Aug 182012

Australia’s productivity isn’t growing and it’s fashionable among business community to blame Australia’s productivity decline on high labour rates.

While there’s an argument that the cafe worker earning $25 an hour is overpaid – although we don’t hear the same criticism of multimillion dollar packages paid to executives with at best mediocre track records – the argument is far more complex.

In the McKinsey report linked to above, the mis-investment is put down to the recent resource boom, but is this really true?

To really understand why Australia hasn’t performed well, we need to look at why the country is so reluctant to invest in assets that will increase our productivity.

The role of property

Underlying the recent Australian “economic miracle” is the property industry. The country’s domestic building sector is one of the most efficient job generators in the world. Stimulate the Aussie property market and job growth ripples quickly through the economy.

This was one the lessons learned in the 1990s recession – successive governments and bureaucrats have learned the mantra “go early, go hard and go residential” when it comes to cutting interest rates and introducing home building incentives like the first home owners grants.

It was no coincidence that when the Rudd Government was faced by the Global Financial Crisis they launched a wave of initiatives to boost the property industry and shore household wealth. Just as the Howard and Costello governments did in response to the Long Term Capital Bank collapse, Asian economic crisis or the 2001 US recession.

While those stimulus measures have kept Australia out of recession for two decades, the failure to unwind the measures after the economic shock has passed leaves the nation’s property market remains “hyper stimulated” and over valued. That over investment in property has sucked funds away from other areas which affects the competitiveness of Aussie industry.

The great property squeeze

One of the great tragedies of the 1990s was Sydney’s East Circular Quay precinct which could have been one or two of the world’s greatest hotel sites, literally on the steps of the Sydney Opera House.

Instead, high priced apartments were built on the site and Sydney’s tourism and convention industries are crippled by a shortage of top end hotel rooms.

Tourism isn’t the only industry affected by the Australia’s obsession with residential property – across the country service stations, sports clubs and convention centres are being demolished to make way for high rise apartment developments. No economic activity seems to trump property speculation when it comes to attracting Australian investors.

Ideological beliefs

Adding fuel to the property obsession are the ideologies of the 1980s which are still closely held by the nation’s business and political leaders.

Capital gains tax concessions introduced by the Howard government in the late 1990s made property and share speculation far more attractive that invention, innovation or entrepreneurship.

To make matters worse, Australia’s social security policies and taxation laws favour capital gains – any Australian over thirty who has tried to build a business has plenty of mates who did far better out of negatively geared property than those who foolish enough to create new enterprises.

For those older entrepreneurs facing retirement, they are in for a nasty shock if their businesses don’t sell for what they hope. They would have been far better staying in a safe corporate job and buy a few negatively geared investment properties.

Again, this ideological belief that capital gains trumps wage or business income means investment is steered away from productive assets and into residential property that can be held for a capital gain.

The Ticket Clipping Culture

Australia’s failure to invest in productive assets is not just a feature of the household investor, the corporate sector has a lot to answer for as well.

While good in theory, the superannuation system has been a failure in providing a capital pool for new and innovative businesses and productive investments.

The superannuation trustees have largely focused on hugging the index, the ticket clipping funds management culture means that any real investment for productive assets is restricted to funding toll roads where fat management fees and guaranteed commissions mean an easy life for those fund managers.

In a perverse way, the short term appearance of the ticket clipping might mean increased productivity as costs are cut to improve profits. In the medium and long term, the lack of investment in these assets means in the long term these assets too cease to add productive capacity to the economy.

Of course there’s more to infrastructure investment than toll roads and airports with crippling parking charges, but the ticket clipping classes of Australia’s investment community don’t see a quick buck in that.

Increasingly the boards of Australia’s major companies are appointed by those running the superannuation funds and these people have the generational bias away from productive investment. Instead they see slashing IT, training or asset investment as costs to be cut in the quest of boosting bonus delivering profits.

More fundamentally, three decades of consolidation in most of Australia’s industries has seen a generation of Australian executives whose main expertise is that of maximising their market power at the expense of their competitors. Investing in productive capacity is not a major concern for those corporations.

Fixing the problem

Getting Australians – whether mom and dad property speculators or high paid fund managers parking money in the ASX 200 or plonking money in the latest toll road boondoggle – to change attitudes and invest in productive capacity is going to take a generational change.

As long as the attitude persists that property is a safe investment that doubles in real value every ten years then Australians are going to continue to ply cash into apartments and houses.

It is possible that a period of Australian Austerity that suppresses property prices may force that change in investment attitudes. An weak property market is one of the unspoken effects of the spending cuts advocated by many right wing commentators,

The question is whether those commentators, or the political classes who derive their much of their policies from right wing ideologues, view have the stomach for disruption that will come when weaning Australians from the teats of corporate ticket clipping and property speculation.

  3 Responses to “Economic cholesterol”

  1. Hi Paul – interesting thoughts but I don’t think we will have to waiting for the gloss to come off property as a capital gain investment … it has been flat/falling for several years and while averages always mask exceptions to the rule, the bottom line is property is inherantly more risky than bank deposits and at some point rental return vs purchase price will need to reflect this. One thing to note about people that start businesses – they get even better tax treatment than share investors/ property purchasers when it comes to selling their business. If I was to start, build up and sell a business for 1mill, I’d pay around 90k on the gain thanks to 50% capital gain concession and 50% active active test, so tax on 250k effectively. So not too bad in the end as far as in incentive to startup. Cheers

    • Thanks for the comment Simon. Those capital gains tax concessions also apply to property and shares so the tax treatment is the same.

      Where the discrepancy lies between passive investments like shares or property and building a business is that can you claim the cost of your property or share speculation – waiting for capital gains isn’t investment. Should you attempt to defray the costs of developing a shopping app or starting a dog cleaning service in your spare time against the taxes you’ve paid on a full time job as a bus driver or accountant then you’ll quickly find the ATO will disqualify your deductions and thump you with a fine.

      The effect of this social and economic engineering has been to skew Australian households’ investment priorities away from building productive capacity into speculating on property.

      We should keep in mind this is not new, this is a process that has been underway since the 1960s, it’s only now we’re beginning to see the long term effects of having an economy, and a society, that largely rests upon property speculation.

  2. Your analysis is being referenced and it looks even more relevant than ever. I’m drawn to Morrison’s comments recently of supporting people ‘having a go’ and your insight on the cushy, subsidised, tax protected havens of residential property & protected superannuation contributions doing exactly the opposite.

    It’s looking more and more like a generational wealth transfer system that is driving the majority who work to:

    * Be under threat by the ticket clipping – increased overtime due to less staff sharing their job, stagnant wages, underinvestment, redundancies.

    * For the younger members.. having housing stretch out of reach or being locked into the first property without the option to move.

    ..& depressingly any sign of change or challenge to the status quo being hunted & howled down by vested interests.

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