ABC must put national values first

The ABC treats Australia like a bag of mixed lollies.  The public broadcaster is strong on many key Australian values;  others are discarded like a licorice-flavoured jellybean.

It is unambiguous in its support for liberal democracy.  It has taken a strong position in favour of democracy and the institutions that support it.  But its support for the free markets that ensured our prosperity leaves a lot to be desired.

The ABC is usually strong on human rights, regularly producing news editorials scathing of the injustices inflicted by government against individuals.  In September last year, Lateline compiled a report on the state executions of innocent Chinese prisoners and showed unequivocal support for due process and a fair trial.

On the other hand, the ABC has produced critical reports that questioned the rights of the individual in Australian society.  A report into industrial relations reform and the choice of workers to take responsibility for their conditions reflected a very different attitude to Australian values.  The concept that workers and employers could come to a mutually agreeable arrangement without government interference is reported as a fait accompli.

This is where the ABC's ambivalence towards Australian values is most glaring.  It has produced segments on the operation of the free market that hold it in contempt.  Late last year stories on Lateline and The 7.30 Report flouted the benefits of media ownership deregulation.  Segments were framed with a tone and structure that argued that where the market operated, Australians lost.  Credibility was given to baseless speculation.  Support for free markets was limited.

A story on foreign investment presented a similar scepticism of the operations of the free market.  The message was clear:  foreign business is bad, and where it invests its money, ordinary Australians lose.  The tone of the segment reinforced narrow-minded, Hansonite prejudices against foreigners, an unfortunate position considering Australia has always been reliant on foreign capital and we benefit enormously from it.

Ultimately, it is no surprise that the ABC opposes free markets.  Its very existence is anathema to competition:  the public broadcaster is protected from the creative destruction that characterises the market economy.

Australians should not be afraid to unequivocally promote the superiority of its values.  Our commitment to liberal democracy, human rights and free markets should be resolute and firm.  They are a package deal, intrinsically intertwined and mutually supportive.  They are the framework for Australia's success as a nation.

Our strength comes from the framework of our society that unleashes the maximum potential of each individual.  These are the values we wish for ourselves.  They should be the values that we wish for others.

And they are the values espoused by the main political parties.  Although there is often legitimate disagreement, there is a remarkable level of consensus:  free markets, liberal democracy and human rights animate Australian public policy.

Each year, Australians pay tax dollars to the ABC to promote our values in the region.  But instead of promoting these values, it insists on redefining them and promoting its own interpretation.

The consequence is a distorted message promoted to our neighbours, who would benefit from an unequivocal message:  Our values created our prosperous society;  adopting them will ensure your prosperity as well.

Societies formed in opposition to one or more of these values have always failed to achieve a similar standard.  Failure to recognise the importance of these values to the establishment and maintenance of societies is to turn a blind eye to history.

The 20th century was a testament to the failures of societies that did not adopt these values.  Instead of enjoying stability, dignity and prosperity, they suffered under tyranny, injustice, servitude and scarcity.

The failure to achieve prosperity through central planning and control ensured those societies brought conflict to Australia and its allies.  They also ensured our prosperity was stifled.

It has become trendy to believe that these values are not universal, do not suit or are not the ambition of each society.  History shows that every time people have a choice, they have voted with their feet.  Just ask the refugees who risk their lives to get from Cuba to the US, or the North Koreans who seek out South Korea or Japan.  There are few who make the return trip.

But when we try to ask the ABC to deliver this message to our neighbours, it is being lost along the way.

Under its charter, the ABC is charged with responsibility for promoting Australia's identity abroad.  For instance, Lateline is broadcast to the region as part of the satellite Australia Network.

Criticism of the ABC's role in public diplomacy should not be grouped as part of a broader chorus of the failings of the ABC.  The ABC often attracts criticism.  Complaints of bias by the Government, Opposition and think tanks are common.  It asserts its claim to be independent but, if we are to be honest, the best it can hope for is to be non-partisan.

But the rules are different in its responsibilities for public diplomacy.  To fulfil its charter, it should not be merely neutral on Australia and its values.  It should actively promote our interests and project our values to increase their appeal and adoption in the region.

The ABC is failing this mandate.  In public diplomacy it is time to put the national interest and the values that support it first, and the ABC's role last.

Reform that threatens our prosperity

Mineral exports, largely fuelling China's industrial expansion, have been vital to the health of the Australian economy.  Almost all of Australia's increased exports over the past three years have comprised coal and iron ore.  This bolstering of the balance of payments has upheld the value of the Australian dollar.  The benefits have been enjoyed by all of us.  They include cheaper imports and production inputs.

Without the China minerals boom we would now be much poorer, irrespective of Australia's micro-economic reforms of the 1990s.

But it is one of those reforms -- that regarding competition policy -- which now threatens our continuing prosperity.  The 1993 Hilmer report spurred changes to the Trade Practices Act to open up transport and other government-owned monopoly facilities to rival suppliers.

As well as demolishing government monopolies, this legislation also amplified the powers of the Australian Competition and Consumer Commission and its sister regulatory agency, the National Competition Council.  Though the target for opening access was largely government-owned "essential" facilities, built under guarantees against any competition, the laws were written much more broadly.

Making it mandatory for companies, individuals or institutions to provide services, essentially on terms and conditions decided by a government agency, is a sweeping power.  It is fundamentally at odds with the basic property rights that underpin the economy and the free market.

For these reasons the power should be used sparingly.  But once we combine well-resourced regulatory agencies with businesses that are keen to get free-ish rides on other businesses' assets we have a potent brew for cooking up monopolies that are ripe for government control.

Regulators have required private enterprises to give access to their facilities in industries that include gas, ports, airports, telecoms and rail lines in the Pilbara.  These requirements extend not only to assets built under a government protective shelter but also to new facilities built without government protection.  The only facilities that automatically escape coverage are those deemed to be manufacturing.

The issue of rail in the Pilbara has been before the Federal Court on two occasions.  In the first instance, Rio Tinto was fighting off an attempt by North (which it later took over) to access its rail lines.  Judge Susan Kenny decided the system was a de facto manufacturing operation and therefore beyond the scope of the Part IIIA provisions.  Judge John Middleton took a contrary view in a case last December concerning BHP Billiton.  He said the facility looked like a railway, smelled like a railway and by golly it was a railway and BHP must offer access to it.

Regulatory intrusions on property bring a cost and this is why such measures are associated with failing states and not successful ones.

Private facilities are rarely conscripted for some greater "public good" for three reasons.  First, companies' opposition to such confiscation will hold things up;  second, the risks government regulation creates require higher threshold rates and "dampen" new investment;  and, third, companies considering new investment will wait and see what others are doing rather than take the entrepreneurial plunge themselves.

In the context of the Pilbara dispute, several consultancies have considered the implications of regulators requiring access.  They used conservative assumptions but still estimated large costs.  The Centre for International Economics examined a deferment of six months in the start of an investment program which would eventually duplicate the estimated $35 billion in capital investment in the Pilbara mines and associated facilities.  The outcome involved a net loss to the economy over 20 years of up to $20 billion.

Charles River Associates estimated that a one-year delay in annual spending of $2 billion with a catch-up in the following year would still mean a permanent loss of output of $400 million.

The actual delays would far exceed the assumptions these models used.  But even these indicate the huge penalty the economy pays for the sort of buccaneering approach to property rights that regulatory agencies are taking.  The agencies argue the costs will be offset by increased competition, but this seems doubtful.

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Regulators a headache for market forces

Every year, Telstra must submit 162,000 pages of paperwork to regulators.  It estimates that there are 500 public servants devoted to its regulation.

Large firms in transport and communications, such as Telstra, rail operators, and pipeliners incur considerable costs to accommodate regulators such as the ACCC and the National Competition Council.

These firms battle against regulators who want to force them to sell their services cheaply.  And they won't make new investments if they can't control them.

Small businesses face different problems.  These stem from regulators trying to discover them conspiring to jack up prices.

The ACCC made an art form of this under its former boss, Professor Allan Fels.

Even before becoming head of the ACCC, as Victorian prices Commissioner, Prof Fels concentrated on the price collusion issue.

He could apparently find no evidence of collusion between cigarette companies to jack up prices but looked at the prices in the shops and decided it must be there.

Likewise, he drove around country Victoria observing petrol prices which he felt were too high and decided that there must be collusion.

Firms acceded to demands for price reductions even though they often believed they were unjust.

The pressures intensified when Prof Fels became head of the ACCC.

It appears that current ACCC chief Graeme Samuel has failed to halt this pursuit by regulators of small businesses in petrol retailing.

Last year the courts found that the ACCC invented data on alleged price collusion in Geelong.  A similar case by the ACCC in Ballarat fell apart on appeal.

It's bad enough having regulators as drones on the public purse but when they're actually undermining productive activities their costs are amplified.

And they would like even more power, including an ability to demand jail terms for business owners and executives who collude to raise prices.

It's doubtful that regulators would want such penalties extended to their own activities where these create unnecessary costs.

The problem is that few people within regulatory agencies understand business.

They see identical prices offered by different firms and assume collusion.  They don't realise that with similar goods tiny price differences mean a firm loses almost all its trade.

A day at the Melbourne market would show just how rapidly businesses change prices in response to demand, supply and competitors' behaviour.

What regulators don't understand is that firms are constantly looking at each other's prices to try to win sales or raise their own prices if those of competitors are heading north.

Our prices stay low because markets are open, not because they are patrolled by regulators.

Any firm that seeks to increase prices above costs sees new competitors stealing its customers.  Any firm that looks for a quiet life sees new rivals undercutting it.

Our over-resourced regulatory agencies fail to recognise this.

And they impose legal and other costs on firms in their zeal to find markets that don't work as they think they should.

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Planning rules price more people out of housing market

Demographia, based in St Louis, has issued its third annual survey of housing affordability.

The survey covers 159 cities in North America, England, Ireland, New Zealand and Australia.  It measures average (median) house prices and compares these with average family incomes.

On this basis, Australia has higher housing costs than any of the other surveyed countries.  The average Australian house requires 6.6 years of income to buy, compared with 3.2 in Canada, 3.7 in the US and 5.5 in Britain.

Traditionally, the cost of a house has been at the level of threefold average family income.  But last year there was no major housing area in Australia where houses could be bought for such a price.  The only cities where houses could be bought for less than three times average family incomes were in North America.  Many were major cities, including Quebec, Pittsburg, Atlanta, Houston, Dallas and Detroit.

Melbourne, Sydney, Perth and Hobart were in the ignominious top 25 unaffordable cities.  Adelaide and Brisbane were not far behind.  The study this year contained a special feature on Australian trends.  This shows how affordability has deteriorated in the past 20 years or so.  And, as every aspiring home buyer knows, the position has become worse over the past few years.

Australia has arrived at its present poor position despite having one of the most efficient and low-cost house building industries in the world.

The cost increases are partly produced by rising government taxes, charges and regulatory requirements on houses.  But, above all, they are due to planning restrictions.

Gradually over a 40-year period the role of urban planners has switched.  Planners used to determine where people wished to live and arranged roads, sewerage, school developments and other infrastructure to meet the demands.  More urban planners have tried to dictate where people live, and designating this to be confined to within an "urban growth boundary".

This sort of development is in line with the preferences of those who want to transplant to Australia the densely packed European-style city.  Such people see this as ideal to promote culture and facilitate public transport.

But that sort of city is a thing of the past.  No longer do we all troop to work to the urban centre using buses, trains and trams.  For the most part, we work in dispersed locations and prefer to travel by car to work and for entertainment.  Most of us also prefer a house rather than an apartment and, to the bewilderment of some urban planners, many of us actually prefer to live in the suburbs.

Imposing constraints on developments means an alarming inflation in the cost of land.  Land is like any other product -- if the Government restricts its availability, its price increases.

There are those who argue that we are running out of land, that "urban sprawl" is eating into the countryside.  Such claims are laughable in Australia, where only 0.2 per cent of the area (0.5 per cent in Victoria) is urbanised.  The regulations that prevent land being zoned for housing bring windfall gains to those fortunate or savvy enough to have their land made eligible.

They also vastly restrain the value of land owned by those who are denied the ability to sell their land for housing -- to sell for the most valuable uses.  Land use restrictions are crippling the affordability of housing.  This is denying thousands of young people an opportunity to own a house.  It also brings personal misfortune to those who are denied home ownership because of government restrictions on land use.  And it means a different sort of Australia is being created -- one that comprises the "haves", who own their homes, and the "have-nots", who have to rent all their lives.

It also means a building industry that is smaller than it should be if demand were not priced out of the market.  And this means fewer jobs.

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Instinctive bias of its staff is not among ABC's virtues

Some truths are so self-evident that they are hardly worth debating.  Yet one of these -- that a certain bias shapes news and current affairs coverage at the ABC -- still provokes outrage at the Ultimo/ Southbank staff cafeterias.  The bias, to be sure, is not deliberate;  it's not as though Aunty's journalists sit around in dark corners and plan how they will slant their program in favour of their friends and causes.  But there is little doubt that, notwithstanding their denials, most reporters and producers at the public broadcaster naturally dress a little to the Left.

Of course, there is a lot to like about the ABC.  Its websites and the service provided by regional radio and News Radio are outstanding.  Many journalists there -- especially those who have no time for the union's "Vietcong-style industrial tactics" -- are intelligent, extremely well-informed individuals who are almost always on the pace with breaking news.  At a time when political and current affairs programs are being dumbed down on commercial television, it is heartening to know that at least one network takes ideas and public affairs seriously.  On balance, the taxpayer is better off with the ABC than without it.

But when it comes to the quality of the news and current affairs programs, our public broadcaster could be so much better if a certain bias did not cloud so many stories.

Sure, ABC TV and radio journalists insist they keep their political opinions to themselves and merely produce objective and truthful inquiry.  But, like everyone else involved in the political process, ABC journalists also have strong views about pretty much everything, no matter how neatly they put such baggage aside on air.  (Just ask Sydney and Canberra news readers Juanita Phillips and Virginia Haussegger, who pen opinion columns for The Bulletin and The Canberra Times respectively).  When recently challenged about the corporation's Left flavour by a listener, ABC radio's Virginia Trioli (a former opinion columnist with The Age) told her Sydney audience that she no longer voted at elections:  that's how she maintains her objectivity.  It is a nice idea, but personal opinions don't start and stop at the ballot box.

ABC journalists, like journalists in general, may say that they never allow their opinions to shape their reporting.  They may even see themselves as perfect arbiters of ultimate truth.  But this is a pretension beyond human capacity.  Sometimes, a journalist's personal views cloud their news reports, their choice of topics and their analysis.  Again, it's not deliberate;  it just happens.

Which brings us to the news that former ABC stalwart Maxine McKew will help Kevin Rudd and the ALP beat John Howard and the Coalition in this year's federal election.  McKew, who was an ABC journalist for more than 30 years until she quit the national broadcaster last month, will now be a special adviser on strategy to the Labor Party.

She is hardly alone;  at one time or another many ABC journalists have worked for the Labor party (think of Barrie Cassidy, Kerry O'Brien, Mark Bannerman, Alan Carpenter, Claire Martin, Mary Delahunty and Bob Carr, among others).  In contrast, how many prominent ABC journalists have worked for the conservative side of politics in recent decades?

Now, McKew, like the aforementioned Labor-oriented journalists, will say in good faith that she never consciously went out of her way to favour the ALP and criticise the Liberals on air.  After all, as Bob Hawke and Paul Keating will attest, ABC journalists often offend Labor as well as Coalition governments.

This is true.  But this misses the point about real bias:  it comes not so much from what party the journalists attack;  it comes from how they see the world.  A left-wing conspiracy is not necessary at the taxpayer-funded behemoth, because (most) ABC journalists quite spontaneously think alike.  Former BBC staffer Robin Aitken once said he could not raise a cricket team of conservatives among staff at the British public broadcaster.  Could an indoor cricket team be raised at the other Aunty?  Not when so many ABC workers are creatures of a culture that is divorced from the thoughts and attitudes of mainstream Australia.

How else to account for the fact that ABC presenters often identify conservatives as such but not those on the other side of the ideological spectrum?  Thus, according to Lateline's Tony Jones, the right-wing Mark Steyn is a "conservative polemicist", whereas the left-wing journalist Robert Fisk is "one of the most experienced observers of the Middle East".  No left-wing labels are necessary.  Perhaps conservatives need to be identified because in the world-view that prevails at the ABC, they are outside the mainstream.

How else to account for the fact that the one ABC show that challenges the prevailing orthodoxy is called Counterpoint:  Michael Duffy's Radio National program, which airs conservative voices and ideas?

And then there's the ABC's Insiders.  Although a conservative commentator is accommodated on the program every Sunday morning, he (either Andrew Bolt, Piers Akerman or Gerard Henderson) is always outnumbered by two other more liberal counterparts and sometimes host Barrie Cassidy.  The token conservative's input, moreover, is often regarded by the panelists not as a contentious contribution to the debate, but as a flat earther's fit of extremist nonsense.  Incidentally, during its 15 years of existence, Media Watch has never been hosted or produced by anyone in the centre, let alone right-of-centre.  Why?

All of this might also explain why certain stories that would appeal to a conservative audience are played down.  For instance, during the week of Ronald Reagan's death in June 2004, Lateline virtually ignored the Republican president's life and times.  No stories, no features, no debate.  Nothing.  Yet several months earlier Jones went weak at the knees remembering John F. Kennedy 40 years after the liberal leader's death.  Instead of affording similar treatment to a conservative leader -- much less having a debate about Reagan's place in history -- Jones focused on tributes flooding in for another American legend who died that week (musician Ray Charles) and he browbeat Alexander Downer on the topic of Australia's (as it turns out) non-role in the Abu Ghraib scandal in Iraq.

Now, more honest friends of the ABC insist that we need Aunty to "balance" the so-called shock jocks on commercial radio and the right-wing columnists at News Limited newspapers.  So, the argument goes, what difference does it make that ABC journalists are lefties?  But those who hate talkback programs or The Australian's opinion page can take solace in the fact that they aren't subsidising Alan Jones or Janet Albrechtsen;  taxpayers who subsidise the ABC to the extent of more than $800 million a year don't enjoy that peace of mind.  Besides, the need for balance is there in the ABC Charter;  it is the legislative quid pro quo for public funding.

Of course, there is nothing wrong in Left-liberal voices being heard on the ABC.  It's just that there should also be a place for conservative, more contrarian, voices:  and these should not be put on air with some sort of health warning.  At the very least, there should also be a place for the silent majority:  that is, a good percentage of the population to whom the ABC purportedly answers.

Dobbing and the community

Australia is a nation founded by people who were dobbed in.  Perhaps that's why one of the first rules we learn in life is not to dob in each other:  what happens in the playground, stays in the playground.

This lesson, quite obviously, doesn't come from our teachers or parents.  Dobbing is one of the ways that they can know about our infractions of their rules, such as swearing and sneaking away at lunchtime to buy chips at the 7-Eleven.  Our anti-dobbing tradition frustrates this, and means that parents and teachers have to police us themselves.

Whatever its historical basis, Australia's tradition against dobbing works well.  Trust is a foundation of community.  Without trust, individuals struggle to develop relationships with others.

We need to know that when we confide in another person, we can reasonably expect the confidence won't be used against us.  When we invite another person into our home, we can reasonably expect they won't bring a baseball bat and start destroying our possessions.

Trust is vital in a market economy as well.  When we buy an item we've seen in a store window, we trust the seller to give us that same item in a box.

We expect real estate agents to sell us houses that are actually on the market.  In Nigeria, where, after decades of corruption and poverty, levels of trust are abysmally low, houses display placards stating this house is not for sale.  One popular scam in that country is to sell houses the scammers do not own.

Trust is at the centre of every personal and economic relationship we have and without it, any community in the meaningful sense of the word is impossible.

Encouragement by the government to dob each other in discourages the formation of that trust.  The extreme example of a government actively encouraging the breaking of that trust suggests how important it is.  In totalitarian socialist and fascist societies, the state broke down civil society to such an extent that people would report even their own family members for any perceived minor infractions.  Memoirs recall citizens being reported not out of desire to do the right thing but out of petty and unrelated personal grievances.

This indicates a further useful consequence of the anti-dob tradition:  without being able to appeal to a higher power -- parents, teachers or the government -- we are forced to sort out interpersonal conflicts ourselves.  In most cases, we negotiate with each other, and when we do so, we form and strengthen our relationships.

It also fosters Australia's egalitarian spirit.  Individuals negotiate with each other as equals.  Running to the government is un-egalitarian.

The government uses its coercive powers to force a solution to a disagreement.  The solution may not be efficient or fair, but it will certainly suit the government.  Naturally, then, governments are urging us to abandon our anti-dobbing tradition and call a toll-free number every time we see a neighbour doing something wrong.

We are asked to dob in water cheats, litterers and disgruntled taxi drivers.

The tax office is hoping that all those amateur accountants will monitor their friend's finances to detect tax cheats:  he couldn't possibly afford that on his salary, could he?

Importantly, mislabelled seafood has its own dob-in hotline:  1800 737 147.

Many dobbing-in schemes are beneficial.  Crime Stoppers is a typical example.  Few people would object to reporting robbery or assault committed in their neighbourhood.

The terrorism hotline, mocked and ridiculed when it was brought in, is theoretically just as helpful.

Reporting crime or terrorism helps, rather than harms, the viability of our communities by making us feel safer and more confident in our person and possessions.  As a result, no one complains.  The thief knows that stealing is wrong, and the dobber knows that stealing is wrong.  Everybody accepts laws against stealing.

But not everybody accepts all government legislation.  Speed limits are a good example of this.

The Victorian Government has set speed limits, for example, at 50 or 60 km/h.  Hop into a car for even a few minutes, and you will notice that almost everybody exceeds that.  Most cars travel five to 10 km/h over the limit, and few tickets are given out to drivers who do.

In fact, drivers who obey the speed limit can often be more dangerous than those who go at the speed of other drivers.  Most of us would be outraged if we were dobbed in by another driver for going 5 km/h over the limit.

Another example of a law that we routinely reject is jaywalking.  The semi-regular police blitzes against crossing roads diagonally or against the pedestrian crossing signs are treated with derision by even strong law-and-order folk.

Dobbing in a thief is unobjectionable.  But dobbing in a water cheat or a slightly faster driver seems un-Australian or anti-social.  This perhaps makes sense:  these latter laws are not as well accepted by the individuals and the community.

It's easy to sympathise with a home owner who waters on the wrong day, or splashes water on the roof of their car to give it a quick rinse.  If we dob them in, its seems as if they're being punished for a crime they didn't really commit.

This is the cause of the furore over Dob in a Water Cheat:  the disconnect between laws Victorians willingly accept and laws treated less seriously.

As more activities become illegal across the state -- watering the garden of an even-numbered house on a Wednesday;  telling a joke about religion;  owning a cigar bar -- the Government is going to face more of these reactions.

It's only when governments make laws that we don't fully believe in that our two desires -- the need to build healthy communities and to obey the law -- come into opposition.

Dob-in-your-neighbour initiatives undermine our egalitarian tradition and even our sense of Australian community.

If we have a problem in the playground, will we tell the teacher or sort it out ourselves?

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The Government's courting of greens is starting to show

This week's rare power outage in Victoria and the fact that it was controlled quickly demonstrates the resilience of the electricity supply system we have.

Automatic trigger mechanisms caused by smoke closed down the line from the Snowy.  This left a 20 per cent hole in supplies at a time when a heatwave boosted demand and some plant in the Latrobe Valley was down for maintenance.

Traders and generators would have been cheering when the price zoomed up from $60 per megawatt/hour towards $10,000.  Their joy would have turned to sorrow when the price collapsed as the system operator shut down demand.

The incident was by and large well handled.  The market operators, NEMMCO, will doubtless examine it to find ways that they can better shed power to cope with an outage.  They may also use the experience to seek out faster ways of transmitting to the market that a real emergency is in the offing.

No electricity system is fail-safe and the Victorian system is generally well managed.  Policies could be introduced that gold-plated supply but these would be expensive and probably not worthwhile.

Government policies over recent years have, however, increased the Victorian system's vulnerability to unexpected developments.  Among these policies have been the generally unfavourable approach towards the coal-based power that provides 95 per cent of the state's electricity.  Most of this government hostility has been a result of its sympathy with and fear of green radicalism.  Green radicalism is supported to a considerable degree by the Government, courtesy of the taxpayer.

One rather shameful example of those policies involved the long hold-ups and additional costs imposed on the Hazelwood power station in its expansion and refurbishment plans.  These hold-ups resulted from the Government forcing a conventional and relatively modest investment program to be analysed within the context of global environment treaties.  Hazelwood itself suffered costs of delays and mandatory changes to its plans that raised its costs by millions of dollars.

The Government has also made its hostility to coal-based power abundantly clear in legislating for increased levels of high-cost renewable energy.  It has led policy discussion across Australia in promoting further reductions in carbon dioxide emissions.  Such a policy is code for reducing the share of coal within the electricity supply system or requiring new coal-based generators to incur costs of novel measures that increase the ratio of energy to carbon emissions.

All of these policy measures, in effect, raise the risk of new investment and therefore the threshold of returns investors require to give the go-ahead for new plant.  This reduces the availability of new plant and increases the vulnerability of the state to unexpected loss of a major plant or transmission line.

Regulatory policies increase the risk exposure of the state to particular supply sources in other ways.  The single line linking Victoria to the Snowy and the NSW system passes through national parks.  There is a case for building another line, a by-product of which would be reduced vulnerability to a single event.  Although by no means commercially proven, it would not be even considered in the current framework of environmental hysteria.

Over the past 10 years, Victoria has stood out in a generally very successful Australian national market as providing reliable electricity at prices that are among the lowest in the world.  But there is nothing inevitable about such a performance.  It can readily be undermined by poor regulatory arrangements.

Unfortunately, rather than recognising the fragilities of electricity supply and its exposure to various uncertainties, government policy has all too often fanned those uncertainties.

The centrepiece of its energy policy consists of promoting wind power.  This offers no advantage in terms of energy security since it is totally uncontrollable.

In spite of there being a bit of a breeze about yesterday, not much electricity came from the wind farms.  This is typical:  this time last year when South Australia had a peak in demand, the state's extensive wind capacity was only operating at less than 10 per cent.

It is likely to take more events like yesterday's outage to persuade the Government and perhaps the community in general that there is no such thing as a secure and reliable electricity supply.

The pity is that playing politics with electricity to garner green votes is likely to endanger reliability.

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Polar panic eco-hysteria

I received an email from the North Pole at Christmas.  It wasn't from Santa, but a fellow complaining that he wouldn't be able to hunt polar bears anymore because of all the concern about global warming.

Well you may think, fancy anybody hunting polar bears.

Aren't they already on the verge of extinction?

In the early 1970s the five artic nations (Canada, United States, Greenland/ Denmark, Norway and Russia) agreed to restrict hunting and as a consequence polar bear numbers have shot from about 5,000 to 25,000.

I know it's not what you normally hear on the nightly news.

Indeed, at Christmas there was much misleading reporting suggesting that polar bear numbers are on the decline.

Interestingly, most populations are still hunted, but under strict quota systems.

In Canada the Inuit (Eskimos) increasingly sell part of their quota to US big game hunters.

But if the worldwide campaign to have polar bears listed as a threatened species in the US is successful, there will be no more hunting, in part because it will become illegal to take the the skins and heads back to States.

My North Pole emailer explained that if the listing goes ahead this will mean a loss of $3 to $4 million dollars to the Nunavut economy, most of which goes directly to Inuit hunters, guides and their families.

He said that these guides are some of the poorest people in the north and are still reeling from the European Union restrictions on seal skins.

Yet, he said, this is another entirely sustainable harvest that didn't require extra protections.

So why all the eco-hysteria associated with polar bears?

Well, according to Kassie Siegel, a lawyer from the US Centre for Biological Diversity, people care about polar bears -- they're iconic.

They can be used to sell the global warming message.

By focusing on polar bears, her group, along with Greenpeace and the Natural Resources Defense Council, hope to force the US Government to reduce its greenhouse gas emissions as well as stop the bear hunt.

Judging by the one-eyed reporting in Australia over Christmas they may well succeed.

There is nothing like a groundswell of public support to force change.

And the strength of the environmental lobby in a world of fast global communications makes it increasingly difficult for natural resource users -- be they Australian farmers, New Zealand foresters or Inuit hunters -- to retain access to the resources they have traditionally used.

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Private sector Nobel Prizes

A crowning achievement for a scientist is the award of a Nobel Prize.  For an academic institution the winner is a real live jewel in the academic crown.  But what about those winners who were not in these institutions?  Are there any policy lessons to be learned?

Since the Nobel Prizes were first awarded in 1901 there have been about 20 laureates from the private industrial sector out of more than 500 awards for chemistry, medicine and physics.  There are also a number of Do-It-Yourself Laureates.

The Australian winners of the Nobel Prize for Medicine in 2005 -- Barry Marshall, on internal medicine fellowship training at Royal Perth Hospital, and Robin Warren, a hospital pathologist, at the time of their original observations -- have said that much of their prize-winning work was done in their spare time.  The unanswered question is how many Nobel Laureates did their key work in their spare time?

The ultimate DIY personal achievement was 100 years earlier.  In 1905 Einstein published three remarkable papers on Brownian motion, quantized light and special relativity.  He was not awarded the Nobel Prize until 1924.  It was for quantized light.  But the papers were written in his spare time while he was a clerk in the Swiss Patent Office in Berne.

Nobel awards often illustrate the unusual utility of discovery and the two DIY prizes above certainly do that.

This does not fit with the received wisdom for governments.  Policy makers have in mind a linear model of discovery giving rise to technology that in turn gives rise to business.  They would even like areas for discovery defined by national needs.

Harold Wilson, when prime minister of the United Kingdom, was going to "forge the new Britain in the white heat of the technological revolution" thought to emerge from scientific research.  There was lots of government funded research and development initiatives while the country became an economic shambles and the IMF was called in to help put it to rights.

Is there anything to be learned about the path from discovery to business from the Laureates of the private sector?  The research directors in business must be loosely equivalent to government bureaucrats as they set policy and direction.

One would expect the industrial Nobel winners to be drawn from the great "high technology" companies of their time.  That is indeed the case.  In the early years up to 1940, the few Laureates come from I.G.Farben, Marconi, Bell Laboratories and General Electric.  In the second half of the 20th century, Bell, IBM, General Electric and Dupont are all contributors.  These prizes are roughly split between fundamental discoveries and processes with a small number of device awards.

Some of the awards in the private sector are for quite staggering developments.  The invention of the transistor at Bell Laboratories by Shockley, Bardeen and Brattain (1956) was the first part of a transforming invention for the 20th century.  This in turn begat the second part:  the integrated circuit (or silicon chip) from Robert Noyce and Jack Kilby (2000).  Noyce did not live to share the award (he died in 1990) but he was one of the "Traitorous Eight" who walked away from Shockley's management and, with others, eventually founded Intel.  Kilby was at Texas Instruments.

There are other echoes of the past in the prizes.  Sir James Black (1988) created the beta-blocker drug for ICI and then a drug to suppress acid in the stomach for Smith Kline.  This stopped a revenue stream for surgeons cutting out stomach ulcers thus proving the pill was mightier than the knife.  Marshall and Warren (2005) then challenged the wisdom of the origin of ulcers thus modifying a very successful treatment with a simpler one that threatened drug company revenue as well as medical teaching.

The "most remote from business" prize and the winner of the celestial steak knives must be Penzias and Wilson from Bell Laboratories (1978) for their discovery of the cosmic microwave background radiation.  It was noise in their microwave receiver.  They could not remove it and finally by elimination determined that it was universal, not just galactic, in origin.  Their colleagues down the road at Princeton knew just what it was, the echo from 300,000 years after the creation of the universe.

Even IBM in the 1980's allowed researchers to try to measure the mass of the neutrino, the smallest and least interactive of nuclear particles.  The supposed justification was if the neutrino had mass then the universe might not go on forever and IBM would not have a continuing business.

The last 15 years have not seen more prizes going to the big industrial research laboratories.  Part of the explanation may be that IBM and Bell Laboratories are changed companies.  IBM no longer dominates computing.  Lucent Technologies, the successor to AT&T struggles with Bell Laboratories.

Also the culture has changed.  The big corporations used to reflect the East Coast US philosophy of corporations doing and controlling everything relevant to their business.  This might include a central research laboratory that could be a reflection of university departments.  But, with the West Coast corporations, the approach was more co-operative with technology spread over a number of independent companies, many acting as suppliers of components or equipment.  As the centre of technical innovation moved to California, the East Coast businesses lost their markets and their corporate model was abandoned.

Thus we now see Intel, Microsoft, Cisco and others, all the equal financially of the older East Coast corporations.  There may not be a central research function.  Laureates have emerged from this distributed system.  The integrated circuit was a prize winning device and Kary Mullis (1993), inventor of the Polymerase Chain Reaction (PCR) while at Cetus, now part of Chiron, is perhaps the first of a line from the new biology frontier.

Unlike Einstein, Marshall and Warren, these industrial researchers did not make their discoveries in their own time.  Their research directors encouraged them to explore their fields, even though few discoveries directly benefited their corporations.  It was part of the corporate culture of the time and it brought great kudos to the organisation.  It may have helped recruit bright engineers and scientists.

In Australia in the 1990's, BHP closed a number of research centres, as did ICI.

What of the Australian government?  Do these events point to a new approach to national needs, distributed research funding and to reappraising the role of the CSIRO?

For policy makers, the private sector achievements are an example of the likely success of national needs.  Corporations have corporate needs but scientific research frequently delivers to a wider community without direct or immediate benefit to the corporation.  Discoveries achieve technical utility through diverse pathways.  Finally from the West Coast of the US there are signs that plurality is important in creating a more vibrant technical and business environment.

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Spiralling house prices a national tragedy

According to the Real Estate Institute of Australia, average house prices in Melbourne's outer suburbs and Geelong were $270,000-$285,000 in the latter part of 2006.

Some regional centres like Ballarat, at $211,000, were more affordable.

High house prices are part of a national tragedy.

In spite of the prosperity stemming from 13 years of solid growth, spiralling house prices are taking home ownership beyond the means of young people.

High home prices are due to state government controls.

It costs about $50,000 to prepare a block of land for housing and about $130,000 to put a house on it.

The value of a block of raw land is only a few thousand dollars but the government restricts the use of land for housing.

This creates scarcity and boosts housing costs in outer suburbs by another $100,000.

It also creates knock-on price increases in urban areas.

In most parts of the US and in Germany, land controls are less stringent and house prices are at the $200,000 level.

Prime Minister John Howard and Treasurer Peter Costello have recognised the price boosting effect of stringent planning laws and have urged state governments to relax them.

Land-use controls on housing developments were first introduced in Australia by misguided planners.

Some thought we were running out of land, others wanted to re-create a dense European-type city.

Many claimed that it would be cheaper to supply a denser population with sewerage and other services.  In fact, we cannot be said to be running out of land when less than half a per cent of Victoria is urbanised.

Even with the most optimistic population increases conceivable, this figure would never reach 1 per cent.

Nor is it cheaper to service city land than it is to service outer suburban developments.

But dismantling the planning laws is proving difficult.

For a start the "don't-build-anything-anywhere" brigade actively oppose development and conjure up the spectre of "urban sprawl".  Then there are firms that have a financial exposure to land development.

More building blocks being made available will undermine the value of blocks that are already approved.

Some of these firms are highly influential.  Macquarie Bank, for example, has undertaken research which claims to prove the increase in housing costs is due only to high demand.

Gullible journalists have reported this research without questioning why price inflation is not happening in places where the supply of land has been increased.

While land-development controls boost the wealth of those with houses, by pricing younger Australians out of home ownership the controls threaten to create a two-class nation.

In addition, they mean bigger mortgages and higher living costs for those who can afford to buy.

Hopefully state ministers will heed the calls of their federal counterparts and remove the controls on housing development.

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No benefits with strings

If it wasn't an election year, the recent suggestions that the Federal Government will attach highly restrictive strings to the acquisition of Qantas would seem ludicrous.

The downsides of these strings are obvious:  they will undermine sustainable jobs and services and all at the expense of consumers.

But when it comes to Qantas, it seems good public policy loses every time.

There are two proposals under consideration beginning with a requirement for the consortium to commit to existing regional services.

Deputy Prime Minister Mark Vaile, who is also Transport Minister, has all but admitted that the Government will require commitments to regional services.  As Nationals leader, the politics leave him with little room to move.

Such a proposal will do nothing to assist delivery of regional services.

Regional airline services should be provided on the basis of demand.  If there is not the demand for these services, Qantas should not be obliged to provide them.

However, if this demand exists and if Qantas has not filled it, then there is no reason existing smaller airlines with lower overheads cannot move in and fill the market gap.

Small, independent airlines are flourishing in deregulated airline markets around the world to fill exactly these sorts of niche demands.

If Qantas is regulated to provide services they do not find economical, it will pass the costs on to consumers -- perhaps directly to regional consumers or even by raising ticket prices across all routes.  In neither case do consumers benefit.  The other string the Government is considering attaching is the requirement for jobs to be kept in Australia.

When the Macquarie-led bid was first proposed, Prime Minister John Howard made it clear -- you cannot preach the virtues of the free market and introduce laws to inhibit it every time it does something you don't like.

The decision to approve the takeover will ultimately be the Treasurer's on advice from the Foreign Investment Review Board.  Peter Costello should be listening to the Prime Minister.

The entire approval process through the FIRB is a relic of days when foreign direct investment was treated with suspicion.  More enlightened attitudes about foreigners investing in Australian companies have since developed but the FIRB remains an anachronism, particularly for a country that has always been dependent on importing capital.

Were it not for Qantas' size and transport deemed a "sensitive sector", the United States Free Trade Agreement would have done away with the need for approval.

To a certain extent, Qantas is in no position to complain.  It already enjoys unnecessary protection as Australia's national carrier with preference for government flights and a near monopoly in trans-Pacific flights.  It was only recently that Virgin Blue has been granted limited access on these routes.  Companies that enjoy the benefits of government protection also have to wear it when that government turns on them.

Yet the Government is vulnerable on industrial relations because of the introduction of its WorkChoices package.  Regardless, the Howard Government should know better than protecting existing jobs if it wants to promote long-term job sustainability and to create new jobs in the industry.  Job protection will make Qantas less nimble in a competitive market.  The more it is inhibited from reducing delivery costs, the more ticket prices will need to rise.  This will make other, foreign-owned airlines more competitive taking ticket sales and the jobs attached to them.  It is clearly not a recipe for keeping Australian jobs and profits in the country.

Unions are supportive of the proposal.  Their view is short-sighted.  The job of a union is to protect the interests of its members and the people who pay the wages of union officials.  Their job is not to represent the interests of working Australians, our national interest or the millions of Australians who fly with Qantas each year.

The best way to promote the interests of existing workers and create new jobs is to allow the industry to grow and develop by responding to consumer demand.  This will ensure ticket prices are low and more people fly.  Trying to rig the outcome will decrease the flying population.  It also will ensure Qantas is sensitive to external shocks that have plagued the industry for the past five years.

Consumers already suffer because of Qantas entitlements on trans-Pacific routes.  There is limited competition direct to the United States.  If consumers want a cheaper price or do not want to fly with Qantas they have to fly via Asia or New Zealand.

Additional requirements to protect jobs will make Qantas uncompetitive.

If management decides to cut jobs to save costs and are blocked from doing so they will use other avenues.

It could include selling off or restructuring its Frequent Flyer program.  It could also involve restructuring the company.

In that scenario jobs will not be lost to other countries, they will just be lost.

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Protectionism's many faces

Kevin Rudd will face many forks in the road on his way to making Labor electable in time for this year's federal election.  During his travails he won't be able to count on much help from his friends.  Already on industrial relations and manufacturing policy the trade union movement has urged the ALP left, when in fact the path to policy respectability veers to the right.

Another challenge to Rudd posed by his erstwhile friends from the unions will be "offshoring".  The Finance Sector Union is campaigning against the major banks transferring their administrative and technical functions from Australia to other countries, notably India.  It won't be long before Rudd will be called upon "to protect workers' rights".  He'll be asked to promise that Labor will stop or at least discourage the practice.  And no doubt he'll say that similar functions undertaken by government departments will be done in Australia by Australians.

According to the figures being quoted by the FSU, 70 per cent of all local finance jobs could be performed offshore -- equal to 200,000 jobs.  In addition to the potential job losses, the FSU claims that processing and storing customer information overseas raises security and data protection issues.

Notwithstanding that banks already have extensive operations overseas, the union campaign seems to be having some effect.  In November, Westpac announced that it wouldn't proceed with a plan to relocate 400 jobs offshore.  Other banks have made vague promises about keeping jobs in Australia and consulting with staff and stakeholders before further decisions are made.

For a variety of reasons banks have been reluctant to confront the union campaign.  Many financial institutions have embraced varieties of corporate social responsibility and these days they're afraid to defend even the basic principles of capitalism.  Further, bank executives remember the 1980s and the public outcry at branch closures.  Now, two decades later, rather than explain why banks need to continually cut costs, they ignore the issue and hope it goes away.

The pity is that on at least two levels the union campaign against sending bank functions offshore is a campaign of gross hypocrisy.

First, unions and consumer groups are quick to criticise banks about the level of their fees and charges on customers.  But it is these same fees and charges that are paying the salaries of union members in the finance sector.  When banks pay Australian employees more than their counterparts overseas would be paid for the same task then inevitably customers will end up being charged higher fees.

Second, the ACTU, to which the FSU is affiliated, has been at the forefront of calls for the federal government to lift its spending on international aid.  Such is the ACTU's commitment to the issue that it even has its own international aid organisation, Union Aid Abroad.

Demanding more aid spending is easy rhetoric for the unions.  And it's not even their own money -- aid is taxpayers' money.  However at the same time as unions are saying the Australian government should be doing more to alleviate world poverty, the unions themselves are doing everything they can to fight Australian companies investing in less developed countries.  The campaign against offshoring is a good example of unions saying one thing and doing another.

In effect, what Australian unions are saying to the poor in foreign countries is:  "you can have our charity, but you can't have our jobs".

It's quite understandable that the FSU is seeking to protect the employment of its members.  After all, that's the basic responsibility of a union.  But actions have consequences, and the FSU is doing nothing to lift the 300 million Indians living in poverty out of their condition.

In a speech at the end of last year, Treasury secretary Ken Henry put his finger on the problem.  He identified the arguments against offshoring as a new species of protectionism.  "Offshoring used to be called importing.  And that is what it is:  importing services", he said.

His final condemnation was unambiguous:  "Opposition to offshoring is based on the same protectionist nostrums that were once used to support the high tariff wall that a generation of Australian policymakers has been busy dismantling.  It may be dressed in different garb, but it is no more respectable".

Given Henry's credentials as having been Paul Keating's economics adviser, these are comments that should at least give Rudd pause for thought.  And it might now be nearly 14 years ago, but Keating was, after all, the last Labor leader to win a federal election.

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Thumping the Table: Key Questions for the Labor Party's "Industry Policy"

Occasional Paper

INTRODUCTION

Is industry, in particular manufacturing, characterised by market failure that demands government intervention?  The recently appointed Shadow Minister for Industry, Innovation Science and Research, Kim Carr has argued it is:

Industry policy is about addressing market failure… Clearly the reliance on market fundamentalism is not working.  In the last five years we've seen the loss of nearly 40,000 jobs in manufacturing. ⁽¹⁾

The Leader of the Opposition has similarly argued that Australia risks being relegated to the positions of "China's quarry" and "Japan's beach". ⁽²⁾  In other words, the majority of Australia's prosperity may become dependent on as few as two industries, tourism and mining, with a single buyer for each.  Such a situation, it is implied, will provide a poor base for Australia's future economic prosperity.  Australia therefore requires a "sustainable economy" buttressed by a diverse range of industries (a "broad economic base"). ⁽³⁾

The Shadow Minister has also targeted low-end service industries as an example of what ALP industry policy will avoid, arguing that Australian employment cannot be restricted to "burger flippers" and "cappuccino makers". ⁽⁴⁾  This constitutes an extraordinary slight on those workers, and indeed on all low-skilled workers.  This type of job-snobbery is entirely inappropriate for an elected representative.  Such a view also ignores the fact that these jobs are typically entry-level positions, as employees go on to higher level, higher skilled and higher paid positions either internally or externally.

Reflecting on the claim that Australia's extractive industries provide an unsustainable base for economic prosperity, the Opposition Leader and Shadow Minister for Industry have signalled their intention to rejuvenate Australia's ability to "make things".  This call for "reindustrialisation" is a return to leftist ideas of the 1980s.

The term "industry policy" refers to any active assistance given to economic production by government.  These forms of assistance can range from the relatively benign -- for instance, the legal protection of intellectual property -- to the strongly interventionist -- for instance, the imposition of protectionist tariffs, subsidies, or direct government control.

Australia has a long and disgraceful history of protectionism;  high tariffs, the "White Australia Policy" and highly regulated labour markets were some of the tools employed as part of previous industry policies.  The state socialism, which characterised Australia's political economy for much of its history, drained the nation of much of its natural wealth.

Instead of these "old-fashioned" measures of an industrial policy, the Federal Labor Party proposes a new brand of industry policy. ⁽⁵⁾  The Shadow Treasurer Wayne Swan says "Industry policy means to me getting the basics right -- skills, education, innovation, infrastructure and tax". ⁽⁶⁾  Senator Carr has indicated a more expansive program, including measures such as utilising government procurement policy to provide a "base level of demand" for Australian products. ⁽⁷⁾

SEVEN QUESTIONS FOR LABOR

1) WHAT PROBLEM IS "INDUSTRY POLICY" TRYING TO SOLVE?

Senator Carr argues that there is a demonstrable market failure that has created the current state of Australian industry.  "Market fundamentalism" -- a tortuous concept, but which we will take to mean a laissez-faire approach to the political economy -- is "an old-fashioned view", as shown by the "loss of nearly 40,000 jobs in manufacturing".

This simple formulation does not seem to acknowledge the beneficial reallocation of resources -- labour -- to their most efficient use.  Senator Carr seems to imply that the only result of these jobs losses is unemployment.

In the words of the Shadow Minister, the purpose of Federal Labor's industry policy is to mitigate against market failure, particularly in manufacturing.  However job losses -- the reallocation of labour across the economy -- are not a typical indication of market failure.

The Shadow Minister may be referring to a market failure not strictly defined as an example of inefficient allocation of goods or services.  Instead it appears that he defines market failure as being where the market has directed production contrary to some other criteria.

By adopting a definition of market failure that is ambiguous, and without a theoretical or empirical basis, the justification for government action is unclear.  Nevertheless, Federal Labor policy appears to not be focused upon correcting market failure, but instead influencing the Australian economy in a particular direction.

2) WHAT ARE LABOR'S OBJECTIVES FOR RESEARCH AND DEVELOPMENT? ⁽⁸⁾

The Commonwealth Government expects to spend six billion dollars on science and innovation in 2006-07, distributed, for instance, towards the higher education sector, federal agencies like the CSRIO and defence.

But should government fund science and innovation?  It is self-evident that innovation and technological development provide a key bulwark of economic growth.  Successful innovation increases productivity, allowing firms competitive edges above their competitors in domestic and international markets.

Profit seeking firms should eagerly pursue the competitive advantage provided by innovative business practices or products.

Nevertheless, many commentators perceive the characteristics of market failure in investment in research and development.  Science and innovation has a "public good" characteristic, which inevitably leads to under-provision in a laissez-faire marketplace.  Anyone can use knowledge, once created;  consequently the producers of science cannot earn a return for their efforts and would do less science than is socially optimal.

As our Backgrounder Back to Basics:  Why government funding of science is a waste of our money demonstrates, the characterisation of research and innovation as a public good and its subsequent under provision does not reflect reality.

Determining whether there is an underinvestment in research and development is an uncertain task.  Private investment in R&D has grown rapidly since the late 1970s, from less than the government's expenditure, to roughly double.  This is not entirely due to R&D tax concessions introduced in the mid-1980s.  The Productivity Commission has investigated the growth in private R&D and argues that the acceleration in business R&D preceded the introduction of tax concessions by two years.

3) HOW COULD LABOR FACILITATE "BOTTLENECK" INFRASTRUCTURE INVESTMENT?

It is in the area of infrastructure investment that there is demonstrable problem in Australian public policy, which a Federal Labor government would be able to correct.

Economy wide access regimes like Part IIIA in the Trade Practices Act, and industry specific regimes like Part XIB for telecommunications discourage investment by mandating infrastructure owners to share their investments with competitors.  When firms are considering potential investments in infrastructure, this regulatory framework is even more pernicious.

In telecommunications, these disincentives have recently become obvious.  Telstra's abandonment of its plan to construct a fibre-to-the-node network earlier this year was primarily caused by the firm's reluctance to open the network to competitors at a price set by the regulator.  Telstra's subsequent rollout of ADSL2+ has been restricted to areas where there is similar competing infrastructure;  a policy that the company maintains is to dissuade the regulator from mandating access.

For infrastructure built under government fiat, or built using public funds, access regimes are perhaps a reasonable approach to introducing competition.  However, for infrastructure that is built in a competitive market, using private funds, mandatory access policies restrict the market from providing necessary infrastructure.

We wrote:

Where there are no regulatory restraints on competition, we see the most promising conditions under which entrepreneurs seek out new needs or seek the meeting of existing needs more cheaply.  The outcomes of new infrastructure built under such conditions epitomise the gains made by competitive processes.  For, although mistakes in competitive strategies are inevitable from time to time and excessive or wrongly sited infrastructure will be built, the outcome of the process of free market decision-making offers us the best use of resources and the widest scope for the application of human ingenuity.  If excessive building occurs, unless there is (illegal) collusion, the mistakes cannot be retrieved from the consumer.

Indeed, in such circumstances the consumer obtains windfall gains as the rivals seek to cut their losses by expanding their market shares and in the process driving down the price. ⁽⁹⁾

If the Federal Labor Party intends to construct an industry policy that facilitates private investment in necessary infrastructure, it would be well advised to reform the Trade Practices Act to allow firms to do so.

4) WHAT WOULD BE THE MEASURE OF FAILURE?

Interventionist public policy should always be coupled with a strong index to indicate whether the policy has been a success or not.  As Jeffrey L. Pressman and Aaron Wildavsky argue in their classic study of federal programs in the United States:

Policies imply theories.  Whether stated explicitly or not, policies point to a chain of causation between initial conditions and future consequences.  If X, then Y. ⁽¹⁰⁾

Before constructing public policy, these theories need to have a clear idea of the desired future consequences of political action.  For instance, as argued above, it is not certain that there is a case for government intervention in research and development.  This is doubly the case when the measure of success is not clear.

The case that there is a market failure in Australian industry has not been demonstrated.  (Australia's infrastructure investment problem is an example of government, not market, failure.)  In the absence of a solid theory of causation, and without the ability to test the results of a policy against the results of a laissez-faire approach, it is hard to justify a policy's pursuit.

Even with clearly defined measures of success, implementation of an ambitious public policy program -- in this case, the implied goal of rejuvenating the Australian manufacturing sector -- is no simple matter.

5) WHAT ARE THE FISCAL CONSEQUENCES OF THIS "NEW" INDUSTRY POLICY?

Craig Emerson has described the Howard government as a "conservative administration that parades itself as the champion of free enterprise and small government is, in truth, heavily interventionist and the highest-taxing government in Australia's history". ⁽¹¹⁾  If, by implication, we can expect the tax burden to decrease under a Labor Government, it is hard to reconcile such sentiments with a desire to reintroduce an interventionist approach to economic management.

Senator Carr has indicated that "ship building, automotives, pharmaceuticals, information technology and greenhouse abating technologies" were all sectors worthy of policy consideration. ⁽¹²⁾

These industries all require massive financial investment.  Where will the money come from?  The tax burden is already very high, and the budget surplus already under some strain.  Will a Rudd government take money from middle-income families and give it to industrialists?

Will a Rudd government take GST money from the states for its industrial policy?  Our Backgrounder Opportunity Squandered:  How the States have wasted their reform bonus shows how the states, having been granted through the introduction of GST a massive revenue windfall, have not used this unexpected money well.  If Federal Labor is looking for a source to fund significant government investment, reform of the federal tax system would seem a natural place to start.

6) WILL THE OLD-STYLE INDUSTRIAL POLICY BE ABANDONED?

Labor's proposed policy continues to pick winners

The fallacy that government's can adequately pick winners, let alone pick winners more reliably than the decentralised market has been well dealt with in the popular and technical literature. ⁽¹³⁾

Kevin Rudd has indicated that Federal Labor's industry policy is not about picking winners -- that is, not picking winners amongst individual firms. ⁽¹⁴⁾  But Senator Carr's distaste for the typically entry-level coffee shop and fast food jobs, and his nomination of industries like ship-building and "greenhouse abating technologies" seems to contradict this position, indicating a willingness to pick winners, albeit out of industries, rather than firms.

This is of more than academic interest.  As the source of finance for industry policy is taken from a broad base through taxation, directing those finances to certain favouring industries penalises the industries -- and their employees -- which do enjoy political support.  Any advantages conferred upon ship-builders by government action are at the expense of burger-flippers.

If the "picking winners" accusation remains a slight against proposed economic policies, then it is hard to see how picking winners out of industries, rather than firms, constitutes a dramatic departure from traditional protectionism.

An opportunity for Labor:  final abandonment of protectionism in Australia

Senator Carr has told us that Labor will pursue an "interventionalist but not protectionist" industry policy.  Does that mean that those elements of current government policy would be abandoned under a Rudd government?  Australia still applies a whole raft of trade barriers that inhibit trade and provide protection to local industry.  If the Labor Party is to finally abandon traditional industry policy to focus on less orthodox methods of national economic management, then this could fruitfully be coupled with a reduction of all barriers to trade as close to zero as possible.

7) HOW CAN INDUSTRY POLICY BE RECONCILED WITH CLIMATE CHANGE POLICY?

In 1998-99, the energy-intensive manufacturing industry accounted for 26% of primary energy consumption and 34% of electricity consumption.  Greenhouse gas emissions from the sector had grown 8% in the preceding decade. ⁽¹⁵⁾  All else being equal, it seems likely that the artificial stimulation of manufacturing will have a corresponding increase in greenhouse gas emissions, both directly from the processes of "making things", and indirectly, from the increases of electricity use in these sectors.

If, as the Opposition Leader has stated, "the science is in" on climate change, this government-stimulated increase in greenhouse gas emissions would seem to be counter with Labor's climate change policy.  Conversely, if industry policy is to be coupled with explicit measures to reduce harmful emissions, such as carbon taxes or trading arrangements, or mandatory emission reduction technologies, then this added burden on manufacturing would seem to be against the desire to encourage Australian industry.

It is beholden to Federal Labor to detail how these two seemingly disparate and irreconcilable policy areas can coexist under a Labor government.

CONCLUSION

Those mindful of the havoc which previous state and federal governments wreaked on the Australian economy have rightly greeted the announcement of a new-look industry policy with scepticism.  Whether this scepticism is deserved remains to be seen as Federal Labor prepares its policy.  This document has tried to outline some key questions which need to be answered, and provided a few possible recommendations to help the Opposition Leader and Shadow Minister prepare a policy which has the best chance of allowing Australians to grow their economy.

---

REFERENCES

1.  "Rethink on tax to lift R&D" The Australian, 12 Dec 2006

2.  "New Labor leader outlines plan" 7:30 Report, 4 Dec 2006

3.  ibid

4.  "Carr promises 'creative' support for manufacturing" The Age, 15 Dec 2006

5.  See, for example, "Hard times ahead for steel:  Carr", Illawarra Mercury, 12 Dec 2006

6.  "Labor's first job is to catch up on economics", Sydney Morning Herald, 11 December 2006.

7.  Kim Carr, "Reviving Australian manufacturing" Labor eHerald, 18 Dec 2006

8.  Much of this analysis is drawn from Richard J. Wood, "Back to Basics:  Why Government funding of science is a waste of our money", Backgrounder 18-4

9.  Review of Competition Policy, The Productivity Commission's inquiry into Clause 6 of the Competition Principles Agreement, Richard J. Wood, 2000.

10.  Jeffrey L. Pressman and Aaron Wildavsky, Implementation:  How Great Expectations in Washington Are Dashed in Oakland;  Or, Why It's Amazing that Federal Programs Work at All.  3rd ed. 1984

11.  "Productivity growth the key factor", Australian Financial Review, 20 December 2006.

12.  "ALP opens with big R&D tax break", Australian Financial Review, 12 December 2006.

13.  Back to Basics provides a good overview of the technical literature regarding picking economic winners.

14.  Kevin Rudd, Radio Interview ABC Adelaide, 14th December 2006

15.  Government-business climate change dialogue, Energy Intensive Manufacturing Working Group Report, 2003.

A major difference, at last

The creation by Labor leader Kevin Rudd of a shadow ministry for independent contractors is suddenly changing the political debate about workplace issues.  And new spokesman Craig Emerson has entered the debate with a fresh approach.

The big shift is the ALP's new public and policy acceptance of independent contractors.  This is a response to the government's major workplace legislation, the Independent Contractors Act.

It's also a recognition by the ALP that the independent contractor community is large but not naturally aligned to any political party.  Emerson has stated that independent contractors see themselves as neither "capital" nor "labour".  They view traditional workplace class consciousness as irrelevant.

An interesting comparison emerges.  The coalition's Independent Contractor Act is controlled by the minister for employment.  This sends a signal that -- administratively and bureaucratically -- the government is still treating independent contractors as a subset of employees.  But the ALP has placed independent contractors firmly within a commercial and business portfolio.  The apparently small administrative detail signals a major mind-set difference.

It's normally expected that unions want to drag independent contractors into their sphere of control.  The usual expectation of an ALP opposition is that it makes enticing noises towards independent contractors but ultimately seeks to deliver them to unions when in government.  This has been the process experienced with many state ALP governments.  But placing independent contractors in a separate business portfolio disconnected from union and industrial relations agendas creates new expectations of a potential Rudd government.  Business commonsense may prevail.

When the bill was debated in parliament, speeches from ALP MPs made independent contractors sound like traitors to their alleged working-class roots.  ALP members often sounded like former union officials appealing to their union mates who control ALP preselections.

But Emerson is different.  He comes from an academic economics background.  Over many years, he has established a reputation as a well-researched ideas person.  In interviews on the independent contractor issue he has emphasised the non-ideological and practical nature of small business.  He says independent contractors are small businesses that don't employ anyone and their issues are business issues.

This is the language to which independent contractors relate.  It doesn't traditionally appeal to unions.  But even at the union level there is a shift.  At the senate inquiry into the Independent Contractors Bill the ACTU accepted the common law definition for independent contractors used in the legislation.  And Emerson has not committed the ALP to repeal the act.

What does this demonstrate?  In isolation, the issue is not an election decider.  Independent contractors, numbering about 1.9 million with their small-business soul mates who employ up to five people, do not vote as a class block.  Their political views and allegiances are as diverse as the total community's.  It is how the political parties choose to perceive and talk to this group that is interesting.  Everyone expects a Howard government to be anti-union;  but it is when the ALP starts to be perceived as pro-business that change begins to look real.

The ALP's new position on independent contractors is a potential indicator of a determination to engage with the small-business sector at its own level.  Rudd may have important union supporters on this.  Whether this is maintained is yet to be seen.

Further, the ALP's new keenness for independent contractors will be tested in its policy detail.  For example, Emerson has indicated a desire to potentially fiddle with common law definitions.  But this could upset stable commercial relationships for independent contractors and alienate the sector.

Independent contracting has grown despite substantial legal and institutional blockages.  Independent contractors are businesses.  The capacity to have legally secure business-to-business relations no matter what the business size, supported by political consensus, is essential to healthy business and a successful economy.

Politically and institutionally, accepting that independent contractors are not employees is a plus for Australia.

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Fixing the Crisis: A fair deal for homebuyers in WA

Occasional Paper

INTRODUCTION

This submission supports the aspirations of average Australian families and argues that current planning policies, more than any other factor, restrict the capacity of first home buyers, and other less advantaged groups, from achieving a goal of home ownership.  Current planning orthodoxies inflate urban land prices and discriminate against younger and poorer people seeking to achieve home ownership.

"Australia's housing can be described broadly with the following phrase:  owner-occupation of detached dwellings". ⁽¹⁾  Perth and other urbanised parts of Western Australia fit this model.  At the last census 80 per cent of Perth dwellings were separate houses and a further 12 per cent are in semi-detached or terraced houses (ABS 2001 Census).  Over long periods of time, and in differing economic conditions, Western Australians have continued to express a strong preference for their own home, often in a new suburb, on a relatively large block of land.

Yet for the past thirty years, urban planners and government have pursued a policy of greater density, more flats and townhouses, in higher blocks, closer to the centre of town.  Instead of ordinary people acting like these elite urbanists would have it, new home buyers are forced to use up ever increasing amounts of their incomes to buy the kind of house they want.  And the cause is inflated land costs produced by a scarcity of urban building land resulting from regulatory measures.

In terms of changing people's preferences (not the job of government in a free society), urban planning has resulted in ever increasing returns to existing property owners and spiralling land prices.  In the process it has even failed to produce the planners' goal of increasing density.

WA has many natural advantages over other Australian states and clearly over many other places in the world.  One of those advantages is space.  WA has a comparative advantage in land availability.  Though the state is mineral rich it can ill afford to undermine its assets by bureaucratic and regulatory measures that raise the price of housing artificially when housing land should be the cheapest in the world and contribute to providing the state a standard of living that is surpassed by few other regions in the world.

PERTH HOUSING IS TOO EXPENSIVE

... AND LAND PRICES ARE THE CAUSE

Urban land costs in Perth were relatively low until recently.  In 1973 Perth land prices were lower than those in Sydney, Brisbane and Melbourne.  Since 2000, the median land-to-median house price relativity in Perth has jumped from 46 per cent in the March quarter 2001, to 62 per cent today. ⁽²⁾  The price of residential lots in Perth has risen 77 per cent in the past year, or $115,000 to $265,000 ⁽³⁾, fast closing on Sydney and exceeding the average in all other Australian metropolitan areas.  The president of REIWA, Mr Rob Druitt identified planning and development costs as a major factor in these price rises.  "The ongoing constraints in preparing and releasing land for sale is pushing up prices and making it harder for buyers," Mr Druitt said.

Figure 1 could be from a standard introductory economics text so clearly does it show the relationship between supply and demand.  Production of housing lots in Perth peaked in 2003 at 8,744 and has fallen substantially since to its current level of only 4,870 in 2006.  As a result land prices have shot up like a rocket as desperate home buyers bid up the available land to gain a foothold in the market.

Figure 1:  Perth Lot Supply vs. Price of Land BlocksSource:  2006 UDIA State of the Land

Though different authorities have slightly different estimates of house prices, all show the steep rise in Perth prices.  According to REIWA, the median house price in WA at the end of September 2006 was $450,000.  This makes WA the most expensive state in Australia, out-stripping the ACT by $18,000 and NSW by $50,000. ⁽⁴⁾  Over the past year the median house price in Perth has increased by 42 per cent to $480,000, putting Perth on track to overtake Sydney as the most expensive Australian city.

The result of this phenomenal growth in housing prices is affecting first home buyers more than others.  Only 1,172 first home buyers were able to purchase a home in September 2006, ⁽⁵⁾ continuing a trend of falling numbers of first home buyers being able to enter the market.

Figure 2:  Perth Housing prices compared to the rest of AustraliaSource:  ABS 6416.0

In commenting on the trend, the Productivity Commission noted that rising building material costs were not the prime mover in rising house prices and concluded that rising land prices were the culprit. ⁽⁶⁾

A common reason put forward for high Perth (and WA generally) house prices is the resources boom causing demand pressures that will dissipate when the boom ends.  Yet instead of increasing building activity to meet demand, new housing starts in WA have been stagnant for some years and actually fell in the September quarter 2006 (See Figure 3).  In terms of land availability, for demand to be the cause of escalating land prices there must be a lack of supply and this is clearly the case.  But the failure of a supply response is not attributable to an intrinsic lack of suitable land.  There is ample land suitable for housing development surrounding Perth yet, like new housing starts, lot production (land with planning approval) far from increasing currently appears to be trending down (see Figure 4).

Figure 3:  New Housing StartsSource:  ABS

Figure 4:  Perth lot productionSource:  REIWA

Nor can capacity constraints be blamed for the increase in new house costs or the fall in new housing starts.  Building costs of new homes are up 15.7 per cent this year;  this is higher than construction labour costs only up 5.0 per cent and building materials up 4.8 per cent, both in line with Perth's CPI (up 4.8 per cent) for the same period (See Figure 5).  Were capacity constraints the cause of the large increases in project home costs, this would be apparent in the materials and labour prices, yet these are moving in line with the strong growth of the WA economy.  Instead, the major difference between input cost prices and the final cost rises (which are, as discussed, dwarfed by the price increases) is most likely due to additional regulatory burdens being added to the new housing sector.  Examples include tightening energy efficiency ratings, changes to occupational health and safety and additional government charges.

Figure 5:  WA building costs and componentsSource:  ABS 6416.0, 6427.0

Furthermore as Table 1 shows, there has been a long-term mismatch in all Australian cities between land price increase and building cost increases.  Housing Industry Association data shows that increases in the house component of a house and land package has broadly been in line with inflation over a thirty year period.  Even in Perth, where there has been some cost breakout in the past year or so, house costs have increased eight times over 33 years compared to national CPI increases over the same period of 6.3 times.  By contrast, the land price has increased by 40 times, a five fold increase over the house price increase.  The latest annual land price jump in Perth of 77 per cent compared to 4.8 per cent for the CPI is more extreme than the historical data but it is of the same pattern.

Table 1:  New land and house package costs

Typical new house and land prices by capital city, 1973-2006
(Standardised to a 135sqm house and a 700 sqm block)

	1973	1983	1993	2006	Price Increase Multiple 1973 to 2006
Sydney
Land	$9,100	$29,400	$107,100	$460,600	49.6
House	$18,900	$43,200	$121,500	$128,250	5.8
Melbourne
Land	$6,900	$15,800	$49,000	$107,000	14.5
House	$14,000	$35,000	$75,000	$112,000	7.0
Brisbane
Land	$7,000	$27,000	$60,000	$135,000	18.3
House	$16,000	$37,000	$70,000	$112,000	6.0
Perth
Land	$6,500	$17,300	$80,974	$270,000	40.5
House	$12,000	$28,000	$60,000	$109,000	8.1
Adelaide
Land	$2,000	$12,000	$35,000	$140,000	69.0
House	$12,000	$20,000	$40,000	$90,000	6.5
CPI	20.5	61.6	108.9	150.6	6.3

Sources:  Sydney:  REI of NSW;
Melbourne, Brisbane and Adelaide:  UDIA;
WA:  HIA.

HOUSING STRESS IS GROWING

The Australian Housing and Urban Research Institute (AHURI) defines housing stress as households with housing costs at least 30 per cent of gross household income.  Extreme stress occurs when housing costs consume more than 50 per cent of total income. ⁽⁷⁾  Since 2003, median Perth house prices have more than doubled and rents have also increased markedly yet household income has grown far more modestly.  As Table 2 shows, on the AHURI measure, Perth first home buyers have moved beyond housing stress in 2003 to being priced out of the market by 2006.  Even using REIWA's far more generous estimates of average household income, once council rates and basic maintenance costs are added to the mortgage costs first home buyers are experiencing extreme housing stress.  The low mortgage default rates and the persistence of at least a few first home buyers in entering the market demonstrate the overwhelming preference of Australians to own their own home at the expense of other expenditure.  Notwithstanding this preference, there comes a point where home ownership is priced outside the realms of possibility for ordinary families and that point in the Perth housing market has been reached.

Table 2:  House affordability for first home buyers

	2003	2006	2006 (REIWA)
Weekly Mean Income	$1,116	$1,322	$1,748
Weekly Median Income	$900	$1,067
Mean income	$58,032	$68,768	$90,900
Median income	$46,800	$55,458
Mean After Tax	$45,273	$52,788	$66,690
Median After Tax	$37,410	$43,471
Median House Price	$230,200	$450,000	$450,000
First Home Buyer House Price	$195,670	$419,100	$419,100
First Home Buyer Mortgage @ 90%	$176,103	$377,190	$377,190
Monthly Repayments	$1,383	$2,961	$2,961
Annual Mortgage	$16,591	$35,536	$35,536
Mortgage as % of Mean Income	37%	67%	53%
Mortgage as % of Median Income	44%	82%

Sources:  REIWA, ABS 6523.0, National Australia Bank Standard Variable Rate, HIA/CBA

WA and other governments are in danger of creating a class system—whereas wealthy people can help their own children get a start in the housing market, children of poorer parents become marginalized—unlike in the pre-planning restraint era, it is increasingly difficult for them to find the means themselves to step onto the real ladder of opportunity.  This illustrates how regulatory measures can have unintended bad consequences.  Goals that might have some broad support in the abstract, for example to create higher density cities, come up against people's preferences and the forced densification leads to higher prices and less development that infects the whole of the community.

UNAFFORDABILITY:  PERTH MAKES THE GLOBAL TOP 10

Another measure of housing affordability is the multiple of median housing prices to median income.  International research on these multiples has concluded that ratios below 3 are rated as affordable and above 5.1 as severely unaffordable.

Given the explosion of median house prices since 2005 to the current level of $480,000, ⁽⁸⁾ Perth's current housing affordability rating has leapt to 8.7, making Perth the least affordable housing market in Australia and the seventh least affordable market on the planet (see Table 3).

Table 3:  Top 10 most unaffordable housing markets

Rank	Housing Market		Median Multiple
1	US	Los Angeles	11.2
2	US	San Diego	10.8
3	US	Honolulu	10.6
4	US	Ventura County (Greater LA)	9.6
5	US	San Francisco	9.3
6	US	Miami	8.8
7	Aus	Perth	8.7
8	Aus	Sydney	8.5
9	US	New York	7.9
10	US	San Jose	7.4

Source:  Demographia.com 3rd qtr 2005, Perth calculation 3rd Qtr 2006.

The research institute Demographia notes that all the cities in the least-affordable category have stringent planning and building codes which limit the availability of new housing and increase building costs.

YOUNG FAMILIES ARE PARTICULARLY HARD HIT

Perth's outright home ownership in 1996 was 37 per cent with 31.5 per cent buying their own home.  Total owned occupied housing rate of 68.5 per cent is not much different from the 71per cent of a decade before. ⁽⁹⁾  By 2001 the rate had inched back up to 70 per cent home ownership. ⁽¹⁰⁾  However these gross statistics mask some significant changes in the age profile of homeowners.

The rates of home ownership by younger people are falling as they are priced out of the market.  Yates, in a study of the causes of falling home ownership in this age group, found:

• Less than 25 per cent of these declines could be attributed to the changing socioeconomic composition of households (the endowment effect) in each city.
• The remaining 75 per cent (the residual effect) is attributable to the changes in housing market constraints, or to changes in any other factors that affect tenure choice (such as changes in preferences).
• The results obtained suggest that the housing market constraints are the dominant explanation for declines in home ownership rates.
• Within the 25-44 year old age group under consideration, home ownership rates generally declined most for households with children, yet these are households for whom many of the social benefits attributed to home ownership are perceived to be the most pronounced.
• Declines in home ownership have been greater in metropolitan regions, where the economic (real capital) gains from home ownership have been higher and less in non-metropolitan regions where the economic gains have been lower. ⁽¹²⁾

While Yates did not enquire into the sources of housing market constraints, her conclusion that constraints were the cause highlights the scope of the impact of creating market conditions that ordinary Western Australian families find it impossible to get a foothold on the ladder of home ownership.

Yates looked forward to the outcome if these younger households are permanently excluded from home ownership, and concluded the rent assistance demands they make on public expenditure are likely to re-emerge when they reach retirement age.  Likewise, the support services they may need are likely to differ depending on whether they are, or are not, in their own home.  If they live in areas where housing is low cost and, because of this, have less access to employment opportunities, the rent assistance demands they make on public expenditure are likely to continue until they reach retirement age. ⁽¹³⁾

We do not necessarily believe that all should own their own home (and there are very good reasons, including the need for a stock of dwellings for those starting out in adult life and for the increasing number of people who are transient in a particular city).  What does seem offensive though are policies that result in artificially high prices that make such choices unaffordable.  Aside from the utilitarian motive that owning a home provides people with a savings cushion that reduces their future call on others, home ownership gives citizens a property stake in the community, a stake that would almost certainly enhance their feeling of shared community, matters that enhance the lifestyle satisfaction of all.

One of the reasons young families suffer disproportionately from excessive housing costs is that they are often at the stage in the lifecycle where they rely on one income as one parent stays at home to raise young children.  Most Australian women return to the workforce once their children are in school however this is often part-time work and occurs when the costs of raising children are at their peak.  It is therefore unsurprising that many couples delay having children until they can get settled in their own home.  With WA median prices at $450,000, increasing numbers of couples will either reduce their number of children or remain in the also overheated rental market.

Table 4:  Home ownership, Perth ⁽¹¹⁾

Age	1996 (per cent)	Change from 1986
15-24	24.6	-5.6
25-44	65.1	-4.4
45-64	80.2	4
65+	73.0	-3.2

EXPENSIVE HOUSING HURTS THE ECONOMY

Edward Glaeser of Harvard University, blames excessive regulation for slowing construction to the point where demand has outstripped supply, fuelling a run-up in home prices.  The danger, says Dr. Glaeser, is such places have priced out today's highly skilled "knowledge workers", forcing them to live in a more affordable locale where their contribution to the economy might not be as great.  "These are places where only the elite can live", Dr. Glaeser says. ⁽¹⁴⁾

Already this is a common theme in blogs as people trying to buy a house on ordinary incomes find this has become impossible in Perth. ⁽¹⁵⁾  Many professionals and trades people vital to the growth and operation of an economy such as teachers, nurses, and chefs can no longer afford to buy housing.  Over time these people will migrate to other areas and States in pursuit of the Australian dream but WA will endure chronic labour shortages.

A QUARTER ACRE BLOCK IS A FOND MEMORY

The modern city is more dispersed because it can be.  Jobs are less concentrated, shopping centres more diversified, the number of trips to the centre has fallen from over 50 per cent to 10 per cent.  Planners must adapt to the city not try to force people to live in ways they do not prefer.  People want to live in their own space and Perth and WA generally is ideally positioned to allow this

There are common misconceptions that Perth's low population density is both exceptional for cities of her size and an unwanted blight.  Yet compared to some European cities of similar size such as Lyons, Marseilles and Bordeaux, Perth is not all that dispersed.  It is comparable with Boston, Baltimore and virtually every other 800,000 to 1.5 million sized city in the US and Canada.  WA has a comparative advantage in land availability.  Though the state is mineral rich it can ill afford to undermine its assets by bureaucratic and ill considered political moves that raise the price of housing artificially when housing land should be the cheapest in the world and contribute to making the state a standard of living that is surpassed by few other jurisdictions anywhere in the world.

Perth's average block sizes are declining from around 800 square metres (0.2 of an acre) 20 years ago, and comparable in size to the suburban areas of many US cities, to around 550 square metres today. ⁽¹⁶⁾

Figure 6:  Perth Lot Sizes and Price ⁽¹⁷⁾

The reduction in house block size is unlikely to be driven by consumer preference.  New house sizes have been increasing as block size shrinks, leading to the phenomena disparagingly called McMansions.  Instead, the reduction in house block size is much more likely related to the exorbitant cost of development land.  Families buying these new house and land packages just can't afford the size blocks their parents did and the continuing preference for more housing space per person is leading to larger houses being placed on smaller blocks.  Recent comment from Perth developers has noted house sizes are now falling as people decide they can live without a separate dining room or the fourth bedroom.  Again, this is unlikely to be an expression of unbounded consumer preference, instead home builders having already shrunk their block size by 30 per cent as land prices have exploded, are now lowering their expectations of what kind of house they can build and still be able to afford it.

As a recent UK report into planning notes densification comes at a cost, the cost of frustrating the clear preference of most people to live in detached housing rather than flats or other housing options.  Furthermore, "densification can also make the best use of available land, but there are limits to how far this can go.  Although in some urban areas it is possible to build at very high densities, this may be less acceptable elsewhere.  The savings of land which come from building at 50, rather than 40 dwellings per hectare are smaller than those from building at 30 rather than 20 per hectare." ⁽¹⁸⁾

In WA, like the rest of Australia, people have over long periods of time expressed a clear preference for lower density living.  The Australian lifestyle has also been a key draw card for the large waves of immigration by people who have achieved their dreams by building houses that reflect their heritage in suburbs in all major cities.  There are in fact some 1.3 million Brits resident in Australia and according to research by the Institute for Policy Research ⁽¹⁹⁾ a major reason for this outflow is the exhorbitant price of houses in the UK.  This attraction is likely to be severely diminished unless policies are changed.

THE COSTS OF NEW HOUSING

REIWA estimate the current price in Perth for an average block of 550 sq m at $265,000. ⁽²⁰⁾  There are two major causes of housing development land costing so much more than the price of bare land.  The first is that development costs add significantly to the undeveloped land price.  Some of these costs, such as direct utilities connections and developer margin are properly borne by the buyers of new housing, the utilities add about $36,520 (see Table 5) with about $40,500 in design, building road preparations and margin.  However there are a plethora of other charges such as offsets for open space, school provision, public transport provision etc. which are lumped on residential developers and therefore passed onto the buyer;  these add a further $32,000 to each house block.  On average, a total $109,020 per block is charged in developer costs and government charges.

Table 5:  Land allotment costing

Nature of cost	Cost per allotment
Civil works construction costs including:    Establishment & Disestablishment    Sedimentation Control Works    Allotment filling    Road Formation works    Roads, pavements & gutters    Hot-mix seal coat    Stormwater drainage works    Sewer reticulation    Water reticulation    Common Service Trenching    ETSA/Telstra conduits materials    Survey Certificate    CITB levy	$30,415
Sewer	$2,495
Water Supply	$500
Survey & Engineering	$3,000
Planning, registration, title fees	$110
TOTAL	$36,520

Source:  Figures extracted from a 70 Allotment Stage for a development within the City of Onkaparinga with sales starting in mid 2006.

However, in Perth, the largest impost on buyers of house and land packages is the undeveloped cost of the land of $156,000.  At $156,000 for 550 sq m development land is being sold for $2,836,000 per hectare.  This is clearly absurd for a resource that is naturally abundant but restricted in supply by planning laws.  A more reasonable figure for undeveloped land would be $60,000 per hectare, $3,300 per block which would still value the land at more than five times the most expensive agricultural land and provide handsome returns to farmers selling up.  At $60,000 per hectare this provides a substantial profit to the selling landholder if it is compared to the average price of $2,000 per hectare estimated by ABARE for agricultural land in the high rainfall wheat sheep areas in the south west of Western Australia.

In a recent enquiry into first home ownership the Productivity Commission noted the slow supply of housing will cause large price rises in land in the presence of increased demand. ⁽²¹⁾  It is likely therefore that some of the current spike in price will have been caused by a short-term supply demand mismatch as a result of the booming WA economy.  However, as Table 1 shows, housing prices across Australia and including Perth, have shown marked long run increases above inflation.  Therefore, even after making allowance for current upsurge in price inflation (as land holders with development approval are able to obtain extraordinary returns), underlying undeveloped housing land is massively overpriced because of long-run government rationing through the planning process.

Moreover, restraints on land availability are suppressing the normal market reaction by not allowing increased stock to be made available to respond to the soaring price rise caused by lack of supply.

Building approvals are shown in Figure 7 below.  Remarkably, given the booming economy of Perth, building approvals have only trended upwards marginally from 1436 in September 2001 to 1675 in September 2006 (16.7 per cent).  The cost data presented above strongly suggests that labour and material shortages are not the cause of the relatively sluggish increases in building approvals.  Instead, builders have insufficient land on which to seek approval.

Figure 7:  WA Building ApprovalsSource:  ABS

Land preparation costs, like house building costs have been kept competitively priced by competitive forces.  The following is typical of the components of costs necessary to have land readied for building.

If land was a reasonable price and governments did not require home buyers to pay for all the additional costs (such as provision of open space, regional roads, schools etc.) that previous generations of home buyers received as part of general government provision financed through the general tax base, the total cost of a new home would drop from $379,000 ⁽²²⁾ to $195,500.  The difference of over $180,000 costs the home buyer an additional $1,546 per month at current interest rates and brings the total mortgage (assuming 90 per cent borrowed) to $666 a week.  The most recent ABS household income numbers show WA has a median household income of $889 per week. ⁽²³⁾  This implies a new home owner with an average income spends 75 per cent of their household income on housing, in effect proving the impossibility of ordinary income earners to buy a house and land package in Perth.  If the raft of government policies penalising home owners were removed the proportion of income paid by average income earners would fall to 34 per cent, still above what the Australian Government's research institute thinks is appropriate, but not an impossible dream for ordinary families.

Figure 8:  Perth new housing under different regulatory regimes

PERTH AND HOUSTON:  SISTER CITIES

Perth is sister city to Houston, the largest city in Texas.  Texas and Western Australia have much in common in terms of their mineral and petroleum wealth and frontier nature.  Texas has a larger and faster growing population than WA and forty times the population density of WA.  Similarly, the greater Houston area has over three times the population of greater Perth.  However the cities share similar population density and broadly similar home ownership levels.

As Table 6 shows, even on 2005 data (the latest available for all measures) Perth's median housing price is over 2½ times that of Houston.  All else being equal, housing prices would be expected to be higher in Houston:  the city has higher incomes and the US has lower interest rates, making mortgages cheaper.

Table 6:  Comparison of Perth and Houston

	Texas	WA
State population (2000)	22,471,549	1,978,079
Households (‘000)	7,393	695
State GDP (bn)	$989.4	$65.2
GDP per capita	$44,031	$32,491
Area (sq km)	696,241	2,527,633
Population density per sq km	32.30	0.8
	Houston	Perth
Population 2005	3.8m	1.2m
Land area, sq km	3.355	964
Persons per sq km	1,132	1,244
Median value occupied housing 2005	$123,400	$331,100
Median household income 2005	$46,705	$55,458
Home ownership 2005	62.9%	68.5%
Median monthly housing costs	$601	$2,080
Mortgage costs as per cent household income	15%	45%
2005 house price as a multiple of income	2.6	6.0

Source:  ABS, US Census Bureau, all values in local currency

On this basis Houston ranks as one of the more affordable housing markets in the developed world. ⁽²⁴⁾  By contrast, using 2005 data Perth has a ratio of 6.0, placing this city in the severely unaffordable category.  (As discussed above, Perth's ratio is now 8.7).  Similarly, using the housing costs as a percentage of household income measure vividly demonstrates the affordability of Houston housing at only 15% going to mortgage costs with Perth homebuyers hefting an average 45 per cent of their income to pay the mortgage.

Building costs, housing size and other demand factors are not the cause of Perth housing being so much more expensive than Houston, ⁽²⁵⁾ instead the major difference is planning controls, with Houston having no city development boundary and a pro-development city administration.  According to the Wall Street Journal Houston "has some of the least-restrictive land-use and construction rules in the nation.  Those factors help supply to keep pace with demand and keep prices within reach of a broad range of potential buyers." ⁽²⁶⁾

If Perth had a housing multiple the same as her sister city Houston, median house prices would decline to $181,700, a fall of 62 per cent and housing costs would fall to a very manageable 25 per cent of median household income allowing more first home buyers, young families and other average income households to purchase their own home.

Tellingly, whether the optimal house and land package is calculated from the ground up so to speak of actual costs or implied by applying a reasonable multiple to income to determine a fair price, the result is quite similar:  $195,500 from a cost basis and $181,700 using a multiple.  Either methodology results in a far more affordable price than the current $379,000 for house and land packages or $480,000 for an established house.

SPRAWL IS NOT A DIRTY WORD

Within current planning discourses a number of orthodoxies reign.  Together these orthodoxies seek to build a comprehensive case in favour of urban infill and increased density.  However, the majority of urban Western Australians, like their counterparts in other Australian cities, choose to live in suburbia.  Moreover, for many people, the great Australian dream is still to build their own home, to their own specifications, in a new suburb, surrounded by families doing the same thing.

Never mind rising sea levels and galloping desertification.  Never mind that suburbia guzzles land, wastes energy, pollutes air, generates traffic, disperses community, makes services expensive and public transport impossible.  Or that in 20 years, when the dominant household is the single person, all these effects will intensify. ⁽²⁷⁾

In the quote above Elizabeth Farrelly of the Sydney Morning Herald manages to compress into a short diatribe many of the elitist criticisms of suburbia.  All of which are either totally without foundation or not applicable to low density cities such as those found in Australia.  As for suburbia guzzling land, presumably from that other evil water waster, agriculture, it is not as if land is scarce in Australia.  Similarly there is a strong relationship between urban sprawl and pollution—but not the one the new urbanists suggest.  Air pollution tends to increase with population density. ⁽²⁸⁾

INFRASTRUCTURE UTILISATION ORTHODOXY

This orthodoxy argues increasing density in established areas better uses the existing infrastructure—roads, sewerage, public transport etc.  However, this line of thinking, often pushed by urban planners and ministries of planning, is frequently stymied by the power of existing homeowners in established suburbs who will not accept increased density in their area, arguing it will destroy the character of the area.  The result is the infill plans of the planners are not fulfilled and housing pressures remain.

However there is a false assumption and a huge degree of paternalism underlying the infrastructure utilisation orthodoxy.  The false assumption is that increasing density in the centre will result in better utilisation of services and utilities.  In some cases such as inner city roads these are at capacity already, in others such as sewers, inner city municipalities have persistently skimped on maintenance and upgrades because as their population densities declined it has been cost effective to let those services slowly decay.  In some cases the costs of upgrading them for higher density is well beyond the costs of new sewers on the urban fringe.  As an example of this, high speed telecommunications needs optic fibre to the home, easily and cheaply added to new developments but very expensively to existing housing.

The paternalism arises in a number of ways but the major one is public transport.  Planners believe, for a variety of reasons that more people should take public transport, particularly to commute to work in the CBD.  However, only 15 per cent of total employment is in the central business districts ⁽²⁹⁾ and this figure continues to fall.  Public transport systems designed around getting people to work no longer fit the patterns of work with more people working across town from where they live and the massive increase in part-time employment changing the traditional morning and evening peak hours to more frequent transport throughout a longer daily period.  As a result in 2001 only 8.1 per cent of work trips in Perth were by public transport and public transport's market share is declining. ⁽³⁰⁾

Even assuming the infrastructure utilisation theory is right, which is not what the data shows, however for the sake of the argument assume infill is cheaper to provide services to than greenfields development.  The clear response in that circumstance is to fully and properly cost the unavoidable infrastructure costs (not the planners wish list costs) and add the necessary costs to the development.  Open and transparent costs allow potential buyers to effectively weigh up whether they are prepared to pay those costs.

ENVIRONMENTAL ORTHODOXY

This orthodoxy argues households with large houses on the periphery use more energy than compact houses near the centre.  More car use causes higher greenhouse gases.  This is a bad thing.  Solutions include infilling the existing areas and if necessary only build new suburbs out along heavy rail, enforce stringent environmental standards on new housing and require developers (and therefore new home buyers) to pay hefty amounts for open space preservation and environmental works.

Again this is dictating the values of a small urban group on the vast majority of people who want their own home, on its own block, with a garden and a three car garage.  No amount of money poured into public transport will make most people use it.  Even if free it is not convenient for people who want to go across town, who have the weekly food shopping, who have babies and young children with them.

In 1995 private road vehicles represented about 93 per cent of city passenger transport.  Urban public transport is a minor component of city transport and has been for many years.  As Figure 10 shows, the average number of journeys per year by Perth residents is about 30, or 15 round trips, and has been around that level since 1991.  That's only slightly more than one return journey a month for the average person.

Figure 9:  Urban passenger transport trips (Australia)Source:  Bureau of Transport Economics, Working Paper 38

Figure 10:  Annual public transport journeysSource:  Western Australia Department of Transport, Passenger Transport Annual Reports, various years.

Over the past thirty years the car has proven the preferred mode of transport except in extremely dense cities such as Hong Kong and Tokyo.  Perth can never emulate the high rise density of Hong Kong and therefore can never match the densities needed to run a mass transit system that people actually prefer to use.  It is unrealistic for urban planners to attempt to instil an alien mass transit ethic on fundamentally suburban communities, the result will be higher public transport subsidies not higher usage.

MISMATCH ORTHODOXY

As household size declines housing size should also decline and people who do not adjust their living space in light of the number of people in the household are underutilising the housing stock. ⁽³¹⁾

Household size has been declining for over 40 years yet until recently house size has been growing as all household sizes exercise their preference for larger per person living spaces.  The notion that "empty nesters", child free couples and singles somehow all prefer to live in new high rise inner urban apartment blocks has not been borne out by the evidence. ⁽³²⁾  The occupants of the new apartment blocks are overwhelmingly young people, often students and recent graduates moving out of their childhood home.  Relatively few families with children or people over forty are populating the revitalised inner city.

The continuing decline in the size of households in Western Australia is affecting housing demand but not in the way those who think there is an appropriate house size per person would advocate.  Lone person households increased from 24.9 per cent of all households in June 1999 to 26.8 per cent in June 2004.  In comparison, in the 1991 Census, 19.6 per cent of Western Australian households consisted of only one person.  Between 1999 and 2004, the total number of households in the state increased from 707,574 to 772,062, with declining household size accounting for 15,109 households or 23.4 per cent of the increase. ⁽³³⁾  Perth residents are breaking into smaller family units but the trend to larger houses is outweighing the lower numbers of people in each one.

THE KITCHEN SINK ORTHODOXIES

Suburban sprawl encourages car use at the expense of walking thereby reducing the exercise of residents and adding to the obesity epidemic.  Home gardens in suburbia use too much water which is in short supply due to the drought/climate change.  Sprawl uses up productive farmland which will lead to an inability of the cities to support themselves due to lack of food supply.  Suburbia is a cultural wasteland characterised by isolated and compartmentalised households.  By contrast, inner urban areas are awash with cultural vibrancy and dense networks leading to high stocks of social capital.

This list is almost endless.  It would no doubt be possible to create a game where the compère lists a random social, environmental or other public policy problem and contestants come up with how it is caused by urban sprawl.

Each of these kitchen sink assertions need to be empirically tested, for example recent water usage figures in Melbourne show some of the most established inner suburbs are much higher water users than gardens at the periphery.  Similarly recent US research found higher stocks of social interaction and social capital in outer suburban areas than the inner city, ⁽³⁴⁾ putting paid to the assertion the suburbs are full of desperate housewives living lives of misery and despair.

CONCLUSION

That Perth's housing market is overheated is beyond doubt.  But for government to throw up its collective hands and assume nothing can be done until the mining boom ends is both an abrogation of responsibility and the wrong conclusion to draw from the data.  The overwhelming reason housing is too expensive for first home buyers and ordinary middle income families is because land is massively overpriced.  This can be fixed relatively easily;  by easing the planning controls and other cost imposts that restrict the supply of land for housing.

Despite thirty years of a planning orthodoxy designed to increase density, homebuyers have consistently frustrated the designs of the urban elite to force them into high rise apartments.  Overwhelmingly families, particularly as they begin to have children, want to live in low density, residential neighbourhoods.  Market forces if left to their own devices will ensure these are serviced by convenient shopping centres.  The great Australian dream remains a detached house.  When denied this choice or government regulations overprice it, people opt for a reduced block size.  Now, an ever growing number are not able to buy at all and remain in the rental market.

It is not the right of government to dictate to the people how they should live.  It is their duty to remove blockages to people's pursuit of their own versions of happiness not to create barriers to this.  And while a case can be made for governments to dictate some things where there are externalities present (e.g. infrastructure costs not born by individuals), this is not an important factor in new developments in Western Australia.  Indeed the costs of the infrastructure is greater in the older inner city areas because it needs to be replaced and this involves far greater expenditure than in green field sites where more modern piping and other products can be easily incorporated.

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ENDNOTES

1.  David Clark Batten, "The Mismatch Argument:  The Construction of a Housing Orthodoxy in Australia" Urban Studies 36, no. 1 (1999).

2.  Reiwa.com.au, Land Prices, Building Costs Skyrocket (Real Estate in WA, 15 November 2006 [cited 19 November 2006]).

3.  Ibid. (cited).

4.  Shane Wright, "WA Homes Nation's Hottest Property", The West Australian, 10 November 2006.

5.  Australian Bureau of Statistics, "Housing Finance, Australia, Sep 2006", (Canberra:  ABS, 2006).

6.  Productivity Commission, "First Home Ownership", (Melbourne:  The Productivity Commission, 2004).

7.  Judith Yates, "Housing Implications of Social, Spatial and Structural Change", (Sydney:  Australian Housing and Urban Research Institute, 2002).

8.  Reiwa.com.au, Perth vs Melbourne for Highest Tax on First Homebuyers (Real Estate in WA, 20 October 2006 [cited 19 November 2006]).

9.  Yates, "Housing Implications of Social, Spatial and Structural Change".

10.  Australian Bureau of Statistics, "Census 2001:  Perth", (ABS, 2001).

11.  Yates, "Housing Implications of Social, Spatial and Structural Change".

12.  Ibid.

13.  Ibid.

14.  Thaddeus Herrick, "Houston Missed the Real Estate Boom of East and West Coasts, but Now It's Payback Time", Wall Street Journal, 7 November 2006.

15.  See for example http://blogs.news.com.au/perthnow/fromlisaslips/index.php/perthnow/comments/the_real_estate_market_is_a_disgrace/ and http://www.hismethod.com/2006/11/04/crazy-land/ and http://mgio.spaces.live.com/Blog/cns!3FB2AC53354F3446!1368.entry

16.  Reiwa.com.au, Bigger Houses on Smaller Blocks Create New Issues (Real Estate in WA, 6 November 2006 [cited 19 November 2006).

17.  David Poole, "The 2006 Udia State of the Land", (Epping, NSW:  Urban Development Institute of Australia, 2006).

18.  Kate Barker, "Barker Review of Land Use Planning", (Norwich:  HMSO Treasury, 2006).

19.  http://www.ippr.org.uk/pressreleases/?id=2479

20.  Reiwa.com.au, Land Prices, Building Costs Skyrocket ([cited).

21.  Productivity Commission, "First Home Ownership".

22.  See Table 1, land $270,000 + house $109,000 = $379,000, source HIA

23.  Australian Bureau of Statistics, "Household Income and Income Distribution, Australia, 2003–04", (Canberra:  ABS, 2005).

24.  Wendell Cox and Hugh Pavletich, "2nd Annual Demographia International Housing Survey:  2006", (Belleville, IL:  2006).

25.  Richard J. Wood, The Tragedy of Planning (Toowoomba, 2006).

26.  Herrick, "Houston Missed the Real Estate Boom of East and West Coasts, but Now It's Payback Time".

27.  Elizabeth Farrelly, "More Reasons Than Ever to Fight for Human Cities", The Sydney Morning Herald, May 17 2006.

28.  Demographia.com "Mythical Underpinnings:  The New Urbanism, Smart Growth and the Crusade Against Urban Sprawl"

29.  Wood, The Tragedy of Planning.

30.  Wendell Cox, "Urban Transport Fact Book", (Belleville, IL:  The Public Purpose, 2003).

31.  Batten, "The Mismatch Argument:  The Construction of a Housing Orthodoxy in Australia ".

32.  Gary V. Engelhardt, "Housing Trends among Baby Boomers", (Washington, D.C.:  Research Institute for Housing America, 2006).

33.  ABS December Quarter 2004 issue of Western Australian Statistical Indicators, ABS Catalogue Number 1367.5

34.  Jan Brueckner and Ann G. Largey, "Social Interaction and Urban Sprawl", in University of California-Irvine, Department of Economics - Working Papers (Irvine:  2006).

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BIBLIOGRAPHY

Australian Bureau of Statistics.  "Census 2001:  Perth".  ABS, 2001.

———.  "Household Income and Income Distribution, Australia, 2003–04".  Canberra:  ABS, 2005.

———.  "Housing Finance, Australia, Sep 2006".  Canberra:  ABS, 2006.

Barker, Kate.  "Barker Review of Land Use Planning".  Norwich:  HMSO Treasury, 2006.

Batten, David Clark.  "The Mismatch Argument:  The Construction of a Housing Orthodoxy in Australia" Urban Studies 36, no. 1 (1999):  137-51.

Brueckner, Jan, and Ann G. Largey.  "Social Interaction and Urban Sprawl".  In University of California-Irvine, Department of Economics - Working Papers.  Irvine, 2006.

Cox, Wendell.  "Urban Transport Fact Book".  Belleville, IL:  The Public Purpose, 2003.

Cox, Wendell, and Hugh Pavletich.  "2nd Annual Demographia International Housing Survey:  2006".  Belleville, IL, 2006.

Engelhardt, Gary V.  "Housing Trends among Baby Boomers".  Washington, D.C.:  Research Institute for Housing America, 2006.

Farrelly, Elizabeth.  "More Reasons Than Ever to Fight for Human Cities".  The Sydney Morning Herald, May 17 2006.

Herrick, Thaddeus.  "Houston Missed the Real Estate Boom of East and West Coasts, but Now It's Payback Time".  Wall Street Journal, 7 November 2006.

Wood, Richard J.  The Tragedy of Planning.  Melbourne:  Institute of Public Affairs, 2006.

Poole, David.  "The 2006 Udia State of the Land".  Epping, NSW:  Urban Development Institute of Australia, 2006.

Productivity Commission.  "First Home Ownership".  Melbourne:  The Productivity Commission, 2004.

Reiwa.com.au.  Bigger Houses on Smaller Blocks Create New Issues Real Estate in WA, 6 November 2006 [cited 19 November 2006].

———.  Land Prices, Building Costs Skyrocket Real Estate in WA, 15 November 2006 [cited 19 November 2006].

———.  Perth vs Melbourne for Highest Tax on First Homebuyers Real Estate in WA, 20 October 2006 2006 [cited 19 November 2006].

Wright, Shane.  "WA Homes Nation's Hottest Property".  The West Australian, 10 November 2006.

Yates, Judith.  "Housing Implications of Social, Spatial and Structural Change".  Sydney:  Australian Housing and Urban Research Institute, 2002.