Stop looking back and start acting like we’re not afraid to create a better future
By propping up failing firms, Anthony Albanese is making it much harder for the nation’s young innovators and risk takers to thrive.
In this sepia spirit, the “banana republic” comments by Paul Keating to broadcaster John Laws in May 1986 remain a policy touchstone, as the then treasurer detonated a narrative bombshell about the nation’s possible trajectory to “third-rate” status. The message was clear: Australia had to mend its ways or it would go down the gurgler.
Such storytelling, often lurid and always grounded in the vernacular, was fundamental to Labor’s remaking of the economy from the early 1980s. First, define the problem; then, explain the cures; and, finally, provide the therapeutics to workers and businesses during the transformation. It was, in the schema of Joseph Schumpeter, via Marx, a Dickensian serial in capitalism’s “creative destruction”, where innovations destroy old industries while creating new ones.
The recession we had to have
In our case, Bob Hawke and Keating supercharged the process by opening up the nation’s finances and companies to the world, reducing the footprint of government in industries like banking, airlines and telecommunications, and improving the flow of labour and capital to their most productive uses. By God it was disruptive, and painful for Labor’s truest believers, especially in the wake of the “recession we had to have”.
But the pay off eventually came, as productivity surged by over 2 per cent a year in the 1990s and into the early 2000s, as average living standards rose by 40 per cent. In the wake of this dynamism, the “reallocation” of resources delivered a higher dividend than the inevitable “scarring” that comes when workers are displaced and even highly productive firms fail because of financial distress.
Creative destruction comes to mind because we’re confronted, at every turn, by the peril and promise of generative artificial intelligence. As a new Jobs and Skills Australia study found, AI is “more likely to augment tasks than automate them, enhancing productivity through time savings, improved output quality, and reallocation of effort to higher-value work”.
The International Monetary Fund sees AI reigniting productivity growth through increased uptake and deployment at high speed of the new tools. Success would require policies to encourage the growth of highly productive rising star firms, while allowing “unproductive ones to exit the market”. This is the essence of dynamism.
“Gains from AI could well exceed potential costs from their adverse effects on employment, especially if governments put in place adequate regulatory frameworks and offer supportive labour market programs aimed at upskilling and re-skilling workers at risk of displacement,” the IMF said in its World Economic Outlook last month.
As well, this year’s Nobel prize in economic sciences recognised the work of three academics for explaining “innovation-driven economic growth”. The Royal Swedish Academy of Sciences said Joel Mokyr identified the prerequisites for sustained growth through technological progress, while Philippe Aghion and Peter Howitt were recognised for “the theory of sustained growth through creative destruction”.
The latter pair’s 1992 work, according to the prize committee, “contains fundamental building blocks of how new technology surpasses old, where some firms win at the expense of other firms, in an economy characterised by constant churning”.
In an interview last month, Aghion emphasised how openness to trade was a driver of economic growth and expressed concern about rising protectionism. “I see now dark clouds emerging,” the Frenchman said.
The gloom is spreading to Australia. As I wrote a few weeks back, Canberra and the states are risking taxpayers’ funds on expensive bailouts, production subsidies and handouts in a revival of industry policy. It’s rooted in nostalgia for manufacturing that, among both boundary riders on the left and right, is now a policy fetish; the services sector, where most people work and value is added, is increasingly seen as feeding off the “real” economy of digging up ore and “making stuff”.
Sure, as the Productivity Commission has said, there’s a global wave of “new industry policy” amid rising geopolitical tensions and decarbonisation. Here, we have Anthony Albanese’s spending forays under Future Made in Australia, the development of a Critical Minerals List, and the Coalition’s creation of bodies such as the Office of Supply Chain Resilience.
“Emissions reductions and economic resilience are important objectives,” the commission said in a May research paper. “If poorly designed, however, industry policy can prove costly for taxpayers, act as a form of trade protection, and distort the allocation of Australia’s scarce resources towards activities that we may not be best placed to undertake.”
‘When businesses aren’t internationally competitive we have to let them die.’
The guardrails for what, and what not, to support and the off-ramps for assistance are fundamental. The jury is out on whether Treasury’s National Interest Framework, with streams for economic resilience and security and the net zero transformation, is robust enough to deliver value for taxpayers and repel rentseekers on the prowl in national costume.
The fiscal omens aren’t good, but the voter vibe is with a Prime Minister intent to intervene in markets and use the national credit card to fatten his electoral buffer. Naturally, the handout queue is getting longer, as rising energy costs in a disruptive, sub-optimal transition push enterprises to the brink.
According to Jim Chalmers, we’re in an era of “churn and change”. Yet even before the pandemic, measures of business dynamism had slowed. The rates of firm entry and exit had plunged, so too the frequency of job switching; private investment (non-mining) has been stuck at 10 per cent as a share of the economy for 15 years.
Covid assistance blurred the picture on dynamism. As we put that era behind us, we can see the pre-crisis trends have calcified; it’s too hard for qualified workers to shift to where the latest action is, for innovative new enterprises, which are productive and employ people, to get funding and expand. And it’s too easy for failing companies to lobby ministers or capture the regulators to limit competition.
Richard Holden says “when businesses aren’t internationally competitive we have to let them die”. “This frees up resources for a new wave of innovation, productivity and prosperity,” the UNSW Business School economics professor tells Inquirer. “Propping up zombie firms leads to lost decades, like we’ve seen in Europe and Japan. Creative destruction is how economies reinvent themselves and prosper.”
Nobel laureate Aghion was the co-chair of Holden’s PhD thesis committee at Harvard. The intrepid public intellectual says our politicians and officials could learn a great deal from his dear friend and co-author about innovation and growth.
‘Trust the process, trust the settings’
Aghion was recently asked how policymakers could smooth the process of creative destruction. He nominated the Danish “flexicurity” system where if you lose your job, you get a high salary for two years and the state helps you retrain and find a new job. As well, a good transition involves a smart combination of industry and competition policies. Labor is doing better on the latter.
In a tour de force essay published this week about boosting the capacity of our economy, specifically in housing, economist Matthew Maltman distils the essence of the reform challenge. Writing in a private capacity, the e61 Institute senior research economist casts a long gaze over the lessons from successful economic reform in Australia. In hindsight, the case for the blockbuster changes of floating the dollar, financial deregulation and cutting tariffs may seem obvious; it was not.
“Those shifts took years of grinding policy work and a lot of persuasion,” Maltman writes in the journal Inflection Points. “It meant telling stories: a warning that drift would leave Australia exposed, a counter-story that reform could deliver a larger, more confident economy, and a promise to hold course even when the cycle turned down.”
Maltman singles out Keating’s memorable rhetoric, from the “banana republic” warning and then through every new phase of destruction and creation. “Each phrase carried the same underlying lesson: trust the process, trust the settings, and don’t confuse short-term pain with long-term failure,” he writes.
Given the incessant lobbying by companies and unions in all spheres, Maltman reminds us that progress is about markets, not firms: “Good reform means creative destruction: some old firms die, and some new firms enter. Often the biggest beneficiaries are those who do not yet exist.”
‘Go for broke, all the time’
At its best, Maltman says, supply-side reform is the quiet work, beyond the headlines, of accumulating small gains and expanding what’s possible. “The job of policy is not to win the cycle, but to raise the floor,” he writes. “Supply stories take imagination. They require us to picture the world not as it is, but as it could be. And it could be so much better than it is.”
Right now, we’re in a performance slump: over the past nine years our productivity growth has increased by a mere 0.4 per cent a year. GDP growth is restrained at a desultory 2 per cent. As even the habitually upbeat Reserve Bank deputy governor Andrew Hauser noted this week, the growth outlook for the next couple of years is “a far from spectacular performance by historical standards”.
So the challenge, as mainstream economists contend, is to lift our productive capacity, as well as our policy ambition. As Keating urged the timid incumbent the other day, “go for broke all the time”.
Our ageing society may not be able to resist eulogising a lost time, its earthly rogues and fading heroes all taller, wiser and more hygienic in the telling. But to thrive once more, we must stop looking back and act like we’re not afraid of change and creating that brighter future.
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Memories of the nation’s reckless years came rushing back this week, with the deaths of Richo and the Golden Tonsils, as well as the 50th anniversary of Gough’s sacking. The milestones emblazoned a wild age in Australia, where “rules” may have been in place but were cheerily brutalised. Power games cracked on in private and often exploded into public spectacle.