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Author: Evan Thornley is a co-founder of LookSmart, proprietor of Pluto Press Australia, and Research Director of the Australian Fabian Society.
Leaving the "Last Wars" Behind – some thoughts on Labor's Economic Policy
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- Published
- 11 May 2005
I’m mad as hell and I’m not going to take it anymore. Like a lot of Labor people, I’m sick of the conservatives claiming credit for an economy that was built by the Hawke/Keating Government. But I’m even madder that they’re flying the thing into the mountain while jostling over who gets to be the pilot. But mostly I feel like we’re stuck in a 1970’s time warp and haven’t adjusted our sets to cope with the challenges of a modern economy.
For a Labor Party unburdened by incumbency, this creates opportunities to set the political agenda.
When you look at the fault lines in the modern economy, this Government is addressing none of them. I'm not talking the fault lines of "the last war" - pro-market or pro-State, pro-business (whatever that means) or pro-worker, traders versus protectionists. Apart from Howard dusting off his retro-disco era dislike of Unions, those battles have been and gone.
Navigating the challenges of the modern global economy requires a different compass. Let's consider four examples: balancing a strong economy with a fair society, getting the investment/consumption split right, the role of exports compared to the domestic economy and the tensions between the owners of capital and management. Labor has a leadership opportunity on all four.
The prevailing orthodoxy, albeit often unspoken, is that there is an inherent conflict between a strong economy and a fair society. The New Right convinced the Old Left that this was the deal. I see it differently, because the premise is a lie.
The truth is that there is no dichotomy - on the contrary, the two reinforce each other.
You can't have a fair society without a strong economy. To anyone who disagrees with this proposition, there's a one word answer - unemployment. Unemployment drives poor outcomes on every other social indicator - health, crime, educational attainment or anything else. There are supporting arguments about how to afford the best health care and education systems, the most complete welfare safety net, the most prudent environmental protection, but you don't even need to debate these if you can't be convincing on unemployment. And I'm not yet convinced - if we have such a strong economy, how come nearly two million people can't get as much work as they would like?
Which brings in the flip-side of this equation - in the modern global game, you can't have a strong economy without a fair society. How so? The global economy is a team sport - and if we don't put our strongest team on the paddock, we're letting ourselves down and diminishing our chances. That means investing in our people, investing in the supporting infrastructure and diminishing the "fighting among ourselves" thing because we've got bigger fish to fry.
Take a visit to your local bookshop and look at the "Business and Management" section. All the action is around topics like Branding, Intellectual Property, Knowledge Management, Human Resource Development, Innovation and such like. What the accountants would call the "intangibles" on the balance sheet. Because it's these "intangibles" that drive modern capitalism. It's the investments in people, their ideas and their relationships that drives value. Do Microsoft invest in their people ? General Electric ? Nokia ? Macquarie Bank ? McKinsey & Company ? Of course they do. They treat them well, invest in them and invest in supporting them. Why does our Government have so much trouble with it?
Business people and scholars alike have been onto this for a while. Try reading Gary Becker's (Nobel Prize winning Chicago School economist) book on Human Capital. Have a read of the famous Perry study of early childhood intervention programs that demonstrated a financial return - an internal rate of return on funds invested - of 15% compound per annum. Or take this simple fact - for every additional year of education in a given economy, you typically see a permanent increase of about 1% in GDP.
So beware the argument "we know it's not fair, but it's good for the economy". Check your pockets quickly after someone gives you that line. It's an eloquent smokescreen for redistributing benefits in favour of the group whose attachment to "the economy" is less real than trying to ensure they get a larger share of it.
The battle between progressives and conservatives should not be about prosperity versus fairness. Labor believe that a strong economy and a fair society reinforce each other. The conservatives believe they are in conflict. That's where the battle lines should be drawn.
Which brings us to the second dynamic - Labor is the party of Investment and the conservatives are the party of Consumption. We create the wealth, they spend it. Not content with that, they'll borrow more and spend that as well.
Labor created compulsory superannuation to fund needed investment. The conservatives opposed it. Labor took high school completion rates from 33% to 75%. They've flatlined under the conservatives. Labor oversaw value-added exports growing 13% compound per annum. It's virtually flat-lined under the conservatives.
The conservatives have visited upon us the greatest debt-funded consumption binge in the nation's history. We're now the third worst (behind only Hungary and Bulgaria) on the planet in our capacity to pay our way in the world. And this despite having the best commodity prices in over 30 years. We've had the best party on the block because we've borrowed the most money to buy the most beer.
Which brings us to fault line number three - exports and the domestic economy. Or more specifically, exporters compared to the domestic services cartels. For the conservatives, "the voice of business" is largely the noisy self-interest of the banks, retailers and property developers that dominate the Australian economy. If you debt-finance the building boom and debt-finance retail spending to go with it, you've pretty much got all of them happy until the hangover hits.
The conservatives think we can build a scale model of the US economy - a pre-1980 view that ignores all that modern economists have written about increasing returns to scale. In Australia, the hard work of employment growth and getting to scale will come from small business and exporters respectively. Labor must create an environment that maximises the success of both if we are to keep employment going and pay our way in the world.
Finally, capital and management. During the last war, class conflict between capital and labour used to define the political spectrum. Now there will always be some crook bosses and bad companies and their workers can and must be protected. Fair employment conditions should never go out of fashion. We should never forget James Hardie. But if we can get our heads around the fact the US productivity superiority is driven by scale not labour market de-regulation, we can see Howard's current IR battle for what it is - politics not economics. For most businesses, these are tenth order issues.
But there is a different issue confronting modern capitalism and Labor has a fresh opportunity to make a difference. It's the tension between the owners of capital and senior management. And with workers retirement incomes now tied to share ownership in the nations' largest companies, labour can be allied with capital.
So when management compensation goes up 15-20% per annum but shareholder returns are significantly less, what do we see? A silent redistribution of wealth from shareholders to management. When 80% of M&A deals destroy shareholder value, but 80% of the same deals lead to increased management pay packets, what do we see? A silent redistribution of wealth from shareholders to management.
The dirty little secret of management compensation is that Boards start with objective advice on industry comparables but then decide to pay their management in the top quartile of their peers. That's right, 90% of management teams are somehow "top quartile" performers! It's almost Orwellian. Contrary to the apologists claims, Boards are not paying to meet the market, they're paying to beat it. Hence the ever-upward spiral.
Now for the top 25% of companies that (definitionally) are actually the top quartile of performers, I'll take no issue, but for the rest, this is a rort and it should stop. It's a no-brainer that Labor should stand with shareholders on this issue. Don't worry, you're not alone. Warren Buffet and Peter Drucker and a phalanx of great economists, investors and management theorists will back you on this one. Even genuine Liberals will if there are any left.
So that's a start - four examples of where Labor can lead at the idea level on what makes for a strong economy - a fairer society through human capital investments, a bias for deeper investment, a passion for exports and small business and standing up for the rights of workers as shareholders against a rapacious managerial class.
We can debate "$723 million over four years for a ... blah blah blah" some other time - engaging in the economic debate is about fundamental beliefs and orientations, not budget fiddling.
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