The problem with Nobel laureate Richard Thaler’s nudgonomics

With Sinclair Davidson

Economists have spent the last 240 years – ever since Adam Smith published The Wealth of Nations – trying to understand how decentralised economies work. In that time they have established that the price mechanism does a pretty good job of coordinating economic activity, and that profits provide excellent incentives to stimulate human action.

In the course of understanding how economies operate, economists have had to develop a working model of human behaviour, and various simplifying assumptions have been made. An example of such an assumption is that people are pretty smart, and best know their own self-interest. That is the so-called rationality assumption.

But, of course, there are many rationality assumptions. Standard economic theory maintains what can be described as ‘strong-form’ rationality. In this view of rationality, the human brain is an unlimited resource and can easily and quickly compute all outcomes and make choices that maximise satisfaction and well-being.

Then there is a ‘semi-strong form’ of rationality – bounded rationality – associated with 1978 economics laureate Herbert Simon. He suggested that people intend to be rational but that there are limits to rationality. Finally ‘weak-form’ rationality, associated with the Austrian school, suggests that people economise on their brain power as they would any other resource and make use of rules of thumb and heuristics to make choices and decisions.

So the notion that economists have a single dogmatic view of human behaviour and rationality is something of a straw man, if not actually a whipping boy when non-economists debate economists.

Enter into this milieu Richard Thaler of the University of Chicago, and the latest economics laureate awarded for his work in behavioural economics. Thaler is a worthy Nobel winner. He has successfully challenged the mainstream and standard assumption of strong-form rationality. He has brought respectability to what would have been heresy as recently as the 1970s. Many of the insights of his research agenda and his followers have been profound, others have been trivial. That is to be expected from any productive scholar and intellectual movement.

What is unexpected is how successful behavioural economics has been in a policy sense. Popularly and politically, Thaler is best known for his book Nudge, written with Cass Sunstein. This remarkable book both established a new theoretical framework for government intervention and successfully marketed it to the governing class.

Nudge was published in 2008. By 2010, the Conservative government in Britain had established a ‘nudge unit’ within the Cabinet Office. Many other governments have followed suit. The rapid leap that nudge theory made from seminar room to law-of-the-land has been unprecedented.

These days, lots of policies are routinely described as ‘nudges’, and the word is as much a political branding exercise as anything. But Thaler and Sunstein were very specific about what they meant by a nudge. As they describe it, we all have two ‘semiautonomous’ selves: the ‘doer’ and the ‘planner’. The doer is irrational – thinking only about the short term and gratuitous pleasures. The planner is rational – thinking about the future, focusing on getting healthy and saving money.

The planner makes the best choices; the planner makes the choices we don’t regret and would make again. In nudge theory, government should design systems that allow us to favour what our planner selves would rather do, rather than our reckless doer selves.

In this way, Thaler and Sunstein avoid one of the central critiques of the nanny state – the nanny state wants to impose its own preferences on others. Both the planner and doer’s preferences are our own. We still get to choose. Thaler and Sunstein describe nudge theory as ‘libertarian’ paternalism.

But it has some serious practical and conceptual problems.

Rather than just leaving choice to the market, nudge theory says the government should try to discern a set of best preferences from our worst ones – but not impose its own. Then it should regulate the economy so it favours the choices of our planner selves, but doesn’t force us into any specific choice. This sounds like hard work for a government.

More fundamentally, is it true that we have two separate, distinct selves? Nudge theory needs there to be two distinct systems so the government can choose between them. ‘Dual systems’ theory, as it was known in the psychological literature, has now been replaced by theories that describe our cognitive processes as a continuum or graphical space. The upshot is that it is not meaningful to say we have two sets of preferences – good ones and bad ones – but an infinite number of sets of preferences.

With this shift, psychologists seem to have coalesced around the weak-form Austrian view of rationality: that rationality itself is a matter of trade-offs and choices. One could even say this was Adam Smith’s view. People are a rich mix of passion, interest and sympathy – not all-knowing, rational calculators.

Thaler’s contribution has been to help return us to that understanding. But it’s a big leap from the observation that ‘people are not always perfectly rational’ to ‘bureaucrats can make us rational’.

Government must leave encryption alone, or it will endanger blockchain

With Sinclair Davidson and Jason Potts

If we could give Malcolm Turnbull one piece of economic advice right now – one piece of advice about how to protect the economy against a challenging and uncertain future – it would be this: don’t mess with encryption.

Earlier this month the government announced that it was going to “impose an obligation” on device manufacturers and service providers to provide law enforcement authorities access to encrypted information on the presentation of a warrant.

At the moment it’s unclear what exactly this means. Attorney-General George Brandis and Malcolm Turnbull have repeatedly denied they want a legislated “backdoor” into encrypted devices, but the loose way they’ve used that language suggests some sort of backdoor requirement is still a real possibility.

Hopefully we’ll discover more when the legislation is introduced in the August sitting weeks. Turnbull did say at the press conference “I’m not suggesting this is not without some difficulty”. The government may not have made any final decisions yet.

But before any legislation is introduced, the government needs to understand what the stakes are in as they strive against encryption.

Anything the government does to undermine the reliability of encryption could have deleterious consequences for what we believe will be the engine of economic growth in decades to come: the blockchain protocol.

The blockchain is the distributed and decentralised ledger that powers the Bitcoin cryptocurrency. Blockchain constitutes a suite of five technologies: cryptography, a database that can be added to but not altered, peer-to-peer networking, an application of game theory, and an algorithm for ensuring a consensus about what information is held on the ledger.

Taken separately, these are long established technologies and techniques – even mundane ones. But taken together, they constitute an entirely new tool for creating political, economic, and social relationships.

The possibilities far exceed digital currencies. Already banks and other financial institutions are trying to integrate blockchains into their business structures: blockchains drastically reduce the costs of tracking, recording, and verifying transactions. Almost any business or government organisation that is done with a database now can be done more efficiently, more reliably, and cheaper with a blockchain – property registers, intellectual property, security and logistics, healthcare records, you name it.

But these much publicised blockchain applications are just a small taste of the technology’s possibility. “Smart” self-executing contracts and massively distributed organisational structures enabled by the blockchain will allow the creation of new forms of business structures and new ways to work together in every sector and every industry.

In fact, we think that the blockchain is so significant that it should be treated as its own category of human organisation. There are firms, there are markets, there are governments, and now there are blockchains.

But the blockchain revolution is not inevitable.

If there is one key technology in the blockchain, it is cryptography. There are lots of Silicon Valley entrepreneurs playing around with lots of different adaptations of the blockchain protocol, but this one is a constant: the blockchain’s nested levels of encryption are built to ensure that once something is placed on the blockchain it is permanent, immutable, and only accessible to those who own it.

Blockchains only work because their users have absolute confidence that the system is secure.

Any legal restrictions, constraints or hurdles placed on encryption will be a barrier to the introduction of this remarkable new economic technology. In fact, any suggestion of future regulatory challenges to encryption will pull the handbrake on blockchain in Australia. In the wake of the banking, mining and carbon taxes, Australia already has a serious regime uncertainty problem.

Melbourne in particular is starting to see the growth of a small but prospective financial technology industry of which blockchain is a central part. The Australian Financial Review reported earlier this week about the opening of a new fintech hub Stone & Chalk in the establishment heart of Collins St. What’s happening in Melbourne is exactly the sort of innovation-led economic growth that the Coalition government was talking about in the 2016 election.

But the government won’t be able to cash in on those innovation dividends if they threaten encryption: the simple and essential technology at the heart of the blockchain.

Diverted Profits Tax Will Go Nowhere

With Sinclair Davidson

The Turnbull government’s diverted profit tax has passed the Parliament. Introduced in response to the moral panic that, somewhere, somehow multinational corporations don’t pay a fair share of taxation, this new tax is at odds with the government’s professed belief in lowering the corporate tax burdens, is at odds with our international competitors, and (as we learnt just this month), is even at odds with the Australian Taxation Office’s tax enforcement priorities.

The 40 per cent tax on diverted profits is expected to raise $100 million. That implies that the federal government estimates a mere $250 million of diverted profits. To put that figure into perspective, the federal government recently announced a tightening of the rules on the grandparent child care benefit. That policy change would result in welfare savings of $250 million.

Grandparents allegedly rorting the welfare system are a much bigger budget problem than multinational corporations allegedly rorting the tax system.

Indeed, Tax Commissioner Chris Jordan gave the game away on March 16 when he told a Tax Institute conference that the gap between what large corporates and multinationals pay and what they should pay in tax was “relatively modest” and that “the biggest gap we’ve got in the system is us” – that is, individual taxpayers.

After five years of hyperventilating about corporate tax avoidance, this is a striking confession. The previous treasurer Joe Hockey made much of the fact that the ATO had identified 30 multinational corporations likely to offend and had embedded agents in those firms and would carefully investigating their practices.

True, Scott Morrison did say that this diverted profits tax is a tax integrity measure. Ensuring the integrity of the tax base is a legitimate policy goal. But a diverted profits tax is a counterproductive and illiberal way to go about it.

It allows the ATO to impose upfront liability and collect tax on allegedly diverted profits. It reverses the onus of proof and removes the right to silence – thus multinational corporations the right to natural justice under the Australian legal system. That is not a reasonable integrity measure but rather a punitive regime that targets foreign investors and successful Australian companies.

This is a policy that substantially increases the powers of the ATO without any governance measures to ensure that abuses do not occur. No doubt these powers will be exercised by the ATO to collect revenue beyond the amount intended by Parliament. That is simply the nature of regulatory bureaucracies and it will be small comfort for those multinationals who successfully challenge the ATO that their money is eventually returned to them.

Even more fundamentally, the diverted profits tax doesn’t sit well with current policy settings, nor with economic reality. There is currently a lot of effort and anti-business rhetoric to collect $100 million. Is it a coincidence that business investment is low? Or is that government is passing tax laws that violate societal norms of fairness and are creating an uncertain and arbitrary tax environment?

Business doesn’t know what tax rate they will face in Australia in years to come. It could be 30 per cent. It could go down to 25 per cent over 10 years if the Turnbull government’s corporate tax cut goes through. Or it could be as high as 40 per cent if some Canberra bureaucrat, empowered by the diverted profits tax, gets a bee in their bonnet about multinational structures they do not understand.

There’s been a lot of talk about policy uncertainty in the Australian energy market. With a lot less fanfare the corporate tax confusion is doing the same to the entire corporate sector. This is not how to ensure jobs and growth

In the meantime, Australia is facing an international environment where the British Prime Minister is openly discussing turning the UKinto a tax haven, and the Trump administration wants to reduce America’s corporate tax rate to between 15 and 20 per cent. The Turnbull government has chosen the wrong time to put multinational engagement with Australia at risk.

Why Multinationals Are Not Avoiding Australian Tax

with Sinclair Davidson

The title of the interim report of the Senate economics committee inquiry into corporate tax avoidance, released this week, is “You cannot tax what you cannot see”.

This is a rather embarrassing admission that the evidence for widespread corporate tax avoidance – the avoidance which has filled so many newspaper columns, so many hyperbolic speeches in parliament – just doesn’t exist.

Imagine being pulled over by the police and told that even though you’ve been observed driving below the speed limit, stopping at stop signs, giving way at give way signs, indicating correctly, wearing your seatbelt, and maintaining a respectable distance from the car in front, the police have a hunch you’re somehow violating community expectations.

While the Senate committee feels sure there are questionable corporate tax practices going on, it doesn’t actually find any.

Rather, it relies very heavily on the political rhetoric of a now-discredited 2014 report by the Tax Justice Network, which claimed that firms were denying the government vast sums of revenue through opaque and confusing tax arrangements.

In fact, what the committee’s interim report shows is that the tax practices of the big tech firms are quite explicable.

For instance, Microsoft and Google have their regional headquarters in Singapore. As the committee admits, these headquarters are not shells, existing solely to avoid giving Joe Hockey money. They’re real. They have real offices, real assets, and real staff doing real work. In Singapore. Not Australia. Just because those Singapore headquarters digitally export some products and services to Australia does not mean they should pay Australian corporate tax on the profits.

Even more explicable is large firms with large research and development costs deducting those costs from their taxable profits. The R&D corporate tax deduction is bipartisan government policy. It seems a bit much for governments to introduce a tax incentive then get angry with firms for using it.

The lack of evidence of tax avoidance makes the committee’s belief that the Australian government should name and shame corporate tax avoiders vaguely comic.

Certainly, the Australian Tax Office should be vigilant ensuring firms are paying what they owe. Firms that fail to do so should face the full consequences of the law. But that already happens. Australia has some of the strongest anti-avoidance laws on the planet. The government has the tools, right now, to deal with illegal tax evasion.

Underpinning this whole debate is the fact that Australia’s corporate tax rate is very high. At 30 per cent, it is substantially above the OECD average of 25.3 per cent. And Australia is one of the most heavily reliant countries on corporate tax revenue in the OECD. The Senate committee admits that this heavy burden puts Australia at a “comparative disadvantage”.

With such a disadvantage, it is no surprise that multinational companies are not lining up to establish their regional headquarters here.

But a failure to establish regional headquarters in Australia – “avoiding permanent establishment” in the lingo of the committee – does not constitute tax avoidance. Australia’s tax and regulatory environment is not competitive. Singapore’s is competitive. This ought to cause some soul-searching by the Parliament. Handwringing about phantom corporate tax avoidance just postpones consideration of the real problem.

Perhaps we might expect the sort of anti-corporate nonsense espoused at the inquiry from Labor and the Greens. What’s really disappointing is the full-throated support of the corporate tax panic from the Coalition.

Government senators on the committee wrote a dissenting minority report. Yet their complaint was that the committee did not fully acknowledge all the exciting work the Abbott government was doing to clamp down on multinationals.

Earlier this year the government released its own proposed legislation to deal with corporate tax avoidance. In effect that legislation would empower the ATO to second-guess where it feels profits should be booked for tax purposes.

The consequences of such an approach would be dire. It would expose multinational firms to double taxation. It would be a huge incentive for those firms to leave Australia all together, taking jobs and economic activity with them.

All this fretting about tax avoidance makes good demagoguery. But it might seriously harm Australia’s economy.

Moral Panic Overlooks Real Company Tax Problem

with Sinclair Davidson

The corporate tax profit shifting debate is a classic example of moral panic. First, it’s incredibly complicated. How many Australians could explain how company tax is calculated, let alone what business practices a “double Irish Dutch sandwich” refers to?

Second, it’s driven by hyperbolic and simplistic reports of companies paying little to no tax. These stories pivot on even more complicated scandals, such as “Lux Leaks”, and the technicalities of foreign tax systems.

And third, it’s wildly overstated. The best current estimates of how much corporate tax is shifted across borders is in the realm of 2 per cent to 4 per cent of total corporate tax.

It’s true that earlier estimates in the 1990s were much more than that. It was those high estimates that got the Organisation for Economic Co-operation and Development interested in the issue. But the firm- and affiliate-level evidence is better now. It’s pointless to scrutinise a moral panic for the clarity of its claims. But the corporate tax debate is missing the point.

As a society we don’t value firms for the money the government extracts from them. We value firms because they produce goods and offer services that make us richer, our lives easier, more convenient and more enjoyable, and our standards of living higher.

We ought to design our tax system to encourage foreign firms operating and doing business on Australian shores, bringing investment and jobs. Any attempt to tackle profit shifting that raises uncertainty or lowers Australia’s investment climate would be a disaster.

The corporate tax is not a good tax. As a recent Treasury paper pointed out, it is one of the most inefficient taxes levied by Australian governments. The burden of the corporate tax is scattered and obscure.

Greens leader Christine Milne has been running around this week accusing companies of not paying their “fair share”. But that fair share is always and inevitably passed on to someone else. The literature on the incidence of corporate taxation suggests the burden of corporate tax is worn in the short term by investors, and in the long run by a combination of investors and workers. Of course, under our superannuation system every worker is an investor as well.

Few of the standard justifications for the existence of corporate tax – particularly in a small, open economy – are compelling. One fear is that company owners might divert their personal income into the company. But they’d still have to pay capital gains tax on the way out again. Another argument is that corporate tax is an easy way to get money out of multinationals. Absurd, we know.

That’s why there are academic tax papers with titles such as “Why is there corporate taxation in a small open economy?” and “Can capital income taxes survive? And should they?”

For the political class, the corporate tax has one great advantage: it’s unclear who ultimately pays. It’s easy and comfortable to beat up on corporations, just as long as you stay mum about who actually ends up paying corporate tax. The whole system rests on this clever one-two trick. Who could sympathise with big bad business?

But even if the government wishes to keep the corporate tax fiscal illusion going, there’s hope. For all the handwringing about the double Irish Dutch sandwich, one point often missed is that Ireland has been very clever. That country’s low corporate tax rates have brought in multinationals, and with them jobs and investment.

It’s not obvious those low rates have come at a cost to the Irish budget. Corporate tax revenue as a percentage of total revenue in Ireland is almost exactly the OECD average. There’s no reason we couldn’t copy the Irish example – get in on the Irish-Dutch sandwich ourselves. The Irish make their own luck. So should we.

Communications Minister Malcolm Turnbull’s Metadata Move Will Aid Regulators, Not Security

The Abbott government has rightly focused on red tape reduction and deregulation.

But Communications Minister Malcolm Turnbull could well preside over one of the largest increases in the regulatory burden since the telecommunications market was liberalised two decades ago.

At the very moment when Turnbull seems to have cleaned up the mess that was the national broadband network, his mandatory data retention policy puts the entire competitive dynamic of the Australian telecommunications sector at stake.

Terrorism is a very real problem. The existence of the Islamic State in Iraq and Syria has heightened the terror threat. If there are serious gaps in our anti-terror law framework, they should be filled. The government has spent the past six months doing so.

However, the data retention bill the government has put forward – which requires telecommunications providers to store masses of data on their customers for no other purpose than if a law enforcement agency or regulator wants to have a look at it in the future – is not a targeted anti-terror law.

If data retention is just for terrorism, the government could legislate to ensure it was just for terrorism. But from what we know, both the Australian Competition and Consumer Commission and the Australian Securities and Investment Commission are likely to get access to the new data.

Indeed, over the half a decade that data retention has been debated, its most fervent advocates have been economic regulators, not counter-terror agencies.

One draft data set (even as Parliament is set to vote on the bill, we still don’t know what the final data set to be retained will be) included a requirement to store records of “download volumes” for two years. What anti-terror benefit would that add? Download volumes would useful in copyright infringement cases.

The threat data retention poses to privacy has been widely discussed. But data retention is, first and foremost, a new economic regulation. So let’s treat it as sceptically as we would any increase in the regulatory burden on business.

Prime Minister Tony Abbott has said that the cost of data retention would be around $300 to $400 million, or just 1 per cent of the total revenue of the telecommunications industry.

This is a very significant amount of money. Telcos are already some of the most highly regulated firms in the country.

Turnbull has suggested government will contribute substantially to the cost of implementing data retention. But whether we pay for data retention through internet bills or just general taxation, we’ll still pay for it.

This new burden could dramatically reshape the telecommunications sector. All else being equal, large firms, with their well-established regulatory teams, are able to comply with new regulation much easier than small firms, which lack the economies of scale to absorb costs.

The unfortunate result of burdensome regulation is push smaller firms out of the market, reducing competition as they disappear. Less competition will, in the long run, result in higher prices.

In the case of data retention, it isn’t just size however that matters. Some telcos have more complex networks and technologies and legacy systems – think of Telstra – for whom imposing these new requirements might be disproportionately expensive.

Turnbull and Attorney-General George Brandis claim that mandatory data retention will require telcos to store no more data than some firms do already – just store it for a bit longer.

It’s not clear which firms they’re referring to. The entire industry has been up in arms about data retention. The proposed policy is not just a minor extension of existing practice.

Nevertheless, there’s a reason some telcos store data more than others. The smallest internet service providers survive by keeping their data storage and infrastructure costs as low as possible, hoping to pull customers away from the big firms with lower prices or better service.

For the law enforcement and regulatory agencies that have spent the past six years lobbying for data retention, regulatory compliance costs are an abstract second-order issue.

But for internet users and taxpayers, who will be charged higher prices by a declining number of internet service providers, the economic effect of mandatory data retention is a big deal.

Splitting Telstra Is Not The Right Move

Last week, the US Federal Communications Commission abandoned its decade-long experiment with forced access sharing. Under this process the four so-called “baby bell” phone companies were required to open their phone lines to competing broadband retailers, rather like Telstra’s ADSL must be opened to its rivals.

As the former chief executive of US West, the baby bell that served the US Midwest, Sol Trujillo is intimately aware of the harmful effects that forced access policies have on telecommunications services. In the name of competition, access requirements also disingenuously known as unbundling make an entire industry subservient to regulators, rather than the market and consumers.

Telstra’s last attempt to change prices for high-speed internet, involving the introduction of the entry level $30 per month price early last year, was subject to vigorous action by the Australian Competition and Consumer Commission and Telstra’s retail rivals seeking to have the price increased.

This was punishing the customer to preserve the competitors and was just as odious as the policies that US regulators have unanimously decided are harmful to true telecommunications competition.

Telstra’s decision last year to lower the cost of home broadband should have been welcomed around the country. Instead, a pricing arrangement which resulted in a massive surge in ADSL uptake was greeted with threats of a multimillion-dollar fine and a brutal series of condemnations in the press.

Telstra’s basic broadband pricing has not changed in 1 1/2 years, probably as the result of lessons learnt from last year’s ugly fight. Such stagnant pricing in such a dynamic sector is not the sign of healthy competition.

The most harmful effect of forced access regulation is on infrastructure. The telecommunications market does not have the same stability as electricity or water; the steady progression of new communication technologies requires significant infrastructure investments to meet consumer demands.

It is clear that allowing competitors to leech off Telstra’s copper wire network at a nominal rate that ensures their profitability, means that there are poor incentives to invest in newer, more advanced infrastructure.

To argue that the capital required to build such a network is so large that no company would possibly do so is fallacious. One need only look at the sudden explosion in aviation competition with the advent of Virgin Airlines to recognise this fact.

In telecommunications we can be confident that this will emerge in the US now that price shackling has been abandoned. Not only do the existing regulations dissuade young competitors from developing new services, but they give Telstra a significant disincentive to upgrade lines. This point was made clear in a Senate committee earlier this year in a discussion on comparable broadband speed.

Telstra’s reluctance to roll out fibre optic cable to the home a technology which will rocket broadband speeds to among the best in the world is based not upon a lack of desire to do so, but a fear that the ACCC will force the company to open its lines at a rate which could make the roll-out a poor investment.

This is the regulatory environment Trujillo faced in the US, and this is the one he faces in Australia right now. However the recent developments here have not followed the positive developments in the America.

While recent Australian debate has focused on the National’s rent-seeking demands for future-proofing, it is the operational separation of Telstra into a wholesale and retail division which threatens to be the legacy of the coalition’s compromise.

If it goes through as planned, separation will lock in the regressive forced access regulation. Telstra Wholesale will be no more than a province of the ACCC empire controlled not by consumer demand but by an ACCC managed cartel of parasitic competitors trying to suck concessions from the one provider of significant communications capital that the country has.

The timing of the US decision is fortuitous for the federal government and those who will draw up the new arrangements for the final sale of Telstra.

We can look to the US, and their momentous decision to end this regulatory arrangement, for ideas on how to progress.

Hands Off Software, Samuel

Nothing gets you more attention than picking on the cool kid at school.

The Australian Competition and Consumer Commission is arguing that Google is responsible for the content of the advertisements that accompany its search results, and that it is not sufficiently obvious that they are ads.

The ACCC alleges that ads that appear to link to one firm, but in fact link to another firm, are in violation of trade practices law.

But Google already has its own dispute resolution process that adequately resolves these problems. This machinery is not there because it wants to satisfy regulatory authorities; it’s there because it is part of the search engine’s commercial attraction to ensure its links and advertisements are credible and not likely to mislead searchers.

Google’s reputation rides on the integrity of its search results. The company may seem like it owns the internet, but the history of software and computing shows us that such domination is easy to lose. Users will migrate if they stop trusting Google.

The ACCC’s second contention has more important implications. The regulator argues that Google’s ads are inadequately distinguishable from its search results.Again, this argument is easily dispensed with. Not only does Google highlight and separate ads from search results, it also clearly labels them as sponsored links.
Furthermore, it is easy to tell where links are directed – Google publishes the full address to help its users navigate their searches.
This is in addition to the status bar visible at bottom of modern web browsers, which also indicates the destination of any given link.

Internet users are fairly sophisticated at determining the validity of individual sites. They have to be – the deluge of email spam has made computer literacy a requirement.

Even so, if a search engine wanted to pepper its results with ads, it should not be against the law to do so. Publications mix paid advertisements and editorial content shamelessly, but do not find themselves the target of high-profile ACCC lawsuits and media releases.

The biggest challenge modern software companies have is developing business models that can actually turn a profit. Reckless regulatory intervention will limit the ability for firms to experiment with ad-based revenue models.

The action against Google is a symptom of a deeper struggle that government and regulators are having with the implications of digital technology and the internet. Rather than seeing the paradigmshifting opportunities of online services, they are merely being seen as a further opportunity to expand the turf of the regulator.

ACCC chairman Graeme Samuel has repeatedly argued that online sporting content provided exclusively to Telstra BigPond subscribers could constitute a monopolistic bottleneck to competition. Never mind that this is a whole new service developed entrepreneurially by Telstra, and the rights to provide this content to subscribers had been ascertained by fair competition on the open market. Nor that Optus and other service providers are also seeking to provide unique content of their own.

The regulator has announced that this is the first action of its type internationally. But this is not entirely the case. By arguing that Google is responsible for the content of its ads, the ACCC joins individuals and firms who sue the search engine for merely linking to objectionable material.

Such activity is becoming common internationally – rather than suing the site or sponsor of the offending material, litigants target the much higher-profile Google. This ensures publicity and targets an entity that is wealthy enough to pay should the suit be successful.

There is a further worrying implication of this action. The software industry used to be clearly separate from the regulatory morass that rules other industries. The industry moves astonishingly fast, has no entry barriers and is characterised by the sort of innovation and entrepreneurial action that renders regulatory oversight redundant.

But in Europe and the United States, the potential expansion of regulation to online services has forced tech companies to set up lobbying divisions in Brussels and Washington staffed with lawyers and government relations specialists.

The last thing the industry needs is to compel software engineers to sit down with regulators before they can offer new services. To do so would be to invite the same regulatory stagnation that has enveloped telecommunications.

Media-Rule Horse Has Bolted

Communications Minister Helen Coonan’s attempts at policy reform have so far been conspicuous failures. Telstra’s fibre to the node network was scuttled by her requirement that Telstra build it and then give control over it to the regulator. And now what was already a timid “media reform” package has been watered down almost to the level of pointlessness.

The coalition’s proposed changes to media laws were obsolete on the day they were released. They were an attempt to deal policy into the frenzied technological change taking place in the unregulated parts of the media and telecommunications sector.

In March, the day the government released its media discussion paper, Apple released for download and purchase on its iTunes service High School Musical. The movie has been a huge success with the “tween” market (children between the ages of eight and 12). It cannot be seen at the cinemas, it’s available only on DVD and via the internet. Movie distributors had learnt the lesson from music distributors’ failure half a decade ago – consumers are migrating their entertainment onto the internet, and are happy to pay for the privilege.

This week we saw the final watering down of the media package and the sale of YouTube to Google – $US1.65 billion ($2.2 billion) for 67 employees and a website.

None of Apple, YouTube, Google or Microsoft made submissions or appeared at the Senate inquiry into the government’s media legislation. Telstra gave evidence only about the mobile television licence. These companies didn’t need to get involved in debates about old media. No reform package can stop the migration of consumers from traditional media into more exciting and more flexible formats.

Now, with the release of Telstra’s Next G network, the transition from old to new media is firmly under way. Certainly, the wireless network is slower than the scuttled fibre to the node network, but it doesn’t take much to happily stream a YouTube video onto a mobile phone. Next G speeds are already faster than those that many consumers have piped into their home, and are set to increase in speed tenfold.

When Prime Minister John Howard says media reform is only a second-order priority, he is more prescient than he realises. The creative storms of change will blow no matter what is in the Broadcasting Services Act.

The Holy Grail of modern communications has long been obvious: high-speed internet. If this is available on mobile devices, consumers can watch video from any service, read their email from any provider and browse any website with the same freedom they have in front of their computers at home. But Australia has a regulatory environment dramatically at odds with technological and cultural developments here and overseas.

What was the debate about? The “diversity” cry rings hollow – on the internet, an infinite array of content and opinion is available to anybody who cares to look. Online media services, still in their infancy, can deliver more diverse content than can be consumed in a lifetime.

But political debate about media ownership always ends up with politicians pontificating about the relative merits of media content. Genuine deregulation means that this decision would be made entirely by consumers. In a deregulated market, what people want on television or radio, people get.

By forcing local radio stations to broadcast a minimum of local content, the politicians say they know better than consumers what should be broadcast. It is an attempt to force consumers to pay for politicians’ public visibility – elsewhere this would be called corruption. By restricting the ability for stations to respond to consumer demand, the reform package condemns many independent broadcasters to failure.

Local media produces niche products that can be supplied by other vehicles. Whether product is supplied on the same radio transmitter as 50 years ago, or a podcast inaugurated 50 days ago, should be of no concern to legislators.

Outside the realm of government regulation, we have innovative, dynamic companies responsive to market demand. Within its reach, we have an industry being variously protected and attacked by flawed public policy and political manoeuvring. Unsurprisingly, audiences for unregulated new media are growing faster.

Traditional media still have a role. But when the government imposes new regulations and fails to strip away the old ones, that role is looking more and more perilous.

Only The Market Can Properly Reshape The Media

Robert Menzies despised television and stated privately that he hoped it would not be introduced during his government. Does Communications Minister Helen Coonan have a similar attitude towards the next radical media change?

Given the opportunity to robustly liberalise the regulatory environment that the Australian media has been subject to for over a century, the government has declined to act.

There are big entrenched media companies which have made large investment decisions based on the current framework, and the political reality is that genuine deregulation would have to be a slow and careful process. But instead of attempting to unwind our Byzantine media regulations, at whatever pace, the government’s media reforms do nothing more than add more rope.

For instance, the proposed auction of two additional swathes of spectrum should have been greeted with enthusiasm. Entrepreneurial companies which had won these new licences could have used them to deliver whatever services they perceived to be in demand.

Instead, the government has chosen to dictate to potential users the terms and conditions of their licences, terms and conditions which will not apply to existing users of broadcast spectrum. This “command and control” approach to economic management has been discredited in both theory and practise. It’s ill-suited to managing a limited and static array of services, and it’s doubly unsuited to manage the fast paced and high-risk communications and media industry.

It does, however, allow the government to claim credit, as the Communications Minister did this week, for any potential new services delivered within their strict framework. What Coonan fails to mention is the services that the government will not allow us to receive. To this end the government has invented two terms, “narrowcasting” and “datacasting”, defined not by what they can do, but what they cannot.

One of the channels to be auctioned is allowed to broadcast free-to-air, but not replicate traditional TV services. Why not?

The government is not a suitable body to predict the possibilities of and the demand for newer forms of media. Only a market unhindered by restriction is capable of doing so with any success.

Similar objections can be raised to the government’s proposal to replace one elaborate formula for media ownership restriction within a market with another elaborate formula. While touted as a grand liberalisation of ownership regulations, they are in fact, little more than minor adjustments. For advocates of genuine deregulation throughout the economy, this should be a disappointment.

Many critics of the reform proposals hinge their arguments upon the potential lessening of diversity that could be the result of consolidation within the industry.

It is absurd to argue that media diversity will decline without stringent checks on the ownership of broadcast media outlets. In no era in history has this been less true. While the internet has been justifiably praised in bringing alternative viewpoints and independent media outlets to the home, rapid technological improvements in seemingly mature industries like printing have increased in the last few decades the volume of magazines, newspapers and printed material manyfold.

Anybody who doubts that minority or niche voices will not get heard after genuine media reforms should consult the vast ethnic press, made possible by dramatically lower print production costs.

In fact, mergers between media organisations could have tangible benefits. A fully vertically integrated corporation, able to command world-wide news gathering and content production, may be able to produce a far better and diverse range of services.

The massive competitive pressure exerted upon existing media companies from the proliferating new media compels dramatic change, even in such seemingly dominant organisations as News Ltd. Rupert Murdoch’s recent acquisition of the social networking website MySpace is a case in point.

These gains are not guaranteed, however. The US market, after a rush of media consolidation in the 1990s as companies rushed to prepare for the digital era, has been beset by a series of failures and divestitures. AOL Time Warner has been shedding assets now that the financial gains expected from its highly publicised merger have not appeared. Viacom, Disney, Clear Channel, Knight-Ridder and many others have downsized or spun off companies in the last few years.

But these companies need the freedom to experiment, and fail, with new business models.

New media organisations are popular and influential, and will become more so. Governments of all stripes across the world are struggling to predict its significance. That is understandable – nobody has any inkling of how these changes will pan out.

But instead of indulging itself in public consultations and submission processes, commissioning reports and carefully releasing sections of the spectrum with highly prescriptive regulations, the government would be far better to leave the future of the Australian media up to the market.

There is no convincing reason why entrepreneurs, allowed to experiment with new technologies and business models, cannot amply deliver the services that Australian consumers demand now and into the future.