Category: Articles

Ignoring The Deficit: Disappointingly Predictable

Is there any less edifying event in Australian politics than The Budget?

Each year the Treasurer offers a seemingly arbitrary smattering of policy adjustments and spending programs.

This year the Family Tax Benefit A has been extended. Small businesses will be able to write-off $5,000 of new car costs. Free set top boxes for pensioners. Trades apprentices get a $1,700 bonus on completion. Former prisoners of war get another $500 a fortnight.

Check them off: families, small businesses, pensioners, apprentices, Our Boys.

Some of these have obvious merit, some obviously not.

In his mind, Wayne Swan is the government’s hard man. But giveaways do not bring to mind the toughness he wants to project.

In 2010, a tough and “no frills” budget included a 50 per cent tax discount for the first $1,000 of interest earned on savings. The low income tax offset was increased to $1,500. Government superannuation top ups for people earning $37,000 or less. Small business write-offs for assets worth less than $5,000. More money for veterans. More money for renewable energy, skills, and rail. More money for elite sport.

No frills there.

In 2009, another “tough budget”: Tax concessions on super contribution reduced from $50,000 to $25,000 a year. The small business tax break on assets increased 50 per cent. First home grants boosted for another six months. Pension payment increases. Supplements for carer payment recipients. More money for pretty much everything.

In 2008, a “tough but fair budget”… anyway, you get it.

It’s a bit rich to describe a budget as tough if it includes free electronics.

Nevertheless, the budget process itself encourages uncoordinated and haphazard policymaking.

After all, the budget is not just an annual restatement of the government’s financial health. It is the centre of the policy process. It is clearly unsuited for this role. The budget is not a great frame in which to develop public policy.

Government departments submit ambit claims, ministers push hard for programs which could demonstrate they’ve achieved something, and everything gets filtered through a political mesh, packaged into “deliverables” and rolled out in leaks.

Then the Treasurer tries to teeter between generosity and hardheadedness, prepare a speech, and try to place himself at the symbolic heart of the government.

Any substantial policy reform gets quickly subsumed into the budget spectacle – one thing must be offset by another, and spending reductions become only justifications for further spending in other areas. The only purpose of savings is for more spending.

Take the government’s dignity-of-work welfare changes, which are as much about savings as they are about reform.

As Alan Kohler pointed out on Tuesday night, $21.7 billion worth of savings in this budget was matched with $18.9 billion in new spending. Cuts made while spending added; programs expanded while other programs reduced. That’s policy churn – the sort of fiddling which makes the tax code blossom and keeps accountants in business.

At its best the budget process results in incremental approaches to policy issues. At its worst, a ballooning of under-resourced and utterly ineffective programs. $34 million dollars to help manufacturers supply resource projects? This is surely too low a figure to achieve its ambitious goal, yet too high to be dismissed as trivial.

No wonder budgets marketed as tough come off as indecisive.

The pressures of budget time are not conducive to coherent policy. But on the other side, the budget spectacle – the May policy dump – has made it hard to strongly confront fiscal problems when they arise.

2011-12 is yet another budget in the expanding shadow of the global financial crisis. The decisions made by Kevin Rudd, Wayne Swan, Lindsay Tanner, and Ken Henry in a few critical months still dominate the fiscal landscape. (Julia Gillard may have been in the famous “kitchen cabinet”, but according to Lenore Taylor and David Uren in Shitstorm, she was in the outer kitchen cabinet.)

Three out of those four – Rudd, Henry, and Tanner – have now left the economic policy stage. Swan is now the sole custodian of the government’s crisis legacy, and the man who has to live with its consequences.

The Treasurer has not seriously attempted to tackle the stubbornly growing budget imbalance which resulted from his decisions nearly three years ago. Instead, he’s relied on Treasury forecasts about a possible revenue surge in the future. That surge keeps being postponed while the target to return to surplus gets closer and closer.

The government is playing chicken with the economy, hoping revenue will catch spending before the self-imposed 2013 wall.

It may – perhaps Treasury’s projections are right this time – but would you really want to bet on it?

Our economy faces the world. What happens in China, or the United States, or Europe, makes a big difference to our terms of trade, our dollar, and ultimately the government’s revenue. And the last few years have been some of the most volatile in the global economy in the last few decades.

In this environment, Wayne Swan cannot be comfortable gambling his reputation on the reliability of Treasury projections.

We could shout ourselves hoarse asking Swan to put those projections aside and to take positive measures to reduce the deficit. The Treasurer might, if he wanted to, cut spending deep and hard – a good idea whether the budget is in the red or the black. But there’s no real demand for an Australian age of bureaucratic austerity.

So the government’s reluctance to face its deficit is predictable, if disappointing.

Without the support of his crisis co-conspirators, Swan appears to be hoping the budget will just fix itself.

The Nanny State Is Coming…For Your Democratic Soul

Is saying “nanny state” just a cheap slur?

The term was coined in The Spectator in 1965 and clearly bears the marks of that publication and that era.

I have in my collection half a dozen academic papers published in public health journals decrying its use: “The nanny state fallacy”; “No need for nanny”; “Nanny or Steward?” “Medical police and the nanny state: Public health or private autonomy?” and so on.

One, co-written by a prominent member of the Rudd government’s Preventative Health Taskforce, Mike Daube, compares “nanny state” to the phrase “health Nazi”. Daube and his colleagues argue the latter is needlessly offensive and the former is “an easy phrase in the same tradition”.

Daube’s artless comparison reminds us that one can protest too much. The problem some in the public health community have with the nanny state appellation isn’t that it’s unfair. It’s that it resonates with the public.

And we rely on “nanny state” because it describes something very specific – an observable and concrete change in the way government relates to individuals. It has no obvious or elegant alternative.

Where more “traditional” regulatory interventions try to protect individuals against the adverse consequences of the decisions of others, the nanny state primarily seeks to protect individuals from themselves. As with all public policy, supporters deploy a wide variety of justifications, but this is what makes nanny unique.

And the attitude which underpins such paternalistic policy has implications far beyond alcohol and fast food. It is, in a very real way, profoundly undemocratic.

If we can’t trust people to choose their poison, then how can we trust them with a vote?

That question may sound glib. But democratic legitimacy rests on a positive belief that while not all citizens may be equally intelligent or informed, they are equally sovereign, and as a consequence have the right to have a say about the country’s future. In their own small way.

The systematic chipping away by nanny state activists of these assumptions – that people should be assumed to be competent to make such portentous choices themselves – presents more of a challenge to democratic legitimacy than the public health community may recognise.

Nobody is suggesting a cadre of experts should guide citizens to make the correct political choices. They never will. (The public health community would no doubt be horrified at the thought.) But it is just as hard to see not, given this paternalist philosophical stance.

After all, we have undermined the notion of individual responsibility to such a degree that some government advisors no longer even trust people to, say, manage their own food serving size (the Preventative Health Taskforce suggested regulators standardise portions in restaurants).

Basic notions of political equality should compel us to leave those food portion decisions in the hands of individuals, not state-appointed experts. We cannot pretend to have a legitimate democracy if the government operates under a presumption that voters are idiots.

So dismissing individual responsibility has consequences. Once you’ve accepted that the government should not treat people as autonomous, all sorts of authoritarian policy results.

The increasing centrality of income management for welfare recipients is driven by the same philosophy. To support nanny regulations yet oppose income management is incoherent.

That’s a hypocrisy found on the left. On the right, drug-warriors against the nanny state are just as contradictory.

This is why the strongest objections to nanny interventions have always been philosophical, not practical or economic. The nanny state is a radical reworking of the relationship between individual and state.

Certainly, some nanny interventions have been going on for a long time, and, in retrospect, few find them are objectionable.  Seatbelt laws protect people from the consequences of their own decisions and potentially the behaviour of others.

The difference is of degree, not kind. But there is a difference nonetheless.

Where we can isolate one or two regulations of the past with similar purpose, the nanny state of the 21st century is expansive and insatiable. It’s a volume thing.

The Preventative Health Taskforce proposed 122 separate recommendations to clamp down on alcohol, tobacco, and weight-gain. It recommended seven entirely new bureaucracies be set up. It suggested twenty-six new laws and regulations.

Some critics have begun to describe paternalist interventions as indicative of a “bully state” mentality; a graduation from nudging to shoving. While this is true for some new and proposed regulations, it’s not clear that, say, imposing new, simplified food labeling laws is really bullying.

The Nobel-winning economist James Buchanan tried to rename the nanny state “parental socialism”. Buchanan’s alternative has an appeal, but its second word is louder than the first. And nanny is the better metaphor. In a democratic system, government is the hired help who we delegate to perform collective tasks – not actually our progenitors or superiors.

We could invent other phrases.

Public health activists are clearly frustrated by the nanny state critique. So they should be. They do not understand how substantial a challenge their ideas are to the philosophical assumptions which underpin liberal democracy.

Big Business In Full Flight Is The Clarion Cry Of Democracy

Is big business running rings around the government? That’s the view of an increasing number of commentators convinced the era of economic reform is over because business won’t play ball.
 
Their argument rests on the campaign by mining interests against the Rudd government’s resources tax last year, a campaign described by one journalist as ”thuggery, pure and simple”. In the Julia Gillard era, many say similar business thuggery will destroy any future reform. Put aside the implicit assumption businesses should meekly accept tax rises and new regulations.
 
In his Quarterly Essay, George Megalogenis wrote: ”The miners were seeking a veto no lobby is entitled to – to deny a government the right to set taxation rates.”
 
But that’s the nature of democracy. Individuals (and individuals in business) can aggressively criticise the actions of the government, to try to influence opinion, to make their case in public. Nobody was trying to strip the tax power from the Commonwealth, just saying that a particular new tax should be open for debate.
 
The anti-mining tax campaign will be the template for corporate activism for decades to come – like the attempt by Clubs Australia to drum up opposition to proposed pokies regulation with that turgid word ”un-Australian”.
 
But was the miners’ campaign really that strong? The ads weren’t that good. They were light on detail. Certainly they lacked the detail to be convincing. Voters are not so naive to take what a lobby group says on face value. Every single business facing new regulation or tax says they’ll be ruined. Australians aren’t stupid.
 
The success of the anti-mining tax campaign reflects nothing more than the weakness of the Rudd government. After watching Kevin Rudd launch policy after policy with little to show for it, voters were not convinced increasing the taxes on one of Australia’s most successful industries was really a pressing issue.
 
Still, it’s true that business seems to have given up quietly lobbying behind the scenes, and now makes its arguments in carefully scripted television spots.
 
That’s not a bad thing. Better that special business interests lobby against legislative change in public than in secret boardroom lunches with ministers.
 
Anyway, whatever influence business has in Australia, it’s dwarfed by Canberra’s influence. While the mining sector contributes about 6 per cent of our GDP, the federal government spends 23 per cent. While the miners spent $22 million on a one-off ad campaign, the Australian government spends about $100 million in advertising every year.
 
But most of all: business can’t impose new taxes or laws on everybody else. There’s definitely a power imbalance between business and government, but it isn’t business that has the upper hand.
 
The most intense campaign against a government policy in Australian history was the opposition to the Chifley government’s proposed nationalisation of banks between 1947 and 1949.
 
The private banks produced millions of pamphlets stating their case for private enterprise. They took out thousands of column inches of advertising. They sponsored anti-nationalisation ”interviews” on commercial radio. Town hall meetings against nationalisation were attended in the thousands. The nationalisation failed. Ben Chifley lost the 1949 election to Robert Menzies.
 
That campaign makes the anti-mining tax ads seem like an inaudible squeak. If such a campaign happened today, it would be dismissed as a ”billionaires’ revolt”. But the banks did us a favour by opposing Chifley’s plan.
 
Australian politics does not remember the bank campaign. Certainly not as romantically as it remembers the environmental campaigns in Tasmania, or anti-Vietnam War rallies, or Gough’s It’s Time slogan.
 
The fact that this story has been largely forgotten reveals a misplaced and deeply undemocratic hostility to business participating in public debate.
 
Business is no less justified in protesting policy than, say, the medical research community in protesting the rumoured reduction in funding this federal budget. An ad campaign isn’t thuggery. It’s argument.
 
Now business is speaking up again as the government prepares the carbon price. So be it.
 
To imagine business leaders should take every government impost on the chin is absurd. They have as much right to participate in democracy as everyone else.

Morality And Humanity In The Gambling Debate

Opposition to gambling has always been somewhat aesthetic and moralistic. The character of that moralising has, however, changed over time.

During the Middle Ages, betting was seen as unproductive and idle. Only knights, clergymen, and monarchs had sufficiently good character to be allowed to play dice for money.

A few hundred years later, Reformation era moralists saw gambling as sin. It was blasphemous to ask God to decide such trivial matters as dice throws.

Their Enlightenment descendants imagined gambling to be irrational; contrary to the spirit of the age of reason. The 19th century saw it as a social disorder; disruptive, inefficient, and, as a consequence, borderline criminal.

Anti-gambling activists of the early 20th century focused on class. The lower and upper orders played different games. Predictably and unfairly, working-class gambling was suppressed, and upper-class gambling left alone.

Today, the vast bulk of anti-gambling opinion has a medical hue. We now see gambling mostly through the prism of illness and addiction.

Mental health concerns are genuine and serious and do not deserve to be dismissed out of hand – regardless of whether we think the Government should step in to manage or override people’s choices.

But the aesthetic and moralistic critique of gambling has not disappeared.

Certainly it’s obvious that opposition to, for instance, poker machines, is not solely based on data revealing the relative incidence of problem gambling occurring on the pokies compared to other games.

A part of that opposition (we can disagree how big a part) is undeniably grounded on how the pokies look ‘sad’. Playing is solitary. Players appear joyless. A poker machine seems to be a mechanised and computerised tool of corporate manipulation; a metaphor of consumer capitalism made real. (‘People cannot seriously enjoy pokies, can they?’)

These impressions colour the debate over poker machine regulation.

Nick Xenophon’s weekend statements suggest much of the political push against the pokies is motivated not by a belief that the pokies are uniquely dangerous, but by a distaste for gambling in general.

The South Australian Senator is drafting a bill to crack down on online betting. And he’s upset about the very existence of sports wagers. In comments to The Age on Saturday, he said he wants to “ban commentators referring to the odds”, ban “odds being broadcast” and impose “restrictions on the maximum bets being able to be played”.

Xenophon would also like advertising of online gambling sites to be banned, having argued in the past gambling advertising should be regulated as heavily as tobacco advertising – in other words, regulated out of existence.

The reasons Xenophon offers for such restrictions are many and familiar. He argues gambling poses dangers to sport itself – match-fixing is inevitable in a world where sports betting is widespread.

‘Children – think of the children!’ could be normalised to gambling. This is left unexplored, but is presumably undesirable; the implicit argument being that sports betting, while not necessarily harmful itself, is a gateway drug to the RSL.

Then, of course, the aesthetic argument: “It’s a shame for the great game of cricket that it’s been reduced to just another event to have a punt on,” Xenophon said in 2008.

Whether gambling enhances “the great game” or undermines it, preserving the enjoyableness of sporting events should not be a central concern of parliament, let alone the Commonwealth Parliament.

As the social scientist Gerda Reith argued in her 1999 book The Age of Chance: Gambling in Western Culture, gambling is endemic, historically and in the modern world. And, as a consequence, has developed great cultural significance.

Through gambling, people engage both the mathematical concept of probability, and the metaphysical concept of chance. It’s a way to make light of risk; to tame uncertainty.

In other words, gambling is part of human nature.

Given gambling’s cultural centrality, it’s not clear why the Government should try to wall it off; to regulate gambling into an isolated and denigrated corner of the Australian consciousness.

Rather than treating gambling as alien and dangerous and not fit for children, why not treat it as a normal part of being and encourage it to be enjoyed responsibly?

Gambling is, after all, just a game.

Bookmakers are running odds on nearly every facet of the royal wedding: the first dance, the colour of the bride’s dress, the colour of Victoria Beckham’s dress, whether Prince Phillip will fall asleep during the ceremony, whether chicken tikka masala will be the main course, and whether Prince Harry will drop the ring and be too drunk to finish his speech (25-1, as of a few days ago). And, unsurprisingly, on the chances of divorce.

These bets do not detract from the wedding, which will be as painful as it would be in a world without wagers.

They do, however, make a game out of it – transforming the public from spectators to participants.

For moralist opponents of gambling like Nick Xenophon, such engagement only conjures up images of ruin.

But there is no need to be that pessimistic. The desire to play games of chance is a part of the human condition. Archaeologists have discovered four sided sticks – proto-dice – dating to 6000BC. In 2011, let’s try not be so scared of it.

Why Bad Policy Can Be Good Politics

Why would the Gillard government want to cut an unambiguously popular area of government spending – medical research? Because, perversely, it may be good politics.
The Prime Minister has promised to bring the budget back into surplus as quickly as possible. There is considerable political pressure on her to do so, and (as far as the budget deficit accords with a general perception of her government as hopelessly wasteful) considerable public pressure as well.
So the government needs to talk about tough choices. And nothing demonstrates toughness than cutting medical research.
The government is apparently considering slicing $400 million off the National Health and Medical Research Council. The Council looks at things like cancer treatment, trauma psychology, child allergies, cot-death, and genetic heart defects. It’s a pretty sympathetic Commonwealth body.
So if the rumours are true, the government is playing a familiar game. When cutting against your wishes, cut in the most painful place. Government bureaucracies do this all the time. Bureaucrats have a powerful incentive to make budget cuts hard for their political masters.
When in 2008 the Rudd government insisted the Australian Bureau of Statistics take a haircut of $20 million, the ABS’s immediate response was slice into two of its most necessary statistical functions – retail sales data and labour force numbers. The ABS couldn’t have picked more painful and sensitive things. If those figures aren’t reliable, then, for instance, the Reserve Bank would struggle to do its job at all.
Next the public sector union claimed that the census would be next on the chopping block; that the budget reductions meant the 2011 census would have to be exactly the same as the 2006 census, instead of being updated. Welfare agencies cut things like taxi trips for children with disabilities. Education departments close schools, instead of reducing the blossoming ranks of administrators, the paper-shufflers, and the lavish consultancies to friendly specialists in academia. School closures do not play well in the press.
In 2009, Hawaii’s education department was told to make savings. Instead of cutting jobs, it cancelled school on Fridays. Similarly, Julia Gillard and Wayne Swan have an incentive to make deficit reduction look as tough as possible.
To paraphrase American journalist and satirist HL Mencken, if the public wants cuts in government spending, they’re going to get them good and hard. And the louder the research community complains, the tougher the government looks.
The government has been accused of wasteful spending at every opportunity. Tony Abbott has made “the BER” and “pink batts” into all-purpose symbols of fiscal recklessness. So Julia Gillard probably welcomes the thought of having taxpayer-funded researchers rally across the country to protest her austerity measures.
There’s a very good chance the medical research cuts won’t be made. If the government follows this well-thumbed script, it will back down – “saving” research while simultaneously demonstrating an eagerness to make tough budget calls.
Still, the research cuts put Tony Abbott in a spot. The opposition leader prides himself on clarity of message. When opposing a government that cannot shake the impression of hopelessness, simplicity works. Cutting the debt was point one of the Coalition’s “Action Contract” in June last year. Ending the waste was point two.
Yet Abbott gets into trouble when he tries to fill in the detail of what, specifically, he would like to cut to bring the budget back to surplus Every government program has a vocal constituency certain that their funding is the difference between refined, advanced civilisation and a brutish Hobbesian state of nature.
Now he’s found himself opposing a reduction in government expenditure. The Coalition’s health spokesman, Peter Dutton, said over the weekend that “The Coalition is going to the barricades over this one. We won’t stand for hundreds of millions being ripped from research.” It muddies the Coalition’s otherwise simple and clear message about reducing spending – a side-effect which wouldn’t disappoint the government at all.
Of course, just because strategic budget cuts might be good politics don’t mean they’re good policy. The medical research community is quite upset. Yet its reaction does raise the question of whether there is such thing as an optimal amount of funds directed towards medical research.
Is all medical research spending the most efficient research spending? Or can funds only ever increase? Do we have the right mix of private and public? Are the incentives for private firms to develop new treatments the best they can be?
Or is it uncouth to ever ask such impertinent questions? Perhaps so.
Yet our deep reluctance to ask them is why these sorts of cuts are more politically clever than they first appear. The government wants to look tough on spending. And nothing’s tougher than cutting the development of new cancer treatments.

Plain Packs Pointless When Smoke Gets In Our Eyes

When the Rudd government’s National Preventative Health Taskforce released a position paper on anti-tobacco measures, they titled it “Making Smoking History”.

If that was the goal you’d think the government could just ban cigarettes – a clear, bold, unequivocal stance on what it has condemned as a very dangerous and addictive product.

But the title does help us understand the reasoning behind plain packaging of tobacco, a policy which federal Health Minister Nicola Roxon announced a few weeks ago. It’s punitive.

The nanny state is no longer trying to inform us of the best choices and the risks of unhealthy behaviour. Now it’s just resorted to bullying – haranguing and punishing people who still make those unapproved choices contrary to nanny’s wisdom and despite nanny’s best efforts.

Where will this end? Surely, after decades of anti-smoking education, the presumption eventually has to fall back onto individual responsibility.

You can hate tobacco companies. You can hate what cigarettes do. But the government is planning to make Australia the first country in the world to impose plain packaging on cigarettes. It seems reasonable to ask whether it will work.

Here’s what we know: smokers are influenced by packaging, to a degree. Lighter colours seem to imply less risk. One leaked Phillip Morris document admitted as much. “Smooth” and “silver” also suggest safer cigarettes.

Hence the government’s proposed new packet design – an unappealing olive green, with unadorned text for the label. But the literature suggests package marketing only influences the choices of existing smokers.

The government’s goal for packaging is to stop people becoming smokers in the first place. Roxon argues “catchy colours” are designed to “suck in young people”. Her aim is to “make sure fewer people start on this dangerous habit”. And there’s no clear evidence packet design inspires non-smokers to start smoking.

The most that reviews of the scholarly evidence can find are surveys in which teenagers are asked to imagine whether their friends could be duped by shiny packages. You may not be surprised to learn teenagers assume their friends are idiots.

This lack of evidence isn’t surprising. People start smoking because they want to try the sensation of smoking, not try the sensation of holding a well-designed package. And what about existing smokers? Let’s just say if graphic photos of bleeding lungs haven’t inspired you to kick the habit, an olive box probably won’t either.

The tobacco companies are upset about plain packaging because it will make it harder to compete for the existing pool of customers. They focus on packaging design because there’s nothing left for them to do.

It’s not as if cigarette marketing isn’t highly regulated already. Smokers won’t even be able to see the olive-ness of the packets until after purchase. New Victorian laws mean cigarettes are closeted out of view behind the counter. Now retailers can only display a sign, provided by the state government, with the words “We Sell Tobacco Here” in black on a white background.

Existing laws will undermine the effectiveness of future anti-smoking policies the government might implement.

After all, it’s one thing to show that people in an experimental psychology lab think lighter colours mean lighter cigarettes. But it’s quite another to imagine that – after decades of anti-smoking advertising, warning labels and social disapproval – the colour of the packet will make a lick of difference to the decision to smoke.

The traditional justification for nanny state-style regulation is that people don’t understand the consequences of their choices.

Should people be allowed to manage their own risks: to conduct themselves in their own way, to abuse or protect their bodies as they see fit?

The answer to that question ultimately depends on your personal values. But the first health warning on cigarette packets was imposed 38 years ago.

Anyway, we’re a long way past the days of health bureaucrats gently nudging us to make better decisions, and moderate sin taxes to recoup the costs to taxpayers.

Budget after budget of tobacco excise increases mean tobacco taxes now far outweigh the burden of smokers on the publicly funded health system.

The government estimates smoking-related illness costs about $300 million a year. But it collects $5.8 billion each year in tobacco excise duty.

If the very existence of brands causes harm, as the government’s plain packaging strategy suggests, then plain packaging for alcohol will no doubt be next. Eighty per cent of Australians believe the nation has a drinking problem.

Brewers won’t be able to get away with fluorescent and sparkling alcopops forever. They’re obviously targeted at younger consumers. Nobody drinks Bacardi Breezers “responsibly”.

Prominent text warning labels will come first. Then graphics.

Seems unlikely? Well, 10 years ago the idea that the government would eliminate logos from cigarette packs would have seemed pretty unlikely too.

In a nanny state, what first sounds absurd can quickly become the law of the land.

Learning From Public Policy Mistakes Of The GFC

In the Financial Times at the end of March, the former Federal Reserve Chairman Alan Greenspan wrote “With notably rare exceptions (2008, for example), the global ‘invisible hand’ has created relatively stable exchange rates, interest rates, prices, and wage rates”.

That statement is mundanely true. But as it came from Greenspan, it was not well received.

Left-leaning blogs have had great fun: “With notably rare exceptions, the levees protecting New Orleans have held fast in the face of major hurricanes”.

The Nobel winning economist-turned-polemicist Paul Krugman wrote he “didn’t know quite how to respond”.

The Global Financial Crisis still looms large.

Our understanding of the crisis will shape debate about the role of government and the fragility or robustness of markets for decades.

So it’s important to get it right – to pinpoint exactly what went wrong in the US housing market and what caused it. The particulars are important.

Those particulars make it hard to shove the crisis into a morality play of deregulation and rampant greed.

We know a lot more about the crisis than we did in 2008 and 2009.

The US government’s Financial Crisis Inquiry Commission reported this January. While its majority report largely fails to interrogate the structural origin of the housing bubble, a dissenting report released as an appendix is much more interesting.

Written by Peter Wallison of the American Enterprise Institute, the dissent rigorously documents the deliberate erosion of lending standards by successive American administrations.

As Wallison writes, in the early 1990s lending standards were seen as a barrier to home ownership for low and middle-income families.

The solution was the Housing and Community Development Act of 1992, which intended to give those families better access to mortgage credit through the government-sponsored enterprises Fannie Mae and Freddie Mac.

Fannie and Freddie had been, until then, conservative and relatively benign, trading mortgages on the secondary market since the Great Depression. But with the 1992 Act they now had a new mandate, a social mission.

Over the next 15 years the Government ratcheted up the affordable housing goals.

The result of these goals was spectacular.

By 2008, “non-traditional” mortgages (loans made to those with blemished credit, or lacking documentation, or with negligible down-payment) made up a massive 58 per cent of the total US mortgage market.

And US government entities – primarily Fannie and Freddie – were either directly holding or guaranteeing 71 per cent of those non-traditional loans.

This was a successful program, under its own terms. It boosted homeownership rates substantially. But the housing bubble it created eventually burst.

The received wisdom on this boom in non-traditional mortgages has focused on fraud by lenders, the naivety of borrowers, and the greed of investment bankers who packaged them into complex and inscrutable investments.

This tale has been reinforced by bookstores full of hastily-written financial crisis porn, rich with anecdotes about fast-living financiers and lazy lenders.

Yet in a market engorged by government affordable-housing goals, these bankers no more epitomise the ‘invisible hand’ than the US Congress does.

So three years after the crisis, the policies which caused the housing bubble are starting to get their due recognition.

As are the mistakes made in 2008, while the bubble was collapsing.

If the erosion of lending standards was the long-term cause of the crisis, then the actions of the US government in 2008 was the short-term one – badly deepening the crash and impeding the recovery.

Since the 1980s, the US government had slowly built an expectation it would bailout big firms if they got into trouble. This expectation was never explicit. You wouldn’t want to bet the company on it. But it was there.

Still, the bailout of the investment bank Bear Sterns in March 2008 came as a surprise. Sure, Bear Sterns was deeply involved in non-traditional mortgages, but it was only a mid-sized firm. If Bear Sterns was “too big to fail”, so were dozens of others.

When the Federal Reserve stepped in to save Bear Sterns, it was massively expanding the government’s implied support net.

In retrospect, many participants have blamed the failure to bailout Lehman Brothers in September for the crash. And it is true that the market only truly sunk after it became clear Lehman would be left to fail, and investors realised government help was not guaranteed.

But Lehman’s actions in the week after the Bear Sterns bailout reveal the real problem in 2008.

Bear Stern’s near collapse in March should have inspired all participants to stop and reassess the quality of the mortgage-backed securities they were holding.

Instead, Lehman doubled-down, packaging all their riskiest assets into a special fund with one purpose – as collateral to borrow money from the Federal Reserve. In other words, instead of limiting their risk, they increased it.

For Lehman and other firms, maximising the chances for a bailout became the main game. Not cleaning balance sheets and taking a financial hit. As a former director of the Federal Reserve Bank, Vince Reinhart, has argued, the question becomes less “how do we get out of this mess?” and more “how much money will the government pony up first?”

Expectations changed again in September with Lehman’s collapse. The US economy froze. The global panic began. Governments initiated an unprecedented series of interventions and stimulus packages.

And the name of the Lehman Brothers fund specifically designed to take advantage of Federal Reserve largesse and the banking sector’s new claim on taxpayer dollars?

The “Freedom” fund.

Memory of the Great Depression shaped economic policy in the second half of the 20th century. The Great Recession will shape the next 50 years.

So let’s not let our understanding of its causes slip into a vague haze of myth and cliché. The crisis was caused not by greed, or deregulation, or neo-liberalism. It was caused by a web of public policy mistakes – if well-intentioned ones – and their unintended consequences.

Multiculturalism Is A Useless Word

Multiculturalism is one of the least useful words in Australian politics.
It owes all its power to ambiguity. It is divisive because it is vague.
Recall that multiculturalism refers not to the policy of letting in migrants and refugees, but to how we deal with them when they get here. Multiculturalism is the opposite of ‘assimilation’, not the opposite of discriminatory immigration settings.
If multiculturalism is a positive program, a deliberate, imposed set of policies and laws, then those policies are few and not easy to pin down.
Interpreters, multiple languages on government documents, and a few scattered cultural grants do not make a policy revolution. A female-only swimming session does not constitute a threat to the Commonwealth.
The political rhetoric about multiculturalism is vastly disproportionate to the number of policies which multiculturalism has apparently inspired.
But if, alternatively, multiculturalism is an ideology, it is an ill-defined and unclear one.
Sure, ideas have consequences. Yet it is hard to see how stating that “every person should be able to maintain his or her culture without prejudice or disadvantage” (in the influential formulation of the 1978 Galbally Report into migrant services) leads to migrant crime, one of the many claimed consequences of multiculturalism. Or how it causes new arrivals to prefer to settle in suburbs near other new arrivals – an entirely reasonable preference, as one person’s ethnic enclave is another’s comfort in numbers.
Attributing the misbehaviour of some young migrants to vague philosophical statements made in bureaucratic documents gives government too much credit. Politicians are just not that influential.
And it is too simple to blame law and order problems on migration levels or ethnicity, rather than under-policing and skewed police priorities.
The basic idea of a liberal democracy is that individuals can live their own lives according to their own preferences under a neutral legal and political framework.
Rights in a liberal democracy are held by individuals, not by groups. Nobody has more or different rights than another by virtue of their cultural origin.
No substantive policy imposed in Australia under the banner of multiculturalism has undermined these basic principles. Sure, there’s been a lot of academic waffle about cultural relativism and the superiority of non-Western thinking, but that waffle has not been translated into law.
Australia has done settlement policy pretty well.
Several European leaders have made recent statements damning multiculturalism, and Australian critics have claimed these statements are just as applicable to our circumstances. They are not.
For one, the European economy is vastly different.
It’s no coincidence that the biggest social problems with multiculturalism occur in European countries with sluggish jobs markets. Or in those countries with extremely generous welfare schemes.
Nothing impedes integration like unemployment.
Other specific policies can exacerbate the natural, well-known, but manageable challenges of mass immigration.
Germany’s Chancellor Angela Merkel said late last year that multiculturalism has failed. But this is in no small part due to the legacy of Germany’s post-war guest worker program, which was so poorly designed as to entrench a disaffected Turkish underclass.
In the 1960s and 1970s, Turkish guest workers were meant to be temporary. The government deliberately encouraged to them live outside German society – they were housed in dormitories near the factories where they worked.
But the two-year rotation for guest workers was extended for another two years, then for four decades. All the while the workers expected to be sent back. One Turkish migrant told Der Speigel last year that “Some of our friends kept their packed suitcases under the bed or on top of a closet for 10 or 15 years, so that they could leave at a moment’s notice.”
No wonder Germany has had integration problems.
We’ve avoided these sorts of policy mistakes. Australia has strict walls around welfare, and a comparatively dynamic labour market.
As has the United States. Last week in the conservative National Review, the law professor Eugene Volokh pointed out that the US was also a successfully “multicultural” nation. Volokh argued that the success of this policy relied on a few basic principles like economic liberty and freedom of speech.
None of this is to deny the tensions when migrants enter countries that value individual liberty and the right to free association.
But it does give us a guide to minimise those tensions. Social integration comes after economic integration. Secure employment helps migrants build roots and communities. Migrants engaged in peaceful commerce feel more connected to their adopted country than those on welfare or unable to find work.
During his exile in England in the early 18th century, Voltaire observed that in the centres of trade, “representatives of all the peoples gathered… There, the Jew, the Muslim, and the Christian deal with each other as if they shared the same religion and give the name “infidel” only to those who go bankrupt.”
Multiculturalism means vastly different things in different countries. Let’s stop obsessing over this useless word, and talk about specifics.

Deregulation Can Save The Taxi Industry From Itself

The regulation of Melbourne’s taxi industry was a mess from the beginning.

Taxis were new, smart and efficient when they were introduced in 1908, but they were a threat to the existing horse-drawn hackney cab lobby. As The Argus newspaper said, “once the Melbourne public has ridden in a taxi-cab it will ride on one always, in preference to the horse-drawn vehicle”.

The mechanical competition was an ominous challenge to the hackney cabs, so when the city council considered the new taxis, the hackney cabmen had demands. First they said the cars might scare the horses, and should not be let on Melbourne’s streets.

Then they said motorised cabs should share the ranks with the horses-drawn ones. That way customers wouldn’t have a choice as to whether to take the new cars or not. They could only take the next one in line.

The politicking between hackney drivers and the new taxi company meant it took the city council until October 1910 for the cars to get licences to ply their trade.

More than 100 years later, vested interests, and the outdated regulations those interests rely on, are still a serious impediment to taxi services in Melbourne.

If Ted Baillieu is searching for a serious reform to hang his hat on – and he should be – he’s found one with taxis.

The Premier has announced an apparently wide-ranging inquiry into Melbourne’s taxi system, headed by the former federal competition regulator Allan Fels.

Transport Department research suggests Victorians have more complaints about taxis than trains. And we hate trains.

But the real problem with Melbourne’s taxi fleet isn’t their lack of cleanliness. Or the poor language skills of drivers. Or their low salaries. Or that some drivers don’t know where they’re going – something which could, you would think, be resolved with a GPS unit.

The problem is there’s not much reason for taxi operators and owners to make them better.

State governments have artificially limited the number of taxi licences, virtually eliminating competition and with it the incentive to provide a better service.

The licensing system is one of the few remnants of our old, stale, highly regulated economy – a relic that should have been discarded when we discarded egg marketing boards and laws limiting how far you can transport bread.

But on it has trundled, until today, when the market price of a single taxi licence has blown out to $500,000.

That extraordinary figure should be all the evidence needed to suggest something is wrong with the system – half a million dollars for the privilege of driving drunks home at 4am.

Taxi journeys are expensive, yet driver salaries are low. Much of the difference between the two is the cost imposed by the limits on taxi licence numbers.

To compound all that, taxis have strictly regulated fares, which further reduces competition.

It’s not a system unique to Melbourne – taxi licences are limited and highly regulated in most places in Australia and around the world. And there’s an overwhelming consensus that this doesn’t work.

A few countries have bucked the trend. New Zealand has deregulated its taxi industry. So has Ireland, the Netherlands and Sweden. Darwin, too.

A comprehensive survey in 2006 by economists Adrian Moore and Ted Balaker concluded that taxi deregulation would be successful. And not just in theory – every case study Moore and Balaker canvassed found that deregulation worked.

Allan Fels said this week effective taxi licence reform could cut the cost of a ride by a third. The experience from overseas suggests this is not just possible, but likely.

Considering that the poor, the elderly and those with disabilities (in other words, people who cannot drive or afford a car) are disproportionately large users of taxis, reducing the price and improving the service would seem like an important task.

But taxi regulation has never been set by impartial governments seeking only the best thing for consumers.

Current licence owners have a lock on taxi policy. They will no doubt aggressively lobby against any attempt to eliminate licence limits. That’s understandable, because they bought licences in good faith, and paid a premium. Licences will have to be bought out or, at least, the limits phased out predictably over time.

That challenge should not be seen as an excuse to avoid reform.

Back in 1908, the frustrated manager of the new taxi organisation complained far and wide that “public convenience” was being “subordinated to the interests of hackney coach owners”.

The situation is not so different today.

No reform will be worthy of the name unless it tackles – for good – the archaic limited licence system which increases costs, reduces quality of service, and is rigged to favour just a few wealthy licence holders at the expense of drivers and consumers.

Climate Change Can’t Be Stopped, But We Will Adapt

Julia Gillard is half-right. The world is acting on climate change. But not acting to stop it – to adapt to it. In the 1920s, an average of 240 people out of every million died every year from extreme weather events: drought, flood, windstorm, landslide, earthquake, extreme temperatures and wildfire.

According to data from the International Disaster Database, last decade that figure dropped to just three per million.

Actually, the numbers are even better than they first look. The 20th century saw a 99.9 per cent reduction in the risk of death from drought. And the risk of death from floods came down almost as much: 89 per cent. Floods and drought – two of the most commonly mentioned consequences of climate change. We’re getting much better at managing and surviving them.

The causes of this remarkable decline in mortality are many. Better transport and communications help move food to where it’s needed, quicker. Globalised trade gives producers an incentive to do so. Hardy modern agriculture can survive not just long-term climatic shifts, but the more pressing problem of bad growing seasons.

Better flood control and prevention, weather forecasting and more responsive emergency services all help reduce the damage from floods. Never have we been better at protecting ourselves against nature.

If the past is any guide to the present, that’s how we’ll deal with further changes in climate (whether caused by human activity or not): through adaptation. Especially considering there’s next to no chance of serious international action to reduce carbon emissions. Sure, if Australia introduced a carbon price now, we would not be “leading the world”. Other countries have introduced their own. But there’s action on climate, and then there’s “action on climate”.

The only purpose of carbon pricing programs is to achieve deep emissions cuts. By that measure, they’ve been a dismal failure. Those jurisdictions that have introduced them have been slowly backing away from serious reductions. The coalition of 10 American states acting on climate that Gillard often cites will soon be nine: New Hampshire is planning to withdraw.

European climate policy is pushing bravely ahead. But if nuclear power is off the table after the Fukushima scare then cutting emissions there will be a dead end. As George Monbiot wrote in The Guardian last week, “the energy source to which most economies will revert if they shut down their nuclear plants is not wood, water, wind or sun, but fossil fuel”.

And China has been increasing its carbon dioxide emissions by an average of 12 per cent every year this century. By 2020, China will be emitting nearly 500 per cent above its 1990 levels, even after their highly publicised emissions reduction efforts.

The goal of public policy must always be to increase human welfare. One lead author of the Intergovernmental Panel on Climate Change, Richard Tol, has pointed out that many studies of the economic impact of climate change have excluded the possibility of adaptation entirely – as if potential sea level rises will be met by humanity with a stoic fatalism, rather than levies and insurance. (Tol, it’s worth pointing out, is no climate sceptic.)

Nor do enough studies consider the positive effects of temperature increases. In a warming world, marginal land can become productive for agriculture, just as often as productive land can become marginal.

Given how we’re getting better at coping with extreme weather events, there’s reason for optimism. Taking all peer-reviewed studies of the economic consequences of temperature rises into account, Tol estimates that climate change could cost just a few per cent of global GDP over the next 90 years. That’s about one year’s economic growth. The cost of climate change is the equivalent of a bad recession, spread over nearly a century.

With the economic cost of climate change so low, Tol suggests (at most) an optimal carbon price would be $2 per tonne – a lot less than the $26 to $40 per tonne suggested by the government and commentators. But at $2, the cost of collecting such a tax would seriously eat up its revenue; hardly worth doing at all, and a bit trivial to be ”major economic reform” on which Julia Gillard could build her legacy.

The most damaging consequences of IPCC-projected climate change will be in the Third World. But developing countries aren’t disproportionately vulnerable to climate change because they’re in more dangerous parts of the globe, but because they’re poor.

Wealth and sturdy institutions are critical for handling natural disasters and climatic changes – as we’ve seen in the difference between the 2010 Haitian earthquake and the 2011 Japanese earthquake. This makes the real climate change question a question about economic development. How can the world’s poor get rich quick?

If her government is serious about tackling the consequences of climate change, that should be the one question exercising Julia Gillard’s mind. Her carbon price is, at best, a distraction.