One of the complaints that critics of a Job Guarantee raise is that it might compete with the private sector for labour, which they say would be unfair given the unequal capacities of the two sectors (government allegedly has an advantage) and the undesirability of allocations being based on so-called “non-market” criteria. Mostly these complaints reflect the fact that the critic hasn’t read any of the relevant literature about Job Guarantee design and rationale (it employs workers which have no private sector bid). However, when the government becomes a speculator balancing risk and return in private capital markets and, in doing so, contributes to asset price bubbles and uses its financial might to “distort” market outcomes, it is praised for being financially prudent. Welcome to the hypocrisy of the Future Fund, Australia’s so-called sovereign fund. But it gets worse. We have now learned about the types of products that the Future Fund is investing in. It comes down to the Australian government promoting increasing cancer incidence in our nation. And all because they lie about their economic capacities as a sovereign currency-issuer.
I wrote about the Future Fund in this blog – The Future Fund scandal – back in April 2009.
By way of summary, the Future Fund was formed in the midst of the nonsensical intergenerational debate in the early 2000s, that the previous federal government used as a political tool to justify running unjustifiable budget surpluses.
They hammered the population with the lie that Australia would not be able to honour its liabilities to public sector superannuants unless drastic action was taken. They told us that the national government would run out of money.
This is despite the fact that the Australian government is the monopoly-issuer of our currency.
But the smokescreen created massive hype and the spin doctors moved into overdrive to tell us how the establishment of a sovereign fund – ironically named the Future Fund (ironic because it actually undermines our future – more later) – would save the day.
The Future Fund is a sovereign fund which have become favourites of the neo-liberals over the last 20 years. This site provides some international comparisons of sovereign funds.
The mythology that surrounded the creation of the Future Fund was aided and abetted by statements from the so-called markets. For example, the CEO of the Association of Superannuation Funds of Australia claimed at the time that “the Future Fund was a savings vehicle while superannuation funds were investment vehicles with strategies aimed more at growth.”
Which if you understand anything you will know immediately that claim is arrant nonsense.
The financial market players lapped it up because they knew they were in for more largesse at the expense of public spending. Corporate welfare is always attractive to the top end of town while they draft reports and lobby governments to get rid of the Welfare state, by which they mean the pitiful amounts we provide to sustain at minimal levels the most disadvantaged among us.
Anyway, the previous Federal government created the Future Fund in 2006 to meet what they claimed were “unfunded public sector superannuation commitments”. The imagery was that there were all these public servants who would eventually retire and divert public spending away from essential services etc so that their superannuation payments could be made.
The claim was that the Future Fund would create the “fiscal room” to fund the so-called liabilities. Clearly this is nonsense. The Commonwealth’s ability to make timely payment of its own currency is never numerically constrained. So it would always be able to fund the superannuation liabilities when they arose without compromising its other spending ambitions.
The Futures Fund also got them out of an embarrassing hole when the T3 sale of Telstra – the privatised national telecommunications carried – looked like becoming a train wreck. It meant they could avoid total privatisation and still claim otherwise. How did the Government ever get away with persuading us to buy shares in something we all already owned? And then to look us in the eyes as that wealth plunged in value! That still amazes me.
Here is the slide in Telstra’s shares since it was initially privatised in 1999 (there were stages of the sell-off):
So our Federal government continues on with its gambling ways in the World’s bourses while millions of Australians do not have enough work.
While the Future Fund and the current Finance Minister still try to tell us that the fund is performing well in a tough climate, all the spin they like to put on it doesn’t alter the fact that the Fund in the last year hardly has done better than a cash investment.
Yet the Government is paying the fund managers millions in salaries and bonuses to do it!
Now, while this in itself doesn’t stop the Government from spending any amount that they want – given they have no financial constraint – it does pose a political issue.
What if I said that the spending they put into the Future Fund was sufficient to employ all of the current unemployed and underemployed for about the next decade at minimum wages? They would immediately say, among other disparaging remarks, that there was no fiscal room to do any more than they are doing.
They would also say that government job creation programs are unproductive and likely to interfere with the “market”.
Yet at the same time, without seemingly understanding the contradiction, they are spending public funds to buy private financial assets and distorting the market in doing so. And the transactions they enter into have no productive value at all – they just amount to shuffling wealth and driving up asset prices.
So we have a situation where our elected national government prefers to buy financial assets instead of buying all the labour that is left idle by the private market.
They prefer to speculate in financial markets with no great success instead of funding public education and health properly.
They prefer to hold bits of paper that are totally unnecessary in terms of its responsibility to advance public purpose rather than putting all this labour to work to develop communities and restore our natural environment.
How could we have ever become entrapped by this level of absurdity?
But then in the last few days we have learned more. Their investments are not only unproductive wealth-shuffling but we now know they are actually investing in products that are highly damaging, especially to our teenagers.
The Future Fund has been in the news again this week as a result of its extraordinary (and covert) decision to invest in shares of tobacco companies, despite a major Australian government campaign to drive these products out of business.
Why tobacco is legal and heroin is not is a debate we avoid but should have.
The tobacco scandal was covered by the Melbourne Age (October 16, 2012) – Future Fund back in the firing line – which carried quotes from the Federal Finance minister (Penny Wong).
The article initially confirms (which you can read in the transcript I link to below) that the Fund has been evasive about its shareholdings in tobacco companies at previous Senate hearings. It has been increasing its stake in tobacco companies for some time (and riding a mini-boom in the industry even though:
The purchases occurred while the federal government was passing legislation for its plain packaging rules, which will require branding to be replaced by drab packaging with graphic health warnings.
The CEO claimed it was fine “because cigarettes are legal”. Of-course, legal doesn’t equate to ethical.
The Minister’s response was appalling. She said “it would be ‘inappropriate’ for a government to intervene in investment decisions by the Future Fund” and:
Whatever one’s personal views about investments, I do, and the government does, have a concern with a proposition that says the personal views of a politician should be the ones guiding investment decisions in the Future Fund.
While the FF is busily investing in products that cause death through long-term addiction, we are told that the Government has no money and so has to contract out vital public infrastructure investment via so-called Public-Private Partnerships (PPPs).
Please read my blog – Public infrastructure 101 – Part 1 – for more discussion on this point.
Further, we have a crisis in public education, particularly higher education.
Interestingly, the independent non-executive Chairman of the Future Fund, David Gonski, recently headed a committee investigating education in Australia. That Committee concluded that some $A6 billion had to be injected into public education immediately just to bring our system up to international standards. The pursuit of budget surpluses over the last 15 years has come at the expense of public education (as well as health, public infrastructure, environmental care, etc).
The Future Fund boss (Burgess) was asked whether the FF was planning to invest in public education given the high social returns that are available to educational investments and he said there had been no discussions.
But reflect back on the earlier points made about how this fund was established from so-called Federal budget surpluses. So we get the ludicrous and obscene situation where a government claims erroneously it has to starve public education (and health and etc) because it needs to run surpluses but then moves those surpluses into a speculative spending account, which they call the Future Fund, that then spends to support products that guarantee higher rates of cancer.
That is our national Government’s conception of a Future!
The tobacco scandal was covered by the Melbourne Age (October 16, 2012) – Future Fund back in the firing line – which carried quotes from the Federal Finance minister (Penny Wong).
The boss of the Future Fund appeared before the Senate Estimates Finance and Public Administration Committee yesterday (October 16, 2012) – and you can read the full Transcript if you wish of the interchange with the Senate panel (note that when I downloaded it earlier this morning the file was badly named and you had to edit the extension to ensure it would open).
The Hansard Transcript from yesterday’s Senate Estimates hearing with the CEO was interesting.
First, it revealed that the fund was performing no better than cash over the last financial year yet still paid the executives bonuses:
Senator CORMANN: … the Future Fund, according to your portfolio update of 30 June 2012, returned 2.1 per cent for the financial year to 30 June 2012, and has returned 4.4 per cent over a five-year rolling period. If you had invested all your funds in cash, what would your return have been over that period?
Mr Burgess: I do not have the figures on exactly what the return would have been over cash, but it would probably have been roughly about the same rate of return at this point.
Senator CORMANN: Without all the signs and administration costs?
Senator CORMANN: Did the Future Fund pay bonuses to its executives this year?
Mr Burgess: The Future Fund does pay bonuses. We have a very clearly structured remuneration program for staff.
Senator CORMANN: So did you pay bonuses in 2011-12?
Mr Burgess: We did pay bonuses for the year 2011-12.
Senator CORMANN: A range of other organisations—for example, AustralianSuper—did not pay bonuses on the basis that returns had been below expectations. Is there a point at which the Future Fund would make a decision that bonuses are not appropriate on the basis of lower than expected performance?
Mr Burgess: There is a very clear point at which bonuses do not get paid if performance is not delivered.
Senator CORMANN: How low do you have to go before you do not get bonuses?
The expression – snouts in the public trough – comes to mind.
The discussion then moved on and eventually came to the tobacco share holdings of the Future Fund:
Senator DI NATALE: Mr Burgess, can you tell me what the current value of the tobacco holdings in the Future Fund are?
Mr Burgess: We use a definition of the MSCI-GICS category, and the current value as that 30 June is $210 million.
There was a discussion then about the way the Fund delayed providing the government with information and the information provided appeared to be evasive, especially on tobacco share purchases.
The interrogation then moved on to discuss the Environmental, social and governance (ESG) risk management codes that the Future Fund is meant to adhere too. The interchange became almost comical.
The CEO initially claimed that by engaging with companies as shareholders the FF had a “a very powerful tool with which to improve corporate behaviour”. Okay. But how has that improved the tobacco companies behaviour? He was asked to “define what criteria were used for improved behaviour with the fund.”
… What I am specifically asking is that given that tobacco is an inherently harmful product and there is no safe use of tobacco—ultimately it will result in damage to your health if it is used as it is supposed to be used—then what is the criteria for improved behaviour that you are looking at?
… [an irrelevant answer was provided – page 22 – to which he was asked again] …
I suppose the question is very specific. Are there any examples, apart from cluster munitions, where the fund has exercised the option to exclude, that is, it no longer invests in that particular industry or company?
Dr Burgess: You are absolutely correct. The cluster munitions were excluded, but since the February policy. So the question is: during this last year have any specifically being excluded? The answer is no, but we have definitely very significantly engaged with companies, as we do, on an ongoing basis.
… [but what about the tobacco industry?] …
In the United States v. Philip Morris, we had the United States District Court Judge there quoting that the tobacco industry ‘survives, and profits from selling a highly addictive product which causes diseases … a staggering number of deaths … immeasurable … human suffering and economic loss, and a profound burden on our national … system’. The tobacco companies have known all of this for 50 years or more but they have continued with enormous skill and sophistication to deny these facts in public. This is all on the public record. We know that they have lied about the impact of smoking on lung cancer. This has occurred over 50 years. This was a ruling from a US District Court Judge. Given the 50-year-plus history of what I think is very shameful behaviour and anything but the actions of a good corporate citizen, how do you expect to be able to change that through engagement with the industry?
Dr Burgess: There is a lot of history there and opinions about the tobacco industry—
Senator DI NATALE: Are you denying that anything I have said is incorrect? This is not a question of opinion; this is all fact, and you have used the word ‘opinion’—
Dr Burgess: You were talking about the history of the tobacco industry over many decades. I have been with the fund for a year.
Senator DI NATALE: So rather than perhaps documenting the known and established track record of the tobacco industry, let us look at some of the companies that the Future Found is currently invested in. We are invested in 15 tobacco companies as of today. As of 30 June this year, we had about $57 million worth of shares in British American Tobacco. British American Tobacco gets most of its cheap tobacco from Africa. In countries like Malawi, for example, British American Tobacco, through its business practices, employ about 78 per cent of kids between the ages of 10 and 14 and 55 per cent of seven to nine-year-olds on tobacco farms for less than two cents a day. They have no protective clothing. There is malnutrition and nicotine toxicity. Kids are subject to abuse if they do not turn up to work on time. That is all aside from the fact that, in Africa, young kids are a very attractive new market for British American Tobacco. Given that $57 million holding, can you tell me how you expect to improve the behaviour of British American Tobacco as a corporate citizen through your engagement?
Mr Burgess: First of all, I cannot comment on the specifics that you have just raised. Let me give you an example of our process. If specifics are raised to us about a company, we have a very clearly defined process to review and look at that. We demand that our managers review and look at that and then we use service providers to review and look at that, and these are specialists in determining the corporate behaviour of companies. In this case, you are using British American Tobacco. If we are presented with examples as you have just given us today, we will look at that closely and review it to ensure that the company is behaving according to the standards that we expect, the laws, the treaties of Australia and the conventions. I think that is a very well-defined process and that is the way we approach looking at any investment.
Senator DI NATALE: As of 30 June 2012, the tobacco company that had the highest rate of return that the fund was invested in was an Indonesian company, Gudang Garam Tbk. They are the company that makes those lovely clove-smelling cigarettes, including the ones with the sweet tips that the kids like so much. In Indonesia, the average age for a kid to start smoking is under 10. There are about 65 million smokers in Indonesia. The company involved markets very heavily and targets very heavily young kids. In fact, I understand they sponsor schools and so on. Again, we have several million dollars invested with a 50 per cent return. It is a very healthy return, would you agree?
Mr Burgess: A 50 per cent return is a good return. That is true.
Senator DI NATALE: The question I have is that, given the behaviour of that company, how is it consistent, again, with ensuring that our ESG policy targets those industries with a poor track record and ensures that we improve that behaviour?
Mr Burgess: I think today you have outlined a series of views and opinions on the behaviours of companies—
Senator DI NATALE: No, these are facts. I have outlined a series of facts about the behaviour which these companies are engaged in.
Mr Burgess: As I mentioned, when we are presented with facts as you have outlined today, we will review them and look at them. So I will take that on notice and come back to you with a comment on those issues. That is what you would expect. There are a lot of opinions about companies. People may have views about the way a company is operating and behaving. The key is to do research. The key is that our managers do research into that. We use a variety of world-class service providers to assess the corporate behaviour of these companies. I will have to take your discussion on those points on notice but we will review that for you and come back to you.
Senator DI NATALE: This does not require extensive research. Most of this is actually a matter of public record. What about Philip Morris? If I started talking about the track record of Philip Morris, we would need a few hours, but they are the gold standard when it comes to denying the link between cigarettes and lung cancer. They have a systematic history of covering up evidence. They target young kids in their advertising. There have been very clear links demonstrated between pesticide use from that company and major birth defects. We now have $47 million in Philip Morris, with a 15 per cent rate of return. Again, I just want an example of how we are attempting to improve the behaviour of Philip Morris through our ESG approach.
Mr Burgess: As I mentioned, we would expect our managers to engage with any company that we invest in to ensure that they operate at the standards that we expect. We monitor that very closely. You have given detail today. I would have to take that on notice, come back to you and discuss that. We will provide that to you on notice.
Senator DI NATALE: Are you optimistic that Australia can have an influence through its Future Fund holdings? Just remind me about the resources. It has one part-time ESG officer—is that correct?
So you are optimistic that, through the approach you have outlined, we are going to see a change in behaviour within the tobacco industry and within each of the companies I have outlined to you— specifically the issues around child labour, around denial of evidence and around targeting young children through sweet tips on filters of cigarettes, sponsorship of schools and so on? You are confident that your ESG approach will change all of those things to improve the corporate behaviour of each of those individual tobacco companies?
Mr Burgess: As I mentioned, if we were presented with any specific issues or facts—allegations I would call them—then we would review them, and we would review them with our partners and our service providers to ensure that we understand the factors behind that. Moving to the issue of corporate behaviour, though, there is absolutely no question in my mind that engagement is vital to improve corporate behaviour on a global basis ….
Which is nothing short of unbelievable really.
So what is wrong with the Future Fund?
An understanding of Modern Monetary Theory (MMT) reveals that the Future Fund is a false construct in terms of its rationale. Whether the fund gains or loses makes no fundamental difference to the underlying capacity of the Federal government to fund all of its future superannuation liabilities and whatever else might be requiring or for sale in Australian dollars – at any time between now and infinity.
The Commonwealth’s ability to make timely payment of its own currency is never numerically constrained by revenues from taxing and/or borrowing. Therefore the purchase of a superannuation fund (in this case the Future Fund) in no way enhances the government’s ability to meet future obligations.
In fact, the entire concept of government pre-funding an unfunded liability in its currency of issue has no application whatsoever in the context of a flexible exchange rate and the modern monetary system.
The misconception that “public saving” is required to fund future public expenditure is often rehearsed in the financial media. In rejecting the notion that public surpluses create a cache of money that can be spent later we note that Government spends by crediting an account at a member bank of the Reserve Bank of Australia – that is, a commercial bank.
There is no revenue constraint. Government cheques don’t bounce! Additionally, taxation consists of debiting an account at an RBA member bank. The funds debited are “accounted for” but don’t actually “go anywhere” and “accumulate”.
The concept of pre-funding future liabilities does apply to fixed exchange rate regimes, as sufficient reserves must be held to facilitate guaranteed conversion features of the currency. It also applies to non-government users of a currency. Their ability to spend is a function of their revenues and reserves of that currency.
So at the heart of all this nonsense is the false analogy neo-liberals draw between private household budgets and the government budget.
Households, the users of the currency, must finance their spending prior to the fact. However, government, as the issuer of the currency, must spend first (credit private bank accounts) before it can subsequently tax (debit private accounts). Government spending is the source of the funds the private sector requires to pay its taxes and to net save and is not inherently revenue constrained.
However, trying to squeeze the economy to generate these mythical “pools of funds” which are then allocated to the Future Fund as if they exist is very damaging.
You can think of this in two stages. First, the Federal Government spends less than it taxes and this leads to ever decreasing levels of net private savings. The non-government deficits manifest in the public surpluses and increasingly leverage the non-government sector. The deteriorating private debt to income ratios which result will eventually see the system succumb to ongoing demand-draining fiscal drag through a slow-down in real activity.
Second, while that process is going on, the Federal Government is actually spending an equivalent amount that it is draining from the private sector (through tax revenues) in the financial and broader asset markets (domestic and abroad) buying up speculative assets including shares and real estate.
That is what the Future Fund is about. It amounts to the Treasury competing in the private equity market to fuel speculation in financial assets and distort allocations of capital.
However, as you can see from pulling it apart, this behaviour has been grossly misrepresented as providing “future savings” to pay for the superannuation liabilities.
Say the sovereign government ran a $15 billion surplus in the last financial year. It could then purchase that amount of financial assets in the domestic and international capital markets. But from an accounting perspective the Government would no longer have run that surplus because the $15 billion would be recorded as spending and the budget would break even.
In these situations, the public debate should be focused on whether this is the best use of public funds. It would be hard to justify this sort of spending when basic infrastructure provision and employment creation has been ignored for many years by neo-liberal governments.
How can the government justify purchasing any speculative financial assets when there were more than 12.5 per cent of willing labour resources either not employed at all or being forced to work less hours than they desired because of overall spending constraints in the economy?
How can a government justify purchasing shares in tobacco companies when their products cause death and inflate the resources needed for the public health system, while at the same time, they claim they do not have enough money available to provide a first-class public health service?
If we want to provide for a better future the Government should be spending sufficient amounts to make sure everyone has a job. That is a minimum requirement for improving the future prospects. Then it might spend some of the $60 billion it put in the speculative Futures Fund on medical research to find cures for cancer and HIV and to make our public schooling system the best that money can buy. That would be a funding the future.
The Future Fund does nothing for our futures and should be unwound as soon as possible and the executives made to earn a living somewhere else!
Running short of time today.
Lots of interesting things coming up in the next few weeks, including a trip to Korea (leaving tomorrow) for work I am doing for the Asian Development Bank on national development strategies in Kazakhstan.
Then next month I am off to Timor Leste to meet various officals including the President to discuss economic development and related issues. Of-course, I plan to disabuse the government there of the notion of a dollarised currency. I already made the point when they were setting up the nation some years ago – but I was ignored. Keep on message is my motto though, in case you haven’t already worked that out.
And then there is all the rest of it that I will report on over the next few months. Having fun in the tropics.
In the meantime, stay off the fags and drive the Future Fund broke.
That is enough for today!
(c) Copyright 2012 Bill Mitchell. All Rights Reserved.