MICHAEL KEATING . Economic Growth ,Redistribution and Climate Change.

Many pundits are arguing that if Labor is to become competitive at the next election it must focus on economic growth and jobs and abandon or at least downgrade its policies for income redistribution and to combat climate change. The evidence, however, is precisely the reverse. It is these policies that are the key to future economic growth and jobs.

According to the media Labor lost the last election because it was too focussed on redistribution and climate change and not on jobs and growth.

In response, Anthony Albanese, in his Press Club speech last Friday declared:

“Strong economy. Jobs at the forefront. You have to get that right. And then – and only then – will you get a mandate to do the sort of social justice provisions, environmental reform and other reforms that are needed.”

As one journalist reported: Albanese is now making it clear that an economic growth agenda will come first and everything else will come second.

The implicit, and still widely believed assumption underpinning this growth strategy is that redistribution and action to reduce global warming must be bad for economic growth.

Starting first with redistribution: it is a very traditional view, held by most economists in the past that there is an inherent trade-off between efficiency and equality. The assumption is that high income earners need to be incentivised, and that will then increase investment from which the benefits will eventually trickle down so that we are all better off.

In the light of the experience of the last decade and more, however, more and more economists have concluded that this presumption of a negative trade-off between growth and equality is quite the opposite of present reality.

Instead, we will not get the economic growth needed to provide decent and secure jobs without taking steps to improve wage growth and restore an equitable distribution of income.

As the Governor of the Reserve Bank put it more than two years ago:

The crisis really is in real wage growth.

And as I have argued in numerous articles posted on Pearls & Irritations, the main reason why most of the advanced economies have experienced economic stagnation for at least a decade and more is a continuing shortage of demand for structural and not just cyclical reasons.

With increasing income inequality and low wage growth, consumer demand has not kept pace with economic potential. Furthermore, over time investment falls off in response to the weak consumer demand, notwithstanding high profit rates. Lower investment then reduces the rate of productivity growth, so that slowly the potential growth rate of the economy also adjusts downwards.

This increase in income and wealth inequality and low wage growth mainly reflect the impact of technological change. Both the OECD and the IMF have found that technological change is the reason why wage growth has become decoupled and lagged behind productivity increases, and it is also the main reason wages in the more skilled professions have leapt ahead of workers doing middle-level jobs that are increasingly being automated.

Our economy, like the other advanced economies, will therefore continue to stagnate unless the government has an active agenda to restore wage growth and a reasonable distribution of income. And it is inconceivable that this agenda will not involve more government intervention in the labour market, and increased spending and therefore taxation.

Second, the other major challenge to our economy, and indeed to life itself, is climate change, and no future government can responsibly walk away from that. But as Ross Garnaut has shown (Pearls & Irritations, 7 November 2019), Australia can cut carbon emissions and make money in the process. Indeed, modelling results reported by Garnaut show that “Australia playing its full part in effective global efforts to hold warming to 2°C or lower would show economic gains instead of losses in early decades, followed by much bigger gains later on”.

In short, an economic policy that puts economic growth first will require deliberate attempts to achieve a more equitable distribution of income and to combat climate change. There is room for debate about the details of how best to respond to both these policy challenges. However, any political party seeking a mandate to govern should not retreat by adopting a policy agenda that seeks to downgrade either of these challenges as second-order priorities.

In my view, it would not be difficult to develop a “vision” that focuses on economic growth and jobs, but which is built around a narrative that embraces policies to improve wages and equality and to arrest global warming.

Michael Keating is a former Head of the Departments of Prime Minister & Cabinet, Finance, and Employment & Industrial Relations. He is presently a Visiting Fellow at the Australian National University.


Michael Keating is a former Secretary of the Departments of Prime Minister and Cabinet, Finance and Employment, and Industrial Relations.  He is presently a visiting fellow at the Australian National University. 

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4 Responses to MICHAEL KEATING . Economic Growth ,Redistribution and Climate Change.

  1. Avatar Wayne McMillan says:

    Labor’s thinking is still caught in false neo-liberal thinking perpetuated by faulty orthodox neo-classical economics. In essence they are frightened politically to move beyond this framework. 21 century Australian political parties are going to have to address climate change and inequality front up or fail miserably. No Australian political partt has yet come to terms with the immense eco-economo social problems facing Australia. For progressive political parties population increase and sustainabilityis the elephant in the room that everyone ignores andcthis is of major concern.

    • Avatar Charles Lowe says:

      I agree.

      Labor fails to understand that, when change is needed, its Leader needs to adopt a radical solution. The Leader’s skill then lies n presenting that solution as “common sense”.

      Labor needs to revisit Gough: 1967 – 1975.

  2. Mike Scrafton Mike Scrafton says:

    In my view, rather than trying to square the circle by advocating economic growth while pursuing mitigation/adaptation of global warming, political leaders should be making a major effort to educate the public about the science behind, and the catastrophic risks involved, global warming. The voting public are not fools and some honest, straightforward discussion from the nation’s leadership on the social and human security challenges ahead and the sacrifices that will be necessary to ensure the massive transformation required to give our children and their children security will win votes.
    It is urgent because seriously disruptive global warming is already unavoidable. The extant greenhouse gases, the growing global emissions, and political inertia have ensured that.
    It is not just energy-the whole commercial industrial fabric will need to be transformed, transport rethought, agriculture adapted, urban planning and demographic settlement reformed, etc.
    The circle cannot be squared. Pursuing global warming as an economic (profit oriented) activity is the path to tragedy.

  3. Avatar Stephen Saunders says:

    It is reasonably contended that low wages growth just might be connected to hyper migration. Sydney voters rejected Labor’s bid to push migration even higher.

    In the ALP post mortem, none of this ever happened. Same in this article.

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