Six headwinds blow a US chill

Earlier this week, Robert Gottliebsen reminded us that Australian labour productivity averaged 87 per cent of the US over the past three decades but this percentage had been falling in recent years threatening our global competitiveness and, ultimately, our prosperity (Bulk up or suffer a US boxing, January 8) .

Since 1970, US labour productivity growth has averaged 1.6 per cent per annum. Over time, GDP growth tends to track productivity changes.

The respected US economist Robert J Gordon, published a provocative working paper in August 2012 (National Bureau of Economic Research #18315) in which he challenged the presumption that growth is a normal state of affairs that will persist forever, and argued that the US faced six headwinds that would impede productivity and would slow economic growth in the decades ahead down to pre-industrial revolution levels of near zero.

The US standard of living has been doubling every 35 years. Gordon suggests that in future such doubling may take a century or more.

Will being an adopter and follower of US practices and technologies, and being already relatively close to US ‘frontiers of productivity and standard of living’ lead Australia to a similar levelling out? Can adverse influences be mitigated? Can we exploit our differences?

Gordon identified the six headwinds as demography, education, inequality, globalisation and technology, energy/environment and overhang of government and consumer debt.

Demography

The demographic dividend of the baby boomer generation moving through their working careers and the increased participation of women in the workforce has peaked in the US. Now with the gap increasing between life expectancy and retirement age, this dividend is reversing.

Gordon suggests unlimited immigration of high skilled workers as one mitigating strategy and points to Canada as a successful example of this. He also quotes the late Steve Jobs as recommending "we should staple a green card to the diploma of every foreign worker who attains a graduate degree in science or engineering”.

In Australia, increasing the participation in our workforce by women remains an opportunity. Also modest increases in retirement ages have been legislated. These, combined with currently high levels of skilled immigration, suggest a more encouraging outlook that might be the case in the US.

Education

The US, like Australia, is steadily slipping down the international league rankings for key secondary school results, and the leadership of their pre-eminent university system is being challenged. With 40 per cent of the 25 to 34-year-old age group holding a post-secondary degree, the US now ranks 12th in this category which they led a generation ago. Education levels in the US have stopped increasing. Plus the rapid escalation of college tuition costs is driving aggregate student debt, inhibiting access by low income people, and may be distorting career choices.

Australia shares some of these challenges including a growing $23 billion of student HECS liabilities. But as other countries catch up to the US in educational outcomes, the question is whether we can match the pace of the lead group?

Inequality

The US has the most polarised distribution of wealth among developed economies with the richest 1 per cent earning 23 per cent of all income (9 per cent in Australia’s case) and capturing more than half of aggregate household income appreciation over the last 15 years. The benefits of productivity improvements have not gone to the middle class whose view of economic growth and prosperity is more pessimistic than averaged statistics might suggest.

A current ideological battle in Australia is whether economic appreciation which is disproportionately captured by the most wealthy is an acceptable scenario. Government intervention in the form of punitive taxation of super-normal returns or assets is one option, though a far from popular one as the French president has recently found.

Globalisation and technology

The outsourcing of jobs to countries with less expensive labour but with access to modern technology has the greatest impact on high wage economies. Further downward pressure on wages arises from competition from growing imports afforded by a strong domestic currency. Gordon asserts that the current "revival of US manufacturing … is part of an ongoing process that erodes the number of high paying middle class jobs available to those without a college education”.

He is also sceptical of any further productivity benefits from today’s IT investments. "Invention since 2000 has centred on entertainment and communication devices that are smaller, smarter, and more capable but do not fundamentally change productivity or the standard of living.” These modern gadgets drive consumption but not labour efficiency, in his view.

It’s hard to argue that Australia is any better off. Relatively inflexible labour laws have inhibited any consideration of significant wage reductions and the restructuring of manufacturing. Instead, our mining boom has sustained our export revenues and underpinned our budgets thus far.

Energy/environment

Part of any effort to cope with global warming represents a payback for past growth – a time shifted economic burden on current and future generations. The commitment to sustainable development, widely supported, is nevertheless costly. "In 1901, the environment was not a priority and the symbol of a prosperous city was a drawing of a factory spewing pure black smoke out of its chimneys.” The paradox is that a clean environment does not move the GDP needle.

Gordon is also unimpressed by the discovery of shale gas and the fracking revolution. "It is not a source of future economic growth, rather it merely holds off future economic decline.”

The costs of the various climate change strategies, including Australia’s carbon tax, are undoubtedly an imposition on productive capacity even if, as a form of wealth redistribution, they help address income inequality at the margin. To paraphrase Gordon, climate and environment strategies may not be a source of economic growth; they merely hold off future economic decline.

But his undervaluing of the era of shale gas may be a serious misjudgement.

Debt

Data from the McKinsey Global Institute shows that total debt (which includes all loans and fixed income securities of households, corporations, financial institutions and government) is approximately 280 per cent of GDP for both the US and Australia, having peaked during the GFC.

This is an unprecedented overhang of debt. Households are gradually paying off their debts thereby dampening economic growth. Should governments choose to lower their debt to GDP ratio through higher taxes or lower benefit payments, this reduces the growth of household disposable income relative to GDP. Debt reversal is a potential break on growth.

Gordon acknowledges that his analysis is controversial and that he intended to challenge conventional assumptions and provoke alternative thinking.

The impact of his headwinds may be different for the Australian economy. Lagging the US in some areas such as workforce participation and higher education suggests we may still have plenty of room for improvement before maxing out.

Better education and more innovation are the prerequisites for continuing productivity gains.

Yet it’s in the category of technology where Gordon’s views are most unsettling. For example, he believes the most impactful contributions to productivity from robotics have already occurred, implicitly dismissing future benefits of artificial intelligence, drones, etc.

He asserts that the era of truly important changes arising from computers and the internet is behind us. Provocative stuff indeed.

All of this should remind us that the past may not be a reliable guide to future trends, and that continuing improvements in our standard of living have to be planned for and made to happen, often against the force of certain headwinds. It may well be that we are nearing the end of a supercycle of prosperity gains which has lasted 250 years. But there is no immutable law of economic gravity that makes this inevitable.

Ziggy Switkowski is chairman of the Suncorp Group and chancellor, RMIT University.

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I recently read about the use of Thorium as fuel for nuclear power. The power produced without harmful emmissions, no harmful residue; the ability to destroy existing radio active by-products from existing nuclear power plants and China having sufficient Thorium deposits to power the entire country for the next 20,000 years! I understand that China has given this high priority and is in the process of developing the technology with a team of some 750 scientists and engineers devoted full time to this project. Given Dr. Switkowski's background in this field, I would like his opinion about how this sits with the doom and gloom outlined in this article. Particularly potential for sustainable growth and reversal of Global warming as the world moves from dependancy on carbon emmitting fuels to this new technology (Six headwinds blow a US chill, January 10).
There is one area in which both Gordon and Switkowski have both missed and that is in the area of inequality.
Switkowski Talks about taxing super normal profits harder..and what rubbish that is, few today make such profits.
So whilst it is a small area of improvement, the real area and the missed demographic is on inherited wealth.
Both Warren Buffett and Bill Gates have recognise this area as being in need of regulation.
And here in oz, we could do nicely out of that, simply by saying no one is allowed to inherit more than 10% of anyone's wealth.
It would be nice to see how well some of our most wealthy then perform, will they still be considered brilliant, elite figures, I doubt it. (Six headwinds blow a US chill, January 10).
Dear Ziggy
I suggest nothing stands in the way of excessive "dead taxed money" being paid; overall to our bureaucracy (Six headwinds blow a US chill, January 10).
It would be a huge injection into our economy if:
1. benchmark the multiplier savings of our taxed dollar if starting from the top all civil servants were not getting $1.0, but $400 K per annum; our top Queensland bureaucrats $250 to $375 K vs $500 to $650 K. And trickle that down the system;
2. then pay off the debt;
3. then according to "best practice" how many do we need?.
Now consider this world-wide. I believe that UK and USA are more efficient but our/their handouts (or bribe money) are massive.
Then labour reform in Australia .......... etc. etc.
Gordon, referenced in the article, appears, in my opinion, to be too pessimistic in regards to advances in technology - " the era of truly important changes arising from computers and the internet is behind us." Why would technologist Switowski quote such retro thinking? It reminds me of the story of the bureaucrat in the US who around 1900 wanted to close down the US patent office, because everything had been invented! (Six headwinds blow a US chill, January 10.)
The truth is technological advancement is growing very rapidly - the number of R&D folk globally is increasing very rapidly.
To compare how this advancement gets applied in productivity within the US and Australia, Australia has and promotes relatively more oligopolistic structures that tend to restrict markets and thus application of innovations. One nice example is the new monopoly created by the NBN built with restrictions on competition and even without a business case normally forced on enterprises in relatively freeer markets.
Other examples of Australia's oligopolistic structures: Woolworths and Coles, and Qantas & Virgin Blue. And how did we ever come to a situation where Sydney taxi licenses cost $500,000 and taxi numbers are too limited?
Perhaps what the data in the article suggests is that the Australian market is becoming more ossified relative to the US market.
The US will for a long time in future have the advantage of a much larger market and the benefits of scale economies and competition this brings. A government that is relatively more pro innovation will help them as well.
Re: Tony Holland inheritance tax. It is simplistic to suggest it. Think about spouses, think about examples such as the family farm: owner dies, family gets kicked off the farm to pay the tax (Six headwinds blow a US chill, January 10).
Regarding Brian Scorgie's comment re thorium, Australia holds vast reserves of thorium, contained in monazite (mineral) sands (Six headwinds blow a US chill, January 9). Although previously extracted along with rutile, ilmenite & zircon, since 1994, due to enviromental conditions (monazite is naturally radioactive) and the current low price, the monazite (and it's thorium) is blended back into the tailings and spread evenly back into the pit. We may well live to regret the failure to stockpile the monazite when we had the chance.
Considering the massive increases in computing power that are still to come, I cannot see how anyone can write of what the future holds with technological advancement.
I would also say we are still at the frontier of GRIN technologies - Genetics Robotics Info Tech Nano tech.
There's already an AI that has been trawling though old medical research papers that has come up with new solutions - admitted not by creating totally new ideas, but quite often the best idea is to not reinvent the wheel.
I do question how long unlimited immigration can work. To me it's just kicking the can down the road on the demographics. It may let us become rich enough to afford the retirement of so many, but it does come at a fairly large environmental cost. (Six headwinds blow a US chill, January 10).
Don't get too excited about the use of thorium as a fuel, Brian Scorgie (Six headwinds blow a US chill, January 10). It's theoretically possible, but difficult to achieve in practice (the idea has been around since the early 1980s). While abundant, thorium is also difficult to extract from its sources. Also, China has about 2% of the estimated world reserves; the US has about 8%; India has about 16%. No special advantage to China to be found here.
Whilst we possess human ingenuity we will have innovation and technological advances in response to human needs. The greatest hindrance to this is over regulation of human activities and over government or worse, governments trying to pick winners.(Six headwinds blow a US chill, January 10)
Australia can't address its economy of scale problem because we have the worst freight transport facility in the developed world; 25th and last on the OECD transport costs.The Americans' is tops on the OECD chart.Our economy is fragmented and failing industrially because we can't move anything, raw produce, final produce, anywhere in Australia or overseas except at high cost.Remember, industrial output is dependant on multi-faceted transport facilities.
Never mind 'the headwinds' navel gazing. Lets get serious about our national transport infrastructure facility and develop a singular, cohesive economy.