, and the innumerable other ticket-clippers that characterise modern capitalism.
These agents have not enriched themselves through innovation, human endeavour and the progress of productivity brought about by ‘creative destruction’ and the free market system. They have simply shaped the economic, political, social and cultural landscape to enable, accept, and even celebrate the theft of economic surplus (the commons), from the people that produced it.
The only way to solve wealth inequality and return to true progressive principles is for economic-rent in its many forms to be taxed completely, as suggested by classical reformers like Henry George and the genuine students of economic and financial history like Michael Hudson. We will not achieve social justice and democratic justice unless we can first achieve economic justice, and the classical reformers understood that such justice begins with rent-taxes like a universal Land Value Tax.
A failure to tax economic-rent is the essential modern economic disease, shared by all nations that have signed up to the hegemony of globalised finance capitalism. And it is why a simple unfortunate metric like falling rates of home ownership represent the full weight of rising wealth inequality in the developed world, and by extension, is a poster-child for the populist anti-globalisation movements erupting across the global political landscape.
This humble and quietly “lapsed” home-ownership inquiry is therefore one of the only current political tools able to help expose the systematic plundering of a whole class of landless (and indebted landowning) people, and as such help in addressing systematic wealth inequality and the rise of dangerous populism and extremism. It is symbolically and practically an admission that our elites and powers that be, our new aristocracy of rent-seekers, will never voluntarily do anything to solve wealth inequality and will therefore be destroyed by rising waves of populist backlash. Such is the eventual fate of all societies based purely on the reward of rentier economics, rather than the meritocracy that most of us were raised to believe in.
Democratic access to land and shelter without the burden of onerous debts or enslavement. This is the fundamental human right that was enshrined (if not achieved) by the destruction of feudalism, and that right has slowly but surely been eroded in the neoliberal age. The problem is structural, but it is nonetheless a choice. And it is a choice made by bearers of power, who will stop at nothing to hide the existence and nature of that choice to create and uphold that class structure.
My argument is therefore that this small move of cynical political neglect is a call to arms in the strongest possible terms. It is a red flag that nothing will change until either/both market realities and/or political upheaval destroy the prevailing order and cause a lot of pain, to all people, in the process.
There must be a Neo-Progressive platform to urgently tear down the finance capitalism superstructure – and its local manifestation, the politico-housing complex – at the centre of this new class war, lest we find ourselves, much like the early 20th century proletariat, either embracing or at the mercy of a burning platform.
5 thoughts on “Australia’s new class war: A return to the Gilded Age”
Fantastic piece, thank you for writing it. I hope that it is widely read.
Sorry for this, but I’m going to be that guy who nitpicks. The Hudson piece, ‘Finance is not the Economy’ was co-written with Dirk Bezemer. I just thought Mr. Bezemer also deserved a shout out.
Really great writing RR. We are indeed well on the way to neo-feudalism.
An excellent article, Matt, drawing appositely on the great Michael Hudson.
The Great Australian Dream has gone from simple ‘Home Ownership’ to ‘Investment Property Ownership’, thanks in part to outrageous tax arrangements introduced by those robbers of the common good, Howard and Costello, following on, as they did, the deregulation regime of Hawke and Keating.
One point you didn’t mention is the stagnation, indeed decline, of real wages, mainly in the USA. To maintain levels of consumption, including home ownership, debt became essential in compensating for declining purchasing power in the face of rising prices; over the last three decades astronomical debt has become intrinsic to the lives of ordinary people living on very modest wages; their incomes are inimical to the scale of risk which they have been induced to embrace. Of course, the bankers (Too Big to Jail) carried on with impunity, knowing they could simply foreclose on those who went under when the ‘market’ crashed.
Superb piece. In Australia the ordinary members of the population have no rights except those in specific bits of legislation, hence governments are progressively more dishonest and failures of governance are more frequent. Collapse lies ahead in many domains as the fantasy of the powerful starts to unravel.
Truly excellent writing. I would be tempted to distribute it to my friends except I have nearly given up on influencing anyone at this stage. The only thing that will make people wake up to reality of how utterly warped our economy has begun is the inevitable pop of the bubble itself. I have been most interested to read about Toronto’s housing market these past 2 months…