Apr 142015
 
Skilled workers are essential to building industries

Yesterday this site looked at the shortcomings of the Australian government’s Inter Generational Report and criticised it primarily for its failure to imagine how society and the economy would look by 2050.

While no-one has a crystal ball, making projections on how government spending will look in the future without having some basis for the assumptions on revenues and expenditures renders a document like the IGR somewhat useless.

So what might Australia’s economy in 2050 look like? Here’s a quick list of thoughts.

Rethinking retirement

The obvious is most western societies, including Australia’s, are going to be older. This has a number of consequences, particularly with the retirement age.

In 1909 the old age pension was introduced in Australia with eligibility starting at 65 for men and 60 for women. At the time, life expectancy was 55 years for men and 59 for females.

Today age pension age has barely moved with it becoming 67 for those born after 1952. Life expectancy today 91.5 years for men and 93.6 for women, this expected to increase by 2055 to 95.1 and 96.6 respectively.

More importantly, life expectancy at age 60 will move from 16.9/19.3 years today to 21.3/23.1 in 2055.

Quite clearly the superannuation assumptions of being able to get a tax free pot of gold at 60 are doomed, few people will get enough from their lump sum to see themselves through twenty years retirement.

That throws them back on to the state. Given these numbers it’s clear the eligibility age for the old pension is going to have to be increased.

Coupled with a declining birth and participation rates seeing fewer taxpayers contributing to government coffers, the need to reform the pension age is going to become more pressing.

A healthier population

One of the differences between 1909 and today is that we’re far healthier. A fifty something today is generally in better shape than a thirty year old of their grandparents’ time.

Coupling that with the changing nature of work where most workers of a century ago were employed in exacting physical labour, today’s employees are far more likely to be sitting on a computer. This means the working life can be extended.

While the population is going to be healthier, an older population is going to mean more people with chronic conditions and those with serious issues like dementia are going to be an increasing drain on medical services, not to mention increased incidence of cancers and possibly diseases related to sedentary lifestyles.

This means the nature of medical treatment is going to change, a lot more is going to be spent on early identification and intervention of chronic and debilitating conditions.

Changing the workforce

While the workforce is going to get older, it’s also going to become more precarious. This is already clear in the long term trends since the 1980s and with the rise of ‘collaborative economy’ businesses like O-Desk, Mechanical Turk and Airtasker we can see jobs becoming more casualised.

Today’s children will not have a steady career path and governments have to plan for extended periods of unemployment. This too affects the participation rate and the levels of household spending.

A precarious income also means workers are less likely to take on large debt commitments. This trend is already apparent and is the main reason why companies with a 1960s consumer spending model are struggling in the economy of 2015.

Property stagnation

The Australian middle class model that depends upons highly indebted householders paying down mortgages is likely to be unpopular by the middle of the century as people will be reluctant to take out a huge loan to buy a property when their medium term job prospects are uncertain.

This one aspect is where the Australia government projections go badly awry. It’s understandable not to consider this given the political poison of telling the population their assumed property gains aren’t going to happen but it damns the IGR to failure.

A society with lower levels of property ownership means a dramatic shift in the tax mix and government expenditures. Assuming that today’s normal will also be tomorrow’s is very risky.

Changing technologies

The technologies themselves are changing the revenue and expenditure streams for government, just rolling out diverless vehicles might eliminate the need for half the US’s police force while reduced registration fees, taxes and fines will hit state and local government budgets.

Similarly the global nature of digital businesses is going to challenge governments as the locations of where work is done, goods are delivered and profits made becomes less certain. Right now tax officials are struggling with the revenues of multinationals but increasingly smaller companies will present the same problems.

The other changing nature of work is going to be its composition, just as a hundred years ago nearly half the workers in western countries were in agriculture, a number that’s below one in twenty today, we can expect changes in employment sectors as robots and algorithms take over many of today’s jobs.

All of this means a very different society and workforce to today’s. While it’s difficult to envision what it looks like from here, just as the current economy was almost unimaginable in 1975, it’s necessary to give some thoughts on the shifts to make informed policy choices rather than the opportunistic populism displayed by most of today’s political leaders.

So how do you see the economy of 2015 looking? And where are governments going to raise their money from? I’d be interested to hear what you see in the crystal ball.

Apr 132015
 
Does the digital divide really exist

“If you don’t know where you are now, you don’t know where you’re heading” says science presenter Karl Kruszelnicki – aka Dr Karl – in the publicity for the Australian government’s latest Inter-Generational Report.

Doctor Karl is part of a glossy campaign based around the report with the grand title of The Challenge of Change. The problem with the report is that it barely identifies any of the changes, let alone the effects, that might affect the economy over the next forty years.

The aim of the IGR is to identify the long term trends in the Australian economy and provide a basis for policy development. The first was delivered in 2001 and one has been produced roughly every five years since, making this the fourth.

An aging population

Much of the 2015 IGR hangs on the observation that Australia’s population is aging; stating the bleeding obvious that became apparent when the nation’s post World War II baby boom came to an end in 1965.

While the fact Australia’s population is aging despite massive immigration in recent years is undeniable, most of the report is a mish mash of motherhood statements that expose the key contradictions – dare one call it schizophrenia – lying at the heart of Australian politics and society.

The motherhood statements are all quite valid; the nation needs to develop better infrastructure, build a more skilled workforce and develop new industries as the mining boom sputters to a messy end.

Cutting education

Sadly the actions of Australian governments at both state and Federal level are in direct opposition to these laudable aims. The discussion on training and education illustrates the contradictions;

Under the ‘proposed policy’ scenario, Australian Government spending on education and training is projected to decline to 1.0 per cent of GDP by 2054-55. However, these figures do not take into account the significant increase in lending to students through the higher education and vocational education and training loan schemes.

Despite recognising the importance of training the workforce in order to keep the nation competitive the Federal government is actually forecasting to reduce spending on education and worker training.

Given the typical government education spending among developed nations is around 5% of GDP – in Australia total government spending is 5.1% for 2014 – this indicates a lot more cost to be pushed onto states to make up the shortfalls, if it is being made up at all.

A lack of investment

Particularly notable in the report is the scant talk about what industries are going to develop over the next thirty years or where the money for investing into them is going to come from.

The little discussion there is around private sector investment revolves around the superannuation system – the Australian equivalent of the US 401(k) personal pension accounts where workers are compelled to contribute into private schemes.

Total Australian superannuation assets have increased strongly since compulsory superannuation was introduced in 1992. At the end of 2013-14, total superannuation assets were $1.84 trillion, around 116 per cent of GDP. As the superannuation system matures and wages grow, total Australian superannuation assets are expected to continue to increase and make a growing contribution to national savings.

This statement ignores how the pool of superannuation funds is going to decline as baby boomers and Generation X reaches retirement age and starts to draw down its savings.

An even more important aspect missed by the authors are the risks Australian workers are exposed to as the only thing guaranteed by these funds are the rich fees charged by the managers.

During the global financial crisis of 2008 both the returns and asset bases of superannuation funds were hit hard with some funds suspended from trading and withdrawals restricted. The risk of similar event happening in the next forty years and its impact on household savings and business investment is simply ignored.

Ignoring the elephant

The key to understanding the Australian economic miracle of the last 25 years lies in the property market where housing lending has been boosted at the first sign of economy trouble.

As a consequence Australian households have become amongst the most indebted in the world and the bulk of domestic savings are in housing assets. Housing is the cornerstone of the Australian economy and the source of its middle class wealth.

Remarkably in the entire document the words ‘housing’ and ‘property’ only appear twice and three times respectively.

In ignoring the effects of housing on both state and Federal budgets, the bureaucrats have ignored the single most important factor in Australia’s wealth.

Given even in the most favorable projections, baby boomers and Generation Xers will be selling down their property portfolios to fund their retirements during the IGRs forecast periods, it is nothing short of amazing there is little mention of such a critical factor.

A flat line future

An important feature of the IGR is its focus on government spending with a strong ideological bent supporting the Australian political obsession with privatisation and currying favours from the deeply discredited and corrupt global ratings agencies.

This blinkered view of the world makes it hard for the authors to give a balanced analysis of the risks presented to the Australian economy and this weakness is exacerbated by poor analysis.

Each of the reports has featured ‘flat line’ projections for growth, unemployments and trade. For example here are the terms of trade projections from the current report.

Australian-terms-of-trade-projections

Such analysis is effectively useless and, because of each of the reports features such lazy forecasting, the projections in each time period end up being distorted by the circumstances of the day; forecast economic growth for the 2020s across the four report has varied between 1.6 and 2.8% over the reports.

Indeed the latest report is possibly the most optimistic with a 2.8% forecast growth rate which is at odds with the comparatively pessimistic view of 2.3% in the halcyon days of the 2002 report.

Lazy analysis

The IGR’s forecasters justify the flat line analysis by claiming long term trends will be due to underlying changes in the economy which will smooth out business cycles.

It is also important to keep in mind that the long-term projections look through business cycles and assume a smooth growth path through to 2054-55. In reality, it is almost certain that any economy will go through such cycles over a 40 year time period. However, the outlook to 2054-55 will not be driven by these cycles, but by the underlying trends in population, participation and productivity.

While this is to an extent true as short term cycles oscillate around the longer term trends, the forecasters do nothing to identify what will drive growth in the Australian economy for the next thirty years.

The IGR’s greatest failure is in not considered the structure of the economy and the workforce over the next three decades is its greatest flaw. How people are working and where they are working is going to shape the nation and government revenues.

Compounding the report’s failure to at least attempt to forecast the workforce’s changing structure, the authors’ projection of unemployment are almost an insult.

estimated-australian-unemployment

As this blog has pointed out constantly over recent years, the workforce is undergoing fundamental shifts in the face of automation, robotics and intelligent systems. While it may turn out five percent is the average rate of unemployment over the period we can expect major fluctuations in the workforce as industries are dislocated.

In turn those fluctuations are going to affect government revenues and expenditures, not to mention their influences on home prices and the superannuation balances of those facing extended periods of unemployment.

A flawed roadmap

Ultimately the Inter-Generational Report is of little use in helping policy makers and the community plan for the challenges and opportunities facing Australia over the next thirty years.

Like the Australia in the Asian Century report it’s a curiously selective document that fails to consider most of the external factors that are going to shape societies over the upcoming decades.

Just as the Australia in the Asian Century paper is a dated and discredited document a mere three years after its release shows the calibre of advice being given to the nation’s leaders.

While Doctor Karl is exactly right that we can’t know where we’re heading unless we know where we are, this report fails to acknowledge how Australia came to be in its privileged position and what the opportunities are in a radically changing world.

It may well be that The Lucky Country stays lucky to the middle of this century and caps off two hundred years of good fortune. If that does happen though it will not be because of this flawed and shallow report.

The authors of the Intergenerational Report ducked the challenge of change.

Apr 082015
 
business_suits-on-way-to-meeting

I’m putting together a story on what the Australian tech community can learn from the Ellen Pao story where an upcoming female associate at iconic Silicon Valley venture capital firm Kleiner Perkins Caufield & Byers sued the firm for sexual discrimination.

Although Pao lost the case it rightly caused much debate within the US tech community about the lack of gender diversity, particularly given the number of women in the American venture capital industry has collapsed from 10% in 1999 to 6% in 2014

The reason for this seems to be simple, as Lauren Helper pointed out in the Silicon Valley Business Journal back in 2013 the industry is intensely tribal quoting one industry participant, Mark Taguchi, ‘“people operate in tribes,” he said. “They have groups of people that they learn to trust, that they work with, that they like.”’

In some respects this is a strength for the Silicon Valley industry as it means new entrants have to be vouched for by trusted figures but it also risks the sector being insular and dominated by narrow groups based on background, ethnicity or gender.

Once an industry defines its leaders and innovators by their friendships, schools or workplaces it risks becoming irrelevant to the outside world and it’s inevitable an inward focus will blind the group to new trends and developing technologies.

The warning from Pao’s case is Silicon Valley may be becoming too insular, it’s a handy wakeup to remind participants there is a big, diverse world outside the Bay Area.

However the US tech sector might survive without diversifying given its size and access to capital. Forother countries’ developing industries – like Australia’s – it’s a hindering factor few can afford.

In most ecosystems diversity is strength, it’s hard to see how that’s any different for the tech sector. Boys Clubs are relic of last century and have little place in this one; for regions looking at copying Silicon Valley, this is one trait not to pick up.

Feb 052015
 
75

Coca-Cola are now selling milk as their markets move away from consuming sugary drinks, how much of this is due to the baby boomer era coming to an end?

Following yesterday’s post on McDonalds and the franchising model, it’s worthwhile considering how other businesses are being affected by today’s changing society.

Certainly the fast food industry is one of the most deeply affected as KFC owner Yum Food starts experimenting with a modernised layouts and menus to counter the drift in consumer tastes.

KFC are not alone in struggling with this as McDonalds experiments with own changes in response to the demographic and market shifts.

75-3

McDonalds’, KFC’s and most particularly Coca-Cola’s Twentieth Century success is largely due to the post war baby boom, as the children born during and after World War II reached adolescence – the Jagger generation as described by Irish economist David McWilliams – they indulged themselves in their newfound wealth and personal freedoms that were unthinkable for their parents who struggled through two world wars and a depression.

Coca-Cola was the emblem of that freedom and wealth which made up the twentieth century American dram that the world envied, adopted and copied. Today the world still looks to the United States but its a different America they see.

As the Jagger generation retires and sugary drinks are no longer their first priority their kids and grandkids are looking to different beverages; coffee, energy drinks, bottled water and, possibly, milk which are more in line with their lifestyles.

The task of Coca-Cola, and all the other brands that represented post War American affluence, the task now is to adapt to a very different generation and a society with priorities very different to that of the previous century.

Jan 172015
 
The Australian wine industry has problems

Mind games, wine growers and the Naples mafia are among today’s links along with last person in Britain who lived under Queen Victoria passing away and a touching series of portraits showing the end of the film photography industry.

Cutting out the middle man

Reka Haros is a wine maker in Italy’s Venuto region. Like many small producers her winery struggles with distribution and sales in a crowded market. Reba’s solution of going direct to the customer is one that many businesses should be considering in a noisy world.

Life in protection

I don’t fear death, I fear being discredited. The story of Italian journalist Roberto Saviano and his eight years in protection after writing about the Naples mafia.

Picturing the decline of film photography

Canadian photographer Robert Burley travelled the world with his 4×5 field camera to document the end of analogue photography. It’s a poignant portrayal of how an entire industry comes to and with one technological change.

Last of the Victorians

Ethel Lang, the last surviving Briton to live under the reign of Queen Victoria, died last week at the age 114.

Manufacturing false memories

A frightening physiological experiment shows a cunning interviewer can convince most of us  we committed crimes which we are totally innocent of. This truly is a disturbing story.

Nov 162014
 
G20_2014_brisbane_leaders_meeting

This year’s G20 talkfest has come to an end with the usual communique of fine words.

Apart from the discussion of climate change there’s little in the communique that wouldn’t have furrowed the brows of Margaret Thatcher or Ronald Regan thirty years ago with most of the pronouncement a being around opening markets, reducing unemployment and freeing capital.

On the latter point, the call to reduce tax avoidance given this was an obvious consequence of the 1980s reforms would be met by with a rueful laugh from those responsible for the deregulation wave of the Reagan and Thatcher years given reducing taxes on corporations was one of the reasons for the ‘reforms’

An aspect that would trouble Maggie’s and Ronnie’s ghosts would be the commitment to ‘address deflationary pressures’, something undreamt of in the 1980s, although a clear warning to today’s commentators and investors that Quantitative Easing is not going away any time soon.

What today’s communique shows is the world’s leaders are still very wedded to the economic models of the Twentieth Century despite the massive demographic and technological developments changing our society.

The real message from the G20 is don’t wait for your country’s leaders if you want progress; at best they probably won’t comprehend what you’re saying.

Although if you can put your ideas in terms of creating growth or reducing youth unemployment then you might have a willing audience with your local minister, chancellor or President.

Oct 152014
 
workers in a building site

One of the challenges facing people who’ve started their own businesses is re-entering the broader workforce. Many managers are reluctant to hire previously self employed workers; the PayPal experience shows that attitude could be hurting working

At the Dreamforce Conference in San Francisco yesterday three PayPal alumni, part of Silicon Valley’s infamous ‘PayPal Mafia’, discussed why the company was such a successful incubator of talent.

“The company was composed of a bunch of young folks who were very driven,” said founder of LinkedIn and early PayPal employee, Reed Hoffman. “Once they sold the business to eBay they weren’t the type to retire.”

Along with PayPal’s founders being driven, the company also tended to hire people who had run their own businesses but were finding the  going tough in the economy at the time; “Silicon Valley was collapsing under its own weight,” observed PayPal founder and fellow panellist Max Levchin.

“There was a lot of running for safety in the Valley,” Levchin remembers. “We were looking for people who were into risk taking and were excited to take a risk and this would be the last company they worked for because the next one would be their own. As a result we biased the selection towards entrepreneurs.”

Copying that hiring practice today is Stripe where co-founder John Collison told Decoding the New Economy last month that one of the keys to managing a fast growth business is to hire entrepreneurs and former self employed workers.

“They are self starters; they don’t need much supervision,” said Collison in describing how hiring people who’ve run their own businesses makes running a business that has gone from ten to 150 employees in three years.

it’s no coincidence that one of the investors in stripe is Peter Theil who along with Levchin founded PayPal and is probably the best known of the ‘PayPal mafia’.

PayPal and Stripe’s experience show the folly of overlooking workers who’ve run their own businesses; in a world where business is becoming more competitive, having entrepreneurial employees is an asset too good to miss out on.