Tag: ABC The Drum

Budget Creates A New State Of Play For Premiers

Possibly the most unexpected part of the 2014-15 federal budget is what it means for Australian federalism.

Tony Abbott is the last person you would expect to be withdrawing the Commonwealth from areas of state responsibility.

Under the Australian constitution responsibility for the health and education systems rest with the states.

But over the last century the federal government has steadily, slowly, inexorably spread its tentacles throughout these policy areas.

In his 2009 book Battlelines, Abbott enthusiastically defended this federal takeover of state responsibilities, arguing that the constitution’s divisions of power were anachronistic and inefficient.

In his view at the time, any withdrawal of Commonwealth involvement or spending in health and education “would rightly be seen as a cop-out”.

A lot has apparently changed since then. Now, we read in Abbott’s first budget:

State Governments have primary responsibility for running and funding public hospitals and schools. The extent of existing Commonwealth funding to public hospitals and schools blurs these accountabilities and is unaffordable.

Thus, more than $80 billion in Commonwealth commitments to the state governments for schools and hospitals are being abandoned.

Of course, this is in part sheer opportunism. It helps the budget bottom line for health and education costs to be more borne by the states.

The policy shift would be more coherent if it came after the release of the forthcoming white paper into federalism.

Nevertheless, those caveats aside, the budget represents a new stage in the relationship between the Commonwealth and the states, whose responsibility the national government has usurped.

Kevin Rudd once spoke of the “deep structure, folklore and mysticism of Commonwealth-state relations”. Central to that mysticism has been one article of faith: that with Commonwealth money comes Commonwealth power.

Hence the complex web of grants and regulatory agencies that govern Commonwealth-state relations and use money as a tool for policy control.

Now that the money is being pared back, the states should take the opportunity to reject Canberra diktats as well.

For instance – wouldn’t this be a good opportunity to abandon the Gillard government’s national curriculum?

One of the most common claims in Australian politics is that federalism is dysfunctional. Indeed, that was one of the themes of Battlelines: a century of Commonwealth policy imperialism has left us with overlapping responsibilities, unclear areas of accountability, and widespread voter confusion about what level of government does what.

But in truth the system is only as dysfunctional as any other political system that requires constant negotiation and compromises.

Where the true dysfunction lies is in the politics of federalism, not the structure of federalism itself.

Federalism is constantly the subject of reformist impulse, constantly the subject of complaint, and in a constant state of mutability. Collectively, Australian politicians do not have a clear idea of what they want the federation to look like.

This is not a run-of-the-mill political disagreement. It’s something more fundamental to our political class. They don’t quite know how to handle the fact that political power is divided between two levels of government.

Australian federalism is confused and unstable because the political class is confused and uncertain about federalism.

The easiest political position to hold has always been centralisation – clear away all that confusion by handing everything to Canberra.

John Howard was an unashamed centraliser. Particularly during the last years of his government, Howard made it clear he had no truck with “states’ rights”.

But federalism was once a core Liberal Party belief. Robert Menzies wrote in his book Central Power in the Australian Commonwealth that “in the division of power, in the demarcation of powers between a Central Government and the State governments … resides one of the true protections of individual freedom”.

The end result of Howard’s centralism was WorkChoices – a federal takeover of industrial relations.

Rudd proposed “collaborative federalism”. This model was supposed to forge a new relationship between Commonwealth and states that was based less in hostility and more in harmony.

But Rudd’s kumbaya utopianism was paired with by his technocratic desire for Canberra control. One proposal to end the “blame game” was an outright federal takeover of health – a takeover brought about, if necessary, by a referendum.

In 2009 Rudd even suggested the Commonwealth take over urban planning. It is hard to imagine a less “national” policy area than city design.

Now Abbott – the passionate centraliser, student of Howard – is trying to strengthen the traditional division of powers. No wonder Australian voters are confused about which level of government is responsible for what.

In a crisis meeting in Sydney over the weekend, the state premiers said they hoped to enlist federal senators to their side for the budget contest.

Technically, you see, senators are supposed to represent the states. That’s how our political system was designed.

But in practice they do no such thing. The Senate is just a slightly more patrician group of the usual party politicians. The idea that senators would go against their party interest in favour of the interests of the states they represent is laughable.

The premiers’ suggestion underlines just how disorientated they are by Abbott’s federalist revival.

As, indeed, all Australian politicians are about the purpose of Australia’s federal system.

Beware The Border Force Fetish

The Abbott Government’s proposed Australian Border Force is an incredible and serious militarisation of our borders.

On Friday Immigration Minister Scott Morrison announced the Government would create this new top-level super agency to combine all the enforcement functions of Immigration and Customs.

The Australian Border Force will sit beside the Australian Defence Force, Australian Security Intelligence Organisation and the Australian Federal Police as a core national security agency.

The result will be something like America’s Department of Homeland Security.

Morrison’s speech from Friday is worth a look. It is the embodiment of the bizarre border fetishism that has been building over the last decade.

Back when the Coalition unveiled Operation Sovereign Borders, the name seemed like a bizarre non sequitur – how could a border be sovereign?

Turns out there was no such non sequitur. The Coalition is trying to give the border a sort of independent moral value. Morrison wants to elevate the notion of the “border” to the centre of liberal political philosophy:

“Like national defence, protecting Australia’s borders is core business for any national government.”

“Our border is a national asset … Our border creates the space for us to be who we are and to become everything we can be as a nation.”

This is stirring rhetoric but very strange.

A nation’s borders are a means to an end, not an end in and of themselves. They are only useful insofar as they facilitate more central roles for government: that is, national and personal security, the maintenance of a legal order, and the furtherance of social goals.

There is no reason to suggest their function – that is, creating a space for us to be who we are – is under any threat. Certainly no threat that would justify building a grand bureaucratic empire.

For instance, regardless of where you stand on the asylum seeker issue, large scale boat arrivals are only a threat to the orderly management of our refugee quotas, not our borders.

The “securing our borders” stuff is a catchphrase, not a policy. Our borders are among the most secure in the world. Honestly – when asylum seekers arrive in Australian waters, they phone the authorities.

The Australian Border Force is formally part of the 2014-15 Budget. It is supposed to save taxpayer money. We’ll see. Administrative savings have a habit of disappearing.

But Morrison told the Lowy Institute the Australian Border Force is not a mere efficiency measure. It is structural reform. The idea is not just government restructure but to recast immigration control as a pillar of national security. This is a big shift.

Until now, the Immigration Department has had a pretty simple role: to stamp the visas of foreigners. It is a glorified customer service agency.

Accordingly, the department’s role in national security is extremely limited. It administers the Movement Alert List: a database of identities of concern that is triggered when those identities want to have their visa stamped. But Immigration doesn’t create this list. Most of the identities are identified by intelligence agencies.

It’s the same with the famous refugee security assessments. The Immigration Department just administers the assessments made of asylum seekers by ASIO.

Still, while Immigration Department practice may have little to do with national security, the politics of immigration is drenched in it. The Coalition has often tried to tie refugees to national security. And this confected relationship provided the obvious spark for the development of the Australian Border Force.

Immigration is not a national security agency and never should be. Yet as disturbing as that change is, Morrison’s vision appears to be even grander. Customs is receiving a big promotion too.

Until the 2013 election, Customs was part of the Attorney-General’s portfolio. This makes sense. Customs traverses a wide range of ministerial areas. It enforces things like tariffs, import and export controls, as well as prohibitions on importing illegal goods like drugs and firearms.

Where Customs sits in the administrative hierarchy is significant. Before Customs was with the Attorney-General, it was variously ensconced with the Department of Industry, Trade, and Business, reflecting its role enforcing protectionism.

When the Coalition won in September, Customs became the responsibility of the Minister for Immigration.

Recall the big song and dance Morrison made about guns imported to Australia: “If you cannot trust Labor to stop the boats, then it is no surprise that we cannot trust them to stop the guns either.”

Now that it is being integrated into the Australian Border Force, Customs too will be ranked alongside the Australian Federal Police, ASIO and the Defence Force.

Smuggling drugs and firearms are serious crimes, but not quite on the level of terrorism and warfare.

So here’s an easy prediction. Bumping Immigration and Customs up the bureaucratic hierarchy will give those two organisations new influence, ambition, and ultimately power.

And by recasting them as part of our national security infrastructure, those agencies will orientate their core business towards that new, sexier, and more threatening security role.

Why easy to predict? Because that’s exactly what happened when the United States created the Department of Homeland Security. That monstrosity is expensive, expanding, and working to gain new powers. Until recently, its Immigration and Customs Enforcement division was lobbying forthe power to track citizens’ movements through licence plate scanning.

The last thing Australia needs is yet another grand and ambitious security bureaucracy pushing for powers that reduce our civil liberties.

The Australian Border Force may turn out to be one of the most significant, and dangerous, decisions of the 2014-15 Budget.

We Should Fear Slow Growth, Not Inequality

Is inequality the defining issue of our generation? According to the French economist Thomas Piketty’s incredibly popular new book Capital in the Twenty-First Century it is.

But Piketty’s book actually demonstrates something else. Inequality isn’t the essential economic danger of the 21st century. The danger is slow economic growth.

It’s remarkable how many hidden assumptions and unexamined ideological preferences surround the entire inequality debate.

Piketty’s argument has been widely recounted. He has carefully investigated high-wealth tax returns in Europe and the United States and, deploying some intuitive reasoning, claims to have detected a central contradiction in capitalism.

Income inequality, rather than converging over time to make us more equal, actually diverges to make us less equal, and society therefore less meritocratic.

More formally, Piketty argues that the rate of return on capital (r) exceeds the rate of economic growth (g). That is, r > g.

As a consequence, rich investors accumulate wealth at a faster rate than ordinary income earners. That wealth is then passed on to their children. Over the long term, this creates an established permanent class of the super-rich, whose privilege cannot be justified by any meritocratic or utilitarian considerations.

It’s a powerful story. The specifics of his model are debatable – see Paul Krugman’s supportive review and Tyler Cowen’s critical one – what’s more interesting is what the book suggests is why we should worry about inequality.

The last line of Piketty’s Capital is “Refusing to deal with numbers rarely serves the interests of the least well-off.” This widely quoted aphorism is supposed to reflect his interest in empiricism. Yet it’s quite misleading. The least well-off don’t make much of an appearance in the book at all.

Capital offers a theory of the rich, not the poor. Specifically the very rich – the top 1 per cent of the population. They’re the ones in his model about inherited wealth. However, the 9 per cent of people below that 1 per cent (that is, the rest of the richest 10 per cent) earned their wealth from income like the rest of us, not from capital investments and inheritance.

There are lots of potential reasons to care about inequality. The most obvious one is if high incomes lowered the incomes of those at the bottom of the scale. But outside some Marxist intellectual holdouts, there is no suggestion that the mere existence of the super-rich creates poverty.

No doubt some extreme incomes have come at the expense of the rest of society. In Russia the oligarchs have expropriated public wealth to become private wealth. In our liberal society, rent seeking or legal constructs like intellectual property can generate wealth at the expense of the rest of us.

But the issue in these cases is not the existence of the wealth but how it was taken. And the solution would be to close down the illegitimate means of acquiring that wealth.

So what of the poor? Piketty compares 19th century capitalism to 21st century capitalism and finds that they share roughly the same pattern of capital accumulation and inherited wealth. But even a casual observer of the historical record would understand that the big shifts in the interim century haven’t been focused on the rich but on the poor.

There are lots ways to measure inequality. If we look at inequality of consumption we see convergence rather than divergence. Where, in the past, only the rich could afford home heating, food refrigeration, personal transport, and to outsource chores like clothes washing, now those luxuries are shared by rich and poor alike. The living standards of the 19th century and those of today are virtually incomparable. (I made this argument on The Drum last Christmas.)

Good news for the poor, and all thanks to economic growth. Let’s return to Piketty’s formula: r > g. As he says this is not true at all times, but it is now, just as it was in the 19th century. Sometimes growth catches up to the rate of return on capital. Piketty believes we’re in for a prolonged period of low growth. So does the Commonwealth Treasury. But doesn’t that define the challenge?

The logic of his book suggests we ought to be single-mindedly trying to increase economic growth. Piketty dismisses a growth focus with a simple hand-wave. Yet it is surely no more an unrealistic goal than his alternative: a globally-imposed tax on capital to suppress extreme wealth.

And (here’s a bonus!) a focus on growth above all else would directly help the poor.

Piketty is viscerally opposed to inequality. He says his story is “potentially terrifying”. OK. But he doesn’t get much more specific than that. A number of times in his book he fears wealth inequality will lead to political turmoil, even revolution. This dynamic isn’t elaborated.

(A subsidiary concern he has is that high net wealth individuals dominate western culture. Maybe. But surely this applies better to the top 10 per cent rather than the inherited 1 per cent he focuses on.)

Arnold Kling makes a really important economic point – Piketty’s nightmare of mass capital accumulation would actually boost the wages of the rest of us. That doesn’t sound terrifying, unless you are less able to enjoy your own earnings if others earn more.

The philosopher John Rawls more concretely outlined what he saw was the ability of financial power to become social and political power. Yet if it is political power we are concerned with, then why not tackle political power directly? In New South Wales the ICAC has shown that wealth is neither a necessary nor sufficient condition to wield corrupt influence. It wasn’t inherited riches that gave us Eddie Obeid.

The purpose of Piketty’s proposed global capital tax isn’t really to collect money for spending elsewhere. As he says there are so few high income individuals that even a very large tax would collect a small amount of money. Instead, its goal is simply to reduce the size of those honey pots.

There are lots of progressive reasons one might want to tax a population – for instance, social services or transfer payments. But simply because the government doesn’t like people having lots of money seems like a very bad one.

Yet in context it makes sense. Piketty’s book – and so much of the inequality debate more generally – seems to suggest that the core problem with inequality isn’t that lots of people are poor, but that a few people are rich.

Election Promises Are There For The Breaking

What are election promises for? Who on earth do they convince?

Tony Abbott walked into a trap during the 2013 campaign when he excluded a bunch of policy areas from budget reductions.

Those include the pension (“no change to pensions”), the public broadcasters (“no cuts to the ABC or SBS”), Commonwealth health spending (“no cuts to health”), and Commonwealth education spending (“no cuts to education”). Watch the video, Abbott was unequivocal.

Now, to bring the budget back to surplus, the Government is looking at changing the pension and cutting ABC and SBS.

No one can forget the enthusiasm with which the Coalition pursued Julia Gillard for her “no carbon tax” pledge.

As a consequence, one theme of Abbott’s stint as opposition leader was his attempts to bind his future acts in government. But the Abbott obsession with promises predates Gillard’s carbon tax backflip. In 2010 he even physically signed a “contract” that the Fair Work Act would not be amended.

I’ve put the word contract in quote marks because a contract that cannot be enforced is not a contract at all.

That contract would mean nothing if the Coalition announced tomorrow that the Fair Work Act was going to be abolished.

This is the promises dilemma. Elections are commitment games. We vote for the candidates and parties whose values and policies are most appealing. But how can we be sure they’ll follow through? All we have is their word – their assurance they will act in a certain way under certain circumstances.

Of course, commitment problems are common across all spheres of human endeavour. In the marketplace we often pay up front for services to be rendered later. But we have courts to enforce commercial contracts that have not been fulfilled. In politics there is no institutional mechanism by which voters can enforce the pledges that their elected representatives have made.

H.L. Mencken famously defined an election as “an advance auction sale of stolen goods”. He was not cynical enough. Voters bid without any guarantee that the auction will proceed to settlement.

So the mystery isn’t why promises are broken, but why they are kept at all.

The most likely explanation is that politicians want to be re-elected, and a reputation for promise breaking is likely to damage their re-election chances.

But elections are weak discipline. They’re only held every three years. And three years is a long time to wait to enforce a contract. Elections are an imperfect control. Sure, voters weigh up the honesty of candidates, but honesty is not the only factor that determines an election. Sometimes it’s better to re-elect a liar than risk a potential incompetent.

There are other constraints on breaking election promises. A dissatisfied electorate, even in non-election years, can make it hard to pursue your agenda. Politicians may even be constrained by personal ethics … who knows?

This 2009 survey of election promise studies across Europe and the United States found that political parties kept on average 67 per cent of their campaign commitments.

The inherent difficulties of measuring political promises aside, 67 per cent is surprisingly high. But how would voters react if they were plainly told that one out of three promises would be broken? How would consumers feel if one out of three products were lemons?

If politicians really wanted to demonstrate a credible commitment to the electorate, as the economist Robin Hanson writes, they would post personal bonds – say to their homes – that would be forfeited if a promise was broken. Then we’d know they had skin in the game. Of course no politicians do this.

One objection might be that in a representative democracy we do not vote for representatives as agents to do specific enumerated tasks, but instead install independent delegates who we trust to follow their own conscience.

And it’s exactly what the Abbott Government is claiming now – that its general mandate to fix the Australian budget trumps any nit-picking over what was said or wasn’t said in opposition.

But then why the elaborate, interminably detailed promises? The Abbott Government, like the Rudd government, released dozens of policy documents in the lead up to 2013 – full of specific itemised policies they planned to implement in government.

Here’s one answer. Parties don’t see election promises as promises in the plain English meaning of the word. Instead, promises are signals designed to express a deeper character of the political party. When Abbott promised not to change the pension and not to cut public broadcasters he was trying to signal that his would not be a radical government; that he was firmly targeting the median voter.

After all, why give the SBS promise? Did it win any marginal votes? Surely not. But it did suggest to the electorate he had no secret plan to burn through Australia’s institutions. Promises like that increase the political cost of radical action.

This practice is of course deeply deceptive – election promises as signals rather than genuine commitments – but it’s a deception we’re used to.

Voters are rational. We know campaign nonsense when we see it. As this interesting 2004 paper points out, voters infer the true policy position of candidates for office despite the thicket of untruths.

Obviously Coalition failures deserve to be treated as harshly as Labor failures were. Perhaps more. The Coalition swore to be guided by higher ethical standards than its predecessors.

But let’s not pretend to be surprised. Australia is one of the world’s oldest democracies. We’ve been voting for broken promises for a very long time.

Bilateral Trade Deals Simply A Political Plaything

Bilateral free trade agreements are political confidence tricks.

Far from encouraging trade liberalisation, the trade negotiation process holds it back.

Bilateral agreements make international trade seem like a game that countries win or lose. They encourage countries to hold back on domestic reform, seeing tariffs as bargaining chips for future negotiations. And worst of all, they bury the interests of consumers in the morass of international diplomacy.

The Abbott Government is currently signing bilateral trade agreements across Asia. They’ve finalised one with Japan, another one with South Korea, and they’re trying to get one with the really big fish – China.

These are described as free trade deals but they’re really more like mutual long-term tariff reduction pacts. When the Japanese agreement is in full force in 2029, Japanese consumers will still be paying a 19.5 per cent tariff on imported Australian frozen beef, and 23.5 per cent on fresh beef.

Twenty-three per cent is nobody’s definition of “free”. Beef tariffs are bad for Japan and Australia alike.

In 1817 David Ricardo demonstrated conclusively that free trade is mutually beneficial to all involved. Two centuries later Ricardo’s law of comparative advantage is still what both left and right-leaning economics professors teach their students.

The textbook Principles of Economics, written by the Harvard professor and former Bush advisor, Greg Mankiw, tells students that “the best policy, from the standpoint of economic efficiency, would be to allow trade without a tariff”.

Economics, by the Nobel-winning Paul Krugman, agrees: “The vast majority of economists would say that international trade is a good thing from the point of view of the nation as a whole.”

But here’s the thing. The biggest benefit we get from free trade deals isn’t that other countries lower their tariff barriers. It’s that we lower our own.

Lower tariffs in Australia means cheaper consumer goods and a higher standard of living. Protectionism only favours a few well-connected industries, and does so at the expense of everyone else.

In other words, the chief benefit of trade deals is that they provide an excuse to liberalise domestic trade barriers at home, while placating Australian producers with promises of new markets abroad.

This makes the incredibly complex bilateral trade agreements a much less appealing proposition.

Why not lower tariff barriers unilaterally? In a 2010 report into trade agreements, the Productivity Commission recommended that we do exactly that.

Indeed, the greatest trade liberalisation in Australian history was unilateral – the surprise 1973 decision by the Whitlam government to cut tariffs by 25 per cent across the board.

But the diplomatic focus on trade agreements makes it unlikely we would do this sort of autonomous liberalisation again.

Modern trade agreements are still, to a very large extent, shaped by memory of the Great Depression.

One of the first and most damaging responses of policymakers to that economic calamity was to immediately raise trade barriers. But protectionism only made the slump worse.

As a consequence, when policymakers were rebuilding the international economic system after World War II, they wanted to set up formal institutions that would bring about long-term tariff reductions around the world, and try to guarantee such mistakes were never made again.

One of the big issues at the 1944 Bretton Woods conference (which set up the International Monetary Fund and the World Bank) and the 1947 Geneva conference (which set up the General Agreement of Tariff and Trade, the precursor of the World Trade Organisation) was the preferential trade deals the United Kingdom had set up with the rest of the Commonwealth in the middle of the depression – a policy called imperial preference.

The solution was multilateral trade agreements through the GATT. These rounds ended imperial preference and ate away at the barriers that had built up around the world.

But in the 21st century multilateral trade deals have become bogged down. The Doha round, which is trying to get a trade deal between 159 countries at once, has been going since 2001 and looks unlikely to conclude anytime soon (despite modest progress in Bali last December).

As multilateralism has become dysfunctional, individual countries have filled in the gap by forging individual agreements with each other. Regional trade deals are also being developed.

But the irony here is that those individual and regional agreements are the same sort of preferential trade deals that multilateral trade liberalisation was designed to wipe away.

And they’re being instituted for largely the same reason.

Imperial preference was less an economic policy than a political one. It was seen by politicians in London as symbolising the strength of the British empire in adversity.

Likewise, today’s trade agreements are more about forging diplomatic relationships than benefiting consumers.

This may be why politicians and the press gallery get excited by trade deals but economists and consumers less so.

Perversely, the rise of bilateral trade agreements creates an incentive to keep trade barriers high. The Abbott Government has provided a classic illustration of this dynamic.

The Coalition went into the 2013 federal election promising to tighten controls on foreign investment, for instance lowering the threshold for Foreign Investment Review Board scrutiny of agricultural land deals to deals worth $15 million.

Now that promise is apparently being used as a bargaining chip in the negotiations over the Australia-China trade agreement deal, to be dealt away in return for liberalisations in China.

In part this is because Australia is a relatively open economy already. There are not that many tariffs to bargain with.

But mostly it’s because free trade agreements have little to do with the virtues of free trade. They’re about politics and diplomacy, not economics.

Micro-Parties Tap Into Dissatisfaction

The 2013 federal election was a remarkable election, and Saturday’s Western Australia Senate re-run has confirmed just how remarkable.

In September, nearly a quarter of Australians (23.5 per cent) voted against all the major parties – that is, against Liberals, Nationals, Labor and Greens – in the Senate as their first preference.

This is an enormous figure. In 2010 only 13 per cent voted against the major parties. In 2007 it was 11 per cent. In 2004, 12 per cent.

In other words, the non-major vote has suddenly doubled.

(I’m counting the Greens as a major party. They’ve been around for two decades and deserve to be treated as part of the mainstream.)

Nor was the anti-major vote a fluke, or a mistake voters are eager to rectify.

In September, 19 per cent of Western Australian voters voted against the non-major parties in the Senate. On Saturday that figure increased to 25 per cent.

Yet you wouldn’t know it. The response of our political class has been to try to paper over this profound, revealed dissatisfaction – to focus on side issues and avoid tackling the deeper malaise.

Virtually at dawn on September 8 last year there were claims the electoral system needed urgent reform because micro-parties had gamed preference flows.

Nobody is suggesting our voting system is perfect. Every system has trade-offs and there’s no reason to believe our system is the most optimal. But gaming preferences is something the major parties have been playing at for a very long time.

All such reform would do is hide the basic issue of 2013: given a choice between Tony Abbott, Kevin Rudd and Christine Milne, a quarter of Australians chose “other”.

(One thing electoral reform would do is help the major parties protect their second and third Senate spots. If you assume that political parties work in their own self-interest – a big assumption, I know – there’s good reason to be wary of any proposed changes.)

Be sceptical of anyone who tells you they know how Australian voters really wanted to vote.

To what extent do unusual voting patterns reflect voter confusion, and to what extent are they reflections of democratic choice?

Distinguishing between ignorance and intention is particularly hard in Australia because our compulsory voting system requires those who are disengaged and uninterested to vote.

A case study is the Liberal Democratic Party’s (LDP) success in New South Wales in September’s Senate vote. There are anecdotal stories of people being confused between the Liberal Party and the LDP. It is also clear the LDP benefited from being first on the ballot in that state.

But confusion is hardly the only possible explanation for their large showing. Disaffected Liberal Party supporters looking for a liberal-y alternative would have found a substitute at the start of the ballot paper in the LDP.

The advantage with these sorts of explanations is that they don’t immediately assume voters are too stupid to recognise the name of the party they want to vote for.

But more importantly, they fit the bigger nationwide trend. The rejection of major parties manifested itself in different ways in different states. It wasn’t confusion that led to Nick Xenophon’s support nearly doubling in South Australia. Nor was it confusion that gave Clive Palmer more of the vote than the Greens in Queensland.

And that trend makes the criticism of micro-party success completely misguided.

Virtually by definition, micro-parties are too small to take a Senate spot by themselves.

Think of a vote for a micro-party as a vote against the mainstream, rather than intellectual support of the full platform of, say, the HEMP Party or the Secular Party of Australia.

(Not everybody rigorously compares party policies. Again, voting is compulsory.)

All those micro-party votes pool together through the preference system and throw up a micro-party representative.

In past elections micro-party votes would just dissipate, because the micro-parties weren’t working together and there weren’t as many Australians voting against the big players.

Yes, Ricky Muir of the Australian Motoring Enthusiast Party got a tiny number of direct votes. But it’s not about him. A Senate seat isn’t a personal reward. Muir represents all those in Victoria who voted “other”.

If we rewrote our electoral system to prevent micro-parties from preference aggregation we would, in a very real way, be disenfranchising those who rejected the majors.

The Clive Palmer phenomenon is slightly different. He has the money to elevate his party’s profile above the noise. That allows him to take advantage of the dissatisfaction without having to play the preference game.

But the key thing is this: Palmer’s money didn’t create the demand for non-majors. It simply helped funnel that demand towards him. When a disengaged but frustrated voter goes into the booth they remember the gregarious billionaire who hates Canberra and has all the yellow ads.

Of course Palmer is in politics for himself. A dissatisfied voter might ask: what’s new?

The real question is why so many voters are unhappy with the usual political choices.

One argument is there’s a longer-running decline in trust in the Federal Parliament. Yet this Essential Vision report suggests a more complex dynamic in the medium term. After a precipitous fall in 2012, trust in Federal Parliament has begun to recover.

An alternative is that many voters simply hated the choices on offer this time around.

The latter would only be comforting if you believed major parties choose their leaders and policies essentially randomly – that is, they do not reflect the internal structure and values of the party itself.

Either way the major parties have no interest in publicly discussing why so many voters dislike them.

They’d rather talk about kooky micro-parties, as if those parties aren’t a symptom of the deeper failures of the majors.

But micro-parties weren’t the issue in 2013. Nor was Clive Palmer. Dissatisfaction was.

You Can’t Just Tax Your Way To A Surplus

In 1979, the free market economist Milton Friedman reviewed Margaret Thatcher’s first budget in his Newsweek column. Like Australia today, Britain faced a serious long-term budget problem. Like Tony Abbott, Thatcher had been voted in to fix it.

Friedman thought her budget was excellent – a rare example of financial prudence in a highly imprudent decade. It was chock-full of privatisations and tax reforms. The sort of stuff Thatcher became legendary for.

But, alongside the tax reductions and spending cuts, the Thatcher budget also increased Britain’s sales tax to compensate for some lost revenue.

This was a problem. As Friedman wrote, “From the long-run point of view, it seems to me preferable to resort to a temporarily higher level of borrowing rather than a possibly permanently higher level of indirect taxes.”

In other words, if the unpalatable choice is between a deficit and a tax hike, then a slightly prolonged deficit is the lesser of two evils.

Thirty-five years later, the Abbott Government’s proposed deficit levy is supposed to be a temporary measure – perhaps limited to four years.

Abbott should listen to Friedman. “Temporary” taxes are rarely temporary. Once introduced, they have a habit of staying high and sticking around.

After all, Australia’s income tax itself was only meant to be short-term thing. The Commonwealth Government introduced the income tax during the First World War in order to pay for the high cost of military participation.

Of course, as the Commission of Audit demonstrated dramatically last week, the choice the government faces is not between a prolonged deficit and higher taxes. The Government could cut spending and abandon its Direct Action and paid parental leave schemes.

There is something faintly ludicrous about a Government fighting its budget battle on two fronts.

For the free market right, the deficit levy is not just a broken promise – we’ve come to expect broken promises in Australian politics – but a betrayal by a leadership team that, for the last six years, has been claiming to favour low taxes above everything else.

For the left, the Commission of Audit represents a fundamental attack on the Australian social democratic settlement.

The audit commission report is remarkable. It is incredibly rare to see major government reports so explicitly driven by philosophical beliefs about the proper scope of government.

This is something Australian politics could do with more of, not less. Bold premises, radical conclusions. It’s similar in a way to what came out of Kevin Rudd’s 2020 Summit, but the audit commission is more coherent and doesn’t bother pretending to be the result of Ruddian consensus politics.

Yet to what end? The Abbott Government won’t do much with the report. What is radical in the audit commission is unlikely to be adopted. The policies which will be adopted have been floating around forever.

There is no way that this Government will be returning income taxes to the states. Sure, Tony Abbott has gone through an evolution of his views on federalism since he wrote his 2009 book Battlelines. He is apparently no longer a myopic centraliser. But there is no one in Government with appetite for such epoch-making reforms.

The things that will be adopted – like selling Medibank Private – have been obvious low-hanging fruit for many years.

So in many ways the audit commission reveals the Abbott Government’s lack of reforming ambition rather than its radicalism.

The deficit levy underscores that timidity. Don’t be fooled by the recent polls. Compared to cutting spending, raising taxes is the easy option.

The basic political economy problems with deficits and taxes are similar.

The reason it’s important to return the budget to surplus is to ensure that there is constant pressure on politicians to spend only what the tax system brings them. This is because every political incentive goes the other way. The best way to ensure a voting bloc supports you is to offer them financial support. Unchecked, governments want to spend more than they tax.

The only real constraint on this runaway spending dynamic is the fiscal norm that says budgets need to be returned to surplus. Short-term governments rarely worry about long-term consequences.

So it is important that we reduce the deficit as soon as possible. But not by any means possible.

Because, as Milton Friedman cautioned Margaret Thatcher, while the long-term dynamic of forgiving budget deficits would be bad, the medium-term dynamic of introducing higher taxes would be far worse.

Yesterday morning Tony Abbott said “in the long run the voters will thank us for doing what is absolutely necessary”.

Maybe. But in the long run voters should have no confidence that this Government – or a future Labor government – will happily forego the new stream of revenue the deficit tax will provide.

It’s Power Grabs We Should Fear, Not Cybercrime

“Cybercrime is a systemic risk and I think it is the next black swan event,” the head of the Australian Securities and Investments Commission, Greg Medcraft, told a forum at the end of last month.

That’s just 15 words in which Medcraft squeezed one moral panic and two fashionable but misleading economic concepts.

Catchy, though. Medcraft’s comments were widely reported.

But they demonstrate, once again, how Australian regulators and law enforcement agencies are using the digitisation of the economy as an opportunity for a huge power-grab. More on that in a moment.

Medcraft’s argument is drawn from an unofficial working paper, “Cyber-crime, securities markets and systemic risk”, published mid-last year by the International Organization of Securities Commissions, an association of which ASIC is a member. You can read the paper here.

So, could cybercrime be the next ‘black swan’ event? A black swan (the phrase was coined by the statistician Nassem N. Taleb) is characterised by two things. It is incredibly devastating, and it is incredibly rare. This makes black swan events hard to predict precisely because their probability of occurring is so low.

Crime, whether ‘cyber’ or traditional, does not fit the black swan criteria.

It is not incredibly rare. Financial crime is an already existing, easy-to-quantify, and constant risk.

Nor has it been incredibly devastating. Cybercrime is usually low level. Hackers take down websites, not stock exchanges.

Perhaps they might do worse in the future. But that does not make them a black swan. The very nature of a black swan is that they are unpredictable. You can only recognise them in retrospect.

Nor is cybercrime a ‘systemic risk’. This term refers to the danger that a shock to one institution will have flow-on effects to other institutions in the system. In the Global Financial Crisis, the initial shock was declining house prices, which led to a run on some banks, which spilled over into runs on other banks, and eventually a credit crunch.

It’s plausible to argue that an initial shock could be cybercrime-related. Yet the systemic risk is created by the interconnectedness, not the shock. The worst scenario the International Organization of Securities Commissions can come up with is a cyber-attack on a systemically important institution, or a coordinated attack on a large number of institutions at once. But these are merely more initial shocks.

This might seem a minor objection to Medcraft’s claim. Pedantic, even. It isn’t.

Now that the GFC has passed, financial regulators are quietly changing their approach to regulation. How they see the relationship between micro failures and macro consequences is central to this.

Should regulators try to predict and prevent the crises themselves, as Medcraft seems to argue, or should they instead focus on how the system responds to unforeseeable crises?

Nassem Taleb invented a second famous term: anti-fragility. Anti-fragility describes systems which become stronger when they are stressed. Taleb contrasts this with systems that are simply resilient, designed merely to survive shocks. A resilient system is one which tries to defend itself against known dangers – say, cybercrime. An anti-fragile system is one which accepts uncertainty and is designed to evolve in response.

No surprise then that Greg Medcraft talks about the need for ‘cyber-resilience’. And that makes technology the problem, and ASIC the solution.

Cybercrime is not the bogeyman it is made out to be.

Sure, there is an extraordinary variety of claims about the damage cybercrime does to the economy. Almost all of them are overstated. At Crikey, Bernard Keane has an excellent overview of just how ludicrous these estimates are.

This paper from 2012 finds that traditional crime costs the typical citizen at least a hundred-fold more than computer crime. The paper concludes that the best way to deal with cybercrime is simple law enforcement. Hunt down criminals individually. Throw them in jail. Cybercrime is hardly the sort of policy dilemma that screams black swans and systemic risks.

But not according to the International Organization of Securities Commissions. In its working paper, the black swan event it foresees is a horrifying cyber-catastrophe originally dreamed up by Richard Clarke in his 2010 book Cyber War.

Clarke, a former US counter-terrorism official, warned of a full-blown digital international conflict where cyberwarriors cripple national infrastructure, release chlorine from chemical plants, remotely crash trains, etc, etc, etc.

As Wired magazine put it, Clarke’s prognostications are like “the Book of Revelation re-written for the internet age, with the end-times heralded by the Four Trojan Horses of the Apocalypse”.

Our corporate regulator can’t seriously believe this hyperbolic nonsense. So let’s assume they don’t. Yet that doesn’t give them much credit.

ASIC has a track record of seeking extra powers in response to technological change.

It is the most enthusiastic user of section 313 of the Telecommunications Act, a law that allows it to block (that is, censor) websites from Australian internet users.

And it is one of the big advocates of mandatory data retention, a policy which would force internet service providers to keep records of everything we do online, just in case law enforcement agencies – and regulators – want to look at it in the future.

Medcraft’s dark warnings about cybercrime and black swans need to be seen through this prism: the ongoing battle between government power and digital liberties.

ASIC knows, as all good bureaucracies do, that the best way to get new powers is to massively overstate the problems those powers are supposed to fix. Unfortunately it seems that policymakers are particularly susceptible to technological gobbledygook. Remember the internet filter?

Cybercrime is, undoubtedly, a challenge. But we should be worried when our key regulators, deliberately and explicitly stoke up mindless panic about the impact of new technology.

Politics Stands In The Way Of A Full 18C Repeal

George Brandis’ exposure draft of amendments to the Racial Discrimination Act is a magnificent example of how to repeal legislation without admitting you’re repealing legislation.

It is, without doubt, a reform that advances the cause of freedom of speech in Australia.

The reforms neuter the provision (Section 18C) which Andrew Bolt was found to have breached in 2011 with his newspaper columns discussing white-skinned Aboriginal people.

As supporters of the existing law point out, the next section of the Racial Discrimination Act(Section 18D) is supposed to provide exemptions to 18C, for instance, any reasonable and good faith statements on topics in the public interest.

But Justice Bromberg decided that Bolt was not eligible to meet the exemptions in Section 18D that cover political comment because the columns were not written in good faith. The judge said there were too many factual errors and Bolt had adopted an excessively sarcastic tone.

Well, 18D is to be repealed, and replaced with an extraordinarily, incredibly powerful exemption that reads (and it is worth reading in full):

This section does not apply to words, sounds, images or writing spoken, broadcast, published or otherwise communicated in the course of participating in the public discussion of any political, social, cultural, religious, artistic, academic or scientific matter.

There’s no “reasonable” or “in good faith” there. No ambiguous terms of art a judge could use to decide some speech on political, social, or cultural topics didn’t actually qualify for the exemption.

And this rewritten exemption would undeniably have covered the Andrew Bolt columns, which spoke of what he saw as a social, cultural and political phenomenon of lighter-skinned people choosing to identify as Indigenous.

The full amendment presented by Brandis today makes a lot of other changes.

The old Section 18C prohibited any speech that would offend, insult, humiliate and intimidate a group on the basis of their, race, colour, national, or ethnic origin.

The words offend, insult, and humiliate are gone. Intimidate is more tightly defined as intimidation that involves physical harm, duplicating much existing law. The amendment adds “vilify”, which it defines as inciting hatred against a person or group.

But none of that matters if the grand exemption applies.

The exemption is important not just for what it does to the new Section 18C, but for what it symbolises.

Back in the early 1990s, the High Court decided that freedom of speech is a fundamental lynchpin of democracy, and that therefore the constitution implied some sort of freedom of political communication.

Putting aside whether implied rights make much sense, the court’s basic reasoning was a good one: it is absurd to talk of a democracy that doesn’t freely and openly debate political matters. Or social, cultural, religious, artistic, academic or scientific matters. Democracy is more than just voting.

The defence lawyers in the Bolt case didn’t base their argument on the right to political communication. It’s a shame that they didn’t. The strict confines that the High Court has placed around this right are starting to fall apart, as we saw in the Unions NSW case late last year. It would have been fascinating to see what they might have done with Section 18C if it was taken that far.

The new exemption makes clear the fundamental importance of free discussion on any matter of public interest, no matter how extreme that discussion is.

Yet Brandis is right that protections against racial vilification remain, even in the new amended section.

To understand why you have to be familiar with the sort of cases section 18C is used in. Most section 18C cases don’t cover high profile things like Andrew Bolt columns. I’ve mentioned one such case in the Drum before: where a lawyer called a security guard a “Singaporean prick”.Here’s another one, from 2012 – a family dispute that involved throwing racial slurs around.

Nor does anybody suggest that these sort of cases are major wins in the battle against prejudice.

Depending on how judges choose to interpret the word “vilify” and the phrase “racial hatred” – both added to Section 18C in the exposure draft – it is highly plausible that they would still be considered unlawful acts of racial discrimination. (And of course, there’s all those state racial and religious vilification laws.)

But who knows? Legislation can travel in funny directions once Parliament puts it in the hands of the courts.

That, ultimately, is the problem with leaving Section 18C in there; with not going the whole hog and committing to a full repeal.

The phrase “racial hatred” comes from state law, but we can’t know how future judges will choose to interpret it. There is always some risk that Section 18C could be reactivated in some sense.

Now given the strength of the broad exemption, it’s fair to say that risk might be small. But why not just do the full repeal?

Politics, obviously. The complex amendments allow George Brandis and Tony Abbott to say that they haven’t repealed any protections, just cleaned them up.

And that argument is pitched entirely at the Liberal party room, who will be the ones that decide whether this draft exposure bill becomes Liberal Party policy.

FoFA Fearmongering A Blow To Deregulation

Never has so little been met with so much panic.

Alan Kohler has described the Abbott Government’s amendments to Labor’s Future of Financial Advice (known as FoFA) reforms as unseemly, suspicious and like blessing union corruption. Bernard Keane believes the Government’s plans are “a big blow to consumers’ rights”. Ian Verrender, at The Drum, says the changes will be “enormous”.

The Abbott Government intends to cut regulation across the board. But the hysteria about these FoFA amendments demonstrates how hard it is to get even minor deregulation done.

The original FoFA reforms were in response to a corporate collapse: that of Storm Financial and Opes Prime in October 2008, at the beginning of the Global Financial Crisis.

In 2010 the Labor government introduced a huge package of new regulations, new powers for regulators, and new obligations on firms that offer financial advice.

For our purposes, the key ones were a ban on financial advisors earning commissions from recommending investment products, and another one that required financial advisors to act in the “best interest” of their clients. The bulk of FoFA came into effect in 2012.

Now in 2014 it’s being amended.

That’s amended, not repealed. A casual reading of the press would suggest that Arthur Sinodinos, the Assistant Treasurer, plans to rip away every vestige of FoFA.

Instead, the Government intends to distinguish the regulation of personal financial advice – that given by an advisor who works closely with you, understands your specific goals and needs – from the regulation of “general” advice – that given over a bank counter, over the phone, or through promotions, investor newsletters, or advertisements.

For personal advice, everything important in Labor’s FoFA remains. Commission-driven advice is still banned. Advisors still have to act in their clients’ best interests.

The first controversial change is that the best interest rule is being modified to remove an ambiguous and all-encompassing “catch-all” provision.

There are nearly a dozen criteria that are used to determine if an advisor is acting in the best interest of their client. Things like: does the client understand the product? Is the advisor qualified to give the advice? These remain.

The catch-all provision (Section 961B(2(G)) of the Corporations Act if you’re playing along) is basically a “anything we haven’t thought of” step. It’s absurdly broad.

How – without scrutinising everything about a client’s life and finances, scrutiny which would cost thousands of dollars – could you be sure you knew absolutely everything a court might decide constituted the client’s best interests?

Would you want to give financial advice under that sort of legal uncertainty?

Simply put, FoFA’s best interest, know-your-client rule is massively, dangerously overwritten. The Government wants to slightly relax it. Not remove it.

The second change concerns general advice. This covers things like bank tellers making recommendations about travel insurance. Here, commissions, now banned, are to be made lawful once more. Sounds terrible? Hardly.

Commissions are a completely legitimate form of employee remuneration. FoFA describes commissions as “conflicted remuneration”. This is nonsense. A commission, in practice, is not so different from a sales target, or (for higher paid professions) a key performance indicator, or (for higher paid again) an annual bonus. It’s just a different way to slice the salary pie.

If you go into a bank and ask for recommendations about financial products, you ought to expect that they will try to sell you one of their products. Just like if you ask a Telstra store employee what mobile phone plan they recommend they’re probably going to recommend a Telstra plan. Regardless of whether they’re being paid a commission.

Banning commissions in these circumstances achieves no policy goal. Remember, all advisors, including general advisors, are still required to work in their clients’ best interests. Removing the ban on commissions just cleans up a little regulatory ludicrousness.

Perhaps you disagree with the Coalition’s FoFA changes.

But it is true that Labor’s original FoFA remains – in letter and spirit. It is not being gutted. The Coalition’s changes are not radical. They do not deserve the extreme hyperbole they have received.

More fundamentally, it is not the Government’s responsibility to restore the reputation of an industry.

Voluntary industry charters or private ratings agencies are common solutions to the reputation problem. Personal financial advisors had been reducing their reliance on commissions in the years before the FoFA reforms.

Regulation suppresses innovation, raises consumer prices, ties the sector down in compliance costs, and opens up opportunities for rent-seeking.

Indeed, rent-seeking is the real story of the FoFA reforms.

The battle here is between the super funds and the banks. Australia’s superannuation system has created a titanic financial industry based entirely on the compulsory acquisition of a portion of our salary. Super funds – particularly the union-managed industry super funds – lobbied hard for a crackdown on avenues of financial advice outside the superannuation system. With FoFA they got it.

Industry Super Australia is now predicting these minor FoFA adjustments will bring a wave of financial collapses. Sure they will. Storm Financial did not collapse because bank tellers were selling travel insurance on commission.

Where commentators fall on these changes is usually determined by their pre-existing attitudes towards the super funds and the banks.

Most of the debate has been a loose proxy for bigger questions about Australia’s financial system.

But minor tinkering of FoFA isn’t much to hang these questions on.

The backlash against the Government’s plans demonstrates just how hard deregulation really is – held back by a mire of special interests and an unfortunate natural human tendency for doomsaying and fearmongering.