Instant Experts

To be in public life you need to have a sense of self-belief. How else would you cope with those that feel they can criticise your actions, private life, as well as decisions you have made in the past?

‘Stars’ such as elite sports professionals, actors, performers and so on can demonstrate that they excel in their field of endeavour. While you personally may not like how people like Michael Clarke or David Bowie perform their job, there are plenty of people that do — and they are entitled to their opinion. ‘Stars’ also usually keep their public pronouncements to areas where they have demonstrated expertise and considerable knowledge. If you don’t like the field of endeavour or the person, the public opinion of the ‘star’ is usually ignored and the world moves on.

It’s not the same for politicians. Politicians have a large influence over our everyday lives. On a recent Saturday morning, the Brisbane Times was reporting a newly elected Queensland parliamentarian whose former partner claimed she suffered domestic violence; leading to the premier referring him to the Police for investigation. He is also claimed to have structured his affairs to avoid his obligations in respect to child support. There was also a discussion on the number of federal politicians with more than one mortgage — the implication being that they may allow personal considerations to be a factor in any discussion or vote on the future of negative gearing in Australia. Neither of these issues would be ‘newsworthy’ if the subjects were the staff at the local supermarket.

Ask a politician why they went into politics and few of them would say it’s for the money or to gain fame. Until fairly recently they generally saw a need for something to be done in their community and decided that they were the ‘somebody’ that should do it. In recent years we are seeing the career politician emerging where they join the young [insert party here] club at university while doing a degree, then move on to the senior party and usually take a position in an existing politician’s office, or in the party hierarchy, before ‘blooding’ themselves in an ‘unwinnable’ seat then later being offered a winnable seat as a reward.

Once a person gains a parliamentary seat, they (depending on skills and popularity) may be offered a ministry. The person who can gain the most support then becomes the leader. While the system has worked for a century in Australia (and longer in the UK) with reasonable success — as evidenced by Robert Menzies, a lawyer, and Ben Chifley, a train driver, becoming prime ministers in the 1940’s — there seems to be a pattern for recent ministers to not understand the issue at hand. The Australian government’s website explains the role of a minister as a member of the legislature who has been chosen to also work as part of the executive, usually with responsibility for matters on a specific topic (his/her portfolio). It is a similar practice in the UK and other ‘Westminster’ parliaments such as in Canada and New Zealand. The website also notes that there is no mention of political parties, ministers or the roles of prime minister and opposition leader in Australia’s constitution.

In contrast, the United States of America has a different system whereby the president selects people they believe will perform well in the ‘secretary’ roles — which are similar to the ‘minister’ roles in Westminster parliaments. The person selected usually has some involvement in the industry he or she will regulate. The president can choose anyone he likes to be a ‘secretary’ but the US congress holds ‘confirmation hearings’ to endorse the decision. As party politics are involved in the selection and confirmation process, the confirmation process isn’t always smooth — as discussed here in respect to former Defence Secretary Chuck Hagel. Hagel lasted two years as secretary of defence: his resignation cited differences of opinion with the Obama administration.

In the ‘good old days’, while politicians nominally ran the various sections of the government in the Westminster system, they relied on the ‘frank and fearless’ advice of the permanent public servants provided to their (let’s face it) temporary leaders. The New South Wales Public Service Commission (PSC) discusses the concept here, while acknowledging that at times the action is fraught with danger. The guide includes the following cautions:

One approach (recommended by Stephen M. Goldman (2008) in “Temptations in the Office: Ethical Choices and Legal Obligations”) is to prepare yourself carefully before you give the advice by:
  • Digging into the facts. Seek out a complete account of the situation, including facts and acknowledgement of biases
  • Gauging similarities with past situations. Recognise any significant particulars between the current problem situation and past situations
  • Analysing your decision-making process. Don’t over-estimate or under-estimate your instincts or your rational analyses. Use them as “checks and balances” against each other. Propose options. Suggest a number of practical alternatives, both short-term and long-term, that could be taken to meet the Minister’s or manager’s objectives.
The NSW PSC also has advice for managers/ministers that are being told something they really don’t want to hear:

Your style of communication may not be compatible with the communication style of the person who is giving you difficult or distressing information. However, as a professional, it is your duty to get the information they are attempting to communicate even if you consider the way they are communicating is annoying or distracting. This is particularly important when people are giving you criticism or unwelcome advice, because if you become angry or defensive you may cause that individual to stop communicating with you, and more broadly, you may develop a personal reputation, a culture and work practices that will result in you becoming isolated, uniformed and ineffective.

It must have seemed to be a good idea for federal Treasurer Joe Hockey to appear on Q&A to discuss the release of his ‘Intergenerational Report’ during March 2015. Sadly for Hockey, it wasn’t. Hockey was shown to be out of touch on the economics of current ‘hot button’ issues such as negative gearing and infrastructure spending by John Daley, CEO of the Grattan Institute. As Hockey raised the usual talking points that had no doubt been tested by focus groups of party faithful and fed to him by senior advisors vetted by the prime minister’s chief of staff he was, as reported in Fairfax media, outclassed by someone who knew what he was talking about.

Education Minister Christopher Pyne was probably expecting a relatively friendly interrogation from David Speers on Sky (given the reputation of the broadcaster), however it didn’t happen. Pyne also forgot the adage that if in doubt say nothing, as his claim that he is ‘the fixer’ has come back to haunt him on a number of occasions since.

Prime Minister Abbott is not immune to criticism here either. Abbott claimed at a press conference that he had no concerns about metadata when he was a reporter in the 1980s. At best, Abbott was badly informed when he claimed to a group of journalists (the usual job description includes the ability to research quickly and accurately) that he wasn’t concerned by something that didn’t exist.

Prior to entering politics, Hockey was a banking and finance lawyer as well as a policy director for the New South Wales premier. Pyne also was a lawyer prior to being elected to parliament at the age of 25 and Abbott has various qualifications in economics and arts and, prior to being elected to parliament, was a journalist, concrete plant manager and director for an anti-republic organisation. While they have had varying experience prior to politics, and all have tertiary qualifications, it is unrealistic to expect that they become instant experts on all the matters in their portfolio.

As we discussed earlier, Menzies and Chifley were considered good prime ministers, but they also certainly didn’t have the personal experience to be instant experts in all the detail needed for a government to function — especially in wartime. The difference between the 1940s and 2010s is a permanent public service not afraid to give ‘frank and fearless’ advice, because in the 1940s the public servant delivering the dissenting view was a permanent employee and wasn’t neutered by the fear of their contract not being renewed. The public servant also was a long term employee — not someone appointed by the government of the day — nor did they have to deal with the ‘Minister’s personal staff’ (who have been ‘approved’ by the party hierarchy) disagreeing with them.

Not that the US system is any better. While the ‘secretaries’ are usually chosen because they have some direct experience in the area covered by their portfolio (unlike Australia), there is considerable opportunity through the selection and confirmation process for ‘the best person for the job’ to be ruled out due to some previous alleged misdeed or political belief.

Australia is also subject to political ‘ethnic cleansing’ of ‘permanent’ heads of departments, as witnessed in Victoria and Queensland following the recent changes of government. A master of the art was former Prime Minister Howard, who effectively sacked six ‘permanent heads’ soon after his election because of their perceived closeness to the former Hawke/Keating ALP government.

So Australia has the worst of both worlds. Not only do our ministers generally have no direct experience in the portfolio they control, the higher echelons of the public service are on employment arrangements that can be legally broken by either side should they feel the need. Could it be possible that the ‘need’ could be giving ‘frank and fearless’ advice to their minister?

The Political Sword has discussed the marketing and media management of politicians on a number of occasions. Is the ultimate expression of the failure of Australia’s current political system demonstrated by ministers clearly not being across the details of their portfolio? Is this because the political minders only give the minister the message or theme of the day rather than the information they need when someone goes ‘off script’?

The Westminster system of government clearly has the potential to deliver better solutions to the problems faced by the citizens of the country concerned, as the minister takes advice from experts in the particular field, employed by the government on a permanent basis and thinking with a ‘long term’ view. The experts know that they have the right and obligation to present dissenting options to the minister if needed and discuss the possible detrimental effects of the possible decision — which the minister subsequently makes with all the information at hand. The opinion given should not have any effect on the continued employment of the public service officer. The US system has flaws when the ‘confirmation’ process for the various (probably partisan) senior staff and advisers to the President can take some time or be declined for potentially some party political objective.

The problem is when the politics overrules good government. Those that operate successful businesses look for the best and brightest to manage the business elements the owners don’t understand — such as small business operators timetabling regular meetings with accountants and lawyers to assess the current situation and future plans. The current government maintains that Australia should be run like a business; and then buries the people that could provide the best advice under a layer of political appointees. The result is that ministers open their collective mouths to change feet as demonstrated above and policy is decided on party priorities rather than national priorities.

The scandal in all of this is that both sides are equally culpable; we’re paying for it now and will continue to in the future as less than optimal policy will be implemented.

What do you think?

About 2353

After reading 2353’s post, what do you think? Perhaps we can’t expect our politicians to be instant experts but are we, as a nation, allowing politics, instead of what is in the national interest, to rule our policy? Should the public service be encouraged to return to ‘frank and fearless’ advice? Is there another way?

Next week Ken suggests that the Abbott government may not be as shambolic as it appears in his piece: ‘Beware, there is a plan’.

How the economic rationalists tried to steal our hearts and minds

At the start of the year in my piece ‘Proud to be a bigot’ I mentioned that, before Abbott, Australian governments tended to look after those who were ‘down on their luck’. It was a phrase with which I grew up. People who were unemployed were not ‘dole bludgers’ then, nor even just bludgers (although there may have been a few, bludgers were usually identified when they were in work): they were ‘down on their luck’. I began to wonder why that approach has disappeared.

A key aspect of the phrase ‘down on their luck’ is that it is an egalitarian phrase. In an egalitarian society, success and failure are more usually attributed to luck rather than personal attributes because almost by definition personal achievement breaches the personal equality of egalitarianism. While there are always degrees of success, even in an egalitarian society, success is down-played or shared — either by emphasising the role of others or distributing the monetary rewards of success by throwing parties and ‘barbies’, or buying extra ‘rounds’ at the pub. Acknowledging personal achievement was usually limited to sports people and, to a lesser extent, performers and artists — although we were also good at cutting down the ‘tall poppies’.

We seem to have gone back to something closer to the ‘undeserving poor’ of Victorian times. That, in itself, provides a clue to the change. People are undeserving if they are perceived not to have made enough effort on their own behalf. It follows the logic that ‘if I am successful or moderately well-off then anyone can be’ if only they make the effort. It focuses on the individual and the effort made by the individual, not on initial conditions or community responsibility nor even the common good. And we all know who promotes such ideas: the neo-liberals, the economic rationalists, the free-marketers and, politically, the current Liberal party and the IPA behind it. Somehow they have managed to change us without many of us even noticing. Although loathe to say it, the Labor party has also contributed by accepting the free market philosophy.

Between the gold rushes and the 1890s, Australia was considered a ‘working man’s paradise’. The depression of the 1890s changed that somewhat but also fostered the growth of unionism and the birth of the Labor party to represent workers’ interests. That meant that by 1911 Australia was still considered a great country for the ‘working man’ with higher wages than in many other countries, shorter hours than the US and Canada and more holidays. Australia was also a world leader in social reforms, including universal suffrage, and was known for not having as large a gap between rich and poor as most industrial countries — it was effectively largely egalitarian.

For the purposes of this discussion, we can ignore 1914 to 1950, because it was dominated by two world wars and the great depression which obviously impacted working life and government approaches in ways specific to those events.

I think the first change came with the election of the Menzies’ government in 1949. Menzies’ new Liberal party focused on the small businessmen, the shopkeepers and small-scale entrepreneurs with the cry that these were the ‘forgotten people’ of Australia — which was partly true, as least as far as the pre-existing political parties were concerned. Of course, that emphasis also gave an emphasis to the ‘market’ but in Australia at the time it was still a market protected by government (through tariffs on imported goods) and was to remain so for the next three decades. Protection of the market also gave some protection to the workers: and there was also the Arbitration Commission and the ‘basic wage’ which helped maintain the standard of living of workers.

The major change came after the ‘stagflation’ and oil crises of the 1970s. Governments, led by the Thatcher and Reagan governments, began abandoning Keynesian economics, which had allowed for a degree of government management of the economy and the market, in favour of what is known in Australia as ‘economic rationalism’, or overseas as ‘market liberalism’. The latter name actually explains it better — market freedom. In articles last year I discussed the liberal view of individual self-interested freedom and that is the view that underlies market liberalism. It is the antithesis of egalitarianism and the ‘fair go’.

Also, following World War II, America had become the world’s dominant economy (and still is, although China threatens to surpass it in the coming years). The American ethos has always been focused on the individual and the idea that anyone can rise to the top by their own efforts, even from the humblest beginnings: Abraham Lincoln was often touted as an example. That meant that some looked to the American ethos, rather than an Australian ethos, as the exemplar for economic success. And, of course, modern market liberalism (as opposed to the old English version of the 1800s) also rose to prominence in America.

Reinforcing the changes was the appearance and growth of multi-national corporations and their creation of a global economy. The multi-national corporations loved market liberalism and they had the power to enforce it. They could threaten recalcitrant governments with the withdrawal of investment. Even a government trying to protect its workers knew that such withdrawal would reduce jobs, perhaps slow the national economy, even reduce wages, so that its efforts to protect workers would be in vain. Of course, it was rarely an open threat, more a reminder that the multi-national could do business elsewhere if the government was not favourably disposed towards it in such things as wages and working conditions or did not allow its other products to enter the country without high tariffs. Countries even vied to attract such companies, offering them incentives to invest, in contradiction of free market principles, but such incentives were never turned down on the basis that they breached principles — no, the other principle of self-interest won out.

Underlying all this is competition. Since the 1980s we have been continuously told that competition is the key to an efficient economy and that government regulation reduces competition and efficiency. And to make competition work, individuals need to be competitive in their approach.

I think all those circumstances created a ‘perfect storm’ to undermine the Australian ethos of egalitarianism and the ‘fair go’.

Hawke and Keating succumbed to the international pressure and the advice of the economic ‘experts’, including those at Treasury. While the changes they made did improve our economic situation, it was still threatening our ethos. The trick was to try to maintain both and to some extent they achieved that with the ‘Accord’ but it was a delicate balancing act that also left the ‘fair go’ in the balance.

Even small businesses were influenced by the new approaches. Previously, many small businesses were happy to co-exist with other similar businesses. An example was the old ‘corner stores’ which were dotted throughout the suburbs on every second or third corner. Everyone could walk to a local store. There are other factors that led to the demise of such stores, including changes in transport and food storage, but the people who ran those stores knew they were providing a local service, not just a business. They made a living but were basically little or no wealthier than the neighbours they served. As the world changed some hung on, still providing a local service, but they could no longer ‘compete’ and people eventually sought the cheaper prices at the supermarkets (even though they had to travel further to access them).

Small businesses that survived became more competitive. Some managed to grow by taking over or forcing out their competition or they banded together (and gave up their independence) in order to ‘compete’. For the most part, the idea of providing a service was relegated to second place. (Although I see that it is making a come-back, now as a means of gaining an advantage in the market.)

Companies began running seminars for their workers extolling the virtues of competition, of the need to out-perform and out-do their rivals. You have only to walk past some real estate offices early in the morning and hear them chanting and cheering and psyching themselves to sell, sell, sell in the coming day. In the case of the real estate office, the emphasis is not just on out-performing its rivals but fostering competition between its own sales-people, promoting success by out-selling one’s colleagues.

That whole approach has encroached at the personal level and is readily displayed in job interviews. Even in the public service, I was once told that I ‘did not sell myself’ at interviews: my reply was ‘if I wanted to “sell” myself, I would have been a salesman, not a public servant’. Being able to ‘sell’ oneself in an interview is often not a valid indication of a person’s worth as a worker but it has become the competition in the interview, not the value or quality of a person’s work, that often determines who ‘wins’ the job. Even the fact that it is now more common to refer to a person ‘winning’ a job is an indication of a fundamental shift in values. Previously we would simply ‘go’ for a job and would be asked whether we ‘got’ it.

Some people now appear captured by the philosophy of the new economic world. In their personal undertakings they are competitive; they brag of their successes and claim the credit for themselves; they are concerned for themselves, not for their neighbours and may no longer care about fitting in with their neighbours. The economic rationalists have indeed stolen their hearts and minds.

I have my own theory that even if an ethos is ignored for long periods, people return to it in times of struggle or when they feel threatened because it remains in the collective consciousness. Howard abandoned the balance between the new world and the old ethos, that Hawke and Keating had tried to achieve with the ‘Accord’, when he introduced Workchoices. Abbott is taking the approach to the next level by imposing the underlying philosophy of market liberalism across society and not just to the economy. And, at last, people are seeing that as a step too far. It seems that, while many in the population may see individual self-interest as important for economic pursuits, they have not been convinced that it applies to society and are drawing a line in the sand. When it comes to social issues the ‘fair go’ still lingers or, as I suggest, is being resurrected as a threat is perceived to the way our society functions.

Labor needs to keep returning to the ‘fair go’. Not only does it resonate with a significant proportion of voters, it forces the Liberals to respond because, here in Australia, it would be political suicide to leave only one major party apparently defending the ‘fair go’. The Liberals, however, have trouble defending it because it is their approach threatening it and because their approach is, as I suggested earlier, the antithesis of the ‘fair go’. It leads to such bizarre statements as Hockey asking if it’s fair that the rich pay more tax (in dollar terms); or is it fair that three months’ worth of our taxes is required for those on welfare; or that poor people don’t drive as much as rich people, so a petrol tax is actually ‘progressive’. When reference to the ‘fair go’ can create such contortions by the Liberals, it is an idea worth pursuing.

And as for the economic rationalists stealing our hearts and minds, they almost succeeded — but not quite.

What do you think?

About Ken

As you are here reading TPS, we presume you are not one of those who were conned by the economic rationalists into abandoning our values in the name of economic success. But perhaps you know of some who were. Or perhaps you disagree with Ken’s view. Please let us know and leave a comment.

Come back next week for 2353’s ‘Instant experts’ which raises some pertinent questions about the expertise required of our politicians when they are expected to run our economy, our defence, our health system and so on. Are they qualified for such specific tasks? Should they be?

The ‘trickle-down’ effect

Next time a conservative politician or acquaintance tells you that tax cuts for the better off will help the state or nation’s economy, you might want to have ‘the discussion’.

Tax cuts for the better off is part of a theory of economics known as ‘trickle-down’ that seeks to prove that if the tax cuts are given to the better off, they will spend more, increasing the demand for goods and services to the direct benefit of the economy as well as the government’s tax revenue. So we’re all on the same page — here is a ‘trickle-down theory’ definition:

An economic idea which states that decreasing marginal and capital gains tax rates — especially for corporations, investors and entrepreneurs — can stimulate production in the overall economy. According to trickle-down theory proponents, this stimulus leads to economic growth and wealth creation that benefits everyone, not just those who pay the lower tax rates.

Probably the best known example of this theory around the world has been the Reagan Presidency in the United States. In the early 1980’s, he cut the top tax rate by 20%! Most conservative governments have also implemented similar cuts in the past although, to be fair, not of the same magnitude. Conservatives will also tell you that government spending should be reduced to an absolute minimum and the government’s budget should balance. Forbes (an American business publication) as recently as 2013 has been arguing that while it finds the term ‘trickle-down theory’ objectionable, it is a valid theory that has worked in the past. According to the article, the term was coined —

… by Democrats in the 1980s as a way to attack President Reagan’s economic policy combination of tax rate cuts and some relaxation of federal regulations. They needed a catchy, easy-to-remember zinger to fire at Reagan; a line that would keep their voting base angry.

The article goes through all the usual conservative talking points: small government is less of a drag on the economy; people need work rather than infrastructure such as schools and transportation; the better off are the ones that create wealth; that Obama is to blame and so on. It finishes with this:

What poor people should want is more freedom and more growth, so they will have better opportunities. The deceptive “trickle-down economics” notion was crafted to take advantage of their ignorance about the way the world works. Perhaps one day the pitiable Americans who now cheer when politicians who masquerade as their friends denounce “trickle-down economics” will realize that the massive federal Leviathan is their enemy.

While I take the point that the term ‘trickle-down theory’ may have been coined by a member of the Democratic Party in the US and it does have more ‘zing’ than ‘supply-side economics’, the fact is that the theory is all about those who are better off supporting the economy and the government reducing its influence. The conservatives have their own ‘zinger’ name for the theory as well — ‘Reaganomics’. Regardless of the name you want to give it, the theory suggests that benefits of tax cuts to the better off are supposed to flow to those that are less well off. If that isn’t trickling down, what is?

The other argument is that the reduction in regulation assisted Americans to find jobs — and contribute to the economy. While to an extend it did, the majority of the Reagan era was during a time in the world’s economic history when the economy was chugging along nicely thank you very much. It could also be argued that the seeds for the current social and economic woes in the USA were sown in that era where personal wealth was a far greater concern than the common good.

Seems it’s all cut and dried then, doesn’t it? US and Australian conservatives still call for a return to ‘supply-side’ or ‘trickle-down’ economics (depending on your point of view), citing amongst other justifications, Reagan’s success in 1981 in reversing the US recession.

Reagan’s tax cuts are claimed to be the event that ended the recession of the late 1970’s and early 1980’s in the USA. But what is (conveniently) forgotten is that he increased government spending by 2.5% at the same time. Government spending also stimulates the economy. Therefore the most cited example of the benefits of this economic theory doesn’t stack up, as there were other influences at the time. Despite later increasing taxes for the better off, Regan also tripled the US Federal deficit from 1981 to 1989 — hardly the action of a government reducing influence in the economy. George Bush (the elder) also increased taxes despite a ‘no tax increases’ promise.

Recently the Huffington Post reported on the success on the Governor of the US state of Minnesota (Mark Dayton) and his remarkable turnaround of the state’s economy. The full article is here and the highlights are that when he took office in 2011, he inherited a deficit of US$6.2 billion and 7% unemployment. In 2015, Governor Dayton handed down a budget surplus of $1 billion that he has pledged to spend on transportation and education. Unlike nations, US (and Australian) states do not issue their own currency, so balanced budgets are considerably more important than at the federal level.

Dayton is an interesting person. He has been in politics for some time but considered to be a terrible ‘retail’ politician. According to Mother Jones:

An heir to the Target retail fortune, Dayton, 68, has ploughed tens of millions of his own money into his campaigns, but it still hasn't come easy. He swallows his words in a rush, speaking in almost-unintelligible mumbles and frequently losing track of his point as he rambles on unrelated tangents. "He's not a terribly articulate guy," says Larry Jacobs, chair of the University of Minnesota's public policy school. "He's not a smooth talker; he struggles to give a smooth public speech." At public events, Dayton hunches his shoulders, which makes him appear shorter than his 5-foot-10 frame, and often appears to be trying to disappear into the crowd. No one wonders whether he'll seek national office someday. He's not the leader of the free world — he's your dad, struggling to make small talk with you and your friends after you get home from school.

So how did Dayton do it? Well you could say he threw the ‘supply-side theory’ out the window. Not only did he raise taxes on the highest earners in Minnesota; he increased the basic wage in the state to $9.50 an hour. Mother Jones reports:

Republicans went berserk, warning that businesses would flee the state and take jobs with them.

The disaster Dayton's GOP rivals predicted never happened. Two years after the tax hike, Minnesota's economy is booming. The state added 172,000 jobs during Dayton's first four years in office. Its 3.6 percent unemployment rate is among the lowest in the country (Wisconsin's is 5.2 percent), and the Twin Cities have the lowest unemployment rate of any major metropolitan area. Under Dayton, Minnesota has consistently been in the top tier of states for GDP growth. Median incomes are $8,000 higher than the national average. In 2014, Minnesota led the nation in economic confidence, according to Gallup.

Scott Walker is the Republican Governor of Wisconsin — the neighbouring state to Minnesota — and a potential Republican Presidential Nominee in 2016. For decades, the two states have been comparable in a number of social and economic criteria. In the past few years, it seems that the ‘unlikely politician’ in Minnesota is outperforming his counterpart in Wisconsin according to a number of sources including Minnesota Public Radio and Econbrowser. Walker was also the subject of a ‘recall election’ in 2012, when in excess of 500,000 Wisconsin voters petitioned for Walker’s removal from office. He won the subsequent re-election — only after allegedly receiving considerable financial support from outside the state. CBS News in the US is reporting there are some potential problems with the morals and ethics of how Scott Walker manages his fundraising. Never the less, Walker is seen as a conservative hero by legislating to remove considerable negotiating power from the public service unions in Wisconsin and other US states as detailed in this article from The New York Times . Walker is now claiming that his ‘success’ with unions gives him the experience to deal with Islamic State (when he becomes a Republican President in 2016 you would have to assume). Fighting with unions and reducing public services are not unknown in Australia under the current federal government or its predecessors. Dayton has announced that his current term will be his last — and yes, he did have to wait until the ‘stars aligned’ to actually perform what is considered to be a remarkable recovery.

Australia’s newly appointed (in January 2015) Treasury Secretary, John Fraser, has gone ‘on the record’ claiming that ‘Reaganomics’ had some positive effects. Gareth Hutchens, writing for Fairfax media (link above) suggests that the view of Fraser is somewhat different to Martin Parkinson and Ken Henry — the previous two Treasury Secretaries. Given that Parkinson and Henry demonstrated their credentials during the Global Financial Crisis and its aftermath, Fraser has some large shoes to fill.

It is fair to suggest that there will be economists discussing the benefits of ‘trickle-down economics’ for years to come. However, Governor Dayton has clearly demonstrated that trying to make society more equitable by increasing the basic wage and taxing those that can afford to fund the services will not only improve the state’s bottom line, it will improve the quality of life enjoyed by all its citizens, then when the ‘payoff’ comes, services such as education and transportation can be improved using government funding. It seems there is a better way than the frequent calls for ‘tax cuts for the well-off’.

Minnesota and Wisconsin have seemingly been joined at the hip economically and socially for a considerable period of time. Governor Dayton has improved the living conditions of those in his state, reduced unemployment and is now funding improvements to transportation and education using methods that are certainly not supported by Australia’s Treasury Secretary Fraser or Treasurer Hockey. Governor Walker cannot replicate the success of Dayton (or Reagan for that matter) using ‘traditional’ conservative economic measures in neighbouring Wisconsin; accordingly the citizens of that state are falling behind their ‘long time equals’ who live over the border in Minnesota.

So next time you hear the call for tax cuts, austerity and ‘small government’; why don’t you think about Minnesota’s Mark Dayton and have ‘the discussion’ about a better way instead?

What do you think?

About 2353

Welcome to ‘the discussion’ we have to have. 2353 provides plenty to discuss in this piece on ‘trickle-down’ economics and the alternative approach — that seems to be more successful. The piece is particularly timely as Hockey released the government’s taxation discussion paper last Monday.

Next week, on a similar theme, Ken discusses ‘How the economic rationalists tried to steal our hearts and minds’, which looks at how the economic rationalist approach was trying to change not just our economy but our basic Australian values.

Intergenerational Reports: what are they on about?

There have now been four Intergenerational Reports (IGR) from 2002  to 2015, issued by three treasurers: Costello (2),  Swan  and Hockey.  They were meant to come out at five-yearly intervals but Swan (and Rudd, although officially they are the Treasurer’s report) brought forward what should have been the 2012 report to 2010.

I will compare what each report has projected for the future, particularly the changes that have been made between each report, and how they relate to Hockey’s 2015 report.

The basics each report addresses are:

  • demographic changes (population, ageing, immigration)
  • GDP growth (population plus productivity and participation)
  • and what they mean for commonwealth government fiscal policy (revenue and spending)

 Population and ageing

There have been significant changes in the total population projections: from 25 million in 2042 in the 2002 report, to 28.5 million in 2047, 35.9 million in 2050 and 39.7 million in 2055 in the 2015 report. Australia’s population in 2014 was about 23.5 million.

The fertility rate has influenced the population projections as it was forecast to be only 1.6 in 2002 IGR but in the last two IGRs was forecast to be 1.9. The biggest change, however, comes from immigration projections. The original 2002 IGR forecast average nett immigration of 90,000 per year over the next 40 years but that increased to 110,000 in the 2007 report, 180,000 in the 2010 report and is now projected to be 215,000 per year, which suggests that immigration alone will add 8.6 million to the population by 2055 and leaves about 7.6 million in natural growth.

Those higher population figures have lowered the proportion of people aged 65 and over from a high of 25.3% forecast in 2007 (2002 was slightly lower) to 22.6% in the latest IGR (compared to 15% in 2014). The proportional fall is not quite as high as it could be in a larger population because it is forecast that people will live longer. 

Life Expectancy 2002 IGR for 2042 2007 IGR for 2047 2010 IGR for 2050 2015 IGR for 2055
Women 87.5 89.8 90.5 96.6
Men 82.5 86.0 87.7 95.1


What do you make of that? Quite a big jump in the latest IGR. One reason is that the methodology changed. The 2010 IGR used the ‘period’ method (as used by the ABS in its ‘Life Tables’) which applies age-related mortality rates in the year a person is born but Hockey’s IGR has used a ‘cohort’ method which makes assumptions about medical improvements over a person’s life time. Appendix C (Table C1) of the current report shows that, using the ‘period’ method for 2055, there is actually a marginal decline in the projected ages from those in the 2010 report: females 90.1 and males, 87.5.

I have my doubts of the headline figures in Hockey’s report. Unless we discover the ‘elixir of youth’ (which can’t be entirely ruled out!), I believe there is likely a biological limit to human lifespan. Some credence is given to my view by information contained in the reports that remaining life-span at age 80 has not significantly improved in a hundred years. I think Hockey has deliberately changed the approach to justify his cries of ageing and scare the population into supporting his draconian policies: the marginal drop in life-span using the ‘period’ method would not fit his argument.

Hockey has also emphasised the ‘dependency ratio’ of 2.7:1, which is the number of people aged 15-64 (the ‘working-age population’) for each person aged 65 and over, as though this is leading us towards disaster. The current figure, however, is slightly better than the 2.4 in 2007 and 2.5 in 2002 (and is the same as 2010). I find it interesting, however, that the ratio was 7.3:1 in 1974-75 and in 2014-15 is 4.5:1. We have already lost 2.8 workers for every ‘retired’ person and yet seem to have done so without major problems and will lose only another 1.8 over the next 40 years.

Despite all of the dire warnings about ageing, the international context, as reported in the IGR, makes it appear that Australia is still relatively well-placed.

Australia’s population, although ageing, is neither as aged nor ageing as fast as some other countries. Japan’s median age is almost 45 years and many European countries have a median age in the forties. By contrast Australia’s median age is 36.8. The proportion of the Australian population aged 65 years and over is smaller than many OECD countries, including Canada, France, Germany, Italy, Japan and the United Kingdom. On the other hand Australia has a much larger proportion of its population aged 65 years and above than China, India and Indonesia.

Economic projections

The main measures are real GDP growth, real GDP growth per person (which implies improvements in the standard of living), and they are influenced by productivity, participation (the proportion of people aged over 15 who are in the workforce) and hours worked. 

Annual average 2002 IGR for 2042 2007 IGR for 2047 2010 IGR for 2050 2015 IGR for 2055
Real GDP growth 1.9% 2.4% 2.7% 2.8%
Real GDP growth per person 1.5% 1.6% 1.5% 1.5%
Productivity 1.75% 1.75% 1.60% 1.50%
Participation 56.0% 57.1% 60.6% 62.4%
Hours worked per week 34.25 34.5 33.6 32.0*


* The 2015 IGR doesn’t give an actual figure, only a graph, and this is my best estimate from the graph, although it does seem a significant drop compared to the earlier figures.

The hours worked reduce as part-time work increases, catering for older people and more flexibility for working women. Productivity projections are simply based on the average of the previous 30 years, so as the reports now span 13 years, some earlier higher annual levels of productivity in the 1970s have dropped out. Productivity has been as low as 1.2% in recent years: if that picks up again in the next five years, before the next IGR, that would be reflected in a slightly higher figure then. The report does concede that lower productivity in the 2000s was partly a result of the massive investment in mining infrastructure: while such investment boosts GDP it adds nothing to productivity until the mines are actually in production.

The new, and higher, population figures in each IGR have led to a continuing rise in the participation rate. That change is partly due to the projected higher immigration as the majority of migrants are of prime working age. Hockey is also projecting that participation by those 65 and over will increase from 12% to 17%. The main working age group, aged 15-64, will increase from 15.8 million currently to 23.8 million in 2054-55 and while not everyone in that age group works (a number of the 15-24 age group are still in education), the workforce is projected to be over 20 million in 2054-55 compared to about 11.5 million at the start of 2015. We will have almost 9 million more people paying income tax and yet we have a major problem!

A significant change in the figures is in the ‘real’ GDP growth. It has improved in each successive IGR. If GDP had remained at 1.9% as forecast in 2002, then, I agree, that we may have been facing long-term problems but if we are now predicting real growth of 2.8%, then the problems should be proportionally less, not worse as Hockey is telling us — but perhaps he thinks no-one has bothered looking at the previous reports.

Some economic projections have remained consistent throughout the reports, notably inflation at 2.5% (the Reserve Bank’s target) and unemployment at 5%. The unemployment remains constant because this is the NAIRU (Non-accelerating Inflation Rate of Unemployment) level, below which inflation may increase. I have read criticisms of the whole NAIRU approach. To my layman’s eye, it seems no more than the neo-liberal position that lower unemployment may force employers to offer higher wages to attract workers, and that will lead to inflation. On the other hand, I would have thought that fewer unemployed would help boost GDP: it would certainly boost government revenue and also reduce government outlays for unemployment benefits (Newstart).

Government’s fiscal position

The four reports focus on commonwealth government expenditure that is influenced by demographic changes, such as spending on health, aged care, pensions, payments to families, and so on.

In the following table I compare only the first three IGRs because Hockey’s IGR approaches the issue differently and I will discuss that separately. 

Per cent of GDP 2002 for 2042 2007 for 2047 2010 for 2050
Health 8.1% 7.3% 7.1%
Aged care 1.8% 2.0% 1.8%
Aged & service pensions 4.6% 4.4% 3.9%
Payments to those of working age 1.9% 1.8% 1.9%
Payments to families 0.9% 1.0% 0.9%


As you can see, up until 2010 there was no major change to projections for aged care and payments to those of working age and to families. The projections for health spending and pensions were already trending down, indicating that previous governments had already taken measures to slow the rate of growth of commonwealth spending. That also suggests that a moderated approach with appropriate changes over time is already achieving reductions in future government spending. Instead of continuing that approach, Hockey was insisting we required drastic measures now.

Each of the previous reports has taken the line that the projections are based on current policy settings, although they also comment on possible future approaches to meet the fiscal challenges. As you know by now, Hockey included three projections based on previous (Labor) policy, current legislated policy (what he has managed to get through the Senate) and proposed policy. 

Per cent of GDP 2014-15 current spending 2054-55 current policy 2054-55 ‘proposed’ policy
Health 4.2% 5.7% 5.5%
Aged care 0.9% 1.7% 1.7%
Aged & service pensions 2.9% 3.6% 2.7%
Payments to those of working age 2.8% 2.6% 2.4%
Payments to families 1.8% 0.9% 0.8%


I have ignored Hockey’s so-called ‘previous policy’ because it is such a flagrant lie. He alleges it is based on former Labor policy but it is based on the problems created after Abbott and Hockey eliminated Labor’s revenue measures and increased the deficit in the 2013-14 MYEFO — and of course those changes carried into the 2014-15 budget. It is true that health spending was forecast to increase to 7.1% of GDP by 2050, and that was contained in Swan’s 2010 IGR, but it should be taken in the context that measures by various governments had already reduced that from 8.1%. And the same can be said of aged and service pensions.

Study the figures closely. Hockey is not only proposing slowing the rate of growth of spending, which may be justified, but wants to achieve a final result that is below what is being paid by government in 2014-15 for pensions and welfare for those of working age (payments for families were projected to fall anyway). If you need justification of statements that Hockey and Abbott are attacking those on welfare, then surely that is it.

The three earlier reports each summarised the commonwealth spending by giving a figure for the ‘fiscal gap’ (the difference between forecast government spending and revenue expressed as a percentage of GDP). In the 2002 report that fiscal gap was forecast to be 5% by 2042; by the 2007 report it was down to 3.5% in 2047; and in 2010 it was down to 2.75% in 2050. Hockey’s report does not clearly give a figure. Again this shows that since 2002 governments had already taken measures to close that gap — or that changes in the parameters were having an influence (such as the increase in population).

What the reports tend not to address in any detail are the issues arising from a growing population, not just an ageing population. If we have 15 million more people in 40 years that obviously means we require more housing, better transport systems, more energy and water, and so on and that also has implications for our environment, including carbon emissions. The 2010 IGR is the only one to make this more of an issue:

Population growth has implications for the environment, including: greenhouse gas emissions, biodiversity and water availability; urban amenity; and infrastructure and government service delivery requirements. The risks in these areas are manageable provided governments take early action to plan for future needs and introduce efficient market mechanisms to transition to a less emissions-intensive economy.

Swan’s IGR also introduced a chapter specifically on “A sustainable society’ which looked at well-being and sustainability, and human and social capital which included health, education and skills. It discussed health and education and training as means of adding to future economic growth not just as a potential drain on commonwealth finances. The three reports prepared by Coalition governments have notably ignored that, other than a brief mention that they may have an influence.

While the IGRs consistently suggest that commonwealth spending on education will decrease, partly a result of young people being a lesser proportion of the population, it has recently been suggested by the Australian Council for Education Research (ACER)  that we will in fact need additional education facilities because of population growth in recent years. ACER suggested that Victoria would require an additional 448 primary classes each year over the next decade, Queensland 443, NSW 385 and WA 351, and that will translate to additional secondary classes from about 2018. That is primarily a funding issue for state governments but it raises questions about what the IGRs are actually achieving by their singular focus on commonwealth fiscal policy.

The focus of the IGRs is justified to some extent in terms of the ‘fiscal gap’. What the gap implies is the need to raise taxes or cut spending to meet projected future costs; a warning that commonwealth government spending could result in very high taxation levels, even above 30% of GDP, whereas historically we have usually managed to keep tax below 25% of GDP. Despite that, the reports do not actually prove that gap exists, only that it might if the forecasts are accurate. The changes that have already taken place between reports show how inaccurate such long-range forecasting can be and the figures appear, to me, not to justify that ageing is the central problem to long term spending. Ageing was relevant to Treasury primarily in terms of the retirement of ‘baby boomers’ from the public service because the government had a huge unfunded superannuation liability — which is why the Future Fund was established.

The IGRs are very limited in what they set out to achieve. Inter-relationships between some spending, such as health and education, and their capacity to improve future participation rates, productivity and GDP may be mentioned but are not explored in any depth. The impact of environmental change on the economy again is mentioned without going into great detail and yet climate change has the capacity to throw all those forecasts out the window. They are not providing a grand vision for the future of Australia. They are doing little more than addressing fiscal policy and then only the commonwealth government’s fiscal policy. They would be of more value if they did discuss a future Australia and the role of the states and what sort of funding they will also require to meet the infrastructure demands of a growing and ageing population (and to meet shorter-term challenges like the demand for more school places).

I can understand that originally they were Treasury’s attempt to warn the commonwealth government that it could not keep spending the way it was or handing away revenue. Even retaining a fiscal focus, they could have become so much more and could have fostered a conversation at all levels of government about Australia’s future and the finances required for it. I think the sole Labor government IGR did attempt to give the concept a slightly broader relevance but that has disappeared in Hockey’s IGR.

I think that while the reports maintain a sole focus on commonwealth government fiscal policy, the name ‘Intergenerational Report’ is a misnomer and, when Treasury can’t get budget estimates right from year to year, I’m not sure how much credence we can place on their projections 40 years into the future. 

What do you think?

About Ken

What do you make of the Intergenerational Reports? Are they giving us important information or are they not worth much in their current form? Ken doesn't think too much of them and certainly doesn't believe Hockey's most recent report. Let us know what you think.

Next week 2353 will look at 'The "trickle down" effect' in economics and discuss a successful alternative approach taken by a US state governor.