Was life better in `the good old days'? The Zone: Phil Ruthven Phil Ruthven, founder and Chairman of global forecasting firm IBISWorld, joins Michael Short in the Zone. PT1M20S http://www.smh.com.au/action/externalEmbeddedPlayer?id=d-3ijnh 620 349 October 21, 2014 Michael Short: Phil Ruthven, welcome to The Zone. Thank you kindly for your time. Phil Ruthven: My pleasure. MS: And it is indeed a pleasure to welcome you. As founder and executive chairman of IBISWorld, an international corporation that does forecasting and analyses of industries and economies a fair bit more, you are, it is fair to say, one of Australia's most seasoned observers and analysts. The idea behind our collaboration today is to shed some historical and international perspective on Australia's economy and society. Nostalgia, it is said, is a powerful drug and it can cloud perceptions, can it not? Similarly, it can be useful to have an understanding of how we might be doing internationally. So, let's start, please Phil, with a look at some indicators of how life today compares with life 50 years ago, a time for which we often see and hear a nostalgic yearning in politics and around the barbecues of the nation. Was life really better back in what is referred to as `the good old days'? PR: Well, I suspect that nostalgia basically starts for most people because there are things happening here and now that trouble them. It might be the drug scene for their children, or it could be worrying about jobs since there have been times in the past where we have had full employment. In fact, the majority of the post-war years have been times of relatively full employment. It is not at the moment. People, when they run into trouble or get pessimistic, tend to think with nostalgia that things were a lot better in the past. But one would have to question about even the drug scene being better then. Okay, there was no ice or heroin, but very few people alive today would remember that the 6 o'clock swill was probably one of the worst drug situations that humanity has ever had. You had the 6 o'clock forced closing of pubs; people would finish work at 5:30 and drink as many beers as they possibly could and then when the bar was about to close they'd get half a dozen beers and stick them on the windowsill outside, which you were allowed to do, until they were almost paralytic drunk. Now, that was not a pleasant thing to go home to your wife and family with. These were drunken people who were also even beating up their wives. And it was no good for the kids, either. So to say that we never had a drug problem in those days is just not true. In fact in some ways I think it was worse than we have got today. You will never get rid oF drugs. The question is can you decriminalise them and control them. And of course we get brainwashed into saying no that is not the right thing to do and you are only going to encourage it. Nobody has ever learned the lesson of temperance in America. The people who pushed for prohibition finally apologised in, I think, about 1938 for the extreme damage they had done to America. They had no idea when the Temperance Society was actively pushing it in the 1880s that it would ever lead to the mafia and crime and to death and destruction. So, I think there is a whole lot of confusion out there. And I think that always will be. MS: I agree, and a number of times here in The Zone have had guests talking about the failure of prohibition and the importance of harm minimisation, and the empowerment that comes with knowledge, and all those sort of things. Let's dig a bit further into the notion of whether `the good old days' were better. There are some other indicators. If you look at the quality of opportunity, how we live our lives, those sort of things, can you talk a bit more please about the difference between now and then? PR: First of all, we are living longer. We probably don't realise, but each decade we live an extra 2 1/2 years compared to the previous decade. So, for example today, the age of 65 is the equivalent of 45 in the Great Depression years of the 1930s. We are living much, much longer. The kids being born today, almost all of them are going to live to 100 on average. Even at the turn of the century, 14 years ago, one in four was going to be going to 100 years of age easily. We are going to get close to almost all of them averaging 100 years, as we near the year 2100. Secondly, we are living more pain-free lives then we have ever done. There are cures of pain and health-destroying diseases, whether they be cancers or whatever. So, we are healthier and living longer. And we have a lot more facilities. When I grew up there was no sewage in areas where I grew up in. It was the backyard dunny. Well, everything is sewered today. That was not true in those days. The opportunity to get into university: when I finished university in 1961 there were only 50,000 university students. There are other things too, like we were hung up with anything to do with sex. Parents were scared witless to try to talk about sex with their kids. They would probably throw them a book and hope to God that worked. You were really considered almost a pariah if you talked about sex anywhere. It was just not on. Well, today we have got a much more open society. Paedophilia was going on just as much in those days as it is today, but it was unreported. So you could not do anything about it. MS: I would argue too, Phil, in the same vein that mental health issues, general well-being issues, domestic violence, gender inequality and other equality of opportunity issues, a whole lot of things, a whole lot of knowledge is available now, and widely available, that was not shared in times past. And, as we discussed at lunch, really the younger generation is today enjoying unprecedented access to knowledge, unprecedented access to the sharing of knowledge and coalescing around ideas. It is very, very open. PR: It is so much more open. That does not stop teenagers having hang-ups, and I think that is just as much to do with hormonal imbalance etc as it ever was. But you are absolutely right; the openness of society and the access of society to knowledge are quite extraordinary today. We are moving out of what I would have called a history of envy that goes way back to the first colony almost. Not just the convicts; they were not the only ones that had the envy gene. Today, in 2014, well into the century, we are starting to see what I call the aspirational gene. And that is something for which we have to thank the Net generation, the under 32-year-olds. To me, it is going to be so critical to our future, particularly in this very competitive, fast-growing Asian region. It is critical that we do have the entrepreneurialism and the aspirational gene that is replacing the envy gene. MS: Do you think that moving from envy to aspiration is related to the notion of moving from a focus perhaps on equality of outcome, or concern about inequality of outcome, to a focus on equality of opportunity, basically driven by education but also by economic opportunity? Is that a shift that is occurring, from outcome to opportunity, and do you think more broadly anyway that Australia is a fairer and better place now than it was 50 years ago, in terms of opportunity? PR: Yes I do. And I think that is for a number of reasons. One is that the nature of our economy these days is essentially services oriented, and that is the fastest growing part of our economy. You don't have to buy a factory, you don't have to buy equipment, you don't have to keep stocks of raw materials and finished goods. You can literally, as people are doing, start in your backyard. We had already got at least two handfuls of millionaires under 30 who have just worked from home creating, say, a new app or program for mobile phones. That has freed up a lot of entrepreneurialism. The cost of entry is very low today. I think, too, that we are going through a period of profound change in work that both politicians and unionists do not understand. And that is that we are going through the exit of slavery. I have often said that we are going to look back and our grandchildren are going to say to us `goodness were you an employee once, pop? You poor man. In other words, the whole idea of being an "employee" really carries with it the last vestige of slavery, because we have gone from slaves to serfdom to indentured apprentices and we have got to the term employee and said we are free. Well, no you are not. Too many companies still work on inputs rather than outputs. In other words you turn up at 9 o'clock in the morning and leave at 5:30 in the afternoon. That is an input-based system. Look at the younger generations: they can't stand that. They want to be judged on outputs, not inputs. And they want to be free. They don't want to be beholden to an employer. And employers who do not get it are just going to keep losing employees hand over fist until they have no business left. There is no doubt in my mind that you are seeing that tremendous change coming through of freedom - freedom to either go out and be an entrepreneur, freedom to write a contract with an employer for say one-to-three years and renew it you like the idea and don't if you don't. That is a contractual arrangement, like a business-to-business relationship. It is not a boss/slave or owner/slave business. People forget that the last vestiges of slavery are still left in contracts, still left in the concept of an employee. Okay, you are allowed to go home at night, which often they were not when they were slaves, but politicians just do not get this change that is coming through. It is a really major change. Unions certainly don't get it and are fighting it like blazes. Yet, the best is yet to come. MS: The fact that politicians and unionists and other institutions and institutionalised people don't get it doesn't actually matter in the end because they are off the pace anyway. PR: Correct. In fact what is driving the economy is neither unions nor politicians. The economy is being driven by smart corporations. We tend to forget these days another seachange that has already come through. When I was going to university, that was considered the ultimate acknowledgement. To have a tertiary education meant that you came out at the top of the pile. You cannot say that anymore, because it is the very smart corporations, whether it be the Microsofts or the Dells or companies like mine, you are going to learn far more by joining a clever corporation, if you like. MS: Just looking at one of the issues that really focused people in Australia, and has for some time: home ownership, housing affordability and the Great Australian Dream. Can you please comment a little bit on how that has evolved? And can you comment on it in the broader context of whether we are better off or worse off at that level? PR: First of all we have got to ask the question why did we develop this love affair with housing to the extent that we have. At various times we have had the highest home ownership levels of any nation. But we have got to go back to understand that the older generations went through the Great Depression of the 1890s, World War I, the Great Depression of the 1930s, World War II, the Korean War. They faced three very serious wars, without necessarily having to be in them - some of their relatives were. And they suffered the deep consequences of wars, which is scarcity and rationing and all those sorts of things. So, between wars and depressions, which are debilitating anyway, the home became not only what we call a castle, but a sign of stability. Funny sayings started to emerge. I mean, I was brainwashed well and truly after World War II as I was growing up by two statements. One is that rent is money down the drain, so you are better to own. Well, of course that is absolute nonsense because rents have always been cheaper than interest rates. So, you can rent a home cheaper than the interest rates - and that is without even allowing for the capital repayments over 20 years or 25 years. So to say that rent is money down the drain is ridiculous. It has always been interest rates that have been money down the drain. It is not rent. The second fallacy with which we were brainwashed is a statement which today is seen as stupid. And that is that it will be the biggest single investment you will make in your life. Well, if you think that, God help you because already our superannuation plus our other investments in financial terms needs to be worth more than the house. Indeed twice as much. And in fact for people wanting to retire with some dignity and without having to rely on the pension - which is only $24,000 a year (and you can't live very well on that). Even if you own your own home, to live on that pension is very restrictive in this day and age. You have got to have amassed enough money, either in your superannuation or in other forms. That has got to be at least twice the value of your home. So, if you have got a home worth $500,000, you will need $1 million saved over and above that to earn say 5 per cent on that and that will give you $50,000 a year. You are not going to live like a king on $50,000 a year, but your savings as you retire have got to be twice the value of your house. So if you have spent all your money paying interest over a long period of time, you are losing. Which is why for me for 20 years I did not own a home. I leased. I saved $1 million over 20 years, and that went into my own company and build it into the big international company that it is today. People said `you are crazy. I have written a 15-page report explaining why it makes no sense to own your own home and I have sent that out to thousands of people. The only trouble is the nostalgia bit is still hugging us. And it is probably more so with women than with blokes. But only just. It is a habit we got into out of fear and we have kept it. MS: Why do you think, then, that some people do indeed yearn for a past that many indicators suggest was less fair and prosperous? PR: It is interesting, because again you only have to look at the youngest generation now in the workforce, and that is the Net Generation, aged somewhere from about 32 years old back to about 13 years old. My own staff are a good example. They have realised that if you can do a negatively geared purchase of a property out in the boondocks where it is not too dear, and then rent it out, the interesting thing is that the cheaper the house the higher the rental return. In other words, you can earn about 4 per cent or 5 per cent on those sorts of homes. In the city, you will only earn about 2 per cent or 3 per cent. So what these smart young people are doing is that they are using their heart and their brain, because they are renting a house in the city where they want to be near the lights and the action and the jobs and their friends, and they are simply getting negative gearing to pay off another investment which is costing them nothing. It is being paid off and they are getting capital gain for nothing, to add to their compulsory super. They are owning where they never want to live and renting where they want to. They have got a bet each way. They are smarter. And that is the first generation that have been using their head as well as their heart when it comes to owning property. MS: I do not want to get bogged down on this but this is a question that I have written about and talked about: is negative gearing good policy? That is my opinion. MS: Because it encourages productive investment? PR: I think it does a number of things. It does make it possible for people to actually rent, for a start. And that is where we are heading; at one stage we were about 70 per cent homeownership and now we are down to about 64 per cent. We are going the same way as Europe, where they do not even aspire to own a home. Or very few do. It does make for good investments. Interestingly, what they are doing in Canada, and we're not doing it here yet, is building whole suburbs, maybe 5000 homes, through a bond issue on the financial markets. They will build them and then they will rent it out for, say, 20 years. Those same people who rent, or lease, the home realise they are only spending about a third on rent as they would have been had they been buying the home and paying it off. So they can put some of that two-thirds they have saved into the share market or into superannuation. They are getting the advantage of low rent and much harder working investments in the sharemarket. That will come to Australia, too. MS: And that is a good segue into international comparisons. Let's have a look at where Australia sits relative to the other 230 or so nations out there. How are we doing in big-picture terms? It looks pretty good to me: we have one of the world's highest standards of living, low taxes, stable government, a relatively good employment record etc. What is the scorecard for Australia? PR: Currently we have the seventh highest standard of living in the world, about $67,000 per capita. If you take away the nations that have got less than 1 million people, which hardly counts as a nation, like Brunei or Liechtenstein or Luxembourg, we really rank about third. That is not bad going. Mind you, we were number one back in 1901 at the time of federation. And we had been for 10 years. Along with Argentina, we were the number one in the world. At one stage we fell as low as 25th, and that was in the early 1980s. We are now back up to number three and we are still rising and we would probably be number one if you take nations with over 1 million people. So we are doing very well on the income stakes. Funnily enough, our productivity, which we have been criticised heavily for over the last two or three years, is back to over 2 per cent and I do not see that written up anywhere or talked about on TV. We were very happy to rip it apart when it was zero, but we're actually back up to 2 per cent, and that is better than the world average. MS: What is going on there, quickly? PR: What's happening is that mining was the biggest drain on our productivity because they were hiring people hand over fist. At one stage we were having to use three or four times the number of people to extract the same amount of ore ore people dig up one ton of iron ore, more that it took back in the year 2000. The reason was the price of iron all went up four-fold, so we could afford to do it. Now the price has come back to about a quarter of where it was at the peak and so what has been happening over the last 12 months is mining has gone from a drag of about -8 per cent a year, in productivity which was horrible, to where it had the best productivity in the past 12 months. So we have got rid of the bad ones. There's another bad one we haven't fixed yet, which is utilities - gas, electricity and water, much of which is government-owned. Government-owned businesses have no productivity. But we're starting to see things like health turn the corner. So we went back up to 2 per cent growth by the bad ones stopping being bad, rather than anything else. That is good by world comparison. So, our productivity is good. Our debt is virtually the lowest in the world as a percentage of GDP, and even our current budget deficits put us somewhere around the third-best in the world, so it is not bad there either. MS: Let's just pick up on that one. The so-called debt and deficit crisis that has been used to frame discussion about public policy and particularly fiscal policy - is that valid language when you look at where Australia's indicators sit? PR: Well, the status quo is that we are superbly good compared to the rest of the world. What worries economists is the longer term. We have heard the term "the boiling frog syndrome." In other words, if you throw a frog into boiling hot water it will jump out very quickly because it does not want to die. If you heat it up slowly in cold water, it won't notice it is getting hotter and hotter until it dies. And what worries forward-looking economists is that complacency, which is what has happened to Europe and America, has led people to have massive debts. And they thought they could manage them. And they are still only just managing them today because you have got interest rates at virtually 1 per cent. You might say thank God for that. But no. Because who owns the bonds? It is the retirees. And how can you live off 1 per cent? If you had $1 million in your savings, in bonds, you are going to earn $10,000 a year. Well, you cannot live on that. So it is the boiling frog syndrome that worries economists. It is not that our current levels of debt or deficits are a problem, but left unfixed it does become a serious problem over a period of time. MS: So we are right to be alert, but not right to be unduly alarmed? MS: Do you think that there might be a lack of perspective in debates that highlight social and economic problems in Australia, and perhaps undermine our confidence in our ability to change, because we fail to recognise just where we are and the relative strengths we have? PR: I get worried about some of the figures that come out of that are just not true. People say the rich are getting richer and the poor are getting poorer. That is not true. There are really only two countries better off than us in terms of income distribution, and that is Belgium and Japan. That is out of 230 countries. MS: That is at the level of rich and poor and of income inequality? That is where we are more equitable than people give us credit for. And that should be fixed because if you tell a lie for long enough, people will believe it. That is the trouble. That is human nature, of course, and where would we be without scuttlebutt? Truth has got nothing to do with its enjoyment. You need scuttlebutt, otherwise we are not humans and you kind of need fibs and lies and distortions. But putting that to one side, I think the other thing about Australia is that we do have good productivity - but the relativity should not be taken anymore in comparison with Europe and the United States. We are part of Asia. We are already integrated. There is no doubt about that. Secondly, most of our tourists are now coming from Asia. Thirdly, the Asia-Pacific region is the fastest growing part of the world, so we are on a real winner there. Incidentally, three-quarters of our immigrants are now coming from Asia, too. But there is another side to that: we have got to compete with Asia growing at 7 per cent a year when we are growing at less than 3 per cent a year. Less than 3 per cent looks good by comparison with the OECD countries, but it is no longer valid to compare ourselves to them. We have got to compare ourselves to Asia. We compare very well on standard of living, but we do not compare well on growth. Now, very rich countries will never grow at 7 per cent or 8 per cent a year, because it is too hard and you have got to give up too much on the way through, but we have got to understand we're going to have to be very, very clever as part of Asia to be the smart nation so that we can do things and not be clobbered by imports. MS: So, what is the outlook for Australia in that Asian context, and are you overall optimistic for Australia? PR: I am, but mostly through the good companies that are handling that challenge. I don't think governments handle it very well at all. They go into their big song and dance routines about loving being part of Asia, but that is largely a waste of time - although in a diplomatic sense it is important. But our relationship with Asia is going to be almost 95 per cent about having good corporations that are not going to whinge about imports or competition but just get on with it. I mean, our company, IBISWorld, is in China. We have gone there. And yet the biggest market for us still happens to be the old world - Europe and United States. We are going to have to find our strengths as a nation and be much quicker in getting rid of our weaknesses. To take as long as we did to get rid of the car industry, which had been bung for 25 years, is the sort of thing we cannot afford to do. MS: But we are not going to win in Asia by trying to reduce real wages. We have been doing that for about 100 years. We didn't do it very well when we had protectionism of the manufacturing industry, but everything wasn't just manufacturing. MS: What motivates you? Why do you actually do what you do? PR: Well, probably like you I would suspect, Michael, I love what I do. People have said if you love what you do it is not work, and I love exploring the future and I cannot do that without exploring the past. I'm probably one of the few people that look back over 100 years or 200 years to find where the trends and the cycles have been. Most of us live in the here and now. A year is a long time in the average person's life. They are thinking about school and education and housing. That is the biggest thing on the horizon, and maybe a trip overseas, if you're lucky. I don't look at life that short. I like to look back a hundred years at where we have been and what the cycles have been to help me work out where we're going and I try to take a holistic view of all of those things so that I can fit the jigsaw together. I just love the exploration. MS: When you look back over your life thus far, what are some turning points you recognise, and can you think of whether or not they were serendipitous or whether you were seizing an opportunity or creating an opportunity? PR: I think both. But I think most people have about the same amount of luck in their life. Some have a bad start in life because of their parental situation or something like that, and sometimes through genetics and diseases, but other than those exceptions we have all about the same amount of luck. It is a question of whether we want to grab it. I started off life as a food technologist. I was a chief chemist at a food factory, and moved on to be general manager of the factory and then finally moved totally out of that field completely. And that was triggered by winning a scholarship through Rotary, which introduced me in a serendipitous way to an underground war room in America, and that was at the height of the Vietnam War, and it just blew my mind how much information they controlled. That was in 1967, and I said one day I want to start a company that is going to be the most information intensive company ever seen. That is what I wanted to do. MS: How did you end up in an underground war room? PR: Well, I was a Rotary awardee, where they send you overseas for three months, in my case to Oklahoma, and they put you with different families and in different towns. So they show you everything. It is a very catholic experience in a sense, in that we saw a bit of everything. We saw law courts. We saw factories. We saw whatever. And one of them happened to be a US Defence Department installation in Oklahoma. And thank God the colonel in charge of what they called the computer division happened to be a Rotarian. And he showed us his computer room. We walked into this Defence Department space and they had 220 IBM 360 mainframe computers in one room, and it is big number, and that was when they used to print out paper and there was only about a quarter of them printing paper. And I turned to the colonel and asked why you would have all those computers when they were not working. And he said `God, son, they are working their arse off. He said `they are feeding our defence centre. And I said `what is that? And he said we could not see that. But the Rotarian governor who was with us at the time, and there were six of us that won the award, said `look they have all been screened before they left Australia and they would not be a risk. And so the colonel agreed and I can remember us being taken out to a little inconspicuous shed at the Air Force base and we walked into this room and there were guys with machine guns standing by the door and the colonel said `look we have got these six people from Australia and they have all been checked and so is there any chance of letting us have a look at the war room? He didn't say war room but it was effectively that. And I have never forgotten this in my life; it was one of the things that changed my life. And so the guy came out and he handed us sheets with about 50 questions including date of birth and address and previous criminal record etc etc etc. And he said `forget about the questions because that will be on your passport, do you have your passports? And so we gave him our passports and it only took 25 minutes for them to come back to us and what they had done was completely fill out the forms themselves. That's how much information they had. They could find out my previous place of work, everything, stuff I had even forgotten. They could do that in 1967. That is almost 50 years ago. And so they let us go down into it and it just blew my mind. You had to go through 70 feet of concrete because it was nuclear proof. And there was this huge theatre and a huge screen with all the known submarines, even the U2 was going across. We were allowed to ask questions and he said `we do not have to answer them if we think there is a security problem. But they could just go bang bang bang with the answers. There were three orange lights off the coast of Western Australia up near Broome and I said `look, if you don't mind me asking, what are those three orange lights?' And first of all he said they should not be there. They happened to be three Russian submarines. And I said that there are no Russian submarines in the Indian Ocean. He said, `you believe the newspapers, do you? He said `no, they are there. Mind you, we are where we should not be too, up in the Arctic Circle. But we're not going to tell them that, either'. And he said `they are orange, they are not red and they are not blinking; if they were red and they were thinking we'd have planes in the air'. So they were answering questions like that. And they even told us, when I asked them about the Vietnam war, 'we probably won't win the war even with all this, because we have no idea how to fight a gorilla war. We have got the biggest bombs and the most ships and everything, but we have only got a 50-50 chance. And I said `why? And he said because the politicians won't let us fight the war the way we could: we could do a total scorched earth and there would be no one left in North Vietnam. We would just wipe them all out. But he said `the world would not forgive us for that, and the president will not let us do it. And he said we're going to have to fight with bows and arrows in underground tunnels and we are going to lose'. And of course, we did, in 1973. So it taught me that information is one thing, but being able action it is another. Anyway, that changed my life. And there was one other experience which gave me a huge appreciation of history in doing forecasting. And that was when I was the manager in the factory and trying to plan long term. MS: Tell me that in 30 seconds, please Phil. PR: When I was the factory manager I came across all the company's history, - it was Edgell Birds Eye - back to 1926. This was in 1969. And when I looked at it I thought these should not be just figures on a piece of paper. We can't be changing the factory every day and having the engineers coming in after hours and paying them triple time all the time. So I did graphs on every product, all the way back, and I found the forecasting is not as hard to do as all that. You can see trends. That took me about a month. And then whenever the marketing department sent me their latest changes, I threw them in the bin. I ran the whole factory by those charts. And the whole factory steadied up, there was no paying triple time, you just went and got on with it. That taught me about history. And it took me about the value of history in forecasting. It taught me about the power of what we would now call big data. Those two things are why I set my company up. MS: They are fabulous anecdotes, thank you, and dare I ask my final question, which is the same to every guest in the zone, Phil - and it is what is the hardest thing you have ever had to do? PR: Look, I am blessed in saying the hardest has not been family issues. I am singularly blessed that I come from a very happy family. So I don't think that was hard. I did go through a divorce, but my ex-wife and I still love each other, even though we have both moved on. I think the hardest thing would have to be in business, and it was nearly going broke twice. My net worth in 1989 was minus $1.2 million. I had no collateral to support that. I had gone into so much debt to start my business and I was contemplating what you would do as a beachcomber, because that was all I could see happening. And it was a bit of serendipity that somebody wanted to buy into my company at the time and they came in and solved the problem completely. MS: Did you find that backer, or did that backer pick you? PR: I went to a merchant banker who found the backer. So, at least I can take some credit for using an agent, if you like. A lot of the banks at the time wanted to get into the information business, and so they did. But then when the 1991 crash came, they were forced to get out of everything that was not to do with banking. It was not a good time for anybody to come in and buy it so I then went to another bank and they lent me the money to buy the whole company back. And that was a bit of good fortune. It was an ideal time to do it, and that was a lot of money to borrow, a scary amount of money. But I paid it all back within three years and we are now a totally debt-free company and growing at about 20 per cent per annum. There is luck and serendipity, but you have got to grab it. MS: We have to finish, because we're out of time, and I think that your 350 employees around the world would be pleased that luck and serendipity have met you, and what you've done with it. I am very pleased to have spent time with you today, and in the past, and I thank you very much. PR: It was my pleasure too, Michael.