Some thoughts for a more liberal bill of rights

Let's call a spade a spade, and consider the debate over Australia's Bill of Rights for what it really is:  a political debate on how government power should be limited.  So why not have a liberal, or "free market", Bill of Rights that actually limits the power of government and protects rights that really affect us?

If we are going to have a Bill of Rights -- and there are good arguments why we should not -- it should contain provisions such as these:

• No level of government should be able to acquire an individual's property without compensation.  This currently exists at federal level, but should be extended to state and local governments as well.  Governments take property rights away from property owners all the time -- not just in the obvious way depicted in The Castle, but by imposing limits on what individuals can do with their property, such as heritage restrictions and native vegetation laws.  These regulations impose very real costs, and trample all over the rights of individuals.
• Individuals must be consulted before governments pass laws that adversely affect them.  A similar provision is enshrined in the Charter of Fundamental Rights of the European Union.  Sounds too obvious?  Perhaps, but the Australian government passes a lot of laws, and despite recent attempts to reform the law making process, few potential changes are widely consulted and subject to the sort of scrutiny by those they will affect.
• Budgets must be balanced.  Recognising that future generations have a right not to be burdened with the spending excesses of today, many US states have written into the constitution a requirement that budgets must be balanced.

There are many other possible inclusions.  Any and every tax increase the government wants to burden us with must be approved by a referendum -- again, common in many US states.  Nevada's constitution puts a limit on the amount of days per year their state legislature can sit -- the less time politicians sit in parliament, the less time they have to make bad laws.

The ever growing number of countries instituting "flat" income tax rates recognises the responsibility for citizens to contribute equally to the upkeep of the state, and the right for individuals not to be disproportionately targeted for their money.

These recommendations are undoubtedly contentious -- a Bill of Rights is fundamentally a political issue.  Deep down, what goes into a Bill of Rights reflects the value judgements of those that draft it -- to believe otherwise is naive.

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The Rhetoric of Evidence-Based Policy

As many of you will know, Sherlock Holmes and Dr Watson were lovers of the outdoors, so come spring, it was hardly surprising that they should have decided to spend a weekend camping on the Sussex downs.  As evening came, they pitched their tent, put on nightshirts, nightcaps and bed socks, and after a soothing cup of cocoa, a cordial "good night Watson" and an equally cordial "Good night Holmes", went to sleep.  A few hours later, Holmes nudged Watson, and said "Watson, Watson, look at the stars!".  "What, what?" said Watson, roused from a deep slumber.  "Ah yes, Holmes, the stars".  "Well, said Holmes, what do you make of them?".  Watson, by then awake, summoned his full reserves of pomposity and, as a trained medical man, of scientific method, and said "Well, Holmes, judging by the position of the stars and the moon, I deduce chronologically, that it is some three hours since we fell asleep, geographically, that the earth has rotated forty-five degrees during that time, astronomically, that the handle of the big dipper is still pointing to the north star, astrologically, that Venus is in the ascendant, and finally, meteorologically, that we can expect a fine day tomorrow.  Will that do?"  "You idiot", said Holmes:  "I meant that someone has stolen our tent".

In short, data and facts are no substitute for intelligence.

I say this because I have recently had the privilege of listening to a senior Minister on the subject of evidence-based policy.  My immediate reaction was to be reminded of Rossini's famous quip on Wagner's opera Lohengrin, about which he said that "One cannot judge Lohengrin from a first hearing, and I certainly do not intend to hear it a second time".

But though my instinct was to brush this whole notion of evidence-based policy off, history teaches us that you cannot keep a bad idea down.  Closer attention to the phenomenon is therefore required.

In paying it that attention, I want to start by disposing of a myth.

The myth is that evidence-based policy is good policy:  nothing could be further from the truth.  The value of public policy does not depend on whether it rests on evidence, but on whether it seeks goals that are worth pursuing.  Indeed, few things attest better to that proposition than the very history of evidence-based policy in Australia.

Now, although this may come as a surprise to Mr Rudd, evidence-based policy is nothing new.  As all of you know, in Australia, we are rightly proud of a long history, dating back to Federation and in some cases even before, of serious attention to the compilation and careful analysis of statistics -- precisely for the purpose of supporting public policy.  Three policies, in particular, cried out for evidentiary support, and from the earliest days of Federation gave the greatest impetus to our national efforts in this respect.

The first, and in many ways most potent, was the White Australia policy.  As the twentieth century dawned, Australia's economic and political elites were seized by the fear -- based on studies showing a rapidly declining white birth rate -- that a process of "racial suicide" was underway.  The 1904 Royal Commission, and subsequent reviews, focussed on three issues that needed careful assessment and a forceful, timely and well-informed policy response:  the risk of progressive degeneracy of the white urban child, especially as the "physically unfit and feebleminded" (who, it was thought, would have died off in the harsher British clime, but easily survived in Australia) continued to breed;  the capacity of the white race, as it was then called, to adapt to the tropics;  and the possible impacts of miscegenation, particularly on the offspring's intelligence and ability to withstand heat and humidity.

From these came a mighty evidentiary effort, shaping important parts of our national statistical system.  As one distinguished historian has put it, "measurement of the growth, development and intelligence quotient of schoolchildren became national obsessions", and league table like comparisons featured frequently in the press, often presented in lurid terms.

No less obsessive were the efforts to measure and monitor every aspect of the development of the white population, particularly in Northern Australia.  The objective, in the words of the President of the Royal Society of Queensland, was to determine the conditions most favourable to:  "the formation of a type of [white] human beings specially adapted to live in Tropical Queensland.  The type would be based on British blood and be so sustained and nourished, and be British in sentiment, but would be amended by the sun and the soil in appearance, physique, speech and temperament."

Last but not least, great attention was paid to collecting evidence on miscegenation, with a particular emphasis on establishing the hypothesis that "miscegenation between peoples far apart [in race] gives bad results that are not eliminated, but rather are accentuated, in successive generations".

Overall, Gary Banks, Chairman of the Productivity Commission, has reminded us that policy is an experiment -- and this was precisely the view that was then taken.  As matters were put by Harvey Sutton, one of the shapers of Australia's population policy and a passionate advocate of the measurement and classification of children by "racial stream":  "The settlement of Australia by the British section of the white race is an experiment ... and when we consider that five-thirteenths of the continent is in the Tropic zone -- a daring and novel experiment for which we have no parallel elsewhere".  Given that it was so bold an experiment, the outcomes needed to be carefully monitored;  and it was by drawing on that monitoring that an authoritative survey, written some forty years after Federation to consider the future of Australian population policy, could conclude that if "a century of experiment has proved that northern white males could survive in these wet-dry or arid tropics and maintain fair standards", that was largely due to the preservation of racial purity.

In case you are not cringing enough already, the second great policy that shaped our national interest in the amassing and analysis of evidence was tariff protection.  The allure of the "scientific tariff" -- which morphed over time into the notion, formalised in the Ottawa Agreement of 1932 on Imperial Preference, that protection should be set on the basis of "the relative cost of economical and efficient production" -- spawned incessant demands for the compilation of data on industrial output and on manufacturing costs.  As accountants, customs agents and industry bodies became specialised in the task of analysing that data, the result was a proliferation of tariff studies, each increasing -- in the search for ever more perfect "made to measure" protection -- the costs and distortions the policy imposed.

The third and final area where evidence-based policy flourished -- and did so in symbiosis with the tariff -- was the system of industrial arbitration.  Although the Harvester claim was born out of a desire by the unions to share in what they saw as the excess profits that the Harvester company was earning thanks to the excise, Justice Higgins' ruling that an employer was obliged to pay his employees a wage that guaranteed them a standard of living which was reasonable for "a human being in a civilised community", sparked a mass of inquiries into the cost of living, culminating in the publication of an official Australian Retail Price Index in 1912.  As the ducking and weaving between the living wage on the one hand, and capacity to pay on the other, played itself out over the subsequent decades, the Industrial Relations system -- whatever its many defects -- was never short of evidence:  far from it.  The whole paraphernalia of evidence-based policy was in full swing:  special statistical studies, submitted by government;  so as to better interpret them, economic experts, from the 1930s on (they were described by a distinguished advocate for the employers, speaking off camera, as every bit as valuable as "performing seals");  and as of the 1950s, modelling that claimed variously to show that higher pay would lead to great harm or conversely, that it would result in prosperity.

Now, each of these policies -- White Australia, the tariff, and our system of conciliation and arbitration -- was hardly the stuff of triumph.  True, arbitration, like the Beach Boys, still has its fans, and even more amazingly, has ghoulishly come back from the dead;  but supporting those policies today would, I hope, invite well-deserved howls of derision.  Yet it would be wrong to think that what they lacked was evidence:  on the contrary, in that respect Australia lead the world.  Indeed, the seeming solidity of that evidence helped give those policies both sustained elite credibility, including across the political spectrum, and extraordinary staying power.  Unfortunately, the purposes to which that evidence was put -- the models of the world, the principles, even the moral judgements, that guided the polices and in the light of which evidence was amassed and analysed -- were all too often flawed and in some cases, repugnant.

This then is the lesson:  the mere fact that volumes of data are gathered, expert reports compiled, official committees convened, all assessing how the effectiveness of this initiative or that can be enhanced, is of little use if the goal being pursued makes little or no sense.  Evidence is perhaps a necessary condition for sound policy, but it is far from being sufficient.  Rather, we need to challenge both the goals being sought and the ways in which they are sought if we are to move ahead.  We need to ask not merely whether policy does what it claims to do, but whether what it does is worth doing.

Have we learnt that lesson?  I fear not.  Rather, we seem to have moved into a world where both goals and instruments, means and ends, are all too often poorly analysed and subjected to too little scrutiny and rigorous testing.  Moreover, the larger the decision, the less likely it is that such open scrutiny and rigorous testing will be allowed to occur.

Consider infrastructure policy -- where over $60 billion in taxpayers' funds has been committed in the space of twelve months.  Yet staggeringly large decisions, such as the decision to build a National Broadband Network, have been made without any cost-benefit analysis at all.  Moreover, virtually no information has been disclosed about what little analysis has apparently been undertaken.  What is the objective the NBN intended to achieve?  It is the objective of having an NBN.  Why?  As Kylie Mole pithily said, "cos".

Or consider climate change and greenhouse gas abatement.  Clearly, a major challenge, and one where the policy response will have far-reaching consequences for our economic and social future.  The government's approach, we are told, is based on detailed and comprehensive modelling.  But the model itself is confidential, and all attempts to secure its public release have failed.  Now, I realise that to some, "sceptic" is a term of abuse.  At least in the Western intellectual tradition, however, evidence is only as good as the tests to which it has been put.

As for the global financial crisis, it appears to have merely made matters worse, as weird and wonderful things are done in the name of urgency.  The so-called Australian Business Investment Partnership -- better known as the RuddBank -- and the now notorious OzCar scheme are cases in point, with fax machines running at rates rarely witnessed since the late Mr Khemlani introduced Australia to the mysteries of Middle Eastern finance (now replaced, as no doubt befits a Minister less flamboyant than Jim Cairns, by those of suburban Brisbane).  No less striking is the decision to spend hundreds of millions of dollars on refurbishing schools -- much of which appears to have gone in the form of increased income for the building trades -- while prohibiting those schools from using the funds to install air conditioning (which is one of the few such refurbishments likely to have an effect on the comfort and productivity of students and teachers) or from building homes for teachers in remote areas.

As for the so-called cash splash, it is true that some Treasury modelling was released.  But that modelling failed to model the alternatives, such as tax cuts or greater reductions in interest rates, and did nothing to assess whether the measures, even if effective, would be efficient.  What a contrast to the careful analysis the Congressional Budget Office released in the United States!

And last but not least, what can one say of schemes that seem not so much to lack evidence, but rather to wantonly contradict it, such as the gormless FuelWatch proposal, GroceryChoice, the computers-in-schools plan, the Car plan and the textiles and clothing package?  Perhaps there lurks among these exotic birds an instance of evidence-based policy;  but so far, every attempt at caging and exhibiting such a specimen has failed, with all those captured having to be declared unsatisfactory and released back into the wild after careful examination.

When challenged, the government responds as if it were in the same advantageous position that Pio Nonno enjoyed at the time when the doctrine of the infallibility of the Pope was being enunciated.  He could say, without fear of contradiction, that "before I was Pope, I believed he was infallible;  now that I am Pope, I can feel it".  Yet however well suited infallibility may be to matters of divinity, it appears to perform less well with respect to the governance of us ordinary mortals.

None of this is to suggest that analysis of evidence has completely disappeared -- there are areas where the opposite is the case.  In tax, the current review appears to be doing an excellent job.  And in social policy there seems to be increased interest in careful analysis of data, and even in experimentation;  in health, too, some exciting work is underway.  But the tax area is one where many of the interests at stake are multi-layered and diffuse, while indigenous Australians, welfare recipients, and the mentally ill are among the weakest constituencies in the country.  Could it be that we are willing to carefully analyse our policies for the weak, but would rather cut deals, trade favours, buy silence, with the strong?  A policy of being strong with the weak, and weak with the strong, is a recipe for both inefficiency and inequity.

In short, we are faced with a paradox:  never have we heard so much about evidence-based policy;  rarely have we seen so little of the phenomenon itself.  By the third term of the previous government the rot had set in;  far from disappearing, it has gone ever further.

Ultimately, hypocrisy is the highest homage that virtue can be paid by vice.  Pious statements of devotion to the value of evidence are no substitute for policy based on sound principle, clearly articulated goals and careful consideration of options, and that is not merely willing to stand up to independent scrutiny but that genuinely invites it, even and especially for the decisions where powerful interests are at stake.  That is hardly the easy or always popular road;  nor is it the stuff of focus groups, COAG Communiqués, or the Hollow Men;  but as all the evidence shows, the alternative brings only ultimate failure, with much needless pain and disappointment along the way.

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A clear majority of working journalists do tend to be of a centre-left disposition

John Howard thinks too many media types are lefties.  True, but there's never been such a thing as "objective journalism"

Some truths are so self-evident that they are hardly worth discussing.  One of them is that political journalists are left-leaning on the ideological spectrum.  It is equally true that nothing more irritates so many reporters, editors and academics than the charge of media bias.

So it was hardly surprising that John Howard's recent speech on Australia's fourth estate raised eyebrows.  Speaking at the University of Melbourne's Centre for Advanced Journalism this month, the former prime minister remarked:  "I use my softest, least belligerent voice in saying this very, very quietly:  I think it is fair to say that a fairly clear majority of working journalists do tend to be of a centre-left disposition."

Most journalists sighed, rolled their eyes and echoed Ronald Reagan's famous response to Jimmy Carter in the 1980 presidential debate:  "There you go again."  Melbourne-based media lecturer Jason Wilson, writing on the left-wing web site New Matilda, argued:  "The evidence for Australian journos being leftists deep down inside is weak and mixed."

In fact, all the available evidence indicates otherwise.  What Derek Parker said of the Canberra press gallery during the Hawke years in his book The Courtesans -- that "there is a spectrum of opinion within the gallery, but the centre of the spectrum, compared to Australia as a whole, is decidedly more pro-ALP and anti-conservative" -- could easily be said of that institution during the Howard years.

In 2004, a survey by the RMIT journalism department showed that 55 per cent of the profession described themselves as "Left" or "small-l liberal", whereas only 9 per cent labelled themselves "Right" or "conservative".  Queensland University journalism school professor John Hennington had earlier found that "political journalists leaned left rather than right by a factor of more than four to one", with 58 per cent of press gallery journalists describing their voting intentions as Labor and only 9 per cent Liberal.

These findings are neither surprising nor a peculiarly Australian phenomenon.  During the 1992 US presidential election, for example, a Roper survey of 139 Washington correspondents and bureau chiefs found that 89 per cent supported the Democrat candidate whereas only 7 per cent backed the Republican, even though Bill Clinton marginally beat George Bush by 43 per cent to 38 per cent that year.

Even the ABC journalist and former Fairfax editor Alan Kohler, in his otherwise critical response to Howard's speech a week later, concedes that "as a generalisation ... it is perfectly true" that "journalists are left of centre".  Who, moreover, could forget former Media Watch host David Marr's acknowledgement five years ago that journalism reflected "a soft-leftie kind of culture"?

The issue, however, is not whether most journalists are left-leaning;  it is, as Howard says, "a fact of life".  The issue is whether this is a serious problem.  Kohler says not, because journalists, or genuinely fair-minded ones at least, strive for objectivity in their news stories, and this is a far more powerful influence than cynical readers and viewers often seem to believe.

But it is also true that the term "objective journalism" is a misnomer:  every story involves subjective judgements.  You can strive for fairness and balance, but even in one's choice of topics, selection of guests, presentation of facts, one inevitably shows one's hand, and a journalist's (usually left-leaning) personal views may sometimes glimmer through.  The legendary American political journalist Tim Russert was himself a liberal and former Democrat staffer, but he knew this issue is a big unspoken problem in the profession.

Wilson argues that the Howard government's "protracted persecution of, and repeated inquiries into, the ABC never turned up any solid proof of bias where it counts".  Perhaps.  Certainly Victoria senator Richard Alston failed to prove that an entrenched anti-American bias seriously undermined the public broadcaster's claim to be an impartial news provider during the invasion of Iraq in March and April 2003.  It is also true that Australian life would be immeasurably poorer without the ABC.  Many public broadcast journalists are the best and the brightest in the nation;  News Radio is a national treasure;  its internet sites are outstanding;  and Barrie Cassidy's Insiders is essential viewing for any political junkie every Sunday morning.

Still, there is a strong groupthink mechanism at our taxpayer-funded broadcaster.  Examples abound.

Take man-made climate change and emissions trading.  The ABC has jettisoned all semblance of impartiality on the issue;  its journalists, with rare exceptions, now campaign with a constant stream of scare stories.  (Within two weeks recently, the otherwise excellent Lateline broadcast the doom-and-gloom scenarios of Bob Brown, Tim Flannery and Clive Hamilton, whereas in the past two years only one sceptic has been a studio guest -- Ian Plimer, in May -- and his scholarship was subjected to highly unbalanced, even contemptuous, scrutiny in a news segment just before he himself was interviewed.)

Take balance:  the ABC show Q&A prides itself on representing a fair and balanced spread of opinion in the public debate.  Yet according to web site The ShadowLands, in the five months to May 2009, 42 out of 80 guests were lefties (52.5 per cent), 27 out of 80 guests were righties (33.75 per cent), and 11 out of 80 guests were of indeterminate political persuasion (13.75 per cent).  Worse, excluding the two federal politicians from opposing sides who appeared each week, 27 guests were lefties, 12 were righties and 11 were of indeterminate political persuasion.

Take labels.  Some individuals or groups get labelled and others are described in neutral terms.  Thus The Spectator Australia -- an eclectic publication -- is "the right-wing magazine" whereas the Monthly -- a left-wing publication -- is "the independent magazine".  Why the health warning for the former, but not the latter?

Take disclaimers.  When the ABC broadcast The Great Global Warming Swindle two years ago, host Tony Jones declared that the views expressed in the (right-wing) polemic were not the views of the ABC.  "That was quite an extraordinary thing to do, because of course they're not," says Howard.  "But there are plenty of other programmes that do not carry with them the dignity of that kind of disclaimer."  Indeed, has Aunty issued disclaimers when she broadcast other (left-wing) polemics on big tobacco, big oil and Rupert Murdoch's Fox News Channel?

Lest my argument is somehow misunderstood, let me be clear:  there is no cabal in newsrooms across the nation that plots the downfall of conservative politicians or conspires to slant the news in favour of progressive causes.  It is just that Howard is right to say that a clear majority of journalists are left-leaning, that sometimes their opinions will cloud their judgement, but that this also "is not something that should ever make somebody who's not of the centre-left disposition in any way despair".  After all, the fragmentation of the media in the era of the internet, cable television and talk radio allows more opportunities for different voices to be aired.

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A hard, tough and brutal tax debate is brewing

Tax is exciting -- despite what they say.  Last year the Rudd Government set up the Henry Tax Review and, for a while, shovelled all its problems on to Ken Henry.  The final report is looming and the Rudd Government will soon be shovelling problems away from Henry.  A hard, tough and brutal tax debate is brewing.  Good.  Tax reform shouldn't be easy.  Yet it is not clear that any reform will actually flow from the Henry Review.

Too many observers have been carried away by the GST exemption.  The argument that good tax reform requires a higher GST rate or a wider base is simply lazy.  It is all too easy to gouge more money out of Australian consumers by ramping up the GST.  That is the genius of the Howard Government's implementation of the GST -- the states get all the benefit, the Commonwealth all the pain from any increase.  There is no incentive for Canberra to modify the GST and so any proposal or tax reform predicated on a GST variation is simply a waste of everyone's time.

Of course, the tax purists are up in arms.  Yet tax debates are when the expression "We live in a society, not an economy" especially has merit.

Australians have no interest in living in a theoretically purist tax system.  Rather they want to get on with their lives while ensuring that the various governments are appropriately funded.  The debate has bogged down with the tax tail wagging the dog.

The best example of this is the notion of taxing the family home.

Newspaper reports have suggested that owner-occupied housing is some sort of tax rort.  A Henry Review consultation paper suggested that the Commonwealth foregoes about $25 billion per year.  Remember not being taxed to live in your own house is a concession -- home owners should be grateful.

People who advocate taxing the family home are invoking a "tax folk theorem".  As Professor Joel Slemrod, of the University of Michigan, has explained:

"There is a folk theorem among tax policymakers that goes as follows:  all taxes have weaknesses, and the marginal social cost of the weaknesses increase with the tax system's reliance on any given tax.  Therefore, revenues should be collected from a variety of taxes rather than a small number."

This folk theorem can be seen at work when Professor John Freebairn, of Melbourne University, suggested that the tax-free status of the family home lead to an over-investment in housing, and too little saving in bank accounts.  Remarkably he didn't suggest that bank interest be tax free, rather he proposed a tax on owner-occupied housing.  The United States does have such a tax and it doesn't seem to have prevented an over-investment in housing there.

The debate to date seems to be an exercise in how bureaucrats can devise a perfect tax system to raise more money.  No bureaucrat ever saw a problem that more money wouldn't solve.  But it is not clear that our existing tax system raises too little revenue, the problem is more likely the vertical imbalances in the system.  Tax reform must be about the Commonwealth raising less money and the states raising more.

Unfortunately, all we're hearing from the Henry Review is increasing taxation and greater centralisation.

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Consumerist kiddies? Come on, give them a little credit

There's a lot of rage directed at the advertising industry.  The comedian Bill Hicks famously told his audience:  "If anyone here is in marketing or advertising, kill yourself ... you are Satan's little helpers."

And Hicks was just talking about companies that advertise to adults.  In a documentary aired on the ABC last week, one talking head described advertisers who specialise in children's products as "very similar to pedophiles".  This is an apparently widespread view, if the reactions to the doco on ABC message boards and Twitter are anything to go by.

In The Age, author Sharon Beder argued there is "a generation of children who have been manipulated, shaped and exploited" by the advertising industry.  Corporations are, apparently, turning kids into mindless consumer drones.

But hold on a moment:  children can't afford to be consumers at all.  Kids aren't allowed to earn money -- child labour laws are pretty explicit about that.  Anything children consume is directly or indirectly controlled by their parents, whether by giving children pocket money, or buying them stuff.  Kids aren't the consumers here.  Their parents are.

Often complaints about the commercialisation of childhood seem more like complaints about parenting than marketing.  We keep hearing about the insidious development of "pester power", as if kids are only annoying because a Bob the Builder (a division of HiT Entertainment, owned by Apax Partners) corporate planning session decided that nagging would be the firm's third-quarter marketing strategy.

If there are parents who think their child will shut up when the advertising industry shuts down, they obviously don't remember harassing their own parents about a new cricket set, or having their hair braided like other kids.

Take a child to the zoo, and all they want to do is talk about zebras.  Watch a movie about cars, and all they want to do is play with cars.  If the vast amount of culture modern children are enjoying on the internet, in video games and on DVDs makes them want to wear Elmo pyjamas or eat Transformers-branded cereal, it's hardly a sign of the apocalypse -- unless, of course, you have a philosophical objection to capitalism and brands in the first place.

Claims about the insidious nature of advertising are massively overblown.

Sure, children's movies may often feature subtle product placements.  Last year's WALL-E did feature numerous references to expensive Apple products.  But the plot of the movie was a satire of overconsumption and environmental degradation.  Not many children would have left the cinema exhorting the virtues of consumerism.

Kiddie entertainment is usually pretty good like that -- greedy characters get their comeuppance;  the value of friendship is affirmed.

Similarly overblown are fears of the corporate takeover of schools.  Companies that have been told to be "good corporate citizens" and sponsor community and school events are now being accused of brainwashing children.

In her book This Little Kiddy Went to Market:  The Corporate Capture of Childhood Sharon Beder even speculated that "it is as if underfunding of schools is part of a corporate strategy to enable advertisers better access" -- which only makes sense if you believe that government budgets are determined solely by a cabal of industrial tycoons.

Nevertheless, critics of consumerism argue that advertising is making kids depressed and unsettled because they can't get everything they want.  It's certainly true that more children are being diagnosed with disorders such as attention deficit hyperactivity disorder, hypertension and depression than in the past.  But we've only seriously started to diagnose mental illness in children within the past few decades.  And there is good evidence to suggest that, particularly in the US, some schools are mischaracterising unruly childhood behaviour as a symptom of mental illness:  82 per cent of American teachers believe that ADHD is overdiagnosed, according to a 2005 study in the Journal of Attention Disorders.

Mental illness in children is not trivial.  But to try to blame it on product placement in Pixar movies is just a little tenuous.

Deficit failures condemn us to sluggish growth

The Federal Government is keen to triumphantly declare that it has conquered the recession.

Germany and France -- but not other European Union countries -- recorded positive economic growth in the June quarter.

That quarter also saw hopeful recovery signs in Japan, while US national income fell less than expected.

The Commonwealth Treasury and Reserve Bank are hedging their bets in announcing a recovery.

Reserve Bank governor Glenn Stevens is nonetheless preparing the public for reversing last year's interest rate cuts.

Perhaps chastened by failing to anticipate the world financial crisis, Treasury secretary Ken Henry has admitted puzzlement about why Australia has fared relatively well.  He notes that unemployment has remained low and that our retail sales growth over the past year and a half was in contrast to falls of 4-8 per cent in Europe and the US.

While maintaining that cash handouts, bank guarantees and slashed interest rates cushioned the recession's effects on Australia, Mr Henry is aware that such measures still left the UK and US economically distressed.

Moreover, France and Germany are apparently recovering without much in the way of government stimulus.

Australia's measures included $10 billion in handouts late last year and $42 billion of "infrastructure" spending.  But the infrastructure spending has done little to promote income growth.

What we got was Pink Batts and unnecessary school buildings with plaques to promote Education Minister Julia Gillard's benevolence with taxpayers funds.

A key reason why the recession has been kinder to Australia than to any other developed economy is our economy's greater flexibility stemming from policies of successive governments since the later 1980s.

Labour relations reforms are the standout.  Last year days lost through strikes were only 2 per cent of their levels 20 years ago.

These reforms were also crucial to Australia's ability to supply the China boom.

Canberra may be undermining these strengths.  The new "fair work" laws will increase labour costs.  They also give unions the right to demand to represent workers and to run spurious safety campaigns.  In the past, these have paralysed many worksites.

Government spending splurges and very low interest rates have boosted demand, but these measures cannot continue indefinitely.

The Government says it will reverse its unsustainably high spending levels, "once economic growth is above trend -- allowing tax receipts to recover naturally as the economy improves".

This presents a problem if, instead, we see a flat economy.

And such an outcome is probable partly because the government handouts have been at the expense of savings.  Transferring these savings into consumption reduces investment and future productivity growth.

Government climate change policy is also likely to divert investment activity into unproductive wind farms and discourage investment in electricity-intensive industries.

At best, Australia can expect a weak recovery then sluggish economic growth because of the government failure to rein in budget deficits.

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Off target

The 20 per cent Renewable Energy Target (RET), passed in the Senate yesterday, represents a triumph for vested interests in creating negative value.

It guarantees that high cost, inefficient windmills will be built by forcing electricity suppliers (and therefore consumers) to pay a premium on electricity supply, which is funneled back to the owners of the windmills.

In doing so it builds upon the subsidy regime created in the Mandatory Renewable Energy Target, which in 1997 set a target of 9,500 Gigawatt hours to be met.  In order to ensure the target was met, a market was established for the eligible renewables and a fall-back tax (effectively $57 per megawatt hour) was imposed on suppliers who did not meet the objectives set for them.

MRET was added to by state-based schemes, notably the Victorian Renewable Energy Target (VRET) set up by Premier Bracks in November 2005.  Mr Bracks argued that there was a, "lack of national leadership" by the Howard Government in not increasing the MRET scheme and said this, "is costing Victoria -- economically and environmentally -- and cannot be allowed to continue".

It could once have been plausibly argued that, given time and a large enough market, wind power could become competitive with more conventional sources.  When mandatory requirements for renewables were initially discussed, many among the wind farm lobby expressed such confidence.

That view was even shared by some disinterested parties, for example in 1995 in The Skeptical Environmentalist, Bjorn Lomborg, noted how windmills' productivity had improved and went on to say, "In the long run they will undoubtedly become competitive and even cheaper (than fossil fuel plants)".

No reputable authority would claim that today.  Indeed, anticipating a continued lack of competitiveness in the economics of renewable energy, the 20 per cent renewable proposal increases the after tax fall-back price from the MRET's $57 to $93 per MWh.

Nor will any jobs emerge from the subsidy program.  In setting up the VRET, the Victorian Government said it would represent $2 billion worth of capital investment and result in 2,000 new jobs.  VRET was promoted as the crucible for the creation of new high-tech blade facilities which would find a ready world market for their products.  No jobs were created and, in spite of massive subsidies, nor were any new manufacturing facilities.

The costs of the proposed 20 per cent renewable scheme are relatively uncontroversial.  In a submission to the Senate, I put these at $1.8 billion per annum.  The ALP's Senator Cameron sought advice on this estimate from a number of those giving evidence to the Senate Committee examining the proposal to require 20 per cent of electricity from renewables.  While those he had coached provided him with the derogatory comments regarding myself that he wanted, none seriously disputed the costs themselves.

Indeed the costs are relatively straightforward and are based on the premium required for wind power (the lowest cost exotic renewable) and the additional back-up power required to support the intrinsic unreliability of windmills.

Some argue that the renewable provisions contribute to lower levels of greenhouse gas emissions, their ostensible case for a subsidy.  But this is not even true.  If an emission target is to be adopted and if it is to be met at lowest cost, wind would not play a role.  Other forms of energy, notably gas and perhaps eventually nuclear power would achieve the emission reduction goals far cheaper than wind or other renewables.  All a renewables target does is increase the cost of meeting a general emissions target.

So how did the 20 per cent RET get support?

The answer seems to lie in a collection of vested interests and ignorance.  Those with a commercial interest are pursuing subsidies.  They include the windmill suppliers, firms like Vestas and Pacific Hydro and those that are heavy investors in wind facilities, which includes many of the union super funds.

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Power play distorts reality

Apparently Australia has just got a brand new $28 billion industry.  It's in renewable energy.  Media outlets have breathlessly reported that billions of dollars will now be "unleashed" following agreement between Labor and the coalition on renewable energy targets.

According to the Clean Energy Council, the industry group of the renewable energy companies, we'll get $28 billion of investment and 28,000 "clean" jobs.

If Australia's renewable energy industry gets anywhere close to being a $28 billion industry with 28,000 jobs we'll have a big problem.  We'll then have an industry that is too big to fail.  And we'll have an industry that is so big it will ensure that the government doesn't allow it to fail.  The renewable energy industry only has to follow the game plan of Australia's $50 billion car industry.

Future governments will find it next to impossible to change the renewable energy regulatory regime once it is fully established and companies' investment decisions have been made.  To see just how difficult, all you need to do is look at the saga of changes to telecommunications regulations.

Naturally there'll be those claiming higher electricity charges are a small price to pay for saving the planet.  Whether Australia's renewable energy targets make the slightest bit of difference to saving the planet is anyone's guess.  It might, but on the other hand it might not.  We simply don't know.  As with so much of the "climate change debate", we're dealing in hypotheticals.

What we do know is that the renewable energy legislation has handed the federal government yet another mechanism that will allow it to pick winners, reward favourites and parcel out largesse.  It's not quite as bad as the command and control economy that will be established if ever Australia gets an emissions trading scheme, but it's not far off it.

The "compensation" arrangements for energy-intensive industries are yet to be determined and already the jockeying and lobbying has begun.

Prime Minister Kevin Rudd has made industry policy look easy.  It seems that all you need to create an industry overnight is the stroke of a minister's pen and a willingness to force people to pay more for their electricity.  In the 20th century, this kind of thinking gave us a domestic shoe industry.

Significantly, the government hasn't attempted to justify its renewable energy targets on the basis of saving the planet.  Instead, Rudd and Climate Change Minister Penny Wong have claimed that the benefit of higher electricity prices is that it will create jobs.  A domestic shoe industry certainly created jobs -- but it came at the cost of completely distorting the country's economic activity.

A century ago, at least the government didn't actually use legislation to compel consumers to buy locally made shoes.  What it did was put a tax on imported shoes to make them more expensive.  In the case of renewable energy, people are being forced to buy 20 per cent of their electricity from renewable sources by 2020.

It's no wonder the Clean Energy Council has welcomed the legislation;  its members have a market for their product that's guaranteed by law.  In effect, renewable energy companies have been granted a monopoly over the supply of a share of the country's electricity.

After the states spent the past few decades trying to break up and sell the government-owned monopoly suppliers of electricity, it's ironic that the federal government is creating a new series of privately owned monopoly electricity suppliers.

That's not the only irony.  Before the 2007 federal election Rudd famously said he didn't want to be the prime minister of a country that didn't make things any more.  If he is still passionate about Australia making things, he's got a funny way of showing it.

The renewable energy targets he's championed will make the cost of making things in Australia more expensive.  A conservative estimate is that electricity prices will rise by at least 3 per cent.  One of the things electricity is used for is to make things.

So while Rudd says he wants to save Australia's manufacturing industry, at the same time he's making manufacturing less competitive.  And in acknowledgement that he's making manufacturing less competitive he'll compensate some, but not all, manufacturing firms by giving them cash handouts.

It would be much simpler to not increase electricity prices and not pay the handouts.  But if the Prime Minister left things as they were he wouldn't be able to claim the electoral credit for being seen to be doing something about climate change.

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Does fiscal stimulus work? What Nobel Price winners say

We have been told that "you don't need a PhD in economics" to understand why fiscal stimulus packages increase economic activity.

Senior government ministers, the Treasury, a host of business economists, and a legion of journalists -- amongst others -- seem to treat it as so obvious that it does not even require an explanation.  Where an explanation is offered, it tends to be simplistic in nature.  Here is one explanation ("everything you wanted to know") from the Sunday Age earlier this year:

Economic growth is normally driven by a combination of consumption spending, investment, exports and government spending.  But ... three of the four fuel pipes feeding the growth engine are blocked.  This leaves the ... [government] with the herculean task of keeping the economic engine whirring.  That's exactly what the ... [government] has been doing, with a net $71 billion worth of new spending ...

While Australians don't need a PhD to understand, American supporters of fiscal stimulus appeal to the authority of economists, with the now Vice President of the United States stating:

Every economist ... from conservative to liberal, acknowledges that direct government spending on a direct program now is the best way to infuse economic growth and create jobs.

The belief that expansionary fiscal policy can increase economic activity and employment is (usually implicitly) based on the work of John Maynard Keynes (1883-1946) author of The General Theory of Employment, Interest and Money (1936).  It certainly doesn't come from mainstream macroeconomics as currently taught in major universities around the world.

Keynes was a serious economist of great intellect, and his approach was the dominant paradigm in macroeconomics in nearly all major universities for about thirty years.  Two prominent Keynesians, Lawrence Klein (1980) and James Tobin (1981), were the second and third of the eight economists to win the Nobel Prize in Economics explicitly for their work in macroeconomics.  However, by the time of these awards, Keynesian economics was already passé.

While Keynes and his followers were far more rigorous than any of the expositions seen recently, at its heart was a simplistic concept:  the belief that increased government spending and/or reduced taxation increases economic activity, not only dollar-for-dollar, but also with an amplified "multiplier" effect.  While the Keynesian paradigm quickly displaced the classical paradigm (economic fluctuations are self-correcting as long as input and output prices are flexible), it began to be questioned almost immediately, and the interrogation intensified over time until it eventually gave way to a new paradigm.  As this new approach is so complex and broad, it does not have a generally agreed name.  Perhaps "rational expectations" is the best descriptor, but "supply-side economics", "monetarism", "fiscal irrelevance" and "Mundell-Fleming" are all associated with it.  The new paradigm has yielded all five of the eight Nobel Prizes awarded after 1981 explicitly for macroeconomics.

An early question about Keynesianism came with John Hicks's 1938 article, "Mr Keynes and the Classics", that introduced the IS-LM framework, and showed how monetary resistance could dampen or even neutralise fiscal stimulus -- it only worked unimpeded in a depression and could be completely neutralised in other circumstances.  However, Hicks remained a believer in fiscal policy in underemployment circumstances.  He later won the Nobel Prize in Economics (1972), although not for his work in macroeconomics.

In the 1950s and 1960s, Milton Friedman provided a devastating critique of Keynesianism, including in a very accessible chapter in his masterly polemic, Capitalism and Freedom (1962).  He found and published so many faults with the Keynesian approach that it is amazing it survived the 1960s.  Two of the most important ideas arising from Friedman's research are the permanent income hypothesis and the natural rate of unemployment.

The permanent income hypothesis (incorporating what we now know as "rational expectations") is that any fiscal stimulus (increased government or consumption expenditure) is counteracted by reductions in consumption (increases in savings) from those anticipating increased future tax burdens.  Individuals base their consumption on a concept of permanent income (closely related to "wealth") incorporating their expectations of the future.  For example, expected increased future tax burdens reduce permanent income (and therefore reduce current consumption) and a "windfall" income supplement would be treated as temporary, with individuals only responding to the increase or decrease in permanent income flowing from it.  This particularly powerful theory has gained strong empirical support and underlies much of the macroeconomics developed since the 1960s.

The natural rate of unemployment displaced the Keynesian-inspired "Phillips curve" (the inverse relationship between inflation and unemployment) and underpinned the supply-side economics developed by Friedman and ensuing macroeconomists.  Amongst other things, the Phillips curve needed to be augmented by inflation expectations.  Moreover, the demolition of the Phillips curve was associated with the beginnings of a sophisticated supply-side analysis, an area of enquiry that had been substantially left alone by Keynesians.  The new macroeconomics demonstrated that supply-side impacts would slow down the impact on economic activity of any net increase in aggregate demand.  These ideas were contemporaneously developed by Edmund Phelps, who won the Nobel Prize in 2006 for his seminal work in macroeconomics over forty years.

These developments had effectively demolished the belief in fiscal potency by 1968, but the Keynesian redundancy only became more generally obvious through the advent of "stagflation" (coexistence of high inflation and high unemployment) in major western economies in the 1970s.  Fiscal policy was demonstrated empirically to be useless in increasing economic activity.  This confounded Keynesians, but inspired other economists on the task of refining the new and more credible macroeconomics.  In 1980, Robert Lucas (Nobel Laureate, 1995) declared in his article titled "The Death of Keynesian Economics" that

[o]ne cannot find good, under-forty economists who identify themselves or their work as Keynesian ... At research seminars, people don't take Keynesian theorizing seriously anymore:  the audience starts to ... giggle

Building on the work of Friedman and Phelps, later economists established the new paradigm.  So successful were these economists, that five of them were awarded the Nobel Prize, and that these five awards were the only awards made for macroeconomics after Tobin and Klein.  In addition to Phelps and Lucas, these later Nobel Prize winners are Finn Kydland and Edward Prescott (2004) and Robert Mundell (1999).

Mundell won for his analysis of monetary and fiscal policy.  The "Mundell-Fleming model" concentrates on the international repercussions of fiscal policy, where a fiscal stimulus will be counteracted by the effects in capital markets (increased interest rates leading to increased capital inflow); foreign-exchange markets (appreciation of the currency from increased capital inflow) and in "real" markets (appreciation leading to lower exports and higher imports).  The common textbook version of the model -- standard fare in intermediate-level macroeconomics courses -- has fiscal policy being completely neutralised by an equal reduction in net exports.  Robert Lucas won in 1995 for his work in macroeconomics; particularly the application of the ideas of "rational expectations" and the permanent income hypothesis in more sophisticated models than those developed by Friedman.  Again, this is now standard fare in major universities.

Every economist who has won the Nobel Prize in Economics for his work in macroeconomics after 1981 has either dismissed or deeply questioned the crude Keynesian prescription of fiscal expansion to sustain or increase economic activity and employment.  In contrast, they have argued that fiscal policy is either useless or weak because forces are set in motion that counteract any direct stimulatory effect.  Their work built on that of Milton Friedman, who many years earlier had won the Prize for his macroeconomic analysis.  It is astounding that this paradigm has been overlooked by governments and advisers in many (but not all) countries, as they reach back in time to a crude fiscal approach that has been regarded as passé by the vast majority of professional economists for at least thirty years.

While there are a few PhDs in economics around with a touching faith in the effectiveness of increased government spending in "stimulating" economic activity, there are many more who don't, including the 2004 Nobel Prize winner, Edward Prescott, and the 99 other American economists who publicly and unambiguously rejected the US President's package.  Well-trained economists realise that the four "pipelines" are not independent of one another, and interact in various ways, all of which reduce the flow elsewhere.  For example, consumers now (principally non-recipients of cash handouts) are saving more now in anticipation of the future tax slug they know they will bear.  Competent economists also realise that the supply-side matters crucially, something -- to their peril -- the Keynesians never came to grips with.

Rudd's stimulus has nothing to do with the economy

The "go hard, go early, go households" advice given to government last year is starting to look a little sick.  Serious doubts are being raised about the stimulus spending spree of last year and early this year.

The Australian economy has proven to be remarkably resilient -- this is no accident and has nothing to do with us being "the lucky country".

Australians enjoy a strong robust economy because of a generation of hard-fought and hard-won economic reform.

Last year the government was very keen not to be seen to be "doing nothing".  Anyone who had the temerity to criticise the stimulus packages was pilloried as advocating a "do nothing strategy".

Unfortunately this argument proved to be very powerful.  But as I told the Senate Inquiry into the stimulus package on February 9 this year, "The government is not 'doing nothing'".

By that stage the Reserve Bank had lowered interest rates and to the extent that unemployment had increased, welfare payments would have been increasing too.  So monetary policy had responded and the so-called "automatic stabilisers" had responded too.

We shouldn't also forget that the exchange rate had depreciated.  The forex rate acts as a shock absorber to the economy.  That is one of the functions of a floating exchange rate -- the Hawke Government's greatest and most important reform.

This all raises the question of why the government and its advisors over-reacted to the international crisis.  One easy explanation is that Treasury, in particular, is still shell-shocked from the experience of the early 1990s.  That is the last time that Australia actually experienced a recession.  Bryan Caplan of George Mason University has argued that decision makers have systematic biases in their thinking.

These biases are at work in the current government's approach to economic policy.

Pessimistic bias is the tendency to over-estimate the severity of economic problems.  The idea that the Global Financial Crisis is similar to the Great Depression is simply nonsense.  Australian unemployment in the 1930s peaked at over 25%.  Unemployment is now at levels not seen since the early 2000s.  The "collapse" in forecast revenue, that so spooked the government, returned us to levels not seen since 2006.  This bias re-enforced the anti-market bias that already affected the government and we saw arguments from the Prime Minister about the evils and failures of market mechanisms.  Ultimately this then fed into one of the oldest of economic biases -- make work schemes.

The problem with the government's stimulus package is that it creates a series of make-work schemes.  Make work, any work is never a good economic policy.  The cash hand-outs largely transformed private debt into public debt -- whether or not it did actually boost retail sales is an open question.  But it is the other spending that will create difficulties going forward.  To be sure, having better sheds or another gym or school halls is great for the kids, but what is the additional economic benefit from having these things?  This type of expenditure is better managed, financed and undertaken at the local level and not by the federal government.

The government argued that the stimulus package was intended to save jobs.  That may well be an admirable goal.  But why then stimulate the construction industry?  Were the unemployed bankers and brokers and lawyers expected to get jobs building school halls?  If the government wanted to protect jobs in the expected downturn, they should have bought out the State payroll tax.  This may well have saved some, but not all, jobs lost over the past six months or so.  That would have been "doing something" but it might not have been "seen to be doing something".

Of course the government will claim that it was their policies that have resulted in the Australian economy doing so well.  Yet, the US had a huge stimulus package and then entered into recession, while the French have hardly had a stimulus package and also entered, and have now exited, recession.  The reality of the economic situation is far more messy than official sound bites would have us believe.

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Never judge a book by its coverage in the press

"Peter Costello is swanning around flogging a new version of his memoirs," complained a letter to The Age last week.  "As the last version was remaindered in record time due to severe lack of interest, what are the odds on this one?"

I've long thought that The Age's opinion page was so dripping wet one could not even turn it.  (Costello himself is the only conservative to appear in what is known as "The Guardian of the Yarra", and his column appears only fortnightly.)  But as mono-cultural and dull as The Age's commentary sections are, its letters page is even worse:  it not only stifles dissenting right-of-centre viewpoints;  it is also intellectually dishonest.  There is, for instance, the world of difference between remaindering and discounting practices.  As Louise Adler, the chief executive of Melbourne University Publishing, points out, discounting is the clearest indicator that a book is a winner;  whereas it is a breach of the standard publishing contract to remainder a title within a year of publication.

The aforementioned letter accompanied a Tanberg cartoon of Costello struggling to write an inscription for a couple of potential book buyers.  One asks:  "Any sign of writer's block?"  To which the other person replies:  "Wishful thinking."  Never mind that the Member for Higgins's memoirs were an untold publishing success story.  I say untold, because the conventional wisdom in the press is that, unlike political books written by Labor politicians, The Costello Memoirs failed miserably.  Within days of its first publication 11 months ago, even sober journalists such as the Daily Telegraph's Tim Blair and Christian Kerr peddled the line that the book's sales were dreadful.

Nothing could be further from the truth.  Costello's autobiography, co-authored with his father-in-law (and fellow Spectator Australia columnist) Peter Coleman, has proved the exception to the rule that conservative political tomes do not sell in Australia.  Having sold more than 40,000 hardback copies, The Costello Memoirs are arguably the most popular political book in recent years.  Indeed, according to Adler:  "In the history of Australian political non-fiction titles, this is a bestseller."

By contrast, the book sales of Labor political figures have been shocking, to say the least.  Lindsay Tanner's Open Australia sold 383 copies;  Wayne Swan's Postcode:  The Splintering of a Nation sold 1,097 copies;  Bob Carr's Thoughtlines sold 674 copies;  and Craig Emerson's Vital Signs, Vibrant Society:  Securing Australia's Economic and Social Wellbeing sold less than a thousand.  Meanwhile, Tony Abbott's latest book Battlelines, with proposals to centralise power in Canberra and impose a new tax on business, has raised the ire of many conservatives and will be lucky to sell one-eighth of Costello's copies.

Still, the Opposition frontbencher and aspiring Liberal leader should be applauded for canvassing policies for our political future, and it is particularly refreshing to read a Liberal politician engaged in the literary battle of ideas.  The only other sitting conservative politician, apart from Costello, who wrote a political book was Robert Menzies in 1943 (The Forgotten People and Other Studies in Democracy).

Costello's newly released revised version includes a couple of new chapters on the financial crisis and his decision to retire from politics which still saddens small "l" liberals and conservatives alike across the nation.  Among other things, the new edition highlights the former treasurer's impressive command of economics and should be required reading for every member of the parliamentary Liberal party.  This is particularly the case when one considers that the issue of economic management will dominate the next federal election.

Fortunately, an Australian recession is not inevitable.  Indeed, we will probably weather the global storm, and Kevin Rudd and Labor will claim intellectual and political vindication.  But the reason why Australia stands a good chance of not catching the financial contagion has very little to do with the past 12 months of Labor's "let-Canberra-solve-it" interventionism and virtually everything to do with the starting point.  This is the essence of Costello's thesis, and he makes his case persuasively.

Australia, he reminds us, went into this global recession in an incredibly strong position.  Unlike Britain and the US, we had a Budget in surplus.  Unlike Britain and the US, we had no debt.  Unlike Britain and the US, our banks were well-regulated, well-capitalised and profitable.  All of this gave Australia a lot of padding and insulation.  This was a position of unique strength bequeathed to the incoming Labor government.  And this is why the RBA is now talking up the economy, even though the Labor government is talking it down.

Unfortunately, Costello has announced he is retiring from federal politics at the next election.  So the onus is on other bastions of free markets to defend unapologetically the economic reform record, especially during his reign as our longest serving treasurer, and to point out how the nation became more economically secure, not less, by exposing ourselves to competition and globalisation.

Without the so-called "neo-liberal" agenda, Australians would have been poorer during this period, unemployment would have been higher, the fall in the Aussie dollar would have fed a vicious cycle of higher inflation rather than being absorbed as a boost to national competitiveness, and we would have had much less to spend on social services such as health, education and roads.  Heirs to the Costello legacy should also highlight the perils of Canberra's big-government, big-spending, debt-driven agenda as well as pointing out the merits in a more market-oriented policy approach of reducing disincentives to hard work and innovation.

"It would be of enormous benefit to implement structural changes now that will bear fruit in the recovery," Costello says in his revised memoirs.  "Changes that heighten flexibility in the economy will promote faster recovery;  changes that allow flexible agreements in the workplace, enhance employee share ownership and reduce marginal income tax rates.  Labor has introduced harsh effective marginal tax rates with changes to the private health rebate, family tax benefits and maternity leave.  Reducing these would improve work incentives."

If this case is not spelt out in a coherent and compelling manner, Kevin Rudd, like Barack Obama in the US and Gordon Brown in the UK, will be able to alter the relationship between the federal government and private sector that has been in place for decades.  Then the private sector led the economy;  by the Prime Minister's own intent and purposes, now Canberra will chart its course.  Rudd's new system may not represent socialism, but it is not the system that has produced Australia's miracle economy over which Peter Costello presided.

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No nudging, please

Despite what politicians and senior bureaucrats may let on, governments are highly susceptible to the allure of policy fads.

Federal Finance and Deregulation Minister Lindsay Tanner recently jumped on the behavioural economics, or "nudge theory", bandwagon, describing it as a way to ensure human behaviour was integrated into policy frameworks.  Developed by economists such as Nobel laureate Daniel Kahneman and Barack Obama's regulation tsar Cass Sunstein, nudge theory finds individuals often behave in ways that do not conform to the conventional view of the rational economic man.

Some prefer the status quo when making, say, consumption and labour market decisions, even though change would make them better off.  Others tend to follow the herd by mimicking the decisions of those around them.

For many of us, herders or status quo-ers alike, nudge theorists find our economic choices are often framed by the context in which they are presented.  As set out by the nudge theorists, people often display systemic errors of judgment compared with the neoclassical standard of economic behaviour.  Governments should steer individuals or businesses in preferred directions, but leave open the option for the regulated to choose their own course of action.

This peculiar stance for policy is known as libertarian paternalism and has already started drifting into the Australian policy discourse.

The discussion papers from the National Preventative Health Taskforce are replete with nudge references, advocating policies to stop people smoking, drinking and eating treats.

The insights of behavioural economics have infiltrated other areas of policy, ranging from gambling regulation right through to superannuation and financial market regulations.

Indeed, any issue affecting individual risks and actions seems to be fair game in the minds of nudge regulators.

Some commentators have seized on nudge theory to proclaim it as the death knell for neoliberal, free market economics.  However, the strongest case for free markets in fact rests on a world inhabited by fallible individuals.

Even with their cognitive and behavioural biases in tow, market competition gives economic actors incentives to learn from and correct any errors, thus improving on the assortment of goods and services on offer.  Because of this the freest economies in the world are also the most conducive to economic growth, social accord and personal happiness, even if they remain inhabited by imperfect humans.

The notion that the state should nudge individuals to make better decisions overlooks the fact politicians and government officials are also afflicted by behavioural biases.

For example, the raft of fiscal stimulus and regulation enacted by the Rudd government since late last year revealed an action bias by the government to do something about changing economic conditions.

In an effort to throw borrowed money at selected activities, such as pink batt insulation and school gymnasiums, the long-term costs of these policies appear to have been ignored.

These include the risks of overshot government spending driving up real interest rates and inflationary expectations, as noted in a recent report by the Bank for International Settlements.

That, and the stated reluctance of the government to withdraw its fiscal stimulus and financial sector guarantees, have almost certainly reduced the productive potential of the Australia economy in the long term.

Therefore, the behavioural biases possessed by public sector agents greatly weaken the notion that somehow they can instigate policies to rectify the biases existing elsewhere.

There is a risk that a new nudging rationale for government intervention would encourage politicians with a control bias, or a propensity to prefer greater public sector involvement in economic and social affairs, to meddle even more in our affairs.

Some of the more conventional problems of public policy remain unaffected by nudge economics.

Economist Friedrich Hayek pointed out that policies are affected by an inherent knowledge problem.  This means that a comprehension of individual preferences and circumstances by governments is extremely limited, increasing the risk of policy errors.

By not knowing what people really want, governments also remain susceptible to self-interested arguments by rent seekers delivering special benefits to the few at the expense of the many.

Despite the fanfare, the latest fad of nudge theory is nothing more than old-style paternalism in new clothing.  After all, nudge taxing, spending and regulating would have the same consequences of eroding our economic and social liberties as do the tired interventions of yesterday.

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The great CPRS green jobs con

The Senate has rejected the Rudd government's Carbon Pollution Reduction Scheme today.  By all accounts it will be be reintroduced and then passed with amendments.  The problem with the scheme is that it is a magic pudding.  A government inspired price hike will lead to less carbon consumption, greater innovation, compensation for polluters and low-income households, and all this will be paid for with a "tiny" reduction in economic growth over the next century.  In the process a whole bunch of "green jobs" will be generated.  When described in these terms it is hard understand what the fuss is all about.

Afterall, the Australian economy has survived a generation of economic reform that threatened to destroy jobs;  yet wholesale job destruction has not happened and Australians have enjoyed a long period of economic growth and prosperity.  But there is a fundamental difference between previous economic reforms pursued by the Hawke, Keating and Howard governments and the current reforms.  Previous Australian governments had proposed to make the economy more efficient.  This government proposes policies that will make the economy less efficient.

Renewable sources of energy are hardly new.  Windmills, for example, have been in use for hundreds of years.  In some applications they are very useful, but they simply cannot compete with modern power generators in price and reliability for the base load power requirements of an industrialised economy.  Increasing the price of a ubiquitous input such as power will increase the cost structure of the entire Australian economy.

The debate hasn't really considered the costs of this policy objective.  To a large extent we have simply been told that the costs of inaction are higher than the costs of action.  But a detailed discussion of what that actually means is missing.  On a recent episode of ABCs Insiders David Marr suggested that the government be blunt about its policy:

Ultimately Australians respect people for saying it as it is. ... But [Rudd] should be saying things bluntly, you know "Doing something about global warming means there will be lots of jobs lost in mining because its about burning less coal".  Saying it bluntly.

Yet, the government hasn't said anything of the sort -- it has said lots of green jobs are going to be created.  It is a leap of faith to suggest that the government can create jobs that add as much value as those that will be lost.  If they could do so, why haven't they done so already?

The bottom line is that the federal government has no idea what the employment consequences of its climate change policy will be.  The Treasury modelling of the policy included no employment modelling.  The modelling assumes that there might be some unemployment in the short run (up to ten years) but there is no unemployment in the long-run.  The Treasury have to assume that real wages will fall ensuring that labour markets clear and there is no involuntary unemployment.  In other words, the government doesn't know what will happen to employment, they simply assume that it won't be a problem.

The proposed climate change policy is multi-generational -- the modelling forecasts growth to 2050, and the policy is expected to extend beyond that date.  That is 40 years into the future, and beyond.  The average Australian might only have a working life of 40 years, so it is somewhat disingenuous to suggest that there might only be some unemployment is the "short run".  Even if the "short run" is ten years, the social dislocation costs of unemployment for up to a quarter of an expected working life must be horrendous.  A policy that may well generate a large cadre of long-term unemployed should not be introduced with a wave of the hand and a "she'll be right mate" attitude.

Careful and serious consideration should be given to the employment consequences of the CPRS.  At present that modelling either does not exist or the government has not released it to the public -- either of those possibilities should make Australians very nervous about their job prospects.

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Conservative Meltdown: Right in the grip of a growing malaise

It's no understatement to say the Coalition is in the doldrums in Canberra and across much of the nation.  But the crisis of conservatism is hardly confined to Australia.  Take a close look at both Liberals here and Republicans in the US, and you note striking similarities which may explain why the conservative movement is in dire straits on both sides of the Pacific.

The Liberals and Republicans are out of power and struggling to gain traction in the opinion polls.

They are riven by factionalism that threatens to splinter them on public policy issues.  And they are displaying a lack of philosophical direction.

Their centre-left opponents -- the Australian Labor Party and the US Democrats -- are in the political stratosphere and repudiating much of the so-called neo-liberal agenda of recent decades.

Take leadership.  In the US, Republicans no longer control the White House or either house of congress, and they are steadily losing state offices across the land.  A recent poll asked conservatives and Republicans whom they regard as their leader.  Ten per cent nominated radio broadcaster Rush Limbaugh, 10 per cent said former House Speaker Newt Gingrich and 9 per cent suggested former vice president Dick Cheney.  None is an elected representative and all have virtually ruled out running for national office.

This does not bode well for Republicans at either next year's congressional elections or the presidential election in 2012.  When the GOP was out of power in all layers of government in 1993-94 and 1976-80, a majority of conservatives still had no doubt about their leaders:  veteran senator Bob Dole and former Californian governor Ronald Reagan, respectively.

In Australia, meanwhile, Liberals are out of power in Canberra and all but one of the eight states and territories.  Until their election loss 19 months ago, most MPs had known only the green pastures of government under the watchful eye of John Howard.  Political commentator Michelle Grattan has said they have since been like children who've lost their father.

Last week's polls, moreover, show a substantial increase in Malcolm Turnbull's disapproval rating and a majority of voters would prefer Peter Costello, who is leaving politics, or Joe Hockey, who is too inexperienced, to lead the Coalition.

Take unity:  The American conservative movement that carried Ronald Reagan to landslide elections in the 1980s has dissipated into various cantankerous factions.  To be sure, US conservatism has always contained different factions within it:  deficit hawks and supply-siders;  libertarians and social conservatives;  and realists who stress the national interest and balance of power and neoconservatives who preach democracy promotion and a Pax Americana.

But from the time of the birth of modern-day conservatism in the mid 1950s until the end of the Cold War in the early 1990s, these factions were always subordinated to the larger anti-Communist and anti-liberal welfare state consensus.  In the past 15 years, although the GOP has dominated Washington's political agenda, conservative divisions are increasingly on show on foreign, economic and social policy.

In Australia, the divisions are not so pronounced, but they are evident most notably over border protection, emissions trading, industrial relations and the stimulus package.  On each occasion, the leader reportedly planned to give bipartisan support to Labor, but the more conservative backbenchers pushed him right.

The result is confusion on any number of issues.  Should a Liberal listen to John Howard or John Hewson on climate change?  Should he give priority to cutting "middle class welfare", as Joe Hockey implied this week, or increasing the incentive to embrace private health insurance, as Tony Abbott believes?

Should a Republican pay attention to Steve Forbes' sermons on free trade or to Mike Huckabee's warnings about unfair Chinese trade practices?  Should he derive his foreign policy from Charles Krauthammer or Henry Kissinger?

Take belief:  Many US conservatives lament that their cause has lost its philosophical bearings and that after 50 years of ascendancy, the movement is suffering the kind of mental sclerosis that began to afflict Democratic liberalism decades ago.  In recent years, the party of Barry Goldwater and Ronald Reagan has become the don't-rock-the-boat party content to feed pork to different special interest groups.

And just as conspiracy theories ran amok on the left during the Bush years, right-wing pundits are peddling crackpot arguments about Barack Obama.  Mitch Daniels, the Indian Republican Governor, spoke for many when he recently urged fellow Republicans to dump Reagan as a contemporary symbol.  But few have any clear answers about what to do.

In Australia, as Howard often stressed, the Liberal Party is a "broad church", one capable of embracing a variety of beliefs and of implementing a range of policies depending on what the circumstances permit and what the priorities of the day demand.

Above all else, the two traditions of liberalism -- which stresses the importance of individualism and limited government -- and conservatism -- which defends order and constrains change -- are mutually reinforcing.  The question is not which one is right for the party to adopt in perpetuity, but what balance is appropriate at any given time.

Centre right parties reign supreme in Canada, Western Europe and New Zealand.  And Tories are odds-on favourites to win the next British elections due within 12 months.

But times are tough for conservatives in Australia and that US.  The task to rejuvenate the Liberal and Republican parties is a key challenge in coming years.

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Political godsend

Conventional wisdom says the federal Opposition is out of wriggle room on the emissions trading scheme.  Malcolm Turnbull, the argument goes, has no alternative but to pass the Rudd Government's climate change legislation either this week or, failing that, in three months' time when the bills are tabled again in the Senate.  He must acquiesce, perhaps make amendments as he outlined today, or risk a double-dissolution green election his party has little chance of winning.

But far from setting the scene for a Coalition electoral debacle, opposition to the Carbon Pollution Reduction Scheme could be a political godsend for Liberals and Nationals.  As this is decidedly a minority view among political strategists and media commentators, let me explain.

Imagine that the Opposition rejects the legislation outright and the Prime Minister calls an early poll.  What would Australian voters know during an election campaign early next year?

That the Copenhagen climate conference a few months beforehand had turned into a circus.

The universal consensus is that any global agreement on mandatory and enforceable cutbacks in greenhouse gas emissions to succeed the Kyoto accord in 2012 must include the rising big polluters China and India, whose rapidly growing economies are heavily dependent on energy-intensive manufacturing industry.

Just last month, however, the Indian government insisted it would not discuss signing up to legally binding obligations to make absolute cuts in carbon emissions for at least another decade.

China, meanwhile, has set two stringent conditions in exchange for its own carbon cuts.  First, the US and other developed nations should cut their emissions by at least 40 per cent from 1990 levels by 2020.

Second, Washington and other advanced nations must cough up between 0.5 and one per cent of their annual GNP to help poorer nations cope with climate change.

These demands won't be met.  For one thing, the US bill to cap greenhouse gases that awaits a skeptical senate represents roughly a four per cent reduction from 1990 levels -- that is, one tenth of what Beijing demands.

(That the US climate bill has a lot more compensation and loopholes for big polluters than then Australian legislation adds underlining and an exclamation point.)

And with respect to China's request for 0.5 to one per cent of western nations' GNP to fund climate change mitigation, bear in mind that the entire US foreign aid budget amounts to about only 0.17 per cent of GNP.

In this climate, the Coalition could spell out the dangers of Labor's unilateral action:  that the ETS will kill investment, lower growth, raise prices that would ripple across the energy chain and touch every corner of the economy, and drive jobs and industry to nations where costs are cheaper, thus worsening the global warming problem.

If Australia adopts an ETS, and our trading partners do not, moreover, our exporters would cop a carbon cost not borne by our competitors.

In an election campaign, in other words, the Coalition could focus the ETS debate on jobs and the economy and highlight the injustice of Australian tax payers footing the bill for carbon cuts while China and India continue to pollute the planet.

Now, some media commentators and Liberal strategists warn that such a course is playing with electoral fire.  Australians, after all, want action on global warming, even though we account for only 1.4 per cent of global emissions.

But the politics of climate change have changed dramatically since Wall Street's tumble last September.

A year ago, polls showed nearly 80 per cent of Australians wanted Canberra to "lead the world" on climate change and were content to pay higher bills for electricity, gas, and other consumer goods.

Today, in the midst of the global financial crisis, a majority of Australians want to wait for the world, specifically the outcome of Copenhagen before Canberra commits to an ETS.  Voters are more worried about protecting their jobs than saving the planet.

The same strategists and columnists warn that Coalition opposition to the climate bill means Malcolm Turnbull would look "browner" than John Howard who was committed to an ETS at the 2007 election.

Never mind that Howard's position was that any ETS should be conditional on global action.

In July that year, the Liberal and National parties said:  "We cannot solve global climate change alone.  Australia must not forsake its competitive advantage for no significant impact on global emissions.  Our greenhouse gas emissions represent just 1.5 per cent of global emissions.  Domestic action to reduce emissions, while important, will have little meaningful impact if not part of wider international action."

And this:  "An effective international framework must include all major emitters."

Without China and Indian support, the Liberal and National Party opponents of the ETS legislation are simply sticking to their 2007 policy -- a position that even Kevin Rudd embraced during the election campaign when he publicly brought his then climate change spokesman Peter Garrett into line after he naively pledged Australian support for a post-Kyoto deal that excluded big polluting developing nations.

The Government boasts that the climate change bills represent the most radical and far-reaching reforms of a generation.  This is undoubtedly true.  But there are many unidentified devils in the detail of this immensely complex legislation, and it's no wonder a survey of 400 business leaders of ETS-related industries has found a third have "no knowledge" of key components of the scheme.

Clearly, Labor has failed to explain coherently and compellingly how its radical reform will affect our way of life and reduce global emissions when China and India are excluded from the post-Kyoto process.

So Turnbull would be well advised to call Labor's bluff, oppose the legislation outright and highlight the ETS's costly economic implications while proposing more effective ways of combating climate change.

The national interest, not to mention the Coalition's own political interest, demands nothing less.

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Softly, softly

The goal of international agreements being considered on climate change is to stabilise the world's human-caused carbon dioxide emissions.  This ambition is barely conceivable.  For the main gas, carbon dioxide, it would require emissions to be set at an average global level of about three tonnes per capita.  At present, Australia emits 16 tonnes, the United States 20 tonnes and the EU nine tonnes.  China, which is only one-third developed, is already at 4.5 tonnes, i.e., 50 per cent above the required level.

Australia, even if it closes down its entire coal industry, including the 85 per cent of electricity that is coal generated, will still not get close to any such target.  If we replace coal with gas (adding 50 per cent to the price), it would still leave excessive emissions.  Replacement by wind is not feasible, and wind energy is, in any event, three or four times the cost of that generated from coal.

The Rudd government is suggesting that a step in the right direction would be to reduce Australian emission levels by 20%.  There are only two feasible means of achieving such a target.  The first is to adopt nuclear power generation, at a cost in terms of plant that is similar to a year's national income and would still mean an electricity generation cost premium of over 70 per cent.  The second is adopt poverty as our national life style, i.e. to go backwards in terms of present living standards.

If an ETS is to be implemented globally, and it makes no sense otherwise, it would require the elimination of coal as a source of energy, at least until some cheap form of carbon dioxide capture and storage is available.  There is no prospect of that on the horizon.

Australia has got about 76 billion tonnes of coal reserves.  If we wipe out coal for power generation, then even at a value as little as $10 a tonne, it is a sacrifice of $760 billion wealth;  compounding that, we would have wealth shedding also from shale oil and gas and various other things.

An Australian ETS would not only stifle current business operations, but would also virtually eliminate new investment in power generation as well as other energy intensive processing.  Leakage of important industries overseas would inevitably follow, despite the energy intensive allowances which are in place or intended.

These issues are compounded if Australia continues with its plan to take a very high, proactive position.  If we move in advance of other countries we will lose an awful lot of industry, as well as the inherent value of the coal and all the other natural energy wealth that we have.  But introducing a carbon dioxide tax will also have deleterious direct affects on electricity producers.  Canberra's CPRS proposal leaves Australian generation businesses far more vulnerable than their counterparts in the US and Europe.  That's because only 4 per cent of total allowable emissions free to existing electricity generation businesses.  The US Waxman-Markey bill provides 35 per cent of total emissions free to generators.

As a coal based power generation economy and with coal and other fossil fuels forming one third of our exports, Australia is perhaps the world's most vulnerable economy to carbon taxes and similar restraints.  We therefore need to take particular care to shape a constructive and economically viable policy.  One of the key outcomes of the Treasury modelling offers a promising policy approach, which is its implicit estimate that the cost of doing nothing to 2020, and then catching up with the 2050 target thereafter if necessary, would cost only 0.3 per cent of GDP by 2050.

Even if this is not overstated, 0.3 per cent of GDP seems a reasonable insurance policy price to pay for keeping options open, rather than prematurely embarking on carbon dioxide taxation measures that will comprise, in the white paper's words, "the most significant structural reform of the economy since the 1980s".

By 2020, the need for emissions reduction policies will be clearer, and presumably we will have access to all the technological advances that Treasury claim will be forthcoming by that time.

Preparing for action should it be needed, but meanwhile deferring the introduction of a tax that will wreak massive economic damage, could be an ideal solution for Australia to adopt.

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Going green is just another rinse in government washer

There's no better way to dress up your drab, colourless economic plan than calling it "green".

The Victorian Government has been trying to create a "green economy" where business innovation is guided in a greenish direction by the gentle hand of subsidies, taxes and government purchasing decisions.

Last year's Green Car Innovation Fund gave a nice, fresh, enviro-trendy spin to the traditional Australian pastime of taking money from successful, productive industries and giving it to car companies.  For a short time, we all seemed convinced that dumping money in the deep black hole that is the Australian automotive sector was the best thing we could do for the environment.

Ten years ago, it wasn't green jobs but technology start-ups that were going to be the future of our economy.

Remember the great tech hub in the Docklands that was supposed to make Melbourne the Silicon Valley of the southern hemisphere?  The Victorian and federal governments spent millions on "ComTechPort", a network of buildings to host innovative tech start-ups.  But the jewels in ComTechPort's crown now have as their tenants such innovative, nimble start-ups as the Australia Customs Service, the Bureau of Meteorology, VicTrack and the Telstra Corporation.

Unfortunately, it looks as if we're seeing that same cycle of wishful thinking and half-baked policymaking when governments talk about all the new cool green stuff they're doing.

The Federal Government's recent announcement of 50,000 new green jobs hit a quick snag when Participation Minister Mark Arbib, and then Kevin Rudd himself, admitted they weren't "new", they weren't really "jobs" (most of them were more like work experience and training positions) and there probably wasn't going to be 50,000 of them.

But they are still green.  We will be getting a new Green Jobs Corps, educating, oh, a dozen-thousand or so unemployed youth in the finer points of tree planting and walking track construction.  We'll get a few more thousand "local green jobs", which also involve tree planting.  And we'll get 30,000 green apprentices.  That last program will involve, among other things, "training mechanics in green car engines".  There have been only about 10,000 hybrid cars sold in Australia.  If all goes to plan, they'll be very well maintained.

Government-created green jobs don't tend to make a lot of economic sense.  We might have great ambitions for a green, sustainable economy, but other countries have tried it already.  In Spain, a recent study has found that each of the green jobs created in that country has cost nearly $1 million, and each job cannibalises more than two jobs from another sector.

Of course, some things are more important than money or the economy.  But governments can't simultaneously claim their green jobs schemes will drag us out of the economic doldrums, and argue green jobs are too important to dismiss with crude, heartless, economic analysis.

Nevertheless, a lot of people seem to view the financial crisis as a time to pursue other goals -- we mustn't just have one of those standard, boring economic recoveries, we have to have an exciting, innovative and forward-looking green economic recovery!  But Australia's unemployed would no doubt be a lot happier to get back into work as soon as possible, rather than waiting to be funnelled into a hypothetical green job according to the Government's policy priorities.

Green is fashionable, sure.  Consumers are demanding more environmentally aware products, and businesses are supplying that demand.  Indeed, right now the private sector is doing a hell of a lot better than the Government when it comes to innovative green products and services.

But governments that slavishly follow fashions might just find themselves with a wardrobe full of old, worthless policies that don't fit and cost the taxpayer way too much.

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