Jun 22, 2022 | Governance, Management
Often, we hear the claim that government should manage the budget better, after all it is just like a hugely complex household budget.
The last election was full of the Liberals claiming to be better managers of money than Labour, despite the ample evidence to the contrary. Irrespective of who won a few weeks ago, we currently have a great big shit sandwich to deal with.
The basic difference between our households and the country is that as a household we look at the investments we make, from the new house to a cup of coffee down the road. Each is a simple and discretionary choice. When things are Ok and we have a bit extra, we have that coffee, and perhaps some avocado on toast for breakfast. When times are tough, we stay at home and have Nescafe and Wheat Bix. We judge what we spend by how much extra we have, and the return we get from making the investment. The more productive the investments we make the better in the long run we do, while suffering some squeeze in the short term to enable those productive investments to be made.
When we make a mistake and find ourselves unable to meet the debt repayments, nasty people with court orders come and take our stuff.
By contrast the government is making huge investments, increasingly as a proportion of the total government expenditure, on items with a very uncertain return beyond the moral one, such as aged pensions. Many others have a very long and hard to calculate payback, such as education and health care. Others such as defence, are a bit like insurance. When they are needed you are glad you paid the price, but if not needed, the payments have just been a waste.
When the government spends more than it collects by way of taxes and direct charges over the course of the economic cycle, nobody comes to take the furniture. In effect, the government just ‘creates’ more money by crediting the Reserve Bank account, which then enables the Reserve to release the funds publicly via the financial institutions. Commonly this is called ‘printing money’ or more confusingly, ‘quantitative easing’. The downside is that we then risk the corrosive impact of inflation that over time reduces the value of what we owe, while increasing the short-term costs of borrowing more, which is where we are right now.
The key is the ‘productivity’ of what is spent. Money circulating in the economy has a multiplier effect, the extent of which depends on whether the money is spent on consumption, or is reinvested in some way. The multiplier varies from very low, 1:1.5 or so, to 1:10, or 15 and up. We are spending way too big a proportion of the national tax revenue on items at the low end of the multiplier scale at the expense of investments at the higher end.
In addition of course, are the investments made in assets that are used by enterprises that make no profit to be taxed. No positive multiplier applies here, it is a negative number, dragging down the total productivity of the economy. Profits by multinational resources and technology companies spring to mind. It is like someone breaking into your house and stealing your wallet. You have worked for the contents of said wallet, but get no benefit from it. The robber sticks your money in an envelope and mails it (via the internet these days) to their friend in the tax-free zone of the Bahamas, Delaware, London, or some other exotic no tax on ‘foreign earnings’ regime to be spent on luxury homes, yachts, soccer teams, and more investments in the tax free cycle that depletes the productivity of their host economies.
That is why your household budget is different from the national one. Once burgled in our homes we tend to put up barriers to it happening again. Bars on the windows, alarms, and a big dog with teeth. We take no such measures in the economy. Indeed, we encourage more investment upon which we guarantee not to demand any return by way of tax from the investors.
How stupid are we?
Jun 1, 2022 | Change, Governance
As the new government beds in, the usual hymn-sheet of ‘the budget position is worse than the previous lot let on’ is being sung.
All the public discussion will be about nips and tucks around the edges of the tax system, when the reality is that fundamental change is needed.
There is an institutionalised imbalance between the outgoings and the sagging tax base from which those outgoings are funded, and the position is deteriorating. Deficits are supposed to be a cyclical balance, not baked into recurring expenditure as interest bearing debt. Kicking the can down the road must end at some point, and the longer the rot is left, the nastier the antidote.
The British government has announced a 25% levy on gas profits, being driven up by the war in Ukraine, an option ruled out by new Finance Minister Katy Gallagher.
Perhaps hasty, given the twin facts that the exporters of gas typically do not bother the tax commissioner beyond GST and the PAYE of their local employees, and that the resources they are selling are, or should be, the sovereign property of all Australians, including those yet to be born.
You can only sell the gas once.
Part of the new governments policy package is to crack down on the tax minimisation practices of multinational corporations. This has also been a common theme for the last 5 or 6 elections, yet little has changed.
Key to every (legal) tax minimisation scheme is the simple fact that legal systems are limited to individual countries, while money is global. The money therefore finds the gaps in the system and slides through, assisted by the armies of very smart lawyers and accountants who make piles for themselves assisting this legal but immoral practice.
Yesterday (May 31) Michael West media published yet another item outlining the tax performance fairytales of Google, Facebook and Netflix in the year ended December 31 2021.
The money fleeced from Australian schools, hospitals, and other essentials services by just these three is only a tiny amount of the total that goes walkabout. The tax loopholes enabled by places like Bermuda, Delaware, London, Malta, and many others that have low to zero tax rates, and hide the identities of the beneficial owners of the profits have created the loopholes. Those that hide in plain sight in developed countries, particularly the UK and US, should be the subject of the next round of bilateral conversations.
At the very least we should expect some changes to these practises to be made by the new government. The simple fact is that offshore tax havens and most tax management vehicles exist only to allow people and corporations to do things that are not allowed onshore.
Presumably, the new government will also act on its undertaking to create a Federal ICAC with teeth. The first target of such a body should be the ‘shopping bag’ payments and kickbacks made to individuals, who then can use the same tax loopholes to hide those payments from tax authorities.
Dirty money uses the same loopholes as less dirty money to avoid scrutiny.
Aggressive action is required. The lobbying response from those about to lose if changes are made will be sophisticated, well-funded, and effective at highlighting the ‘cost’ of such changes in the willingness of multinationals to invest in Australia. There will be short term costs, and some very loud losers, but we need to do this for the sake of our grandchildren.
I must be dreaming!
May 30, 2022 | Governance, Leadership
There is no situation that requires a decision that cannot be enhanced by asking two simple questions:
Is the information right?
Is it the right information?
These are different questions that often become confused.
An accurate piece of data is of no value if it does not relate to the question being asked, or is related to a symptom of the problem rather than its core.
Often it seems that people use data to back a point of view, and just because they have data, the critical analysis of the assumptions and methodology behind the data is not seriously questioned.
It also pays to closely observe who is asking the question, and their attitude to an unexpected or uncomfortable answer.
Charlie Munger, Warren Buffett’s brilliant offsider is credited with the quote: “In God we trust, all others bring data”. I think this is absolutely right, as far as it goes. You just need to ensure it is the right data, and you do not mistake the data for the outcomes of crystal ball rubbing, self-interest, or optimism.
Header cartoon credit: Gapingvoid.com.
May 23, 2022 | Governance, Management
Bureaucracy evolved to enable operations to be scaled as mechanisation started to slowly take over from individual effort in the 1800’s.
It enabled tasks to be allocated, completed, and managed where the expertise resided, rather than one person doing everything. That role remains vitally important to the productivity of the resource investments we all make.
It does not matter if the bureaucracy is a private one, or a public one, they are equally potent at working in their own best interests.
The challenge faced by the bureaucracies that dominate our lives, both private and public, is the advance of digital, and the ability for data to make routine roles redundant. However, the people who lead bureaucracies have not evolved at the same rate. They use the technology as a means of control, and expansion, not as a means to reshape the operations of the bureaucracy and risk doing themselves out of a job.
Not unreasonable, but they miss the essential truth that technology is just a tool, and like all tools requires smart trained people to use them well.
The problem they need to solve is that the disruption that is occurring is making these hierarchies cost heavy, inflexible, and unable to change. As a result, they are being ‘cleaned up’ by the organisations that are evolving without the overhang.
Don’t let yourself be a part of the ‘overhang”
Header cartoon credit: Gapingvoid.com
May 19, 2022 | Governance, Leadership
Every adult on the face of the earth has a set of biases deeply rooted in their brains. This is nothing to be surprised, ashamed, or confused about, it is the way we evolved. Our biases serve the purpose of freeing up cognitive capacity for more important, potentially lifesaving things, like the Fight or Flight response to anything that resembles danger.
Confirmation bias is one such cognitive shortcut. When we see something that we are familiar with, that confirms what we already think, we just accept it without analysis. Because it confirms to what we already believe, we accept it to be true.
We no longer live on the savannah where the rustle in the grass might be a sabre-toothed tiger, but the cognitive shortcuts that evolved in response to the need for instant recognition of that situation remain.
We use a host of these biases all the time in all facets of our lives, usually without recognising them.
Those who understand these cognitive shortcuts can use them to their benefit, and potentially our detriment. If someone can use a bias to elicit the response they want to some sort of stimuli, as in a sales situation, they can benefit, and those on the receiving end do not realise they are being manipulated.
The addition of the network effects of the web over the top of biases we all have has the effect of supercharging them. The social platforms particularly Facebook use this as a core part of their business model. Give people what they want and expect to see, and they will be increasingly committed to the view and the sources of ‘information’ on their view.
Over the time of this election campaign, we have seen the major parties put confirmation bias on steroids. Selected messages in selected places to selected audiences, seeking to confirm a selected response in the minds of the audience.
What a farce.
It is a graphic example of confirmation bias at work when what we need is thoughtful policy development and analysis as part of a robust strategy for the country.
Instead, we get this blizzard of psychologically driven tactical messages aimed only at Saturday May 21st.
I watched the Liberal Party ‘policy launch’ last Sunday morning. My penance for being so acerbic over the last months. Thankfully, both the treasurer, and national’s ‘leader’ were brief, but Scomo took 55 minutes of my life with a passionate plea to a packed house of selected Liberal party members for their vote. Presumably, he already has theirs, but what was interesting is that the whole thing was a zealot’s exhortation of a whole range of half-truths and outright misinterpretation of facts. Raw Confirmation bias on steroids for the packed house.
I wonder if any other swinging voter watched it, and had to run for the dunney as I did?
Thank heavens it will be over in a couple of days, but the hangover is likely to last for a while.
Header cartoon credit Chainsawsuit.com
May 16, 2022 | Customers, Governance
When a rule is made by some institution, seemingly in the best interests of the community, most citizens accept the rule and do their best to adhere.
This applies from the rules introduced by local councils to moderate litter, to the larger tax and commercial governance rules applies by federal governments.
Some rules are just ‘semi-rules’. The intent is to substitute for common sense, rather than attracting enforcement in the breaking of them.
Problem is that once you have a rule which dictates behaviour, any behaviour that is not explicitly outlawed becomes OK. That has led to armies of lawyers and accountants using unintentional loopholes in tax laws to slide through.
The wider impact is that the community ceases to consider what is ‘right and wrong’, substituting the question ‘is it legal: Yes/No’. If one of the accountants can make it seem legal, no matter how morally corrupt it may be, we now have the licence to go ahead anyway.
This is stupid, it has led to the erosion of the ‘moral compass,’ the sense of right and wrong that we used to impose on ourselves.
In addition, these rules become so complex that only experts can understand them, and mistaken misunderstanding is not seen as a defence.
Just consider for a moment our taxation regime.
Hugely complex, a great big pile of band-aids that applies only to those without the resources to exploit the gaps.
Even at the ‘semi-rules’ level this applies.
Last week coming up to some roadworks in my street, I slowed to accommodate the obvious cement truck coming out of a side street. There was a bloke with a sign that said ‘slow’ which I took to mean slow but careful, assuming the truck driver would respond accordingly. He apparently did not see the sign, slammed on his brakes, as I did as it became obvious that if I followed the clear instruction, I would not come out of it well. In addition, I copped a mouthful of extremely fruity language from the driver. Understandable, but in the circumstances, unwarranted.
Had the whole thing been left to common sense with no dozy sign carrier removing the need for common sense to apply, none of this would have happened.
In most situations where people are in a position to make a decision, let them. There will be errors, and mis-steps which will lead to learning, and attendant improvement. Providing a framework for decision making empowers people to do the right thing, offering a sense of responsibility and accountability they will not have in a highly regulated environment.
Substituting common sense, courtesy, and respect for others with formalised rules applied by institutions is part of what has led us to this state of perpetual anxiety and selfishness.
