Increasing Australia's exposure to Black Swans

After years on my 'to do' list, I finally got around to reading The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb.

As with his earlier book that introduced the black swan concept, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, I found Taleb's writing grating in parts but his ideas conceptually brilliant.

My copy of The Black Swan has underlined sections roughly every second page, a sure sign that this book contains many concepts I want for future reference.

The book was originally published in 2007. My copy, published in 2010 after the financial crisis, includes a Postscript Essay section. Page 323 included a section that made me laugh out loudly on first read, and on several subsequent reads. It shouldn't have.

Perhaps considering his ideas on Black Swans and redundancy vindicated by the financial crisis (my words, not Taleb's), the author explains how he's torn between a desire to mull over his ideas in European cafés or in his study, working only with people who get it (again, my words), and a 'feeling of obligation to engage in activism to robustify society, by talking to uninteresting people … going to Washington to watch phonies in suits walking around the streets, having to defend my ideas while making an effort to be smooth and hide my disrespect.

'This proved to be very disruptive to my intellectual life.'

Then the paragraph that really got me laughing, because of the local context:

'I was once selected to be one of a group of a hundred who went to Washington to spend two days discussing how to solve the problems of the crisis that started in 2008. Almost all the biggies were included. After an hour of meeting, and during a speech by the prime minister of Australia [Kevin Rudd, presumably], I walked out of the room because my pain became intolerable. My back would start hurting upon looking at the faces of these people. The center of the problem is that none of them knew the center of the problem.

'This makes me convinced that there is a unique solution for the world, to be designed along very simple lines of robustness to Black Swans—it will explode otherwise'.

Taking his concepts well out of context, no doubt, I agree with the sentiment. If we're putting our faith in the prime minister of Australia (any of them, or indeed any politician) to create the architecture to prevent future crises, we're in serious trouble.

Politicians globally will seek to suppress short-term volatility and uncertainty (beyond the next election), unaware or unconcerned that such actions usually increase long-term imbalances and magnify problems.

Creative destruction—allowing the sick to die, generally while they're small and inconsequential—improves robustness. It means allowing normal business recessions to occur. Politicians will never submit to the idea, put forward by Taleb (and Darwin), that 'evolution does not work by teaching, but destroying'. Too many vested interests among the evolutionarily unfit.

Political plans always revolve around 'optimal' rather than 'robust'.

Just days after reading this section of the book, an AAP release stopped any residual laughter. At a recent two-day tax forum in Parliament House attended by 200 people (presumably Taleb wasn't one of them), our current Prime Minister discussed numerous issues.

One was the aging population, which puts a burden on the economy, particularly in terms of health costs. Presumably, the Prime Minister brought up this issue at a tax forum because she sees tax changes as a way for the Government to help shoulder some of the burden of these costs. I understand the sentiment.

The second issue was the resources boom. I'll let her explain:

'We are in a different economic phase and we shouldn't let the language of boom deceive us,' she said.

'It is a boom, it is a huge opportunity for growth in our resources sector and great opportunities for jobs and wealth creation as a result.

'It's likely to be sustained for a very long period of time.'

Either our prime minister has never read any analysis by Michael Pettis, or has given it significant consideration and has some very lucid explanation for why he's wrong. I suspect the former.

Clearly, Gillard is in the 'stronger for longer' crowd. Clearly, changes to mining taxation—on top of the already cyclically-inflated normal corporate tax on miners and inflated income tax on currently high earning mining industry staff—are designed to further increase revenue in order to deal with increased expenses elsewhere, such as the aging population.

Unlike many voters, I don't have a strong opinion on the mining tax, although I understand the passion on both sides. I see pros and cons.

But I do know that if we rely on a highly cyclical industry as a cash cow to fund stable and permanently growing expenses, on top of already relying on it for jobs and growth, we're substantially decreasing the robustness of our nation's finances. Any increased mining tax revenue should be considered a windfall—and perhaps saved or earmarked for long-life required infrastructure—rather than a long-term funding solution.

What if her last claim—wishful thinking at best—that the boom is 'likely to be sustained for a very long period of time' is unfounded? Revenues will fall well short of plan, while promised expenses will certainly materialise. As a concerned voter, I'd like to know if the government or opposition has a Plan B … and a Plan C.

Really, stop gibbering about each others' haircuts and tell me your back up plans.

Those plans should include discussion on where the tax burden will shift if the mining boom doesn't last for 'a very long period of time' and/or which promised expenditures will be abolished if that tax can't come from elsewhere.

Planning for the best is easy. Planning for the worst is what counts.

The demise of the mining boom—not a certainty, but not  a Black Swan either—shouldn't result in ruined public finances. My fear is it might.

My advise for Taleb—enjoy the cafés and the long walks. You'll never convince a politician to focus on unlikely but hugely consequential events before the fact. They struggle to focus even on the reasonably likely and consequential.

The only hope for change is that voters spend less time admiring the height of the government high wire and more time focused on the breaking strain of the net below. Robustness matters. Can we ever hold government accountable for that? I have my doubts.