Are we obsessed with sport to the detriment of business. It’s Eddie McGuire versus ANZ chief economist Saul Eslake on this one. You be the judge.
So let’s look exactly at what Eddie said in his Herald Sun column and then examine Saul’s complete argument so you the reader can decide for yourself. This is now out before the Crikey jury and we want to read about your verdict in next week’s Yoursay.
Heartless economist has no idea
By Eddie McGuire
“I’ll put it down to the pressure of the week, but surely ANZ Bank chief economist Saul Eslake was pulling out leg when he claimed at the Melbourne Media Club that our economic woes could be blamed on our national obsession with sport.
Mr Eslake claimed out love of sport may also have helped drive down the value of the Australian dollar. He was reported in yesterday’s Herald Sun as saying “over the past 12 months international observers of Australia will have seen a country is obsessed by sport and almost completely indifferent to success in any other field. Including, in particular, success in business and economic endeavours.”
May I point out that the world’s biggest economy, the United States, is also filled with sports-mad people and Europe, too, has a certain love affair with soccer, cycling, athletics and so on.
Mr Eslake may be right that our focus is disproportionate in eulogising sporting moments and greats of the games at the expense of the business community – but who cares.
A possible reason more and more Australians are gravitating to sporting events is that it takes them out of the constant struggle of their daily lives. Sport provides a sense of community involvement that once existed in the workplace.
Maybe if the banks stopped closing services and slugging ordinary Australians with fees, charges and interest rate rises dicated by economists rather than profitability there would be a few more accolades for the bean counters of this world.
Surely Mr Eslake doesn’t expect three cheers when banks announce record profits and mass sackings in the same breath. Now the economy is turning pear shape the workers know exactly what is coming.
So maybe the ordinary Australian enjoys going to the footy to watch Nathan Buckley, James Hird, Wayne Carey and others because at least you know they are having a real go for you.
Maybe Cathy Freeman lifts the spirit of ordinary Australians just a little bit more than an announcement that another chief executive has awarded himself a massive pay rise for achieving sustained profit in a growing economy because he was able to downsize his workforce.
Now that it’s beginning to rain on this parade maybe we should look at retrospective bonus schemes and pull back some of those options. That would make them very popular with the ordinary Australian.
Mr Eslake also accused politicians and “ordinary people” of blaming their problems on others. You said it, Saul. So rather than blame what in many ways is our shining example of when we are a “can do” country, embrace it.
Use the sporting world’s example. Recognise excellence and hard work, create and foster a community and team spirit. Don’t accept excuses in the line of battle and get out there and win.
The day an Aussie economist says interest rates have gone up or down because of their ability rather than the cop-out “affect of the American markets” will be the day they rate a headline bigger than an Ansett Cup first round match in March.
Sport is one of Australia’s growth industries and greatest international success stories. It is one of the few areas that other countries try to copy.
Sport has sustained Australians through the bad times of recession and depression more than anything economists have been able to do.”
As you can see by this hairbrained attacked on one of Australia’s best economists, Eddie rather neatly illustrates Saul Eslake’s point by missing it so completely. Interestingly, the ANZ’s chief economist was spotted handing out “Yes” how-to-vote cards during the Republican referendum and was therefore in the same camp as those Republican and very Irish McGuires. He also presumably came into contact with Eddie’s brother Frank (possibly the man who actually put the column item together) back in the early 80s when Saul was Jeff Kennett’s economics adviser and Frank McGuire was the Herald’s state political reporter (before he became a John Cain spin doctor).
The McGuires are a big Labor family (remember the footy tipping gambling licence Labor just gave him) and Saul was Federal President of the Young Liberals just before Mark Birrell in the early 80s. Saul was also brought in by Kennett to produce the Commission of Audit on Victoria in 1993 which largely recommended most of the things the government were already doing.
He shouldn’t worry too much about a Toorak millionaire attacking him and defending “the workers” but don’t expect an invite to a President’s lunch at Collingwood this year Saul.
The criticism of Saul did not stop with Fast Eddie. The ABC’s sports panel show “The Fat” also got stuck into Saul for daring to raise this interesting issue about our obsession with sport to the detriment of other areas including business.
The show ended with the various panellists musing out loud as to his motives, including “this guy obviously needed to get his name in the papers” and “I’ll bet this guy played the recorder – a white recorder – at school” and “he’s probably the type who got picked on at school” .
It was all fairly good-humoured and they did make these comments whilst showing footage of a crowd of drunken yobbos at the Olympics which probably illustrated the point Saul was making about the images we give to foreigners.
Anyway, enough of all that, let’s take a look at what Saul actually said and thinks in detail so you can make up your own mind. The sports arguments are towards the bottom if you don’t want to read the economic analysis.
Remarks to Melbourne Media Club lunch, 15 March 2001
By Saul Eslake
(The following text is based on remarks delivered from brief notes at a lunch hosted by the Melbourne Media Club on 15 March 2001. The lunch took the form of a panel discussion moderated by News Ltd columnist Terry McCrann. The text which follows incorporates numerous additions to the remarks actually made at the lunch.)
Since we have all been given a strict time limit I will structure my comments around brief answers to a series of questions.
1. Is the Australian economy in recession?
Much has been made, since the release earlier this month of data showing that Australian gross domestic product (GDP) contracted by 0.6% in real terms in the December quarter, of whether this constitutes the first of what might be two or more consecutive quarters of negative GDP growth and hence, technically, a recession. In fact economists do not adhere as rigidly to this definition as seems to be popularly supposed. At different times in the past (though not on the latest estimates), the Statistics Bureau has reported consecutive quarters of negative growth in 1977 and 1986 – not usually regarded as recession years, but only one quarter of negative growth in 1974 – which undoubtedly was a recession in anyone’s language. There were also two quarters of negative growth in 1966, which few would recall as having been a recession year.
For what it’s worth, I think it is unlikely that GDP is contracting further in the current quarter. That is, we are not in a recession by this criterion. The employment data released earlier today re-inforce that view. Because the Statistics Bureau uses employment data for the middle month of each quarter to benchmark the wages and salaries component of the income measure of GDP, the fact that employment rose by 0.5% between November and February, compared with a 0.9% decline between August and November, increases the chance that March quarter GDP growth will turn out to have been positive. Given the vagaries of the way in which some of the individual components of GDP are measured, however, the possibility of a second decline can’t be dismissed entirely.
A better criterion for identifying a recession, in my view, is if there is a rise in the unemployment rate of (say) a percentage point or more. By that criterion, we are not yet in a recession – the unemployment rate now having risen by 0.6 of a percentage point from its low in September and October last year – but we may well be by the second half of this year, by which time the unemployment rate is likely to be in the range 7-7%.
Even if this criterion is satisfied, however, it will be a very mild ‘recession’ by the standards of the recessions of the early 1980s or early 1990s when, let it be recalled, the unemployment rate rose by 5.0 and 5.4 percentage points, respectively.
2. Why has the Australian economy slowed so much ?
The slowdown in the economy since the middle of last year reflects a number of factors which, though each in itself not sufficient to cause a pronounced slowdown, in combination have been enough to bring about that result.
Undoubtedly the biggest single factor precipitating the slowdown was the impact of the new tax system on the construction sector. But it wasn’t the only influence.
Other factors include the impact of the new tax system on business cash flows; the rise in petrol prices; a ‘post-Olympics’ hangover; the $4 billion paid over by households for the final instalment of the ‘Telstra 2’ sale; the inability of firms reliant on imports to pass on the effects of the weaker A$; and rising interest rates.
Nearly all of these were ‘home-grown’. In particular, none of the slowdown in Australia’s growth rate thus far can be attributed to deteriorating economic conditions in our major trading partners.
3. Why did so few economists predict the slowdown?
In fact most mainstream economists did recognize, from around the September quarter onwards, that the economy was slowing. In this respect, and in contrast to their performance during the Asian crisis, they appear to have been ahead of Treasury which revised its forecast for 2000-01 growth upwards in November.
That said, it is true that most economists did not predict that the economy would contract in the December quarter (I certainly didn’t), and since that result was released almost all economists have been revising their growth forecasts lower.
Many economists would appear to have underestimated the economic significance of higher petrol prices (just as politicians appear to have underestimated their political consequences). In circumstances where business can’t pass higher energy or transport costs on in the form of higher prices, and workers’ can’t pursue ‘compensation’ for higher petrol costs through wage increases, higher petrol prices have a similar impact to a rise in taxes or interest rates. There is, of course, a benefit in terms of lower inflation (and hence lower interest rates than otherwise); but in the circumstances of the past nine months there has also been a cost in the form of squeezed profit margins.
Most analysts also underestimated the impact of several aspects of the new tax system on business cash flows – in particular, the effect for some businesses of having to pay GST within 30 days of recording a sale but before cash payment for that sale has been received; and the effects of the bringing forward of business income tax payments as part of the transition to a ‘Pay As You Go’ system.
Since official statistics on company profits in Australia don’t go past the pre-tax level, the effects of these tax changes on post-tax profits was not discernible from ABS data. Moreover, since these and other data are published in accrual accounting terms, the impact on cash flows was not readily apparent.
Presumably, however, these cash flow difficulties were one of the factors behind the deterioration in the various measures of business confidence evident over the course of last year – although spokespeople for many of the organizations which compile these surveys seemed inclined to place most of the blame on the Reserve Bank’s increases in official interest rates.
Economists in the so-called ‘official family’ (Treasury and the Reserve Bank) may have been prompted to discount such signals in part because of evidence available to them (but, in general, not to outside analysts) that tax revenues were holding up pretty strongly. Since tax revenues have historically varied in line with the business cycle, government economists do refer to them as another indicator of the strength of economic activity.
On this occasion, however, they may have missed what seems in retrospect to have been an obvious alternative explanation – that it was (in part) precisely because tax payments to the government were holding up so well that the economy was beginning to slow down.
There is also, I think, a reluctance on the part of many economists (and I include myself in this) to lay themselves open to the charge of ‘talking the economy down’, or of increasing the likelihood of recession simply by talking about and thus contributing to a deterioration in consumer or business confidence.
Such charges may be unfair, but they are made, in these and in other circumstances.
I recall, for example, that early last year when a number of bank economists forecast – fairly accurately, as it turned out – that interest rates would rise by more than 1 percentage point during 2000 – they were accused by the Prime Minister of being ‘self-serving’, as if somehow banks were beneficiaries of higher interest rates. Some of the Prime Minister’s more sycophantic back-benchers accused bank economists of ‘bullying’ the Reserve Bank into raising official rates, as if somehow Ian Macfarlane and his colleagues saw it as part of their job to validate the predictions of market economists.
More recently, when Duncan Ironmonger of Melbourne University and Dun & Bradstreet became one of the very few economists to predict that Australia might experience a recession, he was accused by the Treasurer of ‘predicting a recession every year for the past decade in the hope that one year he might be right’ (or words to that effect). That charge was quite wrong. The last occasion on which Duncan Ironmonger predicted a recession was in 1989, and on that occasion he was right.
While I don’t mind having the occasional stoush with politicians, my employers who are more sensitive to relationships between banks and politicians, or the image of banks in the community more generally, don’t want to see it happen too often.
So that does make us (or me, anyway) cautious in forecasting major economic downturns.
4. Where to from here?
As I mentioned earlier, I do not believe that we will have another quarter of negative economic growth. Even without that, however, economic growth for 2001 is likely to average just 2%, the weakest outcome since 1991.
The decline in construction activity looks to be just about over.
And the policy stimulus that will come from falling interest rates, the fiscal measures that have recently been and will probably continue to be unveiled by the Government, and the weak A$, should produce some upturn in the second half of the year.
However there is obviously a non-trivial risk that weaker growth in most of our major trading partners will serve to offset some of these stimulatory forces, keeping the overall rebound modest by historical standards.
I expect that cash rates will fall by as much over the next few months as they have done over the past five weeks – that is, taking the official cash rate down to 4%, where it was before the Reserve Bank began raising it late in 1999. Indeed it’s not impossible that the cash rate could go even lower than that, which would represent a new low for the modern era.
Having ‘broken through’ US50 last night the A$ is likely to continue to struggle in the high 40s/low 50s area. Much of the A$’s weakness can properly be attributed to strength in the US$ – strength which has continued notwithstanding the slide in US share prices this year By the traditional ‘fundamentals’ which have worked well until early last year, the A$ is undervalued by between US10 and 15. However those ‘fundamentals’ have not captured the effects of the huge demands of the US economy on the savings of the rest of the world, encapsulated in the US’s $US435 bn current account deficit. At some point, the US$ may well ‘crack’, but it is impossible to say when or by how much.
However the combination of economic weakness and political uncertainty which has now emerged in Australia has resulted in some independent weakness in the A$ against other currencies which also suffered at the hands of the greenback last year, such as the euro and the New Zealand dollar. Given that in the opinion of most pundits the election seems unlikely to be held until November, this combination will likely continue to weigh on the A$ for many months to come.
5. Why are foreign investors shunning the Australian economy? And what does this tell us about the longer term outlook?
From a different perspective the weakness of the Australian dollar in the face of firmer commodity prices and a declining current account deficit (factors which would ordinarily have propelled it higher) reflects our increasing difficulty in attracting foreign equity investment to this country. (Instead, we’ve increasingly had to rely on overseas borrowings by banks to finance our current account deficit – and since these borrowings, unlike equity inflows, are typically hedged, they don’t create any net demand for Australian dollars to offset the selling of A$ inherent in the myriad transactions which go to produce the current account deficit itself).
Again, our difficulty in attracting foreign equity investment is partly, perhaps largely, due to the extraordinary attraction the US has provided, and apparently still provides, for equity investors from around the world.
But I suspect that the messages which we as a nation have been conveying to the rest of the world about ourselves in recent years have not added anything to our attractiveness as an investment destination.
Bearing in mind that Australia does not in any case loom very large in the imagination of foreign investors, those who have spent a few moments observing this country over the past year could easily, and not unfairly, gained the impression that we are:
a nation obsessed by our successes in sport, and almost completely indifferent to success in any other field, including (but not only) business or economic endeavours;
a nation increasingly inclined to blame ‘globalization’, or foreigners, for our economic problems rather than to accept that the solutions to our problems lie in our own hands; and
a nation lacking a coherent vision of what sort of society it wishes to be, or economy it wishes to have, in (say) five or ten years’ time, nor any credible understanding of how it might get there.
There is nothing wrong with being enthusiastic about sport, or about celebrating our many successes in that field and admiring those who attain them. I enjoy watching at least some sport myself, and I admire successful sportspeople no less than any other Australian. I also readily acknowledge the role that sport plays in bringing together Australians who might otherwise have little in common.
But there is, I think, something rather unhealthy in the apparent double-standard which Australians apply to success in activities other than sport.
To call someone an ‘elite athlete’ or an ‘elite sportsperson’ remains a compliment. But to call some an elite anything else has, in popular discourse, become a polite way of saying how out of touch that person is with ‘mainstream Australians’ – as we saw so amply illustrated during the 1999 republic referendum.
A young person who shows the potential to become an ‘elite sportsperson’ is likely to receive world-class coaching and training, courtesy of the Australian taxpayers, at the Australian Institute of Sport. Nothing necessarily wrong with that, in itself. But are we equally as generous with other young Australians who aim to be elite scientists, intellectuals, artists or business leaders? No we are not.
In fact we go to great lengths to ‘pick winners’ when it comes to sport. But we are curiously reluctant to do the same in other fields.
We do not begrudge our elite sportspeople the affluence that in many cases comes with their sporting success. Neither do I. But we do seem to begrudge the financial rewards which sometimes come to those who attain success in other fields – even if, as is increasingly the case, those who are successful in other fields remain so for no longer than today’s sporting champions.
It seems – especially, I suspect, to foreign observers – that the only socially acceptable path to financial success in Australia is through sport or, stretching the net a little further, through popular entertainment or gambling.
And that’s where we differ from other countries that are also enthusiastic about their sporting successes. Of course Americans love their baseball and football heroes, their golfing champions and their tennis stars. Europeans adore their soccer stars, their tennis idols and their world-beating cyclists. But, unlike the majority of Australians, it seems, they are less grudging in the accolades they give to their artists, their musicians, their intellectuals and (in America at least) their successful entrepreneurs and business leaders.
That Australians place so much value on success in sport is one of the major reasons why we are so good at it. It shows that Australians can, if they really want to, be good at almost anything they choose.
Conversely, the fact that we don’t much value success in other pursuits is probably one reason why we don’t have much success in them.
That, in turn, is probably one reason (though of course far from the only, or even necessarily the most important one) why we don’t rank particularly highly as a destination for risk capital.
And that, in the most general sense, is one reason for the decline in the value of the Australian dollar.
From a short-term perspective, the Australian dollar’s weakness is not wholly a bad thing. As is well recognized, it provides a competitive boost to our farmers, our miners, our manufacturers and our tourist industry (except to the extent that they are themselves reliant on imported raw materials or components). In circumstances where the outlook for many of our trading partners seems to be becoming more gloomy, it at least provides them with the prospect of making market share gains.
However, from a longer-term perspective, the decline in the dollar is far less benign. It adds to the cost of acquiring technology and knowledge, for which we are increasingly dependent on overseas sources. It makes it more expensive for Australian firms to expand their overseas operations, and thus to participate in the opportunities being created by globalization for adventurous businesses. Conversely, it makes Australian companies cheaper targets for foreign predators, highlighting one of the ‘downsides’ of globalization. By making overseas travel more expensive, it limits the ability of individual Australians to experience other countries. It makes it more difficult to attract talented individuals from overseas (not least because Australians object to the salaries which are thus required to induce them to come here) and encourages the drain of talented Australians abroad.
In short, if a continually declining currency were in fact a sure-fire route to national prosperity, then countries such as Turkey, Bolivia and Indonesia would today be among the richest in the world. I mean no disrespect to the people and governments of those countries in saying that they are self-evidently not in that category.
Unfortunately, neither are we – although once upon a time, ironically during the last great age of globalization in the late 19th and early 20th centuries, we were. Whether we ever regain that status, to complement our elevated ranking among the ranks of the world’s sporting champions, is really up to us.