Pushing our luck

| October 16, 2013

Does Australia need a structural change? Ian McAuley from the Centre of Policy Development argues that economic policies and the ideas behind them that might have been appropriate in the past now constrain our thinking.

Although opinion polling revealed economic management as a major concern in the last election, economic policy hardly featured in the campaign.

The fuss about gross government debt and costing over the four year forward estimates period carried the message that economic management is simply a question of budgeting and managing cash flow – a narrow fiscal focus. Difficult economic issues, such as improving public revenue and labour relations policy were glossed over. Where there were partisan differences, such as how we should reduce our economy’s carbon dependence, the debate was superficial.

It is thirty years since the Hawke-Keating Government engaged with the community on the question of economic structure and ushered in a set of reforms – tariff reductions, financial market deregulation and competition policy. There have been subsequent initiatives such as the Howard Government’s reform to indirect taxes and the Gillard Government’s carbon pricing, but these have not been in the context of a wide review of economic structure. Perhaps years of prosperity, through a mining boom and a relatively painless experience through the world’s “great recession”, have left us complacent.

At the Centre for Policy Development, however, we have been asking “what now, after the boom?” How will Australians manage when we can no longer rely on foreign investment and high commodity prices to finance our current account deficit and therefore our living standards? How will we compete in a world where the rewards go to those who make the best use of their human, industrial, social and environmental capital?

In our book Pushing our Luck: Ideas for Australian Progress, published last month, we consider not only specific economic policies, but also the ideas shaping those policies. Ideas which have been appropriate in the past may now be constraining our thinking.

In my contribution I consider six such ideas which I call “legacy ideas”, because they still influence the way we think about economic policy.

The first is an expectation of high investment returns. As Elroy Dimson and his colleagues point out in their 2001 work Triumph of the Optimists: 101 Years of Global Investment Returns, Australia enjoyed outstanding returns over the twentieth century – by some of their measures the highest of the 16 developed countries they studied. They attribute this to wool and mining booms, high population growth and the fact that we escaped the devastation of war on our land.

So conditioned, we now find it hard to accept that returns in the future may be lower.

By raising the cost of capital an expectation of high return not only distorts our capital allocation towards short-term ventures, such as property speculation, but it also devalues public investments in infrastructure.

Unless we become more patient we are unlikely to develop areas of deep specialisation, as the Germans have done so well – areas of enduring competitive strength which can ride out temporary fluctuations in world economic conditions – and we will have an ongoing deficit in public infrastructure.

The second legacy idea is an obsession about cost-competitiveness. As commodity exporters we have competed as price-takers, and have become very good at it. Our mining and agricultural industries are extraordinarily efficient. (Anyone who refers to them as “dig it up and sell it” operations fails to acknowledge their technological sophistication.)

We need also to think about competitiveness in terms of developing products where we can command a price premium, adding value along a chain of integrated goods and services, all the way to the final customers. Thinking about competitiveness only in terms of cost has tended to frame our productivity debate in terms of labour costs – a frame which is about a zero-sum conflict about distribution.

That relates to the third legacy idea. We have echoes of the nineteenth century idea of economic activity as a conflict between “labour” and “capital”, where “capital” is physical plant and equipment – a fleet of trucks, a large computer, an injection moulding machine. We have yet to appreciate that while the cost of such capital has tumbled, human capital – the set of skills, experiences, and socialisation that we bring to the workplace – has become the main source of competitive advantage. We need to see economic activity in terms of people coming together – some with finance, some with entrepreneurial and creative flair, some with management skills, some with formal education, some with experience – to create value and to share the proceeds. Yet we still talk about “employers” and “employees”, and have formal institutions representing these supposedly conflicting interest groups.

A fourth idea is about manufacturing. Our thinking is shaped by statistical classifications which have lost their meaning. The days when manufacturing was the assured path to modernisation and prosperity are long behind us, but it is wrong to think that a high wage country cannot support manufacturing. We think too much about what comes out of the door of enterprises, rather than what people do. We should think more about activities, rather than products. We may be producing clothing and cars well into the future, but they won’t look anything like the unskilled labour-intensive clothing and car industries of the past, and the physical products may be only one part of the value chain.

The fifth idea is about “jobs”, and this comes back to the election campaign. We tend to think about the “job” as something dispensed by a benevolent company or government employer. The concern about proposed cuts to the public service is about “jobs”, rather than about what those people contribute to society. The Salary Packaging Association responds to proposals for tax reform by referring to the threat to people’s jobs.

Obviously it is important that people have the opportunity to contribute economically – full employment is no less a worthy goal than it was in 1945 when the Government of the day made it the centrepiece of economic policy. But a focus on “jobs” can lead us to protecting employment as an end in itself, which was the shackle we imposed on ourselves in the days of made-to-order tariff protection. Arguments about protecting “jobs” become, de facto, arguments for impeding structural change.

Finally there is the idea that a government should look after “business interests”, protecting businesses from cost imposts such as tough environmental controls. But there is no “business community” with uniform, homogeneous interests. For example carbon pricing clearly disadvantages some established businesses, while it provides opportunities for “green” entrepreneurs.

Structural change is not easy, but if we go on pushing our luck, relying on the easy pickings of commodity booms, we will face tough times when our luck runs out.