Brexit and the Federal Election: Fear and Loathing in The Electorate / by Adam Howard

Well, I must apologise for the long time between Updates.  No excuses.  Only accountability here.

And accountability seems to be a hot topic right now…..you know I am talking about Brexit and our own Federal Election result (or lack of result).

Both epic surprises in their own right.

I certainly didn’t see either coming, and I am not going to hypocritically use the hindsight trick and tell a story about how I saw the writing on the wall.

My reasoning was like this:  humans are loss averse.  We hate the thought of losing and it’s been proven using experimental psychology that a loss weighs twice as heavily on us as a win lifts us up.

What this means when considering decision making under uncertainty is that if a person is given the choice between change and retaining the status quo, and it’ s not entirely clear if the change will be better, they will retain the status quo.

The fear of change and the potential for loss that might result from that change generally makes us decide in favour of the status quo.  Generally.  Usually….

But not here.  In either case.

The polls prior to our Federal Election were close.  Maybe 49:51 on a two party preferred basis in favour of the Coalition.

But Brexit wasn’t even a competition prior to the vote.  Betting markets showed it at 58:42 in favour of remain.  Enough for the “In” pollies to be quietly confident.

So, what went wrong?

Now, I am not getting political here.  No way, mate.  Two things you never ask someone in public:  Who is your God? and; Who did you vote for?

So, what I mean is, how did the betting markets and polls get it wrong?

As always, I have a theory…..

The media has abandoned its role in analysing policy and the genuine impact of major decisions.  There is simply too much information out there to analyse the relevant stuff and make some sense of it.

It has become easier to simply report what the leaders of respective interest groups say, regardless of whether it’s true or not.

Even shows that are meant to be about analysis, like the ABC’s The Insiders, or Q&A, end up being about personalities and analysing the politicking around who said what, who has the numbers and what the words used by a candidate really mean.

Not enough talk about what policies mean.  What are potential impacts of these policies?   How different are the policies of the various contenders and what are the medium to long term impacts on households and businesses looked at in a comparative way?

So, the election, or a referendum, ends up being more about the personalities involved and who we like more.

I keep on going back to this tome of wisdom, but have a read of Daniel Kahnemann’s “Thinking, Fast and Slow.”

Nobel Laureate in Economics, Professor of Experimental Psychology, first guy to admit he doesn’t KNOW very much, but he suspects a lot…

Anyway, Kahnemann will tell you that when faced with a difficult questions, like “Which political party has policies which seem like they will have a long term positive impact on my country, my community and my life?” we subconsciously know that’s too hard to answer.

In order to answer that question, which we get asked to answer regularly but can’t due to a lack of information and reluctance to do the hard thinking, we tend to replace it with an easier one; “Who do I like more?”

And it’s not “like” in the sense that you guys met at a party, had a beer and thought each other was cool…No.

It’s “like” in the “I saw that guy on TV and thought he seemed like leadership material” context.

Fairly nebulous stuff.  Hard to pin down.

The politicians know this, and have in fact known this for a while, hence the way that politics has become about the cult of the personality.

They have also wised up to the fact that people are scared of loss, hence the meteoric rise of negative politics.

You know what I mean….

So, the cult of the personality has been joined by negative politics and scare tactics, with these three elements comprising almost 100% of the election campaign AND our day to day political discourse.

Tony Abbott was the King of Negative as opposition leader.  The problem for him was that he couldn’t make the transition from Shadow Minister for Negativity to Prime Minister.  He kept on looking for things to scare people about, but failed.

The boat people…not scary.

The debt and deficit disaster….not scary.

And as we are learning it seems to be difficult to be the Prime Minister when faced with the relentless negativity coming from across the floor and from all sections of the media.

Our Mal has just blown an entire election campaign by trying to scare people about the wrong stuff.

The corruption of the construction industry….not scary.

The potential loss of negative gearing…..not scary.

Bill Shorten’s corrupt past as a Union leader….not scary.

Lack of stability under Labour….not scary, and honestly, just plain hypocritical considering Mal knifed Tony not so long ago.

While Little Bill has played the campaign beautifully.  Picked just the right things to use as frightening topics.

Changes to Medicare?  Scary and potentially true.

Changes to education funding?  Scary and potentially true.

A Liberal leadership out of touch with regular Aussies?  True, but then, it’s true of all politicians, isn’t it?

So, an evenly balanced contest, where the Labour party appear to have done a good job of making the fear of potential loss under the status quo outweigh the fear of loss if we ushered in change.

And now we have a lame duck government….

But then, does this matter?  I posted a podcast a few weeks ago by Freakonomics Radio which analysed how important the President of the United States is, and the result seemed to be, not that important.

With a hung parliament it will be difficult for the Government to push through any contentious legislation as they will need support from the independents.

Not a bad thing.  Democracy at work.

Yes, it looks like we will have some unusual people as Senators and MPs:  Derryn Hinch, Pauline Hanson, Jacqui Lambie.

But we will also have our first indigenous female MP, and some reasonably balanced independents in Nick Xenophon and Andrew Wilkie.

Like I said earlier, this is not me casing a vote for or against either party as I think you could shoot holes in both their arguments.  And I have also made the point previously that just because they are our elected representatives we shouldn’t assume they are great at financial management.

Here is my brief dissection of their primary arguments.

Assertion 1

The budget is in terrible shape and Labour created this problem. 

Response

The budget deficit is not a disaster.  Our debt/GDP ratio is pretty mild compared to lots of our trading partners and it’s quite natural for a Federal Government to run a deficit when the private sector is struggling. 

In addition, most private businesses will note a debt/EBITDA ratio of about 0.3-0.75x is pretty healthy, and that’s where we sit. 

The deficit itself is a structural one caused by the massive increase in welfare payments over the past 15 years, particularly the portion made up by the aged pension.

If you want to blame anyone for this, blame Howard and Costello who delivered surplus after surplus and didn’t do anything to plan for this problem.

A potential solution has already been suggested by the Coalition, and that’s to tax super more aggressively.  Yep, that’s right.  Tax super more…

Assertion 2

Both parties claim their policies will deliver jobs and growth.

Response

Too ridiculous a claim to even really warrant a response…but here goes. 

There is very little a Federal Government in any country can do to stimulate job creation and economic growth in the short term, at least without taking radical action.

That’s the deal.  Radical action will have noticeable results.  Changes around the margins will have little or no impact at all.

Radical action like a $3 Trillion quantitative easing program.

Radical action like Paul Keating getting the RBA to lift the cash rate to 15%.

Radical action like Margaret Thatcher breaking Trade Union dominance.

Radical action like Reagan cutting the top marginal tax rate from 70% to 28%.

Now, I will let readers decide whether the above were good or bad changes, but I don’t see any of our current politicians suggesting any changes as substantial as those.

Global growth looks set to be flat for years, so it would be a reasonable assumption that Australia’s would too.  In fact, given our record of 22 years of growth, Australia is more likely to experience a recession than other nations.

And jobs follow growth.  Unemployment has been rising, although not at the rate I thought it might, given the end of the mining boom and the ugly hangover that has set in.

So, claim all you want, but there’s not a lot you can do to stimulate jobs growth right now.

Assertion 3

Political stability is needed and only they can provide it.

Response

When you hear the words “political stability” what is meant is “unfettered access to power”.  Sometimes you will also hear stuff like “we have a mandate”, which means “we have the power to do whatever we want.”

Both sides of politics think they know best.  It’s a symptom of the really ugly style that modern politics has developed, where I know best and you are an idiot who always gets it wrong.

Consensus politics seems to be a thing of the past, as does statesmanship.  And it appears the Australian voting public has lost patience with this new, toxic style…otherwise we WOULD have delivered a mandate either way.

What we have now, regardless of your political persuasion, ethnic opinions or economic credentials is democracy at work, despite Malcolm’s best efforts to reduce it.

The changes to Senate voting rules were meant to reduce democracy by changing preference allocation to avoid guys like Ricky Muir (The Australian Motoring Enthusiasts Party) ending up as Senators.

The assumption was that this would deliver more Senate seats to the two major parties, but it has delivered them to populist candidates like Nick Xenophon and Pauline Hanson.

So, to summarise, we have a slim majority which probably means the following:

  • There will be no changes to Medicare;

  • There might not be any changes to Superannuation taxation;

  • A Banking Industry Royal Commission is more likely;

  • Our Federal Budget will continue on much the same way, meandering towards surplus at some point over the next decade;

Result?  No great changes for any of us.  Changes around the margin.  Again….

Yes, Standard & Poors have put Australia on a negative credit watch, threatening to downgrade our credit rating, and doing the same for our Big Banks.

But more so because of Australia’s high household debt levels and our Big Banks’ use of foreign money to fund this household debt, than our high Government debt.

S&P’s theory is the Government should regulate the banks more firmly, to limit the growth of household debt and direct debt to more productive uses, which will create more business investment, which will increase profits and wages, meaning taxes increase and these taxes will be used to clear Government debt.

Nice theory….

And I have to say, the Australian Prudential Regulation Authority (APRA, the banking regulator) and ASIC are actually doing a reasonable job of this.  It is much harder to borrow money from a bank right now than it has been for a long while.

But I have trouble taking the ratings agencies seriously given how badly they stuffed up in the lead up to the Global Financial Crisis.  I know everyone should get a second chance, but I have a long memory and bear grudges.

I do, however, agree that our household debt is too high and the Government needs to do more to direct borrowings and spending to more productive purposes.  Hence “The Innovation Age” that Malcolm likes to talk about.

What I have big problems with are both sides of politics still trying to trot out austerity (cutting spending) as the best means to start the ball rolling.  There is evidence in the form of almost the entire Euro Zone showing that doesn’t work.

And then also trotting out a bit of Reaganomics and Trickle Down Economics, suggesting high end tax cuts and lower welfare payments will lead to an economic recovery.

Debt in the western world (the UK, US and Australia) has EXPLODED since this neoclassical approach to financial management was introduced, and the evidence indicates it hasn’t been very successful.  Growing inequality, growing household debt, more mental anguish amongst the middle class.

And that leads onto Brexit.

Once again, the media….

It was reported that it was the old, established and rural who voted to leave, and the young, urban and emerging who voted to remain.

This was duly interpreted, again by the media and “the experts”, as meaning the educated wanted to stay, while the uneducated wanted to leave; or those who had made their money wanted to leave, and those who were trying to make theirs wanted to remain.

 But, once again, the scare campaign run by the leave side appears to have been more powerful than that run by the remain camp.

Leave spoke about the costs to public health and the fear of open borders, with a high number of terror attacks occurring on the European mainland.

And remain spoke about……nothing.  At least nothing specific.  It was about unity and strength in numbers.

And leave won.  Negativity and fear won. 

The media helped leave win because it reported the key themes of the leave campaign again and again as they were more reportable.

The impacts of Brexit?  Unknown. 

Will the UK actually leave?  Unknown. 

Who is going to lead the UK through this fraught time and process?  Unknown.

And that leads me onto a conversation I had with a friend this week; a friend who has customers unlike any other:  the super wealthy.

I won’t give any more details, except to say, he travels the world talking to billionaires, and he told me the billionaires are sitting on their piles of cash…waiting.

And he wanted to know why.

So, I went back to the Brexit result.  Unknown.

And I mentioned the comments from Australian business interests regarding the election result.  We need an end to the uncertainty.

And I asked if he knew if there really was a debt crisis hidden somewhere in China.  Answer was, its uncertain.

What about the US Presidential election result?  It’s uncertain.

You can see the theme.  The world is absolutely chock-a-block full of uncertainty right now.

Digital media is actually making that worse, by providing us all with immediate access to reports on what’s happening all over the world…most of it not too good, by all reports.

I have mentioned the Paradox of Choice before, where the options are too numerous and we are paralysed with indecision.

A similar phenomenon seems to be taking place here with investment, spending and uncertainty.

The world has become truly global, and the trillions of interconnections are unknown, as are the potentials impacts of those connections.  We, as a race, have access to so much information but are aware that not all of that information is accurate and reliable.

We want certainty in order to minimise the risks we see in tomorrow, and at the moment there is a great deal of uncertainty in politics, finance and international relations.

So, what action will people take when faced with too much uncertainty, too many options, too much uncertainty?  No action at all.

And that’s where we find ourselves right now.

Uncertainty, fear and a lack of decisions….