Weak logic beneath Australia’s biggest gamble

The federal budget puts Australia's world-beating position on the line with radical reform based on too many simple correlations, for uncertain gain. A more holistic approach is vital if we are to stay on top.

There’s a lot of doublethink going on in Coalition circles right now. In George Orwell’s famous definition, that means “the power of holding two contradictory beliefs in one's mind simultaneously, and accepting both of them”.

In Orwell’s 1984, doublethink is a necessary precondition of Big Brother’s enduring tyrannical rule -- a useful conceit for a cracking yarn. In 21st century Australia, however, it’s very dangerous. It risks destroying much that Australians have come to value in their own country.

No, not dole bludging, middle-class welfare or lazy bureaucrats -- few on either side of politics would try to defend these. Rather, what could be destroyed are some intangible aspects of the nation’s capital stock -- things that have underpinned Australia’s stellar ranking in global league-tables for wealth and prosperity for well over a century.

To name just a few, there are the various types of human capital, legal and political traditions and institutions, our international relations, ‘brand Australia’ and a strong work ethic. The problem is, it is easy to forget about such measures of capital and focus on financial capital, physical capital and the way they interact with labour to produce wealth.

Economic historian Ian McLean warns against this in his recently published book, How Australia prospered. He explains how most potted histories of Australia lazily explain the rapid development, and enduringly high levels of wealth, as somehow ‘striking it lucky’, be it via the first agricultural booms, the gold rush, the Korean war wool boom or the more recent mining booms.

He also warns against simple correlations between tangible inputs and the wealth Australians have created. Whether it’s physical capital and infrastructure, natural resources, access to global finance, intellectual property or technology imports, McLean repeatedly shows how other nations had these things too, but foundered.

Essentially, McLean wants Australians to understand their economy as a unique blend of factors, which interact in complex ways. It’s very much an ecological view ­-- a number of factors are in balance in an ecosystem such as Kakadu, until something like the cane toad comes along and wrecks everything.

The Coalition’s view is that the Australian economic eco-system was trashed by Labor -- the equilibrium of the Howard years was entrusted to Rudd and then Gillard, but they released thousands public servants who spent tax dollars quicker than a cane toad spawns.

Well that vision works politically, but it is a massive exaggeration. The Coalition relies on the assertion that federal debt has been growing at the fastest rate of any OECD nation -- an assertion that in itself is true. But that is only one part of the picture.

Net debt, at around 12 per cent of GDP is one of the lowest levels in the OECD, whatever its rate of increase. GDP per capita is around the 12th highest in world in PPP terms, and in personal wealth we recently hit number one. But more importantly, we have a huge stock of various kinds of tangible and intangible capital.

Australian homes are full of technology; usually have more than one car parked out front; and house well-educated English-speaking citizens who live under the strong rule of law and enjoy good health and longevity.

As noted previously, these and other factors put Australia at the top of the ‘human development index’ published by the United Nations (okay, second only to Norway). This top position is what is at risk if the government gets radical reform wrong -- and the May 13 budget is a blueprint for radical reform.

It radically changes transfer payments to pensioners, the unemployed and disabled; imposes a forced devolution of power to the states (asking them to raise $80 billion in state-based taxes to fund cuts to planned spending over ten years), turns education into a ‘more efficient’ free market, and lays the ground-work for a sharp reduction in Canberra public servants in coming years.

The risk is that the advisers who have helped the Abbott government formulate this view fail to acknowledge what radical reform puts at stake -- namely that we’re pretty much the best country on Earth to be born into.

Instead, the budget relies on some pretty simple correlations:

– paying fewer public servants will improve the budget bottom line

– slashing welfare payments will increase workforce participation

– devolving power to as close to the point of service delivery as possible will produce better health and education systems.

They all sound quite likely by themselves, but as part of a complex system a more conservative position would be “Why gamble with what you’ve got, when you’re winning already?”

Well there is a reason to reform, but it’s not the imaginary and frankly silly “budget emergency”. The real reason is that Australia is set for an extended decline in its terms of trade, and lacks the ability to compete within its region across a range of industries.

But to go back to McLean’s warning, competing means harnessing all kinds of capital, including the intangible elements -- particularly the human capital that we take for granted.

The day after the budget papers were released, at a media conference organised by the Australian Council of Social Service, Kasey Chambers of Anglicare said the budget plan represented the “conscious creation of a sub-class” of Australians. If she is right, part of the delicate balance of one of the world’s great economic success stories is at risk.  

And so back to doublethink. The reasoning behind this budget relies on too many simple correlations rather than a more holistic view.

It is the same style of reasoning employed by Maurice Newman, chairman of the Prime Minister's Business Advisory Council, when he tried to explain on the ABC’s Lateline program why he thought anthropogenic global warming was a myth: “I just look at the evidence. There is no evidence. If people can show there is a correlation between increasing CO2 and global temperature, well then of course that's something which we would pay attention to.

“But when you look at the last 17.5 years where we've had a multitude of climate models, and this was the basis on which this whole so-called science rests, it's on models, computer models. And those models have been shown to be 98 per cent inaccurate.”

The doublethink there is that Newman is an accomplished business leader -- and there is no way any CEO would run a business with that kind of reasoning. If a marketing director tells the CEO that, despite doubling the marketing budget, sales fell, do you then say “scrap the marketing budget?”

That is one possible course of action ... but not until sales are benchmarked against competitors, global economic shocks are taken into account, or the release of a new product by a rival is considered. That is, all companies use something like an ‘ecological’ view of their business and market. Good CEOs have a model of their market in their heads, and those that get stuck on simple correlations eventually fail.

The doublethink of “I wouldn’t run a company this way” but “I’ll happily run a country this way” is putting Australia’s world-beating stock of human capital on the line, for uncertain gain.

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