Pearls and Irritations

Australia must carefully monitor US domestic developments as a barometer of longer term risks to the reliability of our “great and powerful friend”, and to avoid being drawn into a US war against China. But the biggest lesson from the political polarisation in the US is that it is better to have lower overall economic growth but sustain a fairer society, than to go for broke while impoverishing ordinary citizens. The price of failing to do that is the risk of bitter polarisation, political violence, and democratic tensions.

America’s polarisation has lessons for Australia domestically – understanding US policy mistakes and avoiding them – and for the way we approach our relationship with the US: both bilaterally, and in the way we position ourselves with the US and the broader Indo-Pacific region.

Domestic Policy

Race and ethnic relations, the media and culture wars

Clearly racial and ethnic anxieties have played, and continue to play, a significant role in American political polarisation.

Australia has some advantages. Wars have been fought on our soil but they were acts of colonial suppression of first peoples, not large scale civil war on the scale that the US experienced. While we were an officially racist country for much of our history, we have transitioned to a generally successful multicultural society with a minimum of social strife. We are not and never have been an intensely religious society. We have, in the Voice to the Nation, an opportunity to advance reconciliation to a new stage. To that extent history is on our side.

But we have a habit of adopting US arguments and assumptions about public policy without fully assessing their fit with the facts of Australian life. So just as the extreme right has grown in the US and in parts of Europe we have seen a pale but unpleasant echo of the movement in Australia. Similarly we have seen distressing examples of ‘woke’ attempts to suppress freedom of speech, particularly in our universities.

Our popular media – notably streaming services – are dominated by US material, leading many Australians to identify uncritically with US values and preoccupations – the ultimate triumph of “cultural diplomacy”. We are seeing the division of our media into ideological silos – great reverberation chambers for their consumers – rather than open minded purveyors of (checked) fact and a range of opinions. This, perhaps more than anything else, has fuelled the rapidity of mass polarisation in America. A careful look at the honesty and breadth of our media is important to avoid that happening here.

Our university campuses and the liberal left have begun to emulate the “woke” intolerances and attempts to suppress freedom of speech which have driven many lower income and less educated voters to support right wing populist politicians in America.

It will require special reserves of political will towards decency on the part of our political leaders, and our media owners, to pull back from the most egregious of the US culture wars tropes.

Economic and social policies

The US has maintained its role as a key, vibrant and globally significant economy. But along with the economic growth has been the growth in polarisation, populism and economic inequality.

We have an advantage in the way in which we have so far managed the transition to a post-industrial economy. In significant part this has to do with the way we have skilled our workforce. While a similar proportion of adults has some post school qualification in Australia and the US, HECS-Help has helped ensure that our university education is available on reasonable terms to lower income cohorts. This is not true in the US – there is no direct equivalent to HECS at the Federal level. Student loans, even from the Federal government have higher interest rates and require repayment irrespective of income levels. This has led to the student debt crisis. The Supreme Court of the US has struck down Biden’s loan forgiveness plan impacting some 40 million students. This will likely deepen inequality.

An important factor in our ability to manage the transition to a post-industrial economy without the same level of social stress is the relative effectiveness of our tax and transfer policies. Even though we have a smaller budget sector than most EU nations we have achieved levels of post tax and transfer income distribution that are much closer to European democracies than the explosive growth of inequality in the US.

Starting with Reagan’s tax initiatives which slashed top income and wealth taxes (built on most recently by Trump) inequality in the US has sky rocketed.

Income concentration at the top as risen sharply since the 1970s

Centre on budget and policy priorities (CBPP.ORG)

There are many ways to measure inequality, but it is particularly the mega rich who have benefited from the abandonment of the post New Deal social compact.

After tax and transfers Peter Turchin (Op Cit) has estimated that the top 1% of US income earners command 19% of total income. This contrasts with 13% in Germany and slightly less than 10% in France.

In Australia’s case while inequality has increased it has not done so to anything like the same extent. In the late 1970s the top 1% had a 4.8% share of total income. That has risen, but only to 9% of total income in 2021 – less than half of the US.

This is a result of a system of tax and transfers which has had an unusually heavy emphasis on income and company taxes (although top marginal rates and company tax rates have declined since the 1970s) and on income conditioned rather than universal transfers.

Following years of a bipartisan commitment to keeping a ceiling on tax revenues at 24% of GDP we must be concerned about our tax systems ability to raise the finance necessary to support what will be inevitably increasing government spending on defence, health, disability and aged care. We must also worry about our very low productivity growth over the last decade. This has led to calls from many economists to reduce the emphasis in our tax system on income and profits taxes and to increase less distortive taxes such as those on land and consumption (the GST).

There is no doubt that changing the mix could make a contribution to lifting productivity and lifting the overall tax take is important. But we should be careful to keep equity firmly in mind. We can do this by retaining our focus on income conditioning of transfer payments and a progressive income tax system with marginal tax rates at modest levels for low and middle income earners but rising sharply for those in the top 5% and in particular 1% of income earners. That is why I continue to oppose the Stage 3 tax cuts in their present form, but would support lifting the overall tax take.

The biggest lesson from the US is that it is better to have lower overall growth but sustain a fairer society than to go for broke while impoverishing ordinary citizens – the price of failing to do that is the risk of bitter polarisation and democratic tensions.

Strategic policy

The obvious lesson is to carefully monitor US domestic developments as a barometer of longer term risks to the reliability of our “great and powerful friend”. The problem we face is that strategic commitments undertaken jointly with the US tend to be long term – take for example the AUKUS agreement and the delivery of major new weapon platforms – while turbulence within America which might blowback onto the delivery of those capabilities is something beyond our capacity to manage.

This suggests it might be wise to de-risk our dependence to the greatest extent consistent with maintaining the alliance and to keep our options open with respect to how the alliance is interpreted and implemented – for example in relation to Taiwan.

A polarised and increasingly unstable US may well become more trigger-happy internationally, seeking outsiders to blame for its troubles. The obvious candidate will be China. History has demonstrated that it will not be easy for Australia to avoid being drawn into a US war – in the case of China, against a country of fundamental importance to Australia’s prosperity and security. We must tread carefully.

View all the articles of this five part series.

Share and Enjoy !

SHARE TWEET SHARE COPY EMAIL PRINT