1. Floating the dollar
Letting the market set the value of the Aussie dollar after
December 1983 allowed it to fluctuate between US48c and $US1.10 so far,
making it an absorber of shocks from the rest of the world. This has
made the economy more stable and stopped the resources boom causing an
inflation blowout.
2. Deregulating the banks
Introducing foreign banks and allowing banks to set their own
interest rates made it much easier to get a loan and increased
competition between banks and other lenders, but led to excessive
lending to businesses and caused the deep recession of the early 1990s.
3. New taxes on capital gains and fringe benefits
In October 1985 Paul Keating announced new taxes but cut the
top income-tax rate from 60 per cent to 49 per cent. He also abolished
negative gearing, but reversed this under pressure from estate agents.
4. Removing import protection
In May 1988 Keating announced the virtual phasing out of the
import duties and quotas imposed on most manufactured goods. Predicted
demise of manufacturing industry did not materialise.
5. Privatising government businesses
Sale of the Commonwealth Bank began in 1991 and Qantas in
1992. The Howard government sold Telstra in three tranches from 1997.
State governments sold their banks, insurance companies and some power
producers and distributors.
6. Enterprise bargaining
In 1993 the Keating government ended centralised wage-fixing
through a "national wage case" and introduced collective bargaining at
the enterprise level. In 2005, Work Choices sought to promote individual
contracts by reducing worker protections, further encumber unions and
end reliance on industrial rewards. The Rudd government reversed the
most extreme parts of Work Choices, but left much of it in force.
7. National competition policy
In 1995 Keating sought to encourage deregulation and
privatisation by state governments and tighten the Trade Practices Act's
restrictions on anti-competitive behaviour. Premiers tended to drag
their feet.
8. Central Bank independence
In 1996 Peter Costello allowed the Reserve Bank to make its
decisions independent of the elected government, endorsing its target of
holding inflation between 2 per cent and 3 per cent, on average. The
Reserve has raised interest rates more than a politician would -
including during the 2007 election campaign - but this has kept
inflation under tighter control than when politicians were in charge.
9. Goods and services tax
The start of the GST in 2000 came 25 years after it had been
proposed by a major inquiry. It replaced wholesale sales tax and various
unconstitutional or inefficient state taxes. Much death and destruction
were predicted; little eventuated. But now GST is showing signs of wear
and needs renovation.
10. Taxes on mining and carbon
Wayne Swan planned to raise huge sums from taxing miners'
high profits and use the proceeds to give tax cuts and concessions to
business and individual savers. He also used a tax to impose a price on
carbon dioxide emissions. Both reforms were badly mishandled and Tony
Abbott has pledged to reverse these reforms.
The idealised case for the social usefulness of the economics profession is that, within their area of expertise, economists offer the community dispassionate advice on the choices open to it, identifying the costs and benefits associated with each option and never failing to remind us that, whatever choice we make, it comes at an opportunity cost.
Unfortunately, those economists who belong to the economic rationalist faction often fall well short of this ideal. They don't offer dispassionate choices so much as passionately advocate one option over others, often exaggerating the likely benefits and brushing aside the direct costs and the opportunity cost of their preferred choice - which they sanctify by labelling a "reform".
Economic rationalists are the missionaries of materialism. They often step outside their expertise, failing to warn pollies or the public that their figuring has taken no account of non-efficiency considerations such as how the increased national income they promise will be distributed between rich and poor, and how the reform will affect family relationships, leisure, stress, trust and other forms of social capital.
This is why I was struck last week to see a lawyer, Geoff Giudice, former president of the (now) Fair Work Commission, doing what I don't remember ever seeing an economist do: reminding the community that "reform" comes with costs.
Giudice argued that, after four major reform acts on industrial relations law in the past 20 years, calls for further change should be approached with some caution.
"Reform has a cost. There are significant transaction costs [I'd say switching costs] associated with changes (and attempted changes) in labour legislation," he said. "There is the cost of consultation at many levels: for example, internal deliberations in various representative bodies, governments, community organisations and special advocacy groups.
"Lobbying, including representations to government and opposition parties, is not cheap. There are usually public relations and advertising costs of various kinds. Then the cost of the parliamentary process itself, including legislative drafting, the production of the associated parliamentary materials and sitting time, needs to be considered."
Should laws be changed after all that, there were usually significant implementation costs. In recent memory, very large amounts of money had been spent on changing staffing and other public service arrangements in response to legislative change, he said.
"There are other implementation costs related to compliance," he said. "Public information campaigns and industry education are needed. Employers can incur staff training, legal and other consultant costs ... Significant amounts of management time can be directed to dealing with proposals for legislative change."
The economic rationalists would no doubt reply that the continuing efficiency gain from their proposed reforms would soon dwarf these essentially once-off costs. But this doesn't justify their failure to acknowledge the costs of the reforms they advocate, the way they behave like high-pressure salesmen.
It doesn't justify the cases where reforms fail to deliver the promised benefits because of "unintended consequences" (which their oversimplified model didn't foresee).
How often do reforms fail to bring significant net benefits? Probably a lot more often than we realise. Reformers are guided much more by their preconceptions than by empirical evidence. They tend not to dwell on their failures, shifting the blame to the pollies' flawed execution.
Since we live in a democracy, however, it's inevitable that governments' execution will fall short of textbook purity. This being so, the gap between theory and practice is a sort of cost the reformers should take into their reckoning before assuring us we've nothing to lose.
And the rationalists' mentality that the need for reform is never-ending, that for governments not to be reforming something means they're not doing their job, that too much reform is never enough, creates an environment in which we get too much change.
The reform mania gives rise to plenty of failed attempts to get reforms through, too much pseudo-reform and too much oscillating change as we try centralising everything, then, when that doesn't work, try decentralising.
Particularly in industrial relations, we have too much battling between labour and capital to get the law slanted in their favour, all under the cover of "reform". Little wonder Giudice thinks the goal of any further change ought to be making the law more acceptable to both sides, thereby producing long-term stability and certainty in the legislative regime.
He says "when legislative change is proposed, all of the steps along the way from policy formulation, drafting, public debate and so on, through to implementation in some cases and abandonment in others, can be a wasteful distraction which displaces more productive activities".
It's taken a lawyer to remind the rationalists that reform itself has an opportunity cost.
At the Workplace Research Centre's annual labour law conference in Sydney this week, the topic was "Beyond Groundhog Day". Huh?
Parts of the media have worked assiduously to convince us industrial relations law is in terrible shape and in need of sweeping reform. So Tony Abbott has promised a major review, to be conducted by the hyper-rationalist Productivity Commission, with any proposals for legislative change to be taken to the election after this one.
But we've already had four "wholesale rewrites of Commonwealth industrial law" in the past 20 years. Do we really need another? Are we doomed to keep waking up to another day of system change until, after innumerable goes, we finally get it right? Should we keep striving for perfection, or is there something to be gained from a period of stability and certainty?
In case you haven't been keeping count, the first big change was in 1993, when the Keating government abandoned the highly unusual centralised system of conciliation and arbitration we installed at Federation and replaced it with a decentralised system of collective bargaining at the enterprise level.
Then we had Peter Reith's Workplace Relations Act in 1996, which downgraded the role of industrial awards and the Industrial Relations Commission, greatly reduced union power and inaugurated legislative recognition of individual contracts, known as "Australian workplace agreements", subject to a "no-disadvantage test".
In 2005 John Howard introduced his Work Choices legislation, which replaced the federal and state systems with a single national system, further reduced the role of the unions and the commission, further restricted the right to strike and further downgraded awards, essentially replacing them with a short list of legislated minimum conditions and annual minimum wage adjustments.
Initially, at least, he sought to encourage employers' use of individual contracts by removing the no-disadvantage test, meaning workers moved onto an Australian workplace agreement could indeed suffer a loss of pay or benefits.
And then in 2009 Julia Gillard passed her Fair Work law. It suits both sides in the eternal union-Labor, employer-Liberals IR battle to have you believe Fair Work completely reversed Work Choices.
In truth, it reversed some of it, but retained large parts. It ended statutory recognition of individual contracts, making collectively bargained enterprise agreements the main form of wage-fixing.
It restored the authority of the commission - now called the Fair Work Commission - and a greatly simplified "modern" award system, applying only to workers on less than $100,000 a year. It increased to 10 the number of legislated minimum "national employment standards" and restored streamlined unfair dismissal rules.
But it retained and strengthened Work Choices' national system and many of its measures to limit union power, including limits on unions' right of entry to workplaces, mandatory secret ballots before strikes, and bans on industry-wide strikes and pattern bargaining. It kept the ban on "secondary boycotts" (actions aimed at businesses other than the employer) in trade practices legislation.
It continued to limit the commission's power to settle disputes by compulsory arbitration, and to permit employers to lock out their staff without notice.
So where are we now? According to a speaker at the conference, Richard Bunting, a lawyer who usually represents employers, the present system has nine principal features. First, the state industrial relations systems have been emasculated.
Minimum wages and conditions are specified by statute, supplemented by modern awards. But these are very much minimums, with industry- or calling-wide awards no longer "owned" by particular unions and employer groups.
The system recognises only collectively bargained enterprise agreements, with workers not necessarily represented by unions and with "enterprise" defined only loosely. Workers have a statutory right to strike, but only during the bargaining period for a new agreement.
Individual workers enjoy freedom of association (to join or not join a union) and protection against certain "adverse action" by employers. Unions are less central to the operation of the system, but are still facilitated and protected. Finally, unions retain some rights of entry to workplaces.
The question is, are the industrial parties so unhappy with the operation of this system that another big review is needed, with major changes to follow?
Bunting said most of his nine principal features were settled.
"They reflect the contemporary society and economic circumstances," he said. "No mainstream political or industrial participant advocates a wholly different approach, much less a return to former regimes. We are in the midst of a new period of stability affecting the main features of our labour law. However, there are some aspects in contention and some aspects where there is an apparent lack of balance... "
Another speaker, Tim Lyons, assistant secretary of the ACTU, agreed we already have a stable regime. "With the exception of the issue of statutory individual contracts (a feature basically without parallel in overseas jurisdictions), the essential components of the current architecture . . . are seriously contested only at the margins," he said.
According to the keynote speaker, former justice Geoff Giudice, long-time president of the commission, "while there are some deep-seated differences in the positions of the major interests, it is important that many of the fundamental elements of the system are widely accepted. Policy differences tend to be at the margins or to be based on special pleading.
"There are some proposals for radical reform it is true, but extreme positions seldom provide a sound basis for change," he said.
Even Stephen Smith, of the employers' Australian Industry Group, though he had a long list of complaints, really only wanted change at the margin.
But the last word goes to Geoff McGill, former wages policy bureaucrat and employer consultant. "It is the substance of the employment relationship not its legal form which determines whether people are engaged and productive," he said.
"Productive workplaces are not the outcome of legislation but of the quality of leadership and culture at the workplace.
"There is a significant productivity dividend available to those organisations that have the leadership capability to harness discretionary effort of employees, through increased employee engagement."
Do you like change? I don't, and I don't know many people who do. And yet when it comes to the economy, people are always demanding change and more change from our politicians, and the pollies almost invariably seek our votes by promising it - better change than whatever their opponents are offering. These are promises they inevitably keep.
Some degree of change is unavoidable, of course. The environment in which we live and work is often changed by factors outside our control - particularly developments in other countries and the introduction of new technology - and we often don't have much choice but to change in response.
But we demand - and are given - a lot more change than the minimum necessary to cope with a changing world. Governments give us more change than we need for fear they'll be judged lazy or ineffective if they don't.
How does this paradoxical situation come about? It's simple: the change people demand of politicians and the change pollies promise isn't called change, it's called "reform". Slap on that label and the change we'd otherwise abhor becomes sanctified as virtuous, much-needed and far-sighted.
The politics and policy game involves thinking of a problem, then proposing a "reform" we fondly imagine will fix it. But our apparent love for reform means surprisingly little effort is put into checking how successful the supposed reform has been in delivering its promised benefits.
When a reform doesn't work this doesn't shake our enthusiasm for change, it just whets our appetite for more. We rush off for another round of "think of a problem and propose a reform". So great is our mania for reform we don't notice the not infrequent occasions when, in our efforts to solve some intractable problem, our efforts at reform keep oscillating from one approach to its opposite.
And it occurs to no one to query the wisdom of this incessant activity and reorganisation. Until now.
On Monday I witnessed the most remarkable speech from an authority figure I've heard in a long time. He was the former Justice Geoff Giudice, long-time president of the Industrial Relations Commission and inaugural president of the Fair Work Commission, speaking at the annual labour law conference in Sydney.
As you're well aware, the nation's been arguing furiously about industrial relations law at least since John Howard proposed his Work Choices "reforms" after the 2004 election. Along with the need for action on climate change, Work Choices is held to be a big part of the reason for Howard's defeat in 2007.
The new Labor government proceeded to introduce its own Fair Work "reforms", which consisted of reversing the most extreme elements of Work Choices while retaining much of its change and Howard's earlier changes in 1996.
Add in the Keating government's move to enterprise bargaining in 1993 and we've had four major changes in the industrial relations rules in just 20 years. But employer groups, chief executives and retired Liberal politicians, whipped up by the national dailies, are demanding an Abbott government implement substantial reform, moving the law back in the direction of Work Choices.
Having learnt the bitter lesson of the Liberals' 2007 defeat, Tony Abbott is promising only limited change, while pledging a major review of the system by the Productivity Commission, with any proposals for "reform" arising out of the review to be taken to the election in 2016.
Giudice argues in his speech that achieving a "stable and predictable industrial relations framework for the benefit of business, both here and overseas, for employees and for other stakeholders" should be a national imperative.
The question most often asked by politicians and their advisers, he says, is: what needs to be changed? "A more important question, which is rarely posed, is: how can greater stability be achieved in our industrial relations system?
"Stability is important from an economic and social viewpoint, although not perhaps from a political one. After two decades of change, much of which has been beneficial, further change is unlikely to lead to a net benefit for our economy unless it is the result of a much improved policy formulation process."
While there are some deep-seated differences in the positions of the major industrial interests, he says, "it is important that many of the fundamental elements of the system are widely accepted. Policy differences tend to be at the margins, or based on special pleading.
"There are some proposals for radical reform, it is true, but extreme positions seldom provide a sound basis for change."
I think Giudice is on to something. I agree we'd be better off with better industrial relations - that is, better relations between bosses and workers. But the path to better relations does not lie via yet another round of legislative change.
It doesn't lie in one side or the other using their political influence to get the rules shifted in their favour. We could go on playing that tit-for-tat game forever. But we have achieved a reasonable - if, inevitably, imperfect - balance, and it's time we gave up the delusion that legislative change is key to better relations in the workplace.
That's a job not for politicians, lobbyists, ideologues or media urgers, but for individual employers, their workers and their workers' unions. The parties on the ground need to focus on achieving greater co-operation in pursuing the business's goals, with fair sharing of the resulting rewards.
One thing that makes me proud to be Australian is our tradition of egalitarianism. I love living in a country where Jack is as good as his master, where first names are so commonly used and men are more likely to address each other as "mate" than "sir".
When catching a cab overseas, I have to remind myself not to sit in the front with the driver and I love the way our government ministers - male and female - invariably sit up front in their chauffeur-driven cars, with staff members in the back seat.
It makes me proud to hear that in prisoner of war camps, the American soldiers tended to turn them into little economies and the Brits stuck rigidly to class privileges, whereas the Aussie officers and men shared all their meagre resources on the basis of need - meaning more of them survived.
And I was chastened years ago on an industrial relations junket as a guest of the German government. The Aussies in the group went out to see the sights one night in Munich. When, eventually, we decided to go back to the hotel we realised one of the group was missing.
I said I thought he was old enough and ugly enough to look after himself but an old union secretary demurred. "You blokes go back to the pub," he said quietly. "I'll have a look round for him. You never leave your mates behind."
You might think this egalitarianism would be reflected in a reasonably equal distribution of income between Australian households but that's far from the case. As the economics professor turned Labor politician Andrew Leigh reminds us in his most readable new book, Battlers and Billionaires, the latest figures show us having the ninth highest level of inequality among 34 rich countries.
It's probably not terribly well understood that, between Federation and the late 1970s, the gap between the highest and lowest incomes narrowed steadily, whereas since then, it has widened significantly.
The standard way to study the distribution of income is to compare the fortunes of the poorest fifth of households with those of the middle fifth and the top fifth. But Leigh has led the way in using income tax statistics to focus on changes in the share of total income commanded by the top 1 per cent of income earners.
He finds that, in the 1910s, the top 1 per cent (individuals who, by today's standards, enjoy pre-tax income of more than $200,000 a year) received about 12 per cent of all personal income. That is, 12 times what they'd get if incomes were distributed equally.
But this share declined steadily to reach a low of about 5 per cent of total income by 1980.
What caused this marked decline in inequality? Leigh shares the credit between the effect of the union movement (and, I'd add, our system of arbitration and conciliation) in protecting and improving wage levels, our governments' increasing reliance on income tax (with its progressively higher tax rates on higher income earners) and the development of our heavily means-tested system of welfare benefits, such as the age pension, child endowment and unemployment benefits.
He says the welfare system has twice the equalising force of the tax system.
The result was that, "under the prime ministership of Malcolm Fraser, the share of income held by the richest 1000th of Australians was only a quarter of what it had been under Billy Hughes [in the late 1910s]".
Since sometime in the late 1970s, however, this equalising trend - bringing the way the nation's income is shared more into line with our egalitarian ideals - has been reversed. The share of the top 1 per cent of income earners has recovered from 5 per cent to about 9 per cent.
Why? Leigh estimates the rise in inequality over the past generation can be attributed roughly equally to three factors, the first of which is technology and globalisation.
New technology's ability to give the best entertainers, sportspeople and even lawyers and other professionals access to a global market has hugely increased the incomes of a relative handful of individuals. Efforts to attract foreign chief executives to lead Australian companies have helped to force up the incomes of all chief executives.
Second is the decline of the union movement (including the move from collective bargaining to individual contracts), which has allowed many workers' wages to grow less strongly than other incomes.
Third is taxation, with moves to make income tax rates less progressive and rely more on indirect taxes.
My way of putting it is that, since the early 1980s, we have become more overtly materialistic in our values and political leaders have reacted by undertaking micro-economic "reforms", emphasising the primacy of economic growth and generally becoming more receptive to the demands of business.
The result is a lot more income, but also a lot less equal distribution of that income. The people urging this greater emphasis on materialism have captured most of the benefits while the rest of the community doesn't quite seem to have noticed what's going on.
I confess, I've been a winner from this process. What I'm not sure of is whether it leaves us better off as a community. Perhaps one day, the egalitarian facade will collapse and we won't like what we see.
I want to make four points very quickly. First, I’m not convinced we have an economy-wide problem with productivity - I don’t think the statistical evidence bears that out.
Second, I don’t believe we have a nation-wide problem with unreasonable unions exploiting an IR system that a Labor government has stacked in their favour, if for no other reason than that the great majority of employers, and the great majority of employees, work in what is essentially the non-unionised sector. So let’s not kid ourselves, what’s represented here today is a quite small and unrepresentative part of the economy.
Third, I do believe we need a more flexible labour market. But we have to be clear what flexibility means. If it’s a euphemism for governments changing the IR system to allow employers to ride roughshod over their workers - that employers should have all the rights and employees should have next to none - then we don’t need it - because it’s not in the community’s overall interests - and, in any case, as the defeat of the Howard govt reaffirms, politicians are rarely stupid enough to imagine they could bias the system that far against voting employees (who account for almost 2/3rds of the adult population) and live to tell the tale.
No, the flexibility we need is willingness on the part of workers to accept the often painful changes in their arrangements necessitated by the economy’s changing circumstances - by changes in technology, changes in industry regulation and changes in the threats and opportunities created by the rest of the world. Unless we achieve that kind of flexibility - and I believe for the most part we are achieving it, even in the unionised sector - we will pay for it with declining productivity and profitability and consequently a decline in our material standard of living.
But, fourth, I don’t believe our IR law is the key obstacle to achieving that kind of flexibility, nor is changing the IR law the way to achieve it. The key obstacle is bad industrial relations - that is, bad relations between individual employers and their employees; lack of trust - and if you think the answer to bad relations with your workers is to get the IR law changed in your favour so you can force your will on your workers you’re revealing exactly why you have a problem. A bad worker blames his tools and bad employers blame the IR law. (People who work for employer groups blame IR law because that’s what justifies their continued employment).
In my experience, workers turn to unions, and allow their unions to behave unreasonably, because they don’t trust their employers. Because they believe they’ve been lied to in the past, because their employers refuse to consult, because they don’t give their workers ‘voice’ except via the union, because they refuse to explain in detail and over and over what the problem is and why their proposed solution is the best one and because they won’t assure their workers they’re not trying to pull a fast one, that they’ll do all they can to minimise the pain and disruption involved - or because such assurances aren’t believed.
Bad employers beget bad unions. Then bad employers conclude the only answer to unreasonable unions is unreasonable employers. And then bad employers campaign to have the IR laws biased in their favour. Smart employers don’t blame their problems on the government and don’t delude themselves governments can solve problems they themselves can’t solve on the ground.
Fair Work Australia's monumental rebuff to the Transport Workers Union in its dispute with Qantas strikes a blow to the credibility of claims the Fair Work Act is some kind of conspiracy against employers.
The commission (which is what Fair Work Australia is in all but name) had no choice last week but to support Qantas management because, in both its tactics and its demands, the union was being so bloody-minded.
That's true even though, by grounding its planes worldwide and locking out all its staff last October, Qantas management could come up with no more creative solution to its bargaining problem than to be as bloody-minded as some of its unions.
This was not so much a win for "managers' right to manage" as the commission's commonsense judgment that all the industrial parties needed to face up to the harsh commercial realities threatening the survival of their business.
Here we had a union demanding 5 per cent annual pay rises at the same time it was fighting to prevent its employer from turning to cheaper sources of labour. That makes sense? These guys needed their heads examined.
Qantas's long-running disputes with three of its unions represent the only times Fair Work Australia has agreed to impose arbitrated resolutions so far in its brief existence. Remembering the way the old arbitration system had degenerated by the time we abandoned it in the mid-1990s, it's been vitally important to limit use of compulsory arbitration to cases of the greatest intransigence.
The whole point of the move from the centralised system to bargaining at the enterprise level was to get employers and unions dealing with each other face-to-face and responding their workplace's particular circumstances, rather than the old game of unions pulling on a strike to oblige the referee to intervene and impose a compromise.
It will be a pity if the commission's refusal last week to split the difference in the old way encourages other militant employers to seek to resolve disagreements with their workers the chaos-causing Qantas way.
Even so, the commission's refusal to go anywhere near splitting the difference provides powerful evidence it can be trusted to adjudicate issues sensibly in a system that hasn't swung the balance too far the unions' way.
Perhaps this explains why the national dailies - which, in their campaigning against the evils of Fair Work, seem to find another story about union atrocities for the front page most days - weren't greatly excited by the employers' big win last week.
The trouble with two such influential organs distorting their reporting of industrial relations so persistently and to such an extent is that between them, they can leave the public with a grossly exaggerated impression of the extent of union misbehaviour and the deleterious effect of Fair Work.
Read too much of that stuff and you come away thinking the union movement has risen from its deathbed to pose the greatest threat to our continued prosperity. Remember, union membership is down to 18 per cent of the workforce (from 50 per cent in 1982) and 14 per cent of private sector workers.
Another figure to keep in mind next time you read about the union monster poised to eat the economy's lunch: more than 80 per cent of enterprises don't have a union presence.
Two labour lawyers, Dr Anthony Forsyth, of Monash University, and Professor Andrew Stewart, of Adelaide University, note in their submission to the Fair Work review that "the concerns about union activities that so animate certain employers in the resources, manufacturing and construction sectors are very far removed from the issues confronting businesses in other parts of the economy".
"For the small to medium enterprises that predominate in sectors such as retail and hospitality, both unions and indeed collective bargaining are largely absent. Their concerns are much more likely, in our experience, to revolve around the costs and 'inflexibilities' imposed by the award system, and the renewed exposure to unfair dismissal claims that the Fair Work Act has brought."
So far, Fair Work has failed in its aim to greatly increase the extent of collective bargaining, with the proportion of employees covered by collective agreements increasing from 39.8 per cent of the workforce in 2008, to just 43.4 per cent in 2010.
Forsyth and Stewart argue many of these new agreements are effectively non-union instruments drafted by employers to replace the individual workplace agreements formerly available under Work Choices.
"Such agreements may be presented as 'collective', and they do require the endorsement of a majority of employees to be registered under the Fair Work Act - but only rarely are they the product of anything that could be said to resemble a bargaining process," they say.
Genuine collective bargaining is likely to be confined mainly to large, unionised workplaces in the public sector and to some sections of the private sector.
Much of the bitter complaint about Fair Work comes from the miners. Forsyth and Stewart say what some employers in the resources sector are seeking is a capacity to manage their businesses without the involvement of unions, and to undertake projects entirely free of any threat of industrial action.
"These aspirations are simply not compatible with the principle of freedom of association ... Indeed, to allow them to be fully realised would involve restrictions on the taking of industrial action, or on union rights of entry, that would go far beyond anything envisaged by the Howard government, even during the Work Choices period," they say.
Talk of Fair Work having unnecessarily bolstered "union power" should not only be kept in proportion, but also understood in the context of a broader ideological agenda that is profoundly antithetical to the principle of collectivism, they conclude.
When Peter Reith replaced Labor's Industrial Relations Act with the Workplace Relations Act in 1996, he changed the act's principal objective from the "prevention and settlement of industrial disputes" to "providing a framework for co-operative workplace relations". I'm not sure the Howard government always lived up to that ideal, but it was certainly the right idea.
John Howard was fond of saying we should emphasise the things that unite us, not the things that divide us. Again, I'm not sure he always lived up to that, but it was the right idea - particularly for relations between bosses and workers.
The principal objective of the Fair Work Act is to provide a "balanced framework for co-operative and productive workplace relations that promotes national economic prosperity and social inclusion". That's even better.
At a time when so many of our industries are under so much pressure to change from so many sources - the high dollar, the prudent consumer, the digital revolution, the deregulation of world airlines - we need all the co-operation we can get between employers and unions.
Most economists have rejected the claims of some that our seemingly poor productivity performance over the past decade can be blamed on the Fair Work Act that came into full effect only at the start of 2010.
But that's not the same as saying the act is without fault. And it's certainly not to deny the need for our industrial relations to be as conducive as possible to improved productivity.
If we were to believe all we see and hear, we'd conclude relations were pretty bad at present. I'm not convinced that's true. More likely, a handful of highly publicised, bitter disputes has provoked a lot of tough talking on both sides of the fence, and left us with the impression things are worse than they really are. Even so, too much of the debate about Fair Work has focused on whether it's got the balance right between the adversaries, and not enough on how much it's helping to turn adversaries into partners.
There are plenty of people who've always hated the unions, and plenty who've always hated the bosses. All of us can be lured into playing that game but, in all our interests, we need to resist the temptation. It's self-indulgent at a time when we need to pull together.
For industrial relations to become more co-operative, and hence more productive, we need give and take on both sides.
What managers need to accept is that workers are entitled to reasonable treatment. Managers want to do well out of their association with a business; so do workers. And, to adapt a quote, the economy was made for man, not man for the economy.
There are plenty of ways to improve the productivity of labour - and certainly, to cut the cost of labour - that involve making life more uncertain, insecure, unpleasant and even unhealthy for workers. If that's what "flexibility" means, it's hardly surprising workers resist it. Good managers resist the temptation to go down that shortcut to supposed prosperity.
Many proposals to "outsource" production or resort to contract labour aren't about two-way flexibility but about cutting costs by escaping existing in-house arrangements over pay and conditions. Good managers need to do better than that.
Australia's workers are relatively highly paid, with good conditions. This is a good thing, not a bad thing. It's certainly nothing to try to make workers feel guilty about. As any economist will tell you, our high pay rates are justified by our relatively highly educated and skilled workforce, by the high-quality capital equipment it works with, and by the sharing of this nation's considerable wealth.
The goal of management should not be finding ways to escape these high costs, but finding ways to defend our high wage rates with high productivity. In this endeavour they're entitled to full co-operation from their workers.
What workers need to accept is that the world economy is changing rapidly and as it changes we must change. Businesses must respond to the changing commercial pressures on them, or they will fail.
In a capitalist economy, businesses need to earn an adequate return on the shareholders' funds invested in them. In the final analysis, managers are paid to ensure their business remains profitable. They will do whatever it takes.
Such profits are not illegitimate, and they're not available to be plundered by workers demanding excessive wage rises or refusing to change in response to the changing pressures on the business.
Workers and their unions simply cannot pretend the pressures for change bearing down on the business are a problem for management, but not for them. The more they resist a creative response, the more managers will go around them in the search for cheaper labour.
Change - painful change - can't be avoided by attempting to strongarm management into including guarantees of job security in enterprise agreements. Guess what? There are no guarantees in an ever-changing market economy.
Much of the change being imposed on various industries will inevitably involve redundancies. The most workers can expect is decent redundancy pay, the avoidance of excesses designed to impress the sharemarket, and a preference for redundancies to be voluntary.
Professor Paul Gollan, of Macquarie University, argues the key to greater co-operation in the workplace is giving workers greater "voice" - formal arrangements within businesses by which employees are consulted, given their say and encouraged to propose improvements and "add value". Studies confirm such processes are associated with greater productivity.
Senior managers' "prerogative" - about which I say more in my little video on the website - is to ensure their staff is fully informed about the challenges facing the business.
THE most disappointing thing about the review of the Fair Work Act and the reaction to it is the way they push industrial relations towards being more adversarial rather than less.
At time when so many businesses face unusually challenging pressures for structural change, we need more co-operation between the industrial partners, not more class struggle and barracking from the sidelines.
The standard approach to industrial relations reform is to see it as about "getting the balance right". There's a fundamental conflict of interest between labour and capital, we think, plus a wide difference in bargaining power, so the objective is to ensure the eternally battling parties are fairly evenly matched.
That's the public policy objective, of course. If you're on one side or the other, your objective is simply to get the rules changed in a way that gives you the drop over the other side.
The conventional view is that, with its attempt to install individual contracts as the chief form of bargaining and marginalise the unions, WorkChoices pushed the balance too far in the direction of employers.
So it was fair enough - particularly after voters seemed to reject WorkChoices so decisively - for Fair Work to push the balance back the other way. The review's job was to decide whether the balance had now been pushed too far the other way.
The trouble with the review is that it didn't do much more than adjudicate the rival claims, legal section by section. With two of the three members of the review being lawyers - and one a judge - you couldn't have expected anything else.
Although the media portrayed the employer groups' reaction to the review as angry, I suspect they were quite pleased. They won more points than they expected to, while the unions won fewer.
One trouble with the traditional approach to regulating industrial relations - supervise a fair fight - is that it's reinforced by all our other adversarial institutions. It comes naturally to lawyers, but also to politicians.
There's nothing Julia Gillard and Labor would love more than a rematch on industrial relations and there are plenty of urgers on the Liberal sidelines spoiling for a punch-up.
For once, however, Bruiser Abbott isn't tempted, judging correctly that such a them-and-us contest would greatly favour "them". Electorally, WorkChoices is still toxic.
Should Abbott win the election, it will be interesting to see what gap emerges between his pre-election rhetoric and his post-election policies. Many of his backers are hoping for a yawning chasm.
Just as the traditional industrial relations approach is adversarial, so the IR experts are highly factionalised. Most academic experts long ago chose sides between the unions and the employers. Trying to find experts who can see both sides of the argument is one of the trials of my job.
Wherever there are adversaries, there you can expect to find the media, doing their best to increase the fun by amplifying the conflict. What's new is to have the national dailies taking sides in their reporting, with the union side of the story virtually unmentioned.
Whenever there's a brawl, it's hard for interested bystanders to resist the temptation to join in. I suspect that's the story with big business leaders: they're not greatly affected, but they know whose side they're on.
Consider the results of last week's CEO Pulse survey of 96 chief executives. Fully 82 per cent of them think Fair Work is having a negative impact on productivity. That's for the whole economy. For their own industry, it's down to 60 per cent. And for their own business? Down to 51 per cent, with 45 per cent saying it's having no effect.
Coming from people with such obvious alignment, that tells me we don't have a lot to worry about. It reveals the classic survey gap between first-hand experience and the general impression people have picked up, mainly from the media.
My guess is a few big, militant unions are taking every advantage of Fair Work to make unreasonable demands. And they're being vigorously opposed by a few equally militant, unreasonable big businesses.
But we shouldn't allow people with a vested interest in conflict to misdirect us. The real problem with Fair Work is that it's not doing as much good as it could be at a time when bosses and workers need to pull together.
In all the argument about the rights and wrongs of Julia Gillard's Fair Work Act, it's easy to forget we've been making radical changes to our industrial relations and wage-fixing system since the late 1980s.
Since the labour market is such an integral part of the economy, it's reasonable to suppose those changes have made a significant contribution to the economy's markedly improved performance over the past two decades.
What you can't do is look at the macro-economic record and confidently attribute this improvement or that deterioration to either the Fair Work Act or the Work Choices regime that preceded it.
Why not? Because, particularly if you're talking about our weak productivity performance, the timing doesn't fit. Also because neither regime was or has been in force long enough to be sure they've had much effect on anything. Changes take time to make a mark.
But, above all, because when you take just one factor and use it to explain some particular development in the economy, you're unconsciously assuming ceteris paribus - all else remains equal. And in the real world, that's never true. For all you know, the development may be explained by some other factor, or combination of factors.
So whenever you see a protagonist in the debate confidently claiming the slowdown in productivity can be blamed on the industrial relations approach they oppose, know they're talking prejudice, not reasoned analysis.
As this week's review of the Fair Work Act reminds us, we've been overhauling our industrial relations and wage-fixing system for ages. For most of the time since Federation we operated under a uniquely antipodean system of federal and state "conciliation and arbitration".
In theory, all strikes were illegal because the system made them unnecessary. In practice, strikes were frequent, but short.
In theory, the commission running the system would provide conciliation to differing employers and unions, trying to help them reach an agreement. If this didn't work it would compulsorily arbitrate to impose a solution, usually roughly splitting the difference. In practice, disputes were almost always settled by arbitration. Unions would pull on a strike to get the umpire to intervene and impose a decision.
In theory, wage rises were controlled by the commission in a "national wage case", making them nationally uniform for all workers subject to particular "industrial awards", on which the system was built. In practice, you could get pay rises other ways, including by breaking out of the system if you had enough muscle. Some increases would "flow on" from one key award to all awards.
Get the feeling it wasn't working very well? The first attempt to restore order was to limit wage rises to those awarded by the national wage case, where wages were indexed to the consumer price index.
But indexation was abandoned in 1987 and wage rises were awarded in exchange for the removal of "restrictive work practices" (inefficiencies). Awards were restructured to reduce demarcations between people on different awards at the same workplace and to make awards more flexible.
In 1991, the commission introduced "enterprise bargaining" between unions and employers at the level of the individual workplace. It applied a "no-disadvantage [to employees] test" before ratifying agreements. In 1994, with a new Industrial Relations Act, a more formal system of collective bargaining at the enterprise level was introduced, the national wage case was ended and replaced with a system of small annual "safety net" award wage increases for workers unable to negotiate an increase.
All that happened under the Hawke-Keating government. From early 1997 the Howard government's Workplace Relations Act promoted the use of individual contracts (subject to the no-disadvantage test) by introducing "Australian workplace agreements", increased the emphasis on enterprise bargaining by reducing the content of awards to 20 "allowable matters" and reduced union power by outlawing compulsory unionism and making strikes legal ("protected") only during the negotiation of new agreements.
The Howard government's second major set of changes, Work Choices, took effect in 2006. It moved from a federal to a national system, sought to make individual contracts the main form of wage agreement by removing the no-disadvantage test, greatly increased the restrictions on unions where employers persisted with collective bargaining, and largely sidelined the commission.
After much criticism, in May 2007 John Howard significantly watered down these provisions by restoring a version of the no-disadvantage test and reinstating close scrutiny of individual contracts before approval.
Labor's Fair Work Act didn't really take effect until the start of 2010. It ended legislative recognition of individual contracts and restored collectively bargained enterprise agreements as the main form of wage-fixing. It largely restored the role of the commission under the cutesy title, Fair Work Australia. It reformed the award system, reducing more than 3000 federal and state awards to 122 simpler and less prescriptive "modern awards".
Some silly partisans have tried to blame Fair Work for our weak performance on the productivity of labour, but the figures don't bear this out. Productivity improved fastest under the Keating government's regime and the early years of the Workplace Relations Act, but then slowed and the weakness continued under both Work Choices and Fair Work. In any case, this ignores the huge effect of the special factors affecting productivity in mining and utilities.
But productivity isn't the only test of improved labour market performance. What about strikes? Working days lost per 1000 employees averaged 232 a year in the last days of arbitration, 176 under Labor's first Industrial Relations Act, 96 under its second act, 54 under Howard's Workplace Relations Act, 13 under Work Choices and 18 under Fair Work.
Some have blamed Fair Work for the small jump in days lost last year but most of this is explained by disputes involving the O'Farrell government and NSW public servants, who aren't covered by Fair Work.
Despite employer complaints, the minimum wage grew in real terms by less than 9 per cent over the 11 years to 2012. It dropped from 62 per cent of median full-time earnings in 1997 to 54 per cent in 2010.
The review of the Fair Work Act concludes that, since it came into force, "important outcomes such as wages growth, industrial disputation, the responsiveness of wages to supply and demand, the rate of employment growth and the flexibility of work patterns have been favourable to Australia's continuing prosperity, as indeed they have been since the transition away from arbitration two decades ago".
I've realised we won't be satisfied with the state of the economy until the Liberals get back to power in Canberra. That's not because Labor's so bad, or because the Libs would be so much better, but because so many people have lost confidence in Labor as an economic manager.
The conundrum is why so many people could be so dissatisfied when almost all the objective indicators show us travelling well: the economy growing at about its trend rate, low unemployment, low inflation, rising real wages, low government debt - even a low current account deficit.
And yet the media are full of endless gloom, not to mention endless criticism of the Gillard government. Last week the NAB indicator of business confidence dropped to a 10-month low. And while the Westpac-Melbourne Institute index of consumer confidence recovered almost to par, that's a lot weaker than it ought to be.
Admittedly, the good macro-economic indicators do conceal a much greater than usual degree of structural adjustment going on. But these adjustments - which are generally good news for consumers - seem to be adding to the discontent rather than the root cause of it.
The Gillard government has been far from perfect in its economic policy, but you have to be pretty one-eyed to judge its performance as bad. Similarly, only the one-eyed could believe an Abbott government would have much better policies. It's likely to be less populist in government than it is opposition but, even so, Tony Abbott is no economic reformer.
Gillard's problem is not bad policies, it's Labor's chronic inability look and act like our leader and command the public's respect and comprehension. This is a government that doesn't believe in much beyond clinging to office, and the punters can smell its lack of principle.
To be fair, on the question of economic competence Labor always starts way behind the ball in the public's mind. Decades of polling reveals the electorate's deeply ingrained view the Libs are good at running the economy and Labor is bad.
This is what feeds both the Libs' born-to-rule complex - their utter assurance that all Labor governments lack legitimacy - and Labor's barely concealed inferiority complex.
The Hawke-Keating government did manage to turn the electorate's conventional wisdom on economic competence around for most of its 11-year term.
Labor in its present incarnation has never been able to pull this off. It's lost its race memory of how to govern. All this is compounded by the manner of Gillard's ascension, her non-maleness, her inability to make the punters warm to her and the uncertainties (and broken promises) of minority government. But the problem was apparent before Labor decided it could stomach Kevin Rudd no longer.
It's true the media environment is more unhelpful than it was in Hawke and Keating's day. Increased competition has made the media more relentlessly negative - more uninterested in anything but bad news - which must eventually have some effect on the public's state of mind.
In their search for a new audience in response to the challenge of the digital revolution, part of the media has become more partisan and more unashamedly hostile to all things Labor.
You see this in the radio shock jocks, but also in the national dailies, which have adopted the Fox News business model of telling a section of the potential audience what it wants to hear, not what it needs to know.
It seems a universal truth of the commercial media that the right-leaning audience is both more numerous and better lined than the left-leaning.
So, for instance, a favourite commercial tactic at present is to search for, and give false prominence to, all stories that portray our almost-dead union movement as a threatening monster about to engulf big business.
Boosting productivity equals making industrial relations law more anti-union. End of story. When Treasury people give speeches that fail to echo this infallible truth it's a clear sign they've been "politicised" and we need to find a few hyper-ideological economics professors to misrepresent what they said.
When Hawke and Keating were in power, business leaders judged it wise to keep their natural political sympathies to themselves and work with the elected government.
But with Gillard so far behind in the polls, so ineffective in maintaining relations with big business, with the general media so anxious to accentuate the negative and a significant part of the serious press telling them how badly they're being treated and holding out a microphone, it's not surprising big business people have become so unusually vocal in their criticism of Labor.
When God's in his heaven and the Libs rule in Canberra, business people jump on anyone they consider to be "talking the economy down". But so great is their loathing of the Gillard government that business is leading the chorus of negativity. How they see this as in their commercial interest I'm blowed if I know.
While John Howard was in power, the index of consumer sentiment showed respondents who intended voting for the Coalition to be significantly more confident about the economy than those intending to vote Labor. At the time of the 2007 election, however, the two lines crossed and Labor voters became significantly more confident than Coalition voters.
The latest figures show the overall confidence index at 99, while the Labor voters' index is up at 124 but the Coalition voters' index down at 79. Since Coalition voters far outnumber Labor voters, it's clear a change of government would do wonders for measured consumer confidence.
The same would probably be true for measured business confidence. Suddenly, business would be back talking the economy up, and the partisan media would revert to backing up our leaders rather than tearing them down.
But how much difference that would make to the objective economic indicators is another question.
Whether or not they realise what they're doing, Australia's business people, economists and politicians are in the process of dismantling the weekend and phasing out public holidays. And they're doing it in the name of making us better off.
Historically, the two arrangements that have protected the weekend and public holidays from encroachment by employers are state government restrictions on trading hours and the requirement in industrial awards that employees required to work at "unsociable hours" be paid an additional penalty rate.
Charging employers a penalty was intended to discourage them from making unreasonable demands on their employees unless absolutely necessary.
The first assault on community-wide days off came in the second half of the 1980s with the deregulation of trading hours as part of micro-economic reform.
Not much later, the move to bargaining over pay rises, and then bargaining at the enterprise level, allowed employers to push for penalty rates to be abandoned in return for higher "annualised" wages.
Employers inculcated the view penalty rates were an anachronism standing in the way of progress and modernity. Many still think that way. One of the goals of John Howard's Work Choices was to make it easier - and less expensive - for employers to get rid of penalty payments.
(Another of its provisions was to make it easier for workers to "cash out" part of their annual leave - to exchange days off for money. How this squared with the original rationale for forcing employers to give their workers paid holidays was never explained.)
Julia Gillard's Fair Work changes to Work Choices represented the first setback in the push towards the 24-hour, seven-day-a-week economy. They made it harder for employers to buy out penalty payments. And the "modern award" process - which replaced the various state awards with single national awards - inevitably involved increasing some penalty rates in some states.
But now the push has resumed. Last week, the NSW government moved to join Victoria in allowing all shops - not just those in the CBD - to open on Boxing Day. Now, say the retailers, all we need is for restrictions to be lifted on Easter Sunday.
And this week, the major banks revealed their intention to push for the definition of ordinary hours in the national banking award to be extended to include Saturday afternoons and all of Sundays. The banks say they'd still pay penalty rates, but the union doubts this promise would last. It says the banks' goal is to be able to roster employees to work any five days of the week without recognising traditional work patterns.
What's the banks' justification for seeking such a change? To promote "flexible and efficient modern work practices in a way that has proper regard to the considerations of productivity and employment costs".
Ah yes. It would make the economy more flexible and efficient, and thus raise productivity. Well, in that case, say no more. Silly me.
It's not hard to see why there's been so little public questioning of this push towards a 24/7 economy. It's highly convenient to be able to shop whenever we have the time. The more two-income families we have, the more we value the ability to shop throughout the weekend.
It also fits with the trend towards leisure being commercialised - becoming something we buy (a meal out, a show) rather than something we do (kick a football in the park with our kids).
But this belief that life would be better if shops, restaurants and places of entertainment were open all hours rests on the assumption you and I won't be among those required to work unsociable hours to make it happen. An even less obvious assumption is that the push for a 24/7 economy will stop when it has captured shopping and entertainment; it won't continue and reach those of us who work in factories and offices.
As usual, the "flexibility" being sought is one-sided. Employers gain the ability to require people to work - or not work - at times that suit their firm's efforts to maximise its profits.
If those times don't fit with your family responsibilities - or just with your desire to enjoy your life (you selfish person, you) - or if the boss's requirements keep changing in unpredictable ways, that's just too bad.
It's the price to be paid for getting more prosperous (with the boss's standard of living rising quite a bit faster than yours).
But this is the part of modern life that makes no sense to me.
Accepting the economists' argument that keeping the economy running for more hours in the week is more efficient and so will raise our material standard of living, how exactly will this leave us better off?
Why does being able to buy more stuff make up for husbands and wives being able to see less of each other, having less time with the kids, having a lot more trouble getting together with your friends, and having your day off when everyone else is at school or working?
Why is this an attractive future? Why should our elected representatives reorganise our economy in ways that suit business and promote consumption, but do so at the expense of employees' private lives?
This is a classic case of business people, economists and politicians urging on us a mentality that prioritises the economic - the material - over the other dimensions of our lives. Yet again, no one pauses to ask what these "reforms" will do to our relationships.
Why is it the politicians who bang on most about the sanctity of The Family are also those most inclined to make family life more difficult?
The shape of our economy is always changing, but lately the pace of change seems to have got a lot faster. Some industries are expanding, while others contract. Particular industries are having to change the way they operate - or the range of products they produce - in response to many pressures.
These changes almost always leave us better off materially. ''Structural change'', as economists call it, has been central to the process by which people in the developed world have become ever more affluent over the past 200 years.
The greatest force driving structural change is technological advance: the invention of better ways of doing things, new things to do and countless labour-saving machines. Globalisation has been driven partly by government policy, but mainly by the information and communications technology revolution, which has hugely increased the speed and reduced the cost at which information, money and people move around the world.
This has given us the global financial markets, but also the rise of the developing economies, particularly in Asia. Those countries' growing demand for our minerals and energy is bringing us great wealth but is also bringing intense pressure for change in the shape of our economy. Mining and the services sector are expanding, whereas manufacturing, the tourism industry and education exporters are being forced to adjust.
Then there are all the industries under pressure from the internet and the emergence of ''new media'': newspapers, free-to-air television, book publishing and book selling, and retailers whose customers have discovered how much more cheaply they can buy some things on the net.
The trouble with structural change, of course, is that the benefits go to the customers - new products, wider choice, lower prices - while all the problems go to the people working in the disrupted industries.
Managers have to find a new plan for their firm's survival. Meanwhile, workers go through considerable uncertainty and anxiety. At best, they have to shift to doing something completely different. They may be required to do a lot more for the same money. Perks may be cut. Or their prospects of advancement curtailed.
They may lose their status as permanents. At worst they get shown the door and take a long time to find another job. That job may well involve doing the same work for less money and poorer conditions - perhaps for the business to which their work was outsourced.
Managers have no choice but to face up to the business's changed conditions and cut their cloth accordingly. When they resist change or pretend it isn't happening they just make things worse. Non-unionised employees have to cop whatever solutions managers impose on them. But well-unionised employees have more power to resist, or at least have their viewpoint taken into account.
No firm fits this frame better than Qantas. It has lost its protected status as the nation's flag-carrier and must find a strategy for competing with myriad competitors, many of them low-cost. It can no longer afford the high salaries and cushy conditions its pilots, engineers and other employees have become accustomed to.
The problem at Qantas was not that workers wanted too much in pay rises - that's the standard stuff of such bargaining - but that they wanted to use their industrial muscle to force management to agree never to change the business in ways that disadvantaged their employees.
Sorry, but that's not possible. Here you see the grounds for business's latest complaint against Julia Gillard's Fair Work changes to industrial relations. Gillard has removed the list of ''prohibited content'' restricting the matters over which management and unions may bargain. This has permitted the unions to range far beyond claims about wages and conditions to issues that concern ''managerial prerogative'' and thus challenge ''management's right to manage''.
It's important to remember we're still engaged in the difficult transition from almost a century of compulsory arbitration - where, as soon as a strike began the umpire would step in to impose a settlement on both sides - to a new world of collective bargaining.
A central goal in making this transition - one expressed many times by the now-bellicose Peter Reith - is to encourage the two sides to bargain without external intervention. The goal was a new era of reduced industrial disruption as the parties recognised the great extent of their common interests and put less emphasis on their (undoubted) conflicting interests.
Right on. So I don't think banning debate about management decisions is the smart way to go. That would mean the law advantaging one side, giving managers permission to ride roughshod over the interests and even the opinions of their employees.
Half the trouble at Qantas is the employees' failure to recognise how the game has changed for their company, robbing them of their former bargaining power. The other half is the arrogance of management in their resort to ''managerial prerogative'', in their failure to explain and debate the new realities with their staff.
It's painfully clear management-employee relations within Qantas are utterly poisonous. The blame for that should be shared equally. The fate of Qantas is important in its own right, but it's more important as a case study in how big, unionised companies cope with structural change.
The industrial parties need to reach an accommodation, not rush to the ref. But I agree with Professor Paul Gollan, of Macquarie University, that Fair Work needs to provide a better mechanism to help the parties argue through their differences in cases where belligerence on either side threatens to impose unnecessary hardship on the parties and the public.
It's a compelling narrative: in the 1980s we deregulated the financial markets, slashed import protection and deregulated many markets for particular products. But then it dawned on us that deregulated, highly competitive product markets could hardly co-exist with a centralised, highly regulated labour market.
So Paul Keating started to deregulate the labour market, ending centralised wage-fixing and moving to collective bargaining at the enterprise level. The Liberals' Peter Reith introduced a formal system of individual contracts, Australian workplace agreements, then John Howard completed the process of deregulation by introducing Work Choices.
But then Labor used Julia Gillard's Fair Work Act to re-regulate the labour market. So we've reverted to our original problem of having a regulated labour market that simply doesn't fit with deregulated, trade-exposed product markets.
Just one problem with this neat analysis: it adds up only if you don't actually know much about how the labour market is regulated. The notion that Work Choices deregulated the market and Fair Work re-regulated it is simple, but makes no sense.
Consider this: the Work Choices legislation was much longer, more complex and more intrusive than the law it replaced. Does that sound like deregulation? The Fair Work legislation is considerably shorter and more straightforward. Does that sound like re-regulation?
One of the main complaints against Fair Work is that it has removed the list of ''prohibited content'' about which employers were prevented from agreeing with their unions. Inserting prohibitions in the law is deregulation? Removing prohibitions is re-regulation?
One thing Work Choices did was greatly bureaucratise the right to take industrial action, with the intention of discouraging it. Unions have to hold a postal ballot of their members and achieve a certain proportion of votes to commence a bargaining period after the expiry of their last enterprise agreement.
Then they have to hold another postal ballot before they can undertake protected industrial action during the bargaining period. Then they have to give 72 hours' notice of any action they actually intend to take.
By contrast, employers don't have to jump through any hoops or give any notice when they decide to retaliate by locking out their staff during a bargaining period.
These provisions of Work Choices were carried over largely unchanged in Fair Work. Do they sound terribly pro-union? Do they sound like deregulation? Does continuing them in Fair Work constitute re-regulation?
Confused yet? The simple truth is that ''deregulation'' isn't a sensible description of what Work Choices did and, in consequence, ''re-regulation'' isn't a sensible description of what Fair Work does.
Here's the point: the labour market has always been highly regulated. It remained highly regulated under Work Choices and it's still highly regulated under Fair Work. It's always likely to stay highly regulated for a simple reason: unlike all other markets, the labour market deals with human beings rather than the exchange of inanimate objects.
As a matter of politics, common humanity and common sense, the treatment of people in the labour market will always be carefully regulated. We are, after all, running the economy for the benefit of people.
What changes from time to time is not so much the degree of regulation as the objectives of that regulation. There's a fundamental imbalance of bargaining power between an individual worker and even the smallest employer.
So the main issue the regulation deals with is what should be done about that imbalance. The usual answer - the world over - is to permit workers to bargain collectively.
What Work Choices did - in its original form, at least, before Howard realised he'd gone further than the public would cop - was make individual bargaining far more attractive to employers by removing the ''no-disadvantage test'' which had limited the extent to which workers' wages and conditions could be reduced. A lot of the regulation it added to the system was to constrain the freedom of those employers who chose to continue bargaining collectively with their employees. And it further tightened restrictions on what unions could do.
Howard shifted the balance heavily in favour of employers and tried to delegitimise the (already declining) union movement. It's hardly surprising Labor used its first opportunity to shift the balance back the other way. What is surprising is how many of Work Choices' anti-union provisions it left intact.
All systems of collective bargaining permit unions to take ''protected'' industrial action, subject to certain tight conditions. Why do they need protection? What are they protected from? From being sued by employers in the civil courts because of the economic damage that action has done to the employers' businesses.
See what this means? It means that even if we really did attempt to deregulate the labour market by abolishing the industrial relations act, it would still be regulated by ordinary commercial law and common law. In that imaginary world, it would not be illegal to strike or take other industrial action, but any damage unions inflicted on employers - which, after all, is the very object of industrial action - would leave the unions open to being sued.
So, for all practical purposes, collective bargaining would be impossible - would be prevented by (ordinary civil law) regulation - unless governments regulated to specify the circumstances in which it would be permitted by being protected from actions for civil damages.
Still think it makes sense to talk about deregulating or re-regulating the labour market? There's always legitimate ground for us to debate whether the balance our industrial relations regulation strikes - between protecting workers on the one hand and achieving an efficient-functioning economy on the other - should be shifted in one direction or the other.
But shouting slogans at each other - it's deregulation if I like the latest changes; it's re-regulation if I don't - won't advance the debate one jot.
In the quest to lift the flagging productivity of labour, we can go back to old, failed ideas or move on to new ones. Last week Peter Reith came out of retirement to urge the Liberals to get tough with workers and reopen class warfare.
Want to get more out of your workers, make them work at unsociable hours for normal hourly rates, keep wage rises tiny or simply whittle away at their conditions? Re-introduce statutory individual contracts and split workers off from their union so they lose all bargaining power.
Does this mean you spend most of the year negotiating one-on-one with your employees because Mary wants to leave early on Mondays, Jenny and Julie want to job-share and Bill wants time off to do a tech course?
Hell, no. That's just the advertising. In reality you get your lawyer to cook up a single contract document that runs all your way and tell each of your employees to feel free to leave if they don't want to sign.
It's a good way to minimise wage costs if you don't mind having a surly, resentful staff, if they're supervised tightly enough for you to be confident they won't be able to find ways to get back at you, if they're mainly unskilled and if unemployment is high.
But if their work is skilled, if you need them to accept a high degree of responsibility with limited supervision, if there are shortages of skilled labour and rival employers are on the poach, it's a great way to damage a good business.
I'm sure there are second-rate business people urging the Libs to restore their former ability to screw their workers with impunity, but I hardly think it's the way to a brighter, more productive future.
The first stage of employer enlightenment comes when they seek to improve employees' performance with monetary incentives: merit increases to selected workers, bonuses or other forms of performance pay.
This approach makes sense to model-bound economists and money-minded executives, but industrial psychologists know it often backfires. Workers do care about pay, but they care less about the absolute level of their pay than about its relative level - that is, what they're getting compared with others are getting, particularly those they consider their equals. In other words, play favourites with pay and you're just as likely to create dissatisfaction as satisfaction.
The other thing to remember (which many economists and business people don't) is that when you establish a culture that good performance is rewarded with money, you tend to demotivate people from performing well for other, more intrinsic reasons. You debase the currency, so to speak.
What never occurs to second-rate managers - the sort of managers who run to politicians for legal solutions to their inadequate relationships with their workers; the sort who never reach the ultimate stage of human-relations enlightenment - is that most workers want to work in an environment in which they can trust their bosses and be trusted by them, where they can give and receive loyalty.
Why wouldn't you want to work in such an environment? Recent research by two Canadian economists, John Helliwell, of the University of British Columbia, and Haifang Huang, of the University of Alberta, shows that life satisfaction - happiness - is significantly higher among workers who work where they rank management trustworthiness highly.
For example, the roughly one quarter of surveyed workers who rated trust in management at nine or 10 on a 10-point scale also rated their satisfaction with life at 8.3 on a 10-point scale, compared with an average of 7.5 for the quarter or more who rated trust in management at five or below.
And, get this: for the whole sample of workers, a change in trust in management of just 0.7 points had the same effect on life satisfaction as a 31 per cent change in income. But why should a hard-headed manager care about the happiness of the people working for them?
Well, one reason is that, unless managers are money-hungry to a quite inhuman extent, they themselves would get more satisfaction being the boss of an outfit where everyone gets on and pulls together.
Even a manager should see there is more to life than money (and, please, spare me the sermon about how corporation law requires you to maximise profits for the shareholders). But, if that's not a good enough argument for you, try this: longitudinal research finds that happier people tend to be more successful in all dimensions of their lives - their incomes, their careers, their health and their relationships.
It's not hard to believe successful people are happier, but this is saying the reverse: being of a happier disposition tends to make people more successful. More specifically, happy workers make more money, receive more promotions and better supervisor ratings, and are better citizens at work.
So, if employers want to offer a satisfaction-inducing working environment, what must they do? The British psychologist Peter Warr has identified five factors as important to job satisfaction. First, opportunities for personal control. This means having some discretion - autonomy - in how to tackle problems, apply skills and envisage outcomes.
Second, jobs with a variety of tasks. Many jobs are naturally varied but highly repetitive jobs are soul-destroying. When workers work in teams, roles can be shared.
Third, good supervisors provide a balance of freedom and supervision. The ideal ratio of positive to negative feedback is about six to one.
Fourth, jobs that afford people respect and status are likely to engender feelings of competence and pride. In the best organisations, the respect that is inherent in some high-status jobs can be extended to all jobs.
Finally, have clear requirements and information on how to meet the requirements.
When Dr Martin Parkinson gave a speech urging a renewed effort to lift the productivity of labour, the subeditors at the ABC knew just what he meant: Treasury secretary says we should work harder. Whoops.
That ain't what he meant. As the old slogan says, improving labour productivity involves "working smarter, not harder". Indeed, increasing productivity requires producing more from the same inputs. So increasing output by increasing labour inputs clearly doesn't do the trick.
The standard way to raise the productivity of labour is to supply workers with more and better machines to work with. But Parkinson is talking about something more demanding, more reforming than this. He wants a renewed round of microeconomic reform.
He's right in saying the rate of improvement in labour productivity has "slowed sharply" since the start of the new century. He argues only part of this is explained by the delay while the mining industry's partially installed production capacity comes on line.
So what kind of reform do we need to buck things up? Well, a lot of people think the answer's obvious. Peter Reith, a former Liberal minister for workplace relations, for instance: "Labour market issues are at the heart of productivity and, in the end, about living standards. Australia's productivity performance has been poor in recent years. We cannot pretend this problem does not exist."
Another Howard government luminary, Peter Costello, would be the first to agree. He once said: "We need a new dose of active, wide-ranging and vigorous industrial relations reform in this country. No single reform would boost productivity in the Australian economy to the same extent."
He said that in 2005, in support of John Howard's Work Choices reforms. But Work Choices is no more. First it was watered down by Howard himself when finally he realised how unpopular it was, then it was further dismantled by Julia Gillard's Fair Work Act. And Tony Abbott promised repeatedly that Work Choices was "dead, buried and cremated".
I suspect a lot of Liberals' consciences are troubling them over Work Choices. They share the belief of Reith and Costello that industrial relations is the one key reform that would fix productivity. They know it's politically difficult, but the Liberals have to stand for something and reversing the Fair Work Act is something worth fighting for.
If the Murdoch press is to be believed, there's mounting disaffection among employers at the way Fair Work has re-regulated the labour market. Union power is back, we read, and strikes and excessive wage settlements are on the way.
I remain to be convinced this is anything more than employers' paranoia. Big wage increases in the mining industry are only to be expected during a mining boom. It's actually the way market forces work to shift labour from declining industries to expanding industries.
It's hard to believe the union monster could be revived. Union membership in the private sector is down to 14 per cent. Strike activity is a fraction of what it used to be and still falling. And though it doesn't prove much (because, in the real world, all else never stays equal), wages are growing at an unworrying 4 per cent annual rate.
But is industrial relations reform the key to restoring our productivity growth? I doubt it's the magic bullet the Liberals are convincing themselves it is. And Parkinson's agenda for further reform included not a hint he thought it important.
Even so, I don't doubt that reinstating the weakening of workers' bargaining power against their clearly more powerful employers by frustrating collective bargaining and promoting individual contracts, tolerating summary dismissal of workers and removing legislative protection of wages and conditions would indeed raise the productivity of labour (not to mention enhancing profits at the expense of wages).
It would do so mainly by giving employers far more freedom to shift workers around - to hire and fire at will, to bring workers in or send them home, and to split their shifts, move them between branches, put them on rolling shift work and make them work on weekends and public holidays all without additional compensation.
In other words, removing most of the paraphernalia of industrial relations legislation would give employers almost the same freedom to economise on the use of labour as they already have in managing the inanimate raw materials and machines that contribute to the production process.
It would impart to the labour market the supreme "flexibility" that Parkinson and other economists extol as the sine qua non of economic efficiency.
There's just one small problem, one the economists' model ignores rather than highlights: unlike all the other "factors of production", . Every unit of the stuff comes with a human attached. And each human unit is a bit different.
This means labour can give you trouble that other raw materials can't. The worse you treat it, the more it looks for ways to get back at you. The worse you treat it, the more you have to spend supervising it to prevent shirking.
You can't give yourself a huge pay rise without making it think it's underpaid. You can treat it inconsiderately only when it's in plentiful supply. If it's in short supply, it will up and leave. Smart employers (and conservative politicians) understand this, dumb ones don't.
But all that's by-the-by. The real point is that humans are meant to be the object of the economic exercise. When you seek to raise productivity and material living standards by making people's working lives a misery of uncertainty and insecurity, damaging people's family lives and even their health, you confuse means with ends, harming people in the name of helping them.
At last, at last, economists are getting what they’ve longed for: the return of micro
reform. With the Howard Government’s acquisition of a majority in the Senate, the
good times are back. We’ve had completion of the privatisation of Telstra and now
the Holy Grail of economic rationalism, reform of the labour market. What’s more,
and as we shall see, the next cab off the rank looks likely to be that other economists’
chart-topper, tax reform. Yippee! But whether the reform is what economists
imagined it would be is another matter, as is whether what we’re getting will do much
good to the economy.
Take Telstra. I suspect it’s now dawning on some economists that privatising a near
monopoly isn’t such a wonderful thing, and that much turns on the ability of a quite
intrusive regulatory regime to ensure a hugely resourced and political powerful
company doesn’t abuse its market power. It’s clear the natural monopoly element of
Telstra should have separated from the contestable element before privatisation
began, but I don’t recall hearing many economists saying this back in 1996 -
especially those working for outfits hoping to win the contract to organise the float.
The economics of WorkChoices
Similarly, I doubt if many economists now think WorkChoices is all they had in mind
when they dreamt of labour market reform. It certainly can’t be thought of as
deregulation. It’s hugely prescriptive about what unionised workers may and, more
particularly, may not do. I’ve written that only the employers have been deregulated,
but even that may be too generous. Employers will find the new system more
complex and legalistic. The new act is more voluminous and prescriptive, there’ll be
more work for lawyers, no tribunals have been abolished but additional ones created,
and the minister is given greatly increased discretion to intervene in bargaining.
Rather than reduce regulation of the labour market, WorkChoices simply biases it in
favour of employers by doing all it can discourage collective bargaining and shoving
the old system of awards and arbitration into the background. Because economists’
neoclassical model abstracts from the question of relative bargaining power,
WorkChoices assumes (possibly correctly) that economists won’t notice what’s amiss.
Likewise, it picks up the economists’ point that restrictions on the ability to fire end
up being restrictions on the willingness to hire, while ignoring the more subtle point
that workers (including even economists) derive much utility from perceiving that
their job is secure.
If you draw a distinction between trying to swing one to employers and trying to
improve labour market outcomes, it’s hard to see how WorkChoices will do much for
the economy. In the OECD’s rating of different countries’ employment protection, it
gave our unfair dismissal regime quite a good (ie low) score, and when you remember
that getting rid of the unfair dismissal provisions encourages firing as well as hiring,
you wouldn’t expect much net increase in employment.
Most economists’ main hope of employment growth would come from lowering the
minimum wage, but as Mark Wooden of the Melbourne Institute has pointed out, the
Fair Pay Commission’s freedom to lower the minimum in real terms will be greatly
constrained by the indexation of unemployment benefits. The most the commission’s
likely to be able to do is slowly lower the minimum relative to the faster-growing
median wage. And, as Saul Eslake of ANZ has reminded us, this was already
happening under the much-reviled Industrial Relations Commission. Over the eight
years to 2004, the federal minimum wage fell as proportion of median earnings from
60.6 per cent to 58.4 per cent. Without the ability to change tax and transfer policies,
there won’t be a lot Ian Harper can do.
You might hope that less protection of penalty rates would permit greater flexibility in
the deployment of labour, but make sure you get your analysis right. One little
acknowledged point is that, while the penalty payments specified in awards may be
arbitrary, it’s perfectly legitimate for workers to set a higher reservation price for
work at unsociable hours. And when the cost of labour falls simply because of
unequal bargaining power, what results is a transfer of income from workers to
employers without any net gain to the economy.
The politics of WorkChoices
But let’s turn to the political implications of WorkChoices. Reading my various
columns on the subject, one of the young chaps at work concluded that I’d changed
my mind about it. No, I said, it’s just that my views are complicated. I regard
WorkChoices as bad in principle, but not likely to be terribly bad in practice. It’s clear
the public is most disapproving of the changes, and this accounts for John Howard’s
quite serious slump in the polls.
But let me make this fearless prediction: the changes won’t stay a hot topic now
they’re through parliament and I’ll be surprised if they’re a significant issue at the
election in (presumably) October 2007. There are five reasons for thinking this. First,
the changes won’t be as bad as some have painted them. When bush lawyers pore
over new legislation, they have a tendency to see worst-case scenarios and imagine
they’ll be the new norm. They forget that acts are always conferring rights that are
rarely exercised because they’re considered impractical or impolitic. Second, it can
take quite a while for people to change their behaviour in response to changed
legislative opportunity. Much of the fear of WorkChoices rests on the spread of
Australian Workplace Agreements, but these have been available since 1997 and so
far have spread to less than 2.5 per cent of the workforce.
Third, the changes are designed to be slow release, with some taking a year, three
years or even five years to take effect. Fourth, and this is a point for economists to
note, the very nature of decentralised wage fixing means it’s hard for observers to
know what’s going on. Whereas all decisions by the IRC were made public, and the
terms of all collective agreements are on record, the Act goes to much effort to ensure
the terms of AWAs are kept secret. So, in the event of AWAs becoming much more
significant in the wage-fixing process than they are today, it will be hard for the
public to know if a lot of employers are driving hard bargains, it will hard for the
firms and workers in an industry to know what the going wage is (meaning there’s
likely to be a fair bit of variation), and it will be hard for the Statistician and
economists to know what’s happening to wage growth.
But my fifth reason for distinguishing between principle and practice is, to me, the
killer: it won’t be long before the Government’s efforts to shift bargaining power in
favour of employers are overtaken by the marked shift in the balance of supply and
demand for labour brought about by population ageing and the retirement of the baby
boomers. Many people can’t conceive of a time when even the unskilled are in short
supply, but everyone over 50 lived through such a time. People say a recession would
speed up employers’ exploitation of WorkChoices. That’s true, but it would be wrong
to assume the next recession, when it comes, will be as severe as those of the early
1980s and 90s. I think we could be returning to the pre-1974 period where recessions
were much milder because, in an era when shortage of labour was the norm, there was
a lot more labour hoarding. We’ll soon be entering a period where workers have the
upper hand. It may prove that the one great virtue of WorkChoices was to remove
any institutional addition to workers’ bargaining power, thus limiting the extent to
which the economy is dogged by perpetual worries about excessive wage settlements.
This will, to an extent, offset the ill-effects of the Howard Government’s chronic
underinvestment in education, training and skill-formation, which will be coming
home to roost.
What’s next?
Even so, it seems clear Howard will want to find a new, and preferably less
unpopular, reform issue to fill the vacuum left by the IR changes. He’ll want to
change the subject and he’ll want to look busy - whether he’s going or staying. He’ll
want to get the business urgers off his back and he may well want to add to his tally of
economic reforms something that fits with his long-held views about the key reforms
needed. That all points to one thing: more tax reform, this time focusing on personal
income tax and, in particular, the top rate.
But he can’t just cut the top rate. That would be too simple - too little to occupy
people’s attention - and too much like a blatant handout to his rich mates. It would
compound the impression given by the IR changes that he’d switched to doing the
dirty on Howard’s Battlers. It would also be relatively cheap. No, he really needs to
do something where he’s seen to be working on the tax problems of everyone, even if
some people end up with much bigger tax cuts than others.
One of the people leading the campaign for further tax reform has been Malcolm
Turnbull, of course. You can understand why Peter Costello has been trying to hold
back the push for further reform. He knows that his big achievement in this area -
raising the top threshold to $125,000 a year so that only 3 per cent of taxpayers are
still subject to the top rate - hasn’t even taken effect yet, but has already been brushed
aside and threatens to be subsumed by something even bigger. He would have a
Treasurer’s caution about leaping to early conclusions on how big the ‘surplus
surplus’ is likely to be looking in five months’ time. And he would be aware (as most
people have failed to realise) that at present he’s committed to half a tax cut next July
- one for everyone earning more than $63,000 a year - and that he’ll be in trouble
politically if he doesn’t come up with the revenue for the bottom, far more expensive
half. In other words, he knows he’s up for the cost of another expensive tax cut for the
punters, before he worries about making the tax cut for high income earners even
more generous than already planned.
Is his reticence on the question of tax cuts also influenced by rivalry with Turnbull?
Quite likely. It may even be influenced by his preference for making further incometax
reform the first big reform of the Costello Government rather than the last reform
of the Howard Government. But that’s all the more reason why Howard’s likely to
insist the question of further tax reform be explored immediately rather than left for
later. The test of whether this exercise proves to be anything more that a government
with an embarrassingly large surplus finally giving in to pressure from the most well-off
taxpayers in the land is, first, whether anything significant is done about a far
more important problem - the work disincentives facing mothers returning to work
and people moving from welfare to work created by their much higher effective
marginal tax rates - and, second, whether high income earners are required to
contribute to the cost of their tax cuts by way of base-broadening measures.
So tax ‘reform’ presents an opportunity for genuine reform, but it remains to be seen
whether that opportunity is taken. What else is there on the reform agenda? Not much
that I can see. The next item on Howard’s list is media regulation, but he’s made it
clear he won’t proceed with anything unless the two media barons to whom all
politicians are in thrall, Murdoch and Packer, can agree on what they want. I wouldn’t
hold my breath waiting for any competitive opening up in this area. My colleague
Alan Mitchell has argued that, while labour market reform never looks like it adds up
to much, its power comes from the opportunity it provides to firms now facing
increased pressure from reform of their product markets. His line is that, if the
Government wants to maximise the economic gain from WorkChoices, it will need to
come up with a lot more product market reform. Not a bad argument, but I don’t see
the Government obliging.
The Liberal leadership
As soon as I turned my mind to preparing this talk I knew I’d have to say something
about the leadership, whether Howard is going or staying, and I knew an audience
such as this wouldn’t let me get away with any two-handed economist routine. I
wouldn’t be allowed out of the room without making ‘a call’. That’s quite a tall order,
since I doubt if Howard himself yet knows which way he’ll jump. But, just so you’ve
got something to throw in my face if I’m invited back next year, here’s my call: I
think Howard will announce his retirement early in the second half of next year. He’ll
be tempted to stay - he’ll feel fine, and more Liberal members will want him to stay
than want him to go - but in the end he’ll go because he knows he has to go sometime
and now’s a more propitious time than in three years’ time. That’s a point to note:
since he can’t resign too soon after an election and must give his successor at least a
year (and preferably longer) to settle in before the next election, if he hasn’t resigned
before the end of next year, he’ll have to stay on for pretty much another three, by
which time he’ll be 70. Another technical parameter is that he won’t leave before next
March, which is when he’ll have notched up 10 years as PM. The Costello camp had
set March-April as some kind of deadline, but by then it would be too late to hand the
budget to a new boy, so the revised expectation is not long after the budget. Howard
won’t want any appearance that he’s been pushed out, and I think Costello and his
camp have realised that being too overtly pushy could prove counterproductive and
prompt him to dig in his heals. Like Bob Carr, Howard may delay his announcement
for a month or two till people had concluded he was staying, but I’m sure Howard
will want to avoid the unpleasantness and diversion that could arise should Costello
and his troops fear they’d been cheated. Few prime ministers have had the judgment
and self control to quit while they’re on top, but I believe Howard will be one of
them. Should he stay, however, I confidently predict Costello will cop it sweet - he
won’t challenge (he’s way short of the numbers), he won’t go to the backbench and he
won’t resign. Party support for Costello would gather should the Government stay
well behind in the polls, but I’ll be surprised if it does.
Why the rush?
A related question is why we’ve witnessed the unseemly, undemocratic rush of
Howard banging his key legislation on Telstra, terrorism and WorkChoices through
the Senate before Christmas with insufficient time for scrutiny. And this after he’d
promised to use his Senate majority wisely and not provocatively. Could it be he’s
getting these key items on his personal reform agenda on the statute books so he can
retire in triumph as early as he likes next year? It could be. But there are two other,
equally plausible reasons for his haste. One is that both the Telstra privatisation and
the WorkChoices legislation are highly unpopular, and the Government knew it would
bleed for as long as they were in the public eye. It follows that the way to minimise
the bleeding was to get them through parliament as quickly as possible.
The second is interesting: now Howard has a one-seat majority in the Senate, the
opposition seems to have moved inside his own backbench. While Barnaby Joyce is
the only one threatening to cross the floor, there’s been a lot of rumbling on the
backbench and a fair few changes made to accommodate that dissent. It’s as though
there must always be a balance of power, and when it doesn’t reside with the minor
parties it moves to whoever on the government backbench has the courage to exercise
it. Joyce is a bit wet to be a member of the Howard Government, a Catholic social
justice type. He has his populist streak, but he’s smart and knows how far to push it.
He won’t be crossing the floor very often, but he’ll be winning his fair share of
concessions and getting constant publicity. He’s lifted the profile of the Nats in the
bush; done them a favour. He’s not hugely popular with other backbenchers, but
that’s mainly envy of someone with more initiative. Anyhow, my particular point is
that, with a fractious backbench, Howard would believe that the less time he gave his
troops to think about the finer points of his measures, the less trouble he’ll have
getting them through.
The Labor leadership
Things aren’t terribly flash on the Labor side of the aisle. Kim Beazley is competent
and likeable, but not inspiring. Labor may be ahead in the polls thanks to
WorkChoices, but that doesn’t prove much and isn’t likely to last once the fuss dies
down. Don’t forget that Howard has been well behind in the polls in each of his terms,
only to pull back in front when it mattered. As for the boost from IR, Beazley could
easily find himself caught the way he was with the GST before the 2001 election. He
thought the unpopularity of the tax meant he was on a winner, only to find that
everyone had calmed down - and been calmed down by bribes from Howard - by the
time the election arrived.
You don’t get the feeling his troops are terribly happy with his leadership, but there’ll
be no challenge because no one in the shadow cabinet looks a better bet. Remember,
however, that should Howard retire, Beazley will be a much closer match for
Costello. In with a real chance, I would have thought.
Monetary policy
Before we get down to it, there are some housekeeping matters to note. On the
Reserve board, Frank Lowy will need to be replaced after his term expired last week,
and Don McGauchie will be re-appointed when his first term expires at the end of
March. I think we can be confident Lowy’s successor won’t have being a generous
Liberal Party donor as his only qualification. One dud is enough. Ian Macfarlane’s
term ends in mid-September. On past precedent his successor should be announced
about a month before hand. As deputy governor, Glenn Stevens is in poll position but,
though I know of no reason to doubt he’ll get the nod, there are no guarantees.
My text for today is: the Reserve stays quick on its feet, so so should you. Why?
Because Stuff Happens. I think most people have got the right fix on the outlook for
monetary policy in 2006. Growth is expected to be ‘solid’ (code for unspectacular),
though just how solid remains to be seen. But with underlying inflation likely to drift
up towards the top of the target and headline inflation likely to stay at the top of the
target, ‘policy will need to be responsive to any sign that demand and inflation
pressures are stronger than currently expected’. The Reserve keeps hearing from the
firms it speaks to that they’re experiencing cost pressures - that they’re operating
close to full capacity, with shortages of labour - so it’s got its hand on the lever ready
to tighten when it sees things moving out of line. It will be looking not just at wages -
wage pressure is there, though so far it’s coming through pretty gradually - but also
for signs of pricing power, such as too many firms using petrol prices as an excuse for
a disproportionate price rise. So at this stage I won’t be surprised if we see further
tightening next year. If so, the Reserve would do another 25 basis points, then sit back
to see the response, then do a little more if it thought it needed.
The Reserve’s not likely to be inhibited in any needed tightening by worries about the
deflating housing bubble. After two years in which house prices nationwide have been
flat rather than falling, with the misalignment getting smaller, it’s more relaxed. It’s
true that household interest payments are a higher proportion of disposable income
than they were at their peak in 1989, and are still rising, but they’re rising not because
of sharp rises in interest rates, rather because people are still borrowing quite strongly.
From its peak rate of 20 per cent, housing credit is still growing by 11 per cent a year.
That’s hardly a sign of distress. If anything, it’s a sign mortgage rates are still too low
rather than too high and too tight.
The worry has always been that, during this period in which the economy is
vulnerable because households are so laden with debt, we might be hit by some
exogenous shock that caused a downturn in growth and a rise in unemployment. The
knock-on effect from that could be nasty. But shocks are, by definition, unexpected.
And you don’t fail to do what you should do - keep inflation pressure in check - just
because of what might happen. You do what you have to do, then worry about how to
respond to the shock if it happens.
All this implies that, at present, you wouldn’t expect to see rates being cut next year.
If a year from today rates were lower, they would have gone higher in the meantime.
But all I’ve said represents merely how the future looks ‘at present’. The safest
prediction I can make is that, before we’ve got too far into next year, the future will
look quite different from the way it looks now. That’s what I mean about the Reserve
staying quick on its feet. It responds to the incoming data, and is quite prepared to
change its view - and its policy - as the evidence evolves.
I observed at this show some years ago that ex-bank business economists were better
at second-guessing the Reserve than ex-Treasury economists. Peter Horn said to me
later than he thought he knew why that was. The trouble with Treasury is that it has
detailed published forecasts, which it’s only able to revise once in a year. This means
it feels obliged to defend its forecasts until such time as it’s able to revise them. It
faces a temptation to interpret incoming data in the light of its forecast rather than
vice versa. The Reserve, by contrast, doesn’t really publish its detailed forecasts, and
so doesn’t hesitate to revise them as often as the weight of evidence dictates. It
doesn’t have any institutional ego attached to its forecasts. You can see that in the
way Ian Macfarlane explains to the parliamentary hearing why his predictions of six
months earlier didn’t work out. He does it without a hint of embarrassment. I think the
Reserve’s pretty humble about the low probability of getting forecasts right.
So that’s what I mean about it staying quick on its feet. And this year’s been an
instructive year in that respect because the Reserve went through four distinct changes
of view in the space of 10 months.
The first change came at the February meeting and was signalled in the February
SoMP. Everything seemed to be on hold when Glenn Stevens spoke to the ABE
dinner this time last year, but by the February meeting we were quite worried about
inflation with the economy running out of capacity. What had happened in the
interim? The signs of sharply rising costs in the December quarter PPI, I suspect. At
the February meeting it was felt the public needed to be got ready for a tightening,
which came after the March meeting.
Many people would say the second change of view came at the April meeting, when it
was decided not to tighten again. I guess you can blame me for that. But it had never
been intended to do two in row and the decision not to tighten further came actually
came a month or two later.
The third change came in the Big Mac’s appearance before the parliamentary
committee in August. The point he meant to make was just that the Reserve had
abandoned its tightening bias, that in the SoMP released earlier that week ‘we
refrained from making the point we have been making for the past year or so about it
“being unlikely that there would be no further rises in the course of the expansion”.’
In our present estimation, he said, ‘there is no longer a more than 50 per cent
possibility of [a tightening] happening’. But then he went on to say something a bit
different, that ‘when we look further into the future, we no longer see a clear
probability of it moving in one direction rather than the other’. And that’s where he
inadvertently gave people a bum steer. Understandably, many people went away with
the notion of a 50 per cent chance of tightening and a 50 per cent chance of easing. In
truth, the probability scheme in the Reserve head would have been 20 per cent
tightening, 20 per cent easing and 60 per cent no change.
So the fourth change of view for the year came with the November SoMP, when the
Reserve restored its tightening bias. It could have reverted to saying it was unlikely
there would be no further rises in the course of the expansion, but it didn’t - not
because it wasn’t true, but because, as we discussed last year, that formula was
devised to cope with the election campaign, to warn the public that it reserved the
right to raise rates after the election and to discourage the parties from making
promises about stopping rates rising. In that, of course, it was only partially
successful. But though it hasn’t resurrected that formula, be in no doubt that the bias
to tighten is back.
One last point. We began this year with a major change of tune between the
December meeting and the February meeting. If you think back, you realise the same
thing has happened over many Christmas breaks. When the Reserve gets back from
summer holidays towards the end of January and views things with a new eye, it often
doesn’t pick up where it left off. Why does this happen? I can think of two
mechanical reasons to explain why view-changes are more likely over the summer
break than between meetings during the year: there’s double the amount of new data
because of the missed January meeting, and the summer period also includes one of
the year’s four releases of inflation data. I don’t think that’s enough to explain the
phenomenon. Maybe the fresh eyes do make a difference. But my advice to you is
simple: stay quick on your feet and always keep an eye out for another over-
Christmas view-change.
