The problem with many Treasury and “think tank” economists is that they believe the economic theories they imbibed at university are models of real-world economies.
Thus, they have a reasonable chance of predicting at least broad outcomes of particular fiscal, monetary and other regulatory policies.
In fact, even the best of these theories are no more than logical constructs of what may occur if a given set of assumptions holds true.
The typical set of assumptions is not only prone to error, but usually completely omits many political, sociological and psychological forces as well as external economic events.
Let’s take the issue of company tax as an example.
Successive Treasury leaders, not just the current lot, have argued for lower corporate tax rates and avowed that this will not only be good for company profits but will inevitably flow through to more private investment and jobs.
Leaving aside the argument about whether it is possible to have governments invest taxes wisely, a fair question currently I admit, I think the evidence in favour of lower corporate taxes is very weak.
A lesson from Ireland
In 2004, I had the privilege during an investment delegation to Ireland of a private briefing from the then Irish Treasurer concerning the “miraculous” buoyancy of the Irish economy due to its radical reduction of company tax rates.
I can recall thinking that the Irish economy was very small and geographically very close to the UK and Europe and therefore the attraction of a few corporate headquarters seeking to avoid tax could indeed make some difference, but that this was unlikely to have any relevance for Australia.
As it turned out, this reasoning was superfluous because within four years, Ireland had become one of the PIGS (Portugal, Ireland, Greece and Spain) whose basket-case economies were in danger of becoming un-financeable by the rest of the world.
Clearly there are many issues, most of them more significant than corporate tax rates, that go to making an economy and a society great.
Currently, Australia faces a significant question mark over its standing legislation that workers (other than those earning more than $250,000) will receive an additional employer contribution to their superannuation of 2.5 per cent of wages phased in over the next few years.
A number of politicians, mainly but not exclusively the same ones who supported the policies of Tony Abbott, have called for repeal of that legislation.
In fairness, they have also received some support from the Grattan Institute and now bask in the “advice” from Treasury that increased employer superannuation contributions will ultimately come, to a significant degree, at the expense of wage increases – an argument that runs parallel to the argument for lower corporate taxes.
And one that is equally as flawed.
Theories are flawed
Which brings us back to the stark difference between economic theories and the full facts of life.
In the first place, if your employer puts an extra 2.5 per cent into your super account it’s yours.
Something else has to happen to erode that value.
If that 2.5 per cent increase does not occur, then something else has to happen to get you square or ahead.
The Treasury and some other theorists say the market will at least partially take care of that.
I think if that were so, there would be overwhelming real-world evidence, not just half-baked theory.
During the freeze on super increases, have wages grown unexpectedly?
No, the opposite. During the rapid rise in super contributions from 1992 to 2002, did wages fall? No, they rose relatively strongly.
Has the share of profits in total national income been rising in recent years? Yes.
In the US, do the minority of workers who enjoy decent employer-sponsored pension plans suffer lower wages?
No, the lowest-paid workers also have no pension plans.
Can our public institutions ensure a decent increase in wages?
No, they cannot even effectively enforce current legal wage and employment standards.
I agree that low-income people need help and that additional dollars in their hands will stimulate spending.
So let’s look at lifting NewStart benefits and the minimum wage.
And let’s also stick with increased super benefits for working people, which may also lift confidence.
While we’re at it, let’s show some leadership in creating policy stability so that more and more of this country’s world-class superannuation system can be invested in Australia to provide a smooth transition to clean energy, increased availability of affordable housing, and a radical improvement in public transport along with other worthwhile economic stimulus and social amenity.
Garry Weaven is the founder and retired chair of IFM Investors and was a key figure in the development of the Industry Fund movement.
The New Daily is owned by Industry Super Holdings