The 2014 Budget, Entitlement, Compassion and the Australian Economy

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Hockey's budget has come out to a mixed reaction. Some say the budget is destroying what Australia is, some say it is a needed reaction to a financial crisis. Here's my thoughts - necessarily wide ranging. I'll look at several viewpoints : "Not a crisis justifying dramatic action", "Georgist", "Asset Problem", "Debt / Financial Instability". However, I'll leave out issues of sustainable economics and low-growth economics. Take a look at "Prosperity Without Growth" by Steve Jackson for a review of this issue.

Contents :



1. Regulation


While I'm mostly critical of Abbott and Hockey, I might illustrate one area where I'm almost sympathetic to them. I concede the Libs can do a better job of regulation, so long as it's not ideological axe grinding. Labor do tend to develop bloated bureaucracies and regulation.

I agree with regulation in pursuit of a political outcome. But it should be the minimum necessary regulation for that political outcome, and should not have impacts apart from those intended. Some speak of "consulting with business" to avoid unintended impacts. And maybe that's a point. But you need to be careful to avoid the opposite pitfall of "regulatory capture" where business just gets its way, under the guise of "consultation".

Still, while Labor may have a flashy car that is worth showing off, it is the Libs who will actually get around to tidying up the back room that everyone else has been putting off.

Labor has something to learn from the Libs. Nevertheless, I expect the Libs suffer from too much ideological leakage, with the costs outweighing the benefits. Hockey spoke about the "difficulties with a large amount of regulation". Well, he has a point. However, this reality is being used to cloak other ideological initiatives which cannot be similarly justified.


2. Entitlement or Compassion?


While Hockey used the exact words "The Age of Entitlement is Over", the underlying sentiment behind this expression is nevertheless clear. Welfare recipients and others as have "entitlement"; and we're supposed to feel resentful about that. It's an attempt to frame it as lazy people sucking money from the hard-working people who slave away for the benefit of people who don't appreciate their effort. Hockey emphasised that every payout comes at the expense of a taxpayer. Narrowly speaking, yes. But a handout can also be an investment by us in each other. If someone is ill, we get them better so they can work and pay tax.

Notably, Hockey identified "genuine" welfare recipients. However, this seems like a loaded sentiment, more a consequence of ideology than anything else. Perhaps we can afford to be compassionate with those who do not satisfy Hockey's narrow ideals of "genuine" - we're being compassionate rather than worrying about just who is "genuine".

For me, we should be able to afford being more compassionate, and I don't mind being taxed to support it. Alternatively, perhaps we all share in Australian society. Some of us pay more than others, but equally, we know that if we hit disaster, there is a safety net to look after us. So, we all share in Australia, not resenting those who are less well off than us. Shorten developed this idea, saying we're all interested in each other's health. Of course, there may indeed be some caught in a cycle of welfare dependence. There may indeed be some people who live up to the stereotype. Indeed. But their mere presence does not justify the broad sweep being made. Others might just need a bit of hand-holding and support while they get themselves back on track.

Some live marginal lives, where the health copayments or changes to Family Benefits will hurt. For many, the copayments may just be "two beers" - but some people struggle to find the money for "two beers". Shorten identified this in his speech.

In fact, this idea of "The Age of Entitlement" seems completely wrong headed. You might equally talk about "the end of compassion because we can't afford it anymore".

In fact, turn back the clock and go to the US, and you find Roosevelt articulating a very different set of notions, as pointed out by Professor Brian Ellis at the Blackheath Philosophy Forum :


In our day these economic truths have become accepted as self-evident. We have accepted, so to speak, a second Bill of Rights under which a new basis of security and prosperity can be established for all regardless of station, race, or creed. Among these are:

  • The right to a useful and remunerative job in the industries or shops or farms or mines of the Nation;
  • The right to earn enough to provide adequate food and clothing and recreation;
  • The right of every farmer to raise and sell his products at a return which will give him and his family a decent living;
  • The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad;
  • The right of every family to a decent home; The right to adequate medical care and the opportunity to achieve and enjoy good health;
  • The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;
  • The right to a good education.

All of these rights spell security. And after this war is won we must be prepared to move forward, in the implementation of these rights, to new goals of human happiness and well-being. America's own rightful place in the world depends in large part upon how fully these and similar rights have been carried into practice for our citizens. For unless there is security here at home there cannot be lasting peace in the world.

These are not "entitlements" which are the result of cushy wooly thinking lefties being imposed on us. They are noble things to aspire to, that our society could indeed provide these things, that they could indeed be considered "rights". There's an echo of them in Shorten's identification of Freedom as not just the abstract freedom of individualism, but the freedom of integrity and respect.

Now if we were to "unpack" the thinking behind Hockey's initiatives, I think it would run something like :


We have a financial crisis, which means we need to cut back on welfare programs. But as the recipients of welfare were this lazy undeserving lot who really did not appreciate the efforts of the hard-working taxpayers who supported them, it is not just a financial necessity, but something we can also justify because they were an undeserving lot in the first place.

There's the idea of "tough" decisions - but it seems such a loaded term, with so much about what a "tough" decision actually is reliant on the eyes of the beholder. Now there's other statements that Hockey might have almost made :

This financial crisis means that we must regrettably cut back on expenditures and benefits which some people rely on just to get by. I know that must hurt, and I'm not going claim the recipients are lazy or undeserving, or even that they're somehow "addicted" to entitlement. That would be wrong. It is going to hurt. But, I can only add that all Australians will be sharing the burden of this adjustment. And I'm going to make damn sure that we touch the bases of ethics, fairness and morality along with the strictly financial ones. I'm going to make damn sure that the rich of Australia don't get away without paying their share. We've thought things through thoroughly, and if we had not, we knew there would be a plethora of idiosyncrasies which would be perceived as being unfair. But we've looked ahead, and address those issues, along with the main game I've outlined.

... But he didn't.

Put aside everything else, there's still the issue of how fairly the burden of these changes sit on all Australians. And this last notion becomes still another issue.

Now, to be fair, Hockey has imposed a levy on those better off. You can look at this as bad, and say "Aha! That's a broken election promise". Or you can say "look ... good the more wealthy are paying a bit more".

A plethora of "stingers" have been identified. Yes, there's the deficit levy, which only hits the more wealthy. But there's also a lot of "hits" that other people take, which seem to overwhelm.

And then, Hockey has spoken about getting rid of corporate welfare. However, there's also a bevy of business benefits that continue, and people have noted the apparent contradictions. Ross Gittins ( noted in macrobusiness ) sees the claimed retraction of corporate welfare as a false claim.

Given the contradictions that persist, it seems that Hockey has not "really" spread the impacts evenly.

What does Hockey mean by "sharing" the impact? Sure, some elements of the rich may be paying more, but there's a swag of discrepancies that stick in people's craw. We see, for example, mining subsidies persist at the same time as the clamps come down on welfare. This strikes many people as unfair. It does in fact suggest that rather than being "thorough" so as to avoid such accusations - the Libs have ploughed in with an ideological bulldozer.

Hockey seems more concerned with impacts on comfortable taxpayers than he is on impacts on welfare recipients and struggling taxpayers people who rely on tax concessions. The issue is how you compare more tax on someone to fewer benefits for someone who already leads a marginal existence, and then try to claim that the burden is evenly spread.

Still, to be fair - the previous Labor Government did not want to get into the "rule-in / rule-out" treadmill. They had their own contradictions and tensions to deal with. Taken to its natural limit, you could say that the Government can't spend any money on something other than welfare as long as there is any disadvantage out there which could be alleviated. But this is an extreme position, not one I'd countenance. But, separately to this extreme - which we'd hopefully all back off from - it is still possible to see a bevy of contradictions which could have been avoided with a little foresight. That's a reasonable criticism.

There's some moral issues, around the nature of "entitlement", as Hockey would put it. But, another important plank is - how under threat is the Australian economy, and what action does that justify?


3. The Running Economy


Hockey's speech is loaded with references to debt and "fixing" the Australian economy. If he is to believed, our economy "broken" and in need of "repair" - so he talks about "fixing".

Hidden behind the rhetoric seems to be the assumption that it is not just individuals who might pay more or less tax, but rather the investors who might or might not invest - this might tank the economy, so we do not even have jobs enabling us to pay the tax in order to be compassionate. There's the related idea unsustainable debt - perhaps the ideas is that eventually creditors will foreclose, also tanking the economy.

We can justify debt if it is being used to support investment - infrastructure - rather than consumption. Using this logic, however, it seems that "being compassionate" must be labelled as "consumption" - and something we can ill afford.

Of course, you could increase taxes. Could we increase taxes and both support the compassionate state and wind back the debt? To some degree, it is Labor's plan. We know it is not the Liberal plan. Their rhetoric suggests they see taxes as "inherently evil", not something which has "its part to play". That's been noted in Paddy Gourley's piece in the WA times.

We can imagine an "investment and entrepreneurial strike" and capital outflow as taxes go up. Still, I know many Australians ( myself included ) would be willing to pay higher taxes, so long as the burden really is fairly distributed, in pursuit of a less brutal solution to these issues.

Some will resent tax. The question would be whether we could increase taxes in a way people would accept without wrecking the economy in other ways.


4. Overall health of the Australian Economy

We have some information from the world CIA factbook :


The Australian economy has experienced continuous growth and features low unemployment, contained inflation, very low public debt, and a strong and stable financial system. By 2012, Australia had experienced more than 20 years of continued economic growth, averaging 3.5% a year. Demand for resources and energy from Asia and especially China has grown rapidly, creating a channel for resources investments and growth in commodity exports. The high Australian dollar has hurt the manufacturing sector, while the services sector is the largest part of the Australian economy, accounting for about 70% of GDP and 75% of jobs.


Australia was comparatively unaffected by the global financial crisis as the banking system has remained strong and inflation is under control. Australia has benefited from a dramatic surge in its terms of trade in recent years, stemming from rising global commodity prices. Australia is a significant exporter of natural resources, energy, and food.

Australia's abundant and diverse natural resources attract high levels of foreign investment and include extensive reserves of coal, iron, copper, gold, natural gas, uranium, and renewable energy sources. A series of major investments, such as the US$40 billion Gorgon Liquid Natural Gas project, will significantly expand the resources sector. Australia is an open market with minimal restrictions on imports of goods and services. The process of opening up has increased productivity, stimulated growth, and made the economy more flexible and dynamic. Australia plays an active role in the World Trade Organisation, APEC, the G20, and other trade forums. Australia has bilateral free trade agreements (FTAs) with Chile, Malaysia, New Zealand, Singapore, Thailand, and the US, has a regional FTA with ASEAN and New Zealand, is negotiating agreements with China, India, Indonesia, Japan, and the Republic of Korea, as well as with its Pacific neighbors and the Gulf Cooperation Council countries, and is also working on the Trans-Pacific Partnership Agreement with Brunei Darussalam, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, the US, and Vietnam.

According to Philip Soos, our Government debt is sustainable by historical standards, and also favourable by international comparisons.

There are in fact voices in Australia critical of Australia's economic health, which we'll get to. And it is certainly worth engaging with those voices from inside Australia. With the range of views, however, it can be difficult to get a sense of what's happening. That's why outside views will have an objectivity that we would forever struggle to recognise. There's not just the CIA - world credit rating agencies have given Australia a provisional clean bill of health. Yes, they're concerned - but it not like they say we're currently in crisis enough to downgrade ratings, either.

But, let's nevertheless look at some of the concerns which have been expressed :


5. Shocks


While we can imagine increasing debt independently wrecking the economy, you can also imagine shocks to the Australian economy also wrecking it. A drop in exports through, for example, a shrinking Chinese economy ( though it could also be a more general global decline). Here the concern is not so much about the economy collapsing under its own weight, but rather it being "fragile". You'd have a knock on effects on the Australian economy, resulting in a recession, which means less jobs, and disruption on scale which exceeds any concern we might have about the reach of the compassionate state.

Leith van Onselen, writing in macrobusiness , talks about our "inverted debt structure" making us especially vulnerable to shocks. He approvingly cites Professor Michael Pettis :

With inverted debt [structures], the value of liabilities is positively correlated with the value of assets, so that the debt burden and servicing costs decline in good times (when asset prices and earnings rise) and rise in bad times.


Inverted debt structures leave a country extremely vulnerable to debt crises. Highly inverted debt structures are very dangerous because they reinforce negative shocks and can cause events to spiral out of control, but unfortunately they are very popular because in good times, when debt levels typically rise, they magnify positive shocks.


So - that's articulation of how our economy is "fragile". A "more robust" economy might be able to deal with a Chinese import drop, but with a "less robust" economy, such a drop might lead us into recession.

How large are these threats? In any case, what makes our current economy "fragile"? Abbott would have you believe it is the deficit, related to all his rhetoric about the "Age of Entitlement", but there are other more complex views around which don't really endorse this rhetoric.

Importantly, though it is private debt which is worrying, and it is not clear Government policies are particularly directed towards private debt. According to Macrobusiness, there is one area where Australia is different - our tax and spend approach :

... It does seem strange that France has lower taxation than Australia, given what is known anecdotally about France - or portrayed in movies like "Sicko" and generally seen in the ongoing news - very good public services, and taxes to match. We know tax rates in France are up around 75% ... but tax rates and the size of the economy are different things. But, an interesting graph nevertheless.

They claim high taxation and expenditure is a bad thing of itself - in fact I see it as a policy choice, not necessarily being "bad" - that's baggage you bring in from elsewhere.

But some emphasise the threat. One view is that, regardless of how low our debt is compared to other nations, that's no reason to be complacent. The second is that things are getting worse. According to Phil Bowen, head of the Parliamentary Budget Office:

If you just continued on the trajectory of payments and revenues prior to the budget, net debt is forecast to grow rapidly, I think, at the highest rate in the OECD. I don't think that's a fiction at all, but neither am I saying that we have an immediate emergency.


Sure we're currently at a very low level relative to the rest of the developed world, but frankly we don't want to find ourselves where the rest of the world is.

We've got to have a buffer. One of the reasons we came through the global financial crisis so well was because we started with assets.

OK, maybe Government debt is something of an issue. But .. where did this debt come from. In the case of Government, the Libs would have you think that its Labor propping up cushy lifestyles, welfare or something like that. However, Paddy Gourley, writing in WA today, suggests that Labor is not in fact to blame. Michael Keating, an economist and former secretary of the Department of the Prime Minister and Cabinet, points out:

if we have a fiscal problem, it does not seem to have been caused by excessive expenditure but by a drop in taxation revenue, and the prime cause of that was the miscalculations made by the Howard-Costello government when they embarked on their 2001 tax reforms, which have turned out to cost more than expected at the time

So, if we go back into the past to search for answers, the only question is how far back?

On the one hand we can blame "waste", "entitlement", whatever. But thing is, the budget is a combination of many things, some which you can point to as consumption and some as investment. And it's how they all add up, and compare to revenue. We can spend time partitioning off the "consumption components", but I don't know how useful that is.

Soos, though, emphasises private debt, not Government debt as the main source of concern. He says that Personal debt is 9%, mortgage debt at 84%, and non-financial business debt is at 50%, for a total of 143%.. Now, I assume that we're talking about foreign, not domestic debt - but I'll revise this article if I'm wrong. My gosh, that's potentially a huge foreign mortgage debt ... how on earth? Well, maybe it has to do with us getting loans from local providers which they then bundle up and sell on the international market. And we thought we were getting a domestic loan. But, we're after money, and the international financial market will provide. Ah, the international financial market, operating naturally, and providing better outcomes for us all ...

Yeah, right ...

We can engage with the issue in a measured way:

Yes the Government deficit is an issue, but equally it is not a "crisis" warranting the "sky is falling" reaction of Hockey and Abbott. Further, the focus seems to be on Government debt, ignoring private debt


6. Productivity


Improved productivity means goods get cheaper and we stay employed. Productivity ought to be so we can have bigger and better public hospitals and services, not so much that our goods provided by the economy can become cheaper. That needs to be the goal, but some people pursuing productivity improvements lose sight of the big picture. Greater productivity is a part of the path to a better world, not an end in itself.

Is there a tension between compassion - the identity of what Australia is - and productivity? What about "welfare"? Are there "reforms" to be made which improve "productivity"? That's a strange notion ...

Because of the benefits of improved productivity, you can pursue it regardless of whether there's a crisis - it is good in and of itself. But Hockey talks about this being even more important because of the economic crisis. Hockey seems to claim a more "Productive" economy means you have less Government involvement. To me, though, you can pursue "productivity" regardless of Government involvement.

Now, in moving to a more "productive" economy, there are two aspects - the first is that we'll all be better off because there's well ... more produce. But, there's other elements - that there's "unfairness" in the background, where different parts of the economy get an "unfair" return. Related to this idea is that the economy is "unbalanced" - there's too much wealth captured in, say land banking, when it could be directed more productively elsewhere. In other words, there's a claim of "more cheaper stuff in circulation" together with "less unfairness".

And so, Hockey seeks a "Productive" economy, and makes claims about how he will do that. Interestingly, there seems to a focus on those people previously entitled - receiving welfare payments - but not so much on people doing - say - land banking. And we can wonder about the relative impact on the economy of those two classes of people.

Improved productivity means changes, with winners and losers. While hopefully there will be a net improvement, the losers won't really relate well to the fact that the benefit to others exceeds their loss with an overall benefit to the whole economy; they'll only notice their loss. So, the identification of winners, losers and net benefit need to be made with care. Perhaps those effects will only be people belyaching; perhaps they will have legitimate concerns. This "mix" of effects needs to be identified with care, and sold with care. Importantly, are they "just" bellyaching, or do we have a case where the burden really is falling unfairly on the poor?


7. Outside criticisms


In contrast to critics, some outsiders see that Hockey hasn't made inroads on Australia's "real" economic problems. In particular, the people at macrobusiness in particular talk about this. Just what economic issues are "more important" seems to often correlate with issues that affect their own personal wealth. Still, maybe these issues do have an objective reality, quite apart from how it affects its advocates. They're worth engaging with.

Private debt is one issue.

Then there's the idea that our "wealth" is stuck in "non-productive assets and activities".

Macrobusiness claims there is "No desire to improve competitiveness in the Australian economy" in the budget; and, it seem that increased competitiveness is a good thing. Maybe it is a good thing - but only to the degree we have an improvement in our life. That's an important link to be made.

Negative gearing, capital gains tax, superannuation concessions all hugely mis-allocate of capital across the economy into unused land-banking and price speculation. ( Some of these concerns echo those of the Georgists, but there's a larger base)

There's also ideas of toll roads being over-valued and under-used, as compared to general roads being under-valued and congested.

Then there's not tying education funding to disadvantage.

Lots of little things which could be done.

For me, the issue is : can you make the reforms to facilitate competitiveness, winding back the mis-allocation through negative gearing and so forth, without winding back the compassionate state in the brutal manner in which Abbott is doing?

Now maybe sectional interests will be affected, the middle class will whinge, etc. etc. But that's rather different to current concerns that the current budget unfairly hits the less well off.

If you're going to make broad reforms, you have to be careful that they're not seen as falling unfavourably on the less well off. Abbott and Hockey have blown their chance of making this as a credible claim


8. Radical reforms

So, Macrobusiness have their ideas about "necessary" reforms.

But let me throw two others in from causes I'm involved with outside of here. That's getting rid of State Government and getting rid of tax concessions on Churches. They're due to get us at least $30 billion dollar a year each, perhaps a lot more. That sure can't hurt, given our budgetary pressures. Be a lot easier to afford the NDIS, NBN etc...

But, it does seem there's this battle - yes we have pressures, but as you go up the scale from good ideas in the community to party policy, the outlook gets narrower ... and narrower.

And here's Macrobusiness worrying about their reforms not being taken seriously! Mate, get a grip. You don't know how bad that feeling of being ignored can be! You know I feel like laughing at that claim - hysterically.


9. Reactions


OK, so we can worry about the overall health of the economy, and various macroeconomic goals. But how do we the people - react to Hockey's budget.

I see several different groups :


  • Business, abstractly defined.
  • Resentful taxpayers with at least a modicum of slack, who don't want to pay tax.
  • Taxpayers with at least a modicum of slack, who don't want their tax dollars wasted, but aren't that hung up about it, and can and do endorse the compassionate society.
  • Marginal taxpayers, perhaps in receipt of tax concessions, who must watch their budget.
  • People who receive benefits.



10. Battlers, Bellyachers, middle class welfare, and the marginals


Some are battlers, struggling to pay of their mortgages, raise a family, and keep themselves sane without sliding into decline. They're watching their budget closely, and if the interest goes up just a little - or other costs of living go up just a little - it hurts. So, they keep an eagle eye on Government taxes and other policies. They don't have the money spare to buy two beers - so if a copayment is introduced - they notice

There's also the marginals - the poor - who are even worse off than the battlers.

But, continuing the assessment. You also have people bellyaching. The people who installed six plasma TVs in their house and resent the Government which takes their hard earned dollars, an affront to their sovereignty. In a related vein, you have the recipients of middle class welfare, who resent any changes to their comfortable and well ordered life.

Then you have people who carefully watch the value of their assets, and whinge and complain whenever the Government changes policy.

So, yes, along with the compassionate puzzled taxpayers, and those who have to watch their budgets really carefully, some are certainly cheering Hockey on. Maybe some of them have a genuinely considered philosophical position, but some might just be thinking about their own financial interest. Regardless, the left and right do tend to throw rocks at each other.



11. Taxpayers with at least a little slack


But, next let's consider those well off enough to be concerned about the effects of the budget on others - more so than they're worried about their own tax.

It seems many taxpayers - notably including those employed in private industry - have no "deep seated resentment" about paying tax that the Liberal Government imagines them to have. We'd rather not have our tax dollars wasted. But that's a long way shy of endorsing the Liberal Government's brutal approach.

In fact, the Liberal Party talks about "incentives" in a way which is counter to my own experience. If I'm taxed more, I'm supposed to work less. In fact, in any given week I want enough money to live the lifestyle I want to live. If I'm taxed more, I'll work more to get the same amount of cash-in-hand at the end of the week.

Not only am I not as resentful about paying tax as I am supposed to be, I don't react to "taxation incentives" in the way I'm supposed to. I don't think I'm unique. We sure see a lot of private taxpayers saying "what?" about the current budget, saying "look I may end up paying less tax - but that's not my major issue".

I pay tax and I sure don't want the Government to waste it. The problem is, the Libs go in with an axe, and they destroy what I feel Australia is. Yes, I'd rather pay less tax. But not at cost the Libs are imposing. This is too high.

I want Australia to be compassionate. I'd rather pay more tax to support that, than have it go backwards.

So then, this is my conclusion at the end of all this. But I'll also make some broader comments about Abbott, this article seems a good place to park them.


12. Abbot, Legitimacy and the Future


I've spoken about Abbott on radio( along with Chard Core). It certainly seems that Abbott set the bar for honesty quite high going into the election, and took advantage of the capriciousness of the Australian people. And now the chooks are coming in to roost. Howard ran a "small target" campaign, as did Abbott - apart from the very strong commitments he made as he was losing traction at the end of the election campaign. Howard, at least, had a honeymoon period. Abbott did not. Howard somehow managed to bring the Australian people on board. But we forget just how touch-and-go it was. Yes, Abbott may be in for a single term. Maybe.

I see lots of people complaining about Abbott, saying he should resign. Now, I've no love of Abbott, but this does seem a lot like Abbott saying Gillard should resign. Actually, Gillard was replaced with Rudd, and you'd think the Liberals would have embraced that change, because it's what they wanted. But no, they continued to criticise, even after they'd gotten what they wanted. Go figure.

Look. A Government does not need the confidence of the Australian people to Govern. It needs the confidence of Parliament. It needs the confidence of the Australian people to win an election, but that's a separate issue.

Apart from a revolution, you're not going to get a change of Government till the next election. It's our constitution. It's how it works. It may be useful to make your feelings known, and put Abbott on notice, but the objective should be remind those marginally attached to Abbott that they really have been sold a dud, so they don't vote for him at the next election.

In fact, trying to get Abbott to resign would probably be counter-productive if you want a change of Government. If Turnbull were to become leader, it might just increase the chance of a second term Liberal Government. Is that what we really want? Abbott's doing a lot of good at the moment - right where he is.

I know an Abbott Government is not good. I know people will suffer. But it is not like an epidemic, a Tsunami, an earthquake, or the economic implosion of the former soviet union. It's a Liberal Government. Australia needs to endure the experiment of the Liberal Government, learn from its mistakes, and replace the Government at the next election. And if Abbott stays right where he is, this improves the odds of this happening.

That's how it has to be. Maybe we, the Australian people will get smarter. That which does not kill us makes us stronger ... ( Nietzsche )