Andrew Leigh

AUSTRALIA’S STAGNANT ECONOMY

JOHN CAIN FOUNDATION

MELBOURNE

19 FEBRUARY 2020

I acknowledge the Wurundjeri people, on whose lands we meet today.

It’s less than two months since John Cain left us, and just over a week since the outpouring of public recognition that his memorial service evoked. As a child of the Cain era, his passing still feels raw. My parents grew up in Melbourne, and we visited regularly. I recall the sense of fresh possibility when the Cain Government’s 1982 election ended three decades of Liberal rule. The Cain Government was a reformist government – reforming liquor laws, investing in public health and education, taking on the gun lobby and the tobacco lobby.

Unlike the showponies and charlatans of today, John Cain took public service seriously. ‘It’s no good being in office for three years, or four, or five’, he said. ‘I want to see long-term change’. He drew on evidence, reformed the public service, and worked with the caucus and the broader labour movement. ‘It’s hard to make decisions on complex issues’, he noted. ‘It’s is more difficult if the process is defective.’

As Richard McGregor put it, Cain’s intractable belief was that ‘policy ought to be the supreme arbiter of politics’. In the early years, his public approval ratings were in the 70s – but popularity was always a means to achieving reform, not a goal in itself. After a generation of conservative rule in Victoria, he knew he had to work hard to maintain the trust of the electorate. His way wasn’t pork and marketing, but hard policy reform.

Cain’s approach to politics was one of austere integrity (you'll be relieved to know I flew to Melbourne in economy class today). He kept a jar of loose change in the office to pay for personal postage. He once sent a box of champagne back to a well-connected donor. When it turned out that an Australian Secret Intelligence Service spy had been working in his office, Cain wasn’t panicked, just wryly amused that ASIS had learned nothing they couldn’t have found out from the newspapers.

At the funeral, James Cain shared some of his father’s advice: ‘Be honest and don’t cheat the system. Read books.’ And if you have a choice between the easy way and the hard way, ‘pick the right way, whether it’s easy or hard’.

With that, you can get a lot done. As John Cain once recalled, ‘When elected, we enjoyed more than a touch of idealism. We also had carefully researched, prepared and published policies for all state government activities. Our party had been productive and innovative.’

Nobody Expects the Spanish Inquisition

John Cain’s government marked a change in who was regarded as Victoria’s ‘normal’ party of government. Before him, the state was considered a conservative bastion. Since 1982, Labor has governed in Victoria 71 percent of the time. Victorian Labor has won the last two state elections.

As a federal Labor MP, I note this statistic a little ruefully. Since 1982, Labor has governed at a national level just 50 percent of the time. Federal Labor has lost the last three elections.

Last year’s election loss was particularly painful for those of us who believe that elections should be a battle of ideas. Labor took to the election the most comprehensive set of policies of any opposition in Australian history. Our policies were more detailed, more carefully costed and more rigorously developed than the ideas that Whitlam took to the 1972 election, that Hewson took to the 1993 election, or that Rudd took to the 2007 election. Had we won, there would have been no surprise backflips, no dithering about, no debates over mandates. We would have set about implementing our ideas from day one, and Australia would have been a better nation for it.

But we didn’t win. 48½ percent of the two-party vote was only enough to secure 68 seats, one fewer than we had held in the prior election. As Andrew Charlton has pointed out, the drop in Labor’s primary vote over the prior ten elections averaged 1.3 percent. In 2019, Labor’s primary vote fell 1.4 percent. That’s a structural trend, which goes beyond personalities and unexpected events.

Following our election loss, there were more explanations for why we lost than we had policies. What struck me was the number of people who contended that we should discard ideas based on nothing more than politics. As a friend of mine put it, it was akin to saying ‘the kids didn’t like their Christmas present – let’s buy them something different next year’. Labor isn’t a mere marketing outfit. Our purpose is to craft the policies that will build a better future – not engage in electoral slicing and dicing.

In the 2022 election, we need more than a grab-bag of policies – we need a philosophy for government and a plan for the future. To its credit, Craig Emerson and Jay Weatherill’s election review didn’t take a simplistic approach, and didn’t suggest that Labor had to make a false choice between the bush and the city. It recognised that basic truth: with nimble leadership and strong policies, we can meet the needs of regional and urban Australia. Without nimble leadership and strong policies, we’ll lose them both.

An Ex-Parrot

Today, I want to talk about a topic that’s close to my heart: the Australian economy. But rather than discussing last month’s unemployment figures, or the Reserve Bank’s latest board minutes, I will take a longer view. The case I want to make to you is that the Australian economy is in a deep-seated malaise. Turning it around will take more than temporary stimulus – something much more fundamental is needed.

The headline indicators aren’t pretty. Since 2013, economic growth has slowed. Wage growth is the worst on record. Household spending is growing at its slowest pace since the Global Financial Crisis. Retail is amid its deepest downturn since 1990, with Harris Scarfe, Dimmeys, Bardot and Jeanswest among those to hit the wall. New car sales last year fell 8 percent, with fewer vehicles sold than at any time since 2011. Construction is now shrinking at its fastest rate since 1999. Business investment is at its lowest level since the 1990s recession.

The risk to Australia is if we see these as temporary issues, and choose to blame bushfires or coronavirus. There’s nothing temporary or transitional about these trends. The sad fact is that Australia’s economy is less productive, less nimble, and less dynamic than many other advanced countries. Indeed, on many indicators, the economy has become more stagnant over time.

Let’s start with productivity. According to the latest update from the Productivity Commission, labour productivity — output per hour worked — fell by 0.2 percent in 2018-19. In other words, workers in the last financial year produced less per hour than the previous year. The worst falls were in agriculture, manufacturing, construction, tourism and professional services.

This isn’t normal. Since the 1970s, labour productivity has grown by around 2 percent. But since 2013, there has been a major slowdown. And now productivity has gone into reverse.

To understand why Australia’s productivity crisis is so serious, it’s worth recognising why productivity matters. Through Australia’s history, our economy has become massively more productive. Australian workers today produce nearly four times as much output every hour than in the 1960s. This has been a central driver of rising living standards.

Productivity measures how efficiently the economy turns labour and capital into goods and services. When the Australian economy becomes more productive, we are producing more output from a given level of inputs. Higher productivity creates the potential for incomes to rise faster than prices. A more productive economy can be more generous to the disadvantaged, can reduce its impact on the natural environment, and can play a bigger role in international affairs.

Productivity doesn’t automatically bring fairness: in recent times, workers haven’t received their fair share of the modest productivity growth delivered by the economy. But without rising productivity, wages will eventually stagnate and living standards will stop increasing. Whether your priority is longer lifespans or lower taxes, raising Newstart or building motorways, you should be in favour of productivity growth. Productivity is the engine of the economy, and right now, it’s stalled.

Some of the most interesting work on productivity has been carried out by the Australian Treasury. Last year, Treasury’s Meghan Quinn revealed that researchers in her department, led by Dan Andrews, had been investing in a new analysis that links together workers and firms, and delving into fresh data about the dynamics of the Australian economy. Since 2002, Quinn showed, the most productive Australian firms (the top 5 per cent) had not kept pace with the most productive firms globally. In fact, Australia’s ‘productivity frontier’ has slipped back by about one-third. The best of ‘Made in Australia’ hasn’t kept pace with the best of ‘Made in Germany’, ‘Made in the Netherlands’ or even ‘Made in America.’

And then there’s the other 95 per cent. In the past two decades, their output per hour worked has barely risen. Let me repeat. Nineteen out of twenty Australian firms don’t produce much more per hour than they did when Sydney hosted the Olympics, Essendon were AFL Premiers, and Savage Garden topped the charts.

Just a Scratch? Your Arm’s Off

What’s going wrong? Part of the problem is that many firms aren’t investing in new technologies. Less than half have invested in data analytics or intelligent software systems. Only three in five have invested in cyber security, making them vulnerable to hacking and ransomware attacks.

It’s not just that companies aren’t investing simply in technology — they’re not investing in anything at all. Last year, the Productivity Commission had to use a new term in its report. Typically, the commission measures how the amount of capital per worker has increased — a concept known as ‘capital deepening.’ But the Productivity Commission found that for the first time in record, the amount of capital per worker went backwards. The economy had experienced ‘capital shallowing.’ Given that capital deepening has accounted for about three-quarters of labour productivity growth, this is frightening.

Across the economy, businesses are cutting back on research and development and investing less in good management. Just eight per cent of Australian firms say they produce innovations that are new to the world – down from 11 per cent in 2013.

Compared with the leading countries, the uptake of automation technologies in Australia is only half as large.

Innovation collaboration is especially woeful. Across a sample of around 30 OECD nations, Australia ranked fourth-last for the share of large businesses collaborating on innovation, sixth-last in businesses collaborating with suppliers, and second-last in collaboration between businesses and universities.

A survey of management practices in manufacturing firms found that Australia’s managers rank below those in Canada, Sweden, Japan, Germany and the United States.

Have You in Fact Got Any Cheese Here At All?

And then there’s the dearth of new firms.

It’s been said that you could already tell in the 1950s that Detroit would one day suffer a crash. Although automakers were thriving, the city lacked startups. Once the traditional car manufacturing plants got into trouble, the city slumped. What is true for Detroit holds for cities, regions and countries across the globe: newborn firms are as critical to an economy as newborn babies are to a society’s demography, bringing fresh approaches, shaking up existing industries, and offering new opportunities to workers.

Yet for all the talk of Australia as a ‘start-up nation’, our new business creation rate isn’t accelerating. In fact, our start-up rate seems to be stopping, though it’s partly masked by a quirk in the way we measure new businesses. The conventional start-up figures include anyone who registers for an Australian Business Number. This means that when a public servant takes a voluntary redundancy, only to come back the next month as a consultant, he is registered as a new business. Likewise when a tradie is ‘encouraged’ by her boss to become a sham contractor. Neither of these cases involve true business formation, so they distort the data.

The way to get around this issue is to look only at ‘employing businesses’: firms that hire at least one worker. On this metric, Treasury estimates that the new business formation rate in the early 2000s was 14 per cent a year. Now, it’s down to 11 per cent a year. Strip out non-employing businesses, and it turns out that our economy simply isn’t hatching new firms like it used to.

Another sign that the economy may be stagnating comes from figures on job-switching. A common myth is that changing jobs is bad for workers, and is happening more frequently. In both cases, the reverse is true. Workers who switch jobs typically experience a significant pay increase. In fact, if you study wages over a career, the largest salary rises tend to come when employees switch firms. Occasionally, job changes will be involuntary and painful — but more often they are voluntary and beneficial.

To see why, imagine for a moment that Australia instituted a rule saying that no one can switch jobs. Anyone who didn't like their boss or wanted to try working in a different sector wouldn’t be allowed to make the change. Growing companies couldn’t attract workers from their competitors. Such a rule would be profoundly anti-worker. Consistent with this, Treasury’s analysis finds that a drop of one percentage point in the job-switching rate is associated with a 0.5 percentage point drop in wage growth across the economy.

While changing jobs tends to benefit workers, it is happening less often than in past decades. Forget what you’ve read about a fast-churning labour market and the end of ‘jobs for life’; workers are staying longer in their jobs. In the early 2000s, the rate of job switching was 11 per cent a year. Now, it’s down to 8 per cent. It’s not the fault of employees: there are simply fewer good opportunities available. According to Treasury’s analysis, much of the drop in job-switching is because workers are less likely to transition from mature firms to young firms. With fewer start-ups firms, it stands to reason that there are fewer start-up jobs.

Job mobility isn’t the only form of mobility that’s declined. When the mining boom hit Western Australia, some commentators were surprised to see how few people moved across the Nullarbor. Western Australian jobs paid more (even after housing costs) and were more plentiful than in the eastern states. But for the most part, they were filled by fly-in, fly-out workers, or people who moved from overseas.

Curious to see whether this was a unique feature of the Western Australian mining boom, I looked at trends in residential mobility. In the 1960s and 1970s, 40 percent of Australians reported moving house in the previous five years. In the 2000s, that figure fell to 38 percent. Australians are also less likely to move interstate.[1]

These trends are especially surprising in light of the fall in home ownership, which should have increased the willingness of Australians to move house. Yet it has not – suggesting that we are more likely to stick to one spot than in the past.

A similar decline in geographic mobility has occurred in the US, where the share of people moving each year has almost halved since the 1950s. Among the suggested causes are a lack of portability in pensions, high moving costs, high costs of living in large cities, and inconsistent occupational licensing requirements.

And Now for Something Completely Different

The overall picture for the Australian economy came into sharp relief last year with the release of the latest update to the Harvard Atlas of Economic Complexity.

Here’s how their analysis works. It starts with the idea that some products are more complex than others. Making medical imaging devices or jet engines takes deep knowledge and extensive networks. Exporting timber or tea is less demanding.

Lead author Ricardo Hausmann and his team liken the problem to Scrabble. A player with just a few letters can only make a few words. More complex countries are like scrabble players who can make more words.

Analysing the export mix of countries, the analysis decides which products are complex by looking at the characteristics of the countries that make them. Countries that produce silicon chips tend to export a diverse variety of other items. Nations that export diamonds are much less diversified.

Aggregating a nation’s exports gives a measure of the diversity of an economy. The world’s most complex economies are Japan, Switzerland and Korea. Australia ranks 93rd. The three countries ahead of us are Morocco, Uganda, and Senegal.

Have You Got Anything Without Spam?

The Atlas of Complexity is – how do I say this? – a complex way of analysing the problem. So let’s do a simpler exercise. Let’s look at the stock market in 2010 and 2020, and ask the question: what are the largest listed companies?[2]

Here’s the list for the US in 2010:

1. Exxon Mobil
2. Microsoft
3. Apple
4. Wal-Mart
5. Berkshire Hathaway

And here’s the biggest US firms today:

1. Apple
2. Microsoft
3. Alphabet
4. Amazon
5. Facebook

That’s five technology companies, three of them that weren’t in the list a decade earlier.

Now, let’s do the same exercise for Australia.

In 2010, our largest firms were:

1. BHP
2. CBA
3. Westpac
4. ANZ
5. NAB

In 2020, Australia’s largest firms were:

1. CBA
2. CSL
3. BHP
4. Westpac
5. NAB

That’s three banks, a mining firm and a biotechnology firm. Only one of our largest five firms wasn’t in the top five a decade ago.

Compared with the United States, our largest firms are more stable, and less technologically focused. In the case of Australia’s banks, they primarily serve a domestic market.

Always Look on the Bright Side of Life

In his 2006 book The Australian Miracle, biologist Thomas Barlow pointed out that our oft-cited list of national discoveries – the black box, polymer banknote, hills hoist, wine cask, two-stroke lawnmower and so on – is no more and no less than should be expected of a country our size. We are an inventive people, but it would be dangerously complacent to think that our ingenuity places us far ahead of the Swiss, Canadians or New Zealanders. As Donald Horne’s Lucky Country warned, there is a risk that we ‘live on other people’s ideas’, rather than producing our own.

How do we make the Australian economy more dynamic?

Part of this challenge is cultural. Surveys conducted by the Global Entrepreneurship Monitor found that 41 per cent of Australians say that they would be deterred from starting a business by the fear of failure. This is higher than the average in other advanced countries, including the UK, where only 36 per cent are deterred by fear of failure, and the United States, where the fear deters only 33 per cent.

But it’s also about getting the institutions right. For instance, encouraging firms to collaborate with universities on research and innovation would help students get more practical insights, and ensure that firms were doing more to stay on the leading edge of technology.

Creating pathways for more young people to try entrepreneurship ensures that society is getting the benefits from talent everywhere, not just in the leafiest postcodes. For example, UTS Startups is a program that aims to give half of all undergraduates an experience with startups during their studies. Rather than entrepreneurship being special, director Murray Hurps says his goal is for ‘all students to see entrepreneurship as normal, desirable, accessible and just part of their experience at UTS’.

Innovation cannot be an exclusive process. If the history of invention teaches us anything, it’s that terrific ideas often emerge in unexpected places. The more opportunities Australia creates to encourage innovation among women, ethnic minorities, and people with disabilities, the more fresh inventions will emerge.

When it comes to business, we’ve seen a motza of mergers, but a scarcity of startups. As Adam Triggs and I outlined in our Federal Law Review article last year, this follows a period in which courts and regulators were under the spell of the ‘Chicago School’ philosophy to competition policy, which took too much of a ‘big is beautiful’ approach. It may be time to change tack.

Our relationship with the Asian region has been seen through the lens of people and goods flows. But another aspect is the flow of ideas. Improving Asia-literacy among managers won’t just boost our exports, it will also expose firms to new production processes, management structures and collaboration approaches. Improving our understanding of Asia and our engagement with Asia will be a crucial part of creating a more dynamic economy.

Finally, there’s education. In the face of automation and artificial intelligence, cloud computing and mobile devices, it’s vital that our education system keeps pace. That means attracting and retaining the best people into the teaching profession, creating more opportunities for vocational education students, removing the artificial caps on university places, and accrediting MOOCs so that they form part of the higher education ecosystem.

John Cain taught progressives that idealism and discipline were essential to bringing about change. His government was productive and innovative – characteristics that are essential not only to the Australian economy, but to any reforming Labor government.

[1] The share of people who moved house was 39.4% in 1966-71 and 40.5% in 1976-81, but 37.4% in 2006-11 and 38.9% in 2011-2016. The share of people who moved interstate was 4.6% in 1966-71 and 4.9% in 1976-81, but 4.4% in both 2006-11 and 2011-2016

[2] The US analysis combines the NYSE and the NASDAQ. The Australian analysis focuses only on the ASX.

ENDS

Authorised by  Paul Erickson, ALP, Canberra.