Paul Howes provides 'sparkle' on the Titanic

The response to the Paul Howes ‘grand compact’ speech has been predictable, with Labor and union leaders arguing that his vision of a peaceful transition to a leaner, more productive Australia is a ‘fantasy’.

Well, it’s not that. The power of Howes’ speech lies in his perceptive reading of the structural forces at work within the economy. And it really is “the economy, stupid”, as Bill Clinton might say.  

Howes has painted a line down the middle of a listing ship and invited everyone to join him on one side of it. One by one, everyone will.

Those who read the speech as being just a request, or even an attention-grabbing stunt by a man who dreams of one day being PM, need to go back to their economic stats to understand the real message.

That message is not “hey, why don’t we try a utopian compact?”. Its true message is: “this is what is about to happen”.

How can we be sure? Because if it does not happen, Australia's productivity levels will slip from mediocre to hopeless before the country slides into an economic morass of near-Argentinian proportions.

As a nation, we’re too smart for that. I think Howes is right. Here’s what’s going to happen.

On the union side of industrial relations debate, leaders will start to recognise that this is not simply a political power-grab by Howes. On Friday, The Australian quoted Joe de Bruyn, national secretary and treasurer of the Shop, Distributive and Allied Employees Association (the nation's largest union) as saying Howes’ call for a grand compact was “like a flare that's shot into the sky – lots of sparkles, but when it hits the deck we are in darkness”.

He should have finished that line differently: “... in darkness, headed for an iceberg”. Howes was running through the dining room of the Titanic saying, “If we all pull on the helm in the same direction, we will survive” (The Great Australian Reckoning is upon us, January 30).

To dismiss that call as “sparkles” misses the point. Wages and conditions must reflect both the productivity of a business and the cost of living, rather than be about getting one over on the boss.

The SPCA dispute is instructive. In Shepparton, a factory worker with a young family can buy a modest but decent family home for around $250,000 – about half the median house price of our eight capital cities combined.

Assuming two parents, one working half time, that implies a combined income of around $72,000, using the old rule of thumb in home-lending of a servicable debt being 3.5 times earnings. That would mean a young parent working at SPCA should be on about $48,000, if house prices were the only cost of living.

Of course, while that is the biggest expense for working-age Australians, the truth is that in Shepparton, utilities bills, groceries, health, education costs and so on are not substantially different to elsewhere.

IR consultants in the national press calling for SPCA workers to do the same jobs on $40,000 are not paid to consider whether workers can actually survive on that. Paul Howes is, and there is nothing in his speech to suggest that workers on $50,000 or $60,000 have anything to fear. If they are productive, they are worth the money.

So the message to union leaders and the political left is that decent wages are not under attack. Productivity must rise, and stupidly high wages – such as $200,000-plus incomes reportedly being haggled over by the MUA – must fall.

What is the other side of the coin? What will happen to employers?

This is where the debate gets tough. Trying to pin Australia’s mediocre productivity on factory-floor wages is just not good enough. As a colleague put it this week: “Winning the argument over whether workers at SPCA get $50,000 or $60,000 is like winning an argument over whether unicorns exist.”

What he meant was that productivity problems lie just as much on the capital side of the equation.

For 15 years, the Australian media have celebrated the nation’s appetite for pouring domestic and foreign capital into non-productive assets – the housing stock – while many firms have failed to recapitalise to upgrade technology, management techniques or plant and equipment.

We have now reached something of an impasse. Younger Australians can’t afford to live on the wages IR consultants suggest, but if capital were directed back into businesses such as SPCA, and the infrastructure that connects such businesses to markets at home and abroad, productivity would soar. Wages could rise to match our spiraling cost of living.

It must be remembered that though CPI inflation is currently low, it does not capture the costs of home ownership. It captures rents, which have lagged house-price appreciation due to negative gearing and cultural factors.

We’ve been sanguine about inflation, while house-price inflation has hit workers very hard.

In Howes' world view, here’s what’s going to happen. Excessive wage claims by unions will stop at the same time as the productivity debate starts to look at all the factor-inputs in businesses, rather than blaming workers already struggling to pay the bills.

And how does Paul Howes know this will happen with such certainty that he is willing to risk massive opprobrium from his own side of politics?

He’s seen the iceberg – and he's judged the nation to be smart enough to steer away from it.