What will happen next?

In the last post I suggested that we shouldn’t be shy about questioning assumptions.  But what?  ALL assumptions?

Assumptions serve a purpose, otherwise they wouldn’t have lasted so long. They enable us to take shortcuts. Suppose I assume it is going to be sunny and don’t take a coat when I walk to the neighbourhood shops and get caught in a downpour.  What are the consequences?  I get wet and I am uncomfortable. But it doesn’t last long, and I am the only one affected.  True, it would have taken but a moment or so to check my iPhone, so I probably also feel an idiot. But that’s it.  Cost is small, temporary, and impact is limited.  

Now consider an infrastructure decision where:

• the costs are large,
• the consequences last a long time, and
• they impact many people.

So when the consequences are low, by all means save yourself the effort if you wish, but if they are high – and particularly when the consequences are to be borne by others – we owe it to them to check, to question, to verify.

The DESCARTES SQUARE is a useful tool to ensure that ALL consequences are considered:

Collection of differences

When I was an Economics Honours student, our small class was visited by John Stone, who later became Secretary to the Treasury. He was on a Treasury recruitment mission.  Early in his talk he referred to the Karmel Report on Education and how poor it was.  Prof Karmel had been our Head of Department so I felt honour bound to take up the challenge: “Professor Karmel is a highly regarded economist, so how come this report is as bad as you say it is?”

Consider the Committee!

He did not go on the defensive, instead he gave us a pen picture of each member of the Committee that had produced the report.  I remember one fellow being described as ‘a businessman who believes that there should be ten people lined up outside his factory gate for every vacancy he has available’.

As a student I had naively looked at reports as objective statements of fact, carefully argued. But after that visit, I saw that all reports are in fact a compromise of the various views of the members comprising the Committee. Before the visit I had thought that an ‘independent’ report meant it was independent of the government, but then who chooses the committee?

Unless we know who is on the Committee and the way they see the world, it is hard to appreciate the conclusions reached.   Often the titular head of the committee, the one whose name is associated with the report – as Prof Karmel was  in this case – is chosen for his reputation, but the committee is chosen for their views (and there are more of them!)

President Trump’s protectionist stance has been cemented by executive order withdrawing from the Trans-Pacific Partnership (TPP). Protectionism has swept Europe; Trump is not an isolated believer.

Much of the world’s infrastructure is built by international firms, their success built on scales of economy and expertise.

In the new protectionist environment, major infrastructure will increase in expense and/or decrease in quality.

My question is – where are the economic advisers, educators and leaders that help people understand the facts of globalisation, rather than the beliefs about globalisation?

Sydney, the second most expensive city in the world. The new Premier, Gladys Berejiklian, declares it “the biggest issue”.

Nationals leader Barnaby Joyce tells us to accept it.

But why?

I see this as a complete failure of leadership, and of understanding.

Sydney is lovely, beaches, rivers, parks, infrastructure. There are beautiful beaches for the length of the eastern coast. There are rivers and creeks everywhere. Parks abound. So infrastructure is key to the attraction of Sydney, and to the escalating costs, congestion and other trials for our leaders.

To quote “Field of Dreams” “If you build it, they will come.” And they do, by the thousands.

I spoke to a group of young people and asked them why they moved to Sydney, “because it is close to everything” they told me.

Building more infrastructure in our capitals generates more demand to live in our capitals.

Our regional centres spend year after year, planning different ways to improve the lot of their citizens, without significant success. The deck is stacked against them.

Until our secondary cities can offer proximity to services (and that means infrastructure) they will remain a “negative good” in the minds of our young people, our new people and our businesses.

Long term planning is necessary to relieve the pressure on our exploding Capitals and bring equity to our regional centres. We don’t need a way to build more free-standing dwellings in Sydney. We need to lift the service provision in other areas.

How can this be done?

We assume that ‘big’ events and ‘big’ infrastructure create jobs.  But is this true?

In the last post I said the 1985 Grand Prix was ‘only slightly better’ – at creating income and jobs – than the ‘next best thing’ the State could have done with its money.  What was that ‘next best thing’?   Surprising as it might seem – Creating more public service jobs!    Creating jobs directly by increasing the supply of doctors, nurses, teachers, maintenance personnel and assistants of all kinds, does two things. It directly increases the services received by the community thus improving lifestyles. And it creates lasting jobs, ‘bankable’ jobs, that increase economic stability and well-being the way temporary jobs, such as those from construction, never can.

Why not stop talking ‘jobs’ in general and talk ‘good jobs’ – permanent and sufficient to support a family, as the minimum wage was always intended to do. Or better still, let us think of the outcomes that we want, and how we can get them.

When the first Grand Prix was held in Adelaide in 1985, government officials touted how beneficial it would be. However, they were not able to produce a shred of evidence to support their enthusiasm.  So the Economics Society of South Australia, jointly with economists from Flinders and Adelaide Universities and the Tourism Department, examined that first Adelaide event. It was the first and most complete economic analysis of any special event and was cited in every study on the subject for over twenty years. What did it find? In terms of employment and income generation the Grand Prix was only marginally better than the next best thing and then only because the Federal Government gave the State a grant!  The more enthusiastic the announcement – the more it pays to check!

The same goes for the enthusiastic job promises for new infrastructure proposals. Ask yourself how valid they are – and how they have been derived.

Reference: The Adelaide Grand Prix, 1985, published by the South Australian Centre for Economic Studies.

Infrastructure – ‘if there is a consensus right now in American politics’, says the Economist, ‘it must be that infrastructure spending is a good thing. It employs workers, improves economic efficiency and, at the moment, can be financed at rock-bottom bond yields. So why don’t governments get on with it’  The same could be said of Australia. But just because many people believe it doesn’t make it true. (We used to believe the world was flat!) For example, how exactly does spending $1.6 billion on NSW Sports Stadiums improve economic efficiency? How does it plug the so-called ‘black hole’ of infrastructure expenditure that will stop the NSW economy going backwards? How many jobs are created?  How long will they last? .  It is about time we started asking these questions and more – demanding answers! Yes, us!

The ‘group for building stuff’  (post 20 Jan) focussed on construction.  The reserve bank idea focusses on financing. Both of these miss the point – by your traditional country mile.  What is the point?  Probably best explained in the title of Brett Frischmann’s book “Infrastructure – the social value of shared resources” The whole point of infrastructure is not so much what IT does as what it enables US to do!  That’s the social bit.  The ‘shared resources’ refers to the fact that, unlike our iPhone or car, infrastructure is not owned by any one of us alone, but by all of us together. Thus we need a representative group decision.

So rather than give the job to some group that can only do a partial – and therefore poor – job, how do we improve government decision-making?

In the last post I referred to the Economist’s idea for infrastructure decisions to be made by a ‘group for building stuff’ as if the real issue were ‘how to build’ rather than what to build – and, even more critically, why to build it – and why now?   It is said that during the depression, people constructed holes and others filled them in again, as a means of keeping people employed and with an income. Now, no one wanted the holes – or they wouldn’t have been filled in again.  But is it any different today, with a desire to ‘build stuff’.  Perhaps we are fooling ourselves that today’s constructions are more community-valuable than those holes?  If so, should we not focus on the value to be achieved, rather than the building of stuff?

The right wing think-tanks make great play with ‘mistakes’ made by governments, not excluding corruption, but ignore the fact that a large proportion of private companies fail, creating havoc for their shareholders and communities when they do. Statements such as ‘8 out of 10 entrepreneurs who start businesses fail within the first 18 months’ and ’50% of businesses fail within five years of inception’ are easy to find on the net (even if rather contradictory). Then there are the spectacular failures of older and large companies either through fraud or incompetence. Recently, there has been a flurry of suggestions that our infrastructure decisions should be made by some ‘group for building stuff’ (The Economist) or Paul Keating’s suggestion of a Reserve Bank for Infrastructure). What is the rationale for thinking that either would be superior?  Comments?