ABC The Drum – Page 11

Hockey: The Moderate Man Forced To Be Dry

There’s a revealing story in the new Joe Hockey biography by Madonna King – revealing not only about the Treasurer but about the Government of which he is a senior member.

In 2001 Hockey was minister for financial services in the Howard government. It was a junior ministry but one that gave him responsibility for the Australian Prudential Regulatory Authority, and, through it, the stability of Australia’s banks and insurance companies.

So it was Hockey in the hot seat when HIH, the second largest insurer in Australia, went into liquidation in March 2001.

The HIH liquidation meant that thousands of Australians were suddenly uninsured.

Hockey was informed that HIH’s losses could have been up to $8 billion. He was invited into cabinet to explain what was going on. John Howard asked him how the government should react.

“We should step in,” Hockey said.

King says the cabinet meeting descended into a debate about the desirability of bailouts.

Howard and Peter Costello were the most opposed. They spoke of the dangers of moral hazard – creating a belief that private companies were implicitly guaranteed by the government. They noted that in 1997 their Wallis inquiry into the financial sector had warned against bailing out private firms.

On the other side of the argument were Hockey and the young minister for workplace relations, Tony Abbott. HIH was exceptional circumstances. King writes that “many of those now facing ruin were Liberal Party stalwarts who were practising self-sufficiency, and funding their own lives”.

Hockey told cabinet: “These are our people.” HIH’s customers were Howard’s battlers.

King isn’t the first person to have recorded the cabinet machinations over HIH – Tony Boyd had them in a story in April last year.

But in King’s biography they’re more particularly informative because they emphasise – as the entire book does – that Hockey is a quintessential Liberal moderate.

On almost every major issue that King records Hockey takes the moderate side.

When Hockey was minister for tourism Qantas came to the government asking for regulatory relief to increase its foreign ownership. “I wrote to Cabinet, basically, over my dead body,” Hockey recalls.

King writes that liberalism for Hockey is about individual rights, parliamentary democracy and – this is the crucial one – “a commitment to improve society through reform”.

It’s striking how much the Abbott Government is heavily populated by moderates. Hockey and Abbott are moderates. (That Abbott is no free market ideologue is long and well attested, but best shown by his paid parental leave scheme.) George Brandis is from the moderate wing of the Queensland liberals. Christopher Pyne is a South Australian moderate.

Yes, the Government has its share of dries – Andrew Robb, for one, and Mathias Cormann.

But this team is strikingly different from the previous Coalition government. Howard and Costello had serious dry credentials.

Howard was Malcolm Fraser’s last treasurer and tried to drive that government towards liberalisation and deregulation – a direction Fraser was unwilling to go. When the Liberal Party went into opposition Howard was affiliated with various dry groupings.

Costello’s dry credentials were even stronger than Howard’s. He was a founder of the HR Nicholls society, a group dedicated to pushing for industrial relations reform. Costello got Liberal endorsement in a sweep of moderates for the New Right in 1989.

Of course, Howard and Costello’s dry pedigree did not stop their government from being relatively heavy taxing and big spending.

And despite Hockey’s earlier views, it’s now his policy to remove all the ownership shackles from Qantas.

People can change, of course. It’s easier to be an airline nationalist when you’re tourism minister than treasurer.

But nor does the 2014 budget look like something moderates would produce – with its harsh welfare changes, market-oriented university reforms, and abolition of dozens of government bodies.

King’s book provides some help here.

The key to understanding the budget is the Medicare co-payment – or, more specifically, the Medical Research Future Fund the co-payment is to support.

Media reports of the Hockey biography have focused on the description of the fund as “the sunshine that could wrap the budget coverage in the warmth its authors believed it deserved.” The implication is that the fund is as much public relations as policy; a softener for the budget’s hard edges.

But in context King makes it clear that Hockey, and his Government, does in fact believe that the Medical Research Future Fund is a substantive policy reform. It will bring long term “structural change”. Hockey told his biographer he came up with the idea of investing in health while reflecting on 19th century Sydney’s investment in seawalls.

This is too corny to be entirely fiction. It is seems it is genuinely his belief that Medicare’s long term sustainability will be ensured by a massive government research body. This is hardly the dry-as-dust approach to Medicare that has been so widely condemned.

King may be exaggerating Hockey’s moderate instincts. Her book is incredibly positive and flattering. Biographies often tell you more about their author than their subject.

But the overwhelming impression given by the Hockey biography is of a Liberal moderate assuming a role that demands aggressive dryness.

Politics, Not Policy, Will Decide Who Gets Bailed Out

What can we do about “too big to fail”?

The interim report of the Commonwealth’s Financial System Inquiry, chaired by David Murray and released last week, spends a fair bit of time talking about this puzzle.

“Too big to fail” describes financial institutions, mostly banks, which have become so large and so deeply integrated into the financial system that if we let them collapse they would take everything else with them.

If a corporation is too big to fail, then, it follows, taxpayers have to bail them out.

It’s quite a problem. A market economy is supposed to be dynamic, full of entries and exits. Firms that add economic value thrive. Those that do not go broke.

So bailing out failed companies makes the economy less efficient. More gallingly, it redistributes money from the poor to the rich. And it creates “moral hazard” – a belief by management that ultimately they won’t have to pay for their mistakes.

Moral hazard is a particularly severe problem for banks. Banks trade on risk. A bank’s basic job is to transform short-term highly liquid deposits into long-term extremely illiquid loans. Too much of the latter will prevent redemption of the former.

Too big to fail encourages banks to make riskier loans. Why wouldn’t they? They’re not the ones bearing the cost of failure. Taxpayers are.

So it would be great to get rid of too-big-to-fail. Or at least limit it somehow. The Murray Inquiry has a few ideas: higher capital requirements for bigger institutions, for instance, or new procedures for when banks do fail.

But the question isn’t what should we do about too-big-to-fail but what can we do about it.

And the answer to that question is almost certainly nothing.

Because no matter what the Murray Inquiry recommends – no matter what policy the Government or Reserve Bank or Australian Prudential Regulatory Authority imposes today – the decision of which firms to bail out and which to let fall will be made by the policymakers of the future, according to their own whims, and mindful of political, not economic, considerations.

Simply put, there are no ways to credibly constrain future governments from deeming an institution too big to fail.

Nowhere is that clearer than in the United States.

After the savings and loans crisis of the late 1980s, American policymakers decided to put some limits on the availability of government bailouts. The result was the Federal Deposit Insurance Corporation Improvement Act 1991. This law was supposed to set rules under which an institution would be considered too big to fail.

But those carefully constructed limits fell apart when the Global Financial Crisis hit. Consumed by panic, the American government bailed out not only banks but money market funds and Fannie Mae and Freddie Mac – two bodies that were theoretically and legally owned by private shareholders but were implicitly backed by a government guarantee.

Now American policymakers say they’ve come up with a new system supposed to constrain too big to fail – the 2010 Dodd-Frank Act. Will it work? Don’t bet your house savings account on it.

We’re lucky in Australia to have gone the better part of a century without a high-profile bank failure. But we’re hardly immune to the political pressures that have created the too big to fail problem.

One predecessor of the Murray Inquiry, the Fraser government’s Campbell Committee, argued the responsibility of the government is to keep alive the system as a whole, not prop up individual institutions. Banks should be allowed to go under.

But who gets bailed out is a decision made by politicians not economists.

In 1990 the Farrow Group – a Victorian group of building societies whose most prominent member was the Pyramid building society – got into serious trouble. In July 1990 John Cain’s Victorian government gave it the bailout it wanted, guaranteeing more than $1 billion of unsecured deposits. (The full story is told in this paper).

Was the Farrow Group too big to fail? The Cain government said it was – it was “systemically significant”, to use our contemporary econocrat buzzword.

Systematic significance is a term of art, and not a very clear one. Since the Global Financial Crisis systematic significance has become a totem of financial regulation. The idea is that too big to fail isn’t just about size, but more about integration.

There’s been a cottage industry of academics trying to figure out how to tell which institutions are systemically significant.

No doubt they’re all doing great, insightful work. But the fact remains these studies of systemic significance are just a lot of after-the-fact reasoning.

It was policymakers – not scholars – who came up with the idea that some institutions were just too interconnected with the financial system to collapse peacefully.

Like pornography, politicians and bureaucrats know systemic significance when they see it. The Victorian government just knew the Farrow Group was too important to collapse. The American Federal Reserve just knew that they had to bail out the private money market funds.

Yes, systemically significant institutions get bailed out – but their significance should refer to the political system, not the financial system.

No matter what the Murray Inquiry decides, in the middle of a panic political expedience is going to beat carefully crafted rules every time.

The Lessons Abbott Should Learn From Victoria

Tony Abbott ought to be watching Victoria closely.

His problem – a disgruntled former Liberal controlling the balance of power and holding the Government’s agenda to ransom – is exactly what Denis Napthine has had to deal with for the past year.

In 2010 the Victorian Coalition won government with a one-seat majority. Such a margin would have been perfectly serviceable if it wasn’t for the fact that Geoff Shaw, the Liberal member for Frankston, was accused of an entitlement rort, fell out with the Speaker, then fell out with his party, and then fell out with the entire Parliament.

Since then he has been creating havoc. Shaw has a single agenda – he’s anti-abortion – but beyond that he’s been mainly focused on creating problems.

So yes, Shaw is a lot like Clive Palmer – the man who was a climate sceptic one day and an Al Gore climate ambassador the next.

In June the major parties finally ganged up on Shaw and voted to suspend him from Parliament.

Obviously Palmer and his three senators won’t be suspended or expelled, even if the Abbott Government wanted to do such a fundamentally undemocratic thing.

The first and most important lesson of Victoria is simple: Abbott needs to go to an election as soon as he can.

When the Shaw crisis came to a head last month, Napthine said he would have liked to call an election six months ago. Spill the entire Parliament. Let a ballot resolve the crisis.

But in Victoria the key mechanism to resolve parliamentary instability in the Westminster system – an election called by the government leader or forced by the head-of-state – was eliminated when the previous Labor government introduced fixed terms.

Abbott doesn’t have that problem. And his problem is in the upper house not the lower. He can play the double dissolution card.

This would be a drastic strategy of course, especially because the polls make it look unappetising.

But the alternative may be a lot worse.

The new Senate has sat a single week but there must be Coalition hard heads thinking about the future.

So let’s play this out. (As a hypothetical, mind you, not as a prediction. Who’d be so reckless as to make predictions about the 44th Parliament?)

The carbon tax is likely to be repealed. But almost every piece of ancillary legislation to that repeal has been held up or explicitly rejected by the balance of power senators. They won’t abolish the Australian Renewable Energy Agency, they won’t abolish the carbon tax compensation tax cuts, and they won’t abolish the Clean Energy Finance Corporation.

Sure, in themselves these programs are subordinate to the main game. The Government gets its win from repealing the carbon tax.

Yet Palmer is certain to repeat his theatrics with every moderately controversial bill. The GP copayment. The medical research fund. The welfare reforms. University deregulation. Those dozens of agencies the Government has promised to abolish. Why wouldn’t Palmer make trouble? What else has he got to do with this time in parliament?

And that’s just Palmer and his senators.

Ricky Muir, Bob Day, David Leyonhjelm, Nick Xenophon, John Madigan – none of them are fully signed up to the Coalition’s budget, let alone their broader program.

We could very easily get to Christmas without the substance of the May budget having been passed.

Could the Abbott Government negotiate its way through to parliamentary stability? Perhaps. But recall that last week wasn’t the first time the Abbott team’s negotiating skills have been wanting. The Coalition failed to negotiate minority government in 2010.

These are the Abbott Government’s parliamentary problems. The polls are a worse problem.

Before last week the mantra has been that it is a long time until the next election – polls change. Yet after last week that mantra sounds a little desperate.

More importantly, the Victorian saga shows that voters blame anarchy in parliament on the government. It’s not fair, of course – the Napthine Government is governing well enough. Yet the parliamentary drama overshadows everything.

It is certainly true that if Abbott went to a double dissolution, voters may give him an even more unpredictable parliament, stuffed full of Palmer senators and micro parties. If so, then the Coalition will just have to grin and bear it. Such is democracy. (For that matter, Shaw could be returned in Frankston, and the Victorian Parliament might be hung again.)

But what’s the alternative?

Laura Tingle wrote in the Australian Financial Review on Friday that “cornered ministers have resorted to arguing that no matter how untidy things were at the moment, the Prime Minister will get to the end of this year”.

An earlier rallying cry was that the Government just needed to get to July 1 when the senate changed over. Before that, the Government just needed to get to Christmas.

This is what governments say when they don’t have a Plan B.

Maybe Palmer will calm down. Maybe he’ll play ball. But remember the Gillard government’s hope that they would eventually find “clear air”?

They never found it.

Star Wars Cantina: Patronising Politics Strikes Back

“Senator school”, as it’s colloquially known, happens every time there is a new crop of senators. It’s an induction process.

The two day course takes new senators through the tedious nitty-gritty of work in the red chamber. Education in parliamentary skills is a serious thing.

Usually senator school passes without comment. There’s a (slightly shorter) program for new members of the lower house as well.

This year, however, senator school is newsworthy. It’s been talked about everywhere. The program has been leaked to Business Spectator. AAP wrote, “There won’t be any finger painting but some may have a nap when a dozen new politicians head to Canberra for ‘senator kindy’.”

It’s all incredibly patronising.

The only reason we’re hearing about senator school is because six of the new senators (out of twelve new senators in total) aren’t from the political class.

The nickname that’s been given to the new senate crop is the ‘Star Wars Cantina’ – suggesting the independents are a raucous gathering of aliens, rather than the usual well-disciplined political natives.

(Sometimes the clownish Joe Bullock has been included in the cantina, cast by the press as an honorary independent after he disgraced himself, and Labor, at the election.)

One of the most common complaints in recent years about Australian politics is that it is too clubbish – politicians are drawn entirely from the ranks of political staffers, lawyers, party officials and union reps.

John Howard made this argument last month, decrying the rise of politicians “whose only life experience has been politics”. You hear it from Malcolm Fraser often too.

Here we have, now, a home builder (Bob Day), an agri-business owner (David Leyonhjelm), a military police officer (Jacqui Lambie), a civil engineer (Dio Wang), a footballer (Glenn Lazarus) and a sawmill manager (Ricky Muir).None are ex-staffers. Lambie has the most first-hand experience in the practical business of politics. And all that is a stint volunteering for Labor senator Nick Sherry.

Far from unrepresentative swill, these independent senators are not a bad cross-section of the community. Compared to the rest of the incoming senator cohort they’re much more representative – the other six new senators from the major parties are former union bosses, former mayors, former party directors and former chiefs of staff.

This isn’t the first time the press has treated independent senators as if they didn’t belong.

In 2005 the Canberra Times reported that Steve Fielding was the only incoming senator going to senator school.

A few days later the paper issued an embarrassed correction that, no, all 15 new senators in Fielding’s cohort had to attend.

In other words, the press only find senator school interesting when the aliens take it.

Odgers’ Australian Senate Practice, the manual by which the Australian senate operates, is more than 900 pages long. How many major party senators do you think have read that tome? That’s why politicians have staff. That’s why the parliament has clerks.

Yet we’re being asked to laugh at the entirely reasonable statement by Dio Wang that the details of senate practice are “pretty boring… For things like this it’s always better to learn through practice.”

If we assume that politicians, being human, have limited time for self-education, perhaps it would be preferable they study unfamiliar policy areas rather than the details of senate procedure.

Recall that the new senators aren’t given money for staff and support until they officially enter the senate.

Major party senators have been coddled and cared for by their party organisations while they waited to take their seats.

The micro-parties and independent senators have had to get on with their lives. They’ve had businesses to run and livings to make, while trying to fend off the Canberra press gallery looking for a colourful sound bite to fill out dull copy.

Ultimately, the condescension with which the new senators have been greeted is another attack on their legitimacy to sit in parliament.

I argued in The Drum in April that the new senators do in fact represent the will of the voters; the will of the nearly quarter of the Australian population that chose to vote against the major parties, Greens included.

The major parties are deeply worried that they’ve lost control over their third senate spot. Don’t imagine it’s anything more principled than that.

That raw political calculation explains why the majors have been so patronising towards their new colleagues.

So what explains the media’s snobbery?

There’s a reason we call it a political class. When threatened by outsiders, they protect their own.

Shining A Light On The Dangers Of Royal Commissions

Last week, the Senate Standing Committee on Economics called for a royal commission into the Australian Securities and Investment Commission and the Commonwealth Bank over the financial fraud scandal. (You can read the committee’s report here.)

In other words, the key recommendation of one parliamentary inquiry is that the government should establish an even bigger inquiry.

Royal commissions have an almost magical, mythical status in Australian politics. They have become less a means to an end, and more an end in themselves.

There are already three royal commissions ongoing at the Commonwealth level: one into institutional responses to the sexual abuse of children, another into the Rudd government’s home insulation scheme, and the third into trade union governance and corruption.

It’s been 20 years since there have been this many commissions going at the same time.

Yet there’s only one real public policy reason to choose a royal commission over any other form of inquiry – their coercive powers.

Royal commissions awkwardly span the gap between executive government and the judiciary. They’re formed by the government of the day according to its whim. See, for instance, the royal commission into pink batts – an incredible precedent for new governments to punish the policy decisions of previous governments.

But while royal commissions are creatures of the executive – that is, driven by politics – they’re also empowered with the sort of coercive powers only granted to apolitical courts.

They can summon witnesses. They can compel those witnesses to produce documents. They can force testimony – even self-incriminating testimony, eliminating the right to silence in the process. They can apply for search warrants. (In the Northern Territory, no warrant is even needed. Any member of a commission can enter any building they want and take what they please.)

As the Law Council of Australia told a 2009 inquiry into royal commissions, the Commonwealth Royal Commission Act “removes or significantly dilutes the traditional common law protections usually afforded to witnesses”.

This makes them exceptionally powerful. Even for undoubtedly worthy subjects of investigation (and who could question the virtue of an inquiry into institutional responses to child sexual abuse?) it should be of serious concern that royal commissions throw basic legal rights out the door. Even the worst people have rights.

Do these coercive powers uncover ‘hidden truths’, as many advocates of royal commissions suggest? Maybe. But royal commissions have lower standards of procedural fairness than courts. They can admit hearsay, for instance. They are as likely to uncover untruths as traditional courts are to miss hidden truths.

In his book Royal Commissions and Public Inquiries in Australia, Scott Prasser distinguishes between royal commissions whose purpose is to advise on policy questions and those that are inquisitorial; that is, those which investigate and expose wrongdoing. All three current commissions take the latter form.

But we already have elaborate and expensive law enforcement and judicial systems to investigate, expose, and finally prosecute wrongdoing.

Every inquisitorial royal commission is a tacit admission that the existing legal system isn’t working. More prosaically, every inquisitorial royal commission should be focused on law-enforcement failure.

One survivor told the child abuse royal commission that “the police don’t listen to children”. Another was told by police “we can’t do anything” and that the issue of sexual abuse was too much of a “hot potato”. Whatever comes out of that royal commission, changes in the way the police handle abuse allegations are likely to have the most long-term importance.

While the ability to coerce testimony may be the only real policy reason to form a royal commission, there are a whole lot of political ones.

Nobody ever made headlines by calling for an interdepartmental review. When a government appoints a royal commission, it is trying to tell the public that there is no limit to how seriously it takes a given issue. The government looked at its menu and chose the crown jewels – a royal inquiry.

When the royal commission into union corruption was announced earlier this year, the unions were quick to denounce it as a witch-hunt.

The metaphor was more correct than was perhaps intended. Once formed, royal commissions are impossible to control.

Usually governments have a good idea about the result they’ll get from an independent inquiry. They write the terms of reference. They choose who heads the inquiry. Did anybody doubt that the Gillard government’s inquiry into media regulation would propose new media regulation?

By contrast, the Fraser government wouldn’t have expected its royal commission into the Federated Ship Painters and Dockers Union to delve into corporate ‘bottom of the harbour’ tax evasion schemes. Royal commissions are fishing expeditions, and heavily armed ones at that.

So why a royal commission into ASIC and the Commonwealth Bank?

ASIC is one of our most heavily empowered regulators (I’ve been banging on about this in the Drum for a while, for instance here, here, here, and here). If any regulator deserved to have its feet held against the fire, it would be ASIC.

Yet, as the Coalition Senator David Bushby pointed out in a dissenting appendix (page 457 onwards), we already have an inquiry looking at the structure of financial regulation.

The Financial System Inquiry isn’t draped in the Queen’s regalia, sure. It can’t coerce testimony.

But isn’t that a good thing? The cultural status of the royal commission has obscured its very real dangers to the rule of law and civil liberties.

Tides To Turn For Shorten On Debt, Boats And Tax

Bill Shorten is romping ahead in the polls right now, but being in opposition is a long-term goal and the tables will turn on three big policy areas before the next election, writes Chris Berg.

Bill Shorten has one of the worst jobs in Australian politics – first opposition leader after a loss of government.

Just ask Brendan Nelson, Kim Beazley, Andrew Peacock, and Billy Snedden.

Yet, thanks to the Government’s disastrously bad selling of the budget, Shorten has an impressively winning poll position. If the election were held tomorrow, Labor would romp it back in.

Unfortunately for Shorten there are no federal elections scheduled for tomorrow.

Opposition is a long-term game – almost certain to be longer term for Shorten than most, as Labor’s new party rules make it virtually impossible to spill him before the next election.

In the Sydney Morning Herald on Sunday Mark Latham claimed the “right-wing hunting pack” is targeting Shorten because he is too successful. (This is the sort of canny judgment that made Latham such a success himself.)

But polls go up, polls go down. If we look out two years from now to the next election, Labor’s political profile is very different. Where Shorten looks strong now, he is vulnerable in 2016. Where he looks vulnerable, he is actually quite strong.

Let’s take the big issues of last year’s election: debt, boats, and the carbon tax.

The debt is Shorten’s biggest weakness.

This seems paradoxical, perhaps, because the Coalition’s budget – that is, its solution to the debt problem – is deeply unpopular. According to an Essential Poll earlier this month, just 23 per cent of voters think that Labor should support university deregulation. Just 27 per cent think Labor should support the pension changes. Just 32 per cent think Labor should back the Medicare co-payment.

These are gimmes for Shorten. Yet opposing the specific proposals will do little to rebuild Labor’s economic reputation.

Wayne Swan destroyed Labor’s standing on the economy when he was unable to wrestle the budget back into the black. Year after year Swan claimed that the budget was returning to surplus. Year after year we got deficits.

It’s easy to free ride on public dissatisfaction with government policy. Voters might be hostile to the Coalition’s individual budget measures but voters are not stupid. Shorten has to suggest – perhaps just hint, allude, imply, give us a knowing wink – that there could be a better way to fix the deficit.

That’s the difference between being a time-serving opposition leader and a viable potential prime minister.

If Shorten is strangely weak on the budget, he is strangely strong on boats.

Labor has careened from one side to another on the asylum seeker issue. Last week a few in caucus tried to engineer a shift back to the left again. Quite apart from the morality and practicality of the policy, Labor looks hopelessly divided and confused.

But will it in two years?

Right now, Labor will be secretly crossing its thumbs that the boats have, in fact, stopped, and stay stopped. It is in Labor’s interest to get boats off the front page; to remove asylum seekers from the centre of Australian politics. A weakness isn’t a weakness if nobody is talking about it.

For Labor, the carbon tax is neither vulnerability nor strength.

This is strange, perhaps, because the carbon tax has been one of the defining policies of the last decade. Elections have been won and lost on it. Prime ministers and opposition leaders have fallen at its altar.

Yet much of the heat dissipated from the carbon tax debate after it was introduced. Kevin Rudd smothered what remained when he announced he would transition from the tax to an emissions scheme. This is a rare example of trying to confuse voters as a deliberate political strategy. (I outlined the farcical nature of this announcement on The Drum when it was made last July.)

Climate activists have tried to respark climate change as a political issue – every once in a while the Climate Institute puts out a poll to try to get momentum going again, as they did yesterday – but realistically the issue is on hiatus. All sides have dug in. It isn’t a positive. It isn’t a negative. It just is.

It is often said that the Coalition didn’t win the 2013 election, Labor lost it.

In other words, it was the Rudd and Gillard government’s faults that were highest on the minds of voters as they faced the September ballot, rather than Tony Abbott’s virtues.

This is true as far as it goes, but those faults were made powerful because of the Coalition’s dogged prosecution of them.

Abbott made the carbon tax into a political liability. It wasn’t before. Same with the boats. And Abbott and his predecessor Malcolm Turnbull made Labor wear its deficit spending.

By contrast, Shorten is just along for the ride. He’s been gifted the budget backlash. He’ll likely be spared the need to take a stand on asylum seekers. And he’s been excused from boldness on the carbon tax debate.

Shorten might be polling well now, but if he wants to be competitive in 2016 he’ll have to be more proactive than that.

True Economic Liberty Means More Open Borders

There are two versions of David Brat, the upstart who defeated House Majority Leader Eric Cantor in the Virginia Republican primary last week.

The first is a professor of economics at Randolph-Macon College in Virginia – a principled libertarian, dedicated to the cause of economic freedom.

Brat describes himself “a free-market guy”, who believes the economy has been badly distorted by regulation. He runs something called the BB&T Program on Capitalism, Markets and Morality. He’s passionately opposed to the mass surveillance program exposed by Edward Snowden. His academic research focuses on the intersection between Christian theology and the market economy.

That’s the first version of Brat.

The second version is different – an anti-immigration warrior for the conservative right. He ran hard against Cantor on the latter’s support for amnesty for the children of illegal migrants.

In this campaign, Brat argued immigration “lowers wages, adds to unemployment, and the taxpayer pays the tab for any benefits to folks coming in.” (Just as the asylum seeker debate is in Australia, the question of amnesty for illegals is a proxy for the broader question about how open the United States should be to migration.)

For these sentiments he received endorsements from conservative firebrands like Ann Coulter – Brat was a candidate “true patriots should support with everything they have” – and Laura Ingraham.

It’s not easy to bridge the divide between the two Brats. There’s nothing “libertarian” or “free market” about an immigration crackdown. Quite the opposite.

The great free market victories over the last few decades have meant goods and capital can move around the world freely. This has raised living standards for everyone, rich and poor.

The last remaining barrier to economic liberty is the free movement of people.

It’s as much a barrier of political philosophy as it is a barrier of legislation. As Brat demonstrates, even some of the most hardcore free market advocates have a blind spot when it comes to immigration.

Yet what could be more respectful of the tenets of individual liberty than allowing individuals and families to travel across national borders to make a better life for themselves?

And what could be more inconsistent than claiming to believe in the morality of liberty but then placing the strictest of possible limits on that liberty?

On The Drum in 2011 I argued that to prevent migration is to prevent the most powerful way to lift people out of poverty. Migration is a big deal economically too. Opening the world’s borders could double the size of the world’s economy, according to one famous estimate.

Yet one of the doyens of free market thought, the Nobel-winning economist James Buchanan, said the hardest essay he ever had to write was on whether governments could justifiably restrict immigration.

There are two objections to larger scale immigration that you commonly hear from the intellectual right. Neither are strong.

The first is that increased immigration is incompatible with the welfare state. In this view, allowing large scale migration is great in theory, but we have generous welfare programs. There’s a risk some immigrants might migrate with the goal of hopping on social security. This argument was made by no less an authority than Milton Friedman.

But it’s almost comically easy to resolve the apparent incompatibility: cordon off welfare programs to new migrants for a certain amount of time. In fact, that’s exactly what we do in Australia (with the exception of refugees, who constitute a small fraction of the total migration intake).

The second objection is migrants may not assimilate to the national culture. This is not helped by the fact that many of the loudest pro-immigration voices are on the left and espouse a woolly sort of multicultural utopianism. But the point of a liberal framework of laws is that people of different values, preferences and beliefs can go about their business while everybody’s rights are equally protected.

And let’s not overestimate the cultural consensus among those born in the developed world. In Australia the Lowy Institute poll has been recording remarkably low support for basic things like democracy for many years.

Yet somehow the Commonwealth endures. As it would with a larger – even vastly larger – immigration intake.

(If your concern is that immigrants might vote for illiberal policies – that is, undermine the liberal legal framework – note that immigration and citizenship are different things.)

Let’s be clear – Brat is more philosophically coherent than 99 per cent of the politicians out there. Any defeat of an established Washington politician is a win. In response to Brat’s attack on immigration, Cantor surged hard to the right on amnesty. Self-interest beats principle.

And even taking Brat’s views on amnesty into account, American politics will be better off with him in Congress rather than a beltway native like Cantor.

Brat ought to be praised for his scholarship on the connection between morality and free markets.

But it’s also time for politicians who proclaim the virtues of liberty to discover its connection with the free movement of people.

Coalition In Murky Waters In Hunt For Online Pirates

One of the quickest ways for a company to cut costs is outsourcing. Even better when you can have the Government do your outsourcing for you.

This is the basic political logic behind the upcoming crackdown on online copyright infringement.

For the last year George Brandis has been hinting at a legislative crackdown on copyright infringement. It wasn’t quite an election promise in 2013, but it was definitely on the cards.

Now nine months into Government the Coalition is reportedly on the brink of announcing its approach. (Momentum for the policy was temporarily slowed by the unfortunate political storm around the budget – it was due to go to cabinet in early May.)

Here’s what we know. There are two proposals being considered, “graduated response” and a website blocking scheme.

In a graduated response scheme – sometimes called “three strikes” – internet service providers are required to penalise their users for pirating material on a scale of increasing severity.

Graduated response has been introduced in a number of countries around the world, including France, New Zealand, the United Kingdom, and South Korea.

Typically the scheme works like this.

Copyright owners notify an ISP that they believe a user has pirated copyright material. The infringing user is initially issued with warning notices by their ISP.

If those warning notices are ignored and the user continues to infringe, more serious consequences follow.

The final punishment is the disconnection of internet service altogether.

Why disconnection? Simply because disconnection is the most severe penalty ISPs can mete out. Their only “coercive” power over their customers is to stop doing business with them.

Under Australian law downloading copyrighted material is not illegal – it is not a crime, in any formal sense. (There are some copyright offenses which are criminal: things like importing, selling, or exhibited pirated material. Basically copyright infringement on a commercial scale. But simply downloading a movie for personal use is not.)

Rather, piracy is a civil matter. Enforcing copyright requires a copyright holder to sue the pirate themselves. But litigation is complicated and expensive. Determining exactly who has pirated a particular film or music track is not easy. Lawyers are pricey.

Litigation has an even bigger cost – to reputation.

American copyright holders did themselves enormous reputational harm earlier this century when they tried to sue the piracy problem into submission.

There were some appalling cases. Take the legal action against this single mother in Minnesota, who was threatened in 2004 with a $540,000 lawsuit after her daughter downloaded some music – a damages bill orders of magnitude larger than her $21,000 annual salary.

Stories like these didn’t just make the industry look greedy – it made them look cruel and vindictive.

Outsourcing the problem to ISPs with a graduated response scheme avoids the costly and controversial need to sue otherwise law abiding citizens.

Better to have the ISPs look like they’re the cruel and vindictive ones.

So unsurprisingly, as Nicolas Suzor and Brian Fitzgerald pointed out in an important 2011 paper, graduated response is counter to basic principles of the rule of law.

Disconnecting someone from the internet is a big deal. It’s easy to forget how integrated internet access is to the modern world. There is hardly a public or private service that does not rely on digital interaction with customers.

Graduated response schemes impose such a punishment on internet users without also granting them the legal protections they would receive if they were taken to court.

For instance, graduated response schemes offer little in the way of due process. Copyright infringement is not always clearly proven. The schemes place the burden of proof on the accused, rather than the accuser. Graduated response can easily become draconian.

And for what? There is no reliable evidence to suggest that graduated response schemes reduce copyright infringement, as one detailed study published in the Columbia Journal of Law and the Arts found this year.

The second proposal the Abbott Government is considering to tackle piracy is certain to be even less effective: requiring ISPs to block websites that facilitate the downloading of pirated material. Websites like the Pirate Bay host torrent files through which people share content.

Never mind that some of that content is “legitimate”. The last decade has conclusively demonstrated that when one avenue for piracy is closed off, another quickly appears. Exhibit A: Napster.

But more importantly, any such policy would come head to head with the Government’s professed support of freedom of speech.

In 2010 Malcolm Turnbull claimed that the previous Labor government’s internet filter was “dead, buried and cremated, and if it shows any signs of revival it will then be exorcised”.

But a policy that blocks torrent websites will be, in a very real way, the internet filter by other means.

A crackdown on copyright infringement was not one of the Coalition’s 2013 election promises. Defending free speech was.

If the copyright lobby convinces the Government to take responsibility for protecting its business model, that promise will be completely broken.

No Vote Of Confidence In ID Laws

Policy change happens when events meet ideas.

And so it is with voter ID laws – the idea that we ought to be required to show formal identification when we vote on election day.

Currently our electoral system is based on trust. Voting simply requires a voter to state their name and have it crossed off a list.

It’s incredibly insecure. Charmingly so. Alongside the sausage sizzle, the old-fashioned electoral procedure is no small part of what creates the romanticism of Australian democracy.

On Thursday, during Senate estimates, the Australian Electoral Commission said it was referring 8000 cases of multiple voting in 2013 to the Australian Federal Police. (Voting more than once, in case you didn’t know, is illegal.)

This is a lot. After the 2010 election, only 19 cases were referred to the AFP.

After the loss of 1400 ballots in Western Australia, the reputation of the AEC – and, by implication, the integrity of the electoral system itself – is understandably shaky. There is a strong political desire to do something about the AEC. Something. Anything.

Hence the political push for voter ID laws, which are supposed to prevent multiple voting. Last month, Queensland introduced its own voter identification laws as part of its electoral reform package.

But voter ID is a non-solution to a non-problem.

Let’s start with the non-problem.

Clive Palmer reckons Australians can “vote 10, 20, 30 times if you like”. A voter could visit more than one poll booth and vote under their own name multiple times. Or they could vote multiple times by impersonating other voters, at the same or different booths.

In each case, they would be abusing the trust system. (A person could also potentially enrol multiple times. But enrolment fraud is much harder to pull off.)

Yet just because a law is occasionally broken doesn’t mean it is an urgent problem.

We know when multiple voting happens because once the election is over, the AEC compares the booths’ lists to see if some names are crossed out more than once.

The large number of multiple voters referred to the AFP this year reflects the fact that the AEC is taking the phenomenon more seriously – for political reasons – not that multiple voting is getting more common.

Sure, 8000 cases sounds like a big number. But 10,000 further multiple votes are recorded simply because of human error by booth workers.

In other words, we’re talking well within the election’s margin of error here.

The vast majority of multiple voting instances – usually above 80 per cent – are attributed to confused elderly voters, who often speak English as a second language or not at all. (This 2009 AEC paper details the findings up until the 2007 election. From the evidence given by the AEC to estimates last week that proportion is unlikely to have changed.) Only a tiny fraction of multiple voters have admitted that they were “trying out the system”. Maybe a few hundred in 2013, spread across 14 million electors.

Others say they were drunk. Okay.

One reason the AFP prosecutes so few multiple voters is because there are so few of them. Another reason is that the problem is just not consequential enough to spend scarce resources on.

It is certainly possible to imagine a scenario where multiple voting could strategically alter election results; to swing tight races and thus steal power. That seems to be the underlying concern about multiple voting.

But the concern is misplaced. In a detailed study for the New South Wales Parliament earlier this year, the University of Sydney’s Rodney Smith concluded that “stealing elections is hard … large-scale multiple voting is highly unlikely to emerge as a problem”. Our trust system might facilitate multiple voting, but such behaviour is easy to detect after the fact. Questionable election results can be disputed.

As Smith pointed out, there is no evidence to suggest that multiple voting is directed towards marginal seats, which is what we’d see if one party was trying to game the electoral system.

But Parliament is about finding solutions to problems, not figuring out whether those problems exist.

So, with the AEC’s reputation at a low ebb, there is a push for a voter ID requirement to eliminate multiple voting. The push is coming mostly from the Coalition.

Voter ID would tackle only one of the ways to multiple vote – the impersonation of other voters. It wouldn’t do anything to stop people visiting different booths under their own name. (Unless of course the lists were somehow digitally tied together and updated in real time. This would be incredibly complex, and it’s not on the table.)

Not every change to an electoral system is necessarily self-interested and anti-democratic. But that’s not a bad rule of thumb.

In the United States, voter ID requirements are used to suppress the vote of traditional Democrat constituencies: the young, poor, and minorities. Those groups are less likely to have and carry appropriate identification.

But voting is voluntary in the US. Australia’s compulsory system means voter ID would create a different dynamic. Those voters who find producing identity documents too troublesome and fail to vote will be fined for not doing so. This punishment to vote may (partly) counterbalance the disincentive of having to show identification.

The Queensland reforms allow voters to show a reasonably broad range of identity documents – not just photo ID. If none are on hand, voters would be able to sign declarations of their identity.

But you can imagine how such new rules will gum up the works on election day. Confused voters sorting through identity papers. Booth workers trying to guide non-English speaking elderly through declaration statements.

What an enormous amount of hassle and complexity to fix a non-problem. Voter ID is yet another bureaucratisation of our little democracy.

Chifley’s Time Bomb 70 Years In The Making

Joe Hockey’s father named his son “Joseph Benedict” after Ben Chifley.

Little did the family expect their child to be struggling with the legacy of his namesake at the most critical moment in his political career.

Hockey’s first budget is haunted by a political bait-and-switch Chifley made way back in 1942 and 1943.

The story goes like this. Wars are incredibly expensive. During WWII, the Australian government inflated the currency and borrowed massive amounts of money. Nevertheless, when Labor took power in 1941, there was still a huge budget shortfall that needed to be addressed.

And like the Coalition today, Labor had made much political capital opposing the previous government’s taxes, particularly those levied on low income earners.

Once in government, the new Prime Minister John Curtin doubled down. When the first uniform tax case came before the High Court (which effectively eliminated state income tax in favour of Commonwealth income tax) Curtin promised the electorate that the Commonwealth’s new power would not be used as an excuse to raise income taxes.

Labor’s no-tax pledge was unsustainable.

Throughout 1942 it became clear to Curtin and his treasurer Chifley that the government had to close their huge revenue-expenditure gap.

There was a war to be fought, so cutting spending was out. Printing money was out too. Inflation was already a problem. There would have to be some additional taxation. And some would necessarily hit those on incomes below £400 per year.

(There was another rationale for higher income taxes being pushed by the government’s young Keynesian advisors: the need to suppress excess consumer spending during war.)

The solution devised by Chifley was a classic example of policy misdirection.

For the previous decade, parliament had been debating whether to introduce a national social security scheme. One of the key questions in this debate was whether it should be funded by general taxation, as Labor traditionally favoured, or individual contributions, as the conservative Lyons government had proposed in the late 1930s.

So when Chifley announced that they would increase income taxes on rich and poor alike, they also announced a “National Welfare Fund” alongside it.

This National Welfare Fund would fund welfare measures like pensions, unemployment relief, child endowments, even health care. The fund is often seen as the launch of Australia’s welfare state.

Unlike a contributory scheme, the fund would be financed by the new income tax increases. But there were two tricks.

First, Chifley said the revenue from the tax increase was specially earmarked for the National Welfare Fund. Thus Labor wasn’t breaking its promise not to increase the burden on low income earners – they would be getting social security for their money. (Think of the fund like our Medicare Levy today.)

And second, most of the great new social services weren’t to start until after the war. Cabinet agreed that only £5 million of the estimated £40 raised would be directed towards immediate social spending. Money is fungible. The rest could quietly be used for the war effort.

As the historian Rob Watts points out in his book The Foundations of the National Welfare State, what looks like groundbreaking Chifley welfare reform was really just a smokescreen for unpopular wartime tax rises on lower income earners.

The Menzies government folded the National Welfare Fund money into general revenue a few years later. (It is good budget practice not to hypothecate specific revenues to specific programs). But the fund remained in name until the 1980s.

The social contract has always been a complex mish-mash of popular mythologies about what the state owes to the citizen. We are still living with the political consequences of Chifley’s clever little political ploy.

His scheme made it seem like the Australian tax system was a quasi-contributory and fully-funded insurance program.

One former Department of Social Security employee summed up this belief well in Green Left Weekly: “In the late ’60s and early ’70s, many applying for the pension would say, ‘I’m only getting back the money I paid into the National Welfare Fund’.”

The National Welfare Fund has long passed into historical obscurity. But the mythology of welfare contributions it engendered remains – one that imagines the welfare state as a giant piggy bank.

In 2014, Joe Hockey has come smack-bang up against Chifley’s fiscal illusion.

Hockey says he wants to end the Age of Entitlement. But welfare measures like the pension feel a lot less like unjustifiable entitlements to those who believe they’ve already paid for state retirement benefits.

As one aggrieved person told the Treasurer on Q&A, “many pensioners have worked all their lives and paid tax in order to receive the pension and Medicare”.

In other words, the piggy bank model of welfare is not about the well-off supporting the less fortunate. It’s about churning everybody’s money back to them.

So there’s no place for means testing if welfare is less an old-age safety net and more a de facto retirement savings account. (In fact, quite the opposite. The more you put in the piggy bank the more you deserve what you get out).

If the welfare state is just a big piggy bank, there is no case – for instance – to include the family home in the pension assets test, something the Audit Commission recommended.

It’s easy to ridicule people living in multi-million-dollar homes clinging on to the pension. Yet, thanks to Chifley, many Australians worked and paid taxes all their lives believing that was exactly what the social contract made possible.

Is Chifley’s welfare-system-as-piggy-bank good policy? Certainly not. Over time it will fade away as superannuation carries the burden of the pension system.

But right now, as Joe Hockey has learned, it is a very real constraint on economic reform.