Articles – Page 27

A Nanny State On IR Policy Is The Liberal Choice

In politics, sometimes it’s best not to go into detail. This is the lesson Eric Abetz learned after he explained part of the Coalition’s industrial relations policy last Thursday.

Abetz told the Australian that, under an Abbott government, the Fair Work Commission would not approve workplace agreements that raised real wages unless there had been “appropriate discussion and consideration of productivity” (paywall).

Why? So “lazy companies don’t just give wage increases because it’s the easiest thing to do.”

It is one of the founding assumptions of Australia’s system of industrial relations that workers are unable to negotiate with bosses in their own best interest.

Around this paternalistic assumption we have built a superstructure of industrial relations law, tribunals, and controlled wages unique in the developed world.

Now the Coalition seems to think some bosses are just as incapable of looking after their interests. And that a government regulator knows how to run a business better than the business itself.

If true, one wonders how the labour market functions at all.

The Coalition’s policy is patronising, illiberal, and fundamentally anti-market.

Now we know the true legacy of WorkChoices.

The fight over WorkChoices represents the moment the Coalition turned its mind from liberalising industrial relations to regulating it.

More on that in a moment. On Friday poor old Senator Abetz was accused by his colleagues of “freelancing” – that is, speaking only for himself – and advised to avoid interviews for the next few weeks.

But the Coalition’ official workplace policy document does, in fact, say “before an enterprise agreement is approved, the Fair Work Commission will have to be satisfied that the parties have at least discussed productivity as part of their negotiation process.”

If anything, Abetz softened the policy, suggesting Fair Work will only second-guess agreements if they give pay increases above inflation.

That’s how sensitive the Coalition is to the WorkChoices tag – even talking about its own policy is off-message.

Industrial relations has a special place in the Australian political compact. It is Labor’s raison d’etre; the world’s oldest party was born as the political wing of the union movement. Obviously they have a deep interest in wages policy.

In the Liberal Party there have always been free traders and protectionists, conservatives and liberals, fans of both big government and small. But one thing has bound the party together since conception – an antipathy to union power and prominence.

So Labor supporters recount our political history as a contest between employees (labour) and employers (capital). For Liberal supporters our history is a contest between sectional interests (union thugs) and the mainstream (Forgotten People).

Yet eight decades of the Australian Settlement concealed a few subtleties in the Liberal view.

For all that time, being opposed to union power and supporting greater market control over wage price setting was, effectively, synonymous.

When, during the Hawke, Keating, and Howard eras, labour law was slowly liberalised, this equivalence was superficially reinforced. As labour markets became freer, unions declined.

But then Kevin Rudd repealed WorkChoices. Rudd’s move was the first time since the reform era began that a liberalisation – in any sector of the economy – had been reversed. In 2007 Australia hit the market reform wall. This was very disorientating.

(I’ve described WorkChoices here as “liberalisation” because that’s what all sides of politics imagine John Howard’s policy was. In fact it was a complex regulatory takeover of workplace relations by the federal government. Still, perception is what matters.)

Now the Liberal Party has to figure out what its industrial relations priority is: to pursue a free market in labour, or to battle the unions.

Put another way, is Australia’s industrial relations dilemma that it is too highly regulated? Or is the dilemma that unions are too prominent?

After the 2007 defeat, there are many on the Liberal side who say the latter; many who imagine they are fighting a guerrilla war against the union movement. There are hints of this attitude in the Australian article. Abetz says the Coalition’s policy was developed “in response to unions ‘bragging’ that they had secured productivity-free pay increases.”

The Coalition’s solution to such hubris? Increase workplace regulation. If the government has to nanny lazy companies to reduce union power, then so be it.

Never mind that both sides of a mutually beneficial exchange should be “bragging” about the great deal they got.

It’s worth pointing out that unions would exist in a free society. They would have no privileged position in the law, and no coercive power, but, as Friedrich Hayek once wrote, everybody “ought to have the right to join a trade union.”

The dust from WorkChoices has settled. Now that Coalition is preparing to form government again, what does it really want for industrial relations? Labour market freedom, or just defeat of the union movement?

Behold The Dance Of The Travelling Salesmen

On Sunday Tony Abbott announced his government would provide $10 million to upgrade the Brookvale Oval in New South Wales.

As the Coalition’s press release puts it, “Brookvale Oval is the only ground between Sydney Harbour and Gosford that meets NRL standards.” Furthermore, “Only the Coalition can be trusted to deliver the Brookvale Oval upgrade and better sporting facilities for the Northern Beaches.”

Such is the high stakes of federal politics.

Every election carnival has its major attractions – the set-piece debates and the big announcements that consume half a week’s worth of media coverage. Think of Tony Abbott’s corporate tax cut. Or Kevin Rudd’s northern Australia policy.

But in between these major announcements, there’s a whole lot of filler. Stadium revamps. Road extensions. Oval upgrades.

We’ve grown so accustomed to the stream of spending promises that accompany elections, we rarely reflect on how absurd they are.

For these critical few weeks, when Australians decide who is best to lead, the election campaign subordinates the serious task of distributing public revenue to theatrical opportunism.

We hope for the clash of political visions. But we get rival groups of travelling salesmen, each trying to one-up the others’ offer.

The Brookvale Oval promise has received a bit more scrutiny because the ground is already getting its upgrade – Labor’s Anthony Albanese committed to it a few weeks ago. And the money was already allocated in the May budget.

Few of the usual handouts get that sort of attention.

Over the past two weeks, Abbott has announced he would, if elected, provide money for an Antarctic research centre, a Hobart Airport upgrade, a netball centre in Queensland, a sports centre in Penrith (also announced by Albanese earlier), and a recreation centre in Victoria.

Kevin Rudd would like to be elected so he can hand taxpayer cash to a discovery centre in Melbourne’s east, a sports complex in Launceston, a refurbishment of the Hobart Showground, a gymnastics centre in Mackay, and a natural gas research centre.

There’s clear no rhyme or reason to any of these promises. From the outside they seem completely arbitrary; a scatter plot of spending. They’re sometimes handed to marginal seats, but not always. Hopefully they have some internal logic.

But it’s hard to imagine a single vote being swung on whether the Brookvale Oval or Hobart Showground gets federal funding.

We should distinguish these promises from another group of similarly forgettable announcements meant to reinforce specific messages. Does anybody remember Abbott’s pledge in 2010 to set up an “Office of Due Diligence” in the prime ministers’ department, to vet new spending programs? Of course not. It wasn’t a serious policy suggestion: it was promised solely to remind voters that Labor was wasting taxpayers’ money.

The challenge for any opposition is to convert their core argument – the government is terrible – into deliverable policy. Much policy devised during an election campaign is like this.

Different again are the big, headline-grabbing infrastructure spends. Take Abbott’s promise to put $7 billion into the Bruce Highway in Queensland or $1.5 billion into the East West Link in Melbourne. At least these are subjected to some public debate, and even – occasionally – a cost-benefit analysis to demonstrate they are actually worth doing.

In 2008 the Labor government created an independent body, Infrastructure Australia, to scrutinise such spending. The idea was to avoid pork barrelling. A lovely thought. But the Coalition feels no need to abide by the body’s recommendations. And Labor ignores them when convenient. (The Parramatta to Epping Rail Link in Sydney, a last minute pledge of Julia Gillard in the 2010 election, was never favoured by Infrastructure Australia.)

Anyway, minor showground renovations are well below the threshold for Infrastructure Australia, which only looks at “projects of national significance”.

That is, it only looks at things the federal government should be doing.

If upgrading the only ground between Sydney Harbour and Gosford that meets NRL standards is a desirable use taxpayers’ money, perhaps it could be paid for by state or local governments, whose citizens will directly benefit.

But then federal politicians wouldn’t be able to claim credit.

The purpose of the pork barrel road show is impressionistic rather than specific. It is spending as white noise – designed to give a potential voters a feeling that a Labor or Coalition government will be generous with federal funding. Not generous anywhere particular, but everywhere.

Tony Abbott says he would like to be considered an “infrastructure prime minister”. He’s promising “cranes over cities” like so many storks around a watering hole.

The sociologist Thorstein Veblen coined the term “conspicuous consumption” to describe consumption that was valued for the impression it left on others, rather than the utility it bought the consumer.

So much of what passes for policy during an election campaign is conspicuous investment – not important for its own sake, but to demonstrate how freely money would flow under the next government.

After all, if Brookvale Oval gets its funding, who knows? Maybe your pet project could be next.

Scare Campaigns Aside, GST On Food Is A No-Brainer

Let us thank Kevin Rudd for reminding voters that “great big new tax” scare campaigns are a bipartisan affair.

The sole hook for Labor’s claim that the Coalition will increase the GST is Joe Hockey’s promise to conduct a review of Australia’s taxation system that would include the GST within its terms of reference. (Kevin Rudd’s Henry Tax Review specifically excluded the GST.)

From that, Rudd has concluded that the price of Vegemite will rise 50 cents under the Coalition.

Pretty deceitful, but such is politics. And let’s not be precious. Recall the often farcical tabling of electricity bills by the Coalition in the last parliament. When a politician wants to make an argument – right or wrong – they’ll stretch the truth to breaking point. Whatever works.

But the carbon tax has nothing on the GST. The GST is the great bogey-tax of our generation.

Thirty-eight years after it was first formally proposed in Australia, the GST still retains its power to spook the political class.

In 1972 William McMahon’s government commissioned the first full-scale review of the Australian taxation system since the Great Depression. The review, chaired by NSW Judge Kenneth Asprey, concluded that the key to a simple and efficient tax system was a broad-based tax applied uniformly to all goods and services.

By the time Asprey’s report was released, it was 1975 and the prime minister’s name was Gough Whitlam. The only tax reform Labor was interested in was that which might suppress Australia’s skyrocketing inflation.

Malcolm Fraser’s cabinet toyed occasionally with a goods and services tax, but ultimately left it alone. Paul Keating proposed a GST which was then scuttled by Bob Hawke. John Hewson put it officially back on the political agenda, but an opportunistic Keating tore it down again when he tore Hewson down. And John Howard had to denounce the GST before he could introduce it. By comparison, introducing the carbon tax was a cakewalk.

No surprise our politicians don’t want to revisit all that pain.

But any self-respecting tax review has to include the GST. And any review would conclude that broadening the GST’s base – that is, applying the GST to food – is a no-brainer. Excluding food increases the GST’s complexity and reduces its efficiency.

The argument that a GST on food would disproportionately hurt the poor is misconstrued. Yes, the smaller your income, the more you’re likely to spend on food as a proportion of your income. But the food exemption doesn’t just make food cheaper for the poor. It makes food cheaper for everyone. There are much more targeted better ways to help people on lower incomes – direct welfare payments, for instance, or varying the income tax schedule.

If you were a benevolent dictator designing a tax system from scratch, the GST would apply to all consumption goods and services. The ideal system might even set the GST higher than 10 per cent. There are a lot of inefficient, complex taxes that target production which could be replaced by a simple GST that targets consumption.

(This is important. Free marketeers tend to favour GST reform not because they love taxes but because the GST should replace more distortionary ways of raising government revenue. Any GST tax change ought to be revenue neutral. Hopefully the Coalition remembers this in government.)

Of course there is no benevolent dictator, and we wouldn’t want one.

Policy thought experiments like this are an economists’ fallacy. They assume the best policy can be modelled on a computer or detailed in a white paper and then imported holus-bolus into a nation’s legislative framework. The world doesn’t work like that. The elegant, uniform, and broad-based consumption tax envisaged by the Asprey review was shredded when it came into contact with the Australian Democrats.

One of the current furphies is the idea that Tony Abbott couldn’t change the GST even if he wanted to – it would need to be renegotiated with the states. This is wrong, at least on the face of it. The GST is a Commonwealth law, and a Commonwealth law can be changed by the Commonwealth parliament whenever it likes.

But there appears to be an evolving political norm that would compel the Commonwealth to negotiate to change the GST, even though it technically does not have to do so.

Such a constraint is a good thing. The GST is, after all, supposed to be the states’ tax.

And we know from experience that a tax unconstrained by norms or rules can become a monster.

One of the major taxes that the GST replaced – the wholesale sales tax – was introduced by James Scullin’s Labor government in 1930.

The wholesale sales tax was originally levied on a selected range of goods at a uniform rate of 2.5 per cent. But by 1940 the government had hiked the tax to more than 8 per cent, varied the selection of goods, and introduced multiple rates. The rate and the schedule changed repeatedly over subsequent decades. Scullin’s simple wholesale sales tax became a complex behemoth that the federal government couldn’t stop tinkering with.

The GST has so far avoided this fate in large part due to the trauma involved in implementing it.

Maybe we should also thank Kevin Rudd for ensuring the GST remains a toxic tax.

Not The Time To Convince Us Of Economic Prowess

What a terrible time to call an election.

Kevin Rudd went to the Governor-General just 48 hours after his government released the appalling Economic Statement on Friday.

The media cycle moves along quickly in an election, so let’s recap. Turns out, since the May Budget, this year’s deficit has leapt from $18 billion to $30 billion. And projected unemployment has gone from 5.75 per cent to 6.25 per cent.

Those are major revisions. May wasn’t very long ago. (You can read the Economic Statement for yourself here.)

Some of the budget shortfall will be bridged by new taxes. If the revised projections are accurate, unemployment will be higher than it was during the Global Financial Crisis, which peaked at 6.1 per cent in March 2009.

Rudd didn’t deliver the bad news himself. His Treasurer Chris Bowen and his Finance Minister Penny Wong were left to carry the can.

Every election is about the economy. Even the 2001 election – after both Tampa and September 11 – Howard spent the most time in his official policy speech talking about economic issues. (This wasn’t as strange as it seems in retrospect: recall a great worry around the world about the economic consequences of the terrorist attack.)

Rudd knows this. A focus on the economy is his master plan. He wants to make Tony Abbott look like an economic lightweight. He’d like to be known as the smartest, most serious person in the room. In his National Press Club address, he joked about wanting to show more graphs. He probably planned the jokes well in advance. Where Julia Gillard talked about moving forward, he talks about Chinese demand for resources.

So why did he leave the dire Economic Statement hanging? After all, it’s not the only bad news. Economic data released yesterday means there could be as many as two interest rate cuts during the election campaign.

I argued in the Drum last month that while Rudd enjoys talking about future challenges, he hasn’t come up with any policy solutions.

All we have heard from Rudd is a half-hearted imitation of some of the themes of 2007 – he wants Australia to be a country that makes things, and the car industry can look forward to a few hundred million more in subsidies.

It’s hard not to conclude that the Prime Minister’s economic seriousness is purely for show – it is a marketing pitch rather than a strategic plan.

Rudd is no cleanskin. It was his spending decisions in late 2008 and early 2009 that made the budget as grim as it is in 2013. Those decisions are why he is introducing an “efficiency dividend” on the public service. They are why he’s introducing a tax for the bank deposit guarantee – a guarantee he himself introduced.

With the surplus further out of reach, and the national economy looking more stagnant by the day, Rudd has started to rely on some of the old talking points of the previous leadership team.

We even heard that hackneyed Gillard catchphrase “cuts to the bone” in his election announcement speech on Sunday.

Easily the most inept regurgitated talking point is the boast is that Australia has a triple-A credit ratings from all three major credit agencies. We hear it all the time. The triple-A rating is presented as the definitive proof of the government’s economic prowess.

Of course, a triple-A rating is better than the opposite. But if you find the ratings agency argument compelling, well, I’ve got some subprime mortgages I’d like to sell you.

This legally protected trio of ratings agencies must take a big part of the responsibility for the Global Financial Crisis.

Happily for Australia, most of the academic evidence suggests the agencies are better at rating countries than they were at rating mortgage backed securities. Yet few industries have had their reputation as battered in the last few years as the ratings agencies. Labor couldn’t have found a less convincing talking point if they tried. No surprise it was originally Wayne Swan’s.

This is odd because in many ways Rudd wants to be less the anti-Gillard as the anti-Swan. The new prime minister is determined to level with voters about the economic challenges Australia faces, rather than rely on the sort of hands-over-the-ears optimism that characterised the former Treasurer’s tenure.

But the Prime Minister has spent so much time rushing from issue to issue – boats, Eddie Obeid, carbon tax – that he hasn’t put enough work into his basic economic credibility.

One National Press Club speech and a few graphs won’t do it. And an election campaign is not a great time to try to prove you can control the nation’s finances.

The Case for No

With Mikayla Novak

Make that three times. One of the happy casualties of Kevin Rudd’s decision to go to an election one week before Julia Gillard’s preferred date of September 14 is the referendum to recognise local government in the Australian Constitution. Local government recognition was defeated at a referendum in 1974. It was defeated again in 1988. Now it has been abandoned in 2013.

Let’s hope this is the last time this terrible idea gets up.

Anthony Albanese, the Commonwealth Minister for Local Government, was eager to point out that the change to the constitution proposed was only 17 words. The referendum to recognise local government would have amended Section 96 to read:

96 Financial assistance to States and local government bodies.

During a period of ten years after the establishment of the Commonwealth and thereafter until the Parliament otherwise provides, the Parliament may grant financial assistance to any State, or to any local government body formed by a law of a State, on such terms and conditions as the Parliament thinks fit.

Local governments and their peak lobbies said this was a minor, technical change. Albanese has described it as ‘modest’ and ‘sensible’. Julia Gillard said it simply ‘reflect[ed] modern reality’. The Lord Mayor of Sydney, Clover Moore said it ought to be ‘non-contentious’.

It was anything but. The change to Section 96 was one of the most significant, dangerous, and consequential constitutional amendments ever proposed. It would have completely unbalanced Australia’s system of government. It would have freed the Commonwealth from any spending constraint. It would have unleashed local government fiscal recklessness. And it would have eliminated the checks and balances embedded in a federal constitution.

The referendum may not be going ahead — thank goodness — but it was a brief window into one of the most deep-seated problems of Australia’s constitution, and a reminder of how the biggest power grabs are dressed up as minor housekeeping.

The uncertain place of local government

There is one small way the advocates of a local government referendum are right: councils are strange beasts: they’re half state government departments, half autonomous democratic governments in their own right.

The development of Australian local government by colonial governments was among the many institutional innovations enacted during the nineteenth century.

Town trusts were established throughout Western Australia in 1838 primarily for the management and funding of roads. This was followed shortly thereafter by the first elected municipal council in Australia, established in Adelaide in 1840, and similar bodies in Sydney and Melbourne two years later.

By the late nineteenth century local government bodies were widespread and, notwithstanding interstate variations, they were generally responsible for a myriad of functions and activities, such as roads, tramways and other public transport, water supply and sanitation, gas facilities and other local infrastructures.

In some jurisdictions, local governments during the colonial era were responsible for the provision of local schooling, care for orphans and the sick, cultural and recreation services including libraries and public gardens, and even the control of prostitution. Some of these functions have been maintained to this day, whilst others such as direct provision of infrastructure services have been allocated to the states or devolved to the private sector.

While the division of powers in a federated Australia were central to the discussions at the Constitutional Conventions of the 1890s, local governments were largely overlooked due to the understanding that local governments were, and remain to this day, the legal and administrative responsibility of individual states. There was little by way of direct financial relationships between the commonwealth and the states for most of the twentieth century, although tied roads grant funding to the states had an indirect effect on local road works, and councils had some involvement in the growing post war preoccupation with regional planning by commonwealth and state governments.

The size and scope of local government services significantly expanded during the 1970s, as the Whitlam government initiated a direct commonwealth local funding relationship which provided grants funding, bypassing the states, for programs including senior citizens’ centres, leisure facilities, urban transport and tourism.

The ratcheted federal funding to councils reflected Gough Whitlam’s own perception that ‘there are few aspects of our environment or our development, our culture or our welfare which can be adequately tackled without involving local government.’

And, he ought to have added, ‘without sidelining state governments’. Whitlam’s agenda was highly political: local government financial recognition was a vehicle for the traditional Labor Party hostility to the states. Canberra felt that the federal structure of government was a roadblock to its grand plans for bigger government and social reform.

Voters felt otherwise. When Whitlam put the question of local government recognition to a referendum in May 1974, the No case won. While the Fraser government abstained from some of the more interventionist aspects of Whitlam’s intrusion into local affairs, the general architecture of Whitlam era commonwealth funding arrangements to councils and shires remains to this day.

The constitution allows the Commonwealth to fund local government two separate ways. Section 51 gives the federal government power to make policy and spend money in thirty-two separate areas — such as the administration of the postal and telecommunications networks, immigration, banking, weights and measures. Section 51 was designed to neatly divide up the roles and responsibilities of government between the Commonwealth and the states. The Commonwealth can give whatever money it wants to whoever it likes if it is acting in one of the areas allocated to it by Section 51.

The other way is through Section 96, which allows the Commonwealth to pass money to local governments through state governments. Section 96 was added to the constitution at the last minute. It has no international precedent in other constitutions. And it has completely undermined the clean divisions of Section 51. Section 96 currently allows the federal government to pay state governments to do whatever the Commonwealth cannot, and allows them to impose tight terms and conditions on that funding.

This broad section is how the Commonwealth is now involved in education, health and housing. It is Section 96 that is to blame for the ‘blame game’ — the confusion of roles and responsibilities in Australian public policy.

In other words, Section 96 should be scrapped, not expanded. Adding local government to the mix would supercharge this terrible constitutional provision. The Commonwealth would be able to completely bypass the states. Unlike state governments, local governments have no stake in the division of roles in the constitution. They have no powers to protect. They’re also easier to bully: it would be much simpler for Canberra to manipulate and control 565 small councils than six well-funded states jealously protecting their sovereignty.

Local governments fantasise that Commonwealth money would be liberating. This is only half-true. Local governments would be financially empowered, but they would also be tools of Commonwealth policy.

There is a desperate hunger in Canberra for more control over every area of public policy. During his first term as prime minister, Kevin Rudd even said the Commonwealth should assume responsibility for urban planning — the quintessential local and state government role. Given the steady centralisation of power over the last hundred years, aided in no small part by Section 96, it is virtually a certainty that every local government policy will be eventually decided in Canberra, far from the local communities they effect. But the last thing we want is Commonwealth bureaucrats deciding local rubbish and recycling policies.

Unleashing local government recklessness

The current system has one distinct benefit: state supervision of local government has kept councils from soaking ratepayers.

Since the late 1970s the New South Wales state government has maintained a ‘rate pegging’ system, which sets the maximum percentage increase to general revenue, including municipal rates and some user charges, for councils.

Other states have also employed rate pegging in the past, such as Victoria and South Australia during the 1990s.

Several interrelated reasons have been put forward in support of pegging the growth rate in rates. These include the desire to constrain cost of living increases faced by rate paying households, and the prevention of fiscal
exploitation by local governments in setting rates which finance monopoly goods and services.

Efficiency arguments in favour of rate pegging could also be posed, in the sense that constraints on municipal rate increases may encourage councils to finance goods and services through user charges, ensuring that the costs of council outputs are more closely aligned with their underlying demands.

While NSW councils are permitted under rate pegging to formally seek rate increases above the statutory limit, the system has succeeded in constraining the growth in municipal rates revenue compared with most other states.

Since the introduction of the GST, municipal rates revenue in NSW have grown in nominal terms by an average of 4.3 per cent per annum, the lowest growth of all states and the NT and below the national average growth for rate revenue of 6.8 per cent per annum.

The NSW municipal rates regime also generally fares well against other states with regard to other indicators of tax burden. In 2011-12 councils and shires in NSW collected $473 in rates per head of population, the lowest of all jurisdictions except the Northern Territory. NSW rate collections, as a share of gross domestic product, stood at 0.8 per cent in the same year, which was higher than only Western Australia and the NT.

Local governments have long resented constraints imposed upon their abilities to raise additional revenue from municipal rates, with some councils arguing that it prevents them from meeting infrastructure requirements, and other additional service demands placed upon them, resulting from population growth.

Approval of the referendum proposal for financial recognition of local governments in the Australian Constitution would formally provide councils and shires with access to revenues forcibly acquired from federal taxpayers. Unprecedented access to the federal funding tap would diminish the effectiveness of state rate pegging initiatives, as the relative share of commonwealth grants in the total local government revenue mix inevitably increases over time.

Unleashing the Commonwealth

The local government referendum is one part of a much broader attempt by the Commonwealth government to free itself from constitutional checks and balances.

One obscure piece of legislation passed by the parliament last year was the Financial Framework Legislation Amendment (No.3) Bill. This bland sounding law was in fact a complete abrogation of the parliament’s duties to scrutinise government spending.

The bill purports to gives the Commonwealth power to spend on more than four hundred separate areas — everything from United Nations contributions to subsidising political party apparatus — without having to ask the parliament for permission ever again.

It’s no exaggeration to say that revolutions have been fought over the question of whether parliament can scrutinise the executive’s spending. But this Australian parliament — with complete, bipartisan support, mind you — has willingly and happily tossed away that responsibility.

The Australian Constitution serves as the enduring ‘rule book’ framing the nature and scope of collective action to be undertaken by the federal government. In doing this it aspires to provide people with a sufficient degree of certainty to go about their daily lives, without undue fear of arbitrary fiscal and regulatory exploitation by politicians and bureaucrats based in Canberra.

The Commonwealth government is also more distant from the locus of political decision making in local and regional areas, and is thus more prone to significant errors as demonstrated by numerous policy failures over the past few years.

It is for these reasons that proposals to shift the constitutional goalposts in favour of greater control and political prestige for Canberra have rightly been resisted in the past. But the Financial Framework Bill has already allowed the executive to bypass parliamentary scrutiny on its spending.

Local government recognition is no small matter. It would have completely, irreversibly, and destructively rewritten Australia’s constitutional settlement. Will we be asked to revisit it a fourth time? Unless the federal government stops wanting to accumulate power and unbalance the federation, almost definitely.

Politicians Are Powerless Over Australia’s Economy

Australia is a very small country with a very open economy. These facts are sometimes easy to forget.

No matter what they say during the upcoming election campaign, neither Kevin Rudd nor Tony Abbott will have much control over Australia’s economic fortunes in the next term of government.

Wrapping up his National Press Club address earlier this month, Kevin Rudd said Labor governments “manage transitions … sketch the future … harness the energy and ambition of our people” and “put the changes in place that best secures our future.”

Tony Abbott has used the same sort of hyperbole. A Coalition victory would immediately trigger prosperity.

Such boldness is par for the course at election time. But it is a confidence trick.

The fate of the Australian economy – the big ups and downs of the economic cycle – will be determined by global conditions, not domestic ones.

No-one knows this better than the workers at Holden and Ford, for whom global exchange rates are more important than any subsidy or tariff our elected representatives can devise.

This has always been so.

A sudden increase in the cost of bank lending in London caused our first true depression – the largely forgotten Depression of the 1840s. We suffered along with the rest of the British Empire.

Our better-remembered second depression occurred in the 1890s. What little modern Australians know of the Depression of the 1890s is perhaps the housing boom in Melbourne which preceded bank failures and unemployment.

But the Australian episode is only part of a story that encompasses the near collapse of the London-based Barings Bank, sovereign debt crises in Latin America and the Mediterranean, a gold panic in New York, and a mining market collapse in South Africa. Our trouble – as traumatic as it was – was just one crisis among many.

The Great Depression was even more clearly imported. No way were we going to avoid suffering from the stock market crash of October 1929 or the collapse of world trade.

Historically our good times correspond with good times in the global economy too.

We boomed in the 1950s and 1960s along with everyone else. We suffered stagflation in the 1970s along with everyone else.

And the recession we had to have?

Well, that recession had to be had by the United States, Canada, New Zealand, the United Kingdom, and Japan as well.

This all makes sense. Australia is tiny. Overseas there are cities with more people than our entire country. We’re almost entirely dependent on imports for consumption and exports for economic growth. And we need foreign capital for investment. A small country highly integrated into the global economy is going to be very sensitive to international crises.

Yet for each of these historical episodes there exists a cottage industry trying to explain the unique Australian factors that caused them. The 1840s Depression is blamed on problems in the Australian wool industry. The 1890s Depression is blamed on reckless Australian banks. The depth of the Great Depression in Australia is blamed on our obsession with balanced budgets.

It goes on. We’ve all heard Paul Keating blamed for the recession of the early 1990s and John Howard credited for the subsequent growth.

If there is growth or recession in the next term Abbott or Rudd will take the blame or credit. They probably won’t deserve either.

In the past I’ve mentioned research that suggests political success is more about dumb luck than virtue or competence. In truth Rudd or Abbott will win government then cross their fingers.

But political debate struggles with powerlessness. Voters like to assign blame and give credit for things that are actually outside any domestic politicians’ control.

Kevin Rudd rightly points out the global financial crisis dumped a bucket on Labor’s first term. The policy agenda of any party would have been drowned out by the global consequences of America’s subprime collapse.

But then he claims his decision to artificially stimulate the economy was responsible for Australia’s relative endurance.

Not, for instance, Chinese demand for West Australian minerals.

In other words, Rudd believes the disease was entirely foreign, but the cure was entirely domestic.

Yet even if you are a card-carrying Keynesian – that is, you believe the government can and should spend more to boost the economy in a downturn – it is just as plausible that China’s enormous stimulus package in 2008 is responsible for our prosperity, rather than Labor’s smattering of insulation and community projects.

Australia spent around $90 billion to stimulate its economy. Sounds like a lot? Well, China spent over half a trillion dollars. And nearly three quarters of that spending went towards the infrastructure whose raw materials we supply.

Our politicians pretend they can steer the economy like a ship. But we have a very small ship and it’s a very big ocean. During an election, it pays to remember our economic future is determined by the wind, not the sails.

Secrets And Fears Of A Paranoid Government

You’re either with us or against us. “Hammer this fact home,” an internal Department of Defense document instructs its readers, “leaking is tantamount to aiding the enemies of the United States.”

That document was itself leaked last week.

It’s part of the Insider Threat Program – a crackdown within the US federal bureaucracy to stop bureaucrats and private contractors sharing secrets with the press. It is the banal bureaucratic background to the espionage charges laid on Edward Snowden and Bradley Manning.

But in a way the Insider Threat Program is as revealing as the secrets the two men have revealed.

America’s national security state is unmanageably big. It is a Leviathan of dysfunction.

More than 4.9 million American government employees and private contractors have security clearances. There are at least 1,200 bureaucracies and 1,900 private companies working on the government’s security and intelligence programs.

Booz Allen Hamilton (the company that employed Edward Snowden) earned $3.8 billion in federal government contracts in 2012. That’s 99 per cent of its total revenue.

During the Cold War the US government was rightly concerned public servants might sell secrets to the Soviet Union.

There actually were spies at the very top of the bureaucracy. If you passed information to Soviet agents, it was reasonable to assume you did so for Soviet benefit.

But now, a decade into the War on Terror, the American government is more concerned secrets might be passed to American newspapers.

There’s a subtle difference. Citizens in a democracy have a right to know what their government is doing. Edward Snowden revealed a massive surveillance program that was, until recently, dismissed as the fantasy of conspiracy theorists. We are better for knowing that program exists.

Yet the US government thinks leaking to journalists is the moral and legal equivalent of spying for foreign governments or terrorists.

Nobody believes the disclosure of classified information should be legal. Any organisation, private or public, needs some degree of confidentiality to function. As the Guardian writer Glenn Greenwald points out, Snowden “made his choice based on basic theories of civil disobedience”. He will bear the consequences.

But an Espionage Act charge goes well beyond that. Disclosing information about the actions of a democratically elected government to the media is not the same as secretly undermining national security for the benefit of the hostile foreign powers – not on any practical, ethical, or philosophical grounds.

The US Espionage Act dates back to 1917. Section 793 of the Act makes it illegal to communicate information to others “with intent or reason to believe that the information is to be used to the injury of the United States, or to the advantage of any foreign nation”.

In its first 90 years the Espionage Act was only used three times against people accused of leaking government secrets to the press.

But the Obama administration has charged eight different whistleblowers under the Espionage Act.

As well as Bradley Manning and Edward Snowden, they’ve also charged a former CIA officer for revealing the names of colleagues involved in torture, a State Department advisor for leaking information about North Korea, and a senior executive at the National Security Agency for exposing the surveillance program. (You can see a full list here.)

One of the few prosecutions for leaking under the Espionage Act before Barack Obama was Daniel Ellsberg. He released the Pentagon Papers to the New York Times and Washington Post in 1971.

The Nixon administration went hard against Ellsberg. So hard, in fact, that they illegally tapped his phones. The case was ultimately thrown out for misconduct.

Yet in retrospect the release of the Pentagon Papers wasn’t that big a deal. They were merely a classified Defence Department history of the Vietnam War. That history stopped in 1967, and the juicy stuff – mostly how the Johnson administration lied about the Gulf of Tonkin incident – damned Richard Nixon’s Democratic opponents.

Ellsberg was prosecuted for espionage not because he had damaged American national security but because he had embarrassed the state. For Nixon – and for Obama – embarrassment is as good as aiding the enemy.

It was embarrassing, but not damaging, when the world read America’s diplomatic cables in 2011. It is embarrassing that the world knows the US government is listening to its phone calls. But have these embarrassments materially hurt American security interests? Not likely. Were they done in the service of a foreign power? Quite the opposite.

Earlier this year, Barack Obama bragged his was the “most transparent administration” in history.

Compare those fine words to a brochure published by the US Defense Security Service, Insider Threats: Combating the ENEMY within your organization. It urges private contractors to report any suspicious behaviour of their colleagues. “It is better to have reported overzealously than never to have reported at all.”

Such is the paranoia of the impotent.

On The Positive Side, Thousands More May Find Refuge

It’s been four days since Kevin Rudd announced that every single asylum seeker arriving by boat would be sent to Papua New Guinea and either resettled there or returned home.

The political class is still shocked. They shouldn’t be.

It has become an item of faith that Australian politicians are personally responsible for the choices made freely by asylum seekers, and are to blame for the risks they choose to take.

So this was inevitably how the whole thing would end – completely and formally closing down any chance to seek asylum by boat in Australia. For as long as this policy lasts, no boat person will be settled in Australia again.

Our refugee politics are very cynical. And sometimes they are xenophobic. But not always. The defining moment was the December 2010 Christmas Island boat disaster, when 48 people died as their boat was smashed against the rocks.

The anguish that tragedy caused among policymakers and the public was real.

From then on, both sides of the debate became single-mindedly focused on how to stop boat drownings. This became the sine qua non of refugee policy. Even many refugee activists began framing their arguments on this ground.

On the conservative side, many of the Howard-era arguments about national sovereignty were quietly put to bed.

The PNG plan is unlike every other plan and policy adopted until now. It is not a deterrence scheme. To describe it as deterrence is a category error. It does not make it hard or uncomfortable to enter Australia by boat. It makes it impossible.

It’s the difference between a policy of deterrence on the one hand, and a policy of exclusion.

That difference is the key to understanding why John Howard’s Pacific Solution stopped the boats – for a time.

As Tim Hatton points out, the Howard policy didn’t just reduce the number of asylum claims from those arriving on boats. It reduced the number of asylum claims from everywhere. The Pacific Solution created a perception that Australia was completely closed to refugees. The policy’s success rested on this perception.

Yet the perception couldn’t last. When it became clear the vast majority of those detained on Nauru were eventually resettled in either Australia or New Zealand, the bluff was over. Potential refugees understood a stint in detention was the price of asylum. Boat arrivals started picking up from 2006 onwards, as this parliamentary document demonstrates.

With every iteration of asylum policy over the last few decades it has been a reasonable bet that if you hop on a boat you could end up – eventually, and not without taking some risk and suffering some hardship – receiving refugee status in Australia.

Kevin Rudd’s PNG plan puts an end to that. It replaces the asylum gamble with the certainty of a trip to Papua New Guinea.

Is the PNG plan cruel? Absolutely. But let’s not be revisionist. The status quo is extremely cruel as well. It is designed to be cruel.

The “no advantage” policy, introduced by Julia Gillard in 2012, has left thousands of people in limbo. This policy was never fully fleshed out. That was the point. Boat people were to be left in the Australian community for an unknown period. They weren’t allowed to work. Their miserable uncertainty was supposed to discourage others from coming. It didn’t.

No advantage was going to get worse. The Coalition immigration spokesperson floated sending no advantage asylum seekers to work camps. The Labor immigration minister thought that was a very interesting idea.

For nearly a decade Australia has had the worst policy combination possible: our border controls are both punitive and ineffectual.

For all the political anguish about drownings off the Australian coast, the PNG scheme does nothing to make global refugee trails any safer.

Asylum seeker deaths are heartbreakingly common. One estimate has 17,306 people dying trying to enter Europe between 1993 and 2012. Border patrol statistics record around 400 deaths on the US-Mexico border every year.

These figures are understated. In their book Globalization and Borders, the Australian criminologists Leanne Weber and Sharon Pickering point out that for every body that washes ashore in a first world country, two bodies are never recovered.

Unauthorised migrants drown while swimming rivers. They suffocate in cramped spaces. They dehydrate while crossing deserts. They are killed in vehicle accidents. Such tragedies can occur long before the migrants arrive at a first world border to be counted.

Kevin Rudd will not reduce the number of people willing to risk their lives for a better life. They will just risk their lives elsewhere, safely away from our guilt-ridden politicians.

That’s not important if you consider stopping the boats to be the sole fundamental goal of Australia’s asylum policy.

But there are alternative goals: finding a safe haven for people in need, increasing the migration intake, or lowering barriers to the free movement of people.

If those goals appeal then the most important thing about the PNG plan was contained in a virtual footnote to Kevin Rudd’s press conference last Friday. The government is looking at increasing the total refugee intake from 20,000 a year to 27,000 a year.

The intake was just 13,000 a few years ago.

For all that has been said about the PNG deal, that increase would be a very good thing. Seven thousand more people safe and free in a rich developed country.

Dumping The Carbon Tax Without Dumping Anything

When Julia Gillard promised in 2010 that there would be no carbon tax under a government she led – but that her government would pursue an emissions trading scheme – she probably thought it would defuse a toxic debate and help secure victory.

Like so many of Labor’s ploys in that election, it was far too clever by half. Tony Abbott dined off Gillard’s no-tax promise for three years.

Now it’s Kevin Rudd’s time to dine. On Sunday we learned that he wants to transition from a fixed-price carbon tax to a full-blown floating-price emissions trading scheme one year ahead of schedule.

Here’s the riddle: why?

It seems strange to bring this up now. Over the last year or so, anger about the carbon tax has dissipated. Australians like the status quo. The GST swung elections back in its day. It destroyed leaders. John Hewson was one victim. The Howard government almost lost in 1998 because of its proposed great big new tax on everything. But now the GST is completely settled.

Furthermore, Rudd’s fiddling with the carbon scheme isn’t costless. It creates a $4 billion hole in next year’s budget. It exposes the government to charges of policy disarray. The way it was announced (a bare leak to the Sunday papers) recalls one of the worst habits of Rudd’s first outing as prime minister – the obsession with impressive sounding but light on detail “announceables”.

But we forget how Gillard’s 2010 bungle completely realigned the debate over Australian climate change mitigation policy. Three years later, her broken promise allows Labor to market Rudd’s minor scheduling change as “dumping the carbon tax”. Even better, they don’t have to actually dump anything.

The distinction between “tax” and “trading scheme” has always been a triumph of semantics over clarity. An emissions trading scheme is a tax. It just happens to be a very complicated one. Just like a simple carbon tax, it prices an externality – pollution. The trick is that firms are allowed to trade their tax liabilities with each other. But that doesn’t make it any less a tax.

(Here’s the Oxford dictionary definition of “tax” if you’re sceptical: “a compulsory contribution to state revenue … added to the cost of some goods, services, and transactions”. Under a floating scheme, the added compulsory cost would be the European price of around $6 a tonne. The current fixed Australian price is about $25 a tonne.)

Gillard’s broken carbon tax promise has ruled the debate over climate change policy in these last three years. Before the promise, Tony Abbott was calling Kevin Rudd’s emissions trading scheme “a great big new tax on everything”. Afterwards he targeted Julia Gillard’s “bad tax based on a lie”.

There is a subtle but important difference in these talking points. The focus on the lie eases political pressure off the policy itself.

Thanks to the Coalition’s rhetorical realignment, it is the carbon tax that is remembered as Gillard’s folly, not the entirety of the climate change program.

Long forgotten is the protracted and contentious debate about mechanisms and international agreements and subsidies and targets and the assumptions of Treasury modelling and the Garnaut Report.

We haven’t heard much about all this in recent years. Australia’s climate mitigation programs include everything from industry subsidies to renewable energy targets to efficiency regulations. Thanks to the broken promise, the whole debate was anthropomorphised. Climate policy was given human form by Julia Gillard and her tax.

Now Gillard is gone and it has all become a bit confused.

Kevin Rudd plans to recoup the $4 billion in lost revenue by cutting climate-related industry assistance, tightening tax concessions for salary-sacrificed cars, and imposing a further efficiency dividend on the public service.

Take the efficiency dividend with a grain of salt – it’s the magic beans of public finance.

But cutting industry assistance is a great idea. Rudd should have taken the opportunity to go further. The Productivity Commission counted $5.1 billion in direct budget support for private industry in 2011-12. If you want to reduces expenditure, surely that’s the first place to look.

Unfortunately, the Opposition is lumbered with an absurdly expensive, ludicrously inefficient and gimmicky hodgepodge of climate change policies clumped under the banner of Direct Action.

The Coalition’s shadow climate minister, Greg Hunt, insists his plan is the true “market solution” to climate change, but has not been able to convince anybody of that.

We shouldn’t place too much faith in market mechanisms. Tony Abbott was mocked for his comments about invisibility yesterday but his basic point was right. An emissions trading scheme is not a real market. It is a highly regulated approximation of a market, where supply and demand are artificially created by the government to meet a political goal. (I detailed this argument in the Drum in 2011.) Of course, Abbott’s attack on artificially created markets should apply double to his Direct Action program.

In retrospect, it seems obvious the Coalition’s plan has been propped up by the unpopularity of Gillard’s no carbon tax promise.

As has the whole climate change policy debate. Not for the better.

Abbott Should Welcome A Debate On The Economy

Kevin Rudd wants to debate Tony Abbott on Thursday. Abbott should welcome it.

Obviously, the proposed debate, to be held at the National Press Club on the economy, is a political ruse. Obviously. And it’s easy to understand why the Coalition doesn’t want to play Rudd’s game.

But party tacticians spend too much time obsessing over the day-to-day pranks of the other side.

More important than saving face, or “winning the cycle”, is this simple fact: Labor cannot be allowed to control the high ground of Australian politics.

Kevin Rudd has changed Labor’s story about the Australian economy. But he hasn’t any policy to back it up.

Julia Gillard and Wayne Swan told us how wonderfully the economy is travelling, and how we ought to be grateful for their skilful economic management.

Lord knows why. This has been a famously bad political strategy ever since Harold Macmillan told the British people they’d “never had it so good” in 1957.

Nevertheless, just two days before she lost the leadership, Gillard doubled down. She attacked “irresponsible” commentators for their “unreasonable pessimism” about a potential downturn.

Business commentators have been going through a particularly glum stage, talking about recessions and other demonic things. Don’t stress. They do that every once in a while.

Rudd has reversed Gillard’s line. Rather than talking about how well the economy has done so far, he’s talking about how everything could fall apart in the future.

In his first press conference, the restored Prime Minister made much of the end of Chinese demand for resources. Rudd turned first to what this would do to the terms of trade, then what it would do to our living standards, then to – gasp! – unemployment.

It’s a big change from Gillard’s “don’t worry be happy”. Probably an effective one too. Fear is a better motivator than gratitude.

But we’re talking here about marketing, not policy. Kevin Rudd is good at looking serious and ruminating on future challenges. This is easy – it is always easy to find challenges.

Translating challenges into legislative solutions is harder.

The last time the Prime Minister tried to fulfil his promise of a diversified and resilient economy, he revived old-style industry policy.

Industry policy was a big part of Labor’s 2007 election platform. The industry spokesman, Kim Carr, spoke about thumping tables in foreign cities to bring manufacturing deals home to Australia.

In government, Labor pinned its industrial hopes on car subsidies. We all know the result. Ford plans to leave the country in 2016.

For all of Rudd’s solemn warnings, there is not much in the government’s policy armoury to deal with the challenges he’s talking about.

For instance, it would be a brave Labor hagiographer who claims the National Broadband Network will help us through the end of the mining boom. The disability scheme might be a good idea, but if so, it is not because it will boost aggregate productivity. And even the most optimistic analyst wouldn’t claim the benefits from secondary education policy wash through to the real economy in less than a decade or two.

The policies Rudd inherited from Julia Gillard are designed for the good times of stability, not the uncertain times of structural change.

So, yes, Kevin Rudd is good at sounding serious. He speaks with authority. He loves to dwell on specifics. But that seriousness is colour, not substance. Abbott needs to press Rudd on exactly how he plans to reform the economy out of the sort of disruption he foresees.

The Coalition is actually on strong ground here. On Monday, they relaunched their red tape and regulation policy. It has problems (I detailed some of those in the Drum in April). But its objective is admirable. An economy’s resilience depends on its flexibility. Over-regulation ossifies markets, restrains entrepreneurs, and ultimately makes an economy less adaptive to change.

Sure, the deregulation plan is inadequate. But inadequacy is better than nothing.

More promising is the Coalition’s desire to revive National Competition Policy. This was originally a Keating-era initiative to make economic reform methodical and deliberative after the often hasty and opportunistic reforms of the 1980s.

If done right, National Competition Policy would tackle things like Part IIIA of the Competition and Consumer Act, which requires private companies to share “significant” infrastructure facilities with other companies.

Part IIIA slows investment and helps create those infamous infrastructure “bottlenecks” Kevin Rudd was so passionate about clearing in the 2007 election campaign.

Part IIIA isn’t sexy. Nor is it likely to displace boats from the front page of our newspapers.

Yet the obvious economic reforms have already been undertaken. The dollar can’t be floated again. We can’t re-privatise Qantas or Telecom.

Kevin Rudd wants to talk big picture. He wants to talk about structural change and China and the dollar.

But unless he has something to announce, it’s all just a superficial exercise in branding, not a deep engagement with economic reform.

A debate on Thursday would give Tony Abbott a chance to call Rudd’s bluster out.