Following is the full version of the edited remarks published in Australian Manufacturing on April 29. I did the editing, as the following was way too long for the publication.
What is blindingly absent from this election campaign, and politics in this country is any recognition that an economy is a system. No part of the economy acts alone, each part depends in some way on every other part. They are interdependent. The entire system is the sum of the interdependent parts and depends on all the parts playing their individual role.
An economy is like a car, which we sadly no longer produce in this country. No part of a car can move you from point A to point B. It is only when all the parts are fitted together, acting in concert, that it has the ability to move. One part fails, and the rest underperforms at best, fails completely at worst.
We seem to think that we can add a dash of pork here, and a bit of pepper over there in an effort to buy votes, and bingo, all will be well. Utter nonsense.
What we are seeing currently is a confected tactical battle of hollow words backed by the opportunity to spend public money chasing the largess of incumbent government. What we need is a strategic conversation, where a wide range of very tough questions are asked, followed by even tougher choices. We need to have an informed and rational national conversation about those questions, and the resulting choices that must be made.
Nobel winner Daniel Kahneman coined the term ‘prospect theory’ which describes the way people value the prospect of gains and losses very differently. The pain felt by an immediate loss compared to the benefits that come from a long-term gain is multiplied many times. The reverse side of the coin is loss aversion, a remarkably powerful psychological impulse. We value the loss of something we already have far more highly than the value of something we may have in the future.
Both political sides use these twin drivers ruthlessly in an attempt to shape behaviour at the ballot box. It is a reasonable thing to do, when coupled with integrity and transparency, both notable only by their omission.
What we are seeing is the expenditure of the financial and intellectual capital of the nation, investment decisions left in the hands of institutions that we no longer trust based on the behaviour over the last 30 years.
What we need is for our leaders to build the political capital to be able to make bold decisions that change the economic and social landscape of the country.
The last time there was a genuine investment of political capital that could later be recovered, was when Howard risked his position when went to the 1998 election with the GST as part of his program.
Following are a few of what I believe to be the key factors which face the nation, but about which we will hear little, or nothing during this pork led competition for our votes.
Income Vs Expenditure. Our expenditure exceeds our income. This is not a blip in the graph, it is a long-term structural weakness. If Australia was a business, it would be broke. The analogy to the household budget is not an accurate one as the government has control of the money supply, but nevertheless, the piper must be paid. There is no sign of any acknowledgement of the debt, despite the current government using deficits as a stick to beat the labour party for as long as I can remember. In addition, there are none of the preparations necessary to build the productive capacity of the economy to repay this debt, beyond wishful thinking and modelling that uses questionable assumptions.
Education. We need to consider education in the broadest terms, not just the stuff you need to know to pass an exam, but the understanding to break a situation down into is component parts. First principals if you like, define, and understand the problem, generate possible solutions, test and learn, then implement and review continuously. Education is a multigenerational undertaking, not just something you throw money at and hope.
You do not need a degree to be smart. Some of the smartest people I know do not have degrees, and several others with multiple degrees are failing as baristas.
Our system has been bastardised over the years to accommodate fiscal and ideological demands. The result is a distortion in the allocation of resources and the increasing polarisation of opportunity for Australian kids. This is in addition to the conversion of education into a privatised profit centre. Now we have qualifications for sale, and an education system dependent on those sales for survival.
If we are to genuinely address the opportunities of the future, the State/Federal squabbles have to be sorted, and resources allocated to deliver that equality of opportunity.
The largely discarded for political reasons Gonski report, now 11 years old, provided a least a starting point for the school system. A similar exercise needs to be done for the tertiary sector, recognising that technical and academic education combined will deliver the manufacturing and operational skills needed for future productivity improvement throughout the economy.
There also has to be the political will to implement, without which, we will continue to stagnate.
Climate change. The science has been in for 30 years, it is a generational challenge, and should not be a political football tied to short term politics in a few seats. Despite the scathing third report by the IPCC (International Panel on Climate Change) released the week prior to the election being called, the silence has been deafening. This is despite increased recognition of the impact of Climate change by the voters. Meanwhile, there are a cohort of independents threatening mainly formerly safe Liberal seats whose priority is climate change, along with integrity in public life.
We need to be thinking differently about the term ‘climate change’. It is too narrow a term, implying we just need to be concerned about the impact of CO2 on weather, and the human and capital impacts of those changes. Instead, we need to be thinking about the challenge more holistically. We humans are just a small part of the ecosystem of the planet. For millennia we had no appreciable impact in the balance between what we took out, and what nature was able to put back. Suddenly, that changed, and we now take out of the planets ecosystem far more than the capacity of the system to replace it.
There is nothing we do that does not come from nature. The oxygen we breathe the water we drink, the food we eat, the materials we use, all come from nature. We are part of the planets ecosystem, whether we like it or not, and we are consuming the resources of the ecosystem at an unsustainable rate. Think of it as you would a balance sheet. On one side you have assets, on the other liabilities and equity. When your assets grow faster than your liabilities, you add to the store of equity. When it is the reverse, you deplete equity. The tipping point is when your equity is gone, and you can no longer sustain the difference between the rate in increase of liabilities over the production of assets. At that point you are bankrupt. We humans have been depleting the assets of the planet unsustainably since the beginning of the industrial revolution, and the rate at which the depletion is happening is increasing. At some point in time, the music will stop, and subsequent generations will inherit an unwinnable challenge.
Apolitical Policy advice. The politicisation of the public service is a problem. The government does not get frank and detailed policy advice anymore. Instead, they are paying consultants, who are in effect paid to tell the government what it wants to hear in relation to policy, while the public service has been relegated to the role of implementers.
Expenditure Productivity. Fiscal debate, such as it is, has been reduced to how much has been spent, with no reference to the return for that spending. We need to increase productivity of public revenues radically or the reduced number of taxpayers in future will be unable to shoulder the burden of an ageing population. The increased demands for the government to look after people down to the minor details which should list as ‘personal responsibility’ will become overwhelming. Promising no more taxes is not sustainable unless coupled with explanations of how the productivity of the current expenditure will be radically increased.
Governance. The parties cannot rule themselves, how on earth can we, the electors believe that they can deliver for the country. Besides, to use Paul Keatings immortal phrase, they are ‘unrepresentative swill’. Both major parties have about 60k members. Such small and skewed numbers are hardly a representative sample from which the political leadership of the place should be drawn. Instead of having people in parliament who genuinely wish to contribute, who have proven themselves worthy elsewhere in the economy, we now have politics as a career. Smart youngsters with degrees, mostly law, getting jobs as political staffers of various types, and progressing by proving only that they are effective political mechanics to the point where they are endorsed as candidates, and they keep trying until they land a spot. Alternatively, they can be shovelled into a range of highly paid roles that are appointed by political fiat. No experience beyond politics required.
As a director of companies, I am subject to the Corporations Act 2001. The act amongst other things, outlines the obligations of directors to exercise their duties in good faith, and in the best interests of the shareholders. In other words, do not tell lies, deliberately mislead, or act in a way that is not in the shareholders best interests. Both sides of the house fail on all counts. If they were also subject to the provisions of the Corporations act, half of them would be holidaying at Long Bay.
A further pressure on the governance performance of current institutions that has long term impacts on the economy is in the management of R&D expenditure. Our federated and short-term driven system works against the focus necessary to deliver strategic outcomes. Billions of dollars are thrown at the wall of grant programs, most of which do not deliver outcomes that add to any sort of ‘vision’ for the Australia we would like to hand to our grandchildren.
CSIRO used to be a relatively apolitical and deep reservoir of scientific capability that was able to collaborate and co-ordinate across sectors and around the nation. That was before it was progressively gutted and politicised over the last 30 years.
The Labour party has just announced as part of their election platform a new defence research agency similar to the successful American DARPA model. It would make more sense to re-fund and expand the remit of CSIRO, rather than starting again and risking duplication and turf wars.
Institutional integrity. We should not need an integrity commission, but sadly we do, desperately. It would appear to the casual observer that the adage that power corrupts, and absolute power corrupts absolutely is at work. It needs to stop, so the public can have some level of confidence that the taxes they pay are not being wasted, and worse, diverted.
Democracies only work when there is trust in the institutions that run them, and by inference, the people in those institutions are trustworthy. The fact that trust is so low is an alarming indicator, something the government should be addressing, both by its own behaviour, and by increasing the level of transparency and accountability. Unfortunately, the perception of the behaviour of governments is very low, and the refusal of the government to sensibly address the question of an integrity commission with teeth makes us assume the worst. Remember the 26 times the current government voted against a royal commission into the banking industry? When dragged kicking and screaming to hold it, the depth of the avaricious and morally bankrupt behaviour revealed was breathtaking.
The end of cheap money. The inflation figures released on April 27th put the annualised inflation rate at 5.1%, up from 3.5% at the end of the December quarter last year. While it may bounce around given the volatility of fuel and food prices, the trend is very clear, and the current election driven lucky dip of spending promises will not help.
No matter the rhetoric, and short-term giveaways that come with an election campaign, Australia is in for a rocky ride, and it will not matter who wins on May 21, the impact will be felt in every corner of the economy, and by every Australian. Most currently in parliament, and those who realistically aspire to be there after May 21 have not been in a management role in an inflationary surge. That is a very dangerous situation, it is easy to make the wrong call through inexperience.
Inflation led cost cutting
When you are in the red, as we are, the temptation is always to cut the discretionary spending. In a corporation that leads to reduced advertising, not replacing employees who leave, sell and lease back assets, in other words, cashing in on the things that will generate the cash in the future. Governments struggle with this as so much of their spending is baked in, and subject to the swings of the economic cycle. Nevertheless, we should be increasing what we spend on education, R&D, and those future cash generators, and aggressively look to reduce institutionalised waste to fund the increases. Unfortunately, this leads to the difficult choice of accepting short term pain in the expectation of long-term gain, not usually a politically palatable choice.
Cyclic mismatch. Election cycles do not match with those that run the rest of our lives. Generations come and go, scientific discovery to product commercialisation usually takes 20 years or more, the constitution has had only 8 amendments since federation in 1901, the last successful one in 1977 relating to the relatively benign question of the retirement age of judges. The world has changed a bit since 1977, and our strategic framework is almost unchanged after 121 years. We must wonder if the constitution is still fit for purpose. There is not much any government can do about this beyond acknowledging the reality and being prepared to invest in the long-term health of the economy by building intellectual, social, and educational resilience. However, we should be able to have an informed debate about the nature and limitations of our ‘institutional guardrail” the constitution, and be prepared to make changes as necessary to meet the challenges of the 21st century
Header cartoon credit: gapingvoid.com
