Economic Incentives

So much has been written and said about the Global Financial Crisis, but now we are into 2009 it is time for the fearmongering to stop and the rebuilding of the economic pillars of our markets to commence.  Every so often a correction in the markets is needed.  The problem this time around is that we have had far more than a correction.  We have had a devaluation across all investment classes, and the flow on effect of market contraction. 

It is not rocket science to understand that in an environment where there are too many jobs that do nothing to create economic stimulus or build revenue, something has to give.  In an environment of over production something has to give.  The best example of this is new cars, that have been produced enmasse at a supply rate far greater than their demand.  Now tens of thousands of new vehicles sit in manufacturers yards with no consumer demand. 

However there is no better Australian way to measure the mood of the business environment than over a few beers at a major sporting event.  I spent my Sunday talking to dozens of businesses who said they were confident of future growth, that demand remained strong, and that they were not feeling the pinch. 

The free market is important to foster business.  It must remain beyond politics.  Sadly however, we are going to see a big political side show in Australia later this year as Peter Costello and Malcolm Turnball brag about the years of prosperity and the massive reserves that Australia built up as a result.  They will alledge it will now only take months for all of that wealth to be squandered by the Rudd Government, in an attempt to kickstart a new wave of excess consumption.  And then what? they will ask.   I will personally treat this political pointscoring with the cynacism it deserves, and I only hope the rest of Australia does too.  Pointing fingers was yesterday’s job.  Today’s job is to reverse a negative economic trend.  

There is much Jewish thought on the construction of an economic market and the ethics that pervade it.  Maybe that is for another post, but this topic has been of interest to me as a result of an email exchange I have had with some South African friends.  There is no doubt that the Perth Jewish community needs to build its critical mass, and that Jewish migration to Perth from South Africa is very important to the future sustainability of Perth.  In this context, I was discussing Perth in comparison to other Australian communities with some potential migrants.  Our conversation diverted into an all out sledging match that would put our cricketers to shame. 

The very valid point was made by a small businessman in South Africa that the ability to own and operate a business in Johannesburg is supported and aided by a conducive market.  In Australia there is so much red tape and bureacracy, compliance and administration.  We also have complicated tax laws, closed and protected markets, regulated trading restrictions, licence and inspection costs, and all manner of barriers to small and medium enterprise.  “True”, our South African friend said, “it is safer in the streets of Australia.  But we protect ourselves well.  I’d rather have the opportunity to manage a business and the incentive to build wealth in South Africa, than the risk of starting over or not being able to work for myself in the restrictive trading market of Australia”. 

This is an important consideration.  No amount of economic stimulus can ever match the opportunity to support and nurture small business.  Australia proves itself incapable of this.  There is a high profile example of this in today’s news.  It appears that Telstra are looking for a new CEO as the much maligned Sol Trujillo is rumoured to resign back to the USA.  He is three years into a five year program to transform Telstra.  Put aside all of the media bashing (some of it valid) over the Telstra corporate culture, and look more closely at the technological side of the companies development.  Whether it is Trujillo or somebody else, this transformation has to occur.  However mark my words, this US executive will terminate his contract before he has completed four years of service.  Why?  Because the Australian market gives him no incentive to stay.  Our antiquated laws mean that if he lives here for more than four years, he will lose the benefit of having the earnings from his US investments immune from the Australian Tax Office.  It therefore costs him to stay in Australia, and for this reason he will not finish the job.

Australia needs the technical skills and business acumen of migrants, both Jewish and otherwise.  However we deliver no incentive to attract and retain migrants as the developers and owners of their own businesses.  In this respect, the Rudd Government is approaching the job of economic rebuilding in the wrong way.  Major infrastructure expenditure, tax cuts, and social welfare handouts are a short term measure, but not guaranteed to reverse the trend and not sustainable into the long term.  Giving entrepreneurial people the incentive to start and grow a business is a far more important aspect of economic recovery, and in this area we have seen little or no movement.