Culture of austerity distorts business decision-making and we all lose

It is Wednesday and so a few snippets and some Afrobeat. Today, I briefly discuss a rather extraordinary claim by the Governor of the Reserve Bank of Australia that Australian employers refuse to pay higher wages in an environment where the federal government is biases aggregate policy towards surplus creation, even though that strategy was temporarily disabled during the first year of the pandemic. The overall austerity environment has distorted business decision-making to such an extent that firms are now obsessed with cost control and have forgotten that spending equals income and by encouraging a high wage, high productivity culture, their profits rise as well. Win-Win. At present it is lose-lose.

The way austerity distorts business decision-making

In a speech last week (June 17, 2021) – From Recovery to Expansion – which was delivered to the Australian Farm Institute Conference in Queensland, the RBA Governor reflected on the state of the economy.

To his credit he has been calling for employers and governments (state and federal) to increase wages growth as a way out of the economic slowdown that befell the Australian economy even before the pandemic struck.

He has cited the damage that government wage caps have had and noted that they have provided wage leadership (of the wrong kind) to the private sector, which has been suppressing wages growth for some years now.

Nominal wage growth continues at record low rates and that preceded the pandemic.

The most recent federal fiscal statement projects real wages cuts will persist over the next several years.

At a time when households are holding record levels of household debt, the only way that household consumption expenditure will underpin sustainable GDP growth is if wages growth rises.

In this Speech last week, the Governor noted that:

Notwithstanding these signs of a tightening labour market, wages growth and inflation remain subdued and there have not been upside surprises. The Wage Price Index increased by just 1½ per cent over the past year, with wages growth slow in the private and public sectors … And it is noteworthy that even in those pockets where firms are finding it hardest to hire workers, wage increases are mostly modest. There are some exceptions to this, but they are fairly isolated.

This experience speaks to a broader dynamic in the economy that has been evident for some time and is contributing to the subdued wage and price outcomes.

And what is that “broader dynamic”?

The Governor said:

Most businesses feel they are operating in a very competitive marketplace and that they have little ability to raise prices. As a result, there is understandably a laser-like focus on costs: if profits can’t be increased by expanding or by raising prices, then it has to be achieved by lowering costs. This has become the predominant mindset of many businesses.

This obsession with “cost control” has meant there is a reluctance to award any pay rises to staff.

Even when they are “facing labour shortages”, firms will not “increase wages in an effort to attract new employees”.

The Governor said that firms are choosing a “‘wait and ration’ approach: wait until labour market conditions ease, perhaps when the borders reopen, and until then, ration output.”

The problem is that this explanation does not help us understand the pre-pandemic reluctance to award wage increases.

The overall problem is that the obsession with fiscal surpluses at both federal and state/territory level for years now has distorted business decision-making in the way the Governor describes.

It was pre-pandemic.

Sure enough, the pandemic has added an additional element of uncertainty.

But the fiscal surplus obsession has meant that overall spending growth has been tightly constrained as governments have relied on households accumulating ever-increasing levels of debt in an environment of flat wages growth to maintain consumption expenditure and overall growth.

That strategy was coming unstuck before the pandemic as GDP growth was below 2 per cent when trend is more like 3.25 per cent.

The suppression of spending is what has created the “very competitive marketplace” as firms scramble to eke out revenue in a product market environment that is very tight.

The distortion has led to this ridiculous focus on costs and wage suppression.

The firms would be far better off innovating (increasing productivity), creating a high wage culture, and then enjoying the profit bouyancy that would follow.

They would also be better off withdrawing support for governments that impose these public sector wage caps that have encouraged suppressed private sector wages growth.

And instead of going to the wage setting tribunal hearings demanding zero wage adjustments and begging the tribunals to cut penalty rates etc, firms would be better off encouraging the tribunals to award strong wages growth.

Spending equals income.

Ultimately, a wage suppression strategy damages profits and biases the fiscal outcome towards deficits anyway.

Incomprehensible decision making

My own university (Newcastle) has been mired in controversy in recent weeks over the decision by the University Council to appoint Mark Vaile as the new Chancellor.

Vaile is a former deputy prime minister and a former member of parliament serving the National Party (rural conservatives).

When he left Parliament he took up a number of high profile corporate positions, including the position of Chairman of Whitehaven Coal, which is a large coal company – “The leading Australian producer of premium-quality coal” – that also has been mired in scandal (see below).

It is also trying to build new coal mining capacity in northern NSW when community sentiment and the funding bodies (banks etc) have moved firmly away from that sort of future development.

On June 4, 2021, the University announced – Former Deputy PM named 8th University of Newcastle Chancellor.

The decision by the Council shocked many people – staff, students, donors, community etc.

It was an incomprehensible decision given the change in sentiment in the external community away from carbon-based investments and activities.

Within days, the wheels were falling off the decision.

Senior academic staff members resigned from Council and/or made damaging statements to the media attacking the decision.

A full-page statement appeared in the Newcastle newspaper from major philanthropists announcing that they were blacklisting the University as a result of the decision.

Millions of dollars of donor funding was then at risk.

This statement received national media attention.

In this UK Guardian article (June 18, 2021) – Donors say they won’t support University of Newcastle after coalmining executive made chancellor – we read that major philanthropists told the University that:

… it up to us to decide which universities we will support. As significant donors we write this letter to make clear to the university, that we, and many like-minded others, will not support a university who would choose as their leader someone who is determined to build new coalmines when most of the world is determined to reduce fossil fuel use.

Whitehaven’s attempts to build new mines was the “the subject of a recent landmark federal court judgment that found the federal environment minister, Sussan Ley, had a duty of care to protect young people from the climate crisis.”

Smaller donors like me – I have channelled nearly all of my consulting/commission research income back into the university over the years – millions in fact – would have also followed suit.

All the main national media outlets covered the appointment, which amplified the controversy and brought the University’s reputation further under scrutiny.

It was a incomprehensible decision to appoint such a person to a senior role in an Australian university in a time where climate issues are dominating the public debate.

The University likes to style itself as ‘looking forward’, but, having a coal miner as the most senior appointmentment didn’t look like move forward at all.

But the incomprehensible nature of the decision went further than that.

When he was Minister for Trade, Vaile oversaw the Australian Wheat Board scandal which saw hundreds of millions of dollars being channelled from Australia into funds used by Saddam Hussein via a “sham” Jordanian trucking company as part of the ‘oil-for-food’ program.

The Cole Inquiry – was established as a Royal Commission to investigate:

… whether decisions, actions, conduct or payments by Australian companies mentioned in the Volcker Inquiry into the United Nations Oil-for-Food Programme breached any Federal, State or Territory law.

The Volcker Inquiry had investigated allegations of corruption and fraud in the UN Oil-for-Food program and found that the AWB “was the biggest single source of kickbacks made to the Iraqi government” which were paid to ensure Australian wheat would disembark without trouble in exchange for oil.

The conservative Australian government had deliberately underfunded the Cole Inquiry and restricted its scope and the result was obvious – no findings of corruption.

The AWB executives deliberately frustrated the Cole Inquiry’s attempts to get answers and the Chair of the Inquiry regularly criticised them.

The “memory lapses” displayed by top officials on big salaries were comical.

While Vaile denied any knowledge of the kickbacks, there were documents submitted to the Cole Inquiry that were somewhat at odds with his recollections.

He had allegedly met with “an Australian businessman lobbying for the recovery of illicit $US5 million BHP debt from Saddam Hussein’s regime” (Source).

At the time, he issued a press statement saying he had no record of any relevant meeting.

Whitehaven Coal was fined in 2014, for having had a “phantom environmentalist” as part of a community consultation panel to oversee the the destruction of a forest in NW NSW. They had “pretended Greening Australia was on the committee, until the organisation demanded their name no longer be used” (Source).

A year later, the company tried to claim there was no qualified applicants for the position, despite two highly qualified applicants being refused their applications.

In 2017, the company “fought to keep secret … a litany of environmental licence breaches at its north-western NSW mines over the past six years. The breaches relate to a range of problems, from contaminating nearby streams to air pollution at Whitehaven Coal’s four mines.” (Source)

Last year, the company was “charged with 16 breaches of NSW mining laws”, which included “alleged breaches including the construction of unauthorised tracks, drilling of bores in contravention of approval conditions and failure to rehabilitate drill sites” (Source).

There were many other scandals (tyre burials, etc) that this company has been involved in.

And, increasingly, banks and superannuation funds have been withdrawing their funding from the coal industry.

For example, late last year, “the country’s largest superannuation fund has dumped its holding in Whitehaven Coal as it ramps up its climate policy to include a net zero emissions by 2050 target.” (Source).

Vaile largely silent over these scandals then became very animated.

Here is a former Deputy PM of a ‘free market’ government calling out banks for engaging in market behaviour.

Vaile demonstrated complete hypocrisy in 2020 when he started attacking the commercial banks for pulling out of funding deals for big coal projects.

You can read about this in the Australian Financial Review article (October 22, 2020) – Vaile tells big banks to back coal if they want government guarantees.

As the Chairman of Whitehaven Coal, Vaile claimed that:

There ought to be an unwritten, but semi-moral obligation by the major banks in Australia to support those major Australian industries … It is not just about coal. It is right across the resources base.

When Vaile was Federal Trade Minister he pushed the liberalisation, free trade narrative.

The banks and super funds have just been making ‘market’ decisions, realising that their own corporate image will suffer and they will endure losses if they continue to fund carbon-based industries.

At least they had the antennas on that told them that an association with this sort of industry is not good for their repute.

So while pushing the free market line when it suits the corporate interests Vaile represents, he is not shy to push an authoritative, regulative approach when those interests are threatened.

In the last week or so, massive community pressure has been brought to bear on the University.

It would have certainly lost millions of dollars of donor funding and significantly damaged its reputation in a very competitive higher education sector.

And, then, the University sent out an E-mail message to staff indicating that Vaile had decided not to take up the appointment in July 2021.

The statements from the University and Vaile himself demonstrated how little they had understood the situation.

The main media sources covered that decision too – see, for example – Mark Vaile quits Newcastle University chancellor role amid backlash over coal links.

The Federal education minister in the conservative federal government came out yesterday claiming that “cancel culture is to blame for former Nationals leader Mark Vaile’s decision to turn down the role” (Source).

The right-wing media are having a picnic over the affair – citing “activists” for the demise of an otherwise “excellent appointment”.

The problem of echo chambers is that those inside don’t hear things outside.

It was obvious that there was widespread horror at the appointment and it wasn’t just confined to so-called environmental activists.

We don’t know how the decision was made that Vaile would withdraw, but, we, the sensible ones – all breathed a sigh of relief.

The University of Newcastle has dodged a bullet in this rather tawdry and sorry affair.

However, I think it should be investigated how the Council etc thought this was a good idea in the first place.

Music – Tony Allen and Hugh Masekela – where the South and West of Africa combine

This is what I have been listening to while working this morning.

I love – Afrobeat – which combines Ghanian – Highlife – and Nigerian – Fuji rhythmic patterns with Jazz.

Last year, a collaboration between the master Nigerian drummer – Tony Allen and the late South African horn player – Hugh Masekela – came out in the form of an album entitled – Rejoice.

Tony Allen was the founder (with Fela Kuti) of Afrobeat.

Hugh Masekela was a champion of the anti-apartheid movement and met Tony Allen while he lived in exile in West Africa.

Both are giants of the African jazz scene and among my favourite players.

Both believed that music was a political force and that social criticism was an essential aspect of social change.

The UK Guardian article (March 19, 2020) – Tony Allen: Afrobeat’s master on Hugh Masekela, Damon Albarn and friction with Fela Kuti – provides some insights into the album, which was recorded in 2010 but waited a decade before release.

The album was the product of improvisation sessions with the horn and drums – no material was written before they entered the studio.

After Hugh Masekela’s death in February 2018, Tony Allen added some bass lines, some keyboard parts and some vibes over the original recordings.

Then on April 30, 2020, Tony Allen died at the age of 79.

This is the final track on the album – We’ve Landed – and features some killer bass playing among other instruments.

Turn up the volume and EQ the bass!

Perfect.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.