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Treasurer Scott Morrison recently started pushing back, delivering a staunch defense of globalization to an audience in Sydney. Like other world leaders responding to the wave of populism, Mr. Morrison doubled down with strong claims about the universal, lasting benefits of free trade. Australians may be anxious about their economic future, he conceded. But don’t blame globalization.

Globalization “increases our living standards and always has,” Mr. Morrison bluntly proclaimed. Free trade, immigration and inward foreign investment are “the very sources of … prosperity.” Resisting globalization, he suggested, is like thinking “we can pull the doona over our head and insulate ourselves.”

Denying any potential downside to globalization, and deriding critics as hiding from reality, will not defuse the wave of anger that put four One Nation senators into Parliament. Contrary to Mr. Morrison’s claims, there is ample evidence that Australia’s trade performance has deteriorated badly in recent years, despite –- or perhaps because of -– the acceleration of free trade.

Globalization, as currently practiced, is imposing real, lasting damage in many parts of Australia, and producing a fertile political environment for nationalism and xenophobia. The political and policy responses to that danger must go beyond denial.

Mr. Morrison stressed the effectiveness of his government’s trade agenda, especially what he called new “export trade deals” with China, Korea, and Japan. (This curious terminology deliberately neglects that free trade agreements are also intended to facilitate imports!) “The results are there to see,” he said.

Or are they? As a share of GDP, Australia’s exports have declined significantly since the turn of the century, even as government inked several free trade pacts. Services exports also contracted relative to GDP. And ironically, Australia did worse with its free trade partners, than with the world as a whole.

For example, we now have one year of experience under free trade with Japan and Korea. Perversely, Australian exports to both countries declined in the first year: by 9 percent for Korea, and 16 percent to Japan. Yet Australia’s imports from Japan and Korea surged by 14 percent and 24 percent, respectively.

Therefore, Australia enjoyed more exports, and a better trade balance, without free trade than with it. In the first months of free trade with China, Australia’s exports are also declining. Similarly, under Australia’s trade pacts with the U.S., Thailand, Singapore and Chile, imports grew much faster than exports — and in some cases exports didn’t grow at all.

There’s little reason to believe that new deals being pursued by Canberra (with India, Indonesia and the Trans Pacific Partnership) would have any better results.

The cumulation of many bilateral trade deficits is an overall global payments imbalance that is driving Australia deeply into international debt. Australia’s current account deficit reached $77.5 billion last year: the biggest ever (in nominal terms). Relative to GDP, that’s the second-largest of any OECD country — behind only the U.K. (another hotbed of populism). It’s even worse than precarious emerging economies (like Brazil, South Africa or Turkey).

Mr. Morrison actually celebrated this large international deficit last week, suggesting it allows Australia to invest more and grow faster. But he has it perfectly backwards. Business investment is contracting rapidly in Australia, not growing. And with Australia buying so much more from the rest of the world than it sells, we end up with less production, fewer jobs and less income. The gap can be offset with growing international debt, but only for a while.

This miserable trade performance is clearly contributing to Australia’s weak labour market: declining total hours of employment, disappearing full-time jobs and unprecedented wage stagnation. So disaffected Australians aren’t making it up when they conclude their prospects have diminished, and no amount of boosterism can change that reality.

Moreover, they have sound reasons to blame globalization as one important factor (certainly not the only one) for their predicament.

If Mr. Morrison and other free-traders want to truly counter the divisive and dangerous ideas of nationalism and xenophobia, they should start by acknowledging that globalization does indeed have a downside, not just an upside. Then they must move to implement policies -– like balanced trade, job creation, stronger income security, and better vocational education — to assist those Australians who have been harmed by it.

The post Denying The Downside Of Globalization Won’t Stop Populism appeared first on The Australia Institute's Centre for Future Work.

It was a “sleeper” issue in the recent election, and led to the defeat of some high-profile Liberal candidates. But now the debate over penalty rates for work on weekends and public holidays shifts to the Fair Work Commission. The economic arguments in favour of cutting penalties (as advocated by lobbyists for the retail and hospitality sectors) are deeply flawed.

Penalty rates for working on weekends were an important “sleeper” issue in the recent federal election. On the surface, both Labor and the Coalition agreed the future of penalty rates would be determined by the Fair Work Commission. But that superficial consensus couldn’t hide deep differences in what the respective parties were actually hoping for. Labor explicitly urged the FWC to maintain existing penalties: double-time on Sundays, and time-and-a-half for Saturdays. Many Coalition candidates, on the other hand, endorsed a reduction in penalties – consistent with the views of business lobbyists who want lower operating costs on weekends.

At the grass-roots level, meanwhile, the issue resonated strongly with significant numbers of voters. Union activists launched an 18-month “Save Our Weekend” campaign, knocking on tens of thousands of doors in marginal seats before the election was even called. Opinion polls showed strong support for retaining (or even increasing) weekend penalty rates; respondents opposed cutting penalties by two-to-one margins, or more. The swing against the Coalition in ridings targeted by the penalty rates campaign was nearly twice as large (6 percentage points) as the national swing.

Penalty rates will remain a charged issue in the political arena. But for now, the main attention shifts to the FWC, whose decision is expected in coming weeks. The Commission should reject the entreaties of retail and restaurant employers for lower penalties, because the economic case for cutting penalties looks shakier all the time.

Employers in all sectors routinely claim that cutting wages will strengthen job-creation. But this purported trade-off between compensation and employment is refuted by macroeconomic evidence. Indeed, historical data suggest higher wages are more often associated with stronger employment outcomes, not weaker: in part because household consumption spending (which depends directly on wages) is crucial for overall spending power and hence economic vitality. The retail and hospitality industries have been the most aggressive advocates of weaker penalty rates. Yet ironically, it is in these sectors that the argument for wage-cutting is weakest of all.

After all, employment in stores and restaurants depends directly on the level of consumer spending. And this demand constraint is more binding in domestic service sectors than any other part of the economy. In export-oriented industries, employers can at least pretend that lower labour costs will boost sales (by undercutting foreign competition and hence winning new business). Even here the argument is not convincing, since in practice global competitiveness depends more on productivity, quality, and innovation than on low wages. But in non-traded domestic sectors, where Australians produce services for other Australians, the logic falls apart completely.

Remember, Australian consumers already spend far more than they earn. That’s why average consumer debt is growing rapidly: now equal to 125 percent of national GDP. How could making it less costly for shops and cafes to open on weekends, somehow unleash new reservoirs of spending power, and stimulate tens of thousands of new jobs? In macroeconomic terms it’s simply not possible.

Keeping businesses open for longer hours on weekends, doesn’t mean consumers have more money in their wallets. Instead, the same amount of retail and hospitality spending must now be spread across longer opening hours. If anything, that hurts productivity and profitability, and will eventually lead to the closure of some retail and hospitality firms that were already operating on the financial edge.

It’s the same reason why opening a new shopping mall cannot, on its own, increase total employment levels. Unless there are other factors driving an expansion in broader incomes and spending, opening one store must inevitably lead to a closure somewhere else.

It’s especially laughable to hope that cheaper weekend labour could somehow attract new business to Australia’s stores and cafes. Are penalty rate opponents expecting a surge in tourists from China, perhaps – who were just waiting for cheaper Sunday shopping before booking their trips?

In short, the very industries pushing hardest for reduced penalties – retail and hospitality – are the ones most dependent on the spending power of domestic consumers. Hence they would directly experience the most economic blowback from their own wage cuts.

Indeed, there is abundant evidence that unprecedented stagnation in wages is already undermining growth and job creation. Nominal wages are inching along at their slowest pace in recorded history (barely 1 percent per year). Real wages, adjusted for inflation, have been falling since 2013. Economists of all persuasions have highlighted the resulting weakness in household incomes as a key factor behind sluggish growth, rising personal debt, and unemployment and underemployment.

Ultimately, rolling back penalties would simply constitute a major effective wage cut for workers who are already among the worst-paid in society. It will exacerbate the broader wage stagnation that is holding back Australian growth. And it will whet the appetites of other employers for more wage suppression – now on grounds of “keeping up” with the advantages granted to retail and hospitality.

Australia needs higher wages, not lower. Let’s hope the Fair Work Commission sees this big picture.

The post The Flawed Economics of Cutting Penalty Rates appeared first on The Australia Institute's Centre for Future Work.