The Dumbing Down of Politics in the Information Age

Tonight (Thursday 22^nd August), I attended an engaging panel discussion hosted by the University of Melbourne and moderated by Michael Roland (ABC).  The topic of discussion was the media’s reporting of the Federal election, and quality of political discourse in Australia.  The panel members were Michael Gordon (The Age), Sally Young (University of Melbourne), Kerri-Anne Walsh (author of The Stalking Of Julia Gillard) and John Ferguson (The Australian).

Some really interesting points made in a wide ranging discussion, including the dumbing down of Australian politics and political reporting, the narrowness and shallowness of political discourse and debate, the 24 hour media cycle, lack of diversity in media outlets, the low coverage (relative to history) that the media are giving to the election campaign, and people’s disengagement from and apathy towards political debate.  At the end of the discussion, the key question remained unresolved; who was to blame - politicians, the media or possibly even the public?  Skeptikoi believes that the dumbing down of politics can be traced to the lower attention span that people have for political issues, which reflects a number of factors.

First, it is becoming increasingly difficult to analyse public policy decisions, many of which affect us directly.  Working hours have increased for most people in recent decades and the world has become more complex as the pace of technological advance continues to accelerate.  As a result, public policy has is ever more complex and hard for people to easily digest and understand.  Put simply, most people have less time and inclination to engage in political discourse.

Second, as Sally Young highlighted tonight, the competition for ‘eyeballs’ has increased.  Communication and media channels have become fragmented thanks to the internet, social media, and developments in spectrum technology that has delivered digital TV channels.  A related development has been an explosion in the airtime devoted to sports for a sports mad nation.  I can recall a time when only one game of VFL - as it was known back – was televised per week.  And that was a delayed broadcast, on Saturday night anchored by Peter Landy.  Today, free to air offers no less than four games over a weekend, while Foxtel subscribers can watch all eight games live.  TV coverage of other sports such as cricket (all three forms of the game), tennis and soccer has also grown exponentially.  In short, sports coverage is helping to crowd out serious political discourse.

This then brings us to what was described tonight as the gotcha moment and the focus on political personalities.  Much was made in the media of Kevin Rudd’s apparent abrupt and rude demeanour towards the freelance make-up artist in preparation for Wednesday night’s debate.  There was some frustration that the media would focus scarce space and time to such a trivial matter.  But it is inevitable that the media gravitates towards political personalities in the search for that gotcha moment when the public is disengaged from the political debate because policy detail is difficult to digest.  Against this backdrop, we tend to base our political judgements less on policy merit and detail, and more on personal character and behaviour.  After all, the gotcha moment is far easier and less time consuming to observe, process and judge than wading through the details of the mining tax, ETS or paid parent leave scheme.

Isn’t it ironic that in the information age, politics and political reporting has been dumbed down?  Explanations that assign blame to politicians, the media (or people’s apathy) are overly simplistic.  Rather, Skeptikoi believes the answer lies in the growing complexity of the real world and public policy, less time (and attention) that people have to devote to political issues, and the fragmentation of communication and media channels.  There is still a market for insightful and engaging political discourse and debate, but probably a shrinking one.  If there is any consolation to the Australian public, it is that you are not alone; the dumbing down of politics in the information age represents a global phenomenon.

RBA-Speak, Animal Spirits, and the New Capital Discipline

Central bank speak has come a long way since central banks around the world started to adopt inflation targets from the early 1990s.  As part of the process of learning by doing, central banks have steered a fine balance between greater communication and transparency, while retaining policy flexibility.  As one of the early adopters of inflation targeting, the Reserve Bank of Australia (RBA) has done a better job than most.  Its carefully worded target of ‘maintaining inflation of 2-3% on average through the cycle’ has helped to focus its communications and frame monetary policy decisions, but at the same time provided scope for ample policy discretion.

In an era where the official interest rates across major developed economies have hit the zero lower bound, central bank-speak and forward guidance on monetary policy has taken on a new meaning.  Even for central banks that are not engaging in quantitative easing, deciphering the nuances between a bank’s policy reaction function and its view on the outlook has become increasingly challenging for economists.  At the 2012 Jackson Hole Symposium, Michael Woodford argued that markets are more likely to react to central bank speak about a bank’s policy reaction function because there is less information publicly available about central bankers’ intentions than about the economic outlook.

Both its actions and communications in recent years have suggested that the RBA has been a reluctant rate cutter, influenced by what it has considered to be uncomfortably high inflation in non-tradeables and concerns surrounding financial stability.  The result has been weakness in nominal GDP and profit growth, which is expected to persist.  In its updated Economic Statement released in early August, the Treasury downgraded its growth projections for nominal GDP to 2.5% (FY13) and 4.25% (FY15), which represents a dismal outlook considering that the economy has posted nominal GDP growth of at least 5% in seventeen of the past eighteen financial years.

Skeptikoi believes that the RBA’s quarterly update released on 9^th August had a distinctly dovish tone.  The Statement of Monetary Policy (SMP) and other communications suggest that the Bank’s policy reaction function has probably not changed.  Rather, the Bank continues to be confounded by the persistent weakness in business conditions and non-mining capital investment despite the cumulative 225 basis point cut to the official cash rate (OCR) since October 2011.  It acknowledges that business and labour market conditions remain weak and that there are little signs of a pick-up in growth of either non-mining investment or employment.

Persistent weakness in labour costs has reduced the Bank’s concerns about the outlook for non-tradeables inflation.  The SMP cited that wages growth has slowed to its lowest rate in a decade and combined with strong productivity growth, this has contributed to low growth in unit labour costs.  And its Monetary Policy Statement on 7^th August cited the prospect of further moderation labour cost growth as helping to offset the inflationary impact of the lower dollar and help to keep inflation within the target band.

The continued weakness in business conditions and the labour market can be traced back to what Skeptikoi believes is a deep corporate recession outside of the banking sector that has ended only recently.  Gross Operating Surplus (the National Accounts profits metric) for private non-financial corporations declined in the five quarters to December 2012, the longest stretch of consecutive quarterly declines since the inception of the National Accounts in 1959.  The 12% peak to trough decline in non-financial GOS is comparable to the financial crisis (-13.5%) but not as severe as the recession of 1990-91 (-16%).  The corporate recession has seen the non-financials profit share of GDP decline to 17.8% in December 2012, its lowest level in seven years and well below the record peak of 22% in September 2008.

A rise in the non-financials profit share to 18.3% in the March quarter 2013 and the continued moderation in growth of unit labour costs suggest that the profit cycle probably bottomed in the December quarter.  Unit labour costs are productivity adjusted wages growth and are important in shaping shifts in corporate profitability and inflation.  Low growth in unit labour costs is typically associated with strong earnings growth and low inflation.  After expanding at an annualised rate of almost 4% in the two years to March 2012, unit labour costs have actually declined marginally in the four quarters since.  Outside of the financial crisis, this represents the first time unit labour costs have been flat or declined over four quarters since 1998.

It is little wonder then that companies have been aggressively containing costs.  There are already signs in the early stages in the current reporting season that companies continue to focus their efforts on boosting productivity.  At its interim result, RIO announced that improving performance through cost reductions and efficiency gains remains one of three key priorities.  It flagged that it had achieved cost reductions of $1.5 billion in the first half, significant in the context of a $4.2 billion interim underlying earnings result.  The new capital discipline is not confined to the mining sector.  In its full year result, Telstra announced that it had delivered $1 billion in productivity improvements, and that consequently, operating expenses rose by only 0.5%, the second consecutive year in which they had increased well below inflation.

Skeptikoi believes that the renewed cost consciousness and capital discipline amongst the ASX200 companies will remain a feature of the corporate environment for a while yet, which represents a powerful tailwind for corporate profitability and stock-market returns.  Firms will continue to find ways to deliver productivity improvements, and will tend to defer capital investment where feasible in favour of either returning capital to shareholders or further building up cash balances for a rainy day.  Consequently, the recovery in non-mining capital investment is likely to remain soft.

The RBA’s more sanguine assessment of unit labour costs and inflation reveal that the bank is more alive to the growing risks of a shortfall in aggregate demand stemming from corporates simultaneously containing costs and seeking to boost efficiencies.  Further declines in the OCR are necessary to revive the corporate sector’s dormant animal spirits and encourage companies to invest rather than hoard or return cash to shareholders.  But more aggressive language that points to a change in the central bank’s policy reaction function would also help.

Australia's Productivity Renaissance - The Second Stanza

It has been well over a decade since the ‘Goldilocks economy’ was de rigueur amongst economists.  The US, Australian and other developed economies delivered a cocktail of strong growth, declining unemployment and disinflation from the mid to late 1990s that confounded many analysts and led some to believe that the business cycle was dead.

The Chairman of the Federal Reserve at the time, Alan Greenspan, attributed the Goldilocks Economy to a renaissance in US productivity growth.  Non-farm business productivity (real GDP per hour worked) expanded at an impressive compound annual rate of 3% from 1995 to 2003, double the growth achieved from 1972 to 1994.  In an influential study, two Fed staffers, Stephen Oliner and Daniel Sichel, ascribed the pick-up to the IT revolution.  Using a standard neoclassical model, they showed that innovation within IT producing sectors (ie. multi-factor productivity) and adoption amongst IT intensive sectors (ie. capital deepening) underpinned the productivity enhancing effects of the IT revolution.

Other Anglo Saxon economies also experienced a productivity renaissance thanks to the IT revolution.  Productivity growth in Australia lifted to an annualised rate of 2.9% in the first stanza of its renaissance from mid-1995 to mid-2002, well above the growth of 1.3% pa achieved in the prior two decades.  Rapid diffusion of information & communication technologies across the economy accounted for the lion’s share of the acceleration, given Australia’s small IT producing sector.

Over the past decade, productivity growth in the most developed countries has slowed, in part due to the lingering effects of the financial crisis.  US productivity growth has returned to the trend growth of 1.5% pa that prevailed in the 1970s and 1980s, while productivity growth in Australia moderated to less than 1% pa from 2002 to 2010.  Most industries in Australia experienced a productivity growth slowdown between 1995-2002 and 2002-10, but two sectors in particular posted large outright productivity declines in the past decade: mining and utilities.  The decade long boom in commodity prices has meant that previously marginal or low productivity mines became economically viable, while there are long lead times to production associated with large and complex mining projects.  And the construction of desalinisation plants and a generational upgrade in electricity network and transmission assets has pulled down productivity in utilities.

But Skeptikoi believes that the second stanza of Australia’s productivity renaissance is already well underway which will have important macroeconomic implications.  In the eight quarters since March 2011, productivity growth has picked up to 2.6% pa.  The industry level productivity statistics are not up to date, but a number of developments point to cause for optimism that elevated rates of productivity growth are sustainable.

First, the mining sector will transition from being a significant drag on aggregate productivity growth to being a strong contributor.  The peak in mining sector capital expenditures is imminent and the supply side response to the generational shift in commodity prices is now coming through.  The key iron ore producers in Australia – RIO, BHP and Fortescue – are expected to lift aggregate production by 60% over the next five years, from 500 million tonnes in 2012 to 800 million tonnes in 2017.

Second, the hump in water related capital investment is largely behind us.  In the past eight years, desalinisation plants have been built in Australia with the capacity to treat a total of 1,000 mega-litres per day.  Most of that capacity is currently shut down thanks to record rainfalls in recent years.

Third, upgrades to the electricity network – the wires, poles and other infrastructure used to transport power to consumer from generators – that have been designed to replace ageing assets and improve reliability across a number of states, are largely complete.  The Productivity Commission estimates that capital investment in transmission and distribution assets has contributed no less than half of the 100% rise in NSW retail electricity prices over the past five years.

Fourth, Skeptikoi expects the relentless focus on cost control by the ASX200 companies to continue.  The penny has dropped for corporate Australia that the anaemic revenue environment is the new normal.  Aggregate sales revenue for the ASX200 companies is up by less than 10% - in nominal terms – from the prior peak five years ago.  The outlook for nominal GDP growth – a more reliable top-down indicator than real GDP for company sales revenues – is expected to continue to deteriorate.  In its updated Economic Statement released on Friday (2^nd August 2013), Treasury downgraded its growth projections for nominal GDP to 2.5% (FY13) and 4.25% (FY15), which represents a dismal outlook considering that the economy has posted nominal GDP growth of at least 5% in seventeen of the past eighteen financial years.

The large listed companies – which typically have high operating leverage - are at the forefront of the drive to lift efficiency and contain costs.  Both BHP and RIO continue to divest under-performing businesses.  Telstra, ANZ and QBE are incrementally offshoring back-office operations, while the banks have cut back on staff in areas burdened by excess capacity – institutional and corporate lending for instance.  There has been generational change amongst senior management committees and boards in the new cost conscious environment.  Boards are hiring more cost disciplined CEOs than their predecessors; BHP announced that its new CEO, Andrew McKenzie will be ‘laser like’ on costs and operations.  CEOs and Chairmen that have a demonstrated track record of delivering strong acquisition led growth during the boom years no longer command a premium in the managerial market.

The renewed cost discipline is already paying dividends in terms of the pick-up in aggregate productivity growth in the past two years.  While some express concern that the profitability payoff to cost cutting is one-off in nature, what is often thought of as cost cutting really amounts to a re-organisation of priorities and business processes, and ultimately a lift in efficiency at the enterprise level.  At a macro level, innovation or capital deepening best captures the productivity enhancing benefits associated with business re-organisation.

The corporate focus on cost control represents a rational response to the new normal of weak revenue growth.  But there is a growing risk that companies simultaneously undertaking efforts to lift efficiency will lead to a shortfall in aggregate demand.  The prospect that inflation expectations remain well contained and unemployment continues to rise ought to provide the Reserve Bank ample scope to further ease policy and for the Overnight Cash Rate to stay lower for longer.

The divergence in Australia’s relative economic and stock market performance since the financial crisis has puzzled some commentators.  Although Australia managed to avoid a recession, the ASX200 remains 25% below its prior peak in late 2007, in line with the performance of the Euro Stoxx index, but well below the S&P500 and FTSE indices, which are at or above their respective prior peaks.  The ASX200’s underperformance mirrors poor relative EPS growth.  Skeptikoi is optimistic that the renewed cost discipline willunderpin a catch-up in Australia’s EPS growth and relative market performance, provided that the Reserve Bank continues to ease policy to cushion the effects of the ensuing shortfall in aggregate demand. 

Against the backdrop of rising unemployment and sub-trend growth in nominal GDP, the ‘Goldilocks economy’ is unlikely to be trending on Twitter any time soon.  But the second stanza of Australia’s productivity renaissance promises to be a boom for corporate profitability and stock-market returns.