When Treasurer Scott Morrison met Goldman Sachs chief executive Lloyd Blankfein in New York late last week, the Wall Street banker was baffled.
Blankfein was searching for answers. Why, at a time when most economies were generally performing reasonably, had politics become so difficult in many countries?
“He does find that perplexing because their view is [economic] things are a lot better than the politics reflect,” Morrison told The Australian Financial Review in Washington on Friday.
“I made this point: so long as we’ve got wages growth in the space it’s in then it’s understandable that we’ll continue to have those political frustrations.”
After years of flat wages growth in most developed countries, the global economy’s prospects are belatedly picking up long after the 2008 global financial crisis, according to the International Monetary Fund’s forecasts published last week.
Following private meetings with US Federal Reserve chair Janet Yellen, New York Fed president William Dudley and several finance ministers in Washington, Morrison was the most upbeat he’s been about the global economy in his two years as Treasurer.
“I’ve better talking about better days ahead in the budget and beyond, and I think there’s a very similar sentiment among the finance ministers and central bank governors,” Morrison said.
“In the many one-on-one discussions I’ve had with everybody from Fed board members [Yellen and Dudley] to other finance ministers it’s been a pretty consistent trend.”
But there is no escaping the reality that politics around the world is messy, as Blankfein alluded to.
The rise of populist US President Donald Trump, the inability of a Republican-controlled Congress to pass legislation, Britain’s vote last year to quit the European Union, the subsequent surprise competitiveness of far-left Labour leader Jeremy Corbyn, the ascent of far-right minor parties in Europe and the resurgence of Pauline Hanson’s One Nation in Australia after 20 years in the wilderness, underline the volatile state of politics.
For finance ministers, central bank heads and commercial bankers gathering in Washington for the Group of 20 and IMF meetings, talk about the dichotomy between the economy and politics was unavoidable.
JPMorgan chief executive Jamie Dimon said steady – though not spectacular – US economic growth had been achieved “in spite” of the failures in Washington. “We have got to get our act together,” Dimon said.
Despite the pessimism about politics from private financiers on the outskirts of the meetings of finance ministers and central bank governors, there was a flicker of optimism that the anti-globalisation movement had peaked.
Wolfgang Schäuble, the veteran Finance Minister of Germany which chaired the G20 this year, admitted it had been a “challenging year”. But “things are not as bad as predicted” on multilateral economic cooperation, he said.
Talk of trade wars had subsided somewhat, even as President Trump seeks to renegotiate trade relations with China, South Korea, Mexico and Canada.
Asked if President Trump’s protectionist trade rhetoric has been discussed in the meetings, Mr Schäuble said he had become “much more relaxed” and was “quite optimistic” on international trade after an earlier fraught G20 meeting in Germany’s Baden-Baden in March when the world pushed back against the Trump administration’s protectionist instincts.
Nevertheless, President of Germany’s central bank, Jens Weidmann, said despite improved short-term global economic growth prospects, “weak productivity trends weigh on longer term growth.”
If a lack of wages growth is a part of the reason for the populist political backlash and vehement nationalism, as Morrison suggests, it won’t be easy to rectify.
The globalisation of the labour market, automation and digitalisation of human work tasks, a shift to more independent contractors and weakening of trade unions are among a myriad of reasons given by economists for why wages have been subdued.
In Australia’s case the end of the mining investment boom has also weighed on worker pay.
“That’s only going to change through greater investment and improved productivity,” Morrison said.
Productivity, a key determinant of wages growth and living standards, has weakened due to the ageing of the workforce, companies restraining investment in new equipment that would make workers more productive and a lack of microeconomic reform by governments, economists believe.
The Turnbull government argues extending company tax cuts and public infrastructure programs are intended to lift investment, boost productivity and stimulate wages.
“It’s the coupling of cutting business taxes and lifting investment in infrastructure in a low rate environment, and using the government’s balance sheet to achieve that,” Morrison said.
The Treasurer is sitting on a five-yearly Productivity Commission report that he will release before Christmas.
“It is very much on the software of productivity [more] than the hardware,” Morrison said.
“It’s a bit of a different agenda to what was around in the pre iPhone ’80s and ’90s.”
Reforming healthcare, worker training, the functioning of cities and market competition are several of the themes that figure in the report.
But Morrison admits that in this political climate it is a lot more challenging to push through tough microeconomic reforms.
“Today reform is a lot harder, not only because of the political environment.”
“When wages growth has been what it’s been the margin for reform is a lot tighter.”
And that’s perhaps what Morrison was trying to politely express to Goldman’s Blankfein.
A day later when Blankfein arrived in Washington after meeting Morrison in New York, the Goldman boss evidently remained puzzled at the dichotomy in the economy and politics.
“At IMF in DC. Puzzling that politics everywhere are so difficult when world’s economies are (mostly) good and the world is (mostly) at peace,” Blankfein tweeted, in echoes of what he had earlier told Morrison privately.
At IMF in DC. Puzzling that politics everywhere are so difficult when world's economies are (mostly) good and the world is (mostly) at peace
— Lloyd Blankfein (@lloydblankfein) October 13, 2017