Speech - The Global Financial Crisis: 10 Years On (National Press Club)

August 21, 2018





Ten years ago, Australia had a choice. We could go into recession or go into deficit.

As one of only two advanced economies to avoid recession during the Global Financial Crisis – via the timely deployment of monetary and fiscal policy – we came through the GFC by choice, not by chance.

Or to put it another way: Australia avoided recession – our policy worked.

And as a consequence, Australia has experienced its 27th year of continuous growth.

I know many of you might be asking the question: the Global Financial Crisis was 10 years ago, Australia survived it well, why on earth should we be talking about it all today?

It’s said that the past is not dead – it’s not even past – and the GFC is one of those cases.

What obsesses and frightens us today is political volatility of a type the Western world hasn’t experienced since the 1930s – a ring of fire of nativist, extremist political forces are in the ascendant across the world, and thriving in societies very similar to our own – the United Kingdom and the United States. The fact such forces exist in Australia should concern us – but the fact they are tiny fringe movements means we’ve done something right.

In the middle of the GFC, we spoke of global economic volatility not seen for 80 years; today we speak of political volatility not seen for 80 years. Well, you see the connection.

Big economic shocks have big political consequences. 1929 was followed by 1939.

If we fail to take the right lessons from the Great Recession and our response to it, we risk exposing ourselves to the full force of the next economic crisis, and all of the social and political calamities it entails.

So we might not be talking about global economic crisis today, but in my view, we are living the consequences of the last one. High time to reflect on the events of 10 years ago, and how we avoid it ever happening again.

I think there are two areas we need to focus that reflection. The first is on ideas and the practice of economics itself, and the second is on what made Australia different, and what we must learn from that.

Firstly, then, on ideas and how we think about economics.

For me, this is personal as much as anything else, so let me start with an admission.

I’ve said a few times since the crisis that everyone active in economic policymaking today needs to be asked this simple question: “which of your settled opinions about how economies operate changed as a result of the GFC?”

If the answer is none, then you are either a genius or a charlatan. And we all know there are precious few geniuses who can claim to have seen the crisis coming.

For me, my approach to economics has certainly changed. Whereas previously I regarded tackling inequality primarily as social policy – damn good social policy, but social policy first and foremost – I now regard it as absolutely central to good economic policy.

And I believe that viewing economics through the frame of inequality will give Australia a better economic result.

The GFC taught us that rising inequality isn’t just an important moral challenge, something we tackle with the proceeds of growth once we can afford to, and trade off for further economic growth. It is an economic challenge that determines how prosperous and stable our economy can be. And therefore it’s of fundamental and central importance to the health of our democracy.

A decade after the GFC, we can now see clearly that rising inequality globally isn’t just making societies less fair. It’s making economies less prosperous, less stable, more fragile and crisis-prone. And it’s having similar effects on our politics.

The GFC hasn’t just changed my opinion; it’s upended conventional wisdom about economic management in supranational institutions too. In the ten years since the crisis, the IMF, the OECD and other previous bastions of neoliberalism have executed nearly 180‑degree turns in their policy prescriptions – from fiscal austerity to a more active view of fiscal policy.

And so to our second question: what made Australia different, and what can we learn from that?

I could go through the history of our stimulus and the decisions we made, but I don't need to do that today.

Firstly, there is a great book by an extremely wise, intelligent and handsome former Treasurer that I can recommend that all of you read: The Good Fight available in any good bookstore near you!

But secondly, the proof of our policies’ success is the industry devoted to attacking those policies – still going strong after 10 years. Any day of any week for the last decade, you could open a copy of the Australian or the Financial Review, or switch on an interview with a conservative politician, and you will hear – between the tearing of clothes and hair and the gnashing of teeth – a denunciation of active fiscal policy or indeed any crisis response other than surrendering to the cleansing fire of recession.

It’s a deeply important argument to our political opponents, because the retrenchment of the state and the command of the economy by big business interests is the core of their political project.

Hence, despite Australia’s success relative to our peers, there has been a determined and publicly funded campaign to discredit our stimulus as too big, unnecessary because of China, or having little public support.

To those people, three points.

One: The miners were retrenching workers during the crisis.

Two: The ongoing pipeline of public investment from 2009 to 2010 supported our continuing growth as the aftershocks of the Great Recession rocked the global economy.

Three. The Australian people are unmoved by the deniers.

A majority of Australians – a remarkable 62 per cent – agree that the GFC would have sent the country into recession if Labor hadn’t provided the large fiscal stimulus we did. Only 22 per cent of people disagree.

This view was echoed by the RBA Governor during the crisis, Glenn Stevens, who said that “had it gone on, we can be sure that tens of millions more people would be unemployed. But it didn’t go on. It was arrested … These initial interventions achieved what they were supposed to.”

Let me close then with what we learn from all of this, and the lessons that are clear 10 years on.

The capital and skills destruction that we avoided in Australia was crucial to locking in higher levels of growth in the years following the crisis, which meant that unemployment was lower, and deficit and debt were lower than if our Labor Government hadn’t acted.

By contrast, the early withdrawal of stimulus in Britain and the inadequacy of stimulus in the United States condemned these countries to a slower recovery and to high levels of capital and skills destruction, which continue to this day.

The key lesson from these comparisons is that the avoidance of deep recessions improves outcomes in the labour market over an extended period of time.

For fiscal policy, the GFC and its aftermath points to the need for governments to be much more active in using tax and expenditure measures as structural instruments to improve medium- to long-term growth.

And just as important are so-called pre-distributional concerns, such as market regulation and measures that support a strong voice for labour in the form of a higher minimum wage and an explicit set of minimum conditions over which bargaining can deliver additional productivity gains.

Given the fractures that have emerged in the geopolitical order over the past ten years, I genuinely doubt the ability of global institutions to respond as they did at the height of the GFC.

I also have grave concerns about Australia’s capacity to respond to the next crisis – partly economic, but largely political.

So while I believe that Australia could combat the next crisis, whether we would combat it would depend on which party was in government and what lessons they’d chosen to learn from 2008 and 2009.

In 2008 Labor was facing the choice between recession and deficit. I feared then – as I fear now – that facing the same choice, the Coalition would give us both.

And that, in a nutshell, comes neatly back to answer the question we faced at the start of my remarks. That’s why the events of 10 years ago matter crucially to our national prospects today, and will for many decades into the future.



Authorised by Noah Carroll, ALP, Canberra