Wayne the Welder and the Politics of Trade: A Cautionary Tale

WAYNE THE WELDER AND THE POLITICS OF TRADE

A CAUTIONARY TALE

US CHAMBER OF COMMERCE

EBAY, SYDNEY

10 APRIL 2017

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Change is scary. 

And the pace of change is only getting quicker. 

That scares a lot of people.

It certainly scared a lot of people at the last Federal Election.

Malcolm Turnbull talked a lot last year about innovation and what an exciting time it was to be alive.

In his book about the election Mark Di Stefano provides an interesting insight into what some voters thought of that.

He tells the story of a Welder from Wollongong who was in a Labor focus group. 

Let’s call him Wayne.

When they showed him a Turnbull TV ad about innovation he said:

            “What does he want me to do, f**king weld two iPads together?”

No wonder Malcolm Turnbull doesn’t talk about how exciting it is to be alive anymore.

There are lots of Wayne the Welders, here and all around the world.

In the United States a lot of them voted for Donald Trump. 

They are angry, they are frustrated and they are resentful.

They feel left out. They feel like the whole system is rigged against them.

They are worried about immigration and overseas workers taking their jobs.

And for a lot of them one thing is to blame – trade.

FREE TRADE IN THE LAND OF THE FREE

And it’s not just Trump voters. This crosses the political divide.

Bernie Sanders almost won the Democratic nomination off the back of his opposition to the TPP. 

At the Conservative Political Action Conference in February Donald Trump made a point of this. He said:

“A lot of Bernie people voted for Trump. You know why?  Because he’s right on one issue:  Trade. He was right about trade. Our country is being absolutely devastated with bad trade deals. So he was right about that… So actually I like Bernie, okay.  I like Bernie.”[1]

A lot of Americans agree with Bernie and their new President.

According to polling done by Pew Research a few years ago only 1 in 5 Americans think that trade with other countries creates jobs. [2]

Think about that – only 1 in 5 Americans think trade creates jobs.

Sanders and Trump have both tapped into this – a feeling that while big multinational companies might have benefited from free trade American workers haven’t.

The fact is trade does create jobs.

There are almost three times as many Americans working in trade related jobs today than there were 25 years ago.

In 1992 (before NAFTA and the wave of trade liberalisation) there were about 14.5 million jobs in the US created by trade. Today that number is over 40 million.[3]

So why is the rhetoric of Trump and Sanders so appealing?

Well, the US has also lost a lot of jobs – particularly in manufacturing.

In 2000 there were 17 million manufacturing jobs in America. There are now around 12.3 million.[4]

Some of that is because of trade. Most of it is because of automation. 

But if you are a worker who has just lost your job you don’t care what’s caused it you just want your job back – and that’s what Trump has promised he will do.

The other reason is this – for a lot of Americans life is pretty tough, even if you do have a job.

Real wages are about the same as they were fifty years ago.[5] In fact, in the last decade they went backwards. They’re back now to where they were before the Global Financial Crisis but there are still a lot of Americans earning less today than they did when Lehmann Brothers collapsed.[6] 

It depends a lot on the sort of work you do. If you work in the tech sector things are pretty good. Average salaries went up by 7.7 percent in 2015. That’s the biggest increase in that sector ever.[7]  In comparison the federal minimum wage hasn’t increased since 2009.[8]

It also varies from place to place.

In Manhattan the median household income is now 18 percent higher than it was a decade ago.[9] 

But in places like Detroit Michigan it’s 10 per cent lower. It’s the same in Ohio and Wisconsin.[10] 

Economics might be global but politics is still local – and these are the places that made Trump President.

COULD THE SAME THING HAPPEN HERE?

If you look closely enough you can see the seeds of the same problem taking root here too.

If you are much younger than me you probably haven’t experienced a recession in Australia. And unlike the US, real wages have gone up.[11]

But the division between wealthy and poorer Australians has also grown. 

It’s not on the same scale as the US, but it’s growing and it is bigger now than it has been at any time since World War II.

Australian companies are doing pretty well at the moment. The latest Business Indicators Report from the ABS shows company profits are the highest they have been in 40 years.[12] But not a lot of that is being passed onto employees in higher wages. 

The same report shows that wages growth is the lowest it’s been in 20 years.[13]

Just like the US, wages growth is also linked to the sort of job you do.

The jobs with the fastest growing salaries last year were high skill white collar jobs and high tech STEM jobs.[14]

Life is also very different depending on where you live.

Sydney and Melbourne are pretty flush with jobs at the moment – particularly close to town.

Half of all the jobs in Australia in the last decade have been within a two kilometre radius or where we are today and the Melbourne CBD.[15]

It’s a very different story in many parts of regional Australia. 

In places like Townsville unemployment is higher today than it any time since the Great Depression. Wages are lower than they were five years ago[16] and house prices are also down by about 8 percent.[17]

You see the same thing up and down the coast from Cairns to Mackay to Rockhampton. These are the sorts of places where One Nation is polling as high as 30 percent.[18]

The trade debate here in Australia is very different to what it is in the US.  The sort of views held by Sanders and Trump are on the fringe of political debate here. They are the sort of views espoused by the Greens on the left and One Nation on the right. 

The two major parties both support free trade.  With good reason, we are a trading nation. Trade is the key to our success. It always has been.  We rise and fall on what we sell to the rest of the world.

But that doesn’t mean trade is particularly popular.

It isn’t. It never has been.

Hawke and Keating didn’t cut tariffs for the votes. We tend to look back through the rose coloured glasses of history and think what they did was obvious and easy. It wasn’t. 

Cutting tariffs created new businesses and new jobs, but it took time. It didn’t happen immediately, and it didn’t happen everywhere. Some sectors of the economy grew but others shrank – particularly in manufacturing.

Lots of Wayne the welders were affected. 

Keating talked about this recently. He said:

“The hard part was persisting with the cuts politically, particularly during the worst years of the recession, when any other government would have just walked away.”[19]

We are lucky he did. 

The economy we have today is built on the wreckage of the tariff walls he ripped down.

It’s one of the reasons we haven’t had a recession since.

Today one in five Australian jobs are connected to international trade.[20]

The Department of Industry put out a report a few weeks ago that showed Australian companies that export create more jobs than companies that don’t. They also make bigger profits and pay higher wages.[21]

Despite all of this guess what?

A poll last year revealed fewer than 3 in 10 Australians think trade creates more jobs for Australia.[22]

That’s almost exactly the same result as the poll Pew Research conducted in the US.

In both countries – Australia and the United States – most people think that trade doesn’t create jobs.

Even though there is plenty of evidence that it does.

So how do we avoid what happened last year in the US happening here?

THERE HAS NEVER BEEN A MORE EXCITING TIME TO BE ALIVE

Just over a decade ago there was no Facebook or Twitter or Instagram.  The only clouds were in the sky. 4G was a parking space. Big Data could have been a rapper.[23]

A lot has changed. This device (iPhone 6) has more computing power than the Apollo 11 spacecraft that landed on the moon.

Everyone is connected. More people own a mobile phone on the planet than a toothbrush.[24] In fact there are more active mobile devices than there are people.[25]

It’s addictive. Boston Consulting Group did a study in 2015 to find out what people would give up for a year rather than their mobile phone.[26]

65 percent said they would give up eating at restaurants. Fifty one percent said they would give up their pet. 50 percent said they would give up holidays. And 38 percent said they would give up sex. In South Korea it was 60 percent.

So maybe it’s not such an exciting time to be alive.

But for people like Wayne this isn’t the important bit. He is worried about what technology is going to do to his job.

The sort of changes in technology we are witnessing will destroy a lot of jobs.[27] They will create a lot of new ones too – but not many will involve welding iPads together.

Who is going to benefit the most? People who have the skills to work with technology and who can create and make things with it.

In their terrific book The Second Machine Age, Andrew MacAfee and Erik Brynjolfsson from MIT ram this point home:

“There’s never been a better time to be a worker with special skills or the right education, because these people can use technology to create and capture value.  However, there’s never been a worse time to be a worker with only ‘ordinary’ skills and abilities to offer, because computers, robots, and other digital technologies are acquiring these skills and abilities at an extraordinary rate.” [28]

If you are on the wrong end of this – like Wayne – you would be worried and scared too.

FEELING THE BURN NOT THE BENEFITS

Now here’s the thing – what’s true for technology is also true for trade.

Some people do better than others.

Some workers do better than others from open markets and free trade.

Trade does create jobs, but in countries like the US and Australia they are usually high skilled, white collar jobs.

They are industries like finance, business services, property, education and tourism. There are now more export related jobs in finance, property and business services than there are in manufacturing.[29]

This helps explain why so many people like Wayne buy the anti-trade argument. 

They are feeling the burn not the benefits.

Interestingly, it’s the opposite in developing countries.

In countries like China and Vietnam and the Philippines its low skilled workers that have benefited the most from trade – and they have benefitted a lot.

Have a look at this:

[30]

This is Branko Milanovic’s Elephant Curve. 

It shows real income increases of the world’s population between 1988 and 2008.

What it shows is most people did pretty well in the last decade of the 20^th Century and the first decade of this century.

Some have done better than others.

At the peak of this graph right in the middle are 200 million Chinese, 90 million Indians and about 60 million from Indonesia and Brazil.  Over two decades their real income has almost doubled.

By contrast the people at the bottom of the trunk have experienced a relatively small or no increase in their real income. In some cases it has gone backwards. 

This is where a lot of US workers are, and where a lot of Australian workers are.

It’s also where Trump’s argument comes from – that the Asian middle class has been built on the back of working class Americans.

This is what Steve Bannon told a journalist a couple of days ago after the US Election:

“The globalists gutted the American working class and created a middle class in Asia.”[31]

That’s the wrong way of looking at this.

Trade is not a zero sum game.

What this graph shows is hundreds of millions of people lifted out of abject poverty and the creation of a new market for US and Australian goods and services.

Billions of middle class consumers right on our doorstep.

This is a massive opportunity.

This is already creating jobs and it will create a lot more. The key is the type of jobs it creates.

As I said before, in places like the US and Australia they are overwhelmingly high skilled, white collar, service industry jobs.

Now have a look at the far right hand side of the graph. You can see that the real incomes of the top one percent of the world’s population have also gone up – a lot.

About 6 percent of Australians are in this category and about 8 percent of Americans.[32]

A lot of those high skilled trade related jobs are also here. 

But it’s a fair bet Wayne isn’t here, or the people who voted for Donald Trump. They are down at the bottom of the trunk.

BUILDING FLOORS NOT WALLS

Now which people on this graph do you think are the biggest supporters of free trade?

No surprise – they are the ones who have benefited the most.

The Economist did a survey on this around the time Trump was elected last year.[33]

It shows in the Philippines support for free trade and globalisation is over 85 per cent.  In Vietnam it’s over 90 percent.

In Australia and the US it’s about half that.

I think the conclusions we can draw from this are pretty simple. If you want to increase support for free trade and open markets we have got to do something about the bottom of that elephant’s trunk.

We have got to improve the incomes and opportunities of these people.

As New York Times columnist Tom Friedman says in his latest book Thank You For Being Late:

“if a society doesn’t build floors under people, many will reach for a wall – no matter how self-defeating that would be.”[34]

People have got to feel like their own life is getting better not worse and that their kids aren’t going to struggle to find a job or buy a home if you expect them to believe it’s the most exciting time to be alive or you want them to support free trade.

Explaining this is the easy bit. Fixing it is the hard part.

Unless something serious is done the gap between people at the top and the bottom of that trunk is only going to continue to grow.[35]   

So what do we have to do?

If you are looking for a common denominator amongst Trump, Brexit and One Nation voters, its education.[36] [37] [38] They are people who have not had the same opportunities as many others and they feel run over and left behind.

If technology and trade mean that some jobs are more in demand than others we have got to make sure more Australians have got the skills to do these jobs. That’s not the case at the moment.

We need to increase the number of people who finish high school and go onto TAFE or university. Not just across the board, but particularly in areas where school completion rates are low.

We need to supercharge the number of STEM graduates we produce. Just over a decade ago we produced more than 9,000 ICT graduates a year. Now it’s less than half that.[39] Over the same time frame the number of Chinese STEM graduates has jumped from 500,000 to 4.7 million.[40]

We also need to reverse the current slide we are taking down the world education rankings. The latest reports show we are going backwards in science, maths and reading.[41] [42]

As someone who represents a working class community in Western Sydney I am also worried that they show kids from wealthy families are about three years ahead of students from poor families.

And we need to make sure that people like Wayne are not left behind in the way we train and retrain people.

If export businesses create more jobs and more high paid jobs we also need more of them.

There are about two million businesses in Australia.[43] Only about fifty-two thousand are currently exporters.[44] We can do a lot better.

Andrew Robb made this point the other day.

The resources and agricultural sectors are plugged into Asia but the services sector still has a long way to go.[45] [46]

We have also got to make the tax system fairer and more progressive.

I think most people in Sydney would now agree that the housing market is out of control.

When I was at school the cost of the average home was roughly four times the average income. Today it’s twelve.[47]

What this means is a lot of people are just giving up.

First home buyers are now at near record lows and the level of home ownership in Australia is at a sixty year low.[48]

We can’t afford to become the sort of society where most people can only ever afford to rent. But that’s what the current tax system is creating.  It’s easier for an investor to buy their sixth home under our current laws than for your kids to buy their first.

If you want to fix the problem I am talking about – the hollowing out of the middle class – we have got to fix this.

We have also got boost the incomes of people on the minimum wage not cut them – that’s why the cuts to penalty rate are such a bad idea.

CONCLUSION

This is just the start.

These are the sort of things we have to do if we want to avoid the anti-trade backlash we saw last year in the US creeping across the Pacific.

If we can do this – if we can push the bottom of that trunk up – it won’t just boost support for trade.  It will also boost our economy.

Think about it – people on lower incomes spend a greater percentage of their take home pay than people on higher incomes.  Consumer spending is more than half our GDP.  That means if we boost their buying power it will help the entire economy.

And most importantly it will help Wayne and Australians like him.

That’s why the fights we have in Canberra are so important.

It’s about the sort of people we want to be and the sort of country we want to create.

Thank you.

MONDAY 10 APRIL 2017

MEDIA CONTACT: KORENA FLANAGAN 02 9790 2466