Month: July 2015

Please, Just Give Us A Real Growth Strategy

Every once in a while something brings the nonsense of daily politics back down to earth.

Last week Reserve Bank governor Glenn Stevens suggested that the slow growth we have seen over the last few years might not be a temporary post-Global Financial Crisis aberration. It might, actually, be the new normal.

Rather than the three or so per cent growth each year we’ve come to expect, we might have to get used to 2 per cent GDP growth.

For Stevens, this lower growth is a hypothesis, not a prediction. But even so it’s a big worry. In the long term, lower GDP growth means lower living standards for everyone. There is nothing more responsible for our historically unprecedented prosperity than our relentlessly growing economy. Growth is critical. Growth is fundamental. A richer society is a happier, healthier society.

Even if your taste in economic philosophy is less free market than mine, growth is the foundation on which government social services are built. Growth pays for the National Disability Insurance Scheme and helicopter flights to Geelong alike.

We can debate how much tax the government should impose. But you can’t tax income that doesn’t exist.

Yet neither party has any idea – let along any proposal, plan or program – for how to boost Australian growth back up to three, let alone four per cent per year. They’re not even talking about it.

Given that the most effective way to bring the Commonwealth budget back to balance is to increase growth (and therefore tax receipts) this silence is all the more stark.

A quick survey of the economic proposals on the political table is disheartening. Labor wants to boost taxes on savings (cracking down on so-called superannuation “concessions”). The Coalition wants to boost taxes on consumption, by raising the GST and imposing it on online and digital transactions. Labor wants to tax greenhouse gas emissions again. New taxes are not pro-growth.

Tony Abbott was widely ridiculed a few weeks ago when he responded to a question on the Greek turmoil by referring to the Government’s grocery code of conduct. This was all very funny but Abbott’s tone-deaf response hinted at the much deeper issue facing the Government: it has no central economic agenda.

That the Government can propose higher taxes and proclaim its desire for lower taxes in the same breath isn’t a failure of messaging, it reveals an absence of purpose.

The deregulatory drive of the Coalition’s first year, as inadequate and insubstantial as it was, is now a memory.

And abolishing the carbon and mining taxes was good. But somebody is going to have to pull the Abbott Government aside and quietly tell them economic management is about more than righting the wrongs of the Rudd and Gillard governments.

What would a pro-growth strategy look like? It’s not like there isn’t any low-hanging fruit for governments to grasp.

Our absurd and anachronistic restrictions on foreign investment should be eliminated. Competition law should be liberalised and reformed to allow firms to take advantage of economies of scale. The four pillars policy – which prevents mergers between the big four banks – is unjustifiable on any grounds apart from populist anti-bank sentiment.

Business formation is a proxy for economic dynamism. We need regulatory and workplace law to encourage business start-ups, rather than hinder them.

Some of our largest and most potentially-innovative sectors are held back by bureaucracy and regulation. A pro-growth political platform would have healthcare reform at the centre. Innovation policy needs serious change so innovators can bring ideas to market sooner.

And given the importance of education to growth it is embarrassing that the debate over education policy has devolved into a squabble over a shrinking pool of government money. The last big idea implemented in education was the introduction of HECS in 1989.

A pro-growth platform would liberalise Australian trade barriers without waiting for multilateral or bilateral trade deals to endorse them.

And a pro-growth platform would look at the teeming mass of skilled and unskilled labour around the world and see opportunity, rather than threat. Economic powerhouses have been built on immigration. Australia, with our abundant space and stable institutions, is uniquely placed to attract their entrepreneurial energy.

The economist Mancur Olson once described the progress of human society as an accumulation of special interests who defend the status quo. A country slides into stagnation as more and more groups grab privileges that hold back necessary structural change.

Olson’s is a pessimistic story. Let me amplify that pessimism. Australian policy debate is constrained most by the tyranny of the status quo – a refusal by the political class to consider anything but the most moderate, marginal adjustments to existing policy settings.

It’s obvious that Canberra still believes it has the broad strokes right. After all, they think a grocery code of conduct counts as reform.

Perhaps in the parliamentary triangle it looks that way. Right now, all special interests are being nicely catered for. Rents are sought in an orderly fashion.

But, from outside Canberra, it looks like the economy is slowly grinding into stagnation, and our political class is apparently powerless to do anything about it.

Hockey’s ‘Grand Deal On Tax’ Is Just Wishful Thinking

Joe Hockey is looking for a “grand deal” between government and the community on tax reform. On Wednesday last week he addressed a PricewaterhouseCoopers audience calling for a discussion about big, long-term changes to the tax system that might set us up for coming economic changes.

There’s no reason to doubt his sincerity. Hockey seems genuinely interested in the structure of the tax system. He was recently speculating whether the GST has a future in a global economy, where transactions are digital and borderless. It’s not hard to imagine the blue sky conversations he’s enjoyed with Treasury boffins where they ponder such imponderables.

But his hope for a grand deal on tax is folly. Tax reform is easy to talk about. It’s very hard to implement. It’s even harder to implement in a way that prevents the political system from undermining the virtues of the reform in question. And it’s almost impossible to implement when your government has no political capital.

Australian governments levy more than 100 separate taxes. Each of these interact in complicated ways, introducing incentives for us all to rearrange our affairs, to work, spend and save differently. No real-world tax is perfect, perfectly fair or perfectly efficient. They all bias economic activity somehow. (Sometimes this bias is intentional. So-called “sin” taxes are designed to stop us buying the product that is being taxed.)

Over time, governments have amended the system to reduce the most obvious biases and distortions. Many of those policies that are today fashionably described as tax loopholes or concessions exist because, in their absence, some activity would be penalised.

On The Drum last year, for instance, Alan Kohler criticised dividend imputation for making Australian investors obsessed with collecting dividends. But if we didn’t have it, income earning through corporate investment would be taxed twice – first in corporate tax, then when it is returned to investors through income tax.

The tax system is an evolved formula that reflects decades of lessons, errors and political compromises.

So designing a more efficient tax system than what we have now is relatively easy. Everyone has their own ideas. Yesterday John Daley and Brendan Coates of the Grattan Institute were pushing for property levies. NSW Premier Mike Baird proposed a 50 per cent increase in the GST. Tony Abbott likes that one.

But there’s a big difference between tax design and tax reform, as the Harvard economist Martin Feldstein noted four decades ago. Tax systems can be designed on a blank sheet of paper. But tax reform has to be done in an existing political system, underpinned by existing political institutions, coordinated with existing political compromises, and against the backdrop of a welter of political interest groups with political influence and media friends.

All that politics inevitably leaves its mark. All economic reform is the result of bargaining between the most powerful interest groups. What looks like a beautiful, clean, theoretically-efficient tax on paper is distorted and damaged when the political class try to enact it. Not all laws come out looking like firmly-cased and richly-coloured sausages. Sometimes what falls out of the legislative meat grinder is just a coarse pile of mince and broken pieces of pig intestine.

Hockey should know this. Remember the mining tax? The idea of a resources rent tax was, as so many economists said at the time, an elegant and efficient tax compared to the royalties system. But imposing such a tax on top of the Australian landscape was, it turned out, a hopeless task.

First of all, the mining tax was introduced by the federal government. But state governments owned the resources and charged the royalties. So the designers had to work around that problem by crediting back royalty payments. Second, it had to be introduced into an existing landscape where decisions about mining investments had already been made – hence another round of compromises and transitional arrangements.

And all this happened before the Rudd government learned it was not strong enough to resist a publicity campaign by mining companies. The replacement mining tax, introduced by the new prime minister, Julia Gillard, was even worse.

The last real tax reform success was 15 years ago, when the Howard government introduced the GST. But that success is easy to overstate. Parliamentary negotiations meant that large swathes of consumer products now fall outside the GST net. The original intention was that states would eliminate stamp duties on mortgages and other loans. That didn’t happen. And the way the GST is distributed means states bicker over their share and generally act like mendicant clients of an autocratic Commonwealth.

Hockey wants big picture thinking and long-term reform. It is good we have a Treasurer thinking such thoughts. But Hockey is not a theoretician. He is a parliamentarian. And what can be imagined on paper and what can be negotiated in politics are very, very different.

Why We Value The Old School Tie

It’s a very Melbourne thing to be horrified by school fees – and there is much to be horrified about. The fees at Melbourne’s most expensive schools are pushing $30,000 per child.

But take a step back. These big fees are a positive sign of the financial seriousness that society takes educating the next generation. Before we get to discussing equality or standards or choice, let us agree, please, that spending money on education is good.

There’s a real sense in which anti-private school hostility has nothing to do with education, per se, in that some people are richer than others.

What is the hypothetical alternative to wealthy parents investing in their children’s education? That they splurge on holidays and cars? Hand the money over as inheritance? Buy property? Surely we can welcome the money being used to develop human capital.

The returns on education are vast. A better secondary education experience leads to more choice of tertiary education, which in turn can translate into higher earnings over a lifetime.

No wonder parents want to buy as much schooling as they can possibly afford.

Individual students reap most of the benefits from their education. But as education advocates constantly point out, society benefits too. A more educated population is a more innovative, productive, and ultimately prosperous population.

Thus some investment by wealthy parents on private education – over and above what is churned back to them through the taxation system – flows through to society as a whole.

All this makes the hyperventilating about private schooling that forms such a fundamental part of Melbourne’s intellectual life more than a little ridiculous.

In an Age column on Thursday, Julie Szego suggested private schools seem a little like a “con” for those parents who are “bleeding money on private school fees on the assumption this buys their child a competitive advantage”.

Perhaps if you imagine modern Australia as a dog-eat-dog fight for prestige, then every attempt to increase human capital formation looks like a brutal feeding frenzy.

But it’s true: there’s a puzzle here. While private schools get better year 12 results, a whole host of evidence shows that once researchers control for things such as family background, the education level of parents, peer performance and so forth, many differences in results between private schools and public schools substantially decrease. Educated and engaged parents are likely to have educated and engaged kids, regardless of what school those kids are sent to.

So are parents being irrational when they send their kids to private schools? Of course not.

In many ways, by paying for private education, parents are buying their children friends. Who you go to school with matters. It is better have classes with peers that brag about doing too much study than too little. In his new book, Our Kids, social scientist Robert Putnam argues that in the United States peer effects cause a large part of education disparities.

Also, education is about more than test scores. All we know about why parents choose individual schools relates that choice to a school’s values, facilities, extracurricular activities, location, or how nurturing or driven the staff are. In other words, how good a fit it is for their child.

Rather than obsessing about the riches hidden behind the private-school fence, why not focus on how to make public schools more appealing?

Public schools would be more competitive against private schools if governments allowed more variation between schools, granted them more independence, and made it easier for more children to attend schools outside their geographic school zones. Remember, it isn’t just money and test scores driving demand for private education.

The obsession with the most expensive schools ignores those smaller, cheaper private schools blossoming around Melbourne, offering marginal improvements and more choice than that offered by the public system.

Funny how the debate about equality is always focused on the lifestyles of the rich, rather than the living standards of the poor.

The Age reported last week some private schools are taking legal action against families who fail to pay fees owed. But by all accounts private schools go out of their way to be lenient on payment. If you’re going to be in debt to anyone, you’d want it to be a school.

After all, it’s hard to imagine much sympathy for families that, for instance, did not pay a builder for a renovation and were subsequently taken to court.

Such is the moral baggage around private schooling that recouping debt fairly incurred is seen as some sort of ethical violation – yet another black mark against these malevolent institutions.

All that fury, all that outrage, directed towards what? Too much money spent on education?

There’s No ‘War On Wind’, Just MPs Doing Their Job

There was a lot of heat in the debate about the Clean Energy Finance Corporation over the weekend, but not much light.

On Sunday, Fairfax papers reported the Abbott Government had directed the CEFC to stop funding new wind farm projects.

Social media was livid. Tony Abbott was waging a “war on wind power”. How dare the Abbott Government presume to interfere with such a virtuous independent market program to tackle climate change?

That reaction was, to put it mildly, a load of nonsense. The Government’s direction to the CEFC is not unprecedented interference in an independent body. Nor is the CEFC a “market” mechanism. The CEFC is a government program whose funding policies are set by the executive.

Yes, the Coalition wants to abolish the CEFC outright. But it can’t. So the Government says it would rather the CEFC focus on funding innovation rather than established technology. There are a lot of objectionable things in Australian politics. This doesn’t rate.

The CEFC’s enabling legislation – which was written and introduced by the Gillard government and passed without Coalition support – allows the sitting government to do exactly what the Coalition is doing now. As noted in an explanatory memorandum authored by the Gillard government:

It is appropriate that the Government, as manager of the economy and owner of the Corporation, have a mechanism for articulating its broad expectations for how the Corporation’s funds will be invested and managed by the Board.

So each year the government is required to provide the CEFC with an investment mandate direction.

The memorandum specifically nominated “allocation of investments between different types of clean energy technologies” as one of the areas in which ministers might issue a direction.

What independence is provided by the CEFC Act is a requirement that ministerial directions not be contrary to the CEFC’s statutory obligations, and that ministers must not direct or prevent CEFC investments in specific companies. All fair enough.

With these provisions, the Gillard government gave itself the statutory leeway to direct the CEFC’s investment direction. If it didn’t want an Abbott Government to have the same leeway, it should have written the legislation differently. It knew the Coalition was opposed to the CEFC.

Anyway, that discretion is entirely proper. The CEFC is not an ethereal, non-political part of the Australian social fabric. It is the result of a four-year-old political compromise, designed to funnel money into one particular sector of the economy as part of the quid pro quo for theGreens’ carbon tax support.

So it’s a little bit silly to hear (as we did over the weekend) that by changing the CEFC’s mandate the Abbott Government is “picking winners”. That’s exactly what the CEFC was designed to do. The CEFC was designed to pick winners. It was designed to choose investments that it felt were not being adequately funded by open capital markets.

And the CEFC legislation already favours specific technologies. The body is not allowed to invest in carbon capture and storage or nuclear power. Nor can it invest in non-Australian projects. This last constraint seems a little peculiar if you think the CEFC’s ultimate goal is to reduce carbon emissions – a global, not a national, problem. But foreigners can’t vote.

Because it is not driven by the profit motive in a competitive market, the CEFC has to rely on non-market criteria on which to evaluate alternative investments. Right now that is done by these folk – the board of the CEFC. All the Abbott Government’s no-wind mandate does is constrain their criteria some more.

The idea that the CEFC is a “commercial” operation is nonsense. If it makes a profit consistently then it is a good candidate for privatisation. Why should the government own a profit-making financier? Why would it need to?

The CEFC got upset earlier this year when the Abbott Government asked it to lift its investment returns, asking it to “consistently outperform the market by a large margin”. But if the CEFC can’t beat the market with its government support, then the case for its continued existence is pretty weak.

Australia has a long history of government-owned banks like the CEFC – banks designed to push money into politically favoured sectors.

Who now remembers the Commonwealth Development Bank or the Australian Industry Development Corporation? Or the Commonwealth Bank’s Mortgage Bank Department and Industrial Finance Department? Or the joint public-private ventures of the Australian Resources Development Bank, the Primary Industry Bank of Australia, or the Australian Banks’ Export Refinance Corporation?

These banks were abolished or privatised because Australia came to recognise that markets allocate capital better than bureaucrats.

Right now there is a majority in the Senate preventing the abolition of the CEFC.

But it is almost inevitable that one day parliament will end the CEFC. Just as it ended all its other special development banks.

Why Is The Agriculture White Paper Gunning For Supermarkets?

On Saturday Barnaby Joyce and Tony Abbott released the long-delayed Agricultural Competitiveness White Paper.

The Government feels that farm businesses, “especially those of a smaller scale”, are vulnerable to “anti-competitive market behaviour or unfair market practices”.

So they want to establish a new commissioner within the Australian Competition and Consumer Commission to make the ACCC more “farm savvy”.

Yes, I admit this all sounds pretty dull and bureaucratic.

But official government white papers have to be coy. We don’t. The Abbott Government is really talking about a regulatory crackdown on Coles and Woolworths – the twin spectres haunting Australian retail and agriculture.

The journalist Malcolm Knox describes the two companies as “Supermarket Monsters”. They are anti-farmer, anti-competitive, oligopolistic, bullying, overbearing, and so forth.

Indeed, no hyperbole has been undredged in the rhetorical battle against Coles and Woolworths. Last year Bob Katter even compared the installation of traffic lights in a north Queensland town near a Woolworths outlet to the “Norman Conquest”.

How did discussion over the relationship between farming and grocery retail in Australia become so unhinged? And why is the Government indulging these fantasies – pushing the ACCC into a battle with Australia’s supermarkets?

This is what happens when agrarian socialists team up with foodies.

We’re in the middle of a sustained price “war” between the two major supermarket chains in Australia. The battle is mostly waged around private labels – the supermarkets’ own branded cheap products that they have more efficiently integrated into supermarket supply chains.

The opening salvo of this war was the announcement by Coles in January 2011 that it was going to cut its private label milk down to $1 a litre. (It’s tempting to write the “infamous” announcement, but the idea a basic consumer product price cut could be both famous and bad just shows how batty the supermarket debate has become.)

That was four years ago. Since then, the retail contest has been joined by Aldi and Costco, two firms pushing the prices of groceries lower again. Aldi’s German cousin, Lidl, the fourth largest retailer in the world, is set to enter Australia as well.

Changes to grocery markets have been single-mindedly in favour of consumer interests. Cheaper goods, more availability, more competition, and, with the increasing availability of online shopping, incoming technological change. All good things.

Is this price and service competition hard on producers? No doubt. But the Agriculture White Paper gives the political game away. The supermarket’s much fretted over market power and industry dominance is in comparison to the diverse and diffuse farming sector: “The relatively small, independent nature of farming means that farmers can be at a commercial disadvantage relative to buyers.”

If a power imbalance is the problem, the solution surely is to continue the consolidation of farm operations that has been going for decades. Yet, as Bernard Keane pointed out on Crikey yesterday, the White Paper is so enamoured by the romantic image of the family farm and the Nationals heritage that it couldn’t encourage such corporatisation.

This is the true heart of the supermarket debate: a romantic vision of small family farming clashing with consumer demand for ever cheaper and more convenient groceries.

Anyway, if you remember it wasn’t so long ago anti-supermarket activists were concerned grocery prices were too high.

In 2008 Kevin Rudd launched GroceryChoice – Labor’s policy to tackle the Coles and Woolworths menace. GroceryChoice was a website that compared the prices of a basket of goods at the different outlets. The goal was to help consumers navigate the apparently turgid waters of retail competition.

The irony was that according to GroceryChoice’s calculations, sometimes Coles was cheaper than Woolworths, sometimes Woolworths was cheaper than Coles, usually Aldi was cheapest than either of them … but if you wanted to save on your grocery bills you should almost never, ever, shop at an independent supermarket.

So, yes, GroceryChoice empowered consumers. It empowered them to rely more on Coles and Woolworths. This was a classic populist own goal. The website was shut down within a year.

Now the concern has seamlessly changed from Coles and Woolworths being too expensive to a concern that Coles and Woolworths are too cheap.

In his book Supermarket Monsters, Malcolm Knox writes about supermarkets in trenchant, morally-laden terms. He suggests the Australian population is either wary or openly hostile to Coles and Woolworths. Those who do not shop there are “conscientious objectors”. He throws every charge he can at the two companies, hoping some will stick.

In this interview with ABC’s PM program, Knox clarifies his basic economic objection: having pushed prices down, Coles and Woolworths might one day push consumer prices up. They might beat all those new competitors, corner the market, abandon their cutthroat competition, and decide to jointly exploit customers. One day $1 milk will be hiked to $5 milk.

Speculating about the future is a fun parlour game. Yet right now, Australia has what looks like an incredibly competitive and dynamic grocery sector pushing prices down, attracting new entrants, and obviously benefiting customers.

The idea that the Abbott Government wants to unleash the competition regulator onto this unambiguously competitive market is absurd.

The end of history … in Australian universities

With Stephanie Forrest and Hannah Pandel

Executive Summary: Undergraduate history degrees in Australia fail to teach fundamental aspects of Australia’s history and how Australian liberal democracy came to be. Instead, they offer a range of disconnected subjects on narrow themes and issues—focusing on imperialism, popular culture, film studies, and ethnic/race history.

This report contains the results of a systematic review of the 739 history subjects offered across 34 Australian tertiary institutions in 2014, including 34 history programs and 10 separate ancient history programs.

Only 15 subjects out of 739 subjects surveyed covered British history, and of these, 6 were principally concerned with twentieth century British history—that is, the history of Britain after the colonisation of Australia.

Only 10 of the 34 universities surveyed offered subjects on the history of Britain as part of their history programs, even though Australian society is founded on British institutions. By contrast, 13 offered film studies subjects as part of their history programs More universities offered subjects on the history of popular culture (8) than offered subjects on intellectual history (6).

The report also ranks universities depending on how closely they adhere to the Oxbridge model of historical comprehensiveness. Only the University of Sydney, Macquarie University and Monash University come close to the Oxbridge model. Some very small and new institutions — such as Campion College — rank as well on this measure as large and well-established universities like the University of Melbourne.

There is also a tendency for many smaller universities to offer subjects exclusively on Australian and twentieth century history, thus promoting a narrow and short-sighted view of history. Undergraduate history informs the next generation of historians, the next generation of history teachers, and their future students. This report raises concerns that a new generation of Australians will have a narrow and fragmented grasp of our heritage, and lack an understanding of the institutions that have made Australia free and prosperous.

Available in PDF here.