Today I am going to talk about two notionally independent, but nonetheless related, things. First, what Australia means to me. And secondly, a few ideas for Kevin Rudd to consider at the inception of this new decade.
I love being Australian. Because we are different—that much I have learnt. And appearances are deceiving; in many ways we are the inverse of the international image. In my view, our defining characteristic is that we are not complacent, but rather caustically competitive. I never bought off on the popular stereotype of the land of the long weekend. The lazy, dole-loving larrikin. No, what I’ve witnessed is a visceral, and highly competitive intensity—that we are all equals, and if we work hard enough, no challenge is insurmountable. And so I was not at all surprised to read last year that our 44 hour working week is as long as anywhere in the world.
So where does this underlying urge to outdo others derive from? Some might argue that it is the chippy legacy of the ‘convict stain’. I think not. I am always puzzled that little is made of the fact that Australia is one of the world’s great immigrant nations. This is a critical commonality that we share with that other innovation engine, the US. Over one quarter of Australia’s residents today were born overseas. Yet how does this reconcile with the popular projection of the white Aussie racist—the profile perhaps best immortalised by Russell Crowe in Romper Stomper? Well, there are a few of them out there, to be sure. But beyond this very small minority the Australian nation is as open, flexible and secular as any society I know.
Occasionally our elemental multi-culturalism boils over into visible frictions: be it through Sydney clans clashing, or the unsavoury bashings evidenced down south of late. This is the regrettable price we pay for having the benefit of a wonderfully diverse country, which has become a kaleidoscope of ethnic capabilities. It is the price we pay for producing an Australian-born Fields Medalist (the Nobel equivalent for mathematics), Terence Tao, whose parents were first generation migrants from Hong Kong. Or for having Frank Lowy build the world’s largest shopping centre empire after fleeing horrendous persecution during World War II.
But what doors does this open up on the otherwise difficult-to-define Aussie character? The fact is that we all directly or indirectly arrived here from another place at some point over the last 222 years. And anyone traveling the long distance to the mysterious sun-burnt isle was inevitably doing so to carve out a new existence. That is, most were seeking to run away from a less fortunate past.
Today’s Australia is a complex mosaic of these alternative—and at times conflicting—visions of our future. It makes for a textured, vibrant, creative and carbonated society. There is no longer a homogenous Australian identity: the one enormously powerful constant that binds us all firmly together is that we were born unto this hard land to forge a better way of life.
Four friends exemplify what I might call the ‘Australian aspiration’. Elvis’s parents came from Croatia. Since arriving, his father—who escaped as a political prisoner amidst a hail of bullets—has toiled for decades as a crane driver at BHP’s Wollongong factory so that his only son could avoid his fate. Elvis completed a PhD and is now an academic at a leading university. Another, Vito, works alongside me. His parents emigrated from Italy. Vito’s father has, amongst other things, driven cabs so that his brainy son could harness his head not his hands, and assault the new world armed with a doctorate in finance. Vito has another equally bright cousin, Alex, whose parents also arrived from Italy. While Alex’s dad worked as a fitter in the same factory that employed Elvis’s father, the son studied until he ultimately became one of Sydney University’s youngest tenured professors. And finally there is Sean, whose mother was an American teacher. Both Sean’s parents tragically passed away before he was in his teens. While left an orphan he never entertained the easy option. After being discarded by one foster family, Sean was taken in by others. He went on to win scholarships to fine schools and universities. After a career working around the world with Macquarie Bank, he is now a successful entrepreneur living in London.
A coherent picture emerges. Like so many of their countrymen, these were souls burnished by adversity. And with this motivation they are now earnestly willing their way forward to a more prosperous future. The characteristics they share are commitment, resilience, ambition, and the belief that hard work will defeat any challenge.
I would speculate, then, that these sweat-stained origins help explain the intense Australian desire to advance, and to occasionally prove the rest of the world wrong. Be you Terry Tao, Frank Lowy, Penny Wong, Rupert Murdoch, or Cadel Evans. The current generation’s aspiration is fuelled by the egalitarian furnace that produced their forebears, who had to bludgeon their way forward after life’s initially adverse roll of the dice.
My own Australia is an ineffaceable mental monument built on many magical moments. The pride I felt as a six year old watching Ben Lexcen’s ingenious winged-keel triumph over the evil empire in the 1983 America’s Cup. Endless summers spent body-surfing with my father on Sydney’s northern beaches, comforted by the knowledge that I could always anchor myself on his big bronzed shoulders whenever fear surfaced. Going to sleep in my footy boots as a seven year old on the eve of my first rugby match. Trying to secretly smoke ‘river-sticks’ with my two brawny cousins while mustering cattle on bull-catchers outside of Kununurra. The adrenalin that electrified my body as my uncle navigated his chopper up the serpentine Ord River in search of saltwater crocodiles sunning themselves on its muddy banks. The freedom experienced breaking out of boarding school as a recalcitrant ten year old with my equally disobedient mate from PNG only to return, tail between legs, after an uncomfortable night on the beach. Sneaking into the girls’ dormitories at 2am on my final day of school and canoodling with my squeeze. Being gripped by tears as I gazed down from a 747 at the red majesty of the Simpson Desert on my way back from Cambridge. Listening to a senior union official tell me that the election of the new Liberal Party Leader was going to be good for democracy. Looking into the eyes of the Prime Minister’s chief of staff and knowing that this was not just another political operator, but a man who genuinely had the nation’s best interests at heart. Staring solemnly into a computer screen trying to craft the right words to send to the diggers serving in Afghanistan after the death of the first SAS trooper. And the surprise felt as the otherwise very ocker CEO of a major institution, who once led the national under 19 cricket team and was every inch the archetypal Aussie male, told me with unqualified pride that he had adopted two Korean girls and would never contemplate having a biological child. This is the Australia I know and love.
Which brings me to the Prime Minister. Kevin Rudd has the constraints of a looming election, no doubt. So we can offer him some populist accommodations in the near-term. But the unavoidable exigencies of the political process should not stifle his longer-term reform agenda. And it is to this that I now turn. Taking as given my financial-economics focus, here are several policy opportunities for Mr Rudd to consider.
First, there is something horribly wrong with our politicians’ pay. These guys exert an extraordinary influence over our livelihoods. It makes no sense whatsoever that the Prime Minister and Treasurer, who manage a trillion dollar plus economy, amongst many other nation-making things, are paid less than one-twentieth what a bank CEO takes home. And we all know that if you pay peanuts you get, well, third-graders. We need to radically cut the switching and opportunity costs borne by those who are thinking of moving from the private sphere to full-time political careers. And there is an easy solution to this. Kevin Rudd should sit down with Tony Abbott, who I am sure would be partial to the idea, and Bob Brown to formulate a bi-partisan approach to political remuneration. Fairfax recently reviewed survey evidence that indicated that the electorate would be amenable to higher pay. In a rank-ordering of preferences, I would guess that voters would rather our politicians were compensated better than, say, real estate agents, bankers or lawyers. But even if it is politically unpopular, all parties should press ahead fortified by the knowledge that attracting superior human capital to the public service can only be of enduring benefit to the community. And I am not talking about Lilliputian increases here. The Governor of the RBA earns nearly three times what the Prime Minister gets paid. This is just wrong. We should, therefore, be thinking about multiplicative increases for all MPs to bring them back in line with the compensation in the private sector.
Second, I have written voluminously about the lessons yielded by the GFC. There are a host of first-order policy opportunities here. Wayne Swan should start by commissioning the head-to-toe financial system inquiry that I have been advocating since publishing an open letter on the subject last year with five other economists. The review should not be carried out by APRA, the RBA or the Productivity Commission. It should be ostensibly independent of government and the bureaucracy, and draw on our best and brightest minds from academia, industry and the public sector. Obvious names include Stephen Grenville, Alan Cameron, Warwick McKibbin, Allan Moss, Stephen King, David Morgan, Luci Ellis, Ian Harper, Saul Eslake, Nicholas Gruen, Sam Wylie, John Quiggin and Joshua Gans. We need unencumbered, out-of-the-box recommendations on best to prepare Australia for the next crisis, which, as I argued last week, will inevitably batter our shores.
Over and above the more concrete policy ideas I have previously canvassed around offering consumers a low-cost, capital guaranteed, government managed superannuation solution, mitigating the new moral hazard risks that have been unearthed since taxpayer guarantees of financial institutions have been taken out of the box, utility banking, a national electronic credit register, the government’s long-term approach to supporting the securitisation market, the governance of the RBA, whether we should allow monetary policy to be used to manage asset prices, and the opportunity to harness Australia Post’s 4,000 outlets to enhance competition in the banking sector, some issues I would like to see evaluated include:
* It is beyond time that we had a national debate around what we hope to achieve by pursuing ‘economic growth’. This is increasingly germane given sharper awareness of the trade-off between growth and the environment. To address this question, the government should develop and endorse a more multi-dimensional definition of national ‘well-being’ that reflects a much wider range of non-financial factors than, say, output-orientated GDP per capita. That is, this should be an attempt to better quantify our quality of life. Interestingly, John Maynard Keynes perceived economic growth to be a means to an end, and was consistently worried by the emerging ‘money society’. The ‘end’ in Keynes’ minds eye was a improved quality of life—time to genuinely enjoy our time on this planet. We seem to have lost sight of this in economics. So why not have the inquiry appraise how we might refocus our collective attention on national well-being benchmarks in addition to the standard metrics;
* Another insight furnished by Keynes that appears to have been lost with the passage of time is the difference between measurable ‘risk’ and irreducible ‘uncertainty’. Academia and the risk management industry made admirable strides in the post war period towards enhancing the way we monitor and control for risk, notwithstanding media rhetoric to the contrary and specious claims that all banks have been reliant on thin-tailed ‘bell curves’. The truth is, of course, much more nuanced—it suffices to say that risk management has long progressed past the simple Gaussian distribution. Yet one grave shortcoming of the mathematisation of finance has been the quite unfounded confidence the ensuing models imply about our understanding of true uncertainty. There are many risks about which we know absolutely nothing; we don’t have any past data to guide us; we don’t know their probability of manifesting, or even the prospective distribution of those probabilities. We cannot, therefore, predict, price or control for them other than by assuming few risks at all (eg, by eliminating leverage from banks’ business models). The inquiry needs to address the question of how financial institutions can better deal with irreducible uncertainty as opposed to measurable risk, and the ramifications of such for the way in which regulators oversee the system;
* Various folks have suggested that perhaps the full disclosure principle is not adequate when it comes to new financial innovations and retail investors. I am not exactly sure how this is presented as a learning from the GFC given that it was triggered by borrowers defaulting on relatively easy-to-understand home loans. Furthermore, these risks were transmitted through wholesale banking and investment markets, and only then impacted the real economy. Setting aside legitimate questions around the role of regulation and other macro influences, the underlying failure was an all-too-familiar boom-time relaxation of lending standards, which has been at the heart of every credit crisis. The distinction this time around was that we had globalised (ie, highly integrated and co-dependent) capital markets. Nonetheless, some still believe that we should capitalise on this opportunity to permit all-seeing and knowing regulators to unilaterally take decision-making responsibilities away from lay consumers and ban risky financial products altogether (or, in a watered down version, ‘nudge’ them in the direction of the regulator’s judgment of the ‘right decision’). A better idea is Joshua Gans’ (and others) proposal that we have a product testing regime, similar to that which is commonly applied to new drugs, which could involve an initial assessment period wherein products are made available to more knowledgeable and responsible wholesale investors, and, if proven durable, opened up to retail investors. We must, however, have an open debate around this subject—these issues are simply too important for ASIC and the government to decide behind closed doors. That is, we don’t want to throw the baby out with the bathwater and kill innovation altogether; and
* Finally, the Cooper Review looks to be shaping up as an administrative assessment of Australia’s superannuation system. Yet surely we should have an independent analysis of the performance of what the system was actually set up to do: ie, invest members’ money in a manner that cost-effectively optimises their long-term risk-adjusted returns? Bizarrely, this does not appear to be part of the Cooper Review’s remit. The aforementioned inquiry should, therefore, examine the efficacy of the asset-allocation strategies that have been implemented by the industry since 1992, and determine whether modifications need to be made. (We have repeatedly tendered analysis that indicates that there are indeed major flaws in the way in which retail funds in particular go about allocating their capital with an extraordinary listed equities bias.)
