Professor John Piggott

With the election of the Coalition Government, incoming Treasurer Joe Hockey is being asked to firm up plans for his “Son of Wallis” root-and-branch review of the Australian financial system.

Certainly a big picture review of the financial system is a step worth considering. Such a review should look beyond banks to the broader interaction of the banking and other financial sectors, including especially superannuation.

As the first of Australia’s baby boomers turn 65 and start to retire, the challenges presented by population ageing will crystallise. There is still much to be done to address these challenges.

Australia is fortunate to have a very sound and sustainable superannuation system. Comprising three pillars – means-tested pension, compulsory savings and voluntary savings – it is, from a government expenditure perspective, one of the most sustainable retirement income systems in the world. Commonwealth expenditure on pensions is projected to increase from 2.7% of GDP in 2010 to 3.9% of GDP, compared with an OECD average of 8.4% in 2010 and 11.4% in 2050.

But the retirement income system in Australia is a bridge part built. Part of its sustainability is due to the system’s focus on protecting those on low incomes through the Age Pension. The role of superannuation should be to replace earnings for people across the income distribution.

But the remarkable success in accumulating super assets has not been matched by structures that will allow super to fund retirement effectively and allow for income streams that are to provide income beyond the basic pension.

Total estimated superannuation assets reached $1.62 trillion in the June 2013 quarter, an increase of 15.5% over the previous 12 months. Some of that increase has been due to solid returns, but much of it is related to contributions exceeding benefit payments. It indicates that the system is still maturing.

As more baby-boomers retire and the population ages during the next couple of decades, asset withdrawal will become a greater part of the picture. This is this part of the bridge that Australia still needs to build.

The financial products that will allow superannuation benefits to provide steady income streams, such as those featuring life-time or deferred longevity insurance, are lacking. For innovative longevity insurance products to flourish, governance and regulatory support for this market must be carefully developed to be in tune with products that will support consumer needs.

While the previous government’s Cooper Review made policy strides in making the accumulation phase more efficient and implementing an accumulation default, there has been little thinking about products and defaults for the stage when funds need to provide income.

As longevity in later life – that is, our life expectancy from 50 – continues to rise, the continued sustainability of our retirement income system depends on a closer examination of the draw-down phase.

Should Australia follow the example of Singapore, where mandated savings at a certain level translate to a certain level of mandated annuity? Or, perhaps we should look to Chile, where annuitisation is voluntary but well supported, and permits a combination of a deferred life annuity and programmed withdrawal.

This arrangement, suggested by a group of us in Australia more than 10 years ago, can help negotiate the balance between flexibility and security at the time of retirement.

Is the Age Pension sufficient in providing income insurance for all people all of the time? And if not, then what should be the product options? And how can policy help to bring them to market?

The next stage of Australia’s superannuation success story should be about how it provides actual retirement income though a thriving financial retirement products market. A financial sector review that answers questions and addresses concerns about the draw-down phase of super could be a significant part of that story.

John Piggott is a Scientia Professor at the Australian School of Business and  Director of  the ARC Centre of Excellence in Population Ageing Research. A version of this post appeared in The Australian Financial Review.

Peter Swan

Our latest research suggests independent directors have increased the pay of CEOs – regardless of how well they have performed –  and in so doing cut back on shareholders’ wealth.

There has been a major issue since 2003 with the relative ignorance of ‘independent’ directors, which has been combined with their lack of incentive to monitor their own pay, which has led to rocketing pay and no incentive to perform. This has been fatal for Australian company performance.

In 2003, the Australian Securities Exchange (ASX) required all listed firms to either adopt a majority of independent board members without links to management and substantial shareholders, or if they didn’t, explain why not.

Independent directors by definition have either no prior experience with the firm, or at least no recent experience. Moreover, many are professional directors with no specific knowledge or background in the industry and their part-time nature means that acquisition of such information is difficult and is never likely to be comparable to that of full-time executives. Quite simply, they are not as good, and shareholders suffer as a result.

Our latest study compared the performance of 969 Australian companies from 2003 to 2011. 561 changed their board structure following the introduction of the ASX’s rule change.

Arguably, the most important and controversial corporate governance issue is board composition. Independent directors free of personal associations with senior executives and major shareholders should be more dispassionate and less biased, especially when evaluating existing business practices.

However, change in the rules in favour of independent directors effectively meant they were far less experienced – and they also set pay. It is noticeable that Australian companies that instituted boards with a majority of ‘independent’ directors in response to a 2003 change in the Australian Securities Exchange’s listing rules have lost almost $70 billion in value compared with other listed companies.

The ASX’s rule change is the most costly and disastrous regulatory change ever implemented in Australia by a private regulator.

Pursuit of private interests seems particularly likely for independent directors as, almost by definition, they have small or negligible shareholding or ‘skin in the game’ that diminishes any intrinsic incentive to monitor that the independent director may possess.

Peter Swan AM FASSA is a Professor of Finance in the School of Banking & Finance at the Australian School of Business. The analysis will be presented at the Chulalongkorn Accounting and Finance Symposium in Thailand in November 2013.

Associate Professor John Evans

Australians accept that during their working life, some earn more than others, but will they accept that the compulsory Superannuation Guarantee Levy system could deliver very different post retirement incomes to those who had similar pre-retirement incomes?

The Australian retirement system, consisting of the Age Pension, the SGL system and personal savings has one serious flaw that will only start to emerge once the system has matured in 2020.

Almost all analysis done on the retirement system uses “on average” assumptions as to periods of contribution, investment returns, costs and period of retirement and usually concludes the system is “adequate”. But this analysis fails to consider that over a typical working life of 40 years, a lot can vary. In particular, all SGL contributions go into some type of investment vehicle where the member’s accumulated retirement benefit is a function of investment markets, and these include significant “shocks” from time to time, such as the recent GFC.

The consequence of investing SGL contributions in market linked securities, regardless of the capabilities of the fund managers is that workers are going to have very different retirement incomes depending on how “lucky” they were in not being subjected to market shocks during their working life. Research with colleagues shows that even without any market shocks, the typical worker could end up with a replacement ratio (the ratio of post retirement income to pre-retirement net income) ranging from around 45% to almost 300%. With even a modest number of market shocks, this range could extend down to almost 35%, and that includes the Age Pension.

This range of post retirement standards of living is highly likely to be unacceptable to retirees who have been forced to defer part of their income to retirement savings and will not only create unanticipated demands for the Age Pension, but possibly social unrest.

The solution to this issue already exists and was a fundamental part of the industry fund philosophy when first established. The solution is to go back to the concept of the SGL contributions being invested in a common pool, but to credit the member account with an interest rate, much the same as occurs with bank deposits on a regular basis. The interest rates would reflect the underlying earnings of investments of the pool, but would be smoothed by creating reserves to balance the good times with the poor times. This is not a new concept and has been practised in investment related insurance contracts for many years. It is of course not perfect and if mismanaged can create problems, and failures as it did with Equitable Life in the UK. But if properly managed, it can create much smoother returns to members of retirement funds and reduce the effect of market shocks and the impact of market volatility. One of the reasons that industry funds abandoned this concept was that they were expanding very rapidly, and $100 of reserves at the beginning of a year had considerably less impact in smoothing returns during the year when assets doubled to $200, but the industry funds are now much more mature and this issue can be managed.

The interest rate concept would create more significant financial risk for the Boards of the superannuation funds, and greater financial skills would be required than is currently needed, but the result should be less volatile retirement benefits for members who are already pooling their contributions and are expecting some level of retirement income that may evaporate close to retirement. The regulation of superannuation funds would also need greater attention but the regulator already has similar issues with the few remaining defined benefit funds.

A return to a more stable distribution of the investment returns is socially desirable to avoid the results of the current system – without it many people will find they reach retirement without much of the money they thought they’d have.

John Evans is an Associate Professor and Head of Risk & Actuarial Studies at the Australian School of Business.

Geoffrey Garrett

After beating up Kevin Rudd and Labor over debt and deficits for years, Tony Abbott has now dumped any return to surplus mantra, merely saying a Coalition government would beat Labor’s bottom line over the next few years.

This about face is smart politics and good policy.  Rudd’s “cut to the bone” critique makes it hard to attack the Coalition for not balancing the budget.

Behind closed doors, Abbott and Rudd probably agree that with Australian unemployment rising and Xi Jinping and Ben Bernanke both taking their feet off the accelerator at the same time, now is not the time to bring a David Cameron-style austerity regime downunder.

Austerity didn’t work for Britain when China and the US were pumping up their economies. With both now in fiscal and monetary retreat, the notion of austerity-led recovery in Australia next year is fanciful.

Instead, Abbott is betting his company, carbon and mining tax cuts will revive the economy and generate more revenue, 1980s Reaganomics-style. Unlike most western countries, Australia can afford to follow the Reagan playbook.

When it comes to debt and deficit, Australia isn’t Greece. It isn’t even Canada, Germany or Switzerland, three apparent western paragons of post-GFC virtue.

Understanding Australia’s public debt position requires more nuance than the sound bite driven political point scoring that all too often masquerades as serious policy analysis. But the importance of getting the debt picture right justifies a deep dive into the statistics.

Kevin Rudd says our public debt is very low, showing just how well he navigated the GFC.

Joe Hockey says our debt is growing more quickly than almost anywhere, revealing Labor’s profligacy and mismanagement

The problem is there is evidence to support both positions. As the old saying goes, there are lies, damn lies and then there are statistics.

But once you go through all the statistics, one thing seems clear: now is not the time to focus on bringing the budget back to surplus. 

The International Monetary Fund’s Fiscal Monitor is the government debt bible. Its statistic of choice is gross general public debt, the total amount of money all levels of government have borrowed and have eventually to pay back, expressed as a percentage of GDP so as to make comparisons among countries meaningful.

Australian gross public debt will be 27.6% of GDP by the end of this year. This is the second lowest among the thirty advanced economies monitored by the IMF, above only tiny Estonia. Fully two-thirds of the advanced countries the IMF monitors have gross public debt more than twice as large as Australia’s.

Germany is the best performer among the large G8 economies. Its 2013 gross public debt is slated at 80.4% of GDP, almost three times Australia’s. The comparable figures for the UK and the US are 93.6% and 108.1%. Japan’s gross public debt will be a stratospheric 245.4%.

So Rudd is right that Australia today is a very low public debt country?

The Coalition says it was the Howard government that put Australia in this enviable position, a position that Labor has subsequently let deteriorate. They are spot on.

Australian gross public debt was 10% of GDP in 2006, the last full year of the Howard government. Again, Australia was only beaten by ever-abstemious Estonia.

The key question concerns how Australia has fared since 2006, and what this means for the future. When Hockey lambasts Labor for its debt blow out he is referring to proportionate growth in Australian gross public debt.

The IMF estimates Australian debt has grown by 176% since 2006. Put differently, Australian debt has almost trebled in the past seven years. And on this measure only two countries, Iceland and Ireland, have performed worse—and both were devastated by the GFC.

The US’s post-GFC stimulus is legendary, but it gross public debt has “only” grown by 64% since 2006 and this year, three times better than Australia’s performance. But this “better” is a product of the fact that the US started with much more public debt

Things look very different if we simply look at the increase in debt as a percentage of GDP. On this measure Australia’s debt situation has weakened from 10% in 2006 to 27.6% this year. Put differently, our debt has grown by 17.6% of GDP.

Here, Australia lies right in the middle of the IMF league table. We have done much better than the US, where public debt has increased by 42.0% of GDP, and the UK, where it has increased by 50.6% But we have done worse than Germany (+12.5% of GDP) and Canada (+16.7%).

Did Australia need an “average” level of fiscal stimulus after the GFC? Has this stimulus been productive or wasted? The Coalition is probably right that Labor did too much and some wasn’t very effective. Labor is probably right it was better to do too much than too little in the eye of the GFC storm.

But it doesn’t seem voters are interested in our politicians refighting this old war. They are probably more interested in the future.

The IMF estimates that by 2018, based on Labor’s plans, Australian public debt will be back under 20% of GDP—still second behind Estonia, and compared with around 100% in both the US and UK. If we are to believe Tony Abbott, the Australian number will be smaller under a coalition government.

Australia is not in a fiscal crisis and its economy is slowing. Few would have thought that Tony Abbott would respond by going soft on deficits. But he is right to do so, and it seems voters will agree on 7 September.

Geoffrey Garrett is Dean of the Australian School of Business at UNSW.

Professor John Taylor                                                        

Two of the policy differences between the major political parties in the 2013 Federal Election are the Coalition’s commitments to a 1.5% cut in the corporate tax rate and to a more generous paid parental leave scheme than the Government’s – to be funded, in part, by a 1.5% additional levy on the approximately 3000 Australian companies with taxable incomes greater than $5 million.

The Coalition has also announced that the additional levy will not generate franking credits for the companies that are required to pay it. This raises the question of what is the likely effect of offsetting a 1.5% cut in company tax by a 1.5% additional levy on large business and is the combination of the two good policy?

Under the Australian dividend imputation system, payments of company tax generate franking credits which can be attached to dividends. For domestic investors, franking credits have the effect of reducing the net amount of tax payable at the shareholder level on dividends. Investors such as superannuation funds, which are taxed at a lower average rate than the corporate rate, reduce their overall tax bill by offsetting excess franking credits against their other tax liabilities. 

Individual self-funded retirees with average rates of tax below the corporate rate can actually receive refunds of excess franking credits. Thus, for domestic investors in listed companies, cutting the corporate tax rate should produce larger after-tax profits for companies, and hence larger dividends, but at same time will produce smaller franking credits.

The end result is that the domestic investor is in much the same position as before. They get a bigger dividend but a smaller franking credit with the result that they pay more tax on the dividend leaving them with the same after-tax dividend as they had previously. 

How does the additional levy of 1.5% on large businesses affect shareholders in those companies? As the tax on those companies will be higher, dividends paid by them might be expected to be smaller. Here the question of whether or not the additional levy generates franking credits for those companies becomes important.

As the additional levy doesn’t generate franking credits, domestic shareholders (such as superannuation funds and self-funded retirees) in larger companies will be worse off. They will be receiving smaller dividends than investors in other companies but will not be receiving larger franking credits.  

Many commentators favour reducing corporate tax rates generally to provide an incentive for foreign portfolio investment (for example, by foreign pension funds) in Australian companies. Australia does not allow most foreign investors franking credits on dividends paid to them but refrains from levying dividend withholding tax on the portion of the dividend funded from profits that have generated franking credits.

This is of little use to foreign portfolio investors which typically do not obtain credit in their home country for Australian corporate (as distinct from withholding) tax on the profits that funded dividends they receive. Hence, reducing the Australian corporate tax rate can provide real benefits for foreign portfolio investments. 

However, the effect of the Coalition’s paid parental leave levy on the 3000 largest companies will negate this benefit for foreign portfolio investors in these companies. As the largest companies are the ones most likely to have access to global financial markets, the likelihood is that the cut in the corporate tax rate will not increase the level of foreign portfolio investment very much, if at all. 

So who will benefit from the 1.5% cut in the company tax rate? The answer seems to be owners of small companies who, with a lower corporate tax rate, will have an increased incentive to retain income rather than distribute it once their average tax rates exceed the corporate rate. 

That does not seem to be a good policy outcome to me.

Professor John Taylor is head of the School of Taxation & Business Law at the Australian School of Business.

Peter Swan

Journalist, Alan Kohler, in The Business Spectator, 31st July, 2013, draws on a peculiar graph produced by investment bank, CLSA, plotting the executive pay of Australia’s top 200 companies against total shareholder return (TSR). The result:  “No relationship whatsoever. The scatter chart for executive pay and return on equity looks exactly the same.” Mr. Kohler concludes, “the time is approaching for industry funds to do something about the pillaging of companies by the executive classes in the name of performance that doesn’t exist.”

At the risk of being accused of exaggerating the danger, if one were to believe these findings, every business in Australia can sack its talented executives, and for that matter, journalists, and replace them by monkeys paid peanuts with no effect on company performance, or journalistic quality for that matter. Every top business in Australia will raid Taronga Park Zoo’s monkey enclosure to recruit CEOs paid peanuts.

Does the question that Kohler poses even make sense? Once the market has absorbed its view of the firm’s management team, including its talent and pay (excessive or otherwise), together with its board and governance system, all these imponderables are reflected in stock price.

Mr. Kohler would probably agree that Steve Jobs was a fantastic Apple CEO. Does this mean that Mr. Kohler earns a high TSR when he purchases Apple stock with Steve as CEO? No! The high stock price already anticipates Steve’s exceptional talent with an extreme market to book ratio.

Surely, both stock price, and TSR that depends on stock price, should fluctuate randomly in an efficient market? This is precisely what Kohler’s graph with no relationship indicates. A scatterplot of TSR and pay levels says nothing about the relationship between executive pay and performance but may indicate market efficiency.

A more meaningful approach to Mr. Kohler’s question is to ask:  are higher-paid executives associated with higher stock prices rather than necessarily higher stock returns? The answer to this question is a conditional “yes”.
Thus, if union-controlled funds remove high-paid executive who systematically “pillage” like marauding Vikings as Mr. Kohler asserts, then union members may well face collapsing stock prices. Would union members like to see retirement benefits plummet? Would they like to see Taronga Park Zoo denuded of its valuable monkey collection in the interests of “cheaper” firm management?

One of the few meaningful company performance measures dubbed Tobin’s Q, after Nobel Laureate James Tobin (he of the Tobin Tax), is the ratio of the market value of total assets to the book value of total assets. This measure overcomes the problems arising from Mr. Kohler’s misuse of TSR. If a management team adds nothing to the resources they outlay then this ratio will be 1. Typically, the more management adds value in excess of break-even unity, the higher the ratio. Steve Jobs, who was no monkey, performed exceedingly well on this talent measure, even though he slashed his own pay to zero.

There is a catch. There are only a limited number of managers available to recruit as the CEO that possess the talent of a Steve Jobs. Not every manager is capable of generating high Tobin’s Q when large companies need to invest billions of dollars of scarce shareholder funds.

Talent is multiplied or “cloned” by the size of the asset base and magnitude of the hierarchy. Hence, large companies in particular, which have the most to gain from talented managers, are rightly willing to pay the most for scarce talent. Mr. Kohler correctly observes this fact but, unlike myself, thinks that large firm managers should not be paid more. Perhaps a peanut each for the CEOs of BHP (market capitalisation $112 billion) and AusNico ($1.5 million), Mr. Kohler.

Boards’ approve high managerial payments, usually in advance of knowing their actual ability to generate Tobin’s Q. Unfortunately, the board’s talent expectations are not always realised, as is evident from Mr. Kohler’s comparison of CBA and NAB.

Large companies rightly pay the most in an effort to both identify and attract talent in limited supply. This makes it imperative to control for firm size when examining the relationship between CEO pay and Tobin’s Q performance.
My scatterplot [see below] for ASX 200 companies, 2001-2011, with data provided by SIRCA, shows a strong positive relationship between company Tobin’s Q performance and CEO pay after controlling for the logarithm of firm size. The positive association is thus conditional.

This scatterplot from the relationship between firm performance and the logarithm of total CEO pay shows clearly that, conditional on firm size, higher pay is associated with higher performance. Observations in the lower RHS corner may indicate that boards and compensation committees do not always get it right. Poor performance can also be a function of poor board design and the lack of director “skin in the game”.

Having the right board structure and designing managerial contracts that encourage talented managers to self-select into the CEO position are the subject of my ongoing research. In the meantime, I doubt that Taronga Zoo needs to double the number of guards protecting its monkey enclosure in preparation for the onslaught from Industry Funds egged on by Mr. Kohler.

Peter Swan AM FASSA is a Professor of Finance in the School of Banking & Finance at the Australian School of Business

Geoffrey Garrett

The latest interest rate cut to an all time low of 2.5% shows just how worried the Reserve Bank is about the slowing Australian economy.

Kevin Rudd says that he is the man to steer the country through the downturn because he saved us from the global financial crisis four years ago.

Tony Abbott says that the economy is weighed down by Labor’s post-GFC profligacy and that the cure is to cut spending and waste.

Voters should ask themselves two questions about these politically convenient narratives.

First, was it the Rudd government’s fiscal stimulus that saved us from the ravages of the GFC?

Second, is cutting spending the best way to reverse the current slowdown?

The one word answer to both questions is “no”, and the biggest reason is “China”.

Rudd is right to try to focus our attention to the profound impact of the Chinese economy on Australia.

The huge wave of investment in new Australian mining and energy projects over the past five plus years has peaked and is slowing. Commodity prices have fallen considerably from their post-GFC highs.

The Prime Minister is right to point out that the slowing Chinese economy is the culprit. But his “end of the China boom” slogan only tells half the story.

Chinese policy was the reason commodity prices and mining investment were so stratospherically and improbably high in the first place.

Visit the Middle Kingdom and you cannot help but marvel at all the skyscrapers and airports, high speed rail and underground transport systems, and highways, bridges and ports that have been built seemingly overnight in far flung mega cities few of us have ever heard of.

Chinese investment in infrastructure has long been large and impressive. But it was turbocharged after the fall of Lehman Brothers in late 2008—all built with steel made in China from mountains of Australian iron ore and coking coal. 

With the US and the west reeling into recession, global trade plummeted by 30% in 2009. This could have been curtains for China’s post-Mao economic miracle. In a desperate attempt to avert this potential disaster, the Chinese regime went on a lending and spending spree at least as big as what the US did at ground zero of the crisis.

Hu Jintao’s government succeeded spectacularly, and Australia was a major beneficiary. Our exports to China literally doubled from $39 billion in 2008-9 to $77 billion in 2011-12, with fully $50 billion in iron ore and coal alone. Over the same three-year period, Australia’s exports to the rest of the world actually fell, from $192 to $187 billion.

As the world swooned, Chinese infrastructure and Australian mining boomed. The Rudd government’s spending on cash giveaways, school halls, pink bats and the NBN didn’t save Australia from the worst of the GFC. Some of the stimulus may have helped at the margins. Much of it may have been squandered. But the Rudd stimulus was a side show compared with the China boom.

Fast forward to today and China is a very different country. New President Xi Jinping is worried about too much government investment, too many bad local government loans, and too high inflation and asset prices. He is in no mood to undertake another large scale infrastructure stimulus, because he want to let some air out of the Chinese balloon rather than ring the alarm bells like 2009..

So Chinese growth is slowing, its demand for minerals and energy is weakening, and the government seems committed to riding out the transition. Good news for China and the world economy in the long run. But bad news for Australia in the short run.

Abbott may well be right that the Rudd post-GFC stimulus was ineffective and wasteful. But we got away with it because of how China responded to the crisis.

Now that China looks much more accepting of its slowdown, and the Ben Bernanke bound to wean the US and the world economy off five years of zero interest rates. Glenn Stevens clearly believes Australia must try to stimulate at home.

Joe Hockey is right that more RBA action tells us in just how much trouble the Australian economy is. But he and Abbott are wrong to argue that cutting spending, the exact opposite of what the RBA is doing, is the right medicine for the economy.

This probably explains why the Coalition is reluctant to put a date certain on a return to surplus. It also explains why they are focusing on tax cuts that will stimulate investment, growth and job creation—killing the mining and carbon taxes, and cutting company tax—as much as spending cuts.

The bigger point is that the Australian economy is a cork bobbing in an ocean where many of the biggest waves come from China. How we should respond is the biggest question in the election. How the next government responds will be the biggest story for the economy.

Geoffrey Garrett is Dean of the Australian School of Business at UNSW. A version of this post appeared in the Australian Financial Review.

 

Nigel Stapledon

I have been asked to comment on the Prime Minister’s proposed pact between government and business which was aimed at boosting Australia’s productivity to 2% per annum.

The point I have made is that it is for the Government to set the parameters or economic environment in which business operates. Those parameters (e.g. industry assistance or exposure to market forces, taxation, product and labour market regulations, etc.) provide the incentives for business to maximise (or not) productivity. It is then for business to get on with it.

After the economic malaise of the 1970s, there was something of a political consensus that things had to change. The Hawke-Keating and then Howard governments, in pursuing micro-economic reform, shifted the parameters to ones which created increased incentives for businesses and the workforce to lift productivity.

Those reforms included reducing industry protection which made the environment more competitive, and making the labour market more flexible. The lagged result of this was a period of significantly better productivity performance, leading to increased living standards for all Australians.

The Accord with the ACTU in the 1980s was the political process by which the labour force bought into or accepted these changes but the Accord was more about delivering wage outcomes consistent with a return to low inflation.

Industry was consulted but industry-government pacts played no substantive part in the reform process. Industry plans, e.g. the car and textile plans, by delaying change, if anything, hindered the process of boosting productivity.

A key source of advice was the Productivity Commission which represented the broad national as distinct from sectional interests,and provided the economic argument for change. Those past Governments listened to that advice, even if political considerations meant they did not heed it all the time.

A major disappointment in recent years has been the active running down and sidelining of the Productivity Commission. It is today a shadow of its former self. The sidelining of the Productivity Commission has coincided with policies which have if anything acted as a break on Australia’s productivity.

Deals or pacts between business and government are not a substitute for governments listening to, and acting on, sound advice.

An additional point is that 2% per annum target is not in any way realistic. Even with the best parameters for business to operate in, which courtesy of earlier reforms was the case in the period 1993-2003, productivity growth only managed 1.9%. Since 1978, the long term average is 1.5%. In the current environment, i.e. without substantive changes in the policy parameters in the right direction, a result below that long term average and closer to 1% would be a more likely outcome.

Dr Nigel Stapledon, Australian School of Business

Tim Harcourt | The Airport Economist

We are not winning the Ashes or the rugby, but in terms of economic management Australians are world beaters. But you wouldn’t know it from all the gloomy economic talk in the press sapping business and consumer confidence.

In case you missed it, Australia, unlike many other industrialised countries, avoided the worst economic crisis to bedevil the global economy since the Great Depression (note the term they use in the US – “the Great Recession”,  rather than the more technical and even benign sounding “GFC” that we use in Australia).

So what? Well, if you want to think about what could have happened, go to a European country such as Greece or Spain or check out the more depressed areas of the UK or the US. Or even closer to home, take a look the excellent ABC show The Years That Made Us by Chris Masters about Australia’s own experience during the Great Depression. Masters uses his own family and community to explain the hardship that beset working Australians as result of the international economic crisis following the Wall Street crash of 1929.

In fact, the only thing missing in Masters’s excellent oral history is a discussion of economic policy in the 1930s – the very core of Australia’s recent success as a nation.

During the Great Depression of the 1930s there was massive unemployment (Australia had one of the highest levels in the industrialised world) and Australian governments, on the advice of Australia’s fledgling economics community, did the worst things possible in terms of policy.

In what we would call an austerity plan today, the commonwealth and state governments cut government spending, tightened credit, kept the exchange rate fixed, cut wages (the Arbitration Court actually tried to implement a 10% cut in the Basic Wage in 1931) and jacked up tariffs.

As a result, the slump in Australia was longer and deeper than it should have been and it eventually took putting the economy on a war footing during World War II to get out of it 

By contrast, in 2008, facing the financial turmoil of the sub-prime mortgage crisis, Australia’s economic management was world class.

Economic policy-makers did the exact opposite of what was tried in the 1930s. They increased government spending through well-timed and well-targeted stimulus packages in line with advice proffered by then Treasury secretary Ken Henry to “go hard, go early and go households”.

And it worked. Nobel laureate professor Joseph Stiglitz, when visiting Australia in 2010, said Australia was “lucky to have, probably the best designed stimulus package of any of the countries – advanced industrial countries – both in size and in design, timing and how it was spent and I think it served Australia well”.  (I interviewed Stiglitz on that trip to Australia and he said he was “widely impressed with the state of economic and social policy” and had taken a special interest in indigenous labour market policy “where most work clearly needs to be done in the long term”.)

As well as the fiscal stimulus, the Reserve Bank of Australia (RBA) did its bit by quickly loosening monetary policy. Wages were able to rise in line with productivity and minimum wages were adjusted upward rather than cut.

The flexible exchange regime introduced by the Hawke-Keating government meant the dollar could weaken and act as a shock absorber to contain the external impact of the crisis (as it also did during the Asian Financial Crisis of 1997-99 when Australian exports got badly bruised by events in Asia).

And tariffs were kept low and our commitment to an open economy was strengthened in the Doha World Trade Organisation talks. As then trade minister Simon Crean said at the time, “trade could act as an additional stimulus” globally when demand was depressed in the worst affected economies.

Our unsung heroes, the Australian exporter community, adjusted to changing global conditions by cutting hours rather than jobs to minimise the overall pain in the Australian labour market.

The whole package of the GFC period – fiscal, monetary, wages and international trade policy – worked a treat in contrast to the 1931 Premiers Plan and the associated austerity package implemented at the time by Australian governments, urged on by the economics profession.

In fact, the response to the GFC by Australia represents an innovative period in the history of Australian economic policy-making, and overcame past doubts about the efficacy of fiscal stimulus in a global crisis 

As Henry said in his keynote address to the symposium in honour of professor J.W. Nevile here at UNSW:

“…the government and its advisers are in no doubt that without the large fiscal stimulus, and its having been delivered in such a timely fashion, the Australian economy would have suffered a very deep recession.

“Yet the scepticism about the efficacy of the fiscal response is understandable: like many other countries, Australia has a poor history of fiscal activism; indeed, this recent period might be the only instance in Australia’s history of a fiscal stimulus having insulated the economy from an external shock that would otherwise have produced a deep domestic recession. That is to say, it could be a unique achievement.”

The success of this golden age of economic policy-making is outlined by Jim Chalmers in his excellent new book, Glory Daze (anyone who can work a Bruce Springsteen song into the title of an economics book gets my vote!)

In Glory Daze, Chalmers outlines how the politicians (despite well-documented interpersonal rivalries) kept their cool and worked together with the Treasury and RBA – as well as with officials in financial and political capitals around the world as international co-ordination of policy-making was transformed. As a by-product, we now have a restructuring of international economics institutions with the resultant rise of the G20 as a preeminent global policy-making body.

Chalmers’s narrative is lively and dramatic – a real West Wing of Australian economic policy-making as Australia bucked the global trend and avoided recession. And most importantly, all that frantic energy and drama was worth it because it worked.

As evident in a new paper by my colleague, professor Raja Junankar at the Australian School of Business, Australia avoided the contraction and mass unemployment that has plagued other advanced industrial economies since the 2008 crash.

According to Junankar, when you compare Australia with other advanced industrialised economies such as the US, UK, and both strong and weak economies in Europe (e.g. from Germany to the crisis-ridden economies in the south next to the Mediterranean) we score better in terms of GDP, employment, inflation, current account, budget deficits and debt ratios. As Junankar says: “Even the ‘Wunderkind’ Germany took three years before its GDP returned to the pre-2008 levels … All other countries had higher unemployment rates than Australia in the post-2008 period.”

Junankar notes praise for Australia in official international policy circles including the OECD which says: “With 21 years of uninterrupted growth, Australia stands out among OECD countries.”

So there you have it, when it comes to economic management in recent times, Australia is outstanding by international standards.

So why is the story not better known?

The answer is rats, rent-seekers and the rabid 24-hour news cycle.

There is clearly a disconnect between the evidence of our economic success and the plethora of survey and campaigns to illustrate hardship, pessimism, a lack of business and consumer confidence, or alleged government waste.

As market economist Adam Carr says in Glory Daze: “Pessimism is a disease in this country and like rats, lacklustre economists are playing a significant role in spreading it.”

And behind every rat plugging a business confidence survey is a rent-seeker. Rent-seekers aim to capture rents and redistribute income and wealth their way at the expense of others with no net welfare gain to society. You see it in changes to laws and taxes. You even see it in the exchange rate.

Retailers such as Gerry Harvey of Harvey Norman will bemoan a high dollar as his retail outlets can’t then compete with online imports from the US (especially with different tax treatment) and make claims on the government and the RBA to “do something about it”. The issue facing Harvey Norman may be structural – due to long-term industry trends in retail and the rise of the online global consumer – but it is still easier to blame the government and the RBA.

Put the rats and rent-seekers together with the rabid nature of the 24-hour news cycle with its hysteria about polls and surveys, a bit of a gotcha journalism, and some hyper-partisan opinion dressed up as ‘analysis’.

There is also a fair bit of irresponsible economic commentary around by people who should know better. Recently, shadow treasurer Joe Hockey said that the Australian economy is ‘volatile’ because of recent changes in the exchange rate. As demonstrated at a time of turmoil in most advanced industrialised economies, Australia has an enviable record in terms of economic growth and employment and the movements in the floating exchange rate have saved us from serious ruptures in the real economy.

The recent period of Australian economic management should be one of the proudest moments in our history. Over time, economic historians will find this to be the case and we will revel in it, just as we did with the Hawke Keating reforms and the like. But it’s a debate we have to have now because otherwise we’ll miss one of Australia’s greatest moments in history, a moment captured in our own lifetime (and outlined brilliantly by George Megalogenis in his book The Australian Moment).

If we miss it, or fail to realise it, we might fall into the same trap as the austerity-ridden economies such as the UK, which may have a new royal baby and the Ashes, but not the jobs to go to after the celebrations are over.

A shorter version of this blog post was previously published in The Conversation.

Tim Harcourt is the JW Nevile Fellow in Economics and an adjunct professor in International Business Strategy, at the Australian School of Business, the University of New South Wales (UNSW) & author of The Airport Economist:  www.theairporteconomist.com.

Michael Peters