Two pieces in the media today warrant further comment. Commentary heavy-hitters take diametrically opposing views on the prospects for the Australian middle class. In the doom-saying corner is a locked-up Gotti:
…we are about to follow the US in seeing a decline in the middle class and rise in the number of people on high incomes and an even sharper rise in those on low incomes.
…The biggest single change in the American society over the last five to ten years has been the dramatic decline of the middle class. And the factors that caused that reduction are being duplicated in Australia. Analysis by Michael Snyder shows that six years ago, some 53 per cent of all Americans considered themselves to be ‘middle class’. Now it’s only 44 per cent – and falling.
In 2008, a quarter of all Americans in the 18-29 year old age bracket considered themselves to be ‘lower class’. In 2014, that doubled to an astounding 49 per cent of youngsters, who believe they are in the lower class. The movement to lower incomes is worst among young people, who can’t gain employment. Retailers like Sears and JC Penney, which relied on the middle class, are now struggling. There is a very similar pattern in the UK, where retailers who service the middle class are in decline.
Why should Australia duplicate what has taken place in the United States and the UK? Put simply: because we have adopted the same policies and strategies. The US transferred much of its manufacturing operation to China and, in doing so, it decimated a vast amount of middle-class workers…the US believed manufacturing jobs would be replaced by the service sector, not realising that just as many of those jobs would go offshore on the back of internet technology.
Contrast this with the upbeat Gitti:
If you want to know in which particular industries or occupations the government plans to ensure new jobs are created – which winners the government has picked – the answer is: none. It’s leaving the market to determine all that.
But it does have a ”jobs plan” of sorts. It’s a two-step plan. Step one: leave the primary responsibility for ensuring the economy keeps growing and creating jobs to the Reserve Bank. Step two: get started on ensuring we don’t end up destroying jobs the way the Europeans and Americans have been by getting the budget back under control, while ensuring this ”fiscal consolidation” doesn’t weaken demand and so discourage employment in the next few years.
So what’s the Reserve’s ”jobs plan”? You ought to know. It’s to encourage borrowing and spending on consumption and investment – and, in the process, counter the employment-dampening effect of our still-too-high exchange rate – by keeping interest rates at near-record lows. With any luck, our dollar will fall further as the US Federal Reserve phases out its policy of ”quantitative easing” (creating money).
What makes the Reserve so confident doing this will, before too many months have passed, create lots of additional jobs and get the unemployment rate heading back down towards 5 per cent? Well, apart from orthodox economic theory, decades of experience. It’s worked every other time, why won’t it work now?
As for the government itself, there is more it could be doing to enhance the economy’s job-generating capacity. One is to borrow as much as necessary to provide our businesses with adequate public infrastructure and ensure existing infrastructure is used efficiently through such things as appropriate pricing.
Another is to ensure our education and training system – from early childhood to postgraduate – is doing enough, and is effective enough, in raising the skills of our labour force.
…I don’t know where the jobs will come from this time, but I’ll give you a hint: virtually all of them will be in the services sector.
Who to believe? I’ll make a few points to help guide our thoughts. Gotti runs into a bit of trouble because:
- it’s not entirely fair to juxtapose Australia with the US or UK. Neither of them has a massive endowment of resources;
- resources are a very important component of the debate because they are exclusively tradable. They now constitute two-thirds of Australian exports and that percentage will rise even further;
- that means Australia has a source of export revenue outside of the manufacturing dependence of the US and UK to support their external balances;
- in turn, that means we can continue to expand our borrowing offshore so long as the revenue side of the external accounts keeps growing as well, and
- that means we can keep borrowing locally as well and services can expand (they are largely non-tradable, contrary to Gotti’s suggestion).
But, there are limits and this is where Gitti runs into trouble:
- the combination of resources exports and borrowing to support services industries hollows-out other tradable sectors in the economy by inflating costs and reducing competitiveness;
- the borrowing itself eventually becomes a problem as well, when debt saturation threatens households balance sheets and we are already dancing somewhere around that cliff’s edge, and
- the great offset of government spending also has its limitations if you want to have an economy with any dynamism at all.
So, is the Australian middle class in decline or on the rise? Neither protagonist fully explores the landscape so both can be partially discounted, but I conclude that Gotti is closer to the mark than Gitti. The erosion of Australian competitiveness is now so advanced and our debt loads sufficiently full that warning signs about the end of our economic model and its support for the middle class should be taken seriously.
Another way of looking at this is that Gotti is looking at the structure of the Australian economy and seeing weakness whereas Gitti is looking at the cycle and seeing strength.
But pursuing a new cycle of services inflation based upon a resources endowment that is inherently volatile and reliant upon a stretched Chinese model that itself must change is very plausibly the pride that comes before a US and UK-style fall driven by growing structural weakness.
