Question on Notice response to the Select Committee on Red Tape

Red Tape Committee
Department of the Senate
PO Box 6100
Canberra ACT 2600

Dear Committee,

At the Sydney public hearings on the Select Committee on Red Tape on 24 February 2017, Senator Dastyari asked me to take on notice a “large ideological question”:

Do we want socialism in one country or perpetual revolution?

I am glad to supply an answer to this question.

Senator Dastyari’s question recalls a debate between Leon Trotsky and Joseph Stalin regarding the future direction of the socialist movement. I doubt a debate between two totalitarian mass murderers remains a major bone of contention within the Australian Labor Party in 2017. As the Senator would know, Lenin dismissed Labor as a “liberal-bourgeois party”.

But as Karl Marx and Friedrich Engels so compellingly pointed out in their Communist Manifesto, the bourgeois “has played a most revolutionary
role in history”. They observed that “by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, [the bourgeoisie] draws all nations, even the most
barbarian, into civilization”.

Marx and Engels are spot on. The competitive marketplace, with the innovation and change brought about by free entrepreneurial activity, is itself a permanent revolution. The Labor Party, having presided over much of the economic reform of the last few decades, can rightly take credit for allowing the permanent revolution to be unleashed in Australia.

Contrast this revolution of the free market with socialism in one country. Countries that have experimented with the socialist model of economic control have stagnated. They have been forced to copy and counterfeit living standard-enhancing technologies rather than contribute towards that technological development. Central planning has historically been deeply inefficient and corrupt. The economic problems of planning do not seem likely to be resolved any time soon. The necessity of centralised power in order for planning to function also creates serious problems of political authoritarianism. It could be said that socialism in one country is also a “permanent revolution”, but unlike the market revolution (which grows wealth, living standards, and the ability for individuals to live
the lives they choose) the socialist revolution is a revolution against its own citizens.

It should be clear that I favour the permanent revolution of the market to a permanent revolution of socialist control. However, as recent political events have emphasised, the market revolution also entails disruption, as industries shift across borders and technological change undermines established business models. Furthermore, in our actually existing political-economic system, the heavy burden of regulation, red tape and taxation can make it hard to establish new firms to replaced obsolete ones, prevent successful firms from expanding, and encourage rent-seeking and other prosperity-reducing behaviour.

I advise that the growth of the administrative state, with its network of unaccountable and antidemocratic independent regulatory agencies, and quasi-independent watchdogs and standards bodies, has failed to suppress the market’s permanent revolution, but has placed many obstacles for citizens and workers who have to try to adjust to those changes. If parliament wants to help workers adjust to the permanent revolution, it should be looking to repeal regulatory and red tape burdens that make it harder to find a job and grow a business.

Please do not hesitate to contact me further for more details

Kind regards,
Chris Berg
Postdoctoral Fellow, RMIT University
Senior Fellow, Institute of Public Affairs

“Stop This Greed”: The Tax-Avoidance Political Campaign in the OECD and Australia

With Sinclair Davidson. Published in Econ Journal Watch (2017) vol. 14, no. 1, pp. 77-102.

Abstract: Corporate tax avoidance has come to be a major political and popular issue. This paper considers the evolution of the corporate tax debate; it scrutinizes the empirical claims and the calls for crackdowns on corporate tax avoidance. It focuses on two jurisdictions, the OECD and Australia, to show how international claims were reproduced in domestic political rhetoric. The paper then considers the economic function of tax competition, and examines the evidence underlying the OECD’s claim that the corporate tax base is being “eroded” by “profit shifting” to lower tax jurisdictions.

Available at Econ Journal Watch

Safety and Soundness: An economic history of prudential bank regulation in Australia, 1893-2008

Abstract: This thesis is an economic history of the prudential regulation of banks in Australia between the crash of 1893 and the global financial crisis (GFC) of 2008. It applies two theoretical frameworks in order to characterise the institutions of prudential regulation and identify the sources of regulatory change over the period studied. The institutional possibility frontier is used to characterise regulatory regimes. Three common models of political economy – public interest, public choice, and ideas – are used to identify the causes of changes in those regimes. The thesis uses unexamined and underused archival sources to refine and expand our understanding of regulatory change in the period studied.

As policymakers in the wake of the GFC conceive of new approaches to prudential regulation of banks, it is important to understand where and how prudential regulation has been adopted in the past. Yet no general study of the history of prudential regulation of banks in Australia exists. This thesis is an attempt to provide that study. Prudential regulation in the period covered has swung between extremes: first, from a laissez faire approach to regulatory control, where regulation was both light and poorly administered, to a system of financial repression, where prudential regulation was both heavy and thorough. As the Australian financial market has been opened to foreign entrants and global competition since the 1980s, prudential regulation has been expanded, formalised, and internationalised. Prudential regulation of banking offers a window into broader changes in the way Australian governments have controlled economic activity.

The thesis makes a number of significant contributions to knowledge. First, it finds that, contrary to later claims by the Reserve Bank of Australia, the Curtin government established a bank deposit guarantee in 1945, and was understood to have done so by the parliament and the Commonwealth Bank, which was to administer the guarantee. Second, it offers a new history of the origins of the deregulation movement in Australia, by situating the Fraser government’s 1979 Campbell committee inquiry into financial regulation in the context of a building society crisis and a contest between two visions of Australia’s economic future. Third, it offers the first account of Australia’s rapid adoption of the international Basel Capital Accords in 1988. Fourth, it provides a new interpretation of the development of prudential regulation after the introduction of foreign banks in 1985, which helps identifies the ideological drivers and economic pressures that led to the (re)creation in 2008 of the Australian bank deposit guarantee scheme by the Rudd government.

The thesis also develops a new theoretical approach to analysing changes in political economy. The ‘subjective political economy’ framework aims to integrate diverse ideological viewpoints and motivations into an institutional model of regulatory control. By characterising institutional choices as a trade-off between subjective costs, the thesis shows how changing ideas about the purposes, possibilities, and risks of prudential control drove regulatory changes. Furthermore, the framework provides a way to understand institutional innovation as changing perceived costs places pressure on the institutional choices available.

The thesis finds that the history of prudential regulation of banking in Australia was driven by changing perceptions of the relationship between the state and the economy and the responsibilities of governments to bank depositors. Australians have long seen the relationship between banking and the state as a window to understand political economy more generally. By bringing the Basel adoption and prudential regulatory changes to the front of any account of the period of financial regulatory reform, we can see how the reform movement of the 1980s was characterised less by ‘deregulation’ and more by regulatory evolution and expansion. A reassessment of the changes in prudential regulation since the crisis of 1893 should inform our understanding of the trajectories and development of Australia’s regulatory state.

Available in PDF here.

The Case for the Repeal of Section 18C

With Simon Breheny, Morgan Begg, Andrew Bushnell, and Sebastian Reinehr

Executive Summary: Research conducted by the Institute of Public Affairs demonstrates that section 18C of the Racial Discrimination Act 1975 must be repealed to protect freedom of speech in Australia.

Part A of this report comprehensively outlines the case for the full repeal of section 18C, and the reasons why alternative proposals for reform fail to stand up to scrutiny.

The key arguments of this report are that section 18C:

  • Is a restriction on the human right to freedom of speech and an attack on human dignity;
  • Undermines democracy
  • Is inconsistent with a peaceful and cohesive society
  • Punishes defendants through an unfair process
  • Is partially redundant
  • Undermines attempts to combat racism
  • Is unconstitutional.

The report rejects the following proposed compromises as inadequate:

  • Removing ‘offend’ and ‘insult’ from section 18C;
  • Replacing ‘offend’ and insult’ with functionally similar language;
  • Reforming the process for hearing section 18C or the Australian Human Rights Commission.

None of these reforms will address all of the problems created by section 18C.

We conclude that section 18C must be repealed in full, along with the associated provisions in Part IIA of the Racial Discrimination Act 1975.

Part B of this report outlines the history of section 18C and how it has been interpreted. This information forms the basis for the argumentation in Part A.

Available in PDF here.

Section 18C, Human Rights, and Media Reform: An Institutional Analysis of the 2011–13 Australian Free Speech Debate

With Sinclair Davidson. Published in Agenda (2016) vol. 23, no. 1, pp. 5-30.

Abstract: The paper examines two Australian freedom-of-speech controversies between 2011 and 2013 – the debate over section 18C of the Racial Discrimination Act, and the debate over the Gillard Government’s print media laws. These controversies featured rhetorical and ideological debate about the limits of free speech and the nature of human rights. The paper applies a ‘subjective political economy’ framework to these debates in order to trace the effect of increased perceived ‘disorder costs’ and ‘dictatorship costs’ of freedom of speech restrictions. The paper concludes that policy change is driven by exogenous changes in perceived institutional costs. In the case of the Gillard Government’s media laws, those costs were borne by the Gillard Government, and one would not expect print media laws to be a major political issue in the absence of a further exogenous shock. In the case of section 18C the revealed dictatorship costs of legislation, which includes the words ‘offend’ and ‘insult’, suggest the section 18C controversy will endure

Available at Agenda

Unleashing Prosperity: How to cut red tape on farmers and Australians

Address to the Pastoralists and Graziers Association of Western Australia 2016 Annual Convention, Friday, 2 September 2016 at Crown Perth, Burswood

Australia is a country with enormous potential.

We have some of the most productive and technologically advanced primary industries in the world.

While agriculture is only 2.3 per cent of GDP, Australian agriculture produces enough food to feed 80 million people.

Yet this productivity and potential is being limited by poor public policy settings.

In this speech I’m going to outline the cost and consequences of red tape on Australia’s economy and primary industries – how large the burden of red tape is, how much new red tape is introduced every year and the enormous army of bureaucrats employed to invent, design and enforce it, and how it puts us behind our international competitors like Singapore and the United States.

I’ll then explain how red tape reduction efforts have failed and how they can be revitalised. Red tape can be cut, as it has been in other countries like Canada, Sweden and the Netherlands.

Finally, I want to briefly reflect on the moral consequences of red tape – how it prevents us from achieving the human flourishing that should be the goal of every policy approach.

But I should start with the big picture.

Australian Commonwealth governments have been unable to return their budget to surplus after the dramatic increase in spending by the Rudd government.

We are now spending almost as much as that government did in their extraordinary stimulus ever single year. Expenditure for 2016-17 is projected to be 25.8 per cent of GDP, compared to the 26 per cent of GDP which was spent in the crisis year of 2008-09.

Australia’s gross public debt will soon rise to over 30 per cent of GDP. The Australian government owes its creditors half a trillion dollars. This will have to be paid off by our generation or the next.

Until then, each year we are paying interest on that sum. In 2016-17 the Australian government is expected to pay $12.6 billion in net interest payments alone.

To put that in perspective, this is almost as much as the Western Australian government spends on health and education combined.

The facts I have outlined are well known, if rarely stated in these stark terms. Each government since the Global Financial Crisis has promised to return the budget to surplus and ease the debt burden on the Australian economy, but each government has failed to do so.

The Coalition has been unable to reduce spending to the levels needed to make the budget balance.

Given that spending cuts seem to be off the cards, and the economic consequences of increased taxation would be harmful – there is only one other trigger left that would restore our public finances.

We need to focus on economic growth. Governments need a singular focus on growing the economy out of fiscal mess. If we are to learn to live with big government we need to be able to pay for it.

Growth would return those on unemployment benefits into work. Growth would increase government revenues without increasing the taxation burden on individuals and businesses. Growth would ease the strain on social services, allowing more people to fund their own healthcare and education.

Growth brings about increases in living standards, it brings innovation and technology to yield positive environmental outcomes, and most importantly, growth brings human flourishing – the ability for us to be the individuals, and the society, we want to be.

I’ve given this lengthy introduction to a discussion about red tape and agriculture because it’s vital to understand what Australia’s heavy red tape burden means.

By throwing up barriers to enterprise and development, red tape means a slower economy, less opportunity, lower living standards, and fewer people innovating, creating, and serving their communities.

In the last decade, between the years 2006 to 2016, Australia’s real GDP growth has been just 1.1 per cent per year.

In the IPA’s analysis, the answer to the question of why Australia has not recovered from the Global Financial Crisis as it recovered from the recession of the 1990s or the economic upheaval of the 1970s is over-regulation.

Governments now see their role as interfering in markets and controlling business with red tape and unnecessary regulatory control.

The result is unprecedented legislative hyperactivity whose consequences we are now seeing in slower growth and prosperity.

It took the Commonwealth just 358 pages of legislation to set the federal government up in 1901.

But in 2015 the Commonwealth passed an impressive 6,453 pages of legislation.

That doesn’t include all the subordinate legislation – thousands more pages of spiralling rules and regulations governing what businesses must do before they can expand and employ.

Nor does it include all the state legislation its subordinate legislation. Or the local government bylaws and requirements. Or what political scientists call quasi-regulation: the codes of practice, standards, and requirements that are imposed by industry bodies on the government’s behalf.

This sheer volume of legislative activity is itself damaging.

The constant revision of rules and regulations means businesses have to dedicate resources to monitoring and interpreting the whims of parliament and a growing number of regulatory agencies.

By our count there are 497 bureaucratic bodies involved in the design, implementation and enforcement of red tape at the Commonwealth level alone.

Businesses are used to the uncertainty of market competition – the shifting winds of the global economy, changing exchange rates, the preferences of consumers – but we are increasingly asking them to be political soothsayers as well – to monitor and predict the whims of the political class.

We should not underestimate the uncertainty this brings about.

Economic certainty and the rule of law, thought Fredrich Hayek, was the bedrock of Western economic growth.

Uncertainty about current or future red tape makes it risky to invest, employ and to grow.

The consequences of red tape and uncertainty are being felt across the economy.

For all the enormous innovation and technology that drives our living standards forward, on a number of traditional indicators the Australian economy is less dynamic than it has been in the past.

Fewer new businesses are being created now than they were ten years ago.

The Australian Bureau of Statistics says the number of new businesses that enter the economy each year has plummeted from 17.4 per cent of all businesses to 13.4 per cent of all businesses between 2003 and 2015.

How many potential firms have we lost in the last decade because Australia’s red tape has been seen as unattractively burdensome, or the future regulatory environment to unstable or uncertain?

The Commonwealth government estimates that red tape imposed by the federal government costs the Australian economy $65 billion a year.

Commonwealth public servants use a range of techniques to come to that estimate, such as surveying regulated firms to find out how much time they spend on complying with paperwork and bureaucracy.

But the amount of time filling out forms is only a tiny sliver of the burden of red tape.

Red tape does more than impose paperwork – it slows and reduces investment, it distracts businesses from more profitable endeavours.

Earlier this year the Institute of Public Affairs came to a new calculation of the burden of red tape on the Australian economy.

We did so by looking at the relationship between the World Bank’s “regulatory quality index” and real GDP per capita using a method developed by two American economists in 2014.

We find that red tape costs a massive $176 billion to the Australian economy.

Let’s just pause for a moment and look at what that means.

It means that the government’s best estimate has underestimated the burden of red tape by more than $100 billion.

It means that the red tape burden constitutes 11 per cent of Australia’s GDP.

It means that the red tape burden is larger than any other Australian industry.

It means that red tape costs each Australian household on average $19,300 a year.

And, fundamentally, it means that red tape is the single largest burden on the Australian economy.

While Australia tends to do very well in many global comparisons of government stability and corruption, the World Economic Forum has found that we are in the bottom half of the world when it comes to business perceptions of the burden of government regulation.

This means that Australia has a heavier perceived burden of regulation than Singapore, China, Canada, the United States, and New Zealand – that is, those countries with which we compete.

Each individual permit, licence, or government approval looks trivial and minor when it is first introduced, but they add up.

The Australian Business Licence Register lists more than 30,000 licences across the country.

The Roy Hill iron ore mine required more than 4,000 separate licences, approvals and permits in its pre-construction phase alone. Many more have been required for production and operation.

A recent Deloitte report suggested nearly 10 per cent of the mining workforce is dedicated solely to regulatory compliance.

The Consolidated Pastoral Company has estimated that it is required to comply with more than 300 pieces of legislation, regulations and codes.

But red tape hurts small businesses even more than large businesses.

The Australian Chamber of Commerce and Industry has found that 47 per cent of small and medium businesses in Australia were prevented from making changes to grow their business from the weight of red tape.

Large firms can dedicate the resources to monitoring and complying with regulation. They can hire lawyers and economists and consulting firms.

A small business with less than 20 people typically has to rely on its owner-manager to do this work. Not only will this person lack the training and specialised knowledge required, but every moment spent on regulatory compliance is a moment not spent on innovating, adapting and adjusting to the demands of the market and clients.

A 2013 survey by the Australian Institute of Company Directors found that red tape and workplace relations regulation were second only to general economic conditions as barriers to productivity growth.

But the 2016 election was the first election in recent memory that neither party offered a significant red tape reduction plan.

In 1996 John Howard promised to halve the red tape enveloping small business.

In 2007 Kevin Rudd declared that red tape was eating away at the enterprising spirit of small business. The Rudd government established the Commonwealth’s first minister of deregulation.

In 2013 Tony Abbott promised to cut $1 billion worth of red and green tape a year.

But in 2016 the only notable mention of red tape was buried in page 19 of the Coalition government’s National Economic Plan, with a promise not of reducing red tape but of spending $5.6 million to “systematically review regulatory regimes”.

The Abbott-era red tape reduction programs – like the special parliamentary sitting days dedicated to repealing legislation – were quietly cancelled earlier this year.

This is, to be fair, not due to any lack of political will.

Many of the red tape reduction policies were stymied by the Senate. For example, the government was unable to reform – not abolish – the government’s workplace gender reporting requirements.

The requirements are the definition of red tape. The require firms with 100 employees or more to report to the government the gender composition of their staff, pay rates for men and women, and flexible working arrangements.

The government does nothing more than collect this information – it imposes no obligation on firms to do anything differently.

Gender reporting requirements are both intrusive and pointless.

But the government withdrew the changes when it learned how much of a backlash awaited it.

Likewise, modest changes to the regulation of financial advisors to avoid some of the perverse and unintended consequences of increased regulation under the Labor government, were rejected by the Senate.

Politics is not the only barrier to red tape reform.

As the Abbott government found, the public service itself has an obvious interest in maintaining its grip over the Australian economy.

In July this year the Canberra Times reported that the Coalition’s policy to link senior public servant bonuses to red tape reductions – effectively a pay for performance measure for deregulation – had been ignored and refused by those public servants who were supposed to implement it.

Last month the Productivity Commission released its draft report into the regulation of agriculture. The commission’s found that agriculture was subject to a “vast and complex array” of regulation and red tape, that affects every part of the supply chain.

That red tape emanates from state, local and federal governments and frequently duplicates regulation imposed by other levels of government.

Red tape delays the construction of dams, delays innovative new uses of land, and delays the introduction of new technologies like drones.

I’d like to briefly focus on one of the commission’s recommendations that illustrates clearly the opportunities and challenges for red tape reduction.

The PC found that native vegetation controls harm productivity, are complex and costly, and duplicated across state and federal governments.

Rigorously adhering to the requirements of state legislation is no guarantee that the federal government will not override that compliance and impose new costs and controls on a landholder.

These native vegetation rules extort landholders and users on the basis of often vexatious claims about biodiversity.

The commission recommended that state and Commonwealth governments adopt more market-based approaches to protecting native vegetation.

To understand why markets would be better for the environment its worth briefly describing the perverse incentives created by native vegetation regulations.

Economists describe property rights as a “bundle of rights” – that is, a bundle of rights to use, exploit, inhabit and sell land.

When the government imposes control on the use and exploitation of privately held land they are effectively seizing part of the property rights without compensation to the landowners.

From the government’s perspective, it costs nothing to prohibit people from clearing land for their use.

They have every incentive to prohibit more and more – particularly if they are driven, as many environmental bureaucrats are, by a deep ideological hostility towards our primary resources sector.

The Australian Conservation Foundation’s Andrew Piccone last month described “big cattle, big agriculture and big mining” as “the marginal and unimaginative industries of last century” and a threat to prosperity.

Market based approaches to native vegetation protection are designed to fix this incentive problem.

Governments should have to pay for the land they lock up – to compensate landowners for the property rights which have been taken and to fund the upkeep of that now undevelopable land.

If the Australian community wants to prohibit development it should be asked to pay for the cost of that prohibition – not to fob responsibility onto landowners who suddenly find themselves poorer.

But market based alternatives to red tape are a hard sell because so much red tape is designed not to control economic activity but to prevent it.

The complexity and cost of so much red tape is no accident – it is driven by political opposition to the primary industries that have underpinned our prosperity.

To understand that much red tape is in fact designed to prevent economic activity is to understand why reducing it is so challenging – the special interests who oppose development and growth do not see red tape as merely consisting in form filling or compliance activity, but a tool to stop economic activity.

The government’s demand that it approve development is, clearly, the government’s insistence of the right to deny development.

With this in mind, how can we reduce red tape?

There is an enormous political interest in red tape reduction, and a growing recognition that red tape is the single largest constraint on Australia’s prosperity.

But we have surprisingly little information about exactly how much red tape there is on the books.

All the political goodwill in the world is not enough – governments which promise to reduce red tape need to be held accountable. Ministers who want their departments to reduce red tape need to know that the job is being done, not evaded.

The In most successful red tape reduction in recent history was done by the Canadian province of British Columbia, which has managed to shrink its red tape burden by nearly 50 per cent between 2001 and 2015.

British Columbia’s economic performance relative to other Canadian provinces jumped from one of the lowest performing to one of the best.

The key to the British Columbia success was verifiability. In recent decades bureaucracies have been encouraged to calculate a total cost of the burden of individual regulations on business. But these calculations are crude and can be easily gamed by bureaucracies and self-interested politicians.

Instead the government of British Columbia counted the number of “regulatory requirements” imposed by law – the commands from government that forms need to be filled out, permits need to be obtained, committees need to be formed, and so forth.

In 2001 British Columbia had 330,812 of these requirements. As of March 2016, the regulatory requirement count was down to 173,419.

Under their rules, no new regulation can be introduced without removing an old one. At one stage the government imposed a one-in, five-out rule.

This is the “trust, but verify” approach. We need to be able to see red tape being reduced.

Clear and unambiguous reductions in red tape boost business confidence and the willingness of firms to invest in Australia.

But the real lesson I want you to take from this is the simple fact that red tape can be reduced. It is easy to be cynical about red tape reduction, considering we have had two decades of underwhelming attempts to do so. But other countries and jurisdictions have managed to cut red tape, cut it deeply, and are better off as a result.

It requires a political willingness to commit – and to be seen to commit – to genuine reform, underpinning by a deep understanding of the harm that red tape is causing to the Australian economy, to Australian jobs, and to Australian prosperity.

We are in a point in history where alternatives to regulation and the old way of doing business are thriving – changes caused by technology, by education, and a highly specialised and open market.

To fully exploit these changes into higher living standards we need to cut the red tape that was designed for earlier eras, and prevent governments from adding more.

But I’d like to finish with a brief reflection on the deeper harm that red tape does to us as a society and as individuals.

That is, the moral consequences of red tape.

When the government imposes red tape on our economic activities, on the businesses we create, on the people we seek to employ, on the goods and services we deliver to the community, it is asserting a control that is deeply paternalistic and disempowering.

It is a claim that governments know better than their citizens about how to care for the environment, how to develop a safe and effective workforce, how to run machinery, how to move goods between two points on a map, what employment conditions are more fair, who should be able to practice a profession.

It elevates the preferences of bureaucrats over the people they are supposed to work for.

And it does so at the expense of the economic growth Australia’s economy desperately needs.

It is no exaggeration to say that red tape is the most fundamental challenge that faces the Australian economy. We believe that the public understands this. But our job now is to convince the political class to do something about it – to cut red tape and unleash Australian prosperity.

Evidence-based medicine: A predictably flawed paradigm

With Michael Keane. Published in Trends in Anaesthesia and Critical Care (2016) 9, September, pp. 49-52.

Abstract: Is evidence based medicine the most appropriate paradigm for advancing clinical knowledge? There is increasing discussion of how evidence and science guides clinical medicine and the accumulating awareness that individualized medicine inevitably falls within a clinical gray-zone. Here we argue that the basic proposition that an analysis of historical data from controlled trials can objectively and efficiently decipher what treatments are uniformly superior is fundamentally flawed. We also argue in particular that in such a complex system as acute medicine it is predictable that randomised control trials will frequently lack the fidelity to give definitive or even useful answers, especially around the margin of progress.

Available at ScienceDirect or Academia (accepted manuscript)

The Campbell Committee and the origins of ‘deregulation’ in Australia

Published in Australian Journal of Political Science (2016) vol. 51, no. 4, pp. 711-726.

Abstract: The 1981 Australian Financial System Inquiry, known as the Campbell Committee, is widely seen as the start of the reform movement of the 1980s and 1990s. Accounts of its origins have been dominated by a debate about which policy actor can take credit. This paper utilises cabinet and Reserve Bank archives to reassess the origins of the Campbell Committee. The inquiry had its origins in an earlier attempt by the Whitlam government to take federal control of the regulation for non-bank financial institutions and the building society crisis of the mid-1970s. In its response to these political and economic challenges we can identify the moment in which the Fraser cabinet turned towards market-based reform. The political decisions made in the context of crisis set the path for regulatory change in subsequent decades, particularly in the area of prudential regulation, where we have seen regulatory consolidation and expansion rather than ‘deregulation’.

Available at Taylor & Francis Online or Academia (accepted manuscript)

Is reform hopeless in an era of disillusion?

Around 23 per cent of Australians gave their primary vote to minor parties and independents at the July federal election. This is the highest number since the formation of the Liberal Party and the three party system at the end of the Second World War.

When political historians look back on our era it is unlikely they will focus on the machinations that have seen prime ministers spilled and governments rolled. Rather, they are likely to see the most important trends of our time and the growing popular disillusion with the major parties — indeed, the growing disillusion with the entire political class. It’s no surprise that in the privacy of the ballot box, more and more Australians are voting for none-of-the-above.

This trend is not unique to Australia. In the United States, the support for Donald Trump in the Republican Party and Bernie Sanders in the Democrats shows that even party loyalists are tired of what the mainstream is offering up. In the United Kingdom, Jeremy Corbyn’s ascent to the Labour leadership and Brexit — the successful referendum to withdraw from the European Union — was driven by a similar anger.

This is the politics of our time. It’s not about individual politicians — it’s no more about the individual characters, even policy positions of Nick Xenophon or Pauline Hanson or Derryn Hinch, no more than it is about Donald Trump as an individual or Bernie Sanders or Jeremy Corbyn. It’s about what has driven so many voters in the richest, most stable liberal democracies that human history has ever known to reject the political mainstream.

A matter of trust

A democratic political system is based on trust. Each party trusts that the other will accept the result of an election that does not go in their favour. This is a trust we take for granted in a country like Australia but a very real challenge for weak democracies in the third world.

But there are other layers of trust. We the voters trust that having elected a party it will govern in a way that resembles that which it promised before the election. In a representative democracy no government is obliged to fulfil its campaign promises — it does so by convention and fear that it will be punished by voters for failing to do so.

That promises are often broken is one of the long-standing norms of democratic politics. One 2009 survey of studies into election promises found that political parties in Europe and the United States kept an average of 67 per cent of their promises when in government. This number is if anything remarkably high. But in the Australian context what has mattered in recent years is not the number of promises broken or fulfilled, but how those achievements or failures have reflected in the perception of the government that promised them.

Take Julia Gillard’s infamous election-eve statement that there would be ’no carbon tax under a government I lead’. This was followed in government by a fixed price emissions trading scheme that all commentators on the left and right admitted was functionally equivalent of a carbon tax. Were many voters duped into voting Labor because of the specifics of a fixed price emissions scheme, and subsequently angry that they had voted under false pretences?

This seems unlikely. But it spoke to a betrayal of the values which the Labor party had presented in 2010. Before the election, Gillard had punted the divisive issue of an emissions trading scheme to the ‘citizen’s assembly’ — 150 ordinary Australians who would listen to experts on climate change and what to do about it, and provide recommendations to the government. Labor’s deal with the Greens to push through a carbon tax immediately not only reversed the go-slow approach but it gave the impression of a vastly different Labor government to that which had been cultivated during the campaign.

Broken promises only hurt when they speak to a party’s overall identity. Likewise, Tony Abbott’s decision not to pursue his promised repeal of section 18C of the Racial Discrimination Act has been a running sore on the Coalition’s time in power because it presented, for the government’s supporters, a rejection of the ambitions of a centre-right philosophical resurgence.

Section 18C is not the be all or end all of liberal policy, or even of the threats to freedom of speech in Australia. But its promise sent a powerful signal that the tide could be turned towards liberty, and that a mainstream party was able and willing to make that change. When Abbott abandoned the promise, he undermined the vision of liberal-conservative government he had cultivated in opposition. The Coalition surrendered the very ‘Freedom Wars’ it had declared.

It must have been somewhat to their horror that Malcolm Turnbull and Scott Morrison spent the first half of their eight-week election campaign talking about their changes to superannuation. Superannuation stung them for the same reasons that the carbon tax stung Julia Gillard and 18C stung Tony Abbott. Repeatedly throughout the Coalition’s term in government it rejected the possibility of increasing taxes on super. Tony Abbott had ruled out no changes to superannuation in the 2013 term ‘or the next’. Scott Morrison was publicly opposed to changes as recently as November 2015.

The Coalition was gearing up for an argument that pitted the high taxing Labor party against the low taxing, small government Liberal-Nationals. Their error was in part strategic — to announce an extremely complicated policy that harms self-funded retirees, many of whom would be expected to be Liberal voters was always going to be fraught — but it was a serious policy mistake as well. It was a breach of faith that recalled the deficit levy in 2014, demonstrating that the Coalition was happy to whack its own supporters for expediency.

Trust, indeed, is fundamental to the superannuation system itself. Superannuation has long been presented as a secure foundation for savings. But now the Coalition has established that the Commonwealth sees it as a money pot which can be dipped into for fiscal or political expediency. Having changed the rules this time, savers will rightly believe the rules can be changed again. This is the sort of policy manoeuvre that erodes faith in the public policy system as a whole.

In his 2016 book The Trust Deficit, Sam Crosby, executive director of the Labor leaning think tank the McKell Institute, points out that voters who do not trust that governments will act in their interests will vote for non-incumbent and third party candidates. Trust — as nebulous as it is — is the bedrock of political power in a democracy. And the major parties have been systematically eroding it, by governing contrary to what people thought they were voting for.

Kevin Rudd promised fiscal conservatism, and gave us the record stimulus spending. Julia Gillard promised a sober approach to climate change policy and gave us the carbon tax. Tony Abbott promised a slower, more adult government than Labor and could not live up to that. Malcolm Turnbull promised us a new disciplined approach to economic management, and gave us six months of policy confusion, a tax increase, and an eight-week election. The minor party vote is a reflection on the failures of the major parties.

The consequences

Australia’s fiscal and economic problems demands serious reform. In 2016-17, the Australian government will spend, as a percentage of GDP, as much as it did when Kevin Rudd was stimulating the economy. In other words, the Commonwealth is at a permanent emergency level of spending.

Furthermore, our policy settings seem deliberately geared against the needed economic growth that might bring the budget back to surplus. For instance, Institute of Public Affairs calculations have found that red tape — that is, unnecessary and counterproductive regulation — costs the Australian economy $176 billion a year. There are nearly 500 separate government bodies at the Commonwealth level involved in the imposition, administration and design of red tape.

Australia has fewer taxpayers supporting more people who are dependent on the state. As the Weekend Australian pointed out in May 2016, if you add the 4.48 million people who are wholly dependent on federal government pensions, allowances and parenting payments to the 1.89 million people who are public sector employees, that means 44 per cent of Australians draw their livelihood from the non-productive sector.

This is not sustainable — certainly if we are to maintain the high living standards we expect.

Whether they like it or not, the Turnbull government is going to have to reckon with these deep structural problems in the Australian economy. Yet the eroded trust between population and politician is going to make it extremely hard to do so. That lack of trust affects the possibility of reform in two ways. First, it is not clear that the minor party and independents that have been thrown up by the anti-major vote are capable of reckoning with this problem.

Neither Pauline Hanson nor Nick Xenophon — to take the two most prominent winners from 2016 — have an appreciation of the need for drastic economic reform. If the Coalition acquiesced to some of their policy positions — such as subsidies for private firms and protectionism — our economy would be in a substantially worse shape than it is now.

Second, and more fundamentally, reformers need the trust of the voting population in order to push major reforms through. Complex reform needs explanation, and if the public believes that explanation is not done in good faith they will reject it. No matter how certain they are of their course, few governments can swim against the tide of public opinion indefinitely.

This looks like a pessimistic story but it is not. One of the arguments that came out of the Gillard years was that the era of reform was over. Paul Kelly, most influentially, argued that the political system had evolved a few key features that made reform if not impossible, then improbable. In his argument, the faster pace of political life (encapsulated by the unending panel shows of 24-hour news networks and the anarchic, unpredictable world of social media) along with the power of sectional interests (here he is thinking of the mining industry’s campaign against Labor’s mining tax) are structural barriers to reform.

There is no question that the pace of political life has changed. It’s unclear how this selects against reform — more venues for political commentary does not imply the population is more interested in politics than they were in the past. Kelly’s concern with ‘sectional’ interests is also misplaced. We are in an era where old power blocs are breaking down, rather than consolidating their power — at no time in history have the old industrial empires (media, unions, corporations) been under as much pressure and contestation as today.

In fact, Kelly’s argument would be more convincing if he had traced the opposite argument: getting through political reform is no longer a matter of a few handshakes between unions and corporate leaders. The trust deficit is in part a reaction to that cosy, conspiratorial style of politics.

Seen through this light, there’s a clearly undemocratic thread running through complaints that minor parties make reform impossible. The criticism that non-major parties are ‘populist’ is a bizarre complaint in a democracy where voting is supposed to aggregate the popular preferences of the masses.

The nostalgia for political moves like the Hawke government’s Accord is a nostalgia for government by handshake rather than popular consent. Political strategists advise governments to shirk reform because it is unpopular. It is true that John Howard took a GST to an election, explained the need for reform clearly and comprehensively, and nearly lost. But he pushed the policy through parliament after that election, and the GST is widely seen as the cap on the reform era.

By contrast, Malcolm Turnbull took very little to the 2016 election — failing to explain either his superannuation tax increase or his corporate tax reduction — and nearly lost.

Howard left 1998 empowered, despite the election being a close run thing. Turnbull looks wounded from his 2016 near loss. Reform is hard to argue for. But if we are to tackle the substantial economic problems facing the Australian economy, the focus will have to be establishing a trust between the political class and the population they purport to represent.

Populism is not a dirty word

The political news right now is Malcolm Turnbull’s tenuous hold on government.

But tight elections aren’t unusual. The real significance of the 2016 election is how it reveals the growing dissatisfaction with the political class and mainstream parties.

This is a thread that links the support for Nick Xenophon and Pauline Hanson in Australia with the support for Donald Trump and Bernie Sanders in the United States and for Jeremy Corbyn and Brexit in the United Kingdom.

It’s easy to dismiss these movements as “populist”. That word has already been spat out hundreds of times on panel shows and through the quality media since last weekend’s election results began to come in.

But “populist” is a strange insult in a democracy. Democracy is a system by which we come to agree as a group about how we live together. It has lots of flaws. The idea that the conclusions it comes to are too popular – too widely accepted – surely aren’t one of them.

To call a politician or political movement populist is a dodge. A comforting, revealing dodge. An admission that the speaker sees the consent of the governed as a frustrating hurdle, rather than the reason parliament exists in the first place.

But even more than that, it’s deeply condescending. Yes, they’re less polished. They’re less refined. But those apparently dangerous and unacceptable populists deploy much the same arguments and same rhetoric as the major parties.

Consider their approach to foreign investment. Nick Xenophon and Pauline Hanson both want to “take back the farm” and make it harder for foreigners to buy Australian assets. This could have catastrophic economic consequences. Australia needs international capital.

But then again the major parties have been telling us that foreign investment is risky, even dangerous, for years.

The Coalition government has been running a crackdown on foreign investment in housing. It prevented the sale of the cattle station Kidman & Co to a Chinese company. It blocked the American firm Archer Daniels Midland from buying GrainCorp. Kevin Rudd made foreign investment scepticism a key plank of Labor’s 2013 election bid.

So if it is agreed by all parties that foreign investment is a bit of a problem, why would anyone vote for a major party whose concern for this issue seems only skin deep? Why not support a minor party that takes the concerns more seriously? The majors make the argument, and the minor parties increasingly grab the votes.

Likewise free trade. The Coalition government signed some important free trade agreements that are important for the future of the Australian economy. The Labor Party professes support for trade as well.

But too often those free trade agreements are presented by the political class as extracting concessions from foreign countries for Australian exporters, rather than allowing us to import goods cheaper and thereby raise our living standards.

The Labor Party used the Trans-Pacific Partnership for a scare campaign about Chinese workers being brought into the country. When Qantas moved its operations into Asia a few years back, the Transport Workers Union screamed that the company was being “Asianised”. Who does that sound like?

The Nick Xenophon Team wants the next government to directly support struggling companies – particularly the Arrium steelworks in Whyalla. On the one hand this flies in the face of every basic principle of sound economics, representing a transfer of wealth from taxpayers to public companies. On the other hand the major parties do that sort of stuff all the time. The Napthine government handed money to SPC Ardmona after the Abbott government refused. The only jobs plan either major party has for South Australia is to pay South Australians to build submarines.

In other words, no major political party has been making the argument for free trade, foreign investment and market competition. Yet now they blame the voters for being anti-market.

Major party strategists will tell you quietly that they have no choice but to take “populist” positions. Only the impotent are pure and all that. If the voters want protectionism the parties need to deliver it.

But this belief confuses policy means with policy ends. Do voters want higher tariff schedules, or do they want jobs and a sense of economic security? Do voters want lower immigration quotas or employment opportunities for their children?

The Australian public cannot be expected to know every detail of every policy, or the voluminous literature on trade and migration. They have families and businesses to worry about. But the protectionist and interventionist economic policies attracting people to the minor parties won’t protect jobs. They will hurt jobs by slowing the economy.

Basic economics can be counter-intuitive. It needs to be argued for. No major party is making that argument. They’re fudging and hedging, trying to be all things to all people, never committing, constantly doing one thing and saying another. No wonder people are voting for something else.