The ABC, Contemporary Journalism and Moral Vanity

A Speech at a Dialogue
Whose ABC?:  The ABC, Staff Capture and the Obstacles to Accountability
in Melbourne, 29 September 1999

One of the few sadnesses about the fall of the Soviet Empire is the demise of the Soviet joke, those acute and revealing sociological observations delivered in the guise of humour.

A classic Soviet joke asked:  what is the difference between capitalism and socialism?  In capitalism, man exploits man and, in socialism, it is precisely the opposite.  To shift the antinomy a little, public ownership is supposed to increase accountability:  in reality, it is precisely the opposite, as the ABC shows particularly clearly.

There is an idea abroad amongst journalists that the intrusion of proprietors, and concern for the bottom line and for audience reach, are all features which sully and diminish the journalist's craft.  That if journalists were just left alone, they would pursue the journalist's craft in a pure and unsullied form, to the great benefit of free speech, open debate and democracy.

The obsessive focus on the doings of proprietors -- discussion of media policy in the media seems to be almost entirely driven by analysis of gains and benefits to particular proprietors -- the sneering at any current affairs program which is actually popular and worries about editorial policy being affected by those with responsibility for profitability, all indicate this belief.

Well, we can be very grateful to the ABC.  We can be grateful because the ABC provides us with a wonderful example of what happens when journalists do take over the asylum.  And the record of the ABC shows quite clearly that journalists freed from effective constraints of accountability are not fearless prosecutors of free speech and open debate.

Let me start with a vignette from personal experience.  I have no problem with same-sex marriage or adoption, and believe that narcotics should be legalised because adults own their own bodies.  This should clearly class me as a standard-bearer for the counter-culture.  But the ABC is cleverer than that:  they can see right through me.  I am, in fact, an ultra-conservative.  Or at least, that is what they told Australia I am.  The second-last occasion on which I appeared on ABC Radio News I was introduced as a spokesperson for the "ultra-conservative" H.R. Nicholls Society.  The H.R. Nicholls Society is a labour market reform body which advocates the replacement of our 94-year-old arbitration system and adoption of a labour market structure similar to that of many of our major trading partners with freedom of association and contract.  It is reformist certainly, radical maybe.  Yet, in ABC-speak, it is "ultra-conservative".

Now, when was the last time any of us heard an ABC announcer to refer to the "radical" Greenpeace, the "militant" CFMEU, the "left-wing" Australia Institute or the "ultra-left" or "ultra-radical" anything?  Only those deemed to be on the right of centre are automatically given ideological labels by ABC presenters and commentators.  No doubt, this is done in the interests of ideological hygiene:  to warn listeners and viewers of the inherently dubious nature of the opinions the ABC has deigned to allow to appear, briefly, on its airwaves prior to normal transmission being resumed.

I doubt that anyone in the ABC will see any problem in this.  They would not even see the nature of the complaint being made, the inappropriateness being pointed to ("of course the H.R. Nicholls Society is ultra-conservative, what is the fuss about?").  Which is precisely the point -- that ABC staff live in very a narrow intellectual universe.  A narrow intellectual universe that affects both the product of the ABC -- for which taxpayers pay $630m a year -- and national debate.

I am advancing three propositions here.

• First, that the ABC does represent journalists taking over the asylum -- that the ABC is a staff-captured organisation.
• Second, that the product of the ABC is biased and biased as a result of this staff capture.
• Third, that this has an invidious effect on public debate.

What do I mean by "the ABC"?  After all, any large organisation usually has a range of perspectives.  It is true that the rural services of the ABC are somewhat distinguishable in outlook from the rest of the ABC, and that there are some ABC journalists and presenters who, whether due to prominence or whatever, do not replicate the general pattern.  Nevertheless, one of the ABC's distinguishing features is how the biases one notices in political commentary is replicated in foreign coverage, in discussion of environmental issues, in religious broadcasts, in coverage of art and cultural events, even in drama series.  There is clearly a common outlook amongst ABC journalists, presenters, producers, researchers, writers:  a common ABC culture.

STAFF CAPTURE

What do I mean by "staff capture"?  What I don't mean is that the ABC is therefore a happy organisation.  On the contrary, I argue in the Backgrounder that there are pressures resulting from staff capture which would incline the ABC towards being an unhappy place to work.  Universities suffer a similar problem -- the absence of real ownership, of a commercial focus with concern for asset values, means that politics and factionalism rule, leaving many staff unhappy.

What I mean by staff capture is that the ABC lacks a real owner, and the result of lacking a real owner -- and its nature as a large and powerful media organisation -- is that it is, in practice, unaccountable to the general public.  Furthermore, this lack of accountability makes the interests of ABC staff the dominant interest in determining its behaviour.  (I am told that there is an ample theoretical and empirical work exploring perverse behaviour in cooperatives due to exactly the same problem of lack of real owners leading to capture, internal politicisation and factionalism.)

THE PROBLEM OF UNOWNED CAPITAL

Who owns the ABC?  The ABC's PR says we do:  it's "your ABC".  Legally, this is incorrect.  The Commonwealth Government owns the ABC.  It is, in some sense, our agent, but it is the legal owner.

What power over the ABC does our indirect ownership give us?  Effectively, none.  Our personal wealth is not invested in the ABC, we have no power to elect or sack the Board or management of the ABC, we cannot sell our notional stake in the ABC.  In fact, we have none of the prerogatives of real ownership.

We can, and do, elect the Government.  But this is something which we do once every three years or so in an election where many issues are more important than the ABC and where holding politicians to their promises is a standing sick joke.  Moreover, governments are often elected on quite slender majorities, and majoritarianism can be quite careless of the interests of minorities.

So, if we have none of the prerogatives of ownership, how about the Commonwealth Government?  In theory, it has all the prerogatives of ownership.  In theory.  In practice, any Commonwealth Government which started to seriously exercise the prerogatives of ownership would be subject to deafening shrieks about attacks on the "independence" of the ABC.  And, there is indeed a real point here.  Governments are players in the media:  they have obvious and massive vested interests.  We want media organisations to be independent of the Government.

But, if the ABC is independent of the Government, it is independent of its legal owner.  So the role of owner of the ABC is rendered effectively an empty one.  And if nature abhors a vacuum, power arrangements in human societies do even more.  Whose interests move into the vacuum left by the lack of an effective owner?  The staff's, of course.

This is a general problem with government ownership.  The problem operates particularly intensively in the case of the ABC because of the aforementioned vested interest, but it applies to other government-owned bodies as well.  Which is precisely why corporatisation -- having the government act more like an owner -- and privatisation -- creating a genuine owner -- typically lead to staff cuts.  The importing into the pre-existing state of affairs of the interests of an owner concerned with asset value and return on capital leads to removal of rents previously going to staff.

There is, of course, a claim that this is a nonsense point because ABC staff are all publicly-spirited types who would not abuse their position.  This is simple, self-serving arrogance justifying privilege and need not detain us.  The staff are human, and will act in human ways.  If they are not accountable, they will act in their own interests.  The ABC of all institutions is not in a good position to argue for accountability for everyone else except itself.  But, as I can testify, the contemptible hypocrisy of public broadcasting -- where its denizens can comment (often quite intrusively and censoriously) on others but treat as completely illegitimate critical outside scrutiny of themselves -- is one of the more regrettable features of contemporary public life.

Government ownership has the further problem of having the body responsible for regulation also being a major producer:  the conflict of interest involved is quite serious and does adversely affect performance, as anyone who has followed the fortunes of public education can testify.  The fact that, for example, average LAP scores are not published by school is a classic avoidance of accountability flowing quite straightforwardly from this conflict of interest.

BIAS AND MORAL VANITY

That the product of the ABC does tend to be biased there is little doubt.  In the Backgrounder, I adduce various comments from a range of commentators, mostly centrists or on the left, to that effect.  I have assembled evidence to the same effect with its studies of coverage of the 1998 Federal Election and the 1998 waterfront dispute.  Perhaps the most powerful evidence is from Professor Henningham's survey of journalists, where journalists rated 7.30 Report, ABC News, Four Corners and SBS News (in that order) as the most pro-ALP media outlets.  Personally, I am less concerned with party-political bias -- though that is a genuine issue in a taxpayer-funded broadcaster -- than bias in coverage of issues and public debate:  partly, no doubt, because that is the game I am in;  partly because that then feeds into the behaviour of political parties but, far more importantly, because of its potential to disenfranchise whole sections of society and to harm people who are not otherwise in a good position to stick up for themselves.  As a writer in the Australian Left Review observed in criticising Richard Rorty's post-modernism, truth is the only weapon the powerless have.  A biased media is a media which rates other things more highly than truth.  That is good neither for democracy, nor for the cause of the less powerful in our society.  One thinks particularly of the so-called "dissident women" in the Hindmarsh Island affair attempting to stick up for historical truth against fraudulent misrepresentation of it for political purposes:  a fraud that the media in general, and the ABC in particular, were only too happy to accept and, even after exposure by the subsequent Royal Commission, are very reluctant to face to this day.

But why would staff capture lead to a particular type of bias?  One can see that people in a staff-captured organisation would recruit in their own likeness, but why should there be a particular likeness?

Michael James has pointed out to me that ideology can provide a useful sorting function.  It's a way of sorting recruits who are likely to fit in and not threaten existing power structures.  It is also a substitute for genuine performance indicators and so protects mediocrity and established rent-seeking activities of the existing staff.  All the ideology needs to do is to make it plausible for the ABC to present itself as working in the public interest.  Hence, Michael argues, the combination of leftism and nationalism at the ABC, even though the two are strictly in conflict.

Which, I agree, explains quite a lot, except for the specific content of the bias -- almost any ideology would do, after all.  The simplest answer for why a particular outlook is dominant is because they get something out of it.  More to the point, because they jointly get something out of it.

What they get out of it is shared social status and a signalling to each other of their moral "worthiness".

WHY SO LITTLE HAS CHANGED

It is striking how little effect the fall of the Soviet Empire and the collapse of socialism as a serious project of social transformation has had on Western politics.  It is a case of how much has changed, yet how little has changed.  David Gress, in his excellent book From Plato to Nato, argues that there has long been a struggle between two Enlightenment traditions.  On one side is the sceptical Enlightenment -- the tradition of Locke, Montesquieu, the Physiocrats, Hume, Smith, Burke, most of the American Founders, Mill when he is not letting his rhetoric run away from him, Friedman and Hayek:  the tradition which takes human nature as largely a given and works within that.  Opposing that is the radical Enlightenment -- the tradition of the more radical French philosophes, such as Voltaire, Condorcet, d'Holbach, D'Alembert and Rousseau, of Marx -- when he is looking forward -- and modern American figures such as Dworkin (both Ronald and Andrea), Galbraith and MacKinnon:  the tradition which sees human and social transformation as a serious project.  These are the two visions that Thomas Sowell outlines in A Conflict of Visions.

The socialist collapse has demonstrated that socialism was not, in fact, central to the project of human and social transformation:  it was merely a manifestation of it.  A manifestation that could be, with startling ease, displaced by alternatives -- certain forms of feminism, "hard" multiculturalism, environmentalism, certain characterisations of indigenous rights and so forth.  This is a process which has been going on for some decades, but has been accelerated by the Soviet collapse.  What is even more striking is that these manifestations -- or at least certain characterisations of them -- have become far more protected from serious criticism in polite circles and public debate than socialism ever was -- even though many of them are also forms of collectivism:  indeed, environmentalism is able to re-package policies which failed miserably, and at considerable environmental cost, in liberating workers as the way to preserve the planet.  These opinions form a hegemonic -- to use Gramsci's term -- constellation of opinions in public debate.

The problem with socialism is that it was, to use contemporary terminology, a modernist project.  It was concerned with logic, evidence, cause-and-effect, with consequences.  It was based on certain specific claims about what one could achieve if one re-ordered society in particular ways.  It was therefore subject to practical refutation:  and systemic collapse in country after country is as great a refutation as one could hope for.  Not only did serious prosecution of the socialist project of social transformation turn out to be tyrannical, massively environmentally destructive and with a worrying penchant for mass murder:  in some fundamental sense, it didn't even work.  Even its lesser forms in the West -- most notably nationalisation -- were subject to similar practical failure.

But what if you adopted political causes that were genuinely "post-modern"?  Causes which were not worried about logic, evidence, cause-and-effect or consequences.  Causes where the intention and the crusade itself was all that mattered.  What if one could offer strong adherents purpose and meaning, and both strong and weak adherents a sense of moral worthiness and shared status, without requiring any serious concern for consistency or effect or any genuine renunciation of interests or pleasures and only the most cursory concern for evidence?  What if one adopted causes, in other words, of pure moral vanity?  Why, then the vistas are endless.  All those within a certain social and intellectual range can play, without cost -- except that of social ostracism and loss of status if you refuse to play.  And issues of consistency provide no constraints:  one can be as inconsistent as one likes.

There are certain obvious social costs from this, of course.  The entire outlook is hostile to genuine inquiry and to debate, because to accept certain propositions as contestable undermines one's moral assets -- hence a shared attitude that certain positions are beyond the pale.  This hostility to genuine inquiry also means a hostility to truth, since serious search for truth -- facing what Derrida calls "stubborn and inconvenient facts" -- might upset the moral-status apple-cart.  Still, the game is very rewarding, and very low cost, for the players.

But, to whom would such a game of mutual awarding of status particularly appeal?  That is not a difficult question.  In fact, it is an elementary matter of sociology.  It would particularly appeal to those suffering the pangs of upward social mobility via mechanisms which involved separation from their family and social origins.

Welcome to modern higher education.  The mechanism and consequences are discussed at length in Katharine Betts' book The Great Divide.  Now, which profession is going to both find such an approach particularly congenial AND be especially targeted for such appeals?  Journalism, of course, which has moved in a generation from a job dominated by bright working-class types with limited education to the tertiary-educated middle class.

It is a huge advantage being able to sell moral vanity to journalists.  And journalists are eager buyers, particularly in the Fairfax press, the Australian, the Canberra Times, the Canberra Press Gallery and the ABC.  It offers to participants membership of a moral elite, one requiring no effort apart from agreeing to certain attitudes.  Failure to join, however, offers the prospect of exclusion, abuse and reduced opportunities.  One thinks of the ostracism Chris Kenny suffered from exposing the Hindmarsh Island fraud -- particularly the way his book disappeared down the memory hole -- and how much more important, in that case, appearing to uphold indigenous culture was than actually doing so.

This opinion-hegemony has the advantage of a much greater ability to target moral vanity appeals to journalists than opposing positions.  On a whole range of topics -- the republic, indigenous affairs, the environment, migration, multiculturalism, labour market issues -- there is a clear narrowing of debate.  Interpretative journalism has come to mean not much more than the same, narrow, set of values being broadcast across much of the media:  particularly by the Canberra Press Gallery, where weird hours and confinement in an isolated building breeds social isolation and a deeply incestuous and stultifying media opinion-consensus.

The opinion-hegemony has another advantage:  it rests on, and appeals to, the powerful influence of very primitive anti-liberal, anti-economic ideas, as I have outlined in The Changing Fortunes of Economic Liberalism.

WHY THE ABC MATTERS

The ABC crucial in this for various reasons.  First, it is disproportionately important in the amount of news, current affairs and documentary broadcasting it produces -- AM effectively sets the news agenda for the day.  Secondly, as a staff-captured organisation, it is far more dominated by the moral vanity games of journalists than any other media organisation, even the Fairfax press or The Australian (which the late Paddy O'Brien memorably described as The Daily Keating).  It provides, because of its lack of accountability, something of a developer and epicentre for the moral vanity games which have such an invidious effect in narrowing debate.  As I said previously, such an approach is both inherently intellectually sterile, since it is hostile to genuine inquiry, and destructive of democracy.  Both democracy and truth-discovery require flourishing debate and clash of opinion.  If, on a wide range of the most contentious and difficult social issues, most of the media and most commentators are going to line people up as "good" people or "bad" people depending on which side of particular issues they fall -- or even worse, whether they characterise those issues in a particular way or not -- then neither truth nor democracy is well served.  Ignorance and bias provide powerful mutual support.

The ABC, far from counteracting the worst aspects of contemporary journalism, intensifies many of them precisely because it is a staff-captured organisation.  Which is to say, its journalists are more unconstrained, and less accountable, than any other journalists.  Naturally, this lack of accountability magnifies faults.  (When it comes to accountability journalists are, typically, deeply hypocritical:  demanding that they have a freedom from outside scrutiny and accountability they would be the first to sneer at if demanded by any other profession.)

One of the problems is, where do you have the debate over the ABC's accountability?  Their electronic media competitors have an obvious interest in not mentioning them.  Tabloid newspapers are generally not very interested because their readers generally don't watch the ABC.  As for the "quality" press, they tend to be protective of the ABC, partly because of the operation of the Old Mates Act and simple fellow-feeling as journalists, partly because they don't want to close off career options and partly because similar comments could be made about them.  As for the ABC itself, it does little beyond propagandising on this matter.  This problem of where do you have the debate? again indicates the problems of government-owned media:  though it is, in this case, but a symptom of a deeper problem of media accountability.  An edited version of this speech is being run in tomorrow's Sydney Morning Herald and in The Age:  it will be interesting to see if it leads any further.

I am not arguing against bias in media.  A media without people with points of view would be boring.  Passion can often drive comment and journalism in very productive and revealing ways.  What I am arguing against is a biased media -- against an "opinion-cartel" amongst journalists affecting their output.

Nor am I arguing that we should not expect most journalists to be left-of-centre in their personal views.  The question is:  whether that feeds into their journalism and how:  in particular, whether and how an "opinion-cartel" operates.

Moreover, some degree of staff capture in any knowledge/information organisation is inevitable.  The question is:  what countervailing forces and accountability act to ameliorate its effects?

Freedom of the press and the media is based on a deal, an implicit social contract:  freedom for journalists greater than those given to other professions in return for open debate and application of critical scrutiny to all ideas and interests.  If proving to their peers that they are "kosher", that they have the "right" attitudes, becomes more important than a concern for truth and critical scrutiny, then journalists are betraying their side of the bargain.

It is because the ABC, at considerable expense to the public purse, is leading the charge in that betrayal that it should be privatised, broken up or massively reformed.

The Challenge of a Deregulated Market

Address to Conference:
Network Pricing, VoLL Interconnection in the NEM
Melbourne, 29 September 1999

ENERGY PRICE PATHS

DEVELOPMENTS SINCE THE MARKETS BEGAN OPERATING

Most of us remember the confident forecasts of 1994 where the world's most prestigious consultancies estimated the shadow price of new generation at something like $38 per MWh.  Those forecasts still haunt the smaller consumer as they are the basis of vesting contracts.  As the following chart shows, average prices have been around $20.

The frustration of the generators at this level of pricing has not been relieved over time.  The joining of the NSW and Vic markets reduced prices as the greater producer depth tended to reduce the incidences of price spikes.  The one exception to this generally downward pressure was the Victorian off-peak prices where the interconnector allowed higher prices.

Chart 1

In reducing Victorian volatility, the link with NSW made an entrepreneurial Basslink, always a questionable proposition, even more remote.  In Victoria, for example, there were almost as many days (16) when the average price was above $50 in the four months to April 1997 as there have been in the 27 months since.  Basslink's viability, requires a volatile price to amortise the cost of the transmission line.

The following two charts show a relatively trendless electricity price trend.

Chart 2

Chart 3

Prices in SA and Queensland have been far more volatile.

Chart 4

SA prices have been more than double those of the linked market and Queensland has been not much less.

FUTURE PRICE DEVELOPMENTS

Futures Markets

The Societe Generale one year forward data provides some useful market information.  As can be seen in Chart 5, there is an optimistic and a less optimistic (realistic?) way of reading this data.  A least squares regression has the market price trending towards a heady $35.  A log curve has the market trending ever-so-slightly upwards.

Chart 5

Several developments have caused the price to shift.  These include:

• a close to VoLL event in late November 1997, accompanying interconnector maintenance, which caused a repricing in the market, shifting the contract price up from about $18 to $22-26; as memories faded, the price drifted down again
• an upward shift in May 1998 as a result of the one year hedges from the early contestability tranche being renewed
• some increase in prices early this year which may have been due to the Pacific Power/Powercor dispute causing Pac Power to cease seeking contracts thus relieving pressure on the market.  This period also coincided with an increase in the spot price possibly resulting from Pac Power being undercontracted and reducing its generation.
• a further softness in pool prices, reflected in lower contract prices, has taken place since June of this year as a result of AES Yarra (Ecogen) bidding more aggressively, presumably because it has access to take-or-pay gas.  This softening of the market offset the effect on future contract prices of the ACCC forcing some reduction in the NSW vesting prices.  (The lifting of VoLL is likely to have some effect but will not have an effect over the next two years.)

The trends in these prices reflects the reality of an over-supplied market.  The Victorian generators claim the state owned nature of the NSW generators causes them to bid on a market share rather than profit maximising fashion.  There may be something in this but the overwhelming cause of the low prices is excess capacity.

Planned Capacity and Future Prices

Major new licks of capacity in SA are in train with Pelican Point, Osborne 2 and the Transenergie link.  These should bring the price down somewhat as they start to come on line in about a year's time, though SA is always likely to be higher priced than other states.  That would doubtless be the major incentive for an entrepreneurial interconnect and Pelican Point may have been encouraged by especially low gas prices.

Queensland has both PNG gas looking for a market and some of the lowest cost coal available anywhere.  The ESAA's survey of new power stations counts some 2,400 Megawatts of gasfired and 4,690 Megawatts of coal-fired electricity planned between now and 2003.  That's getting close to the existing generation capacity in the State.  Obviously it won't all go ahead in the time frame but there is a coming glut.

These developments have a bearing on price trends.  The SG prices appear to have been ratchetting-up but only to the dizzy heights of $25-30!  The link between NSW and Queensland may bring some price increase in the period prior to the latter part of the year 2000 -- even though it is less than 200 MW, as can be seen in Victoria with Newport generating, the price is often quite sensitive to small additional supplies.  However this is likely to be short-lived if the avalanche of new capacity in Queensland eventuates.  The more substantial regulated link between NSW and Queensland in 2001 seems likely to result in power moving south from an over-supplied Queensland market.  Even so, notwithstanding a renewed price softening over the past month or so, it does not look like we'll plumb the price depths we saw a year and a half ago, possibly because some contracts for unwanted coal have expired.

MARKET STRUCTURE REGULATION

The First Steps

The general pattern of electricity restructuring involving the three way split:generation, transmission, and distribution was adopted worldwide.

Shifting from the nationalised or government franchised industry this was appropriate as the first stage.  But we do not know whether energy suppliers are better run in an integrated or disaggregated fashion.  Probably there is no one answer and, we should not try to impose a particular structure.  It would seem that there are strong incentives on firms to integrate backward and forward to internalise risk.  There is also some production specialisations that require markedly different skills of retailing, generating and distribution.

Privatisation

The process of unwinding government ownership in the industry has not yet reached the halfway stage.  SA treasurer Rob Lucas has offered compelling reasons about why a Minister/shareholder cannot efficiently operate with rival businesses -- he knows that the strategies of one of his charges will adversely impact on others.  It is impossible to apply strategic direction with such conflicts and the businesses become driven by the interests of the executives rather than attempting to maximise the wealth of the shareholders.

Beyond Privatisation

Assuming privatisation proceeds, how is the industry's structure to develop?

Crucial to this question are the relative efficiencies of producing in-house (integrated production) and contracting or selling through a production chain, together with the attitudes of the regulatory authorities.  The ACCC is crucial to the latter question.  The indications of its attitude to a proposed merger is normally final -- its position is seldom contested because of the costs and delay inherent in taking court action.

The ACCC applies a version of the Herfindahl-Hirschman Index.  It may be "concerned" about a merger proposal where 70% of the market is held by the four largest firms with the merged firm to supply at least 15%; or where the merged entity is 40% of the market.  These guidelines are similar to but somewhat more stringent than those of the US and Canada.

The ACCC has made some specific comments on electricity.  Its merger guidelines say that an example of pro-competitive restructuring being undone would be the re-amalgamation of the five Victorian generators.  That is clearly a very remote possibility (even so, the five firms concerned would comprise only 29% of the linked market).

In the past, the ACCC has often taken state markets as its frame of reference, even in areas like banking where the market is far from regional.  Its statements on electricity may indicate a view that the national market is -- or was -- insufficiently connected.  On a state based market, it is unlikely that two significant suppliers would be allowed to merge.  In Victoria, any two of Yallourn, Mission, Loy Yang and Hazelwood would approach or exceed 40% of the market.  It's also probable that merger attempts between Snowy, Southern Hydro and Newport would be heavily scrutinised in view of their combined importance to the peak market.  The existing concentration in Victoria would bring any purchase by one of the big four outside of the ACCC's safe harbour provisions.  Similar considerations would prevail in other states.

The UK experience has coloured a great many views on market power.  The ability of the two majors there to hold prices higher than was considered to be a likely outcome under a fully competitive system continues to have a bearing on the regulatory arrangements in the England and Wales market.  Even though the duopoly is now a triopoly with the growth of Eastern (TUA) as a generator, the authorities consider prices have been manipulated, although not through direct collusion.

But such sustained manipulation in a market without entry barriers is difficult to explain.  And the increased capacity outside of National Power and PowerGen is a predictable market response and one that undermines any market power -- the profitable opportunities caused by high prices sucks in new capacity.  Even so, the Australian competition authorities, like those in most other countries, are rarely impressed by claims that markets self-correct at lower cost than those imposed by their own interventions.  In Australia, the ACCC has blocked or amended mergers in industries without entry barriers.  These have included merger proposals in paints, banking, and the Australian Stock Exchange/Australian Futures proposal.

There would seem to be less justification for ACCC objection to interstate mergers.  However, a merger between a major Victorian generator and one of the three major NSW generators could easily fall outside the ACCC's "safe harbour" guidelines, especially if the nature of the power were broken down into fast start, baseload etc.  Similar considerations may apply if one of the Victorian or NSW generators were to seek to buy South Australia's Optima or even Northern power stations.

The ACCC has raised specific concerns about mergers in its authorisation of the NEM.  In what, in the light of the low prices, reads like a sardonic statement, it drew off ABARE work to suggest that the excessive concentration in NSW could lead to "strategic" bidding.  But the ACCC does had a point here.  Even though there has been no sign of collusion, even of a non-overt kind, it would have been better to have started with a greater NSW disaggregation -- and such an approach is still possible prior to the NSW privatisation.

With regard to vertical integration, the ACCC NEM authorisation also expressed concern about generating businesses operating within retailing.  This already occurs without any known adverse effects.  However the ACCC may look closely on a more full-blooded integration.  Some sort of indication of the ACCC's attitudes to mergers across and within sectors of the industry would be most helpful.

REGULATION OF THE "ESSENTIAL FACILITIES"

At the present time the area of regulation that occupies most of the industry's resources concern "essential facilities" -- the poles and wires.  Both within the States and nationally, Australia's regulatory arrangements in these areas have been particularly intrusive.  In contrast to the formalised processes for declaring that facilities must be opened to competitors and price fixing, some countries -- NZ and Germany for examplehave no specific regulation and simply rely on general competition law, backed up by the ability to by-pass.

In Australia, even where by-pass is clearly evident, as in Victoria's Docklands, the regulator is reluctant to leave things to market forces.

In terms of the outcome of reviews of price applications, the following itemises those that are presently available

Regulatory Inquiries and Outcomes

ISSUE	REGULATOR	APPLICANT CHARGE	DETERMINED CHARGE	DATE
AGL gas contract market	IPART	Annual revenue reduction from $140m to $128m	Annual revenue reduction to $99m	May 1997
Vic gas	ACCC/ORG	9.7-10.2 return post tax	7.75% return post tax	Oct 1998
Wagga gas (GSN)	IPART	Original 11.1% later offer 9.0%	7.75%	March 1999
Telstra Interconnect	ACCC	4.7c/minute	2.0c/min. with 1.6c suggested Sept 1999	June 1999
Adelaide Airport	ACCC	8.89% pre-tax or $3.66/ passenger	8.25% pre-tax or $3.45/ passenger	June 1999
Albury gas	IPART	9.6%	7.75%	July 1999
NSW vesting contracts	ACCC	43.64 cents	no more than 40 cents	Sept 1999
NSW distribution prices	IPART	8% average real price reduction 1999-2004 8.2-8.7% real pre-tax WACC (April 1999)	16% real price reduction 1999-2004 7.5% (7.75% AIE, AE) 15% O&M reductions (10% AE, 5% AIE)	Sept 1999 Draft Determination

Many of us will have waded through the material and attended the meetings behind these decisions.  We know how resource intensive they are.  In terms of outcomes, the authorities are moving towards a consistency, currently 7.75% but perhaps in the light of the latest IPART decision, trending down.  Two major shortcomings of this approach are:

• the intrusive nature of intervention brings an insecurity over the stability of a decision.  Dr Stephen Littlechild, formerly the UK electricity regulator, has discussed the re-opening of the England and Wales regulated tariffs after the 1994 price setting.  Originally, the UK distribution rates were cut by between 11 and 17 per cent and an X factor established at 2 per cent per annum.  A readjustment was sparked by public criticism that these measures offered excessive gains to the regulated businesses, evidence for which was provided by a steep rise in their market values.  The tariff levels were subsequently adjusted down by a further 9 per cent compared to the rates set only some six months previously and a 3 per cent X factor was imposed.  Dr Littlechild stressed that although regulators are intended to be independent of Government, they cannot be oblivious to the same pressures that impact upon Government in determining the just price.
• the setting itself is asymmetrical.  If the regulator sets the price too high, the market provides the necessary discipline because the line is by-passed and, as a result, the owner will discount the regulated price.  If the price is set too low, its sunk cost nature means it will not be withdrawn but:
1. there is less incentive to ensure optimal maintenance levels, upgrade the line and offer premium services;
2. there is a considerable disincentive to building new lines, a disincentive that has been attributed to underbuilding in US transmission, where since FERC Order 888 required open access, new transmission building has fallen 46 %.

CONCLUDING COMMENTS

In general price outcomes in the Australian electricity markets have been understandable, if not predicted.

Shortage of capacity in Queensland has shown the state, long considered to be the lowest cost generator, to be high priced ass a result of too little new capacity over recent years.

Higher prices in SA are prompting their own self-correction.  Docklands demonstrates that a DB cannot seek higher prices than those a rival could provide the service for as long as by-pass is permitted.

Most discussion in the Australian energy industries has centred around issues of how to make the market work and how to prevent market power from having adverse effects on customers.  But the upshot of all this is a considerable increase in regulatory oversight and resources allocated to persuade the regulators.

It is time to start a regulatory disengagement in this industry.  The alternative is an industry that is regulator rather than customer focussed and one with a structure determined by the preferences of regulators rather than efficiency.

Want to win? Look after rural Australia

The 1990s are going out the way they came, with a competent State government led by a popular Premier with a large majority coming an electoral cropper despite being widely expected to win easily.  It happened to Nick Greiner in NSW in 1991, to Wayne Goss in 1995 in Queensland and now to Jeff Kennett in Victoria in 1999.

In all three cases, the unexpectedly bad result was marked by large swings in provincial seats against the incumbent government (though, in Goss's case, the swing was consistent across the State).  But this theme of provincial revolt does not only play at a State level.  Paul Keating's 1996 debacle was notable for the ALP being almost completely wiped out in mainland provincial Australia.  And in 1998, the Howard Government suffered the consequences of the rise of One Nation, again in provincial Australia.  So, Greiner 1991, Keating 1996, One Nation 1998, Kennett 1999.  What is going on here?  With such a strong pattern, there has to be something bigger than the characteristics of particular Governments -- after all, it has affected both sides of politics.

Actually, it is not that hard to work out what is going on.  Paul Kelly famously analysed the politics of the 1980s as being about the dismantling of what he calls the "Federation" Settlement.  That settlement -- the policy principles of imperial benevolence, trade protection, wage arbitration, state paternalism and White Australia -- was not fully put in place until the Deakin Government of 1905-08.  This led to electoral revolt by provincial Australia, culminating in the creation of the Country Party in 1920.  There was nothing mysterious about the reasons for the revolt -- the whole Deakinite system relied on transfers to urban interests, via protection, from rural-based exporters.

Rural-interests were "bought off" by marketing boards, rural subsidies and expanded government investment through public utilities and business enterprises disproportionately concentrated in provincial Australia.  This was the "work-fare" state.

The Whitlam Government greatly expanded the welfare state, an expansion which has continued.  During the 1980s, the process of dismantling the work-fare state (through corporatisation, privatisation and rationalisation of services) in order to pay for this expanding welfare state began.  In this process provincial Australia was obviously a loser, and it was not a winner from the expanded welfare state.  This made some sort of revolt more likely.

The values of provincial Australia (or a caricature of them) have taken a battering.  The period of the 1980s and 1990s saw a great surge in "moral vanity" commentary in public debate -- issues where media and media commentators show what "good" people they are by ostentatiously attacking those who disagree with them as racist, sexist, etc.  Rural and blue collar people do not believe they suffer these moral shortcomings.  What is more, they resent being accused by people with whom they have little in common and suspect of looking down on them -- namely city folk and the intelligentsia.  As journalist Nicholas Rothwell has noted, the effect on a distraught intelligentsia of Hansonism was central to its appeal (until its proponent was revealed to be rather too much of a dill).

Moreover, job losses from urban posturing on indigenous and environmental issues have disproportionately affected provincial Australia.

So, provincial Australia has had jobs and services cut while its values are continually sneered at.  Add to that presidential-style governments focused overwhelmingly on urban concerns, style and values with tight Party discipline suppressing feedback and ability to express regional concerns, and the situation is rife for provincial revolt.  Which is exactly what we have seen.

So, what should governments (and others) interested in continuing the economic and social reforms embarked upon by Labor and coalition Governments do about it?

Obviously, more effort has to be put in to making sure the benefits of economic reform get through to provincial Australia.  One of the best ways to do that would be labour market reform.  Wage rates and employment conditions set in Melbourne and Sydney, imposed on provincial Australia, via awards and the arbitration system, are a major disadvantage and goes far to accounting for its much higher rates of unemployment.  Provincial Australia has higher transport costs and lower housing costs.  It must be able to compete on the basis of wages and conditions that suit its circumstances, rather than merely shifting to lower-wage industries like tourism.  Given the strong correlation between youth unemployment rates and young male suicide, allowing it do so would probably also save lives.

Secondly, there must be more publicly sticking up for the values and interests of provincial Australia and a lot less pandering to urban moral vanity.  Presidential-style election campaigns have an inherent problem here, since its central figure is almost always going to be an urban figure, concentrating on urban concerns.

Governments of either stamp which fail to heed these lessons will continue to suffer the humiliation of provincial revolt, preventing them from carrying out programs they correctly understand to be in the national interest and turning "sure-fire" wins into feather-duster experiences.

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Real Cause for Embarrassment

It is still twelve months till the start of the sporting program for the Sydney Olympics.  But the Olympics embarrassment program is well under way, and the participants are all on steroids.

At a public meeting in London earlier this year, expatriate feminist Germaine Greer pleaded with the world's black athletes to use the Sydney Games for an "expression of solidarity" with Aborigines.  Comparing Australia to apartheid-era South Africa, she said she was ashamed to have been born here, and vowed not to return until the Federal Government agreed on a treaty with Aborigines that would recompense past injustices.  Unfortunately however, she does not seem to take her vows seriously, as she visited Australia a few days ago.

At the beginning of this month, the Human Rights Commissioner, Chris Sidoti, took his organisation to new levels of partisanship by saying that the Olympics should be exploited to highlight human rights abuses in Australia.  Mr Sidoti announced his support for the campaign that Charles Perkins and other indigenous activists are organising to shame Australia during the Games, with tours to show visiting foreign media and dignitaries the Third World conditions under which many Aborigines live.

Mr Perkins should hope that visiting journalists, especially those from Asian countries, have not done any homework on his own background.  He is not the ideal choice for the public face of a campaign against injustice and racism, because throughout the 1980s he was complaining about Asian immigration in a truly objectionable way.

In one interview Perkins said "every third face in the street is Asian ... The humanitarian aspect of the boat people is all bullshit".  He concluded with the comment "who cares if I'm called racist?"  In another, he called for an indefinite ban on migrants from South East Asia, and urged "an AIDS-type campaign" to promote public awareness of the issue -- an ugly and reckless analogy that no non-Aboriginal public figure would ever be allowed to get away with.

Perkins is an old mate of John Pilger, the Sydney-born publicist for radical causes and passionate supporter of the communist regime from which the South East Asian boat people were escaping.  Pilger recently wrote that in the late 1960s, "when I went beyond the Australian frontier for the first time and saw that which I had never imagined, Charlie was my guide".  It must have been an amazing trip, because by that time the frontier no longer existed.

But Pilger has never allowed facts to spoil the feelings of outrage he is trying to create.  He is repaying Charlie's favour of long ago with his own massive contribution to the Embarrassment Olympics, Welcome to Australia, a TV special which was shown in Britain at the end of August.  It will grace our screens later this month, and Pilger hopes that it will eventually go to viewers in over thirty countries.

Welcome to Australia has led to calls in the English press for a boycott of the Sydney Games.  This reaction is hardly surprising.  According to Courier-Mail commentator Gerard Henderson, who has already seen the program, it features Macquarie University Professor Colin Tatz stating that Australia has been "at" genocide in "a much more consistent and systematic way" than what occurred in Nazi Germany or Stalin's Soviet Union.

This is a demented assessment, making the numerous other fictions and slanders that Pilger peddles seem rather tame by comparison.  And Pilger is quite shameless -- in a warm-up article published in the English paper The Guardian shortly before his TV program went to air, he blithely stated that "nigger hunts" to massacre Aborigines continued until well into the 1960s.

He also made the false and mischievous claim that the Howard Government had legislated to effectively remove the common law rights that the High Court recognised in the Mabo decision.  For good measure he added that "the prototype of the One Nation Party was the "One Australia Policy" espoused 10 years ago by John Howard", obviously forgetting his mate Charlie Perkins' role as a kind of curtain-raiser for Pauline Hanson and her party.

Nevertheless, one of the great strengths of this nation is that even people who despise Australia can write what they like with little fear of any legal or physical harassment.  No official obstacles will prevent anyone, whether foreign or home-grown, from doing their damnedest to malign Australia during the Sydney Olympics -- or at any other time.

In fact, the strongest impediments to open and candid reporting of indigenous issues could come from the remote Aboriginal communities that the foreign media may visit.  As the editor of The Canberra Times, Jack Waterford, has commented, a number of these communities impose restrictions on journalists that "are more onerous than those enforced by the military in war".  They are required to sign an undertaking "agreeing to absolute censorship, forever, of anything" they might write about what they observe.

However, some good could come from the Embarrass Australia campaign.  It could provide the Council for Aboriginal Reconciliation with just the opportunity it needs to convince sceptical Australians that it accepts that reconciliation has to be a two-way street.  Instead of jumping onto the Perkins-Pilger bandwagon, the CAR could prepare an alternative information program for the media.

While not shying away from depicting the realities of Aboriginal disadvantage, CAR's program would make clear the enormous efforts and resources that Australian governments and people have devoted towards addressing the issues over the past few decades.  It could acknowledge the intractability of the some of the problems.  It would also stress the many genuine achievements of Australian society.

And in the interests of real balance, it could even point out that some Aboriginal activists who have been very vocal in condemning the rest of Australia have proved to be far more interested in enriching themselves through shady deals than in assisting their own people -- just as happens in many parts of the Third World.  In an Olympic year, perhaps even pigs might fly.

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Workplace Relations Amendment (More Jobs, Better Pay) Bill 1999

Submission to the Employment, Workplace Relations, Small
Business and Education Committee of the Senate on the
Workplace Relations Amendment (More Jobs, Better Pay) Bill 1999

INTRODUCTION

The Workplace Relations Legislation Amendment (More Jobs, Better Pay) Bill 1999 seeks to improve the legislative framework within which the Australian labour market operates.  Knowledge of how labour markets work and how regulation is likely to interact with those workings is essential to assess the likely effects of the Bill's provisions.

HISTORICAL BACKGROUND

The almost 30 years from the end of the Second World War to the 1973 Oil Shock was the only period this century when Australia has enjoyed full-employment.

Graph 1

Since the 1970s, Australia has been moving further and further away from full employment.  The period since the Whitlam Government has seen Australia's worst sustained period of unemployment this century -- 22 years during which annual average unemployment rate has not fallen below 6 per cent.

Australia has been experiencing what might be described as the "rising mountain" pattern of unemployment, where the peak of unemployment in each recession is higher than in the previous recession, and unemployment generally does not quite recover to its low at the peak of the previous economic boom.

Graph 2

Part of this increase in unemployment has been attributed to the increase in the labour force to a historically high proportion of the population, largely due to the entry of women into the workforce.  Wrongly so, in our opinion.

Graph 3

The declining proportion of the working-age population in full-time employment and the fall in the proportion of the working-age population in employment during the later 1970s and early 1980s tends to undermine any such argument.  More fundamentally, it is reasonable to expect economic institutions to be able to adapt to reflect changing preferences.  There is no known limit to the useful goods and services that might be produced if people are permitted to produce them at prices that people are prepared to pay.  The more that is produced, the greater the resources of the community as a whole.  (Distribution of the rewards of that production is discussed in the following.)

International comparisons weaken even further the argument that unemployment is caused by the increased supply of labour, and provide more evidence of the deterioration in Australia's overall labour market performance.

Throughout the OECD nations, an increased proportion of women have entered the paid workforce yet, prior to 1975, Australia's rate of unemployment was consistently below the OECD average.  From 1975 to 1988 it moved up to around the OECD average.  Since 1988 it has been above the OECD average.

Graph 4

Yet another stark indicator of Australia's deteriorating labour market performance is shown by comparison with the United States.  Prior to 1974, Australia and the US had very similar proportions of their working-age population in employment.  Since 1974, the US has employed a higher proportion of its working-age population than Australia, a gap that has tended to increase over time.

Graph 5

In the United States, where women have entered the workforce in great numbers, a greater proportion of the population is working age is in the labour market than in Australia, yet unemployment is lower there than in Australia.

A final piece of telling evidence that labour markets can cope with people who want to work is the manner in which Australia itself absorbed the return of the troops, and then high levels of post-war immigration, without suffering unemployment.

We do not claim that the economic adjustment is immediate and therefore that a sudden increase in the supply of labour cannot cause temporary unemployment, but that is not what Australia is facing.  What is more, the experience of Hong Kong was that, when refugees caused a sudden and unexpected increase in the number of people seeking work, these were absorbed very quickly by the colony's relatively unfettered labour markets.

If unemployment is not cause by the increased supply of labour, then another cause of Australia moving up to the OECD average rate of unemployment, and the diverging Australian and US employment/population ratio, must be found.  These tendencies began with the wage surge of the Whitlam years.  The Australian labour market was not able to recover full employment afterwards -- in contrast to the greater wage surge in the Korean War "wool boom".  In the wool boom case, however, the wage surge had been a result of a genuine upward shift in national income from a dramatic increase in exports.  Employees were sharing the increase in national wealth.  The Whitlam-period wage surge was a result of political deals at a time when Australia was actually under significant negative economic stresses (see Appendix).  While the lower earnings growth of the later 1980s was associated with higher employment growth, the Australian labour market has not yet regained full employment, nor does it seem likely to.  We submit that this is because of a highly-regulated system generating wage-surges not based on genuinely improved economic conditions, preventing their reversal and imposing additional costs upon employment.  (The last would, if wages were totally responsive to supply and demand, not cause unemployment but lower wages instead.  Wages are, however, not totally responsive.)

Graph 6 ⁽¹⁾

An even more stark indicator of Australia's declining labour market performance has been the increase in the average duration of unemployed, from about 13 weeks in 1975 to about a year now.  This is a record which contrasts markedly with the USA's generally steady average duration of unemployment.

Graph 7

MUTUALLY BENEFICIAL EXCHANGE

For most markets for goods and services, the common intuition is that the seller of the product is, somehow, typically "the winner" in the exchange -- hence commentary on international trade on the basis that imports are bad and exports are good.  In the case of labour markets, the common intuition is that the buyer of labour services (the employer) is deemed to be inherently the winner:  certainly as the one from whom the sellers need "extra" protection.  In fact, if market exchanges did not generally leave both sides better off, they simply would not happen.  Yet political debate is filled with commentary that shows no real understanding of this basic truth about market activity -- the "gains from trade" as it is known in economics.  The two real issues are whether these gains are maximised and whether they are optimally/fairly shared.

Employment exchanges occur when an employer offers a wage rate and conditions that a prospective employee thinks is an improvement on his or her present situation and when an employee offers services such that a prospective employer can expect an improvement in his or her situation. ⁽²⁾  Raise the cost of employing someone, increase the risks of employing someone, reduce the output of the employee, reduce the price of what is produced, then the job is less likely to be offered.  Lower the wage and other benefits of moving into employment, increase the costs of qualifying for, and finding employment and getting to and from work, and increase the alternative sources of income and/or non-monetary satisfaction and then the employee's services are less likely to be offered.

Except where employment is compulsory, unemployment is the inevitable consequence of employers and employees inability (without flouting the law) or unwillingness to offer benefits to each other.  Any steps toward removing impediments to finding the "gains from exchange" are improvements to labour market law.

Although poverty (either relative or absolute) is very strongly associated with unemployment ⁽³⁾ there would, even in that theoretical construct the totally flexible labour market, always be a small proportion of the currently unemployed whose productivity is so low that, although employed, they would remain in absolute poverty defined at any reasonable level.  These people need help.  It is, however, better to subsidise them in work than out of it.  This is, first, because productivity is not innate but tends to increase markedly with experience, and second, because there is satisfaction in producing.  (Everyone can bring to mind at least one example of a slow learner or otherwise severely disabled person who has worked his way into gainful employment and would not have it otherwise.) One of the worst faults of Australia's dis-functional labour market is that it denies the dignity of work to so many.

In most cases, even in the current environment, the "gains from exchange" are quite large, certainly large enough to raise the issue of how they are distributed between the bargaining parties.  Two centuries of evolving economic understanding have reached a generally accepted view of circumstances that will cause any market to maximise aggregate welfare.  Conversely, there is also a very fair understanding of the circumstances that cause markets to depart from optimum prices and of conditions of asymmetric bargaining strength.

Employers typically engage more than one employee and are therefore able to spread the considerable costs of information gathering and formalising the deals over several employees.  Where employers are relatively few in number, it is probably possible for them to collude to keep prices and conditions down -- even if only informally by one watching what the other does.  It is fair and efficient that employees should countervail this power by forming unions.  It is, however, neither fair nor efficient that employees or employers should be able to combine as monopolies to engage in holdout strategies against the other party.

For the government to legislate to provide the countervailing power -- either directly or through subordinate legislation such as decisions of industrial relations commissions -- is a particularly egregious exercise of monopoly power.  It has, among other ills, seen 22 years in which the average annual unemployment rate has never fallen below 6 per cent.

It is a particularly striking feature of the Australian labour market that many commercial acts between consenting adults are rendered illegal.  Indeed, the general trend of policy until the Workplace Relations Act 1996 was for the labour market to become more regulated over time.  And the Workplace Relations Act 1996 was, at best, a very mild relaxation of a very highly regulated market.

In most human affairs, conventions grow up to deal with interactions between people.  The sanctions vary, but reputation effects from behaviour -- which encourage good behaviour on both sides -- can be particularly important.  Governments should always be wary about intervening in such conventions, because they often rest on a delicate balance of interests and trade-offs.  Upsetting such a balance can easily lead to outcomes notably worse than the preceding circumstances.

Legislation against "unfair dismissals" provides a classic example of this.  First, the concern is very one-sided.  There is no suggestion that there should be legislative protection for employers against "unfair resignations" even though an employer may be subject to very real costs if a key employee suddenly walks out.  "Unfair dismissal" legislation creates a quasi-property right for employees in their job ⁽⁴⁾ (just as legislating against "unfair resignation" would create a quasi-property right for employers in employees' labour services).

By creating this quasi-property right, such legislation changes quite significantly the incentives facing the parties involved.  The risks inherent in hiring a new person are considerably increased and, if wages or other conditions of employment are not allowed to fall, then fewer jobs are offered.

This may suit labour market "insiders" -- those already in employment, those with appropriate certification, track record and networks able to vouch for reputation -- are advantaged.  New labour market entrants -- with no track record -- and other "outsiders" are disadvantaged.  Since big companies can spread the inherent costs and risks better than small employers, unfair dismissals legislation advantages them against small business competitors.  It is not surprising, therefore that an ACCI survey of employers found that concern about unfair dismissals is strongly related to the size of the business. ⁽⁵⁾  This is of particular concern given that 90 per cent of all additional jobs in Australia between 1985 and 1995 were in firms with 20 or fewer employees. ⁽⁶⁾

Unfair dismissals was introduced into Commonwealth law by the Industrial Relations Reform Act 1993.  The Act was given Royal Assent in December 1993 and its provisions were fully in operation by June 1994.  Given lags for people to become aware of the changes, information to spread on their operation and changes in incentives to be manifested in employment outcomes, one would expect results to show up from 1995/96 onwards.  It is therefore somewhat suggestive that the current economy recovery and the post 19982/83 recovery have had very similar rates of per capita GDP growth (in fact, per capita GDP growth has been slightly higher in this recovery) and equivalent rates of growth in full-time employment until after the third year of the current recovery (1994/95) when the growth of full-time employment in the recent economic recovery began to be notably lower than in the previous recovery.  Given full-time employment represents the greatest inherent risk in a new employee, is more likely to be permanent rather than casual, and the importance of small business in employment, the results are certainly compatible with unfair dismissal legislation discouraging employment.

Graph 8

There are many other examples of the want of wisdom in attempts to replace complex, time-honoured customs including informal penalties by regulation that is at once too simple and too complex.  The words of noted US economist Paul Krugman talking about French employment regulation also ring true for labour market regulation in Australia:

The French have no monopoly on intellectual pretensions or on muddled thinking.  They may not even be more likely than other people to combine the two.  There is, however, something special about the way the French political class discusses economics.  In no other advanced country is the elite so willing to let fine phrases overrule hard thinking, to reject the lessons of experience in favor of delusions of grandeur

To an Anglo-Saxon economist, France's current problems do not seem particularly mysterious.  Jobs in France are like apartments in New York City:  Those who provide them are subject to detailed regulation by a government that is very solicitous of their occupants.  A French employer must pay his workers well and provide generous benefits, and it is almost as hard to fire those workers as it is to evict a New York tenant.  New York's pro-tenant policies have produced very good deals for some people, but they have also made it very hard for newcomers to find a place to live.  France's policies have produced nice work if you can get it.  But many people, especially the young, can't get it.  And, given the generosity of unemployment benefits, many don't even try.

True, some problems are easy to diagnose but hard to deal with.  If [New York Governor] George Pataki can't end rent control, why should we expect [French President] Jacques Chirac to be able to cure Eurosclerosis?  But what is mysterious about France is that as far as one can tell, absolutely nobody of consequence accepts the obvious diagnosis.  On the contrary, there seems to be an emerging consensus that what France needs is¾guess what?¾more regulation. ⁽⁷⁾

Comparisons of employment growth make it easy enough to see why an informed US commentator would be vastly unimpressed by Europe's performance.

Graph 9

In Australia, it is not delusions of national but of moral grandeur which provide a destructive conjunction with sectional interest.  A whole range of possible solutions to our dis-functional labour market are deemed unacceptable because their advocacy is taken to be a sign of moral turpitude.  Those playing such moral vanity games are patently more concerned with being seen to be a "good person" because they have the "approved" opinions than improving the job prospects of their fellow Australians.  It requires no undue humility to concede that we are still as incapable of redesigning well a social system that has evolved over centuries as we are of redesigning an eco-system.

THE "NATURAL" RATE OF UNEMPLOYMENT

Economics has developed the concept of the non-accelerating inflation rate of unemployment (NAIRU), sometimes misleadingly known as the "natural" rate of unemployment.  The NAIRU is the rate of unemployment which -- given current institutional structures -- macroeconomic policy cannot reduce unemployment below without inflation increasing.

In other words, if unemployment is to be reduced further, there has to be institutional reform.  That is clearly the case in Australia.  Substantial, sustained improvement in unemployment cannot be expected without major structural reform in the labour market.  Any improvement achieved merely through economic growth will be vulnerable to the next economic downturn.  Nor is economic growth itself independent of the efficiency of the labour market.  Major regulatory and institutional reform is required.

INSIDERS AND OUTSIDERS

Unemployment is not an evenly spread experience.  University graduates, for example, experience very low rates of unemployment -- and they are the people making the key decisions and writing commentaries on public policy issues.

Since 1982/83, from one to three per cent of the working-age population have been unemployed for 12 months or more.  This is a proportion which has tended to go up over time.

Graph 10

Unemployment is concentrated in specific groups who have differing experiences.  While about 60 per cent of the unemployed are under 35 this age group accounts for only about 40 per cent of the long-term unemployed.  About 65 per cent of the long-term unemployed are in the 25-54 age groups.  Though members of older age groups are much less likely to be unemployed, if they become unemployed they are more likely to become trapped in long-term unemployment.

Graph 11

The Australian labour market operates as one of advantaged "insiders" and disadvantaged "outsiders".  If one removes unemployed teenagers and the long-term unemployed -- creating what might be called the "politically significant rate of unemployment" -- unemployment rates are markedly lower.  If one excludes all unemployed youth as well as the long-term unemployed, the unemployment rate has spent much of the past two decades in the two-to-four per cent range.  This may explain why unemployment has been the subject of many pious political words but little effective political action.

Graph 12

Excluding the young and the long-term unemployed identifies "frictional" unemployment -- which is fairly stable, though above the one-to-two per cent it was in the 1950s and 1960s.  Youth unemployment has risen as youth wages have increased relative to adult wages, undermining their capacity to compete (given their lower level of skills, experience and established track record) ⁽⁸⁾ with older workers and with women entering the workforce.  Long-term unemployed youth provide the basis for the development of an Australian "underclass" -- a welfare-dependant group with a high rate of drug use and petty crime.  Older unemployed can suffer problems of not having appropriate skills in a changing economy while the expansion in family support in welfare provides less pressure to accept work of lower-status or requiring other major changes, such as shifting house (which may be particularly difficult if that means going to an area with much higher housing costs).  In all cases, not being able to "bid" for employment at a level commensurate with their actual productivity is a barrier to employment.  Claims that such barriers are to stop "exploitation" are merely the self-justification of an anti-competitive cartel -- the unemployment which is generated by such barriers most certainly being the result of exploitation of regulatory privilege for private gain.

The failure to substantially improve the deteriorating performance of the Australian labour market is the most powerful evidence that the Australian political system, in practice, rates more highly goals other than restoring full employment -- such as not antagonising the advantaged labour market "insiders".  Indeed, so far from being, in practice, seriously interested in reducing unemployment, the political process has regularly produced outcomes whose most likely effect would be to make unemployment higher than it would otherwise have been -- such as unfair dismissals legislation, legally-imposed wage minimums unconnected with productivity, legally enforcing benefits to employees, increased employer liability for employee actions and increased legal obligations consequent on employment.

UNIONS AS INSIDERS

The union movement is generally strongly in favour of Australia's highly regulated labour market structures and against substantial de-regulation.  On the contrary, they have generally supported increased regulation, even treated that as a major goal -- as was seen recently with the controversy over youth wages.

The point of unions is to deliver advantages to their members.  Clearly, they will seek to advantage their members and pursue their own institutional interests.  This is in itself not a problem, provided the regulatory power of the state is not enlisted in this cause.

The unions' basic approach is to defend the interests of incumbent, organised "insiders".  Historically, these have been male, full-time workers, particularly in manufacturing, construction and other large work-sites.  The groups who threaten the interests of these "insiders" are not the employers -- they are the source of income.  The groups who threaten the interests of the labour market "insiders" are their competitors -- new labour market entrants, such as young people and women, those wishing to work under arrangements which are not easily organised, such as part-time and contract work.  The power of unions has rested on the ability to provide services to their members.  These services have included the wages and conditions for which only a labour monopoly could successfully bargain.  The power and security of unions officials is similarly enhanced by monopoly power.  Monopoly is the exclusion of competitors -- "scabs" are simply competing suppliers of labour.  The losers are the "outsiders" -- those who have never become employed and the marginally employed.  Typically, these are young, in some industries female, and play no effective part in union affairs.

Rules such as "first in-first out", unfair dismissal laws (which raise the risks in hiring new, unknown workers but give incumbents quasi-property rights in their job) and raising youth wages (so less experienced, skilled and productive young labour market entrants cannot compete against the incumbent unionised workers) ⁽⁹⁾ are all based on this pattern of union defence of labour market "insiders" against their competitors.  This has created a problem for unions as those "outsider" groups have become increasingly important in the workplace.

Similarly, complex rule demarcations and specialist arbitration structures provide a role for union officials to acts as intermediaries between workers and management.  Impediments to efficient labour and capital use retard living standards below those otherwise attainable.

Union officials strenuously deny that their activities were based on self-interest against the interests of other workers (and sometimes even their own members).  But an epigram Ben Chifley was fond of quoting comes to mind -- "in the race of life, back self-interest, it is the only horse that's trying".

AWARDS AS THIRD PARTY IMPOSITIONS

The award structure itself is morally offensive.  It imposes, via the regulatory power of the state, conditions on employers and employees to which they have not consented.  Where the effect is to destroy their prospects of employment, it become utterly morally retrograde.  Awards provide a form of price-maintenance and inhibition of competition which is explicitly banned for other goods and services under the Trade Practices Act.  Given that unions only cover about 20 per cent of the private sector workforce (and union membership in some industries is less than entirely voluntary), the award structure cannot be defended on the ground that it is, at least, democratic.  It is something which has completely outlived whatever usefulness it may once have had.

AWARDS AFFECT COMPETITION BETWEEN EMPLOYERS

Union power and labour market regulation often enforce implicit or explicit barriers to competition.  Complex regulations imposing high administrative costs advantage large companies (who can spread the costs over more units of production) against smaller competitors.  Unions can be relied upon to oppose, by political and industrial action, competition among employers which reduce their own opportunities for rent-seeking.  Union opposition to the break-up of electricity and telecommunications monopolies and to the imports of motor cars and clothing provide examples of how effective they have been, and sometimes still are, at opposing competition.  Unions are confident they can share the economic rents and employers with access to such rents would sooner share than forego them.  Consumers, of course, pay these rents, which are typically highly regressive in their effects.

Unions provide real benefits to their members and to the economy.  It is because of their special legal privileges within a vast regulatory apparatus creating a highly dis-functional labour market that the costs they impose are said to, and may in fact, outweigh their benefits.  The solution is not to ban or to regulate them in any special way, but to make ordinary corporate citizens of them.  Changes to workplace law should be directed to that end.

UNEQUAL BARGAINING POWER

It is perfectly reasonable for unions to play the role of improving the capacity of workers to bargain with their employers.  This is a fundamental service they can offer to current and potential members.  It is an entirely different matter for them to be granted special legal privileges to pursue this aim.  After all, the declining rate of unionisation to its current level of just over 20 per cent of private sector employees itself indicates that workers do not feel this is a necessary service for the conduct of their employment activities.

The best single protection for workers is to have skills in demand, to be in a full employment situation, to have employers competing for their services.  A recent speech by Roger Kerr, Executive Director of the New Zealand Business Roundtable expresses these points well:

Behind these developments is the same ideology that was rightly set aside in reforming most other features of New Zealand's labour law, namely that helpless employees must be protected from omnipotent employers.  We all deal satisfactorily with banks, retailers and other firms with far greater resources than we have, without the aid of laws on minimum deposit rates and maximum retail prices, and without resorting to unions of savers or consumers.  This alone suggests that there must be a strong measure of myth in the doctrine of unequal bargaining power.  If bargaining power was a systematically one-sided problem -- as opposed to something which fluctuates with market conditions and which affects employers and employees alike -- we would expect to see wages driven down towards zero in countries without minimum wages, employees without the power to quit at will, and the prices of goods sold by big firms tending towards infinity.

Of course, none of this happens, because it is not the difference in resources between buyer and seller that matters, but the alternatives available to each.  Employers and workers are not in competition with each other:  employers are in competition with other employers for workers and employees are in competition with other employees for jobs.  In all markets, including the labour market, the best protections for savers, consumers and workers are freedom of entry and exit on both sides of the market, and openness to competition.  Hong Kong has no minimum wage or unfair dismissal laws.  Because these freedoms have helped it to maintain virtually full employment ⁽¹⁰⁾ despite massive structural change, its workers are not easily exploited and they now enjoy average incomes 50 percent higher than those of New Zealand workers.

This is not to say that employers and employees have no inclination to behave opportunistically.  Rather, the circumstances in which opportunistic behaviour is profitable are relatively rare.  One reason is that it is normally profitable to strive to achieve and maintain a reputation as a good employer.  Another is that contractual arrangements have evolved through market processes to safeguard against opportunistic behaviour on the part of both parties to an employment contract.

The legal scholar Richard Epstein has repeatedly emphasised the folly of judicial intrusion into routine affairs such as employment contracts:

It is one thing to set aside the occasional transaction that reflects only the momentary aberrations of particular parties who are overwhelmed by major personal and social dislocations.  It is quite another to announce that a rule to which vast numbers of individuals adhere is so fundamentally corrupt that it does not deserve the minimum respect of the law.  With employment contracts we are not dealing with the widow who sold her inheritance for a song to a man with a thin moustache.  Instead we are dealing with the routine stuff of ordinary life;  people who are competent enough to marry, vote, and pray are not unable to protect themselves in their day-to-day business transactions.

Beyond the issues that arise in standard contract law -- such as fraud, misrepresentation, and duress -- employment contracts do not leave gaps or implied terms that courts need to fill.  Employment contracts are made every day;  the costs of contracting are low;  and people can evaluate realistically the risks and costs of contingencies such as dismissal.  If it is optimal for workers to have a job security or just dismissal provision they will negotiate one voluntarily because the barriers to doing so are trivial.  If not, they will choose to avoid the costs to them of lower wages or other less favourable terms in their contract which are the inevitable trade-off for greater job security.  In short, mandatory unjustifiable dismissal provisions diminish the value of the compensation bundle for most employees.

Thus the problem that activist legislators or courts seek to address is an imaginary one, and their decisions harm the very parties they hope to benefit as a class.  Activist judges often find meddling in other people's affairs a rather pleasant burden, but this tendency lends itself to abuses of power.  The law has no economic rationale for a good faith or fair dealing intervention in labour relations.  Economic competition does not create a perfect world, but on both the demand and supply sides of the market it provides incentives for civil and cooperative behaviour.  Firms do not sack workers willy nilly;  such practices are virtually unheard of as they are bad business and the costs of changing staff can be high.  New Zealand employers have every incentive to keep and reward quality employees - after all, there are over 200,000 firms that can bid them away at any moment.  The at-will contract is often the best mechanism for establishing terms of employment which avoid vulnerabilities, opportunism, one-sidedness and monopoly by either party in an employment relationship.  If, subject to the terms of a contract, an employee can quit at any time, the firm has every reason to be responsive to the employee's concerns.  If, subject to the terms of a contract, an employee can be dismissed at any time and for any reason, that employee has every reason to be productive.  Productivity creates job security. ⁽¹¹⁾

Unequal bargaining power is not a reason to maintain Australia's complex and intrusive structure of labour market regulation, nor to do other than to treat unions as ordinary corporate citizens.

WHY REGULATION OFTEN FAILS

There is nothing particularly mysterious about why government regulation in markets is often counter-productive -- it has been well, if not exhaustively, analysed.  In practice, there is usually very little real quality control on regulatory provisions, either before or after the fact.  Determining effects is often quite difficult ⁽¹²⁾, few resources are put into systematically doing so and there is very limited feedback into the legislative process from such measurement as does occur.  Worse, such feedback and measurement as does occur is often left to the regulators, who have a vested interests in the regulations they administer. ⁽¹³⁾  This situation was much improved by the creation of the Industries Assistance Commission in 1975 but, 29 years later, there is still far to go.  There are also obvious conflicts of interest in government funding evaluation, since governments are not likely to want to be publicly and authoritatively told that their policies are not working.

Furthermore, interest in public policy itself is a "public good", subject to considerable "free-riding", so therefore tends to be under-provided.  By contrast, those with concentrated special interests often have powerful incentives to be involved, leading to intrusive regulation tending to favour those with such interests (e.g. by raising marketentry costs in, say, law and medicine).

Unlike ordinary commercial exchanges -- where people only come together in expectation of benefit, where people have to know only their own situations and preferences -- regulatory action is the application of centralised coercion.  The regulator cannot learn of the diversity of ever-changing personal preferences, aptitudes and resources.  Even if they could, they much adopt a "one size fits all" approach, even though they know perfectly well that it does not.  Were they to adopt the "flexible" approach, so often advocated by business, they would very soon find themselves accused of favouritism, of corruption.  The operation of centralised coercion is such an excellent way of gaining benefits while passing the costs on to others that those who impose regulations -- even of the "one size fits all" type -- do not escape moral hazard.

There is a place for judicious regulation (they can reduce transactions costs, for example) but there are also powerful reasons why there should be no presumption that extensive regulation is socially beneficial.  The experience of Australia's highly-regulated labour market certainly provides evidence of the cost of over-regulation and regulation imposed at the behest of particular interests.

EXAGGERATED CONCERNS

Argument against de-regulation of the labour market are often based on concerns about increasing income inequality and allegedly increasing poverty rates.  Regarding the former, there seems little doubt that market incomes have been becoming more unequal.  This is largely explained by life-time earning paths becoming notably steeper.  Evidence from the US is particularly pertinent, as the US is usually used as the "horror" example of income inequality.  Whereas, in 1951, earnings in the US peaked in the 35-44 age group at about 50 per cent greater than the earnings of 20-24 year olds, they now peak in the 45-54 year age group at about three times the earnings of 20-24 year olds, as human services and knowledge skills become increasingly important in the economy.  This pattern of steeper life-time income paths has certainly significantly increased income inequality.  That is, however, not something that public policy should be concerned with.

Graph 13

Although poverty even in well-to-do Australia should concern us, claims about increasing poverty are wrong, since it is actually decreasing, both here and in the US.  One US study found that, if households were assessed against the official US poverty standard (three times the income needed to purchase a nutritionally adequate diet) according to their actual consumption patterns, poverty in the US has declined from 31 per cent of the population in 1949 to 13 per cent in 1965 and 2 per cent by the late 1980s. ⁽¹⁴⁾  Applying the official, income-based, definition of poverty, in the early 1990s, the median duration of a poverty spell in the US was 4.2 months.  Only a third of those classified as poor by the Census Bureau had been below the poverty line for 24 or more months reducing the long-term poverty rate (measured by income) to about 4 per cent of the US population. ⁽¹⁵⁾  A University of Michigan study of households tracked over a 16 year period (1975 to 1991) found that only 5 per cent of the households who were in the lowest fifth of income in 1975 were still there by 1991.  A far larger proportion (29 per cent) had made it to the top quintile ⁽¹⁶⁾ -- employment growth and steeper lifetime earnings in operation.

Despite claims to the contrary, the United States is not a nation in which poverty is increasing -- quite the reverse!

Concerns over inequality and poverty are not good reasons to fail to embrace major labour market reform.  Particularly reforms that would increase employment and decrease unemployment which would therefore reduce poverty and, by lifting the incomes of the poorest people, reduce the disparity of incomes a little.  There are no good reasons for Australia not to learn the lessons of American success or to follow the path of European failure.  On the contrary, getting people into jobs and up the employment ladder is the best path away from poverty.

WHERE REGULATORY POLICY SHOULD BE DIRECTED

Wage Arbitration remains the last great survival of the Deakinite Settlement (see Appendix).  Indeed, with the exception of some very partial freeing up in the Workplace Relations Act 1996, the labour market has been a conspicuous holdout from the process of de-regulation in factor and product markets with measures such as unfair dismissal laws and affirmative action and equal opportunity legislation, or indirectly, through health and safety regulations, welfare changes and so forth adding to the regulation of the labour market.

Australia has tried increasing government regulation of the labour market, and it has been a notable failure.  It is time to change direction.  In particular, it is time to stop loading onto labour market regulation redistributive goals which should be pursued through the tax-and-transfer system.

Current regulatory structures create or entrench the "insider/outsider" divisions in the Australian labour market.  Regulatory reform should therefore be systematically directed to abolishing or reducing provisions which create barriers to entry to employment.

The Workplace Relations Legislation Amendment (More Jobs, Better Pay) Bill 1999 must be regarded as a mild step in the right direction.  Taking the major features in the order they are set out in the Explanatory Memorandum:

• Restrictions of the ambit of awards, allowing parties to choose appropriate jurisdictions and clarifying the role of the courts and Commission in dealing with unprotected industrial action are but minor improvements on the award system and subsidised compulsory arbitration.  The fundamentally dis-functional system is retained;
• Given the decreasing importance of manufacturing in the economy, adoption of the term "workplace relations" is hardly objectionable, nor is improved services -- though the competitive pressures of an open market in arbitration and mediation would improves services more effectively;
• Establishing the distinction between compulsory and voluntary arbitration is a desirable step toward removing inappropriate taxpayer-subsidy to arbitration services;
• Similarly, providing for the use of voluntary mediation as an alternative to the Commission is a step in the right direction.  The role of accreditation of mediators is more problematic, since it provides the possibility, indeed likelihood, of (re)creating an "insiders' club" of the type which has for so long be-devilled the Australian labour market;
• If awards are not to be abolished, they certainly should be limited in their coverage as much as possible;
• Any easing of the burden of unfair dismissals is desirable.  As much of the harm such provisions do is, however, entirely independent of the merits of any particular case, the benefit of any such restriction -- short of complete abolition -- must be doubtful;
• Simplifying the registering of AWA's is also inherently desirable, though it is hard to see why workers and management cannot be treated as adults and allowed to come to their own arrangements without any need to register anything;
• Industrial action is both clearly a basic defence for workers against unconscionable action by their employer and a means by which power can be exerted against other parties in an unconscionable way.  It is therefore desirable that the law on such matters be clear, that they be undertaken only with the workers' clear consent and that they should not be used as a weapon against third parties;
• Right of entry can be easily abused and safety issues can be, and have been, used as a "cover" for inappropriate industrial action.  It is therefore appropriate that the property rights of employers be protected in these matters, without impeding the legitimate activities of unions.
• Freedom of association is one of the more basic civil liberties that should be adequately protected by common and criminal law but, to the extent that it is not, it become an appropriate realm for legislative action.  It is certainly desirable that the individual's right not to be compelled to associate (or not) be clarified and that attempts to get around protection of such rights be blocked;
• Since Victoria has surrendered legislative responsibility to the Commonwealth, improved integration of the Victorian system is clearly desirable.  It is worth noting, however, that one of the most unfortunate aspects of Australian labour market regulations has been the imposition of standards which may be appropriate for Sydney or Melbourne on places -- such as rural Australia -- where they are very inappropriate;  and
• Repealing of provisions that allow the Federal Court to vary or set aside contracts made with independent contractors is highly desirable, given that having the Courts interfere in contracts in such a way must tend to have a pernicious effect on commercial operations, greatly reducing certainty in commercial transactions.

In summary, the Workplace Relations Amendment (More Jobs, Better Pay) Bill 1999 is not the radical reform that the Australian labour market -- and the unemployed -- both need.  It does, however, move policy in the right direction.

We are happy to support this Submission by appearing at a public hearing.

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ENDNOTES

1. Information on female average earnings is not available prior to September quarter 1981.

2. The operation of features such as implicit contracts, etc add to the subtleties of the labour market exchanges without changing the essential details.

3. See Bob Gregory and Peter Sheehan, "The Collapse of Full Employment", in Fincher, R. and Nieuwenhusen, J. (eds), Australian Poverty then and Now, Melbourne University Press, Melbourne, 1998, pages 103 to 126.

4. Steven Kates, "Unfair Dismissals", Paper to the H.R. Nicholls Society Conference, August 28, 1999.

5. Ibid.

6. Gregory and Sheehan, Op. Cit., page 111.

7. Paul Krugman "Unmitigated Gauls:  Pardon my French about French economics", Slate, posted Thursday, June 5, 1997.

8. The element missing in the old refrain of "can't get a job because I don't have experience and can't get experience because I don't have a job" is being able to put a bid to start off on a wage sufficiently low that it is worth the employer's while to have a punt on an inexperienced person.

9. That raising youth wages can be seen as "benefiting" young workers -- indeed, if they are abolished all together one can parade one's opposition to "discrimination" -- provides an excellent example of conspicuous benevolence and sectional interest marching together.

10. Since December 1998, the Hong Kong unemployment rate has been 6.0 to 6.3 per cent, during a period of deep economic stress.  Australia could only manage a rate that low for some months in 1989 after six years of economic recovery and has not managed it since.

11. "Obstacles to Employment and Productivity Growth in New Zealand's Labour Market", speech to Institute for International Research, 11th Annual Industrial Relations Conference, 3 March 1997 available at http://www.nzbr.org.nz/documents/speeches/.

12. Effects of any particular provision tend to be very hard to pick out from a mass of government action.  The enormous increase in legislative activity (see Appendix) militates further against effective quality control.

13. Not least, in preserving the "human capital" of intimate knowledge of the regulatory structure, with potential future earning potential.

14. Slesnick, Daniel T., "Gaining Ground:  Poverty in the Postwar United States", Journal of Political Economy, February 1993, pages 1-38, cited in Cox, W. Michael and Alm, Richard, Myths of Rich and Poor:  Why we're better off than we think, Basic Books, New York, 1999, page 16.

15. Cox and Alm, Page 74.

16. Cox and Alm, Page 73.