Articles – Page 12

How We’re Getting The Whole GST Debate So Wrong

The GST reform debate is a complete mess. If this was in doubt, the Council of Australian Governments meeting last week made it unambiguous: the Government is pushing ahead with a solution to a problem that it has not yet defined. The solution is a 15 per cent GST. Does anybody know what the problem is?

Most economists have a good, clean answer to that question. Basic tax theory tells us that consumption taxes are more efficient than most alternatives. Taxes that are easy to evade or substantially alter our behaviour are less efficient. Yet consumption taxes play only a small part of Australia’s overall tax mix. The ideal tax from an efficiency perspective is low, broad, simple and does not encourage people to avoid saving.

Hence the Henry Review’s position that “a broad-based consumption tax is one of the most efficient taxes available”, and why lots of serious people these days talk about raising the GST and expanding it to fresh food and financial services.

But theory and practice are very different things. At last week’s COAG meeting the state and commonwealth governments were discussing a complicated tax bargain, where two levels of government would trade off fiscal favours with each other. In the Australian Financial Review, Phillip Coorey has a good run down of the proposals.

Jay Weatherill’s plan is that the Commonwealth Government would keep the revenue from a GST increase, which could be used to finance income tax cuts and compensation to low income households, while the states would be allocated a fixed percentage of the commonwealth’s income tax take to spend at their discretion.

An alternative model is that proposed by Mike Baird, where the states would receive $5 billion between now and 2020 to recover some of the funding increases cut from the 2014 budget. After that, the states would be allocated the revenue from income tax bracket creep – the steady tax increase that occurs thanks to inflation every year.

Neither of these plans have much to recommend them. They would further entrench the fiscal imbalance in the federation – the distorted political incentives that arise from the fact that the states do not raise the money they spend. But Baird’s plan is particularly awful. Not only does it rely on maintaining bracket creep as a fixture of the Australian tax system, it would create a constituency – the states – that would lobby hard against any future income tax relief.

The states are obviously clamouring for money. Having lost any real revenue base of their own, they’ve been reduced to begging the commonwealth for scraps.

The real question is why the Commonwealth Government is indulging any of this. The efficiency gains from replacing income tax with a consumption tax are unlikely to be realised once the Government starts compensating low income holders and bargaining with the states. Those compromises will impose their own efficiency costs – costs that do not get captured in the blackboard modelling that informs the debate – but those costs might swamp the benefits from tax reform.

There is a vast gap between an ideal, perfectly implemented tax system and the necessarily compromised and complicated system that emerges from the process of democratic bargaining.

The Government is correct to say that our tax system comes from an older era, and correct to point out that many of our tax rates are punitively high – particularly the income and corporate tax rates. But piecemeal changes could tackle these problems. Every budget includes its own minor changes to the tax system. Why not work through the normal budget process? Why the need for big-bang reform?

When the GST was first introduced by the Howard government, it was designed to replace the wildly inefficient, complicated and obscure wholesale sales tax, as well as stamp duties, taxes on financial institutions, and bed taxes. The one fell swoop approach suited our tax reform needs then. It does not anymore.

The flaws of the existing system have been created by the same political dynamic that makes a revolutionary jump to a substantially better system unlikely. And if the trade-off for a higher GST is to lock in bracket creep forever, as the Baird plan would, tax reform will have been worse than pointless: it will have been genuinely harmful.

The Turnbull Government can’t even convince its own economic elders about the desirability of reform. Peter Costello (who brought in the GST in 2000) warns that a GST debate “will swamp everything”. Peter Reith (shadow treasurer when John Hewson presented his GST plan) urges the Government to “shut down this discussion before Christmas”. Neither of these two are the sole founts of wisdom on tax, of course, but something has obviously gone badly wrong.

On Tuesday the Government will release its Mid-year Economic and Fiscal Outlook, which will reportedly show that government expenditure is around 26.2 per cent of GDP.

This means the Australian government now spends more than it spent when the Rudd government was trying to pump-prime the economy during the Global Financial Crisis (“just” 26.0 per cent of GDP was spent in the 2009-10 financial year). We are at permanent emergency levels of spending. This – not marginal changes to the efficiency of the tax system – is what Malcolm Turnbull should be spending his political capital on.

Innovation v Regulation: How Turnbull’s Pitch Fell Short

The fundamental problem with the Turnbull Government’s innovation statement is that it is a category error. The only thing governments can do to the “culture” of innovation is hurt it.

When he first took the leadership, Malcolm Turnbull was right to describe our economic growth challenge as one of boosting innovation. The problem has always been what on earth that means.

Now we know. The policies in Monday’s innovation statement try to do two things. Unfortunately, they’re both underwhelming.

First, the Government wants to buy innovation. All those tax offsets, capital gains tax exemptions, and adjustments to the way the tax office treats company losses are trying to trade government revenue for corporate innovation. Same with the money for the CSIRO and the incubator support program, money for “landing pads” in Silicon Valley and Tel Aviv, and money for quantum computing.

Can governments buy innovation? Unlikely. This is a longstanding debate in innovation policy. It is certainly true that if you throw an unlimited amount of money at professional researchers they will eventually research something useful. But as my colleague Sinclair Davidson has pointed out, the OECD is unable to find any relationship between economic growth and public spending on research and development. The OECD speculates that public spending on research crowds out private spending on research.

More prospective is the second approach taken by the Turnbull Government’s innovation statement: clearing existing regulatory barriers to private sector risk taking and entrepreneurship. In this category are the insolvency reforms – which reduce bankruptcy periods from three years to one year – safe harbours for insolvent trading, and changes to the law governing employment share schemes.

Yet these policies are miserly in comparison to the generous policies on the spending side. They barely scratch the surface.

The thing about regulatory barriers to innovation is that they exist for a reason: either because they have constituencies who support them, special interests who rely on them, or politicians who lean on them for populist benefit.

The real barriers to innovation are those steadily accumulating regulatory burdens that hold new products and services back for government approval and divert the attention of entrepreneurs to regulatory compliance.

Think how data retention has gunked up the internet industry, how the regulatory uncertainty of the NBN has slowed down telecommunications investment, how financial innovation is held back by the labyrinth of regulatory controls on financial products. The Australian Government’s left arm doesn’t know what its right arm is doing.

For instance, it takes a special kind of cognitive dissonance to ignore the fact that while the Government is trying to create Apple-like and Google-like companies in Australia, it is at the same time trying to target the real Apple and Google for what is alleged to be corporate tax avoidance.

One of the big reasons these firms have apparently low tax profiles is because they take advantage of the research and development tax credits successive governments have introduced to boost innovation.

The other reason that they have low tax profiles in Australia is simply because they’re not Australian companies, and much of their economic activity occurs offshore. Yet under the Federal Government’s multinational tax avoidance legislation (which passed both houses last week) the tax office will estimate how much tax they reckon multinational firms like Google and Apple should be paying, rather than how much they are strictly liable to pay under current tax law.

This legislation creates enormous uncertainty and is almost guaranteed to push economic activity and innovative firms out of Australia. Why would multinational companies risk being taxed twice? How on earth can the Turnbull Government reconcile its anti-global approach to corporate tax with its apparently pro-global vision in the innovation statement?

In the specific case of Google, the difference between innovation rhetoric and policy practicality is even more stark. Under our archaic intellectual property laws, an Australian Google would be unlawful. Google in the United States relies on a fair use defence in copyright legislation to copy the text of websites onto its servers for searching. But we have no equivalent fair use provision to allow such uses. Google would be legally vulnerable in Australia: our copyright laws constitute “a significant and unacceptable level of business risk”.

Yet the Australian Government has repeatedly rejected introducing a fair use exemption for copyright, despite the advocacy of the Government’s own law reform commission. Movie studios and record labels don’t want fair use, and have lobbied hard to prevent it.

The economist Mancur Olson developed an influential and depressing theory of economic growth in his 1982 book The Rise and Decline of Nations. In Mancur’s view, innovative, entrepreneurial economies develop powerful special interests over time that can prevent the sort of regulatory reform that economies need to grow.

So ask yourself this. Are there any major special interests who will be upset by what the Turnbull Government proposed in their innovation statement this week? Not really. Sadly, for all the Government’s sound and light, very little has been “disrupted”.

How to be a thoroughly liberal government

With James Paterson

On Saturday 10 April 1954, Robert Menzies gave an after dinner speech to the Institute of Public Affairs.

The event was a private one, held in Melbourne, and Menzies relished what he thought would be the ‘last opportunity’ to speak in ‘a humane and civilised fashion about the issues before this country’ before election day, which had been set for 29 May. (Menzies knew something his audience didn’t: three days later in Canberra he would announce the defection of the Soviet diplomat Vladimir Petrov, and the 1954 election would be consumed by the Petrov Affair).

The full transcript of Menzies’ speech has now been reproduced for the first time on the IPA website and an extract is available in this edition of the IPA Review. It’s a casual but fascinating exploration of his ideas of the relationship between principle and pragmatism in politics. Fascinating for two reasons: first, it gives us a picture of Menzies as a politician and leader, and second, because it offers a guide to help a modern Coalition government navigate what Menzies saw as ‘the greatest problem in politics’.

Menzies told his audience that ‘political principle, a genuine philosophy, a genuine body of doctrine in your own mind’ was ‘the most important thing in public affairs’. People go into politics ‘because they have beliefs, because they have a faith, because they believe there is something that matters for their own country.’

In Menzies’ view, the art of politics was discovering a path through which the principle can be made pragmatic. Expediency and philosophy have to work together. This was, unfortunately, a political relationship the late Abbott government was unable to forge. On two of its central challenges — fiscal policy and freedom of speech — neither necessary political compromise nor unabashed principle were allowed to flourish. Menzies’ speech gives us a clear reflection of the ethical trials of political decision-making that the new prime minister would be wise to consult.

Spending and the Australian fiscal crisis

Malcolm Turnbull takes office at a time when the process of budget repair is sclerotic at best. The Commonwealth budget has still not recovered from the Global Financial Crisis and the decisions made by the Rudd government during those years. The Rudd and Gillard government established what seems to be a permanently higher spending pattern. Commonwealth government payments — that is, spending — as a percentage of GDP is 25.9 per cent in 2015-16, down only 0.1 percentage points from 26 per cent as it was when Kevin Rudd was launching his stimulus package. By the end of the Labor government’s time in power, spending declined to 24.1 per cent in 2012-13 — in part due to deliberate effort, in part from the recovery easing welfare rolls, and partly by some creative accounting.

Yet this rollback was hopelessly incomplete. Wayne Swan made much of his belief that ‘If we are going to be Keynesians in the downturn, we have to be Keynesians on the way up again’, as he put it in a 2011 essay for the Fabian Society. Yet Swan never managed to achieve the ‘Keynesian’ budget balance which he repeatedly promised. This was partly because he could not commit to the necessary cuts, and partly because numerous policy decisions increased the spending burden on the Commonwealth budget. Indeed, Labor’s headline budget outlook was a lot worse than it looked on paper — many of their expensive new promises were to bite on the budget over the course of a decade, rather than in the next financial year. This is why the Institute of Public Affairs repeatedly urged the Rudd and Gillard government to bring the budget back to balance through spending cuts, and quickly.

Governments should not assume that budget deficits will resolve themselves. Overspending, once established, is hard to reverse. Special interests protect the privileges that come with new spending programs. Voters respond badly when government programs are taken away. Politicians soon learn that spending cuts are more politically costly than spending increases are politically beneficial. Australia’s fiscal crisis is one on the spending side, not the revenue side. Of course any imbalance in a budget can be attributed to both income and expenditure, so this is partly a question of competing values — should government be larger, or smaller?

But if Commonwealth government spending was at the level it was in the final years of the Howard government in 2006-07 and 2007-08, the budget would be in surplus today.

Underpinning the arguments that Australia is suffering a revenue shortfall, is one myth that needs to be disposed of: the significance of the end of the mining boom for the budget. For the last few years we’ve been treated to regular news stories reporting the precipitous decline in the price of iron ore and the billions of dollars that decline will strip from government revenue. It is true that iron ore is sharply down from where it was under the Rudd and Gillard governments — in 2011, iron ore was pushing nearly US$200 per dry metric ton, whereas in October 2015 that price is now down to US$52.

Yet the Howard government could only dream of such iron ore prices. The highest monthly price iron ore ever reached under Howard was US$36. The minerals market is not to blame for the budget’s problems. There are other reasons why Malcolm Turnbull and his new treasurer — Scott Morrison — ought to focus on government spending, rather than revenue, as they try to bring the budget back into balance.

First: Australia is not a low taxing country, both relative to other countries and in an absolute sense. As the IPA’s Sinclair Davidson and Mikayla Novak have argued over many years, when the proper comparisons — including the inclusion of superannuation, the health insurance mandate, and workers compensation to ensure comparability with countries that have different enforced retirement savings schemes — are made with other OECD countries, Australia’s tax take at 34.3 per cent is higher than the OECD average of 33.7 per cent.

Second: the government ought to be smaller than it is. A government which spends a third of the country’s GDP is spending that third unproductively. Perhaps by necessity — as public goods like courts and national defence have to be paid for — but we should not imagine that because taxpayer financed programs are necessary that they are well designed. The less tax Australians pay then the more Australians will have to spend and invest on things which suit their preferences, rather than the preferences of the political class.

The problem of tax reform

Joe Hockey can take some credit for launching a serious public debate about taxation when he released the tax discussion paper in March 2015. Turnbull and his Treasurer Scott Morrison have now picked up a tax inquiry process driven by Tony Abbott and Joe Hockey, which was in turn an attempt to turn the tax reform agenda away from Labor’s interest in higher taxes and towards the Coalition’s interest in lower taxes.

Yet a budget crisis is a terrible time to conduct tax reform. Every incentive in the public service leads towards tax increases. It’s easy to see the hand of Treasury behind the curtain here. Treasury appears to be convinced that we are an under taxed nation both in relation to our demands for public spending and in relation to our trading partners.

In a report published in October this year. the Productivity Commission became the first Australian government agency to admit that Australia’s tax take is higher than the OECD average once the proper comparisons are made. Yet Treasury still refuses to support this reasoning, allowing them to maintain the fiction that we are a low taxed, and, by implication, an insufficiently taxed, country.

In our IPA Review article ‘Be like Gough’, published in August 2012 with John Roskam, we observed that neophyte ministers are susceptible to capture by their departments, particularly when adequate groundwork for policy development has not been done before a ministerial appointment.

Treasury is both the most important department, and the most intellectually formidable (some high profile errors exposed by Sinclair Davidson notwithstanding). Scott Morrison has gained a reputation as a capable administrator and advocate for conservatism, but maintaining a distinctively free market vision against the prevailing winds of Treasury will be a challenge. It was a challenge that Joe Hockey unfortunately failed to surmount.

Ever since he took the leadership, Malcolm Turnbull has been arguing that tax reform has to be ‘fair’ if it is to be successful. This is an inarguable truism. But fairness is a matter of perception and perspective. It is not a quantitative criterion. Reducing the top income tax bracket will be characterised as unfair if it is not explained how disproportionate the fiscal burden weighs on the top taxpayers. Corporate tax cuts might be perceived as unfair if it is not explained that the burden of the corporate tax is felt by workers, superannuation portfolios and economic growth more generally.

That fairness is impressionistic rather than empirical should remind us that we’ve been here before. In fact the 2014 budget — on which Bill Shorten and the Labor Party hooked their focus on fairness — was specifically written to counter perceptions of unfairness. Hence the deficit levy—the 2 per cent tax increase levied on those earning $180,000 and above — in order to ‘share the pain’ of an apparently austere budget.

As a concession to expediency, it was a plainly unsuccessful one. It appeared to do nothing to mitigate the charge of unfairness emanating from Labor and the left-wing press, and bumped the top marginal tax rate — when added to the Medicare levy — to 49 per cent. And of course from the perspective of principle, it was a clear violation of the Coalition’s support for lower taxes — not just Abbott’s campaign promise to have lower taxes, but the Liberal Party’s fundamental belief in a lower fiscal burden on the economy.

There’s an intriguing detail in the first book published on the Abbott government after its demise, Battleground, by Peter van Onselen and Wayne Errington, that Turnbull, alongside Julie Bishop, opposed the deficit levy in the cabinet when it was proposed by Joe Hockey and Finance Minister Mathias Cormann. Yet since the spill, signs that the fairness debate was to be recontested on liberal — and Liberal — terms have been slim.

Turnbull’s communications skills have been much praised. They need to be used to clear the cobwebs around fairness and fiscal policy that have built up since the 2014 budget. This is less a question of policy development and more a question of public philosophy.

The GST should not be changed

In this light, it was of real concern that the tax debate under the new Turnbull government so quickly turned to whether the GST should be increased from 10 per cent to 15 per cent. Consumption taxes are theoretically more efficient than many of the taxes which make up Commonwealth revenue. But efficiency is not the most important principle of taxation. The goal of the tax system in a free country should not be, in the words of Jean Baptiste Colbert (French Minister of Finances during the reign of King Louis XIV) ‘plucking the goose as to get the most feathers with the least hissing’. The government should not try to obscure how much it is extracting from taxpayers.

The more fundamental problem with a GST rise is that there is little reason to believe that the tax system will emerge from any reform with a lower total burden on Australian taxpayers. It is certainly true that the possibility of a GST rise has been mentioned in relation to a possible income tax cut for the top marginal income bracket — a cut which is sorely overdue. But it is indicative that through leaks and briefings to journalists we have a very concrete idea of what a GST rise could constitute, but very little idea of the tax cuts that would be the reward for this GST bargain.

A GST rise with income tax cuts pushed into the never-never would be no victory.

It is possible to imagine a broad tax reform proposal that both reduces taxes and transitions the tax base from income onto less economically harmful consumption taxes. But seven years after the Rudd government established the Henry Review into taxation, that vision looks further away than ever. But politics is about momentum. Any suggestion of raising the GST should be stopped in its tracks as soon as possible.

Principle, expediency and free speech

When he took the leadership Turnbull said:

This will be a thoroughly Liberal Government. It will be a thoroughly Liberal Government committed to freedom, the individual and the market.

But it would be hard for a government to be ‘thoroughly liberal’ without reinvigorating the Liberal Party’s ideological disposition towards freedom of speech. The Abbott government’s decision to break its promise to repeal or reform section 18C of the Racial Discrimination Act in August 2014 was a major event, both at a political and policy level. This — coming so soon after the deficit levy — dashed the optimism that many on the free market right had for the Abbott government’s ability to turn the tide towards individual rights and economic freedom.

In public comments, Malcolm Turnbull has indicated that he is personally sympathetic to what has come to be known as the compromise position on section 18C — that is, the removal of the words ‘offend’ and ‘insult’ from section 18C’s prohibition on ‘offend, insult, humiliate and intimidate.’ As Morgan Begg points out in this issue of the IPA Review, this is the compromise position in Senator Bob Day’s Private Members’ Bill, currently before the parliament.

Thus, without having to stand in front of the Institute of Public Affairs, as Abbott did, and promise the repeal of section 18C in its current form, Turnbull has already built himself a test on freedom of speech.

If a thoroughly liberal government cannot bring itself to repeal two words of a law obviously antithetical to liberal values, then what can it do? As Menzies reflected back in 1954:

If you stand on the basis of principle you may go wrong but you will never go far wrong. You may go wrong according to the current political judgement, but in the long run somebody will be heard to say, “That was right”.

A Nudge In The Right Direction? How We Can Harness Behavioural Economics

The Turnbull Government last week announced the formation of a behavioural economics unit inside the Department of Prime Minister & Cabinet.

The unit has a real title (Behavioural Economics Team of the Australian Government) but everyone is calling it the “nudge” unit, after the book Nudge, by Cass Sunstein and Richard Thaler.

The nudge unit could backfire badly or be incredibly good. At its worst, it will provide new excuses for petty meddling and over-regulation. At its best, it will lead to a fundamental rethink of the authority of government-appointed experts and the dangers of political power.

The idea behind behavioural economics is to bring psychology back into economics. You’ve probably heard the caricature of economic thinking that it assumes all people are “rational”. At its simplest, behavioural economics tries to identify patterns and circumstances where our choices aren’t perfect – when they are irrational or inconsistent.

For instance, we tend to rationalise our opinions, looking for evidence to confirm pre-existing views rather than threaten them. We imagine we are more competent – better informed and more skilled – than we actually are. We are loss averse: we fear losing money or status more than we enjoy gaining them.

These quirks are, strictly speaking, cognitive errors. They mean we make worse decisions than we would if we were meticulously rational, profit-maximising algorithms.

Behavioural economists overstate the novelty of these findings. Pre-modern economists knew very well that people were motivated by more than money – what Adam Smith called the “passions”. But that sort of “humanomics” was lost when economics got all mathy. Economists are groping back to the earlier, richer picture of human motives and flaws. Behavioural economics is just one of the paths on the return.

All very interesting. But Sunstein and Thaler argue the lesson from behavioural economics is that policymakers should alter the environment in which we make decisions in order to help us make better choices. Not eliminate bad choices, as traditional nanny state paternalism suggests – just nudge us into making less bad ones. Nudging involves such actions like rearranging choice hierarchies and changing defaults so that better choices are more prominent.

In practice, however, these “nudges” are either trivial, or tend to be more like shoves. Policy inspired by behavioural economics is rarely able to find the sweet spot: passive, respectful interventions that also offer significant benefits.

Take, for instance, one of the most famous apparent nudges. In his Fairfax piece on Turnbull’s nudge unit, Peter Martin cites the case of officials at Amsterdam’s Schiphol airport who embossed images of little flies on the urinals. Now men have targets of what to hit. Spillage reportedly declined dramatically.

Yet, it is not clear how this is a manifestation of nudge theory or the application of behavioural economics to policy. What systemic cognitive error is being fixed here? As the economist Riccardo Rebonato points out, urinal flies are a “clever ruse”, not a “major breakthrough in social engineering”. Yet it is regularly trotted out as the classic nudge.

The Australian Tax Office has its own nudge program. Late taxpayers now receive a letter stating that, “When you pay this debt you will be joining the millions of Australians who pay their tax to support our country and Australia’s way of life.” Because humans are social animals who like to conform, payment rates have apparently increased.

Other ATO nudges are less impressive. Why, contra Peter Martin’s article, is sending text message reminders to late taxpayers a behavioural economics trick? Debt collection is one of the world’s oldest industries. Harassing debtors is not a new idea.

The reliance of nudge supporters on such trivial examples does not bode well for the usefulness of behavioural economics as a public policy project. The Schiphol toilets example comes straight from Sunstein and Thaler themselves. It’s the first real-world example of a nudge in their book.

But there is something very important the Turnbull Government could do with its nudge unit. The findings of behavioural economics should be applied to policymakers too. Politicians, advisors, policy consultants, bureaucrats, regulators and legislative drafters are all as susceptible to loss aversion, seeking evidence that confirms their prejudice, choosing irrationally, and assuming unwarranted competence as anybody else.

The nudge unit shouldn’t spend its time thinking of clever ways of government to regulate irrational citizens. It should consider the implications of the fact that the people in government are just as irrational as the citizenry.

This is, admittedly, new intellectual ground. The field of behavioural economics is a young one, and its significance for political behaviour has not yet been deeply considered. An early attempt from 2011 argues that viewing regulators as irrational as those they regulate would suggest a “humbler approach” to regulation is necessary.

Governments would do fewer things if they were less confident in their own abilities. But, then, overconfidence is one of the core cognitive errors.

Defending the nudge unit in parliament last week, Arthur Sinodinos said it would “test these concepts in a way that is consistent with our broader deregulationist philosophy”. But the nudge unit could be better than that. Used creatively, behavioural economics could underpin the entire deregulation program.

Why Politicians Ride The Wave Of Anti-Bank Populism

Australia’s banks are launching a new campaign to educate policymakers and regulators about the ins and outs of their business, the Australian Financial Review reported on Monday.

The banks feel defensive since the debate over the Future of Financial Advice (FOFA) reforms, in which they were depicted as semi-corrupt fraudsters preying on the elderly and uninformed, and the recent outrage over mortgage interest rate rises.

Good luck to them. This seems a more productive use of their public relations dollar than campaigns on climate change.

But if this campaign breaks the deep connection between Australian politics and anti-bank populism, it will be the first to do so in 12 decades.

The banking crisis of 1893 set in train more than a century of populist political demagoguery about banking.

Our modern Labor mythologists sometimes skip over the comically propagandistic “money power” doctrine that formed such a large part of Labor politics in the first half of the 20th century. According to money power ideologists, a cabal of bankers – British bankers, Jewish bankers – owned every major industry and asset and controlled Australian politics.

The money power doctrine was not an obscure theory held only at the margins of Australian politics.

Jack Lang, the former NSW premier and Paul Keating’s mentor, was a money power conspiracy theorist.

John Curtin’s mentor, the Scullin government minister Frank Anstey, was the author of an anti-banking, anti-Semitic book called the Kingdom of Shylock (have a look at the digitised version, if you want to be stunned at how overtly racist Australian labour thought it could be).

Driven by this sort of thinking, in 1945 Curtin government introduced burdensome and harmful regulatory controls on Australian banking that slowed economic development and pushed ordinary borrowers into the shadow banking sector for decades.

While it is true that some economists excited by the possibilities of the new Keynesian economic thinking had urged Labor to introduce banking restrictions, it was the crude money power populism that led to the most harmful of those controls: caps on interest rates and an outright ban on foreign banks in Australia.

Anti-bank hostility even played a role in the deregulation of banking four decades later. When Keating ended the ban on foreign banks in 1985, he did so because he believed it would undercut the “drones” of the Australian banking industry. The banks had been made lazy and powerful because of the protection his Labor predecessors had granted to them.

When the Reserve Bank decided to break the back of inflation in the early 1990s, exacerbating on one of the worst economic downturns in Australian history, Keating directed popular anger towards the banks.

A 1991 inquiry into banks – A Pocket Full of Change – encouraged people to send in their complaints with bank services, interest rates, customer relations. Anything they could think of. Nearly a 1000 submissions and complaints were sent in. This distracted attention from the government decisions that caused the crisis in the first place.

A Pocket Full of Change is largely forgotten now. But in retrospect it was very significant.

Our semi-regular freak-out about whether banks are adequately passing on Reserve Bank interest rate cuts can be traced back to Keating’s decision to recast old money power rhetoric in a new guise: to present banks and bankers as uniquely profit hungry and exploitative, and to do so as cover for government policy.

Hence the recent kerfuffle about the major banks’ decision to increase mortgage rates independent of the Reserve Bank.

The Reserve Bank’s cash rate has been held steady at 2 per cent since May 2015. But in October the big four banks decided to increase the interest rates they charged on variable mortgages. Westpac went first, and the rest followed. Bill Shorten thinks that this increase was “just corporate greed”.

But the rate increases are explicitly in response to a policy decision by the Australian Prudential Regulatory Authority that the banks should hold more capital against mortgages. Of course the banks were going to pass the cost of that regulatory requirement onto consumers.

Have the banks raised rates more than they need to, as Scott Morrison tried to argue? Given thelikelihood of even more stringent capital requirements in the near future, it’s hard to blame the banks for being cautious.

In the debate over the FOFA reforms much was made of the need to protect uninformed investors from predatory financial advisors. It’s true that many people don’t understand the world of finance and banking.

But this doesn’t just make them vulnerable to unscrupulous financiers. It also makes them vulnerable to unscrupulous politicians who want to obscure the consequences of their own policy decisions.

If the banks want to change that dynamic, they’re going to have to shift the weight of a century of Australian history.

Same-Sex Marriage: When Did Dissent Become Discrimination?

The politics of gay marriage have shifted radically in a very short space of time. Until 2011, the Labor Party was firmly opposed to gay marriage. The Coalition was firmly opposed just four months ago.

So it’s remarkable that a Catholic archbishop in Tasmania is being dragged to a government anti-discrimination authority for opposing same-sex marriage – the position that was until very recently, shared by both parties.

Last September, Martine Delaney, the Greens candidate for the federal seat of Franklin, took a complaint to the Tasmanian Anti-Discrimination Commissioner that the Catholic Church had produced and distributed a booklet which “does immeasurable harm to the wellbeing of same-sex couples and their families across Tasmania”.

This Tasmanian case has Australia-wide significance. We’ve just had a sustained national debate about free speech, and are about to go into a national debate about gay marriage.

Polls show that about 70 per cent of Australians support gay marriage, so you might think the plebiscite is an assured success. Indeed, Tasmania’s Liberal-led lower house last week became the third state to agree to a motion supporting legislation of same-sex marriage. But that success is not at all certain if gay marriage is perceived as the thin end of the wedge for a more general attack on the liberties of religious communities and freedom of conscience.

The booklet in question, Don’t Mess With Marriage, offers the basic Christian case against gay marriage: families are the founding blocks of society and children need a mother and father.

It’s hard to overstate how moderate this booklet is. It offers no fire or brimstone. It’s gentle and Christian, of the suburban pastoral variety. There’s much expression of sympathy for same-sex attracted people who also want to follow religious teachings that preclude their sexuality. It is a calm explanation of a major position on a prominent political policy issue.

To be offended by the booklet is to be offended by what was, until very recently, the mainstream view on gay marriage, and one still shared by a large minority of the population.

For this reason if nothing else, the complaint ought to have been dismissed as laughably frivolous. But this month the commission decided that the Catholic Church has a case to answer under Tasmania’s Anti-Discrimination Act.

The Tasmanian law almost exactly parallels the controversial section 18C of the Racial Discrimination Act that the conservative commentator Andrew Bolt was found to have breached in 2011, and which Tony Abbott (in opposition) promised to repeal.

There are, however, two revealing differences between the Tasmanian and the federal legislation.

The first is that the Tasmanian law prohibits offensive and insulting speech not only on race and ethnicity, but on 20 different areas from sexuality to religious belief to political affiliation.

In this sense the Tasmanian act resembles the Human Rights and Anti-Discrimination Bill which the Gillard government failed to push through parliament in 2012, which would have made it unlawful to offend someone on virtually everything (including their political opinion!) in the workplace.

It is symptomatic of the spread of no-go areas in Australian public discourse. Governments increasingly believe that protecting us from being offended – on whatever spurious grounds – is more important than allowing us to speak our mind.

The second difference is that there is no caveat in the Tasmanian act that even purports to protect free expression. Defenders of the federal Racial Discrimination Act often point out that section 18C is followed by section 18D which provides protection for speech made in good faith on matters of public interest. This protection is weak. The court decided in the Bolt case that something could not be considered in good faith if, in the view of a judge, it was too sarcastic and had errors.

However, the Tasmanian legislation doesn’t even offer that token concession to basic liberties. In a parliamentary debate in 2013, the Attorney-General dismissed concerns by insisting the bill “does not impinge on free speech; it provides protection from bullying”. All words are cheap. The words of politicians – even when they’re interpreting their own legislation – are junk.

Both supporters and opponents of gay marriage should be very unhappy with the Tasmanian case. Even if the Catholic Church successfully defends against the anti-discrimination complaint, damage has been done. Free-speech theorists talk about the “chilling effect” when the cost of defending oneself against baseless claims hampers the open expression of views.

And in the event that the plebiscite fails, it will be because voters feel that expanding marriage freedom to one group means limiting the freedom of another. The date of the vote hasn’t even been set, but the debate about gay marriage has already moved from the realm of public discourse to legal sanction.

The Tasmanian legislation also tells us something about the ongoing political contest over free speech in Australia.

All those human rights bodies – such as the government’s Australian Human Rights Commission – that flaunt the vital protections of section 18D did not lift a finger to protest the lack of such protections in the Tasmanian legislation. Just as they fully supported the Gillard government’s 2012 bill until its absurdities became politically controversial.

When the Abbott government broke its promise to repeal section 18C in August 2014, many commentators believed a line had been drawn under the arguments over free speech and offensive speech. Not at all. Watch Tasmania. This is the debate we are all about to have.

When ‘Safe Spaces’ Become An Attack On Ideas

There is something deeply reactionary brewing in American higher education.

The events at Yale and the University of Missouri over the last few weeks make plain that the movement for trigger warnings in university classrooms and safe spaces on campus has turned into a dogmatic moral illiberalism.

We should pay attention to what’s happening. With a few years lag, Australia tends to enthusiastically adopt American intellectual fashions.

At the University of Missouri, anti-racism activists announced that their protest encampment on public property was a “safe space”. A student journalist, Tim Tai, tried to report on the protest.You can watch what happened. In the first half of the video, you’ll see the activists surround and attempt to intimidate Tai. In the last 10 seconds you’ll see no less than an assistant professor of mass media shout for “muscle” to remove another journalist for simply filming a public protest.

The Yale incident appears more trivial, but is more telling.

Just before Halloween, Yale’s Intercultural Affairs Committee emailed students asking them to ensure their Halloween costumes did not involve offensive “cultural appropriation and/or misrepresentation”. In response, one Yale lecturer and associate master at Yale’s Silliman College, Erika Christakis, objected that the idea that cultural appropriation was inherently wrong could stifle free speech and open debate.

Christakis’ email was apparently beyond the pale. Outrage spread across Silliman College. An opinion piece in the Yale Herald responded that “I don’t want to debate. I want to talk about my pain.” (The piece was taken down but you can read an archived version.) The New Yorkercomplains Christakis was “privileging abstract free-speech rights over the immediate emotional experiences of those who are likely to experience discrimination at the university.”

In these two events, we’ve dramatically seen how the apparently benign movement for trigger warnings in university classes and safe spaces for students has metastasised into a more general assault on the contest of controversial ideas in higher education.

The original idea behind trigger warnings was to advise students who had experienced serious and severe trauma, such as sexual assault, that they were about to hear some disturbing content. You can understand the reasoning behind the warnings, as a reasonable concession to the fact that some material, particularly in humanities subjects, can be highly confronting. Likewise the safe space – say a women’s room – might be seen as a benevolent amenity.

But trigger warnings have become absurd. Some students are requesting classic literature come with warnings. And safe spaces are morphing into places where infantilised students hide from ideas.

Now this movement has turned into a generalised attack on open discussion. The entire higher education experience is being reconceptualised as a zone of post-trauma, in which students demand faculty protect them from the expression and thoughts of others.

Using the language of psychological harm, ideas are condemned, rather than rebutted. Students can receive “pain” from the decision of another person to write an email. It is wrong to “privilege” free speech, a mere “abstract right”, over personal emotional experience.

It’s hard to think of anything more contrary to the purpose of education – which is, in the broadest sense, the systematic exposure to ideas outside personal experience – than that.

One of the arguments in Christakis’s email is worth dwelling on. Not her main points about the benefits of provocation, or the challenge of defining what costumes are offensive, but her point that, from a childhood developmental perspective, students need to learn how to reject ideas that trouble them, rather than running immediately to ban and punish.

This accords with the most well-known argument for freedom of speech – that made by John Stuart Mill in his book On Liberty. Mill argues that by hearing contrary ideas, if only to consider and discard them, we grow intellectually.

In this way, free speech and education are tightly intertwined. Limit the former and you hinder the latter. An education system where the students are excessively cushioned from the provocation of others will stifle that development. One would hope you could graduate from Yale being able to articulate why some ideas are wrong.

But what about students who have experienced genuine trauma? Even then, it’s not clear that preventing “triggering” is the best response, as Jonathan Chait noted earlier last year. Students who are genuinely unable to cope with incidental references to that trauma might not be ready for the window into the breadth of human experience that education is supposed to provide. If you are triggered by the racist language in Huckleberry Finn, you are not ready to study 19th century literature.

For those who are ready, hiding from every reminder of trauma can be counterproductive. There’s a growing area of research into what’s known as “post-traumatic growth”, the idea that some people who experience trauma can become stronger for the experience, rather than made permanently fragile.

This isn’t for everyone, of course. Talk to your doctor. But education is supposed to foster intellectual development. It is not supposed to be a safe zone of comfort and emotional protection. Campus radicals used to brag about how transgressive and provocative they were. Now, it seems, they’re more interested in policing the transgressions and provocations of others.

Turnbull’s Weak Media Reform Plans Aren’t Fit For The Modern Age

One of the pleasant things about being prime minister, I suppose, would be pursuing your own little hobby horses. Especially when those hobby horses had been cruelly stymied by your predecessor.

And so the Turnbull Government looks to be pushing ahead with the reforms to media ownership and control that had been quashed – or at least shelved – by Tony Abbott when Malcolm Turnbull was communications minister.

Now the communications minister is Mitch Fifield and the Government is talking about a media reform package being announced this month. Perhaps even this week.

Yet it is striking how limited the reforms being publicly discussed actually are.

The Government has floated eliminating the reach rule (which prevents firms from owning commercial television licenses that cover more than 75 per cent of the population), eliminating the two-out-of-three rule (which prevents a firm from owning more than two of a commercial television licence, a radio licence and a newspaper in the same area) and abolishing television broadcast licence fees.

Each of these reforms could have been done by any government in the last 20 or 30 years.

In his recently published diaries, Peter Reith records a Howard cabinet debate about eliminating cross-media ownership rules all the way back in April 1997. (An unhappy Reith, who wanted more comprehensive liberalisation, complains “we are busily contemplating a highly interventionist approach”.)

The media landscape is completely different in 2015. Here’s what the ABC’s page looked like then. Just 13 per cent of Australian households had home internet access in 1998.

Anyway, we all know how much technology has changed over the last decade. But even in a much shorter time-span the media environment has changed dramatically.

The last time I wrote about the prospects for media ownership reform was in March 2014, when Turnbull first floated the idea of regulatory reform. Since then our viewing choices have expanded to the streaming services Stan, Netflix and Presto. We’ve seen the launch of Buzzfeed Australia, Daily Mail Online Australia, and Huffington Post Australia.

Even the way we conceptualise media has shifted. A larger and larger number of media consumers use Facebook as their primary news source. Wikipedia’s page on “binge watching” was only created in September 2013.

All those technological and social changes materially affect the old arguments for media regulation. Populist fearmongering about press barons and broadcast moguls might have been effective in the 20th century, but only fantasists claim the media is monopolised today.

Nothing prevents media consumers voting with their feet. Nothing prevents consumers migrating rapidly onto new services and shifting their allegiance to more interesting news organisations. Consumers do not lack for choice.

These transformative changes make the Turnbull Government’s proposed reforms look embarrassingly modest. Even the Greens support the elimination of the reach rule. The two-out-of-three rule is absurdly anachronistic. There’s something comic about a regulation in 2015 that conceives of the media as divided between print, radio and television.

As to the elimination of television licence fees, this is more fraught. The Government apparently believes broadcast licences are effectively worth zero, and that charging for the use of a valueless asset is unfair.

It’s certainly true that electromagnetic spectrum rights are worth less than they were. But they’re not worth nothing. It’s a big leap from “traditional broadcasting is no longer special” to “traditional broadcasting is worthless”.

Anyway, if the Government really believes that, then where’s the proposal for a fourth free-to-air commercial television network? Or a fifth? The incumbent broadcasters, no longer benefiting from the valuably scarce spectrum, would have no cause to complain.

One “high level spokesman” was quoted in The Australian yesterday saying that “if the Government believes one law needs to go, then they all need to go”. Indeed. The technological changes that make some media reform possible also allow for more dramatic media reform.

For instance, anti-siphoning laws, which regulate the broadcast of sporting events, should be eliminated. The spectrum should be privatised, not licensed at no charge. Local content requirements – those archaic remnants of cultural protectionism – should be removed.

Each of these existing regulatory constructs assume a media world where content is scarce, where production and distribution is expensive, and where consumers are locked into free-to-air broadcasting.

Not a world where we browse Twitter on our iPads while Netflix plays on that screen in our lounge room that we still call a television but is really a computer monitor.

Parliament always lags behind technological and social change. But the Turnbull Government wants to be all about innovation. Boldness, not timidity, in media reform would be a good place to start.

Malcolm Turnbull Should Avoid The Seductive Trap Of An Early Election

Early elections are not a good idea.

Yes, they look very democratic. Who could object to a government seeking the approval of the voters, even if not strictly necessary? But if there’s one lesson we’ve learned in the last few years, it’s that early elections are a seductive trap.

Julia Gillard held an early election in 2010. She wanted voter approval for Labor’s leadership change. But by doing so she squandered any hope of exploiting her status as the incumbent prime minister, and nearly lost her first term government.

Kevin Rudd called an election well before he had to in 2013, well before he had re-established himself as the rightful leader, and well before he had rebuilt any semblance of Labor’s economic credentials. Needless to say, Rudd lost.

So one wonders why on earth people are recommending the Turnbull Government go to an election sooner rather than later. In Monday’s Australian, Phillip Hudson had an extended piece saying that Turnbull was being urged to call a poll for Valentine’s Day 2016.

It’s true that with an early election Turnbull could take advantage of his current popularity. Just like Gillard and Rudd took advantage of theirs.

Over the weekend, News Limited papers revealed Treasury is actively considering a 15 per cent GST in return for significant income tax cuts.

It is widely believed that any major tax changes would have to be taken to an election first. It’s not clear to me why that is. It seems to assume that governments these days are incapable of explaining why what they want to do needs to be done.

In fact, the so-called reform ‘mandate’ provided by an election is ambiguous. We cannot know why elections are won or lost. Perhaps an election win means the public loves the policies of the winning party, or perhaps it just dislikes the leader of the losers.

Nevertheless, the idea that reform has to be taken to an election first is the received wisdom, and governments are governed by nothing but received wisdom.

This speculation of an early election illustrates one of the Turnbull Government’s biggest challenges. In the next 12 to 18 months, Malcolm Turnbull is going to have to navigate the politics of a budget, a general election, a plebiscite (same-sex marriage), and possibly a constitutional referendum (Indigenous recognition). In each, Turnbull will be fighting the shadows of decisions left to him by Tony Abbott.

Indeed, of all these, an election is probably the easiest to navigate, given Bill Shorten’s lacklustre poll performance. As things look now, a second term for the Coalition is almost certain.

Turnbull didn’t want a plebiscite on same-sex marriage. But he has some interesting options here. Turnbull could bring the plebiscite forward and hold it before the next election. Surely doing so would not be breaching faith with voters who voted the Coalition into government in 2013. After all, Turnbull would be asking for permission from those voters for the change in policy. That’s the beauty of a plebiscite. It’s hard to argue against on democratic grounds.

Tony Abbott thought he was being clever when he called for a gay marriage plebiscite. In fact, when he did so he threw away the conservatives’ strongest card: with the current make-up of the Parliament, a conscience vote might well have been unsuccessful. A lost parliamentary vote would have delayed the issue for at least a few more years.

Opinion polls show consistently high support for same-sex marriage. When the plebiscite date is announced, gay and lesbian couples might as well book their wedding venues.

The Indigenous recognition referendum is much more complicated. Turnbull is sending it off to yet another committee.

Phillip Hudson raised the possibility of a poll combining the gay marriage plebiscite, Indigenous recognition, and a half-Senate election, to be held perhaps in the second half of next year or early 2017.

But such an omnibus poll plan assumes this new committee will decide on a recognition question that is so uncontroversial it is guaranteed to be successful. Holding a controversial recognition question at the same time as the gay marriage plebiscite will risk both failing. Turnbull surely knows this. So far there is no sign of a consensus question. Don’t count on there ever being one.

The final electoral complexity is the May 2016 budget. It will be the first major test of Scott Morrison’s economic skills. It needs to symbolise a new approach to getting the budget back to surplus, while at the same time maintaining the Coalition’s mantra of “lower, simpler, fairer taxes”. It needs to bear the load of the Turnbull Government’s economic reform agenda. It can’t be the public relations disaster that was 2014.

With all this pressure, you can see why some in the Government would be eager to get an election out of the way before the budget was handed down. Budgets have winners and losers. But doing so would be a mistake. Governments are elected to govern. As the experiences of Kevin Rudd and Julia Gillard demonstrated, voters punish election timing cynicism.

Lego Can Avoid Ai Weiwei, But It Can’t Avoid Politics

On Friday the Chinese dissident artist Ai Weiwei revealed that Lego had refused a bulk order of bricks from his studio. The bricks were to be used for a piece that he was going to show at the National Gallery of Victoria.

Lego says it has a long-standing policy to not knowingly supply its bricks for political uses. Yet there might be something else going on here. In an Instagram post, Ai drew a connection between Lego’s action and the recent announcement of a new Legoland to be opened in Shanghai. He later described Lego’s actions as “an act of censorship and discrimination”.

On the one hand, this ban means nothing in practice. The company may not approve of using its product for political works but Ai does not need Lego’s approval. There’s nothing stopping him from buying new Lego kits from retailers, rather than from Lego directly, then doing whatever he likes. If that fails, there’s a thriving global second-hand market for individual Lego pieces. And the artist has apparently been “swamped” by offers of donations of Lego since Friday.

When Lego declined his order the firm was no more engaged in censorship than was the Brisbane bookstore that refused to stock Campbell Newman’s biography as retaliation for cancelling the Queensland Premier’s Literary Awards.

On the other hand, what we’re seeing here is a toy company struggling with the political implications of its own enormous cultural profile. Lego is a very particular toy company.

The global toy industry is dominated by a few big players. Mattel and Hasbro are two of the largest umbrella firms. Almost every toy brand and product you can think of – Fisher-Price, Barbie, Power Wheels, GI Joe, Mr. Potato Head, Transformers, Jenga, Monopoly, Battleship, Cluedo – falls under one of those two, giant publicly listed companies.

But last year the privately held Lego trumped Mattel and Hasbro to became the biggest toy company in the world.

Unlike its rivals, Lego is based around a single, iconic product: the Lego brick. And unlike its rivals, it professes a peculiarly utopian ethic about the nature of play and creativity that very much reflects the era and place in which it was founded: 1950s Denmark. The firm is still based in the small Danish town of Billund. It is still very much animated by its founding myths.

For instance, Lego avoids making realistic military kits or weapons because its founder, Ole Kirk Christiansen, didn’t want to make war seem like child’s play. Star Wars branded Lego has been central to the firm’s recent success. But as David C Robertson points out in Brick by Brick: How Lego Rewrote the Rules of Innovation and Conquered the Global Toy Industry, Lego nearly passed on the Star Wars license because “the very name … was anathema to the Lego concept”.

Robertson’s book leaves you with the impression of a company struggling to come to terms with the way Lego has been repurposed and reimagined by its own consumers.

In 2010 the firm reported that about 5 per cent of its sales come from adult consumers buying for themselves. This is certainly an understatement, given Lego’s growth since, the Lego Movie, and the fact that some parents are choosing Lego for their children partly for self-interested reasons.

Large scale Lego sculptures are a minor pop culture genre. Lego profits from this: the Architecture line, marketed to adults, taps into the ways consumers have been using the pieces unintended by Lego’s marketing team. That Ai Weiwei wants to use Lego for art is a reflection of its cultural symbolism. Ai is not a pioneer here. There are artists who work exclusively in Lego. Hobbyists make elaborate creations. There’s a rather incredible Battle of Waterloo.

Yet Lego is not a company well-geared for political controversy. At first glance their policy on controversial uses of their product is sound and clear. No politics, no religion, no military. Chinese democracy activists won’t get Lego’s approval, but then nor will Klu Klux Klan members. Lego wants to remain above the grubby material concerns of politics.

Such anti-political neutrality is obviously impossible. Whether they like it or not, Lego is a player in the cultural life of the human species, and in a way that any of Mattel and Hasbro’s competing brands are not. Lego profits handsomely from that status. Perhaps a truer form of political neutrality would mean paying no attention to the ultimate use of bulk Lego sales.

I suspect the refusal to fill Ai’s order is more a case of mindless adherence to their no-politics policy rather than a sop to the Chinese state. But if it is the latter, with this controversy they’ve found themselves in the invidious position shared by firms around the world who want to service markets in unfree countries like China.

Such relationships throw up serious ethical questions. Refuse to abide by the state’s rules and deny their oppressed citizens a product you believe will better their lives? Or obey and hope the benefits outweigh the harm of cooperation? You can imagine the tense meetings going on right now in Billund, as news of the Ai decision snakes around the world. They’re just a toy company after all.

Milton Friedman was correct when he said that the social responsibility of business is simply to increase its profits. But ours is a fallen world. Businesses are also participants in our political systems as much as our economies.

Sometimes that means toy companies have to take a stand on democracy in China. They have to choose between the Chinese state and its dissidents. Implicitly, inadvertently, perhaps even with the best of intentions, they already have.