Life is a highway, and Australia is stuck in second gear

Speed limits save lives. I was reminded of this on Tuesday evening as I drove down the Hume Freeway after the Reserve Bank board meeting and a couple of vehicles overtook me as if my car were standing still.

The Hume’s speed limit is 110km/h. These bozos in such a rush to get to their destination were doing something north of 130km/h.

Illustration by Dionne Gain

They were a risk to themselves, their passengers and anyone else unlucky enough to be on the road at the same time. When it comes to driving, speed kills.

But when it comes to the economic freeway, this nation – and most others – are travelling way too slowly. We’ve become a Volkswagen bus as some fly past in their Lamborghini Huracán. Nations such as the United States, Germany, Belgium and Spain have all improved their productivity levels over the past couple of years, just as Australia’s rate has gone backwards.

Productivity – how much you can produce from a given set of inputs – drives the economy. Without improvements in productivity, be it from better use of materials or increased quality of the output, the economy, and living standards, stand still.

It is not making people work harder (although some business owners seem to believe this). And it’s not giving people more time off with bigger pay packets (as some unions seem to believe).

It’s about being smarter – mixing new and improving technology with workers in a way that allows a business to produce more at a lower cost and/or better quality.

Here’s an example. Henry Ford introduced a new moveable assembly line to his Michigan car manufacturing plant in 1913. He produced 250,000 Model T automobiles that year.

A decade later, he was producing 2 million Model Ts as the technology on the assembly line improved. At the same time, the price on those cars fell from more than $US800 to less than $US300.

Ford also famously paid his workers $US5 a day, double the average wage for car workers, to reduce turnover of staff, many of whom found the assembly line pretty boring. He could only afford to do that because his productivity initiatives had reduced costs and boosted his profit margins.

The problem is that Australians seem to believe they’re flying along in Ford Rangers when really they’re still driving Model Ts.

The road ahead is wide open, but Australia has much to do if it wants to reach its destination.Credit: Getty Images

This week everyone’s attention was on the Reserve Bank’s interest rate cut. But that missed the big scary picture painted by the bank in its broader economic outlook.

It is tipping the economy to grow by around 2.3 per cent per year for the next two years. Yep, that’s better than the 0.8 per cent we’ve recorded over the past 12 months, but by any historical standard it’s rubbish.

For most of this century, economists have thought the economy could grow around 2.75 per cent without troubling the jobs market and inflation. While the bank didn’t concede it, this new forecast suggests the pace at which the economy can safely grow is around 2.3 per cent.

That difference of 0.45 per cent might seem small. Over 10 years, however, it is around $200 billion or like removing South Australia and the ACT from the national economy.

And it’s largely due to our terrible productivity performance. As a nation, we’re throwing in more resources (people, capital) but getting very little in return.

The RBA reckons productivity fell by 1.9 per cent over the past 12 months.

A report from the Productivity Commission this week explains what falling productivity levels mean.

Across the home construction sector, the commission found productivity had dropped by 12 per cent over the past 30 years. Across the rest of the economy, it had lifted by 49 per cent.

RBA governor Michele Bullock this week noted productivity had to improve if living standards were to rise.Credit: Bloomberg

That percentage doesn’t mean much. So the commission put it in terms of the time it takes to build a home.

A decade ago, the average time to build a detached house was 6.4 months. It is now 10.4 months.

The time to build a new townhouse has increased to 12.9 months from 9.4 months, while for a block of apartments it has blown out to 27.8 months from 18.5 months.

Yes, the quality of our new homes has improved. But even taking that into account, our ability to build affordable houses in a timely manner has deteriorated over a long period of time.

What was more surprising was that, compared to nations such as Germany, France, Britain and the United States, productivity was actually higher on building sites here.

Obviously, there are problems in our building system. As the Productivity Commission found, from planning regulations to NIMBYism to the plethora of tiny mum-and-dad businesses who struggle to come up with new ways to build quicker, there are troubles everywhere. But it’s also a global problem which suggests we should keep looking overseas for solutions.

Building is just one small part of the Australian productivity equation.

Our problems include (but are not limited to) our tax system, the red tape around businesses, our poor infrastructure (and inability to build it cheaply), the way we’ve neglected parts of the community (veterans, the disabled, the aged), how this nation throws money at property rather than new ideas, the lack of innovation in our business sector, the way unions can effectively bring a city to a standstill and the power of vested interests that prefer the status quo.

If we continue down the economic freeway at our current pace, we will never reach our preferred destination and our kids, stuck in the back seat of the Australian jalopy, will be left asking the perpetual question: “Are we there yet?”

Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.

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