Data rights will empower consumers and business innovation

Peter Harris, the outgoing Chairman of the Productivity Commission, delivered the keynote address at the opening dinner of GAP’s 9th Annual Economic Summit on the 6th of September at NSW Parliament House.  The Summit this year focused on digital trade and Mr Harris took the opportunity to relate current developments to innovations of the past and emphasise the importance of the new rights given to Australians to jointly control their own data.

He noted that some years ago, a New York based media mogul sparked alarm with his prediction that new technology would force the mass media out of existence. “All those papers”, he said, “which serve as vehicles for intelligence, will be destroyed”. However, the editor of the New York Herald was speaking in 1845 and the revolution he feared was the invention of Samuel Morse’s telegraph.

The telegraph did revolutionise a wide variety of markets, change social interaction and eliminate some newspaper jobs. Junior scribes were no longer employed to rush from the docks to report the collapse of corn prices in foreign markets or the outbreak of disease, but this did not mean the end of the mass media. Newspapers adapted and increased the market for news by adding the astounding novelty of comment to supplement fact, all for the same price of a penny.

Whether it is weavers revolting against James Hargreaves’ spinning jennies in the 1790s or white collar workers threatened in the 1990s by the prospect of the paperless office, new technology is always feared as a threat to jobs and capital. In reality, while old jobs are lost and traditional processes are abandoned, new technology leads to greater investment and the creation of more jobs to replace them.

People who fret about job losses in the digital age should also worry about joining the massed ranks of pundits who predicted similar calamities in the past and were proved wrong by events. In the decades after the telegraph was introduced into the USA, newspaper sales grew more rapidly than any other period in history. In his seminal book, The Rise and Fall of American Growth, Robert Gordon notes that in the decade after 1870 the average American household purchased 3.1 different newspapers, up from 0.9 in the decade the telegraph was introduced.

The newspapers were spurred to add value through new features and comment because simple news sheets could no longer differentiate themselves in the market. Sales then soared with the introduction of comment, analysis and specialisation. Their rise was helped by improving rates of literacy, but there was plenty of completion from cheap books for people’s leisure time and yet the penny press thrived.

The telegraph also supported rail signalling system which allowed single track lines to be built in the USA, Canada and Australia, in contrast to the older twin line system in Great Britain. This massive saving in capital allowed much faster development of new lines in these countries, while Great Britain had already sunk a lot of capital into building dual line railways, and so transport costs shifted in favour of the new world.

The economic and social benefits of the telegraph were immense, and even if newspapers had perished forever, the net benefit to society would have remained immense. In 1890, the net benefit of the railway component alone was worth about 7% of US GDP, 40 years after the invention of the telegraph.

  • Wage growth relies on better productivity

No technological shift can claim a similar impact on national income today. Robert Gordon’s data shows the current revolution in digital technology is not generating the same productivity gains made in the 19th or first half of the 20th century, although the figures offer room for several interpretations.

Productivity growth has declined in Australia and around the developed world, creating a genuine and threatening problem, as improvements in productivity are the key driver of sustainable growth in incomes. Paul Krugman won a Nobel prize for demonstrating this fact, and Australia’s experience supports it, as income growth has declined across the nation for the majority of people since before the global financial crisis. While Australia is producing more, according to recent GDP figures, people are earning less.

The tail end of the mining boom obscured this reality for a while, but as soon as Australia’s terms of trade began to revert towards the norm, the growth in real wages ground to a halt due to poor productivity growth. The same trend continues in other countries, even the USA, despite the economic boost delivered by President Trump’s investment in infrastructure and major tax cuts.

Poor wage growth worries central bankers and centre political parties alike, because there are no simple policies to switch wage growth on and regain the faith of the public. Central banks around the developed world are tightening monetary policy, while countries with historically low interest rates, such as Australia, cannot reduce them any further. Either way, such policies are proving useless in tackling this wages drought.

Centre-right and centre-left governments know that artificial wage setting, like price regulation, would unleash a plethora of unwanted side effects, such as cutting the demand for labour. While some people might get a pay rise, others would lose hours or their jobs. Parties on the wider extremes of left or right may believe they can direct the economy, but history shows such schemes inevitably end in abject failure. Artificial wage regulations cannot deliver the objective of higher wages through the sustained consumer demand which highly developed economies like Australia’s depend on.

Some economists argue that it is too early to condemn the digital economy as a false revolution unable to deliver higher growth. It took decades for the railways to fully exploit the advantages of the telegraph, for example, or for electricity to revolutionise manufacturing.

Industry was slower than public authorities or the general public to switch from kerosene and gas to electric lights, as industry had already invested heavily in steam-powered equipment. Consumers had little capital tied up in kerosene lamps which might also burn their house down, and so were much quicker to adopt the new technology. The new electricity companies aimed their services at consumers and public authorities, because they could readily convert.

Manufacturers who used steam-driven belt and pulley systems across a fixed plant layout clung to the old system until it wore out, and so the productivity and wages boost from electricity was delayed for 30 years until a fresh generation of managers modernised the plants and the consumer benefits from electricity were matched by business gains. The current internet revolution may take a similar course, with the rapid and self-evident consumer benefits of today preceding business productivity gains in the future.

Mr Harris said he remained optimistic about eventual outcomes but conceded that delays in digitally driven productivity growth will not comfort a workforce faced with stagnant wages today. He noted the irony of the thing which we are most afraid of – the loss of jobs to automation – being the only development powerful enough to boost productivity and wages. History suggests that mining booms are rare, and the Chinese economy has already taken its giant leap into ‘guided capitalism’, leaving digitisation as the best hope for the future.

  • New consumer data rights will drive innovation

A 2016 study by the Productivity Commission led to an inquiry which recommended a new consumer right to data, currently in the process of legislating by government. Data is the building block for all digital businesses, but consumers and SMEs now have the right to access and exercise joint control over the data held on them by all data-collecting companies and authorities. Giving consumers the power to leverage their data should intensify competition and encourage innovation, generating the productivity gains which will increase wages in turn.

National legislation has also removed barriers to data sharing and allowed the integration of data across government and state health, education and social welfare departments to allow ongoing access to trusted researchers. It is hoped that people will be more inclined to trust government agencies which share their data in light of their new right to jointly control it. Governments can then use that data to design and implement policy more effectively and remedy the lack of policy evaluation which has been criticised in several Auditor General reports.

All datasets collected on an individual by public or private actors are, in principle, subject to the new right. This data can range from supermarket fly-buy points to My Health Records or their insurance history. Individuals will now be able to profit from their data, as it becomes a tradeable asset which they have perpetual rights to, shared with the data-collecting company.

The new Australian approach contrasts with European legislation which limits data collection and minimises the time for which it can be stored. Australia’s laws will see this valuable data preserved and used for other purposes, as the current destruction of datasets by researchers using government grants is akin to burning books.

Consumers may wonder what the value of their data in their various datasets may be, but a supermarket like Aldi might be willing to offer customers of Coles cash for access to their shopping habits. Customers could then tell Coles to send their data to Aldi and be paid for it accordingly. Customers’ data is valuable, and they can now trade it to realise its value for themselves, rather than it merely benefiting those who collect and use it. Consumers do not have to trade their data, but if they want to, their data will always be retained and available for use in the future. Consumers can now act in their own best interests regarding their data.

While the terms and conditions of firms such as Facebook may appear to grant their users access to their data, in reality it remains inaccessible. Australian case law also confirms that doctors own their patients’ health records, rather than the patients themselves. Patients cannot legally compel their doctors to share their information with a hospital, despite it being in their best interest. Research shows that health records only make a complete circuit from GP to hospital and back again 20% of the time. In other western nations, the benchmark is 60%.

Customers will not have to download or upload any data themselves, as the exchange will be handled by the institutions themselves. However, standards on the safe exchange of data will be required for citizens to trust the process sufficiently to use their data rights effectively. These standards will have to be developed and tailored for every sector. A set of banking standards have already been drafted and will allow customers to order their current bank to give their data to a new bank or “fintech” or to use it to solicit a better home loan. The new fintech industry can only offer tailored services to consumers, if they know more about their clients than traditional banks, and their customers can now offer these firms safe, regulated access to their data, increasing their ability to compete against the troubled traditional banking sector.

Australia’s decision to allow people to trade their own data will be a catalyst for competition and will encourage alternative suppliers, and so was not received well by traditional incumbents. Australian banks had to be encouraged by government to work with the standards setting group that will see the right come into operation in 2019 as part of ‘Open Banking’. Similar rules will cover telcos and electricity suppliers in the near future to allow consumers to trade their data and secure better deals. A request by a customer to their existing supplier to send data to a new one may soon be enough to trigger better offers to remain. This will help replace the complicated comparison websites which are often driven by hidden rates of commission.

  • Open markets need enforceable rules

As well as increasing competition for consumer business in industries dominated by a few large players, the creation of reliable market rules should drive improvement in the future, as it has over the last 150 years. Open markets need well-designed, enforceable rules such as property rights to make assets tradeable. Such rules allow markets to value choices and become self-sustaining mechanisms for efficient resource allocation. The new consumer data right has the same aim, giving consumers the ability to control and trade their data, rather than granting ownership of it, a concept which would have implied a raft of other legal consequences, according to the Australian Law Reform Commission.

Despite general recognition of the data market’s increasing significance around the world, it has attracted few rules to protect the public interest. There are innumerable examples of abuse or poor practice which have been borne with resignation by affected individuals, but this has not slowed people’s willingness to share information in return for free or better services. This reality underlines the need for rights which presume that people will keep sharing data because they want the services such firms provide, rather than attempt to constrain the collection and retention of data.

To avoid the danger of industry players manipulating their sector’s data sharing procedures to allow anticompetitive behaviour, the government accepted the Productivity Commission’s recommendation that the final version every framework must be approved by the Australian Competition and Consumer Commission (ACCC). Industries will undoubtedly attempt to limit the definition of what constitutes consumer data, as new concepts like this can be easily curtailed by constraints slipped into their details. While the definition of consumer data will differ between industries, as the stack of information required for a competitive offer in telecommunications will differ from that of health, sufficient data of the right type must always be provided.

  • Encouraging competition

Other countries are also trying to limit data trade through international agreements. India would like to develop its own version of Baidu, the censored Chinese search engine, and other successful Chinese entities, such as Tencent and its WeChat app, are role models for similar limitations. Australia’s trade negotiators must be more alert to this threat. China maintains its ‘Great Firewall’ for political reasons as much as domestic industry development, but other nations may be tempted to follow suit if they are allowed to.

Many countries now insist that data must be kept on domestic servers for ‘security reasons’, but cross-border cloud computing is one of the most important drivers of digital disruption, as it reduces the computing costs of new entrants compared to incumbents’ clunky on premises systems. Denying start-ups access to cloud services because data might cross borders will hamper digital growth, but this request has been raised in recent trade negotiations.

As well as the restrictive or anti-competitive policies which governments now seek, internet giants like Amazon and Alibaba are trying to create global trading networks which can wield market-changing power. Product suppliers in the respective US and Chinese markets these platforms dominate are increasingly forced to meet their terms, and the pressure which Australian supermarkets already put on their suppliers offers an example of what may happen here. Consumers may benefit from quicker delivery and lower prices in the short term, but at some point, regulators may have to examine their market power and make some difficult decisions.

Australia may not have to deal with these problems in the immediate future, but we will need a regulatory structure that comprehends the need to offset the market power that exceptionally large data collectors can assemble. A first step will be to ensure that whatever data they collect and wherever they hold it, if it is sourced from an Australian small business or consumer, it will be jointly controlled under Australia’s new consumer right.