Why ideology is at core of our productivity slump
Yet even this writedown remains optimistic, given that labour productivity has flatlined in Australia since 2016.
Is Australia’s poor recent productivity performance unique in the rich world? No, it isn’t, but while slow-growth European economies find themselves in a deep malaise like us, only a few decades ago we were streets ahead of them.
In the 1990s, labour productivity grew by an average of 2.3 per cent each year in this country. We were a truly exceptional, pro-growth, pro-aspiration economy where markets, not bureaucrats, allocated resources, governments lived within their means and believed in cutting taxes, and the vulnerable were looked after with targeted safety nets. It was a time when both major parties channelled Milton Friedman but with a social conscience.
We have had a spectacular fall from economic grace so far this century. If we continue along this trajectory, Paul Keating’s banana republic prophecy will be realised – and sooner than we think.
The first step in arresting this slide is to correctly identify the nature of the problem, however confronting or inconvenient it may be. Let’s dispense with the myths and misconceptions peddled by some of those at the government’s roundtable.
Our productivity crisis cannot be blamed on measurement errors in the care economy, the slow uptake of technological advances or progressive economists’ favourite bogeyman – malign oligopolies that undermine competition and dynamism.
Neither can it be attributed simplistically to low business investment. For productivity, it is the quality, not the quantity, of investment that matters – the return it yields in free markets. Too many have forgotten this.
The truth is that we have deliberately chosen the low-productivity economy we inhabit. In the early part of this century we dispensed with the world-leading economic model Bob Hawke, Keating, John Howard and Peter Costello put in place, and set out to replace it with something entirely different. While this new dispensation was billed as a progressive one, it was in fact deeply and obviously regressive.
It was no more than a revival of the failed policies and fraudulent economic beliefs of our pre-reform era but with shiny new labels attached. Back then the rallying cry was “protection for all” – justifying an economy-wide network of tariffs, quotas, subsidies and price rigging. Today we impose these same policies under the inane banner of net zero.
In the area of workplace relations, we are reliving the bad old 1970s where unions dictate terms and multi-enterprise bargaining is back in vogue.
And, channelling Gough Whitlam, we have removed all fiscal constraints on government, embracing unaffordable welfare programs and sneering at the notion of balanced budgets. Both major parties are equally to blame for this economic retreat.
How do we begin to turn the corner?
It starts by posing a simple question. What kind of economy and society do we want to be? Do we want to be a high-taxation, cradle-to-grave welfare economy where resources are allocated by bureaucrats, not markets, and growth is deliberately constrained under the rallying cry of net zero?
Or do we want to be a pro-growth, aspirational economy where markets, guided by consumers, occupy centrestage with government playing a secondary, supportive role?
As I have argued before, this is not a narrow technocratic choice but a political, social and even moral one. This is not an appeal to nostalgia. All societies of today and the future will be confronted with it – there is no third way.
Let me say a few words about the role of our economic institutions, including the Treasury, where I worked for two decades, and the Productivity Commission. The reform task the Hawke and Howard governments faced would have been far more difficult, if not impossible, without the sound advice, credible analysis and professional integrity of these agencies.
While the Treasury is not independent of government, it never hesitated back then to tell ministers what they needed to know rather than what they wanted to hear. We prided ourselves on our whole-of-economy focus and – behind closed doors with ministers – consistently made the case for lower and flatter income taxes, balanced budgets, targeted safety nets, free trade and undistorted markets.
We were informed not by ideology but by the laws of economics and plain common sense.
Across recent decades, both institutions have been colonised – and in my view seriously compromised – by progressive economic ideology, just as so many others have.
The rot started at the top, not at the working level.
The discussion papers they issued for the reform roundtable were shoddy, lacked economic rigour and spruiked highly questionable government policies and accomplishments.
In her press club speech, Productivity Commission chairwoman Danielle Wood called on the political class to adopt a “growth mindset” and be aware of inescapable trade-offs, yet ignored the massive net-zero energy price shock we have imposed on ourselves – even describing it as an “economic prize”.
High on the to-do list for our next reforming government, whether Labor or Coalition, must be a complete overhaul of these institutions. Don’t listen to their media apologists.
Let me end on a more optimistic note. While the task of overturning a failing economic model is a daunting one, we succeeded in doing it before. Policy revolutions must start somewhere, as we discovered when Hawke floated the dollar in 1983.
What are the achievable, initial steps that can be taken that, while not silver bullets in themselves, may build momentum for wider changes? First, the pernicious practice of bracket creep must be outlawed, which not only is a hidden regressive tax but guarantees lazy governments additional revenue every year, feeding the Canberra beast.
Second, to fund needed substantial income tax cuts – both personal and corporate – federal spending must be reduced by the four percentage points of GDP Keating achieved in the late 1980s; if necessary, across several years. A much more narrowly focused National Disability Insurance Scheme should be first cab off the rank.
Third, just as Keating deregulated our financial system as an early priority, we must do the same to our centrally planned energy market, freeing ourselves from the pointless economic straitjacket of net zero.
If we know one thing about the government’s roundtable, it is that it will seek to take us in the opposite direction, serving only to deepen our productivity malaise.
This is not a grand experiment, as some claim, but a movie we have seen before – and as many of us know it has an awful ending.
David Pearl is a former Treasury assistant secretary. This is the text of his comments at the Real Productivity Roundtable, an alternative to the government’s economic reform roundtable, at Parliament House on Wednesday.
More Coverage
Last week the Reserve Bank downgraded its medium-term labour productivity growth assumption by 30 per cent, from 1 per cent to 0.7 per cent. If realised, this will cap the economy’s sustainable speed limit to a paltry 2 per cent each year.