Cryoeconomics: how to unfreeze the economy

With Darcy Allen, Sinclair Davidson, Aaron Lane and Jason Potts. Originally a Medium post.

The Australian government, like many governments around the world, wants to freeze the economy while it tackles the coronavirus pandemic. This is what the Commonwealth’s JobKeeper payments and bailout packages are supposed to do: hold workers in place and keep employment relationships together until mandatory social distancing ends.

Easier said than done. We are in completely uncharted territory. We’ve never tried to freeze an economy before, let alone tried to thaw it out a few weeks or months later. That’s why our new project, cryoeconomics, looks at the economics of unfreezing an economy.

To understand why this will be so hard, think of an economy as a remarkably complex pattern of relationships. Those relationships are not only between employees and employers, but also between borrowers and lenders, between shareholders and companies, between landlords and tenants, between producers tied together on supply chains, and between brands and tastemakers and their fans.

The patterns that make up our economy weren’t designed from above. They evolved from the distributed decisions of consumers and producers, and are shaped by the complex interaction between the supply of goods and services and their demand.

The problem is that the patterns the government plans to freeze are not the patterns we will need when they finally let us thaw.

When the government decides to pull the economy out of hibernation, the world will look very different. As a simple example, it’s quite possible that many Australians, forced to stay home rather than eat out, discover they love to cook. This will influence the demand for restaurants at the end of the crisis. On the other hand, our pent-up desire for active social lives might get us out into the hospitality sector with some enthusiasm. There will be drastic changes because of global supply chain disruptions and government policies. These changes will be exacerbated by the fact that not all countries will be unfrozen at the same time.

The upshot is that the economy which the government is trying to hibernate is an economy designed for the needs and preferences of a society that has not suffered through a destructive pandemic.

Unfreezing the economy is going to be extremely disruptive. New patterns will have to be discovered. As soon as the JobKeeper payments end, many of the jobs that they have frozen in place will disappear. And despite the government’s efforts, many economic relationships will have been destroyed.

Yet there will also be new economic opportunities — new demands from consumers, and new expectations. Digital services and home delivery will no doubt be more popular than they were before.

These disruptions will be unpredictable — particularly if, as we expect, the return to work is gradual and staggered (perhaps according to health and age considerations or access to testing).

As we unfreeze, the problem facing the economy won’t primarily be how to stimulate an amorphous ‘demand’ (as many economists argue government should respond to a normal economic recession) but how to rapidly discover new economic patterns.

It is here that over-regulation is a major problem. So much of the laws and regulations imposed by the government assume the existence of particular economic patterns — particular ways of doing things. Those regulations can inhibit our ability to adjust to new circumstances.

In the global response to the crisis there has already been a lot of covert deregulations. The most obvious are around medical devices and testing. A number of regulatory agencies have stood down some rules temporarily to allow companies to respond to the crisis more flexibly. The Australian Prudential Regulatory Authority is now willing to let banks hold less capital. The Australian Securities and Investment Commission has dropped some of its most intrusive corporate surveillance programs.

The deregulatory responses we’ve seen so far relate to how we can freeze the economy. A flexible regulatory environment is even more critical as we unfreeze. Anything that prevents businesses from adapting and rehiring staff according to the needs of the new economic pattern will keep us poorer, longer.

Today the government is focused on fighting the public health crisis. But having now turned a health crisis into an economic crisis, it must quickly put in place an adaptive regulatory environment to enable people and businesses to discover what a post-freeze economy looks like.

Automating the big state will need more than computers

Robodebt – the automated Centrelink debt issuance program that was found invalid by a federal court last month – is not just an embarrassment for the government. It is the first truly twenty-first century administrative policy debacle.

Australian governments and regulators increasingly want to automate public administrative processes and regulatory compliance, taking advantage of new generations of technologies like artificial intelligence and blockchain to provide better services and controls with lower bureaucratic costs. There are good reasons for this. But our would-be reformers will need to study how robodebt went wrong if they want to get automation right.

The robodebt program (officially described as a new online compliance intervention system) was established in 2016 to automate the monitoring and enforcement of welfare fraud. Robodebt compared an individual’s historical Centrelink payments with their averaged historical income (according to tax returns held by the Australian Taxation Office). If the Centrelink recipient had earned more money than they were entitled to under Centrelink rules, then the system automatically issued a debt notice.

That was how it was supposed to work. In practice robodebt was poorly designed, sending out notices when no debt actually existed. Around 20 per cent of debts issued were eventually waived or reduced. The fact that those who bore the brunt of these errors had limited financial resources to contest their debts contributed to robodebt’s cruelty. In November, the federal court declared that debts calculated using the income average approach had not been validly made, and the government has now abandoned the approach.

Automation in government has a lot of promise, and a lot of advocates. Urban planners are increasingly using AI to predict and affect transport flows. The Australian Senate is inquiring into the use of technology for regulatory compliance (‘regtech’) particularly in the finance sector. Some regulatory frameworks are so byzantine that regulated firms have to use frontier technologies just to meet bare compliance rules: Australia’s adoption of the Basel II capital accords led to major changes in IT systems. And the open banking standards being developed by CSIRO’s Data61 promise deeper technological integration between private and public sectors.

Regulatory compliance costs can be incredibly high. The Institute of Public Affairs has estimated that red tape costs the economy around 11 per cent of GDP in foregone output. The cost of public administration to the taxpayer is considerably more. Anything that lowers these costs is desirable.

But robodebt shows us how attempts to reduce the cost of administration and regulatory compliance can be harmful when done incompetently. The reason is built into the modern philosophy of government.

Economists distinguish between administrative regimes governed by discretion and those governed by rules. The prototypical example here is monetary policy. Rules-based monetary policies, where central banks are required to meet targets fixed in advance, are less flexible (as the RBA, which has consistently failed to meet its inflation target is keenly aware) but at the same time provide a lot more certainty to the economy. And while discretionary regimes are flexible, they also vest a lot of power in unelected bureaucrats and regulators, which comes at the cost of democratic legitimacy.

Automation in government is possible when we have clear rules that can be automated. If we are going to build administrative and compliance processes into code, we need to be very specific about what those processes actually are. But since the sharp growth of the regulatory state in the 1980s governments have increasingly relied less on rules and more on discretion. ASIC’s shrinks-in-the-boardroom approach to corporate governance is almost a parody of the discretionary style.

The program of automating public administration is therefore a massive task of converting – or at least adapting – decades of built up discretionary systems into rules-based ones. This was where robodebt fell over. Before robodebt, individual human bureaucrats had to manually process welfare compliance, which gave them some discretion to second-guess whether debt notices should be sent. Automating the process removed that discretion.

The move from discretion to rules is, to be clear, a task very much worth doing. Discretionary administration feeds economic uncertainty, and ultimately lowers economic growth. We have a historically unique opportunity to reduce the regulatory burden and reassert democratic control over the non-democratic regulatory empires that have been building up.

Of course, public administration-by-algorithm is only as effective (or fair, or just, or efficient) as those who write the algorithm build it to be. There’s a lot of discussion at the moment in technology circles about AI bias. But biased or counterproductive administrative systems are not a new problem. Even the best-intentioned regulations can be harmful if poorly designed, or if bureaucrats decide to use discretion in their interest rather than the public interest.

Robodebt failed because of an incompetent attempt to change a discretionary system to a rules-based system, which was then compounded by political disregard for the effect of policy on welfare recipients. But robodebt is also a warning for the rest of government. The benefits of technology for public administration won’t be quickly or easily realised.

Because when we talk about public sector automation, we’re not just talking about a technical upgrade. We’re talking about an overhaul of the regulatory state itself.

Towards Crypto-friendly Public Policy

With Sinclair Davidson and Jason Potts. Published in Melanie Swan, Jason Potts, Soichiro Takagi, Frank Witte and Paolo Tasca, 2019. Blockchain Economics: Implications of Distributed Ledgers, World Scientific Publishing, Singapore, pp. 215-232.

Abstract: Distributed ledgers are institutional technologies that pose complex challenges regarding regulation and inter-jurisdictional competition. This chapter introduces ‘crypto-friendly’ public policy as a way to understand these challenges. Blockchains are relevant to public policy in at least three ways. First, they can be adopted by governments for the provision of public services. Second, many blockchain applications interact with existing regulatory frameworks and may provide new regulatory challenges. Third, they present the possibility of ‘crypto-secession’ as a form of privately provided public goods provision. The chapter applies an institutional theory of regulation to assess how blockchains effect relative institutional costs and guide public policy choices. Blockchain applications such as property rights and identity management are also considered. Finally the chapter considers the possibility of crypto-friendliness as a dimension for international regulatory competition.

Available at World Scientific.

Opportunities for crypto-havens to capture business

With Sinclair Davidson and Jason Potts.

Blockchain technology is set to drive a new era of global public policy competition. In May 2018, the premier of Bermuda, David Burt, announced to the 8,500 attendees of the Consensus blockchain and cryptocurrency conference his country’s new Digital Asset Business Act and Initial Coin Offering Act. This legislation is intended to establish Bermuda as a premier destination for blockchain business by providing regulatory certainty around new business models.

But Bermuda is hardly the only jurisdiction seeking to attract blockchain firms. Singapore, Switzerland, Dubai, Estonia, subnational jurisdictions and dependencies like Illinois, Zug, the Isle of Man and Gibraltar are all positioning themselves to capture blockchain services. In October 2017, the then prime minister of Slovenia, Miro Cera, declared the country was “setting itself up as a blockchain-friendly destination.”

What we are seeing right now is an aggressive policy-driven grab to become a world leader in blockchain technology, and to capture some of the enormous value that this can unlock. Where once we saw global tax competition – as small nations attracted investment with business-friendly tax and regulation policy – now we are able to watch the green shoots of global blockchain competition. Blockchains are a unique technology, and that uniqueness presents some unusual public policy challenges. They offer us a new platform to organize economic activity: to make trades, to arrange production processes, to store information about assets and property ownership. Blockchains provide an economic infrastructure on which parallel technological developments, such as artificial intelligence and machine learning, the Internet of Things, 5G, and automation, can be built.

We expect to see a great deal of economic activity that currently takes place in firms, in markets, even in government, to be displaced by distributed ledger technology. Blockchains will tie organizations together that have currently cooperated only through market exchange, or by the force of regulation. It will lead to demergers, as large firms realize that a decentralized ledger is an alternative to complex multidivisional corporate structures.

But we have spent hundreds of years building complex taxation and regulatory systems around these institutions. The dominance of large firms has led governments to impose anti-trust laws. Principal-agent problems between owners and firm managers has led to the introduction of complex schemes of directors duties and manager controls. Securities law is built around the dominance of the public offering, taxation law around a sharp distinction between currency and other assets, and labor law around the employer-employee divide.

As a new technology of governing economic activity, blockchain applications pull at the threads of all these traditional regulatory frameworks. Globally, there are still deep uncertainties over the most basic questions around cryptocurrencies, such as when they are taxed, and as what: currency or security? The initial coin offerings that have brought so much money into the industry exist in a legal gray area almost everywhere in the world.

Blockchains are an incredibly young technology – just ten years old. Distributed autonomous organizations, decentralized labor markets, blockchain-secured intellectual property assets and blockchain-enhanced international trade will raise complex issues about fundamental regulatory structures, like labor, competition, and companies law – structures which have been reasonably fixed for the better part of a century. As more applications around economic problems, such as identity management, charities, healthcare, finance and global trade, are developed and introduced into the real world, they will face a spiraling number of regulatory and policy barriers that will need to be overcome. We face decades of regulatory uncertainty and demand for reform.

This is where crypto-friendliness matters. Crypto-friendliness does not mean the government needs to subsidize, plan or control blockchain technology. The sector is awash with funds: a happy by-product of the enormous speculative investment in cryptocurrencies that has occurred over the last eighteen months. No government planner could predict how this technology is going to develop, and given its global nature, no regulator has a hope of controlling it.

But blockchains do require governments to facilitate adoption. Because of the many ways blockchain use cases interact with existing regulatory frameworks they will need the help – or at least the acquiescence – of public policymakers to reform those frameworks to suit. The biggest regulatory risk in the blockchain space is uncertainty. Right now, those uncertainties are about how crypto-assets will be taxed, how and when they will be treated as securities, and the levels of disclosure around anti-money laundering and know-your-customer rules.

Governments that want to attract blockchain firms to their jurisdictions need to be resolving those uncertainties as soon as possible.

A crypto-friendly government is one which is not only focused on resolving current uncertainties but is able to credibly commit to facilitating the sorts of regulatory reforms needed in the future. Technological change is unpredictable. We do not know what blockchain applications are going to be the most successful and disruptive. Consumer demand is unpredictable. Governments should ensure, as far as possible, that regulation is both predictable and adaptive, that shape-changes in regulatory regimes do not occur, and that yet there is adequate space for entrepreneurial experimentation.

Which governments are likely to be the most crypto-friendly? At the first instance, the governments which have already demonstrated themselves as business-friendly environments are obvious candidates for blockchain friendliness. The ingredients of long-run economic growth – liberal, responsive institutions, the rule of law, limited government, regulatory modesty, and low taxes – are as important for blockchain firms as they are for other industries. The Isle of Man, for instance, has long been an established global leader in gambling and e-gaming, thanks to a deliberate effort on its part to establish welcoming and certain public policy. The Isle of Man is now a thriving site of blockchain innovation. As this suggests, blockchain technology presents a historically significant opportunity for the Cayman Islands, and any other jurisdiction which has a reputation for business-friendly policy. The last few decades of global tax competition have shown that smart policy can shape the geography of global capitalism just as strongly as labor or natural resources. Blockchains are a decentralized network but their developers, entrepreneurs and users exist in a real world, subject to real laws. Crypto-havens can capture that business.

Regulation and Technological Change

With Darcy Allen. Published in Darcy WE Allen and Chris Berg (eds.),Australia’s Red Tape Crisis: The causes and costs of over-regulation, Connor Court Publishing, Brisbane, 2018

Abstract: This chapter explores the relationship between technological change and regulation in both directions. New technologies such as artificial intelligence, machine learning, and distributed ledgers are likely to drive structural changes in decades to come, not least in the way firms comply with regulation and how regulators enforce regulation. Regulatory technology, or ‘RegTech’, presents opportunities to reduce the regulatory burden on firms and make regulation more efficient and less harmful. On the other side, regulators need to come to terms with new technologies that may challenge existing business models or regulatory constructs, and we propose policymakers adopt a ‘permissionless innovation’ principle in response, ultimately allowing experimentation with new technologies by default unless direct harms can be demonstrated.

Available at SSRN

Regulation and Red Tape in a Small Open Economy: An Australian Overview

Published in Darcy WE Allen and Chris Berg (eds.), Australia’s Red Tape Crisis: The causes and costs of over-regulation, Connor Court Publishing, Brisbane, 2018

Abstract: It is widely acknowledged in political circles that Australia has a high red tape and regulatory burden. However little scholarly attention has been directed towards understanding the extent and significance of that burden. This paper describes why red tape and regulatory reform should be treated as a particularly significant priority for a small, open economy such as Australia’s. Australia faces a number of economic and fiscal challenges and is likely to become more exposed to macroeconomic fluctuations in coming decades. Red tape and regulation slow adjustment to changes in that environment among individuals and firms. The red tape and regulation reform program should be seen as a central element in making Australia more resilient to local and global economic shifts.

Available at SSRN.

Australia’s Red Tape Crisis: The Causes and Costs of Over-regulation

Edited with Darcy Allen. Connor Court Publishing, 2018

Red tape costs the Australian economy as much as $176 billion a year. Governments create and enforce thousands of regulations on our workplaces and our communities. These rules slow and prevent businesses forming, people from flourishing, new technologies from being adopted, and hold back Australia’s global competitiveness.

Australia’s Red Tape Crisis is an exploration into the economics, politics and culture of over-regulation. How should we structure our federation to achieve reform? Why should political responsibility sit with the elected? Does Australia have a deep desire for a federal bureaucracy? What is the future of red tape reduction policies?

Together, the contributions of economists, philosophers, politicians and lawyers help define a path for overcoming Australia’s red tape crisis.

Available from Connor Court Publishing

A Genuine Commercial Justification for Interchange Fees

With Sinclair Davidson and Jason Potts

Abstract: Ronald Coase famously argued that “if an economist finds something – a business practice of one sort or other – that he does not understand, he looks for a monopoly explanation”. So it is with credit card interchange fees. Intellectual confusion has led to the phenomenon of interchange fees being misdiagnosed as being a monopoly problem leading to inappropriate policy intervention. Following George Stigler’s path breaking analysis of the US Security and Exchange Commission he claimed that financial regulation was “founded upon prejudice and … reforms are directed by wishfulness”. In our opinion, Australian regulatory attitudes towards interchange fees should be placed into the same category: reforms initiated by ignorance and anti-bank prejudice.

Working paper available on SSRN

The blockchain economy: what should the government do?

With Sinclair Davidson and Jason Potts. Originally a Medium post.

Satoshi Nakamoto said Bitcoin would be “very attractive to the libertarian viewpoint”. The pioneers of cryptocurrencies were cypherpunks or crypto-anarchists who wanted to use this new invention to escape the state’s monopoly on money.

We’re sympathetic to this — as we argued in our last Medium essay ‘Byzantine Political Economy’.

But the state is not so easy to escape.

Not only are there many blockchain use-cases for government, but it is possible that positive government action could help the blockchain revolution along.

Just as the blockchain radically decentralises economic activity, the born-global nature of the blockchain can radically decentralise economic power.

Crypto-friendly governments — that is, governments that can rapidly adjust their regulatory frameworks to suit the blockchain economy — have a unique window to attract global investment.

Crypto-friendly governments: the state of play

A number of smaller countries and autonomous regions are trying to position themselves as crypto-friendly.

Both Great Britain and Australia have issued high-level government science reports on the prospects of the technology.

Other smaller countries (such as Estonia) and city-states (such as Singapore) have folded blockchain into a digital and e-government investment strategy.

City-states such as Dubai and states or cantons such as Zug in Switzerland and Illinois in the United States are trying to move many aspects of government services to the blockchain, or to create special crypto-economic zones.

Singapore and Australia have directed their financial regulators to issue detailed guidance about the regulatory, legislative and tax treatment of crypto-assets.

Political leaders in Japan and Russia have made multiple announcements broadly supportive of crypto-investment.

Those are the good news stories. However, most countries maintain a sort of benign neglect — either because of the relative small presence of the cryptoeconomy or lack of government interest or capability in the space.

And a small number of jurisdictions are outwardly hostile. New York adopted a hard line in terms of regulatory compliance when it introduced the BitLicense. China has banned initial coin offerings and cryptocurrency exchanges.

Global differences are going to matter

So far, the development of cryptocurrencies has been geographically concentrated in regions like Silicon Valley. But that won’t last. The blockchain is a distributed technology. The relationship between the regions that develop the technology and the regions that adopt the technology is unlikely to be strong.

In other words, the geography of invention is not the same as the geography of innovation.

The United States is highly successful in inventing blockchain technology. Yet it has been finding it hard to adopt blockchains because of American regulatory complexity.

Regulatory agility will be a significant factor determining which nations are able to successfully adopt blockchain technology.

This favors city-states (Singapore), smaller countries (Estonia, Australia) and subnational jurisdictions (Zug, Illinois).

The blockchain tax problem

How should cryptoassets be taxed? Are tokens money (taxed as spending)? Or are they debt or equity (in which case it would be treated as income or gains from a capital asset or investment vehicle)? We’ve argued that they cryptoassets are in fact the hypothetical asset class that Nobel laureate Oliver Williamson once called ‘dequity’. This means they should be taxed as capital assets, not as money.

But blockchain technology is not just another productivity enhancing technology that can be taxed at the point of adoption. Blockchains are actively associated with tax avoidance or tax shifting owing to the pseudonymous nature of transactions and the difficulty of establishing the correct jurisdiction for taxation.

This is going to be hard to unravel. As Chris and Sinclair told an Australian parliamentary inquiry in October 2017, blockchain-enabled organisations

are going to be harder to tax than the monolithic firms of the 20th century. We’ve published sceptically about the parliament’s efforts to prevent profit shifting by multinational firms. However, the born-global nature of blockchains will supercharge these trends. We do not believe there will be any easy regulatory solution to this, and parliament will need to rethink not just how it taxes, but what it taxes.

What should government do?

Nakamoto did not develop Bitcoin in a vacuum.

To the extent that government funding of academic mathematicians and cryptographers produced the initial research papers that were subsequently developed into the blockchain, then the early development of this technology was publicly sponsored — but not publicly planned.

Should government do more on the research side?

Let’s first assume that governments are benevolent — call this the public interest model of government.

Many economists, following Kenneth Arrow’s 1962 paper ‘Economic Welfare and the Allocation of Resources for Invention’, argue that the uncertainties and positive social benefits from invention can lead to a market failure in research and development.

It’s not clear that the blockchain has this problem. This is in part because token sales incentivise early adoption. What some people are calling a ‘bubble’ we think is massive experimental investment.

Alternatively, governments could substitute blockchains for their own existing services like the provision of money or property registries.

Governments should pick specific use-cases — such as identity and asset registries, licenses and certification, open government data, reporting and management of government contracts and public assets — then estimate the marginal cost and benefits of investment and adoption of this technology.

These benefits could be huge. For instance, a Bank of England report estimates a 3 percent gain in GDP from issuing a government cryptocurrency.

Other potential government involvement could focus on public goods problems — such as the need for the network communications infrastructure upon which a cryptoeconomy operates (particularly in the developing world).

Governments could also create open access data regimes and registries that can be harnessed and used by cryptoeconomy businesses.

But most fundamentally, governments should invest in high quality legal institutions (regulators, courts, bureaucracies, democratic systems, etc) to provide the cryptoeconomy with the needed predictability, efficiency, transparency, accountability, and efficacy.

But then again…

Why might some countries fail to make the necessary reforms for the blockchain economy? Governments might not know about the benefits or might misunderstand them (bounded rationality or information constraints). Governments might not be able to afford the necessary public investment (financial constraints).

Or we might not trust government enough. There are huge efficiency gains to be made from moving government registries like identity, property titling, tax, voting, central bank coin to the ‘trustless’ blockchain. But to do so itself requires high levels of trust in the government making that change.

This is the paradox: it takes a lot of trust to get to trustlessness. Sweden and Australia will be able to move easily to distributed land title registries. Haiti (where the need for a distributed land title register is much greater) will find it harder.

Governments against blockchains

Radical decentralisation will not always be in the interest of centralised governments.

In the public choice model of government, both governments and citizens have distinct objectives that they seek to maximize.

Citizens trade votes for services. Governments seek to create benefits for themselves (subject to the constraint of getting elected). What citizens want and what governments conflict, resulting in political exchange.

Take blockchain-enabled identity. From the perspective of the government, each citizen ought to have one and only one identity. A single, centralised identity is useful for entitlements and taxation — or conscription.

These centralised identity registrations are co-opted for commercial uses of identity (e.g. to open a bank account, or to rent a car).

But from the citizen perspective this is inefficient, because as identity is owned and managed by the state, they have no control over it, and cannot choose how to permission and share this data. It also creates problems of trust and privacy (for example in health and criminal records).

A decentralized identity would be more efficient, facilitating variety of types of identity for specialized uses and enabling user control. Citizens might want this. Governments do not.

What will other governments do?

Ideally, the approach of governments to the blockchain economy would be both rationally optimal from the perspective of its own citizens, but also a best response to the expected moves of foreign governments — many of which will differ in size, level of economic development, and institutional quality.

For instance, there is no doubt that many tax bureaucracies would like to constrain or control the growth of the cryptoeconomy as it will make taxation harder.

But their success will depend on what other countries as well.Blockchains — and the wealth and relationships on the blockchain — are both everywhere and nowhere.

In this world, it is not obvious what most effective public policy settings will be. There will be heavy learning costs involved. Some governments might rationally decide to delay decision making in order to learn from first-movers who can then be expected to incur costly mistakes in the experimental process of policy settings.

It is possible that larger countries will be much more cautious in adopting cryptoeconomic policies that are significantly divergent from other competing countries.

Alternatively, we could see bilateral or club-like coalitions of strategic investment and public policy harmonization — just as we do with tax and trade treaties.

Private governance and crypto-secession

When governments are particularly oppressive, blockchains can be used to move many aspects of an economy away from central control (identity, contract, money and payments, organization, data, etc). This allows what Trent MacDonald calls nonterritorial secession, or crypto-secession.

In the classic federal model of local public goods, governments competitively provide public goods with different offerings and price points. If an individual prefers a different bundle of public goods, they move to another jurisdiction. If a group of individuals collectively prefers a different bundle of pubic goods, they secede. But to secede, they have to physically move somewhere else, which is costly.

Non-territorial secession allows individuals to choose a different bundle of public goods without having to move. They just opt out of all or part of the government bundle. Crypto-secession is when the new bundle of local public goods is organized, coordinated and delivered through blockchain technology.

What does this mean in practice? An example of such emergent private governance of local public goods might occur at a local or regional level where a group of citizens create a pooling mechanism of social insurance, energy grid, or asset titling management through smart contracts, decentralised applications and distributed autonomous organisations.

This is more likely at the local, regional or city level than that of a nation state because of set-up costs and self-selection. We expect that the adoption of blockchain technology for governance will be a bottom-up phenomenon beginning with small groups.

Blockchains and property rights

Blockchain technology may also disrupt the relationship between government and property rights.

A fundamental question in the economics of law is this: Do property rights originate from the state and are then used by market participants? Or do property rights arise from markets and economic activity, and are thenefficiently enforced by the state?

While the former view (legal-centrism) is the most widely held among law and government scholars, public choice and market institutional economists tend to defend the latter (evolutionary) view.

Cryptocurrencies and crypto-assets provide a test of these competing views. It is not obvious what role the state plays in either creating or enforcing the property right claims over these assets.

One argument is that cryptocurrencies and crypto-assets have emerged entirely outside state jurisdiction and instead occupy a new software-enforced constitutional governance realm. In this strong form view, these are native crypto-property rights from which there is a risk of government predation.

An alternative argument is superficially similar, but allows that this parallel crypto-property rights regime has emerged in-the-shadow-of state law and enforcement. Crypto-property rights will remain in the domain of private law only until there are irreconcilable disputes, at which point there will be a role for government enforcement and sanctions.

This distinction about the origins of property rights matters because while governments provide public goods and support property rights(emphasised by the legal-centric school), they also impose costs by accumulating power (emphasised by the evolutionary school). A crypto-property rights regime will test which of these is more significant.

Creative destruction

Governments may also find themselves addressing the effects of creative destruction in a blockchain economy.

Past experience has shown that governments often end up supporting or compensating those negatively affected by new technology. They also end up making complementary investments such as education and workforce retraining.

The risk is that without such government action those who expect to be harmed by the adoption of a new technology may form political coalitions to block or raise the costs of developing the new technology.

Blockchain technologies face substantial hurdles from incumbents and vested interests that might lobby to slow or outright ban uses of the technology.

Governments may find themselves on both sides of creative destruction, seeking to promote the adoption of blockchains for social welfare maximizing reasons, while at the same time being captured by vested interests seeking protection.

Blockchain public policy

The blockchain is an extremely new technology. There is substantial uncertainty associated with its future uses, adoption levels — even its basic economic properties.

But it will be disruptive. And despite the libertarian, secessionist ethic of the blockchain community, government will be involved, for better or worse.The goal for the blockchain community and for crypto-friendly governments ought to be ensuring that this technology can be adopted in a way that benefits citizens, not rent-seekers.

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

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

Australia is a country with enormous potential.

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

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

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

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

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

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

But I should start with the big picture.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This sheer volume of legislative activity is itself damaging.

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

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

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

We should not underestimate the uncertainty this brings about.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Gender reporting requirements are both intrusive and pointless.

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

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

Politics is not the only barrier to red tape reform.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That is, the moral consequences of red tape.

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

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

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

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

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