By Richard Denniss, Chief Economist at The Australia Institute

[Read in the Sydney Morning Herald here]

Economic rationalism and neoliberalism are dead in Australia. In an unexpected twist, the idea that markets are good and governments are bad was killed by the right wing of Australian politics, who simply couldn’t resist the desire to shovel public money onto their friends and tie their opponents up in red tape.

Indeed, these days the so called ‘free marketeers’ in the Liberal National Coalition support subsidising new coal mines, nationalising coal fired power stations and introducing vast amounts of ‘red tape’ to tie unions, charities and NGOs in knots.

This week, even the Productivity Commission abandoned the idea that so called ‘free markets’ can be trusted to deliver good outcomes for consumers and the economy. After decades of advising governments that the best way to help consumers was to let consumers help themselves, the Productivity Commission’s recent review of the superannuation sector concluded that most people can no longer be trusted to choose the best superannuation fund and that a team of experts should instead select 10 low-fee, high-performing funds. I half agree with them.

There has never been any theoretical or empirical evidence to support the assertion that busy people who are forced to spend 9.5 per cent of their income buying a financial product, are well placed to choose from the tens of thousands of products on the market. None. Nearly ten years ago The Australia Institute published research that showed that – just as most people have no real skill in choosing the best heart surgeon or builder – most people have no idea how to choose between the (deliberately) dazzling array of complex financial products on offer.

The assertion that consumers were well placed to compare thousands of products that they didn’t want was always a convenient and profitable lie. And while most of us would, quite literally, be a lot richer if the Productivity Commission had called it out a decade ago, at least their new position has the potential to help significantly reduce the incredible fee gouging in the coming decades.

At the heart of the problems with, and profitability of, the Australian financial sector is the fact that all working Australians are forced to spend an amount equal to 9.5 per cent of their income buying some of the most expensive, and profitable, financial products in the world.

For decades governments have justified forcing people to buy compulsory superannuation products on the basis that people can’t be expected to make good long-term financial decisions by themselves. But bizarrely, those same governments built a system that assumed that those same ‘irrational’ consumers would … wait for it … make good long-term decisions when choosing which financial product they are forced to buy.

After decades of rampant fee gouging, the Productivity Commission has now concluded that millions of people have no capacity to, nor interest in, selecting the ‘optimal portfolio mix for their demographic profile and risk appetite’. And in turn, the Productivity Commission is now recommending that a panel of experts select ten low-fee, high-performance funds that those with no time or patience to look after themselves can be defaulted into.

But if experts can pick the best ten funds to invest our money, why not pick the best five? With 10 funds only ten percent of us would be defaulted into the best fund and 90 per cent of us would miss out on the lowest fees and the best return. If the experts picked the best five then 20 per cent of us could get the best deal. And if experts picked the best three funds, then 33 per cent of us would be able to maximise our retirements savings.

I know, I know- maybe the experts’ task would be a lot easier, and a lot less controversial, if they get to pick the best 10 funds instead of the best three funds; but think about that. If it is hard for well-resourced experts, whose day job is to pick the best funds, then how on earth did our successive governments tell themselves that busy parents were doing a good job of the same impossible task? The whole profitability of the superannuation industry is built on the fact that overwhelmed people stick with the expensive fund they accidentally happened to wind up in.

But there is a simple solution. We don’t need to pick the 10 best funds or the three best funds, we need to create one big investment fund focussed on making good investment decisions and keeping fees as low as possible. And luckily for us, we already have one.

The Australian government’s Future Fund already invests $166 billion. Chaired by former Treasurer Peter Costello, it already has the governance and investment structures in place to expand its role. Indeed, in 2015 when the Abbott government announced its Medical Research Future Fund it was housed within the existing Future Fund Structure to keep costs down.

In addition to the transparency and cost reduction benefits of consolidating more funds within an existing structure like the Future Fund, the creation of one single default fund would make shopping around for an even better deal even easier for those who are keen to try.

At present, most people know that they are getting ripped off but as soon as they start to look for an alternative they become overwhelmed by the vast array of options. Under such a situation the ‘rational’ thing to do can be to stick with a bad product for fear of picking a worse one. But if there was one big government-backed fund, at least consumers could simply ask themselves whether they were getting a better or worse deal than that. And if they wanted to switch from or to the Future Fund’s default product it would be easy; which is, of course, the last thing the underperforming funds making billions want it to be.

But while the idea that subsidies are bad and consumers can always look after themselves might be dead, the prejudice against governments directly solving citizens’ problems still runs deep in Canberra. If the Productivity Commission admitted that the Future Fund could do a better job of managing our money than the finance industry, they might next be asked to look at whether the public health system did a better job of providing health services than the (heavily subsidised) private health insurance industry, or whether the privatisation of electricity distribution had done anything to lower costs for consumers.

The ideology of neoliberalism is dead. Tony Abbott wants the government to build coal-fired power stations. Malcolm Turnbull wants the government to build Snowy 2.0. Gladys Berejiklian wants the government to build football stadiums and back when he was deputy PM, Barnaby Joyce got $10 billion to build an inland railway.

All sides of politics now agree that governments can and should spend up big on important things, they just can’t agree which things are important. It is not ideology or evidence that will stop us replacing high cost financial products with low cost products provided by the Future Fund, it is the political power of the finance industry in Australia. But every day the Royal Commission holds hearings, that power wanes. Let’s hope its term gets extended soon.

Richard Denniss is the Chief Economist for The Australia Institute. Twitter: @RDNS_TAI

His Quaterly Essay, Dead right: How neoliberalism ate itself and what happens next, is released Monday.