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  • P D Jonson

Sunday Sanity Break, 4 August 2019 – Productivity = Well-being

Updated: May 2, 2020

The Economist concludes about Boris Johnson: ‘Britain’s new prime minister promises thrills, but is heading for a serious spill’. The venerable mag these days is pretty leftish and lays out several scenarios, any one of which could unhorse him.

A sample includes:

  • To get to Downing Street he has made wild promises about Brexit that he cannot possibly keep.

  • He swears he will bin the “backstop” designed to avoid a hard border in Ireland, which the EU insists is non-negotiable.

  • … wavering Tories should be in no doubt that if Mr Johnson is allowed to suspend democracy to force through a no-deal Brexit that whacks the economy and risks the union, it will not only be a betrayal of the country, it might well spell the end of the Conservative Party.

Aussie economic policy

Parliament downunder has reconvened and the coalition is sweeping all before it. Before the election some polls put Labor 53-47, headed for a crushing win. Now the most reliable poll has the coalition leading 53-47. If these polls are not dismissed with a laugh they may remain, but as a joke.

The coalition has had its tax cut policy voted through and is busy preparing the ground for other reforms. However, this author voted for sense in monetary policy – to see rate cuts approaching zero leaving nothing to support the economy in a worst case – Fiscal policy achieving its small surplus status, which is great if the government goes on to produce a large surplus. This is for the same reason not to slash interest rates, to provide ammunitition for the case of a seriously hurt economy.

Think of the risks. The USA–China trade war is hotting up, and our status as America’s closest ally may make difficulties with our largest trading partner. Brexit may make the EU and the UK slow even more than they are at present. The crisis in the Gulf over oil transport may produce shortages that also interfere with global growth. And economists are debating the basic causes of productivity improvement, is it ‘capital’ or ‘culture’? Or both, and is either very pro-growth at present?

Domestic productivity is barely rising, and unless this is replaced with some serious economic reforms to raise productivity our living standards will slip down the global league table. Go for it Scomo, and Australia’s economists should speak up to provide examples.

Here is Henry’s contribution.

Productivity – how to increase Australians’ income and well being

The title of this note says the only way tr to increase our well being and incomes is raising productivity. This is no simple matter but has been done in Australia’s recent past and can be done again.

Previous economic reforms that raised Australia’s productivity.

Despite recent disappointment, particularly in the decades of the 2000s and 2010s, Australia in the past 60 years has benefitted from a number of important policies to increase Australian productivity. These included:

  • Freeing ability to mine resources, started in 1960/61 by a government facing an unexpected recession.

  • Cutting tariffs, started by Whitlam government as an anti-inflation policy, continued by Hawke, Howard governments.

  • Floating the Australian dollar in 1983.

  • Financial Deregulation, perhaps as elsewhere overcooked but providing a substantial positive effect on national productivity.

  • Partially deregulating industrial relations, started under Hawke government, continued by Howard government.

  • Establishing a GST, with some offsetting cuts to income taxes, tried by Hewson government, implemented by Howard.

  • The substantial pro-competition reforms to public utilities (commercialisation, corporatisation, privatisation).

A warning note

Not all of these policies produced only benefits. Cutting tariffs cost manufacturing sector jobs and capability. Large scale mining upsets people of a deeply ‘green’ personality. Floating the dollar has allowed what some people regard as ‘too many imports’, further eroding manufacturing sector jobs and capability. Deregulating industrial relations upsets unions and cheers business owners, and is the most ‘political’ of policy changes. The GST/income tax switch is meant to encourage saving and discourage consumption, but national saving has not followed this pattern. (A broader GST with higher rate, say 15 %, might help cure this issue.)

Opportunities for future productivity increases

The following list of ‘Significent Industry Impediments’ and what can be done about them shows the options available to any government prepared to fight for productivity improvement.

  • Reduce cost of coastal shipping compared to foreign flag vessels used for imports, by reform of the current cabotage system that protects high cost coastal shipping.

  • Restore domestic production of petroleum and other oil-based products. Solar or wind products will not keep ships, trains, road trucks or even domestic cars running for many years, and even then reliable baseload energy will be needed.

  • Regulate impacts on power and energy costs by insisting on a seriously inexpensive base load high efficiency supercritical coal-fired generation capacity. If private enterprise will not do this job, arrange government set-up and eventual sale to the private sector. Australia needs to give serious consideration to entering the nuclear age, as many other nations have done.

  • Reform company tax so that depreciation write-off for new manufacturing equipment match rates in overseas companies. When fiscal situation allows, reduce company tax rate to current USA levels.

  • Increase labor flexibility and opportunities for productivity improvement in the workplace. Management must be involved and an appropriate culture embedded.

  • Increase government grants of money spent on R&D and improve taxation treatment for results of R&D spending.

  • Create opportunity to tax capital inflow to reduce exchange rate to eliminate excessively high exchange rate, thus improving competitiveness of exports and reduce competitiveness of imports.

  • Give priority to mergers that create stronger groups that can hold their own in international markets. Take more care to carefully consider likely effect of foreign takeovers which are likely to hinder development of international trade.

  • Create a culture that minimises red tape and bureaucratic obstacles to industrial progress and is kinder than at present to entrepreneurial efforts.

  • How to greatly improve Australia’s defence is a very important issue on its own. Please put some serious brainpower to work on this question. Mr Prime minister.

Implementing this list with careful attention would set Australia on the road to be a far more dynamic society and economy. There are two vital points that need to be taken into account when introducing this set of policies.

  1. Establish a solid narrative for all Australians, as the Hawke government did at its National Economic Summit and in other ways.

  2. Work hard to find ways to convince potential losers from such policies it is worthwhile to back policies that raise growth, meaning better welfare plus better defence and greater spending on much needed infrastructure.


Fiona Prior tunes in to Elena Kats-Chernin Whiteley. More here.

Sporting life

Former captain Steve Smith is back with one of the greatest test centuries, all the more welcome since it came after a batting collapse that would have put Australia out of the game after the first day. Despite double failures for Messrs Warner and Bancroft after day three we are still in the game.

Footy goes from strength to strength and will be reviewed when all the weekend games are decided. If another miracle happens and Caaaarlton! beats West Coast you will hear a shout wherever you are in the wide, brown land.

Rugby continues to limp along and Henry is keenly awaiting My Falou’s legal case to see whether the Rugby Admin has behaved as foolishly as Henry believes it has.

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