How bad were the good old days of Hawke/Keating?

Among Australian economists, the reform years of Bob Hawke and Paul Keating (1983-1996) have achieved near mythical status. Their governments have been credited with opening up the country to foreign competition via reductions of the tariffs, freeing industry from the shackles of the union, reducing industry subsidies, and floating the Australian dollar. Legacies of those days include HECS, superannuation, and the Productivity Commission.

If you arrived in this country in 1995 or 2000, the evidence that a golden period of reform had just happened would have seemed overwhelming.

But with the benefit of another 20 years following the end of the last Keating government, what would the verdict now be? What were the mistakes made by those governments that in hindsight have come to haunt us? I don’t pretend to have any definitive answers as I am sure many of the readers will know more about that era than me, but do want to share my suspicion that the Hawke-Keating governments caused a lot of economic harm that would not have been obvious to observers at the time. To briefly mention a few of my misgivings about the reforms in those years:

1. The compulsory superannuation industry set up in those days has given us much higher costs of retirement than we should have. Compared to Denmark and the Netherlands, where government-run superannuation funds have overheads of around 0.1% per year, Australian super-funds run at around 1% per year. That may not sound like much, but it means that over your whole balance, you lose 1% every year. On a working life of 40 years, that means you lose close to 40% of the first dollars you put in at the start on overhead when you take it out at 65. It means all those skyscrapers in the middle of our major cities belonging to superannuation funds are there because of policy, not competitive forces, as later attempts to force cheap default super-funds have by and large failed. And one should not underestimate the knock-on effects of the huge rents involved in these overhead fees: because unions and employers together get to decide which superannuation funds the employees get to chose from, the superannuation rules have an in-built incentive for both of those decision makers to be co-opted by super funds (and I encourage you to look at how many of them are now in the boards of these funds!). They have created lobbies to ensure that employees have no choice but to use certain superannuation funds (legalised monopolies!). Also, because superannuation is intertwined with income and income tax, a lobby group has arisen to allow circumvention of income tax laws, dressed up as investment and salary sacrificing. In effect, a whole industry of superannuation consulting and lobbying has arisen due to the anti-competitive legislation of the Hawke/Keating years. I don’t think this was done on purpose: just the result of poorly thought-through legislation. But it now is a reality, an economic drag on the system.

2. The Hawke/Keating years in hindsight saw the rise of medical cartels, kick-started by a policy of reducing the number of medical specialists trained at the unis (probably done for the purpose of keeping costs down), which gave the remaining medicos higher salaries which they subsequently tried to protect by keeping their numbers low. That arguably gave us the over-priced medical cartels that now have a large say on health policy.

3. The Hawke/Keating governments saw the rise of politicised ministries, media management, and what is called ‘managerialism’, in essence a form of hidden unemployment masquerading as compliance-oriented management and bureaucracy. The lobbies representing these hidden unemployed now bedevil education, health, and general policy-development across the board in government. See for instance, this Ross Gittins review of a recent book by former senior civil servants arguing a similar same point. The authors of that book tend to blame more recent governments for politicising the civil service, but the trends were arguably set in motion during the Hawke/Keating years.

4. The Hawke/Keating governments saw the privitisation of the then nationally owned Commonwealth bank, which in hindsight can be argued to have reduced the competitive pressures on mortgage interest rates and other financial products offered by the big banks. Again, with mortgage interest rates for households being easily 2% higher than the interest rates charged to banks, we are talking a huge additional yearly overhead cost on a large number of households in Australia, the indirect result of policy.

I encourage you to add your own examples in the comment box of the actual economic effects of the policies of the Hawke/Keating era. In hindsight, I am simply not sure whether to call the Hawke/Keating years the glory days of de-regulation, or the disaster years of a regulatory explosion. I do know that inequality increased a lot following those reform years, in part because of the tax changes then introduced. And the interest groups then created are among the biggest obstacles to a fairer society now. Perhaps that was inevitable and things would have been worse without the positive reforms of that era, perhaps not. It is time though to take off the rose-colored glasses and critically re-assess the long-term consequences of those years.

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37 Responses to How bad were the good old days of Hawke/Keating?

  1. Nicholas Gruen says:

    On a point of clarification, the Hawke Government inherited the demoralised Industries Assistance Commission from the Fraser Government. The IAC (from memory legislated in 1973 and coming into existence on 1 July 1974) was a Whitlam Government revamping of the Tariff Board – which itself went back to something like 1923 (it was a kind of replacement for the Interstate Commission which was established in the Australian Constitution to try to mediate some tensions between the states as part of the compromise between free traders and protectionists, but which never worked). The Hawke Government rebranded and broadened the scope of the IAC, calling it the Industry Commission and sending it more comprehensive references. Renaming it the Productivity Commission and folding EPAC and the BIE into it was a promise of the Howard Opposition which was kept in office.

  2. Nicholas Gruen says:

    ” I do know that inequality increased a lot following those reform years, in part because of the tax changes then introduced.”

    Keating cut the top personal marginal interest rate from 60% to 49.5%, cut company tax (arguably a good thing but introduced dividend imputation which is not only utterly inefficient – it doesn’t lower the cost of capital – but represents the handing of $20 odd billion or more a year of tax refunds to Australian shareholders) and superannuation which now involves a flat tax on $2 trillion – quite an achievement for a left of centre government. By contrast Costello left the top marginal rate where it was (until I think his last budget when, egged on by Lindsay Tanner and Craig Emerson he promised to cut the top rate by 2% which was then matched by Rudd). Costello’s great contribution was removing tax on super withdrawls, but I think Keating’s trifecta counts for more.

    But on the upside sitting alongside these things was Australia’s best in class transfer payments system which channelled money to the poor with double the efficiency of the next best country – New Zealand. And Hawke expanded it aggressively under the influence of the quiet achiever Brian Howe.

    During the Hawke/Keating years PPPs became big, though they were done by the Kennett, Carr and Bracks state governments. The Industry/Productivity Commission sat quietly by occasionally noting that, woops, the PPPs weren’t working too well, but never really critiquing them as they critiqued other policy errors. After all PPPs were done by people with their heart in the right place – ie they were trying to expand the role of the private sector (which is surely a worthier goal than seeking to deliver the right infrastructure at minimum cost.)

    • paul frijters says:

      thanks Nick. When I said there were people who know much more about that period, you were certainly on my mind!

      Yes, the transfer system was by and large a targeted one, though of course ‘targeted transfers’ comes with the corollary of a ‘poverty trap’ and ‘very high marginal disincentives’. They are one and the same.

      The PPPs belong to the managerialism package in that they favour seeming over being.

      • Nicholas Gruen says:

        “Seeming over being”. I like that! It reminds me of something that happened on the takeover from Hawke to Keating. Just before Hawke left he put out a pathetic stimulus package and it’s name was “Economic Statement” with the date on it. Keating took over and put out a statement that began the now grand tradition that everything gets a propaganda name. It was called “One Nation”. I didn’t endear myself to the powers that be by calling it “Ein Reich”. (I’m joking, I wasn’t silly enough for the powers that be to learn that that’s what I called it).

        In any event ever since, if you’re putting out an economic statement the most important question is the same question you ask when you organise a ball. “What’s the theme? Will it be Pirates, teachers or doctors and nurses”.

        Sad really.

        • derrida derider says:

          Heh – referring to “One Nation” as “Ein Reich” is nothing. I once got into big trouble for referring to “Work For The Dole” as “Arbeit Macht Frei”.

          The problems with superannuation were all predicted during Keating’s time ( I know – I was one of the predictors). But some of the problems Paul lists were definitely features, not bugs, for the politicians. The creation of juicy fund trusteeships for prominent businessmen and (especially) union leaders was the most prominent of these, but massively increasing the size and political influence of the finance sector was also anticipated positively (I think it was supposed to be a counterweight to the banks).

          The last was positively crazy for any Labor government – they should have remembered what “the money power” did to their movement in the 30s and 40s .

    • hc says:

      Strange claims about dividend imputation. Imputation means dividend income is taxed as withholding tax within firms. It hands shareholders nothing net other than preventing the income from their investments being double taxed.

      • Nicholas Gruen says:

        Indeed, the introduction of dividend imputation removed double taxation of dividends and so it hugely favoured the wealthy who were the ones overwhelmingly hit by the double taxation.

    • TN says:

      The Industry/Productivity Commission sat quietly by occasionally noting that, woops, the PPPs weren’t working too well, but never really critiquing them as they critiqued other policy errors.

      I think that’s because the Industry Commission was not given an inquiry on the matter. I knew plenty of insiders who were aghast at some of the PPPs set-up by state governments at the time. That said, when the IC did finally get a study on BOOT, it duly noted both the potential benefits but also the risks and costs. But perhaps it pulled its punches a little; its always easy to get the balance right in hindsight!

      The IC was also consistent in saying that competition, rather than privatisation, seemed to be of most importance for efficiency in relevant infrastructure services markets, and that were privatisation to be pursued in such markets then appropriate regulation needed to be in place. It did not endorse maximising the sale price of public assets (which was frequently achieved by granting the assets enduring monopoly rights before sale); nor give carte blanche endorsement of privatisation generally, contrary to some of the public commentary and what we now know as memes circulating at the time.

  3. conrad says:

    I think you are too negative on superannuation. I don’t disagree there are problems with it, but the basic problem you have is (a) the government will try and spend whatever money it has, often on electoral bribes far worse than the negative effects of superannuation you mention (and the money may come from those pension funds, which then makes them unfunded liabilities, and potentially poor “investments” people can’t get out of when the money gets spend on something with a small return); and (b) A reasonable percentage of the population will never save any reasonable amount of money unless forced to do so. It also appears we are never going force people with expensive houses, one of the main things people do save for, to sell them before getting the pension.

    Thus without superannuation, at least in Australia, you will end up with a government with no money to pay pensions, and people with no money to live without them. If people are too stupid to park their money in cheaper funds, I am not sure what you can do about it — but trusting the government to save money to pay for them in 30 years time seems like a bit too much trust for me. I also think some of the problems you mention are likely to get fixed given Turnbull’s rumblings and salary sacrificing is already capped.

    • paul frijters says:

      Sure, there is a good case for having a pre-paid system of retirement funding rather than paying from current revenue. But the detail matters. A single national fund is much cheaper than the 400 funds we have now. And the specifics about how employees get set a choice of funds has, in my view, had very bad incentive effects. I wouldn’t be surprised if many of the developments in the unions ever since have been primarily driven by it, though I await more knowledgeable commenters to confirm or deny it. There is now a pot of gold for those at the top there arguably was not before…..

      • Nicholas Gruen says:

        Agreed with both Conrad and Paul, but if you’re talking about the poor design please please please mention the flat tax. An ALP Government too. I also remember about a year into the effective compulsory system my boss (Treasurer John Dawkins) trying to fix the snafu where fruit pickers would end up with small amounts in super which would then be subject to prohibitive transactions costs. I remember thinking (probably too judgementally – these guys are busy people) “you should have got that right first time pal. Not very good to be allowing the scions of Collins St to prey on the hard working mugs breaking their backs picking fruit. In any event it was never worked out properly because that would be Socialism.

        • John walker says:

          Dawkins was, from memory, one of the architects of the Industry Policy for the Arts, it did not take long , about two years for the likes of Barry Cohen to be very worried about the increasing reverse economies of scale the policy unleashed. Did nobody warn them, the results were quite predictable.

      • conrad says:

        Is a single national fund really that much cheaper? That’s probably true of DIY funds and the smaller boutique ones, but if I think of larger industry funds with billions in them, then the administrative expenses must be almost negligible compared to the amount they have, so if they cost more then this is simply because they can get it because people want what they offer. So this is not really a case of “cheapest possible” but rather giving people choices in how they want to invest their money — they might think the government fund would get a poor return (unisuper gets historically better returns than the Future Fund, for example). In other areas, like the share-market, cheap funds don’t stop people wanting to pay more on boutique offerings. When does choice lose to efficiency?

        Also, as of 2005, I think people are more or less free to choose where their superannuation goes (as far as I’m aware), so I don’t see the incentive effects as such a problem. For example, I have mine in UniSuper just because it is convenient, cheap, and they have done a good job over time, but nothing can stop me from changing it. So I don’t see such a problem with incentives as long as the funds are transparent about where the money goes.

        • paul frijters says:

          “so if they cost more then this is simply because they can get it because people want what they offer.”

          If you think that, then you have been had. Unless you are prepared to put in the huge effort of shopping around for funds, manage your own, and wade through all the costs of breaking with your previous super fund, you are stuck with the menu your employer and union decide for you.
          Do you know all the fees and hurdles you would have to jump to change from UniSuper to another fund (particularly if you are on defined benefit)? Last I checked I could make more money dong consulting than wading through the lengthy appendices and legalise describing how I could free myself of UniSuper. And it is that transaction cost that locks most people in.

          And do you actually know all the hidden fees and costs of UniSuper? They are much more expensive than the Danish retirement fund.
          You dont pay more because you get value for money. You pay more because of the costs involved in switching, which comes from un-competitive legislation.

        • conrad says:

          The obvious solution to expensive switching costs is to legislate against them, as the government has been trying to do with banks so people can change their loans more easily. I agree with you there are obvious vested interested that will try and stop it, but surely it should be easier and more acceptable to allow people to change their savings versus change their loans.

          I don’t know the actual hidden costs of the super fund (I had my DB plan change for free once when I left Australia for some years, and then I got it again automatically when I came back), but I have looked up the purported costs, which are not terrible — far better than the private ones I have seen (the fees with AMP were huge). Curiously my bank offered to work out the true cost for me as a freebie on my home loan so I may take them up — I wonder if they have info on all the big funds.

          Out of interest, I also looked up the costs of the Australian Future Fund, which should give some indication of what big government funds cost, and they were .67% and .52% for 2012/13 and 2013/14. This is very similar to unisuper funds that involve shares and the like and not just bonds or cash. So if you could get rid of the hidden fees, it would be very similar. The returns also looked very similar to the growth fund (which means the AFF returns a bit better than the average super fund, as does uni super).

          So basically, if it is not possible to change the law to get rid of crazy exit fees, then I agree with you, but if it is, then I don’t since I think people get more choice and they could diversify their savings to multiple sources. I guess that is a question of how strong vested interests are here.

        • conrad says:

          As a radical alternative to the current system that might make you happier, one possibility would be to set super funds up in a share-market like system where you could buy and sell shares in any given fund. The information about the cost of funds could then be made entirely transparent. This could be paid for by using a small transaction fee like you find on the sharemarket — e.g., $10 to move $10000 worth of super meaning the “exit” fee would only be .1%.

  4. John walker says:

    It was also the era when a lot of skills oriented training colleges and Tafes were transformed into theory oriented Universities , not good. And then there was the introduction of ‘industry policy’ into the arts, sigh.

  5. Rigby says:

    A perceptive analysis. As you suggest, these effects were predicted by intelligent people at the time, but as always, they weren’t listened to. Wise men and women have been forewarning leaders and governments throughout all of recorded history, and no doubt before that, about the ultimate effects of human activity, but never had the slightest effect. Humans are what they are and we are reaping the inevitable consequences…a planet that will be uninhabitable for humans within a century. Three thousand years ago Greek thinkers were telling their fellows that more than enough was too much; it remains a wise saying, but is never acted upon by anyone with influence.

    • Nicholas Gruen says:

      Certainly not here at Troppo. We’re always after money. You never know when you’ll need it to get hold of another imaginary vehicle. A Troppo Troop Carrier is next on the list, but we don’t know what to call it.

  6. Jim says:

    The National Competition Policy reforms were a bit of a mixed bag (probably some good, some bad).

    I wonder how many of the failures were because of poor policy implementation rather than a poor policy decision.

    • Nicholas Gruen says:

      What were the bad outcomes of competition policy?

      • TN says:

        One problem with the NCP reforms is that they didn’t go far enough and get stuck into labour supply monopolies – in particular, lawyers, medical specialists and wharfies were all able to retain their closed shops, enriching themselves at the expense of the rest of us. The National Competition Council did a report citing the exhorbitant salaries earned by medical specialists – this was and remains the real inequity, or at least a major one.

  7. Kon Vatskalis says:

    I think that the privatisation of the Commonwealth bank was a big mistake. It took away a bank “control mechanism”. The government should it still owned the CBA could control the way the interest rates are manipulated by the big 3 to their benegfits (not passing the RBA rate cuts etc).

    Many people and economists believe that private companies are more efficient than the public sector but I have seen many private companies who are just dinosaurs. How many of these companies would operate effectively if they had an “efficiency dividend” put on them year after year as the public sector has.

    With regards to superannuation irrespective of some faults it is was a wise decision BUT the question is if the contributions will be able to sustain an individual in later life considering who long we live now and how much medical intervention we receive.

    • Crocodile Chuck says:

      In 1988, the commonwealth bank under Don Sanders had a cost:income ratio of 76%.

      Today it is half this, and the CBA is one of the premier retail banks on earth [if it doesn’t have the highest p/e ratio, it is in the very top bracket].

      I disagree with the blogger’s contention that it offered ‘competition’ to the other majors, say, on interest rates. If you go back to the early ’90’s, the player that DID do this was a non bank financial institution: Aussie Home Loans.

      @ the time, the margin on mortgage loans was 450 bp [4.5%]. This cross subsidised a lot of less profitable products and services. AHL came in @ ~ 220 bp, which all the other banks had to meet [they tried ignoring it, but their own competing products were ignored, by the market].

      AHL did this via two things:
      – securitising their loan book 100%, with warehouse funding provided by Macquarie
      – an innovative software front end, for capturing customer information to make a credit decision.

      Today the margin on mtge loans = 150 bp, which all banks must meet.

      Unfortunately, the above drove the explosion in residential real estate values, but that’s another story.

      • paul frijters says:

        Hi chuck,

        I am not saying the Commonwealth bank did provide competition, I wouldnt know! The point is that the public now lack a vehicle to provide competition to keep the margin on the most secure mortgages at .5%, which is roughly the rate in Canada.

        Whether the Commonwealth bank now is successful, or whether another domestic bank is successful in its place, is really beside the point from an economy-wide perspective. The lack of a vehicle for offering low-margin loans via which the public earns something, as well as a vehicle for injecting cash in major recessions, has cost us a lot and is costing us a lot.

        So what I think should have happened is to have kept a simplified national bank delivering a few standard bulk products cheaply, but of course I am open to be persuaded of the contrary.

        The rise in house prices is a different kettle of fish again, but the relatively high interest rates wont have caused them.

        • Crocodile Chuck says:

          “So what I think should have happened is to have kept a simplified national bank delivering a few standard bulk products cheaply, but of course I am open to be persuaded of the contrary”

          This is why Ahmed Fahour was hired to head up Australia Post 6 years ago. At the time, the idea was that it would provide a ‘no frills’ Post Banking [transaction & savings products; no lending]; the funds to be invested in Commonwealth debt.

          But it never happened [I can’t find out why], and the guy pulls in A$4.8M pa and our postage prices are the highest on Earth.

        • paul frijters says:

          indeed, there have been failed attempts. Doesnt mean the idea is bad or that the oligopoly we have now is desirable.

          Do you know the reasons for failure of these initiatives? Would be handy to know if there is another attempt sometime.

        • Crocodile Chuck says:

          You’re right, of course its a good idea.

          “Do you know the reasons for failure of these initiatives?”

          Think about it-MegaBank, Pty Ltd* is the most valuable banking oligopoly on Earth. Do you really believe that it would allow the entry of a gov’t sponsored mutual into ‘its’ market?

          * all of the denizens of the ‘Big 4’ here have the same strategies, the same balance sheets, the same executive incentives & the same values for managing their ‘regulators’. They’re not individual entities. They’re components-of the same thing.

  8. John walker says:

    Paul it was in those years that the rise of the Uni Admistrator really took off.
    There was a significant big increase in the sheer number of and size of universities : a significant number of CAEs were made into Uni’s , some of them litteraly went from being agricultural colleges teaching green keeping, greenhouse maintenance etc , to being schools of the university of Western Sydney , overnight.
    And this lead to a rapid increase in the number of minor administrators that became , a professor .

  9. We don’t have very good data on how many administrators there are over time in unis, but the share of non-academic staff among those with on-going or fixed term appointment is very stable at around 57%. I’ve found data going back to the mid-1960s that finds this share.

    Dawkins did aim to improve the performance of unis, and the mostly financial incentives used helped strengthen the position of managers within universities. However, given the automation of routine administrative tasks that does not necessarily mean that the number of ‘administrators’ increased disproportionately to overall movements in staff or student numbers.

    • paul frijters says:

      Hi Andrew,

      yes I know of the ‘official’ numbers, but what is included in the categories academic and non-academic seems to have changed over time. For one, things like building maintenance, catering personnel (at uni clubs), cleaners, security, etc., seem to have been outsourced over time and hence no longer count as non-academics. On the other side, much of the hierarchy calls itself professor and is counted as academics rather than non-academics, with many more hierarchical layers than in the 70s. If one then thinks of the amount of time that academics then have to spend on administrative matters now (‘compliance’), then that too should count on the non-academic side, but is not in the statistics. Finally, I dont know where the casual teachers on fixed term contracts fit in, but suspect they swell the academic numbers.

      It is hard to know just how important these factors are, but they do all point in the same direction, which is that the numbers of academic to non-academics now must be must lower than it was in the 70s if we’d compare like with like. When I had an RA go over the phone book of the universities (about 4 years ago now!) to manually assign people to the two categories, we found more like a ratio of 1.8 non-academics per academic (rather than the 1.4 of the university statistics). When adding the self-reported share of admin time that academics reported to spend (around 25% of their time), we estimated that over 70% of the university’s labour time was spent on admin rather than teaching and research. I’d love for a wealthier institution to do a more proper job and would be happy to hear of better estimates out there than our back-of-the-envelope attempt.

      • John walker says:

        Can only speak about the viz arts in detail,
        back in about 1970 there were really no tertiary art schools in Australia, there were skill oriented institutions like the National Art school in Sydney and the national gallery school in Melbourne as well as a relatively small number of suburban Tafes .
        These places had very small administrations, not much need and they did not have the budgets to spare either.

        By about 2008 the number of Tertiary level Art schools in Austral had grown to about 26,( more than the combined number of music, theatre and circus schools.)
        A few have closed or are about to close since then,

        These tertiary art schools have quite a lot of admin.
        It was a big increase and much of it happened in those years.

  10. If we include casuals and do the calculation on a FTE basis the non-academic share goes down a bit, to 54-55% because most casuals are teachers.

    There is outsourcing of academic work as well, which has made student:staff ratios only broadly indicative, but I agree it is larger on the non-academic side.

    In their 2015 staff workload survey, the NTEU reported a series of academic time use surveys, which suggest administrative work was about 7 hours a week in the late 1970s and early 1990s, and around 10 hours in 2015. That seems intuitively plausible, given extra working in reporting, grant application, and managing casuals.

  11. I am and will always be Not Trampis says:

    What is regularly forgotten as is here now is that reform was forced onto the Labor governments. Keating was no Roger Douglas with his own secret policy to implement come hell or high water.

    As Harold McMillan would have said events determined their policy settings.

    It would be nice if context was added before pontification.

    for instance in terms of superannuation where we were a world leader the original plan was for the government to only tax the benefit side but Bill Kelty objected to this.
    he saw no problem of a worker using up all his super and then going onto the pension.

  12. marks says:

    It always seemed odd to me that the superannuation system pays tax (or part thereof) up front, and no tax on exit after 60.

    Surely it would have been better to pay no tax up front, and tax all outgoings at full marginal rates?

    Sure, paying some tax now helps with current problems, but you would have thought that deferring tax to the payout stage would have meant higher final balances (and thus lower old age pension eligibility via the means test), plus higher tax revenues when we have more aged people to support.

    Of course, higher fees play a poorly understood part here too. For every $1000 of fees taken from final balances, thats an extra $3 to be paid out in pensions under the assets test. (I think that’s right under the new rules in January). So, it seems to me that the level of fees directly affects future old age pension liabilities.

    Just roughly, if a present final balance of $200k had 25% more via lower fees, and 15% more via lower taxes, then that $200 would be roughly $290k. In the range where a single pensioner would be reducing their pension, and paying income tax.

    But under the present arrangement, nothing.

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