Saul’s global forces

Find below a very big picture presentation by Saul Eslake on global megatrends and the Australian economy. Some killer charts:

Houses and Holes
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  1. Full marks for presentation, even if you don’t agree with the conclusions. And the Turner canvas adds a nice touch. The Snowstorm series are great aren’t they? Keep it coming!

    • I suspect H&H selected this image with full intent.

      Snow Storm: Hannibal and His Army crossing the Alps, 1812,Oil on canvas
      Tate, London, Bequeathed by the Artist, 1856

      “[Hannibal’s] troops had indeed endured hardships enough; but there was worse to come….[W]inter was near – and it began to snow….[A]s in most parts of the Alps the descent on the Italian side, being shorter, is correspondingly steeper, the going was much more difficult than it had been during the ascent.”
      Livy, Periochae; History of Rome from its Beginning, A.D. 14, translated by Aubrey de Selincourt (1965)

      and I had hoped it was The Light at the End of the Tunnel!

      Yep, an interesting set of charts and a pleasure to read a measured presentation, that does not rule out the China story, includes it. If correct will help Australia weather some of the economic uncertainties ahead. I’ll stick with The Light at the End of the Tunnel.

  2. Very interesting. Seems as if productivity keep coming up as the major drag – anyone got some suggestions?

      • Hi Prince. I have a question for you.

        It’s easy to say tax reform, but what has to happen in our society for the general public to understand that this is the way?

        Both political parties are frightened of a voter backlash. They won’t make hard decisions. So there has to be an outside catalyst. Can anyone really know what it would be?

        • They first need to know what “productivity” means (or at least how it’s measured). Most people would think it’s got to do with how hard they work, and again most would argue they work pretty hard, certainly harder than those slack Yanks… A difficult one.

        • OF course its easy to say it – its even easier to come up with some reforms (and some of them have to work, even if its by trial and error), because something has to be better than the broken system we have now.

          It looks stable from the outside, but is rotten to the core, but nobody wants to admit it, just tinker around the edges.

          So yes, it won’t reform internally, but externally.

          Internally because both sides of politics are right and wrong at the same time – let alone the economists…..

    • Most improvement in human productivity comes from technological improvement. Although these days, most manager believe ‘productivity’ means sacking your workforce and move overseas. The overseas worker is not producing more (often they’re producing less), however the cost is reduced.

      Think about this for a moment : our banks are still running overnight batch file to process their transaction. (technology from what? 20 years ago?). Their idea of ‘productivity improvement’ is to outsource their IT to India to run the batch file. I would not be surprised if an Australian bank will become the first in the world to lose all their customer’s account details due to computer equipment failure.

      We may be doing things cheaper, we’re not doing things any smarter.

    • My conclusion from the productivity data is that we are faced with either over employment or too high wages. High unemployment such as in the US tends to fix low productivity problems.

      • It is tempting to think of high wages as the cause of poor productivity. But this is a fallacy. If low wages created high productivity, South Sudan, where per capita incomes are less than USD1.00/day would be a world productivity leader.

        The causality is the other way around. High incomes are the result of high productivity. To achieve high productivity, we need to optimise the deployment of all the factors of production, especially our capital. We need to foster investment in the best-available/ best-scale technologies. This maximizes output/labour unit.

        It works in Germany. It will work here too.

    • We need to to do several things at once:

      1 Cut company tax.

      I think the cut needs to be from the present 30% to around 20% of earnings. The point is to really significantly improve the returns available on the deployment of capital. Tax cuts also indirectly reduce the cost of capital and increase the net present value of new capital investments.

      A lower tax rate would also help attract new direct equity investment in the Australian economy, which would be a very good thing, as it would reduce our dependance on foreign debt.

      The main way to improve productivity is to apply more advanced technologies to production. That is, there must be renewal and improvement of the capital stock on an ongoing basis. Reducing the tax on returns to capital is the single fastest and least distorting way to achieve that.

      2 Grant tax holidays for earnings derived from new technologies.

      Australia has some outstanding centres of excellence in scientific research and does create some world-class technologies. We should try to build upon this – we should create a new science-based industry which, loosely described, would consist of identifying, husbanding and commercializing patentable new technologies. The income derived from the commercial application or licensing of advanced technologies would be tax-free for, say, 10 years. Likewise, the expenses incurred in their creation would also be able to be amortised against the income streams from new technologies.

      Think of it as a venture-capital industry with a science- and engineering-based R&D charter. This would harness the learning and creativity of our centres of academic excellence, binding it with the skills needed to create and grow new products, production systems and enterprises.

      The pay-off will be in creating:

      New technologies in themselves.
      An advanced technologies/venture capital sector that is scaled around around the properties and nature of our economy.
      A whole new generation of high-skill, high-mobility, high-income jobs.
      Linking Australian science with enterprises in other economies.
      New industries based on our human capital rather than our finite natural resources.

      This kind of thing can change the economy, create new, high-paid jobs and valuable, dynamic and world-class enterprises – a kind of brain-based future fund.

    • Given my European perspective I can definitely observe AU suffers from low productivity in general compared to e.g. Germany or The Netherlands – not because people or lazy, but usually because of a mix of the following things (from my own observation):

      – old fashioned bureaucracy; redundant control layers; lack of independent decision making at lower levels
      – paper based economy (in AU one needs paper forms + signatures for everything)
      – liability avoidance culture; everyone is afraid to make decisions because they might be liable
      – IR laws stuck in the 80’s (try to understand the myriad of Awards and their details)
      – low loyalty of emplyees to employers; as many employers do treat their employees a bit substandard (relative to EU), loyalty is low and therefore employees are not as motivated to act/think in the interests of its employer

      Central to many issues seem to be a lack of independent thinking or the ability of decentralised decision making – the school system (at least here in QLD) doesn’t help at this point; it promotes compliance and ‘good behaviour’ over the encouragement of analysis and optimisation skills.

  3. To quote from Paul Krugman : “Productivity isn’t everything, but in the long-run it’s almost everything”. Given how little both Australian businesses and government spend on R&D, our fall in productivity is not surprising. What ever happened to ‘The Clever Country’?

    China’s GDP is about half of US currently. If China grow at 8%, while the US grow at 3%, they’ll almost be at the same size in 10 years, and India is growing even FASTER than China!! The amount of resources they will consume simply beggars imagination.

    • Higher education has been on a downwards spiral for 15 years now. People held hope when the ALP came in, but when Gillard announced her first cabinet and it contained a “Minister for Schools” but not a “Minister for Education”, the University sector went nuts. Gillard then said “You report to the Minister for Science.” And someone pointed out that half of our University graduates are in the humanities (including commerce)…. so not much hope there for a productivity boost I’d say.

    • As they consume the same key fossil fuels for the majority of their energy (coal, oil, gas) then they will be just as vulnerable to the worlds energy extraction limits when they hit peak coal production.

      Going by
      1) astronomical coal production (3Gt a year)
      2) growth of coal production close to 10% p.a.
      3) coal reserves of similar size to Australia (120Gt)

      they are going to hit peak coal production soon…

  4. The productivity thing is interesting. My own take on it is that it is a consequence of an abundance of aging managers and leaders who become increasingly risk and change averse as they age.
    I base this mainly on my own experiences so it’s a very narrow perspective but I know that my boss is just not interested in any suggestions of change. My feeling is that he knows he is a few years off retirement but just needs to keep drawing a salary for long enough to make sure that is comfortable. Change involves risk and if something goes wrong he may attract unwanted attention from further up the chain. So we just keep on doing things the way we’ve always done them even though there are those of us who can see better, quicker, easier ways of d oing things (we may be wrong but shouldn’t we give things a trial at least?).

    The other problem with productivity I think does come down to education and training. The innumerable government I.T. debacles in Victoria are testament to this (Myki, police database, health records etc). I think that we just don’t have the mass of expertise necessary to see projects like these through to completion. Apologies to I.T. people who are good at their jobs – it’s not you, it’s the fact that there aren’t enough of you. If you’re in I.T., genuinely talented, and not tied down, why would you stay in Australia when silicon valley beckons? This is only part of the problem in the field though; the other part is either inept or corrupt project management in various government departments (and my suspicions of corruption get stronger and stronger – I’m sure corruption is easier than ever with the dramatic drop off in the quality of journalism in the MSM).

    Anyway, that’s enough of my random collection of thoughts on productivity. Sorry to take up your valuable time.

    • Yep, The ex Brack / Brumby Government in Victoria is a study in itself on how not to roll out major IT (and other) Projects.

      Myki, Desal Plant, plus all the others you mentioned. And that is just the major foul ups – there are dozens of smaller examples.

      They still can’t get the train system anywhere near up to standard. Everyday there are issues. Mind you, that has been 50 years of systemic neglect from all parties.

      • It’s not as if you’re alone – “Office of Shared Services” anyone? WA Govt attempt to integrate payroll across the whole public service, after about 6 years of work and more than $500M it’s been scrapped. How you can spend $500M on an IT solution is beyond me.

        Then again, we’ve also managed to do it on an indoor stadium that was “only” meant to cost $100M, somehow blown out to $500M. Unbelievable, that’s $400M that could be deployed somewhere more useful than for watching basketball.