This chapter addresses one of the most difficult issues in Macroeconomics, how to increase useful economic growth. While fiscal and monetary policies can derail growth if handled badly, new ideas applied to real businesses are the main source of increased economic growth.
Australia’s Productivity Commission is one of Australia’s most golden public sector organisations. As official information on the work of the Commissions says: ‘The Productivity Commission is the Australian Government's independent research and advisory body on a range of economic, social and environmental issues affecting the welfare of Australians.’
This graph shows the increase from 1990 - a time of severe recession - to 2013. The vital fact is the sharp rise in national productivity from the depths of recession until the end of the 1990s and gradual decrease since then. The apparent increase in the past 5 years is welcome but productivity increase in the past few years so far are still around half the rate achieved at the peak.
The recently retired Chairman, Gary Banks, kindly provided speeches he has presented to give me a better feel than I had for the organisation and its work. Dr Banks started a talk in 2007 with the following definition: ‘The Productivity Commission was created as the Australian Government’s principal advisory body on microeconomic policy and regulation. Its role, expressed most simply, is to help governments make better policies in the long-term interests of the Australian community. As its name implies, the Commission’s focus is on ways of achieving a more productive and efficient economy — the key to higher living standards’.
[Reference: Gary Banks, ‘Public inquiries in policy formulation: Australia’s Productivity Commission', Address to the International Workshop: Australia’s Public Inquiry Experience and Economic System Reform in China, China-Australia Governance Program, Beijing, 3 September 2007. ]
A key feature is use of experts, and when it is a review by the Productivity Commission the main work is done by experts employed by the Commission. Gary Banks again: ‘Taskforces of experts can reduce the risk of governments making ill-informed decisions. They may also provide for public consultation and gather information about how current and potential future policies affect different groups.
‘Australia’s experience with such processes has been mixed. Some have provided reports of high quality, which have led to major policy changes. (Examples include the ‘Campbell Inquiry’ into financial market regulation in the 1980s and the ‘Hilmer Inquiry’ into competition policy in the 1990s.) Such reviews have been characterised by eminent and expert leadership, well-resourced and ‘neutral’ secretariats, and adequate time frames.’
Other characteristic of the work of the Commission is independence and public consultation. ‘Independent’ public inquiries, by definition, need to be structured such that those involved can undertake their own analysis, reach their own conclusions about the best way forward, and not have a vested interest in the advice provided to government. They should also provide ample opportunity for public input to the formulation of policy recommendations. This combination of independence and public consultation has major advantages. It can lead to better inputs to policy making, because there is an opportunity for various points of view to be heard and considered, not just those who have the most influence within government.’
[Reference: ‘Independence’ was addressed specifically by Dr Banks in 2011, in a paper presented at the AIAL 2011 National Administrative Law Conference in Canberra.]
‘The Commission’s independence is formalised in its statute, the Productivity Commission Act 1998 (Cth), but key features of this legislation have their origin in the Tariff Board Act 1922 (Cth). The Tariff Board had a quasi-judicial role in relation to its advice to government. Tariffs involve both winners and losers and impartiality in making judgments based on transparent ‘evidence’ was rightly seen as essential.
‘The same rationale for independence was adopted by Sir John Crawford in his report to Gough Whitlam in 1973 on the replacement of the Tariff Board by an Industries Assistance Commission (IAC) (Crawford, 1973). The IAC was assigned a similar role, though with a wider responsibility, in the conflicted area of industry assistance. Its purpose, like that of the Tariff Board, was to provide evidence-based impartial advice. However, a crucial difference, introduced in its statute, was that it was required to take an ‘economy-wide perspective’, ie it must promote the interests of the community as a whole over those of any particular industry or group.
‘Over the years, the Commission has evolved considerably and its work now covers much more extensive policy territory than tariffs and other industry assistance. However, the formal statutory independence that had its origins in the Tariff Board has held it in good stead. Indeed it has facilitated the extensions of its public policy role.’
In a later presentation, on the occasion of the launch of a Productivity Commission in Queensland, Dr Banks provided some thoughtful issues. This has followed the birth of similar institutions in other states of Australia and in some overseas countries.
[Reference: ‘The Productivity Challenge and 'the PCs'.]
Early on, Dr Banks provided some necessary warnings.
‘I wish I could begin by saying that governments’ increased interest in Productivity Commissions has coincided with an increase in productivity-enhancing policies and reforms. Rather, the past decade has, if anything, witnessed more policies that detract from productivity growth than enhance it.’ and
‘Monetary and fiscal policy have an important, indeed at times crucial, role to play with respect to economic activity and employment in the short to medium term. But they have little direct impact on growth rates over the longer term. As the ‘3Ps’ identity makes clear, economic growth is determined by the rates of growth in population, participation and productivity. And on a per capita basis, the growth in incomes depends (terms of trade aside) almost entirely on the latter two.’
Past examples of policies for productivity increases
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, already discussed in chapter xx of this book.
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).
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.)
My impression is that these changes have made Australia a more dynamic and globally interested nation. Again there are results that some people do not like. Many more women are working and seem to enjoy it. However, some two income households struggle in various ways, some of which create neglect of children. Some women complain about being paid less than men but a fine female economist says there are good reasons for this. [Reference: Judith Sloan]
Also, growing numbers of women in the workforce mean less full time jobs for men. And loss of jobs is no longer just losses of blue collar jobs. There is now an excess of lawyers, accountants and other white collar jobs that are being replaced by of jobs for people offshore or technical innovations. Imagine the effect of the university sector when ten or twelve American universities, and perhaps one or two in the UK, go global. What rapid development of Artificial Intelligence means for jobs of humans is a black cloud over thoughtful people.
For a mix of factors, including excessively easy monetary policy, Australian house prices are far too high for young and lower income workers to buy into an overheated market unless helped generously by relatives.
Whether Australia is a more inequitable country is hard to decide. Careful analysis shows that generous welfare payments mean that the poorest people, those with the bottom 10 % of income levels, keep pace with percentage growth of people with the top 10 % of income. Many middle income people however, find their income growth slower than those at the top.
I suspect that most Australians believe that senior financiers are paid far too much and the recent Royal Commission has had the effect of putting a crimp in this issue. But all the large banks are busy cutting jobs and workers that make up a significant share of their total workforce.
A most important general issue involves development of a viable defence industry. During the second world war, Australia’s manufacturing industry was rapidly shifted to a war footing. Ships and aeroplanes were rapidly built and performed well. Scientific discoveries were applied to improving the nation’s defence. Even so, it took the might of the US navy and the bravery of Australian soldiers to block the downward thrust of the Japanese attackers.
Nowdays, fighter planes, ships and submarines are made very slowly by companies domiciled overseas. Australia believes it will learn from these activities, and no doubt that will occur. But the expertise immediately available in the 1940s will be lacking for at least the next 30 odd years. In any war we shall be totally dependent on the American forces and who knows how willing the US administration will be to come to our aid.
Perhaps we should be focussing on some virus, like the viruses used to kill rabbits, to attack people from overseas, and make sure Aussies, or welcome visitors, are inoculated so it does no harm.
The need for further progress.
Despite the efforts already discussed, the Australian economy has fallen behind other nations in its quest for increased productivity. This is important because increased productivity is the route to greater national wealth and individual financial wellbeing. In 2014 I was involved with a group called The Industry Group, lead by Richard Morgan, in an attempt to explain the ways Australia was falling short in the drive for increased productivity and suggestions for remediation.
[Reference: Richard Morgan, Peter Jonson, Mark Rayner and Colin Tease, Growing the Trade Exposed Industries, Self published, 2014.]
Governments, Regulators, Industry and Unions have often failed to recognise, understand or give consideration to the less obvious and often long term consequences of their
decisions and actions, and their impact on Australia’s competitive position.
Recent examples of adverse consequences are the progressive closure of Australia’s oil refineries around the coast, rather than their progressive replacement with one or two world-scale facilities, and the closure of alumina refining, aluminium smelting and aluminium rolling capacity. Reductions in cement and steel manufacture, and closure of a number of food processing operations are other examples.
Nowdays oil is refined offshore, well to the North of Australia. Not only would it be for an enemy to cut off supplies, a war, or even a strike, could cripple Australian and normal life in Australia in a most unhelpful way.
Decisions against major renewal in more productive equipment are made when the cost impediments are compounded by low rates of tax-deductable depreciation and the absence of accelerated write-off to match overseas competitors.
The trade exposed industries are now operating in a global economy. Markets no longer have a national or regional emphasis but have a global perspective. Specialisation provides gains in productivity but it is the size of markets which enables these gains to create wealth with opportunities to generate jobs, economies of scale, resources for research and innovation and an increase to the national tax base.
The study by the Industry Group provides a host of impediments to growth of the Trade Exposed Industries, in particular Manufacturing and Minerals and Food Processing. Readers of this book may request a copy of our full study by writing to the author at email@example.com.
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, but 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.
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 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.
How would Australia need to change?
What will Australia look like if opportunity to create jobs is limited by powerful international businesses with productivity we cannot match?
The first point is to stress that Australia can match even the largest international enterprises. As one way to achieve this, a national wealth fund could be created to invest in some of the world’s greatest corporate entities and find a way to fit some appropriate divisions in Australia into their operations.
To the extent that this fails to keep a large proportion of Australians working, we can increase numbers working in defence, health, educational and welfare services funded by government. Of course, mere keeping pace with people's needs will require these increases in all liklihood, provided national productivity is sufficient to allow this. Printing money, or borrowing from overseas, are dangerous ways to pay for jobs in all these sectors.
Views of a genius
The great economist John Maynard Keynes wrote of a third strategy, one that we are seeing signs of emerging now, albeit it later than he thought likely. As he put it:
‘I trace the beginnings of British foreign investment to the treasure which Drake stole from Spain in 1580. In that year he returned to England bringing with him the prodigious spoils of the Golden Hind. Queen Elizabeth was a considerable shareholder in the syndicate which had financed the expedition. Out of her share she paid off the whole of England’s foreign debt, balanced her Budget, and found herself with about £40,000 in hand. This she invested in the Levant Company – which prospered. Out of the profits of the Levant Company, the East India Company was founded; and the profits of this great enterprise were the foundation of England’s subsequent foreign investment. Now it happens that £40,000 accumulating at 3½ per cent compound interest approximately corresponds to the actual volume of England’s foreign investments at various dates, and would actually amount to-day to the total of £4,000,000,000 which I have already quoted as being what our foreign investments now are. Thus, every £1 which Drake brought home in 1580 has now become £100,000. Such is the power of compound interest!
From the sixteenth century, with a cumulative crescendo after the eighteenth, the great age of science and technical inventions began, which since the beginning of the nineteenth century has been in full flood – coal, steam, electricity, petrol, steel, rubber, cotton, the chemical industries, automatic machinery and the methods of mass production, wireless, printing, Newton, Darwin, and Einstein, and thousands of other things and men too famous and familiar to catalogue.
What is the result? In spite of an enormous growth in the population of the world, which it has been necessary to equip with houses and machines, the average standard of life in Europe and the United States has been raised, I think, about fourfold. The growth of capital has been on a scale which is far beyond a hundredfold of what any previous age had known. And from now on we need not expect so great an increase of population.
If capital increases, say, 2 per cent per annum, the capital equipment of the world will have increased by a half in twenty years, and seven and a half times in a hundred years. Think of this in terms of material things – houses, transport, and the like.
At the same time technical improvements in manufacture and transport have been proceeding at a greater rate in the last ten years than ever before in history. In the United States factory output per head was 40 per cent greater in 1925 than in 1919. In Europe we are held back by temporary obstacles, but even so it is safe to say that technical efficiency is increasing by more than 1 per cent per annum compound. There is evidence that the revolutionary technical changes, which have so far chiefly affected industry, may soon be attacking agriculture. We may be on the eve of improvements in the efficiency of food production as great as those which have already taken place in mining, manufacture, and transport. In quite a few years – in our own lifetimes I mean – we may be able to perform all the operations of agriculture, mining, and manufacture with a quarter of the human effort to which we have been accustomed.
For the moment the very rapidity of these changes is hurting us and bringing difficult problems to solve. Those countries are suffering relatively which are not in the vanguard of progress. We are being afflicted with a new disease of which some readers may not yet have heard the name, but of which they will hear a great deal in the years to come – namely, technological unemployment. This means unemployment due to our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour.
But this is only a temporary phase of maladjustment. All this means in the long run that mankind is solving its economic problem. I would predict that the standard of life in progressive countries one hundred years hence will be between four and eight times as high as it is to-day. There would be nothing surprising in this even in the light of our present knowledge. It would not be foolish to contemplate the possibility of afar greater progress still.
Let us, for the sake of argument, suppose that a hundred years hence we are all of us, on the average, eight times better off in the economic sense than we are to-day. Assuredly there need be nothing here to surprise us.
Now it is true that the needs of human beings may seem to be insatiable. But they fall into two classes – those needs which are absolute in the sense that we feel them whatever the situation of our fellow human beings may be, and those which are relative in the sense that we feel them only if their satisfaction lifts us above, makes us feel superior to, our fellows. Needs of the second class, those which satisfy the desire for superiority, may indeed be insatiable; for the higher the general level, the higher still are they. But this is not so true of the absolute needs – a point may soon be reached, much sooner perhaps than we are all of us aware of, when these needs are satisfied in the sense that we prefer to devote our further energies to non-economic purposes.
Now for my conclusion, which you will find, I think, to become more and more startling to the imagination the longer you think about it.
I draw the conclusion that, assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution, within a hundred years. This means that the economic problem is not – if we look into the future – the permanent problem of the human race.
Why, you may ask, is this so startling? It is startling because – if, instead of looking into the future, we look into the past – we find that the economic problem, the struggle for subsistence, always has been hitherto the primary, most pressing problem of the human race – not only of the human race, but of the whole of the biological kingdom from the beginnings of life in its most primitive forms.
Thus we have been expressly evolved by nature – with all our impulses and deepest instincts – for the purpose of solving the economic problem. If the economic problem is solved, mankind will be deprived of its traditional purpose.
Will this be a benefit? If one believes at all in the real values of life, the prospect at least opens up the possibility of benefit. Yet I think with dread of the readjustment of the habits and instincts of the ordinary man, bred into him for countless generations, which he may be asked to discard within a few decades.
To use the language of to-day – must we not expect a general “nervous breakdown“? We already have a little experience of what I mean – a nervous breakdown of the sort which is already common enough in England and the United States amongst the wives of the well-to-do classes, unfortunate women, many of them, who have been deprived by their wealth of their traditional tasks and occupations – who cannot find it sufficiently amusing, when deprived of the spur of economic necessity, to cook and clean and mend, yet are quite unable to find anything more amusing
Thus for the first time since his creation man will be faced with his real, his permanent problem – how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well.
The strenuous purposeful money-makers may carry all of us along with them into the lap of economic abundance. But it will be those peoples, who can keep alive, and cultivate into a fuller perfection, the art of life itself and do not sell themselves for the means of life, who will be able to enjoy the abundance when it comes.
Yet there is no country and no people, I think, who can look forward to the age of leisure and of abundance without a dread. For we have been trained too long to strive and not to enjoy. It is a fearful problem for the ordinary person, with no special talents, to occupy himself, especially if he no longer has roots in the soil or in custom or in the beloved conventions of a traditional society. To judge from the behaviour and the achievements of the wealthy classes to-day in any quarter of the world, the outlook is very depressing! For these are, so to speak, our advance guard – those who are spying out the promised land for the rest of us and pitching their camp there. For they have most of them failed disastrously, so it seems to me – those who have an independent income but no associations or duties or ties – to solve the problem which has been set them.
I feel sure that with a little more experience we shall use the new-found bounty of nature quite differently from the way in which the rich use it to-day, and will map out for ourselves a plan of life quite otherwise than theirs.
For many ages to come the old Adam will be so strong in us that everybody will need to do some work if he is to be contented. We shall do more things for ourselves than is usual with the rich to-day, only too glad to have small duties and tasks and routines. But beyond this, we shall endeavour to spread the bread thin on the butter – to make what work there is still to be done to be as widely shared as possible. Three-hour shifts or a fifteen-hour week may put off the problem for a great while. For three hours a day is quite enough to satisfy the old Adam in most of us!
There are changes in other spheres too which we must expect to come. When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues. We shall be able to afford to dare to assess the money-motive at its true value. The love of money as a possession – as distinguished from the love of money as a means to the enjoyments and realities of life – will be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease. All kinds of social customs and economic practices, affecting the distribution of wealth and of economic rewards and penalties, which we now maintain at all costs, however distasteful and unjust they may be in themselves, because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last, to discard.
Of course there will still be many people with intense, unsatisfied purposiveness who will blindly pursue wealth – unless they can find some plausible substitute. But the rest of us will no longer be under any obligation to applaud and encourage them. For we shall inquire more curiously than is safe to-day into the true character of this “purposiveness” with which in varying degrees Nature has endowed almost all of us. For purposiveness means that we are more concerned with the remote future results of our actions than with their own quality or their immediate effects on our own environment. The “purposive” man is always trying to secure a spurious and delusive immortality for his acts by pushing his interest in them forward into time. He does not love his cat, but his cat’s kittens; nor, in truth, the kittens, but only the kittens’ kittens, and so on forward forever to the end of cat-dom. For him jam is not jam unless it is a case of jam to-morrow and never jam to-day. Thus by pushing his jam always forward into the future, he strives to secure for his act of boiling it an immortality.
I see us free, therefore, to return to some of the most sure and certain principles of religion and traditional virtue – that avarice is a vice, that the exaction of usury is a misdemeanour, and the love of money is detestable, that those walk most truly in the paths of virtue and sane wisdom who take least thought for the morrow. We shall once more value ends above means and prefer the good to the useful. We shall honour those who can teach us how to pluck the hour and the day virtuously and well, the delightful people who are capable of taking direct enjoyment in things, the lilies of the field who toil not, neither do they spin.
But beware! The time for all this is not yet. For at least another hundred years we must pretend to ourselves and to every one that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight.
I look forward, therefore, in days not so very remote, to the greatest change which has ever occurred in the material environment of life for human beings in the aggregate. But, of course, it will all happen gradually, not as a catastrophe. Indeed, it has already begun. The course of affairs will simply be that there will be ever larger and larger classes and groups of people from whom problems of economic necessity have been practically removed. The critical difference will be realised when this condition has become so general that the nature of one’s duty to one’s neighbour is changed. For it will remain reasonable to be economically purposive for others after it has ceased to be reasonable for oneself.
The pace at which we can reach our destination of economic bliss will be governed by four things – our power to control population, our determination to avoid wars and civil dissensions, our willingness to entrust to science the direction of those matters which are properly the concern of science, and the rate of accumulation as fixed by the margin between our production and our consumption; of which the last will easily look after itself, given the first three.
Meanwhile there will be no harm in making mild preparations for our destiny, in encouraging, and experimenting in, the arts of life as well as the activities of purpose.
But, chiefly, do not let us overestimate the importance of the economic problem, or sacrifice to its supposed necessities other matters of greater and more permanent significance. It should be a matter for specialists-like dentistry. If economists could manage to get themselves thought of as humble, competent people, on a level with dentists, that would be splendid!
[Reference: John Maynard Keynes, Essays in Persuasion, ‘Economic Possibilities for our Grandchildren’, New York: W. W. Norton & Co, 1963. ]
Word count 4400