Something interesting has emerged in voting patterns on both sides of the Atlantic: Young people are voting in ways that are markedly different from their elders. A great divide appears to have opened up, based not so much on income, education, or gender as on the voters’ generation.

There are good reasons for this divide. The lives of both old and young, as they are now lived, are different. Their pasts are different, and so are their prospects.

The Cold War, for example, was over even before some were born and while others were still children. Words like socialism do not convey the meaning they once did. If socialism means creating a society where shared concerns are not given short shrift—where people care about other people and the environment in which they live—so be it. Yes, there may have been failed experiments under that rubric a quarter-or half-century ago; but today’s experiments bear no resemblance to those of the past. So the failure of those past experiments says nothing about the new ones.

Older upper-middle-class Americans and Europeans have had a good life. When they entered the labour force, well-compensated jobs were waiting for them. The question they asked was what they wanted to do, not how long they would have to live with their parents before they got a job that enabled them to move out.

That generation expected to have job security, to marry young, to buy a house—perhaps a summer house, too—and finally retire with reasonable security. Overall, they expected to be better off than their parents.

While today’s older generation encountered bumps along the way, for the most part, their expectations were met. They may have made more on capital gains on their homes than from working. They almost surely found that strange, but they willingly accepted the gift of our speculative markets, and often gave themselves credit for buying in the right place at the right time.

Today, the expectations of young people, wherever they are in the income distribution, are the opposite. They face job insecurity throughout their lives. On average, many college graduates will search for months before they find a job—often only after having taken one or two unpaid internships. And they count themselves lucky, because they know that their poorer counterparts, some of whom did better in school, cannot afford to spend a year or two without income, and do not have the connections to get an internship in the first place.

Today’s young university graduates are burdened with debt—the poorer they are, the more they owe. So they do not ask what job they would like; they simply ask what job will enable them to pay their college loans, which often will burden them for 20 years or more. Likewise, buying a home is a distant dream.

These struggles mean that young people are not thinking much about retirement. If they did, they would only be frightened by how much they will need to accumulate to live a decent life (beyond bare social security), given the likely persistence of rock-bottom interest rates.

In short, today’s young people view the world through the lens of intergenerational fairness. The children of the upper middle class may do well in the end, because they will inherit wealth from their parents. While they may not like this kind of dependence, they dislike even more the alternative: a ‘fresh start’ in which the cards are stacked against their attainment of anything approaching what was once viewed as a basic middle-class lifestyle.

These inequities cannot easily be explained away. It isn’t as if these young people didn’t work hard: these hardships affect those who spent long hours studying, excelled in school, and did everything ‘right.’ The sense of social injustice—that the economic game is rigged—is enhanced as they see the bankers who brought on the financial crisis, the cause of the economy’s continuing malaise, walk away with mega-bonuses, with almost no one being held accountable for their wrongdoing. Massive fraud was committed, but somehow, no one actually perpetrated it. Political elites promised that ‘reforms’ would bring unprecedented prosperity. And they did, but only for the top 1%. Everyone else, including the young, got unprecedented insecurity.

These three realities—social injustice on an unprecedented scale, massive inequities, and a loss of trust in elites—define our political moment, and rightly so.

More of the same is not an answer. That is why the centre-left and centre-right parties in Europe are losing. America is in a strange position: while the Republican presidential candidates compete on demagoguery, with ill-thought-through proposals that would make matters worse, both of the Democratic candidates are proposing changes which—if they could only get them through Congress—would make a real difference.

Were the reforms put forward by Hillary Clinton or Bernie Sanders adopted, the financial system’s ability to prey on those already leading a precarious life would be curbed. And both have proposals for deep reforms that would change how America finances higher education.

But more needs to be done to make home ownership possible not just for those with parents who can give them a down payment, and to make retirement security possible, given the vagaries of the stock market and the near-zero-interest world we have entered. Most important, the young will not find a smooth path into the job market unless the economy is performing much better. The ‘official’ unemployment rate in the United States, at 4.9%, masks much higher levels of disguised unemployment, which, at the very least, are holding down wages.

But we won’t be able to fix the problem if we don’t recognize it. Our young do. They perceive the absence of intergenerational justice, and they are right to be angry.

In the absence of significant new reforms by governments—both Federal and State—aimed at expanding opportunity and innovation, the outlook for Australia’s national income growth over the next decade is bleak.

The basis for this conclusion is simple:

• productivity is, over time, the key determinant of national income, as per Paul Krugman’s famous dictum: in the long run, productivity isn’t everything but it’s almost everything
• there’s good evidence in western countries, including Australia, that a secular slow-down in productivity has occurred over the last decade
• at the same time in Australia, there’s also a strong slow-down in national income due to our declining terms of trade (the relative prices of exports to those of imports)

What this means is that for the next decade, we face a clear shift downwards in income growth, perhaps to half of the level that this economy has been used to over the past fifty years.

Contributions to growth in average incomes – stagnant labour productivity and poor national income growth (ie same growth as 2000–2012)

The improvement will still be small even if labour productivity returns to long run levels in this decade from its relatively poor growth in the 2000s. We need a productivity surge.

And there are other pressures. Depending on how rapidly baby boomers choose to retire, workforce participation—the number of us aged 15 to 64 who are employed—which is already showing signs of decline, will worsen at some point. Once established, this trend may not reverse itself, absent policy action and change in employer attitudes, for the next thirty years or so.

Of course, some of us will still prosper. There will be some income growth. But it’s likely that more of us can’t expect to enjoy rising real incomes. And the competition for a share of our slower-growing wealth could be a corrosive social issue if poorly-handled.

Alternatively, we could move to recognise this new reality and try to offset it with other policy initiatives.

Monetary policy and the actions of the Reserve Bank may not have much more scope left to offset these trends; interest rates are historically low. And fiscal policy remains beset by arguments over when to return to budget surplus.

This leaves microeconomic reform, a term which includes all manner of changes to the structure of our economy, who pays for the things we want, and which level of government offers greatest efficiency gains to delivering those things.

A generation ago, we faced a similar challenge, although the driving forces were different.

We chose to respond not by adding to the fiscal burden by borrowing, nor by over-reliance on monetary policy, but by wholesale economic reform, industry by industry, involving a comprehensive examination of both the traded and non-traded sectors of the economy.

Over more than a decade and across multiple changes of government—State as well as Federal—we pursued change and excluded no significant sector.

Economic Statements were a vehicle for change from 1987 until 1999. Because so many sectors were addressed together, each successive Statement reinforced two things:

• change was a shared responsibility and
• there was no escaping change, regardless of what business you might be in.

It’s my contention that this period of change altered expectations across the Australian economy.

It was no longer possible to be protected by government from the consequences of poor decision-making at the corporate level, nor was it easy to exploit market power—for union or for employer. Boards changed their approach to investment and innovation, and unions took opportunities to improve the lot of workforces by aligning better with investment plans.

Expectations are very powerful. They are, after all, a key driver of the effectiveness of monetary policy. And the famous US dictum ‘don’t fight the Fed’ indicates how powerful expectations can be.

Of course, there are many factors beyond the efforts of governments to reform that create the economy and society we have today.

But government is a crucial swing factor. It can choose to intervene, or to stand aside. If it chooses inaction, there’s an implicit signal that all will be right, eventually. And perhaps it will. Not always must government be part of the solution.

But the nature of the challenges listed above—lifting productivity, improving our terms of trade and addressing the issue of our ageing population—suggest there’s a vital role for government.

And it’s in managing Australia’s long-term economic trajectory that government has a core responsibility as well as a natural advantage—its ability to assess risks which are simply beyond the scope of other actors in our society.

We need governments to collectively choose to contribute via new policy approaches aimed squarely at real reform—in trade policy, energy policy, industrial relations, transport, planning, saving, as well as essential government-supported services like health and aged care.

These measures won’t always link directly to improved productivity and income statistics. But they offer a genuine opportunity for innovation and adaptation that’s our best chance to arrest a downward shift in Australia’s national income.