Bring on the competition

It's hard to believe this is Australia in 2011.  People are complaining milk is too cheap.  The government wants books to be more expensive.  And unions are demanding that steel imports be either banned or have tariffs on them at such high levels they may as well be banned.

It's as though the last 30 years of Australian economic and political history never happened.  Up until the 1980s Australian governments put the interests of producers first.  Since then governments have put the interests of consumers first (the glaring exception to this being the treatment of the motor vehicle industry).  The result of this policy change is obvious for all to sec.  This is not to say that change has been easy, because it hasn't.  What changed 30 years ago is that politicians stopped trying to prevent competition.  Eventually politicians realised it's better to alleviate the negative consequences of competition and take advantage of its benefits.

Thirty years ago politicians at least had an excuse.  They had no idea how prosperous the nation could be if the shackles of protectionism were broken.  The notion that Australia should embrace free trade had been killed off at the time of federation in 1901, and within a few decades free trade had become practically an alien concept.  Whatever ideas of economic liberalism that did exist in this country resided in the works of foreign economists like Friedrich Hayek and Milton Friedman, and in the writings of people like the marginalised Liberal backbencher, Bert Kelly (whose Modest Member column appeared in The Australian Financial Review).

The standard of living we now enjoy is a direct result of the decisions of successive Labor and Coalition governments in the 1980s and 1990s to reject protectionism and its handmaiden, economic myopia.  Sure, there's been a degree of good fortune involved in the boom of the past few decades.  Australia is lucky we've got lots of iron ore and coal, and we're lucky Asia is at our doorstep, but these advantages could easily have been squandered.  The worst thing we could do is to assume that the decisions of government don't matter.  They do.

The Labor government believes that because its stimulus spending "saved" Australian consumers from the global financial crisis, consumers won't mind too much if they're saddled with a range of government-inspired cost of living increases, such as imposing a "carbon price".

A return to the bad old days of protectionism and tariffs would be a disaster.  Yet the Australian Workers Union with its new campaign against "cheap imports" has signalled it is quite happy for Australia to return to a pre-1980s world.  Our union leaders and politicians should know better.

Larry Summers, economic adviser to both Bill Clinton and Barack Obama, put it succinctly a few months ago.  "Rising protectionism is emerging as a major threat to global economic growth.  In the end, protectionism makes people poorer, makes nations more hostile to one another, reduces opportunities for business and for workers and it is as good as being a zero-sum game.  It is actually a negative-sum game that destroys value."

Few members of Julia Gillard's cabinet have the courage or the capacity to stand up for economic liberalisation.  Once there was Lindsay Tanner, but he's now gone.

Trade Minister Craig Emerson is one of the very few ministers left who is not willing to disown the Hawke and Keating legacy.  Last week Emerson did what the Prime Minister or the Treasurer should have done.  When Australian Workers Union boss Paul Howes -- fresh from launching his fight against free trade -- declared war on Rio Tinto, it was Emerson who made the obvious point that it wasn't particularly productive for companies and unions to spend their time beating up on each other.  When Wayne Swan was asked whether he supported Emerson's comments, Swan declined to answer.

At the moment an air of unreality pervades the decisions coming out of Canberra.  There's a feeling that because the China-led boom is going to go on and on, government doesn't count any more.  We can afford bad decisions because there's money to burn, and we don't need to make good decisions because things are as good as they're ever going to get.  Policy is on autopilot.  At the moment policymakers think they face only two issues.  The first is how government can squeeze as much money as possible out of the boom.  The second is how government can spend that money.

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Government squeezing ever tighter

Governments around the country are becoming significant players in fuelling cost-of-living pressures affecting many families.

The available CPI data shows goods and services either directly provided by governments or that are highly regulated or taxed have recorded some of the strongest price increases over the past five years.

Prices have risen most significantly in the utilities that are either owned or regulated by government.

Compared with the overall increase in average prices of 16 per cent, water and sewerage charges have almost doubled over the past five years.

Compounding the financial squeeze on families and businesses, electricity and gas prices have increased nationally by 56 per cent and 39 per cent respectively.

In the case of electricity, contract prices are likely to rise further because government greenhouse policies prevent new low-cost generation from being built, instead favouring more expensive renewable power.

Environmental policy has increasingly become a friend to inflation in recent years.

Clarity for energy investment is becoming increasingly fraught since certainty in government regulation is practically impossible to provide.

It is well known Queensland desperately needs new investment in electricity generation.

Additional capital spending on water infrastructure, which has also failed to keep pace with demands from a growing population, has been factored into higher price levels.

Environmental and planning regulations have also played their part in scuppering plans for new utility infrastructure.

A recent example of this was the proposed Traveston dam, which was eventually vetoed by the Federal Government.

Some states have misdirected their capital investments in ways that will guarantee excessive costs are passed to consumers.

The cost per kilolitre of water produced by energy-intensive desalination plants is 10 times more than water harvested naturally through conventional dam water storages.

The Bligh Government's recent decision to mothball the Tugun desalination plant will only temporarily dampen the overall increases in water charges for households.

As much as information on previous price trends provides insights into cost pressures already being felt by individuals and households, what is important for the inflationary outlook are expectations of future price movements.

An emissions trading scheme preferred by the Government would significantly increase total household bills, with rising power input costs for consumables feeding through to final prices paid at the checkout.

Maintaining the 20 per cent renewable energy target by 2020 will only add to the cost pressures.

Without economic reform proposals to enhance productivity and thereby reduce business costs, there seems little prospect green inflationary pressures will ameliorate any time soon.

The risks for potentially higher official interest rates under this scenario are manifold.

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You may not believe in climate change, but you will pay

A Galaxy poll has found that only a third of Australians think the world is warming due to human carbon dioxide emissions.

The poll, taken last weekend, represents no shift in views from those in an identical poll eight months ago.  And that's in spite of well-publicised claims by climate activists linking recent floods with man-made global warming.

The Gillard Government must be disappointed.  Courtesy of the Australian taxpayer it is vigorously promoting the case that mankind is causing global warming and that Australia must have a carbon tax, people are not buying the message.  A vast edifice of publically funded bodies is in place for this task.

The Government has its own politicians and a vast supportive bureaucracy in Government Departments and the CSIRO pressing the case.  It has also established a series of ''independent'' bodies to review the data, then explain that global warming is taking place and to promote its favoured carbon tax.

The latest is the Climate Commission headed by Tim Flannery.  This has a budget of $5.6 million and comprises five members who can be relied upon, supported by nine science advisers.

We already have Garnaut's Review of the 2008 Garnaut Review, staffed by personnel seconded from the Department of Climate Change and elsewhere who are committed to the greenhouse cause.

Then there are the expert advisors to Parliament's ''multi party committee on climate change'' and government subsidised bodies like the Grattan Institute.

The Government's generosity with taxpayers' money means we are being bombarded by material from three greenhouse related directions.

First we are told that thousands of scientists all agree that man-made warming, now renamed climate change, is taking place and that recent hurricanes and, counter-intuitively, cold spells, actually substantiate this.  Evidence that the weather anomalies have always been with us are dismissed.  So is the fact that the drought has broken and that our rivers are no longer drying and that the data showing the world's climate unexpectedly and inconveniently has not warmed for 15 years.

There are many scientists with views on the debate but in fact few of these are credentialed in the key area of climate physics.  Indeed climate change skeptic Richard Lindzen, the world's foremost atmospheric physicist, points out that only a few hundred people in the world have the qualifications appropriate to speak with authority.

Secondly, Australia is depicted as standing alone against a tide of international action to tax carbon.  Unstated will be the fact that we already wastefully ensure more electricity than average is produced from politically correct non-carbon sources like wind.  Wind produces two per cent of our electricity, a larger share than the US, Japan, China and the UK.  Moreover, the US states, like the Obama Administration, are reneging on previous commitments to reducing carbon emissions, a process that has now commenced in Europe where Holland, Spain and the UK are leading the retreat.

Finally, figures have been conjured up to demonstrate that a new carbon tax won't need to be that large, at least initially.  A compliant Treasury has modelled the effects of the tax on electricity usage and, by assuming an imminent adoption of new and unproven technologies, argues that electricity prices won't even need to double.  We are assured that a radical industrial restructuring that eliminates the energy intensive industries on which we depend, will be painless.  The consumer, so it is said can afford the costs and the poorest will be compensated.

Using taxpayers' money to persuade the same taxpayers that they should acquiesce in releasing additional swathes of their incomes the government epitomises a nanny state.  The Government is saying that its own wisdom is superior to that of its voters, in understanding the public's real interests.

A confederation of interests supports the proposed tax.  For the Government the tax will provide a means of balancing its budget and a war chest to buy votes at the next election.  Support is offered by those scientists who want to be listened to and to have access to well-paid positions.  Then there are environmentalists who want to change the way people other than themselves behave, consume and interact.  Policy makers are also keen to be involved in remodelling the economy in ways that will enhance their own stakes.

The losers are the ordinary citizens who are being coerced into providing funds to promote policies that will lower their living standards.

Infrastructure Australia has been all but derailed

The Gillard government's confirmation that it will contribute $2.1 billion to building the Epping-Parramatta railway line in suburban Sydney will probably not help Labor in NSW, but it has delivered a fatal blow to the credibility of Infrastructure Australia.

Set up, with great fanfare, to ''develop a strategic blueprint for our nation's infrastructure needs'', the whole rationale of Infrastructure Australia was that it would be national, scientific and impartial.  A body of experts would weigh the merits of competing infrastructure proposals from across the nation and pick those that would deliver the greatest benefit for the taxpayer dollar.

Yet, less than three years after its establishment, a combination of irrelevance and incompetence has Infrastructure Australia on the verge of joining the growing list of reforms Kevin Rudd failed to deliver.

By signing off on the commonwealth contribution to the construction of Epping-Parramatta, federal Infrastructure and Transport Minister Anthony Albanese has removed any pretext of national infrastructure funding decisions being taken on the basis of economic analysis.

When Julia Gillard made the original announcement about funding the project in the federal campaign, not only had Infrastructure Australia not recommended spending even one cent on this project, it had not even been considered a strong enough proposal to form part of the NSW government submission seeking federal largesse.

The best that Albanese could come up with, when queried as to why he was ignoring his own process, was the lame declaration that he had been discussing the proposal with chairman Rod Eddington for a ''long period of time''.

Last August, the obvious motivation for pursuing the project was an attempt by federal Labor to save Bennelong;  now it is to save a couple of seats at next month's state poll.  Just as it did not work then, it probably won't work now.

However, the commitment of the funds does present a potential conundrum for the next NSW government.

Barry O'Farrell may have a difficult job negotiating with the commonwealth to divert the funding to a more worthy project.

A similar issue has arisen in Victoria although, in this instance, Infrastructure Australia itself, not its political masters, needs to cop much of the blame for the problem the Baillieu government has inherited.

Based on Infrastructure Australia advice, the Rudd government committed $3.2bn, the largest chunk of its initial round of funding from the Building Australia Fund, to Melbourne's regional rail link.  This project will see new track built from Werribee in the city's outer southwest to the edge of the CBD, thus removing regional rail services from crowded suburban tracks.

Victoria's new Liberal Transport Minister, Terry Mulder, recently revealed the true cost of the project was actually $880 million more than the previous Labor government, or Infrastructure Australia, had calculated.  Somehow, the original costing had overlooked items, including a couple of rail overpasses, and underestimated the cost of signalling works by $400m.

At the same time that Mulder made these facts public, Albanese announced that he needed to defer $500m in expenditure on the project, mainly because of the need for post-flood re-prioritisation.  This might sound reasonable if Albanese had not already clawed back $400m last November, well before the flood rationale was available.

In Victoria, Mulder has explained that his newly inherited bureaucrats were not at fault because they had been given insufficient time to cost the plan accurately, before the previous government went public with it.

While the Brumby government is rightly being held to account for this shemozzle, it also casts significant doubt on the ability of Infrastructure Australia to scrutinise state governments' plans rigorously before cheerfully doling out the commonwealth cash.

When this project was originally assessed against competitors, there were grumbles in other states that Victoria was always likely to have the inside running at Infrastructure Australia, as its $38bn transport plan was based on a report undertaken by Eddington before he became the chairman of Infrastructure Australia.

There also have been concerns expressed that the body was focusing too much on urban public transport, traditionally a state responsibility, and not enough on funding projects that were designed to boost the nation's export performance.

The fact Infrastructure Australia did not spot the holes in the Victorian plan certainly raises question about how rigorous its assessments were.

Maybe, like its Victorian counterparts, it was given insufficient time by its political masters to do a proper analysis.

And certainly, under Gillard's prime ministership, it is the politicians who have to take the lion's share of the responsibility for undermining Kevin Rudd's Infrastructure Australia.

As well as Epping-Parramatta, also in the federal election campaign, Labor pledged $742m to build a railway to the Brisbane bayside suburb of Redcliffe, a project neither recommended by Infrastructure Australia nor on the Queensland government's priority list.

In fact, even while Rudd was still prime minister, the government had begun ignoring Infrastructure Australia.

Last year, the Australian National Audit Office released a damning report on the allocation of infrastructure spending, pointing out that six rail, road and port infrastructure projects announced in the 2009-10 budget, as well as two rail projects funded in the 2010-11 budget, had not made Infrastructure Australia's short list of priority projects.

Four of the projects had been evaluated and found ''not sufficiently developed to meet the criteria for recommendation as ready to proceed''.

That capricious record, and the lack of transparency, creates serious problems for incoming state governments as they try to assess the real infrastructure priorities in their jurisdictions.  They can only guess what type of projects may gain, or retain, commonwealth funding.

It is a long way from the promised ''strategic blueprint'', and can lead to only more questioning of whether it is worth the government persevering with Infrastructure Australia.

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Anti-dumping laws: in whose interest?

It's hard to top deposing a Prime Minister.  But having the management of Rio Tinto replaced by monkeys (as Australian Worker's Union boss Paul Howes suggested last week) would be pretty impressive too.

The AWU celebrated its 125th anniversary with bluster and assertiveness.  It's been swinging wildly at mining companies, foreign imports, and ministers in the Government it installed.

None of it shows the AWU in a particularly good light.  Take for instance the union's campaign to strengthen the Government's anti-dumping laws.

''Dumping'' occurs when a foreign firm exports into Australia products and sells them for a price lower than in their home market.  The idea, in theory, is to put Australian firms out of business, and then jack up prices.  Our anti-dumping laws impose selective tariffs on goods to compensate.  Lots of countries have similar laws.

So it may seem the union's ''Don't Dump on Australia'' is of minor importance.  But the campaign against dumping exposes a simple truth:  the union movement is a special interest, acting on behalf of a few favoured sectors of the economy.

Because from the very beginning, anti-dumping laws had almost nothing to do with the theory of dumping.

The first anti-dumping law was enacted in Canada in 1904.  New Zealand imposed one in 1905, and Australia in 1906.  The US joined the anti-dumping club 1916;  South Africa and Great Britain five years after that.

But it was only in 1923 the economic theory of dangers of dumping was formulated, by the economist Jacob Viner in his book Dumping:  A Problem in International Trade.

So what inspired the earlier anti-dumping laws?  Politics, not economics.  The Canadian government first imposed anti-dumping laws to curry favour with domestic steelmakers feeling threatened by cheap US imports.

The rest of the world followed suit.  For Australia, anti-dumping legislation was a simple component of ''protection all round''.

In other words, anti-dumping is not a measure to defend the integrity of free trade (as Howes claimed last week, saying foreign competitors were ''cheating'') but a measure to undermine it.

Anti-dumping laws are protectionism, pure and simple.

As the failures of state socialism have become clearly manifest in the last few decades, Viner's theory of dumping has been abandoned, along with the arguments for infant industry protection, import quotas, general tariffs, and trade subsidies.

After all, the dumping thesis relies on the possibility of a foreign producer, having eliminated all its competitors, raising prices.  But it's hard to find in the literature an example of a firm ever doing so.  It's not a very good strategy:  it's expensive, and its reward is uncertain.  Even if a firm managed to eliminate all its competitors, the moment it raised prices new competitors would flood back into the market.

And if imported goods are only cheap because they're subsidised by foreign governments, that's a straight transfer of wealth from overseas taxpayers to Australian consumers.

A Productivity Commission inquiry last year found while anti-dumping measures benefited a few companies, those benefits came at the expense of everybody else's economic well-being.

It did, admittedly, find the overall cost to the economy was likely to be very small.  So the commission recommended keeping the laws for a very specific reason -- to placate the fears of some firms (and the union movement) about tariff reform.

That is, for politics, not for good policy.

You could dismiss the Productivity Commission as unforgivably neo-liberal.

But even the Nobel Prize winner Joseph Stiglitz -- hardly a doctrinaire free-marketeer -- describes much anti-dumping laws nothing more than ''creative new measures to block imports'' which make ''little economic sense''.  The first world, Stiglitz argues, uses anti-dumping legislation to shield itself from third world competition.

The AWU is welcome to stand up for what it perceives to be in the interests of its members.  That's its job -- to seek special privileges for those who pay the annual fee.

But the union cannot claim the policies it pursues are in the general interest of the Australian economy.  (And, as Stiglitz might add, in the interest of third world workers.) The union's ferocious advocacy of anti-dumping laws is a small but indicative reminder of this.

If the AWU was concerned with all Australians they would campaign to eliminate anti-dumping laws.  Lower prices and a more competitive economy benefit unionists and non-unionists alike.

Unfortunately the Federal Coalition has joined the AWU on its anti-dumping crusade:  Tony Abbott has also called for an examination of the anti-dumping regime to protect jobs.

The review of 2010 federal election by Steve Bracks, John Faulkner and Bob Carr has reaffirmed the relationship between an antagonistic union movement and a deferential Labor Party.

Given the union movement's willingness to forego the national interest while protecting its client industries, this should not be welcomed.

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Booksellers spell it out

The demise of Angus & Robertson and Borders book chains should be a wake-up call for the Gillard government to scrap trade import barriers forcing book retailers to be uncompetitive.

Even before factoring in postage costs and the appreciation of the Australian dollar, any Amazon.com customer knows retail books are expensive.

Under existing rules the Australian printing and publishing industry enjoys trade protection allowing it to block imports of copyrighted books if they're published within 30 days of being released overseas.

The consequence is that Australian retailers cannot source cheaper printed books from overseas despite them providing royalties to the author.

Individual consumers are allowed, and clearly are importing cheaper equivalents, making it impossible for domestic retailers such as Angus & Robertson and Borders to compete on price.

The voluntary administration of the parent company of these ailing book chains, REDgroup, on Thursday didn't need to occur had the Rudd government accepted the 2009 recommendations of the Productivity Commission.

At the time the commission recommended full liberalisation of book import restrictions, recognising they didn't protect the copyright of authors and acted as protectionism for the publishing and printing industry.

At the time the only outspoken voice in the government for liberalisation was then consumer affairs minister Craig Emerson.  Instead the government bowed to a campaign fronted by Melbourne University Press chief executive Louise Adler and a Labor arts set that maintained support for the existing regime.

This advocacy came despite the benefits flowing mostly to the two leading book printing businesses and multinational publishers who used import restrictions to boost profits.  In particular they argued passionately that scrapping import restrictions would undermine the fostering of new Australian talent.  Author Peter Carey hysterically described it as ''cultural self-suicide''.

But as an indicator of the import restrictions' success, no Australian author has won the prestigious Man Booker Prize for the best original English language literature novel since the present regime has been in place.

The same arguments were put by the music industry when the Howard government liberalised its import restrictions.

But industry data has since shown total royalties to Australian music writers and publishers has soared following liberalisation.

And the number of writers and publishers collecting royalties has doubled from 111,000 to 223,000.

Culture doesn't flourish on the back of government protection.

This week's release of the review of the Australian Independent Screen Production Sector into the film industry shows government support at record highs while the industry is bogged in a quagmire.  Not even jobs are protected under the regime.

In its submission to the Productivity Commission inquiry that recommended import restrictions be abolished, the Printing Industry Association of Australia argued they protect 1600 printing jobs.  It's a far cry from the 2500 that will be lost if the REDgroup falls over.

Meanwhile, in the import restrictions-free New Zealand printing industry, jobs have stayed static since 1995 and the number of domestic publishers and books has increased.  In Australia the printing industry has shed 10,000 jobs during the same timeframe.

It's hardly surprising because cheaper prices result in greater consumption, requiring more printed and published books.  But at present the government and industry are in denial, and consumers will pay the price.

The long-term threat to book retailers isn't cheaply imported printed books but digitised ones on devices such as the Amazon Kindle.  Electronic books cannot even be taxed at the border.

No doubt many consumers will continue to enjoy physical books.  But faced with the choice of buying a high-priced locally made book and a cheaper electronic alternative they'll almost certainly vote with their mouse clicks.

It's precisely why industry should have started its process of adjustment.

Now, as Trade Minister, Emerson should use the REDgroup's woes to fulfil his commitment to make Australia a unilateral liberaliser in the Hawke-Keating-Howard tradition by putting the scrapping of import restrictions back on the government's agenda.

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Striving for political and economic freedom

It was no surprise that the Economic Freedom of the Arab World Report was launched in Cairo last year.

Egypt has been at the centre of economic liberalisation in the Middle East.

Hosni Mubarak stubbornly resisted political and democratic change, but had much ambition in the economic sphere.  The end of the dictator's grip on the Egyptian presidency comes after a substantial economic reform program.

So the world observes in Egypt not only a people trying to free themselves from dictatorial rule and a police state, but another illustration of the close relationship between economic and political liberty.

Introduce one, and people will demand the other to match.

Reform needs consent.  Mubarak isn't the first dictator to fall because he ignored this requirement, and he won't be the last.

The Economic Freedom of the Arab World Report rates the 22 members of the Arab League on measures of economic liberty:  tax rates, size of government, security of property rights, monetary soundness, regulation, labour market flexibility, and trade barriers.

When the report was launched eight years ago, Egypt was near the bottom of the rankings.  For its effort, the country is now dead in the centre.  Not as economically free as Kuwait or Bahrain, which occupy the top positions, but doing much better than Algeria and Syria.

Egypt's government launched an economic reform program in 2004.  The tariff burden was reduced from nearly 15 per cent to 5 per cent.  Egypt re-engaged forums of trade liberalisation, and facilitating import and export.  The company tax rate was reduced from 40 per cent to a 20 per cent flat rate, and their progressive income tax system is now levied at a maximum rate of 20 per cent.  The rolling series of privatisations, which had petered out in the late 1990s, were rejuvenated.

As a consequence of these changes, Egypt increased its GDP growth from 3 per cent per year at the turn of the millennium to around 7 per cent.  That figure only modestly declined during the financial crisis, to 5 per cent.

And unemployment -- commonly cited as a source of Egyptian unrest in the wake of the Mubarak regime's privatisations -- declined during the reform period.  At 12 per cent in 2003, unemployment is just over now 9 per cent.  Economic reform has been disruptive.  It always is.  But it has not hollowed out the Egyptian labour market.

Poverty, of course, remains a major problem, as it does across the developing world.  Yet while Egypt is very poor, it is not as cripplingly so as those under it on the economic freedom rankings.

Alexis de Tocqueville said the most dangerous moment for a bad government is when it begins to reform itself.

While deregulations, privatisations and other economic liberalisations are rarely popular on their own behalf, the wealth and economic growth they spur usually is.  The challenge for would-be reformers is to demonstrate the connection between growing prosperity and those disruptive reforms.  And to ensure those benefits can seep through the entire society as quickly as possible.

Any attempt to demonstrate that connection is going to be tough while a country is ruled by a dictatorship.

No amount of positive economic reform will excuse the absence of individual liberties, widespread government harassment, arbitrary arrest, political repression, a justice system divorced from the rule of law, rampant corruption, and restrictions on freedom of expression.  And nor should it.  An increase in GDP is no comfort for someone who has been tortured in custody just to fill an arrest quota, or someone who is unable to report a sexual assault for fear of being seen as ''fair game'' by police.

In the same period when Egypt was rapidly up the economic freedom rankings, its ranking by Freedom House, which measures civil and political freedoms, remained stagnant.  That stagnation hides hundreds of thousands of individual human traumas at the brutal hands of the state.

Dictators can't always have it both ways.  They can't reap the benefits of economic growth -- with their higher tax revenues and more luxuries to hand to political supporters -- and maintain complete political control at the same time.  No country can be both a police state and a market paradise.

Sure, the Chinese model seems to suggest otherwise.  But China is less economically free, more decentralised, and its constituent parts more unstable than the first country appears.  And the Chinese story, like the Egyptian story, isn't over yet.

Not all economic reform is the same.  In developing economies like Egypt, the benefits of privatisations can easily be corrupted by bribery and secrecy.

After all, the idea behind privatisation is not merely to get enterprises off government books as quickly as possible.  It is to reintroduce market competition, improve services, and make those enterprises more efficient.  Consumers should be the beneficiaries, not politically connected oligarchs.

Unsurprisingly, Egypt's privatisation program has been dogged by corruption allegations.  Whether justified or not (there's every reason to suspect in many cases they are) those allegations reflect a lack of democratic openness.  Egypt ranks poorly on Transparency International's Corruption Perceptions Index -- consistently well below most other Middle Eastern countries.

Corrupt practices, whether on a large or small scale, are the manifestation of a broken, undemocratic, and illiberal political system.  A corporate tax rate of 20 per cent sounds wonderful, but is illusory if daily business requires greasing the palms of bureaucrats and police.

Despite a decade of reform, Egypt may no longer have one of the most unfree economies in the Middle East.  Yet compared to the rest of the world, it is still terribly over-regulated, corrupt, and dominated by state subsidies and restrictive labour practices.  Craig Emerson correctly wrote in The Australian last week that ''Political freedom without economic freedom would dash the hopes and aspirations of the region's youth for a better life.''

The military takeover has underlined how much work there is to be done if Egyptians wish to be both prosperous and free.  There are some worrying signs.  At this stage the new leaders seem more interested in cracking down on strikes than democratisation.  ''Stability'' is the catchcry of tyrannies everywhere.

The military has, however, promised to continue economic liberalisation.

And if last few weeks have demonstrated anything, it's that a country cannot reform its economic system and leave a corrupt and oppressive political, judiciary, and administrative system in place.

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Are we all neo-cons now?

An old neo-con colleague from Washington called me at the weekend to gloat about the downfall of Mubarak.  ''What do you think now, Wood?'' he asked in a voice that oozed a certain sort of metropolitan smugness.

His argument went like this:

For too long, US policy in this region has emphasised stability of pro-US regimes over the democratic aspirations of Arab populations.  But this was a phony and dangerous status quo, because dictatorships such as Mubarak's gave birth to 9/11-style terrorism.  The cosy US alliance with Cairo was a great recruiting tool for Al Qaeda.  Which is why Bush was right to try to ''transform'' the Middle East and make ''ending tyranny in our world'' the centrepiece of his foreign policy.  More freedom and democracy will undercut radicalism and terrorism.

You so-called realists have egg on your faces for thinking that the Middle East would never move toward democracy.  We should back these people seeking freedom and recognise that any short-term instability is outweighed in the long term by the emergence of new liberal democratic governments that share our universal values.  With the downfall of Saddam Hussein, Hosni Mubarak and potentially more dictators in the region, the Arab world is catching the global democracy wave that began in 1989.

What is one to make of all this?

Leaving aside the Bush triumphalism, there is a lot here that neatly overlaps with the conventional left-leaning critique of my views on the subject.  A fortnight ago, I wrote an article on this site pointing out how revolutions can be for the worse, especially in part of the world with limited democratic traditions and institutions.

The response, both here and elsewhere, was overwhelmingly hostile -- and, dare I say it, almost neo-conservative.  Amoral, callous, condescending, crude, hypocritical, uncaring -- all of these barbs were hurled my way.  How insensitive to not fully embrace the democratic spirit on the Arab street.  How cynical to say democracy for us but not for them.  And so on.

The striking thing is that many of the same people who only a few years ago reviled a Texan cowboy's ''freedom agenda'' in the Middle East are now claiming solidarity with his neo-con sidekicks and the Egyptian democrats on the streets.

As the neo-conservative Wall Street Journal's editors claimed on Saturday:  ''We are all neo-cons now.''

Well, allow me to disturb this harmony and point out why I think the transition from dictatorship to a genuine democracy in Egypt remains tricky, potentially messy and could even produce more unintended than intended consequences.  Foreign policy idealism run amok can be dangerous, and the US and other western states must deal with nations as they are, not as neo-cons and liberals would like them to be.

We all know that to be viable democracy requires respect for human rights, the rule of law, private property, an independent judiciary, a free press, and an honest and impartial civil service.  But not only does this mean that losers in elections respect the rights of the winners to rule;  it also means that winners respect the rights of the losers to free speech, free association and assembly and with it the right to become the government by winning in a subsequent election.  That is, democratic governments have to embrace the idea of a loyal opposition.

None of these conditions exists in today's Egypt.  It lacks the civic and political culture and institutions that can sustain a western-style democracy.  It does not have a strong tradition of tolerance and respect for minority rights.  The dominant religious faith, Islam, in its more extreme form, rejects the legitimacy of democratic laws.

To be sure, the protesters that brought down Mubarak have expressed tolerance for difference and held to Gandhi's principle of non-violence.  There has also been little evidence of anti-Americanism on the streets.  Egypt, too, is far more nationalist and culturally homogenous than Iraq which is an arbitrarily created state and ethnically and tribally divided society.

All true.  But the protesters do not represent an organised political party.  Nor is there any established leader waiting in the wings.  Former UN official Mohamed Elbaradei has lived abroad until recently and he has no political constituency.  Ayman Nour, an opposition leader whom Mubarak had jailed, also lacks support and his party is divided.  The history of the Egyptian military is one of supporting dictatorships.  The Muslim Brotherhood, however, has the best existing basis on which to build a nationwide popular party organisation.

A Pew Global Research Centre survey last year showed Egyptians preferred Islamic fundamentalists to moderates and reformers by a margin by 59 to 27 per cent.  By 95 to 2, Egyptians believe Islam should play a large role in their politics.  And half of all Egyptians have a favourite view of Hamas, which Washington deems a terrorist outfit, and one in five has a favourite view of Al Qaeda, which is a terrorist outfit.

To the extent that such views prevail at the ballot box, they may contradict the notion that a liberal democracy can properly work in this part of the world.  Could some aspects of Sharia Law fit well with western ideas of individual rights?  Perhaps.  But the source of law can be God or the people;  it can't surely be both.

The point here is that one election doth not a democracy make.  As even Francis Fukuyama, who famously declared the endpoint of mankind's ideological evolution and universalisation of market democracy, concedes:  ''Democracy does not magically spring to life once the dictator is gone, or even after the first free and fair election has taken place.''  If nations, moreover, lack any well-established traditions of democracy, their revolutions are vulnerable to being hijacked by well-organised minorities that have no sympathy for genuinely liberal and open society.

The question today is whether Egypt will follow the French and Iranian revolutions of 1789 and 1979 or the more recent peaceful and democratic transitions in the Philippines, South Korea, Eastern Europe, Taiwan and Indonesia.

We can only hope that Amr Bargisi, a leading Egyptian liberal activist, is wrong when he warns:  ''Without the knowledge of the likes of Locke and Burke, Hamilton and Jefferson, my country is doomed to either unbridled radicalism or continued repression.''

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Federalism's stuck in a rut

With yet another Council of Australian Governments meeting set to convene this week, it is now an opportune time to acknowledge that a new approach to federalism is needed.

Since the election of the federal Labor government in late 2007, 10 meetings of federal and state heads of government have already been convened.  This compares to the record of the former Howard government, with an equivalent number of meetings strewn over a period from June 2001 to April 2007.  Former prime minister Kevin Rudd saw the need for more COAG gatherings as a way to implement his 2007 election agenda and subsequent undertakings, such as the ambition to create a ''seamless'' national economy ameliorating interstate variations in business regulations.

While the Commonwealth Government might possess the ''power of the purse'' in the Australian federation, it does not have the constitutional responsibility or managerial expertise to engender changes in expenditure or regulatory settings in many areas that directly affect the lives of Australians.

The states, on the other hand, do happen to maintain the responsibility and expertise in regulating and delivering services in priority areas such as education, health and transport.

For Rudd, regular COAG meetings offered him the potential to either seduce or browbeat the states into implementing his policy agenda, using the Commonwealth's funding influence as the key leveraging mechanism.

Over a period of three years it has become clear that the increasing numbers of COAG meetings have not necessarily correlated with the delivery of policy outcomes.

In other words, the ambitious Rudd agenda has fallen short of realisation.

The COAG Reform Council, a bureaucratic body established to check if jurisdictions are implementing the commitments they make, has lambasted the lack of implementation of key elements of the COAG reform agenda.

In some respects, the council has noted that even the availability of consistent, quality data to check progress has not been forthcoming.

The business community, senior government officials and others have roundly criticised the ''executive federalism'' approach of COAG that has become mired in process, and with a progressive overload of commitments yet to be fulfilled.

In response to the overload and weighty, yet unrealistic, ambitions foisted on COAG, Prime Minister Julia Gillard has foreshadowed that one of the key areas close to implementation stage national health reform is to be shelved.

One of the key sticking points unravelling the health reform process has been the inability of the Commonwealth to claw back GST revenue in order to achieve its aspiration as majority funder of the states' public hospitals.

With the Liberal Premier of Western Australia previously criticising COAG for its duplication, overlap and confusion, and with new Coalition partners at the COAG table in Victoria and possibly NSW presumably harbouring similar attitudes, the chance to implement other COAG commitments has become even more difficult for the Commonwealth Government.

The alternative to the ''COAGulation'' of executive federalism is a greater emphasis by the states themselves on fashioning their own innovative solutions to a variety of public policy problems.  This is often described as the ''competitive federalism'' approach to governance.

There are many well-known arguments favouring competitive federalism that emphasise unilateral policy actions by individual state and territory governments.

Competing and reforming governments can set themselves up as providing ''policy laboratories'' for reform, conducive to the discovery of workable policies.

The imitation and enhancement of existing policies by competing jurisdictions can add to the body of knowledge concerning effective solutions to problems.

In conjunction with this supplyside dynamic, the locational decisions of firms and individuals in effect reveal the preferences of these agents regarding the suite of taxes, public spending and regulatory settings on offer.

There have been many examples of this competitive element to federalism in the past delivering good outcomes for citizens.  These included the unilateral effort of Queensland to abolish death duties, and the microeconomic reform efforts of the Court, Greiner and Kennett governments in Western Australia, NSW and Victoria respectively during the 1990s.

There is now a sufficient array of information to allow aspirant state policymakers to track their reform efforts against rival jurisdictions, and to enable residents of each state to put pressure on their politicians to improve the quality of policies on offer.

State budgets are now prepared on the basis of a uniform presentation framework in accrual terms, and tax burdens are benchmarked by such bodies as the Productivity Commission, which continue to develop indicators of expenditure levels and the regulatory burden.

The sooner that Australia engenders a shift from executive federalism where a domineering Federal Government attempts to impose a one-size-fits-all policy regimes on the general public, to competitive federalism emphasising unilateral policy change and innovative differentiation, the sooner it can realise its economic potential.

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Why we're a nation of homebodies

Most Australians think of themselves as highly mobile.  We're a nation of immigrants, after all.  The phrases ''sea change'' and ''tree change'' are commonplace.  But the data suggests otherwise.  Compared to the rest of the world, we don't like to budge.

An immigration department analysis in the 1990s found that the median distance Australians moved was just 16 kilometres over an entire decade.  So when Julia Gillard doubled the places in her Job Seeker Relocation Assistance Package, it was actually quite a big deal.

A 2010 election promise, the program gives unemployed workers grants of up to $9000 to travel to find work.  It has been expanded to help rebuild Queensland.  But the package has an importance that extends beyond welfare, or the Queensland floods.  It's a recognition that Australian job seekers aren't very mobile.

Perhaps fair enough:  Australians like their home towns.  As Dr Johnson put it, people ''have a strong attachment to the habitations to which they have been accustomed''.

Yet compare us to the United States.  Migrating within the country is a big part of America's employment culture.  Americans are twice as likely to move interstate as Australians.  We all know of New York as a city of migrants, but those migrants are as likely to be from within the US as beyond.

The World Bank has demonstrated a clear empirical relationship between high levels of population mobility within a country and that country's economic growth.  In the US, those who travel to find work earn, on average, around 10 per cent more than those who do not.  And, unsurprisingly, internal migrants are substantially more likely to be employed.

No surprise then that internal migration is an even bigger deal in the developing world.  Right now, China is in the middle of the Spring Festival, an annual event where around 130 million Chinese travel back to their home towns to celebrate Lunar New Year.  In 40 days during January and February, there are more than 2 billion journeys taken by migrant workers, reflecting the enormous shift of Chinese labour from the country to the city.

The boom in the Chinese economy is just as much to do with this migration as it is with the slow introduction of liberalised trade.  If the 20th-century United States had one of the great mass internal migrations, as the World Bank argues, then the migrations within 21st-century China will be tenfold more spectacular and a hundredfold more significant.

So why are Australians so stagnant?  It's not just a cultural thing.

A big cause of American internal mobility is tertiary education.  American students typically travel across the country for the university that's best for them.  Then, when those students look for work, they cast a wide net with an open mind.

But in Australia, our government's higher education policies encourage uniformity, not diversity.  All our top universities offer pretty much the same courses, taught in pretty much the same way, and confer pretty much the same quality of degree.  Students can't justify moving to attend a university offering the same service as a university in their home town.  Then, when graduates look for jobs, they only look for jobs near home.

America's more flexible labour market makes for more entrepreneurial and assertive employees.  Just like international immigration, there are few more entrepreneurial activities than leaving home to find a better life.

The Howard government had a similar relocation program to that being introduced by Labor.

Like the Howard-era policy, Gillard's relocation isn't just a free ride to Queensland.  The package contains penalties.  Workers who take the money but ditch their new job within six months are ineligible for unemployment benefits for 12 weeks, if they don't have a reasonable excuse.

Welfare lobbies and the Greens have embraced the idea of more social assistance, but they bristle at the penalties.  We're used to that:  these groups are always happy introducing more cash incentives to get into work, but never happy with disincentives to fall out of it.  Mutual obligation has been a tried, tested, and largely bipartisan feature of Australia's welfare system.  Anyway, it's hard to imagine any better way to protect the scheme from manipulation.

What little debate has surrounded the relocation package has focused on this penalty.  But let's discuss what the package means:  why Australians are so reluctant to move for a better job, and the policies that have unintentionally made us that way.

Media the weakest link

So, in 2011 this is what Australian politics has come to.  Prime Minister Julia Gillard looking ''wooden'' during the Queensland floods versus Opposition Leader Tony Abbott not talking for 12 seconds during a television interview.  Why would anyone bother doing policy?  Pop psychology deployed against your opponent is easy to do and entertaining for the public.

And for the media, it's more fun to discuss the imagined emotional state of our leaders than to dissect the regulatory framework governing Australia's telecommunications industry for the next 20 years.

The most popular politician in Australia at the moment is Queensland Premier Anna Bligh.  If there were a vote tomorrow for president of an Australian republic, she'd probably win easily.

It speaks volumes that a series of competent performances at recent press conferences has made people forget that as treasurer and now as Premier, Bligh has presided over a state that has had an abysmal economic performance.

In the days immediately before Abbott's perceived media gaffe, the big issue for the Canberra press gallery was whether it was appropriate for the liberal Party to send an email soliciting donations to fight the government's flood tax.  The email received more attention from journalists than such questions as why the Queensland government didn't have disaster insurance (unlike other states) and why the federal government has agreed to pay for 75 per cent of the cost of repairing its infrastructure.

We know the Prime Minister has appointed committees to check how the $5 billion is spent, but we don't know yet what that money is going to be spent on.  (There was a delicious irony in having a Labor prime minister appoint a former liberal premier to oversee how a Labor government spends money.)  At a press conference on Monday when the Prime Minister was asked about Queensland's lack of insurance, and she ignored the question and changed the topic, no one bothered to follow her up.

No one is brave enough to ask why the rest of Australia should foot the bill for the failure of the Queensland government to take out insurance.

This week provided a clear demonstration of the misplaced priorities of the parliamentary press gallery.  Trivialities (like Abbott's media interview and the liberal email) were regarded as more important than a substantive policy point (government spending on flood recovery).

To be fair, many journalists covering Canberra politics don't have much experience in analysing issues such as the quality of government expenditure for projects like the national broadband network, the Building the Education Revolution program and now natural disaster spending.

The press gallery is quite used to government spending that's little more than a political rort or a bribe to a favoured constituency.  It's the stock-in-trade of the gallery and these things are written about in a world-weary way by people who have seen it all before.  But waste on the sort of scale of the school building program is something new.

Until it actually happened, most people would have been thought it impossible that up to $2 billion out of a $16 billion program could be wasted.

The global financial crisis produced a federal government very willing to spend a very large amount of money in a very short space of time.

The Rudd government's stimulus package produced a larger growth in government outlay than even Gough Whitlam was able to achieve.

Ministers and the bureaucracy were completely unprepared to deal with a situation in which government spending was increasing at an annual rate of 20 per cent and the media were ill-equipped to report on what was happening.  The media were unable to deal with the shock of something new and unexpected.  In addition, there was hard work involved.

Much the same thing happened when Kevin Rudd was toppled as prime minister.  Because the press gallery had never seen anything of its kind before, it almost refused to believe that a prime minister, perceived to be successful, could be removed overnight.

One of the favourite topics of discussion for political commentators last year was how the federal election was a policy-free zone.  Allegedly it was a contest between Tweedledum and Tweedledee.  And for this the politicians were blamed, which is not surprising given that politicians get the blame for most things.

But maybe the media should look a bit closer to home.  What's happened this week is a good example of the quality of the coverage of politics and policy in this country.

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Dropping the lure

The prospect of Victoria walking away from a business investment anti-poaching agreement will hinder rather than help the state's economic competitiveness.

There is growing speculation that the Baillieu government will not sign the Interstate Investment Co-operation Agreement, due to expire later this year, which forbids all states and territories, except non-signatory Queensland, from luring business investment from each other using expenditure subsidies or tax breaks.

The idea behind the agreement is to stop the business bidding wars that cost taxpayers, yet do little but inefficiently shuffle investment funds and jobs across state borders.  The Productivity Commission estimated that states provided outlays of at least $3.3 billion on help to industry in 2001-02, as well as a range of tax concessions.

The proposal originated in the mid-1990s, with calls by economist Wolfgang Kasper for an interstate pact banning industry or company-specific handouts, followed by an Industry Commission report examining the parameters of such a potential non-discrimination pact.

In 2001, New South Wales and Victoria agreed to not poach business investment from each other and this was followed by a broader agreement in 2003 between the states (excluding Queensland) and the territories to end investment bidding wars.  The 2003 agreement was renewed in 2006 for five years.

During last year's Victorian election, the Coalition parties raised concerns about the state's declining national share of business investment.  During the Bracks/Brumby governments' term the share of Australia's investment raised in Victoria fell from 25 per cent to under 22 per cent.

Capital accumulation is essential to economic development and, through it, a sustained improvement in living standards, and the Victorian Coalition identified an aggressive pursuit of foreign and interstate investments as the key to arresting the slide in investment share.

Queensland's share of business investment grew over the past decade or so, from 17 per cent to 20 per cent, and Queensland premiers Peter Beattie and Anna Bligh have shown little hesitation in using tax concessions and subsidies to lure companies north.

But it is not clear that restrictions on the ability of other governments to secure interstate business investments using taxpayer funds was the cause of Victoria's fall in investment share.

After all, Western Australia, Tasmania and the two territories, which are signatories to the anti-poaching pact, have increased their national investment share over the past 10 years.

There are factors that explain divergent state investment share trends, such as economic growth rates and the composition of industries.  It is no surprise that Victoria, the national base for manufacturing and subject to intense import competition, is seeing its investment share come under pressure.

While Queensland has hailed its go-it-alone approach, making claims about the amount of investment and jobs generated by paying investors to set up or expand operations, there are costs.

For a start, poaching investments is funded by taxpayers.  Many state taxes are paid by businesses that don't receive government handouts, disadvantaging economic activities that already exist.

Investment attraction schemes must also be administered by bureaucrats, adding overheads to the costs imposed on taxpayers.

The prospect of a business securing a handout encourages companies to lobby politicians and bureaucrats about their applications.  Such rent-seeking runs the risk that businesses will divert their attentions from the need to innovate and add value in a globally competitive economy.

While governments may believe that poaching private investments might enhance their political standing, the lack of transparency on the details can undermine public trust in the process.

Indeed, every major report by state auditors-general on industry grants over the past decade has expressed concerns about the transparency of investment incentive programs.

These problems suggest that states tend not to benefit from unilateral investment attraction schemes.  The likelihood is that the shareholders of companies receiving government handouts get a free kick at taxpayers' expense, serving to shuffle investments interstate.

Given the limits on funds that governments can acquire from taxpayers and the need to prioritise spending, the reality is that corporate welfare handouts will do little to raise the total amount of business investment in a given state.  From an economic standpoint, it is likely to render significant economic harm.

Victoria would be better served to tackle policy obstacles, such as inefficient taxes and regulations, that impede additional capital accumulation within the state.

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Beyond the chaos, federalism lives on

The critics of political theatre suggest Anna Bligh has shown successful leadership during the Queensland floods and Cyclone Yasi.

Julia Gillard's notices have been somewhat less positive.  Trying to emote in front of TV cameras, she's looked wooden.  Like Samuel L Jackson in the Star Wars prequels, Gillard is talented but the script gives her nothing work with.

That's a show of leadership succeeding at the state level, and failing at the federal level.

So aren't you glad we still have states?

The last few years have seen a chorus of voices claiming the very existence of state governments -- therefore the entire basis of Australia's federal system -- is anachronistic, a relic of the colonial era, and the biggest impediment to national reform.

Tony Abbott and Bob Carr are openly dismissive of state government powers.  John Howard never saw a centralisation he didn't like.  Neither did Kevin Rudd.

My opinion and letters columns are littered with complaints about wasteful duplication and how just darn unnecessary those states are.

But in the wake of this year's natural disasters, perhaps federalism could find a few more friends.

Putting aside the performances of Gillard and Bligh, it would have unthinkable for a federal leader to take responsibility for this month's disaster efforts:  floods in Queensland, Victoria, New South Wales, South Australia, and Tasmania, and floods and bushfires in Western Australia have all had their own characteristics.  Affected states have each had separate and specific needs.  They require their local leadership and expertise.

Busy with the floods and cyclone in Queensland, a lone prime minister spread too thin would have had to virtually ignore the devastating fires in Western Australia.

The idea of federalism suggests the closer governments are to those they govern the more responsive and representative they will be.  State governments can respond better than Canberra.  The start of 2011 has surely demonstrated the validity of that claim.

It's not even an issue of competence.  Politically, Anna Bligh's government has been on the nose all through 2010.  But her ''bloody awful tough year'' -- to use the premier's words in December -- was all but forgotten as the waters rose and the storm approached.

And it's not to say we won't find Bligh government failures before and during the floods and cyclone.  We haven't heard the last question about the management of the Wivenhoe Dam, or the Queensland Government's decision to forego insurance.

But decades -- hell, a century -- of rolling federal government fiascos should leave us in no illusions Canberra could do any better.

Much has been made of the comparison between the natural disasters of 1974 and this year.  But bookended by the Brisbane floods in January, and Cyclone Tracy that Christmas, 1974 was also one of the defining moments for the relationship between the Commonwealth government and its state counterparts.

The two disasters came smack bang in the middle of Gough Whitlam's push to steam roll his agenda over the states.  (Malcolm Fraser would later describe a Liberal approach as ''new federalism''.  Gough's plans could perhaps be described as ''no federalism''.)

No surprise the events of 1974 led to more restructuring in favour of the federal government.  A Natural Disasters Organisation was set up after the Brisbane flood.  Cyclone Tracy confirmed the Commonwealth's pre-eminent position.  As the director of operations and plans in the Natural Disasters Organisation recalled, it was these twin disasters which gave the ''impetus to the development of legislation and new arrangements for states and territories''.

Unsurprisingly, the reconstruction of Darwin (the Northern Territory was already under Commonwealth administration) was plagued by delay and indecision.  Budgets blew out.  Accusations of bureaucratic empire-building were thrown around.  The Darwin Reconstruction Commission fantasised about building a ''Canberra of the North''.

Where state powers were eroded after 1974, perhaps the aftermath of January 2011 will bring us, slightly, back the other way.

Gillard's uninspiring attempt at leadership might give some small reason to hope for the future of federalism.

After all, Canberra's failures are federalism's last remaining defence.

The Prime Minister coincidentally suggested over the weekend she would be pulling back on Kevin Rudd's grandiose health reforms;  reforms which were to place Canberra squarely in the centre of our health system.

Queensland -- poor Queensland -- which had embraced Rudd's reforms with open arms, will likely now have to keep responsibility for their own hospital system, just like all the other states.

The parameters of this cut-back health reform will be debated at COAG next Monday.

But there's no doubt Gillard is looking to take health reform off her prime ministerial plate.  Rudd's plans to have the Commonwealth assume the vast bulk of responsibility for health and hospitals are being abandoned.

Federalism is the structure of government which the designers of Australia's constitution intended.  That structure has been battered down for a century.

But right now our Commonwealth Government is uninspiring, unloved and, completely unable to pursue its own policy goals.  Federalism may have some life in it yet.

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Can Obama do a Reagan?

The outpouring of affection for Ronald Reagan, who would have celebrated his 100th birthday this weekend, has been fascinating, beyond what one would expect even for one of America's most popular presidents.

On its February 7 cover under the headline ''Why Obama ♥ Reagan'', Time magazine superimposed a photo of the Republican hero with his arm around the Democratic incumbent.

The breakout:  ''No, the two never actually met, but we think they would've had a lot to talk about''.

In a Gallup poll, Americans rank their 40th president as the greatest, just ahead of Abraham Lincoln and John F Kennedy.  The Republicans running for their party's presidential nomination next year -- Romney, Pawlenty, Gingrich, Palin, Huckabee -- consistently cite Reagan as their role model.  And last week distinguished historian Douglas Brinkley said of the two personas:  ''Obama is approaching the job in a Reaganesque fashion''.

The Americans indulging this past week's tributes to the ''Gipper'' are doing more than paying respect to someone who left the White House with the highest job approval rating of the modern era.  I think they are also telling us something about the current political climate in the US.  Americans, put simply, are nostalgic for a better time.

Whatever their ideological and political colours, it is fair to say the American people are in a very foul mood today.  They overwhelmingly believe their nation is heading in the wrong direction.  Obsessed by immediate problems -- skyrocketing national debt, budget deficits, nine per cent unemployment, swelling home foreclosures, a deeply unpopular war in Afghanistan, declining US influence in the Middle East -- there is hardly any evidence of that much prized American commodity, vision.

In embracing the Reagan spirit, they want to forget the pessimistic present and regain that sense of national pride and direction that was all too evident during the 1980s.

Intriguingly, the American mindset today is eerily similar to the national mood three decades ago.  Recall that Reagan took office in the very shadow of Vietnam, Watergate, economic stagflation, the Iran hostage crisis and Soviet adventurism in the Third World.  During the 1980 election campaign, he accused president Jimmy Carter of creating a ''crisis in confidence'' and perpetuating a ''spiritual malaise'' and he pledged to restore America's ''day in the sun''.

He won convincingly.

Newsweek summarised the national mood when it wrote in 1981 that Reagan ''inherits the most dangerous economic crisis since Franklin Roosevelt took office'' in 1933.  The reigning Keynesian-interventionist policy orthodoxy had no answer for this predicament.  But together with Paul Volker's Federal Reserve, the administration's free-marketeers helped slay the inflation dragon, kick-start the economy and set the scene for what Wall Street Journal editor Robert Bartley called ''seven fat years'' -- at that point the longest economic expansion in US peacetime history.

Yes, there were compromises, at times even backsliding, a budget deficit and a whopping national debt, but the course was set.  The result:  Lyndon Johnson's Great Society, which dominated even the Republican presidencies of Richard Nixon and Gerald Ford, became a historical relic.  Reagan had transformed the domestic agenda and, in the process, won a landslide re-election in 1984.

This is why Obama admires Reagan so much.  He also wants to be a ''transformative'' president, albeit along different ideological grounds.  As he put it during the 2008 Democratic presidential primaries:  ''I think Ronald Reagan changed the trajectory of America in a way that, you know, Richard Nixon did not and in a way that Bill Clinton did not.  He tapped into what people were feeling, which is, ''We want clarity, we want optimism''.

As for foreign policy, Reagan regularly argued that America had a special obligation to promote democracy and freedom to the rest of the world.  His policies -- defence build-up, Strategic Defence Initiative, Pershing missiles in Western Europe -- taken together with his anti-communist rhetoric (''evil empire'' and ''Tear down this wall, Mr Gorbachev'') meant that far from containing communism, Reagan transcended it, as he indeed pledged he would do in the early '80s.

Within ten months of his leaving office, the Berlin Wall came down and the Cold War ended.  As veteran left-liberal columnist Richard Cohen has conceded, Reagan ''was right about the Soviet Union -- it was the ‘evil empire' -- and about welfare abuses and the occasional arrogant insularity of Big Government''.

But Reagan was also a realist.  He believed in carrying a big military stick, but used it only sparingly.  Not for him any grand, noble preventive wars or nation building.  He confronted the Soviets in Afghanistan and client states in Central America, but only indirectly, through proxies such as the mujahedeen and the Contras.

Like George W Bush, he rebuffed America's European allies (over Nicaragua and Grenada).  But unlike Bush 43, he never tarnished transatlantic relationships with dismissive name-calling.  He talked tough with the Kremlin, but upon taking office he ended the grain embargo against the Soviets which president Carter had imposed after the Afghanistan invasion.  Reagan, too, was prudent enough in his risk taking:  in his Lebanon fiasco of 1983 in which more than 270 US marines died, he displayed that rarest of geopolitical skills, the ability to cut losses -- something neither Bush nor Obama have done in Iraq and Afghanistan respectively.

Today's neoconservatives routinely praise Reagan.  But, interestingly, in the 1980s they criticised him over not only ''cutting and running'' in Lebanon but also ''appeasing'' the Soviets.  When he signed the nuclear arms reduction treaty with Gorbachev in 1987, the response from the Right was overwhelmingly hostile.  George Will said it was ''moral disarmament'', Normal Podhoretz denounced Reagan for ''appeasement by any other name''.  And William F Buckley, Jr's National Review, the leading conservative magazine, headlined a special issue ''Nuclear Suicide''.

The Senate still ratified the treaty.  As liberal critic John Judis conceded:  ''To Reagan's credit, he saw [Gorbachev's promise of ending the Cold War] almost from the beginning and, in seeing it, encouraged its realisation''.  Which brings us back to what Obama can learn from Reagan today.  Perhaps the Gipper's greatness, as his biographer Lou Cannon has pointed out, was that ''he carried a shining vision of America inside him'', that nothing was impossible, that America was indeed the Exceptional Nation.

Not only did he radiate warmth and a sunny optimism that reflected the mental makeup of his nation, Reagan refused to become snarled in messy policy detail.  He instead explained himself in a simple, coherent, idealist, at times witty, language to which Middle America could easily relate.  And so after a decade of cultural crisis he made Americans feel good again about themselves.  No wonder Obama has been reading one of Cannon's five biographies of Reagan during the Christmas holidays.

Reagan once said:  ''What I would really like to do is to go down in history as the President who made Americans believe in themselves again''.

By virtually all accounts, Reagan succeeded.  Today, however, represents different circumstances.  It remains to be seen whether Obama can boost American morale at a time of US decline in an increasingly multi-polar world.

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Government red tape puts us in house bind

According to the English humourist Auberon Waugh, the urge to pass new laws must be seen as an illness, not much different from the urge to bite old women.

Perhaps Julia Gillard recognised this in abandoning the cash-for-clunkers scheme.

Designed to reduce greenhouse gas emissions, this was to give new car buyers a $2000 rebate to scrap pre-1995 cars.

Premature scrapping of serviceable older cars creates a used-car shortage, and this raises the prices of used cars that are mainly bought by younger and poorer people.  Giving cash for clunkers would have allowed politically powerful people to parade a phony environmental sensitivity while getting others to pay the cost.

It is not the only example of such hypocrisy.

Self-selected political elites also use environmental concerns to prevent housing developments.  Even though urban land comprises only 0.5 per cent of Victoria, and even less for Australia as a whole, regulations restrict city growth.

This creates housing land shortages, increases the cost of land for housing and inflates new house costs.

People without their own homes lose out.  But existing homeowners benefit from increased house prices and can therefore have much to gain from supporting planning restraints in the name of environmentalism.

Last week, the think-tank Demographia released price data for detached housing in 325 housing markets in seven countries.  Prices in Melbourne and the rest of Australia were, except for land-starved Hong Kong, the highest among the countries examined.

The analysis showed that to buy the average Australian house in Sydney, Melbourne, Adelaide or Perth required 7.1 years of the average household's income (nine years for Melbourne).  For comparable US cities, it is 3.3 years, and in Britain, where houses are smaller, 5.1 years.  For the sample of 82 world cities with populations over one million, Melbourne's house prices are the 79th highest (Sydney's are 81st).

Demographia demonstrated that government planning restraints creating a scarcity of housing land were the overwhelming cause of Australia's high prices.

Self-proclaimed housing experts have denied that high housing prices in Australia result from our planning and regulatory system.  Some have said high prices in Australian capital cities are seen in all seaside cities.

Yet house prices in US coastal cities like Houston and Tampa are a third of Melbourne's.  Inland Bendigo's house prices are actually double those of Houston, the world's space research centre.

Some said high Australian house prices stem from low interest rates making them more affordable.  Yet interest rates are far lower in Britain, the US and Canada, but houses are cheaper.

Others blamed high house prices on demand pressures from immigration.

But low house prices in cities like Houston, Dallas and Atlanta are accompanied by far higher immigration levels than in Australian cities.

The Demographia analysis shows the high Australian house costs are overwhelmingly caused by the high costs of land.  For a block on the Melbourne outskirts planning regulations, on my reckoning, add $80,000 to the cost of a new house.

Government intrusion in our lives reduces overall prosperity and often the poor face particularly adverse impacts.

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Fiscal reckoning looms for ''low taxing'' Labor

Julia Gillard is facing a make-or-break year.  This is the last year of leeway before the federal budget has to be in surplus.  In 2012-13 the Gillard government has to budget for a surplus, and deliver it too.

Gillard gave a rather strange speech to the Committee for the Economic Development of Australia this week.  She made all the usual noises:  world-class education and Australia's a great nation and so on.  She also claimed her government was a low-taxing government and that in 2011-12, this coming fiscal year, commonwealth revenue as a share of gross domestic product would be lower than for every single year of the Howard government era.

While the literal meaning of Gillard's words is true, the meaning of her statements is fundamentally misleading.  Treasurer Wayne Swan has been telling anyone who will listen that government revenue has collapsed due to the effects of the global financial crisis.  The Rudd-Gillard government has been ''low-taxing'' because its efforts to be high-taxing have more or less failed;  revenue sources dried up during the GFC.

The then Rudd government did promise in its first budget to keep taxation as a share of GDP below the 2007-08 level.

But for the ''small'' problem of the budget deficit, it looks like the Rudd-Gillard government has met that promise.  Budget deficits are deferred taxation -- the money will have to be paid back at some point through increased taxation.

The Howard government tended to run budget surpluses, which are either deferred spending or deferred tax cuts.  A government that runs a surplus is taxing too much, while a government that runs a deficit is spending too much or, perhaps, taxing too little.  Of course Gillard would have us believe the Howard government generally spent too little, although not even Rudd, who famously said, ''This reckless spending must stop'', thought so at the time.

In order to compare like with like, it is necessary to adjust the revenue figures over time, taking into account over-taxation and under-taxation.

To that end I had a look at commonwealth receipts as a percentage of GDP and subtracted surpluses and added deficits.  It quickly became apparent the current and deferred tax burden under the Gillard government in 2011-12 will be higher than in any year during the Howard era.  Debt and deficit is being used to claim superior economic management when the increased tax burden has simply been shifted to future years.

Yet Gillard couldn't resist the temptation to pillory the Howard government for excess spending in its last term of office.  Indeed it was high, and the Gillard government has committed to a spending cap of about 2 per cent growth.  Yet we are invited to believe that the Rudd-Gillard government has been disciplined in its spending.

Over the life of the Howard government spending grew, in real terms as measured by CPI, by 3.54 per cent on average each year.  The equivalent figure for the Rudd-Gillard government, including over its forward estimates, is 3.32 per cent.  When I look at real spending in non-farm GDP deflator terms, Howard government spending grew only by 2.9 per cent while the Rudd-Gillard government equivalent is 3.3 per cent.

We can't even conclude they're as bad as each other.  The Howard-era data is historical;  most of the Rudd-Gillard-era data is forecasts.  If the Gillard government is as disciplined as it hopes, it will be as bad as the Howard government was.  But fiscal discipline has been foreign in Australian public finance for some time.

Why is this year particularly difficult?  This coming fiscal year requires the federal government to cut spending in real terms (as measured by CPI).  All governments like to decrease the rate of spending and claim that as a budget cut.  That won't be enough this time.  Tax receipts are more or less at the long-term average while spending is way above the long-term average.  A claim that the government is low-taxing is clearly the start of a campaign to butter up the electorate for increased taxes.  We have already seen the flood levy, and the carbon tax and a bank super-profit tax are not far behind.  These taxes will breach the Rudd government's first budget promise.

Government spending over the past few years has been undisciplined.  Rather than being timely, temporary and targeted, the spending has gone on too long and too indiscriminately.

Swan, who foolishly promised that ''come hell or high water'' the budget would be in surplus in 2012-13, needs to deliver.  Given the original promise of a cap on tax receipts, the surplus can only be achieved by spending cuts.  We will know on budget night whether he can deliver -- anything less than real cuts of about 1.1 per cent of GDP will indicate yet another broken budget promise.

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The truth about energy subsidies

Is the Australian Government subsidising the fossil fuel industry?

So said the Climate Institute, when they heard Julia Gillard was scrapping solar schemes to pay the flood bill.

This claim shouldn't be casually dismissed.

Because it's one thing for fossil fuels to be cheaper and more efficient when all energy technologies are competing on a level playing field.

But it's quite another if government policy is artificially boosting the competitiveness of fossil fuels.  If, in other words, taxpayers' money is being used to boost the dirtiest technologies and suppress the cleanest.

Would it be unfair to describe this argument as typically ''neo-liberal''?  The Climate Institute's claim suggests a free market in energy, where the Government treats all forms of energy production neutrally, would be a more environmentally friendly one than what we have today.

One writer on Greenpeace Australia's website condemned ''taxpayer handouts'' being used to ''line the pockets of the wealthy fossil fuel industries''.  Remove corporatist government subsidies -- instantly get a greener Australia.

It's a shame these claims don't really hold up.

The definitive version of the subsidy argument is contained in a 2007 Greenpeace paper written by a researcher at the University of Sydney's Institute of Sustainable Futures.

And the Institute of Sustainable Futures' definition of what constitutes a subsidy to the energy industry is broad, to say the least.

Take, for instance, what the paper describes as the largest subsidy to the energy industry -- roads.  In the author's view, roads are a government subsidy to private transport, therefore a subsidy to petrol, therefore a subsidy to fossil fuels.

Never mind buses use roads too, or bike lanes are being built into roads across the country -- two climate-friendly modes of transport which would struggle without roads.

But, on the facts, this subsidy claim is wrong.  The Department of Infrastructure's own figures show the money raised by road and vehicle-specific taxes ($16.2 billion in 2006-07) is much more than is spent by all levels of government on roads ($12.1 billion the same year).

Anyway, it's hardly reasonable to describe government investment in roads as a direct subsidy to the energy industry.  Unless you are happy to describe government investment in health as a subsidy to the pharmaceutical industry.  Or government investment in schools as a subsidy to the whiteboard industry.

Certainly, other subsidies exist, but it's unclear why they would be of deep concern to environmentalists.

The Greenhouse Gas Abatement Program, for one.  Or the Low Emissions Technology Demonstration Fund, which supports a range of carbon capture projects.  There are more.

These are programs specifically designed to make energy more environmentally friendly.  It's a bit rich to insist, on the one hand, the Government should encourage cleaner energy, and, on the other hand, criticize the Government for implementing projects which try to.

It's hard to see many environmentalists congratulating a government which eliminated those sorts of programs.  Sure, Greenpeace would like those programs to be replaced with fully renewable energy programs.  But subsidies are either bad or good.  It seems Greenpeace would like their elimination to be contingent on introducing other subsidies.  Hardly the most principled anti-subsidy position.

Complicated tax arrangements for company cars are often cited as subsidies, without the proviso that those arrangements are designed to ensure company cars are treated exactly the same as all other forms of income.

Similarly, some environmentalists are also upset about fuel tax concessions for primary producers being available to miners.  But, like it or lump it, miners are primary producers too.  The fuel tax concession is not an energy subsidy.  Quite the opposite.  It's a measure to ensure the tax office treats all forms of production the same.

Instead, the environmentalists just want to penalise miners for existing.

Nor does Australia's lack of a carbon tax constitute a subsidy for energy.  Well:  any more than our lack of an idiot tax constitutes a subsidy for idiots.  The Gillard Government argues the externality of carbon pollution should be internalised through some sort of price mechanism.  But the absence of that mechanism is not a ''subsidy'' in any useful sense of the word.

This is not to say that, globally, subsidies to fossil fuels aren't a problem.  The 20th century's mania for central planning left its mark on the energy sector.

Electricity and petrol was as subject to misguided industry policy as any other industry.  The global energy landscape is a mesh of tax breaks, tariffs, quotas, preferential planning and regulatory controls price controls, grants, government investments, rebates, and outright subsidies.

Government support for fossil fuels in the last century was as fashionable as government support for renewable energy is today.

If we were smart, we would approach this modern fashion much more cautiously, keeping in mind the perverse consequences of the fashions of past.

According to the OECD, eliminating global fossil fuel subsidies would reduce energy-related carbon dioxide emissions 5.8 per cent by 2020 compared to the baseline scenario.  Because subsidies to favoured industries are inefficient, the world economy would be richer to boot.

The OECD is very careful defining what constitutes a subsidy.

The Climate Institute and Greenpeace aren't.  They want to make a political point:  that free marketeers, so diligent finding government programs to cut, deliberately ignore taxpayers' money being handed to their fossil fuel mates.

Cutting those subsidies would be the lowest possible hanging fruit of emissions reduction.  If they existed, doing so would have bipartisan support.

But apart from a few emissions reduction programs -- which most environmentalists would oppose eliminating -- they are nothing more than green mythology.

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A vision worth voting for

Australian politicians have lost the will to embark on ambitious and meaningful reforms.  Instead, the default position of governments is to tax, regulate, and micromanage.

Our governments appear to have become be so afraid of voters -- or bad opinion polls -- that Australia has fallen into a policy vacuum.  Coherent policy vision has been replaced by stunts dressed up as policies, and tactical media responses to the issue du jour.

Take Prime Minister Gillard's announcement of the flood levy.  The problem with the levy is not the cost it imposes on Australians, which is fairly minimal for most of us.  The real problem lies in the fact that it is more evidence of lazy policy, designed as a quick fix to an unanticipated budget hole.

A supposedly one-off, short-term levy is not a solution.  It's a band-aid, and it's about temporarily convincing voters that the Government are good economic managers who can return a budget surplus.  This is the politics of maintaining appearances and disguising the underlying reality;  it's like your 30-something-year-old colleague with the BMW who still lives with his parents.

Australian aversion to long-term reform is particularly evident when it comes to tax policy.  The Henry Review represented the first serious effort at tax reform since the GST was introduced in 2000, and even then it was a compromised enquiry, hamstrung by an unwillingness to consider changes to consumption tax, and further compromised by the Government's unwillingness to deliberate some of its more politically difficult recommendations, like flatter income tax rate schedules.

Of the very few Henry Review policies the Government did consider, the mining tax became decidedly less of a priority the minute it met with opposition.  Those voters who believed in the necessity of the tax must've been gratified to learn that ensuring ''all Australians get a fairer share of the benefits of the boom'' was only a priority as long as it looked like an easy sell.

We could go on.  The Rudd/Gillard Government has represented a disappointing nadir for conviction-based politics.  The strategy is achingly simple:  identify a perceived source of voter concern;  implement a band-aid solution with much fanfare;  quickly junk the policy when it is revealed that it costs too much, doesn't fool enough voters, or is obviously completely ineffectual.  To wit, Grocery Watch, Fuel Watch, the pink batts scheme, Green Loans, and most recently, Cash for Clunkers.

This is not to suggest that the Opposition is any better.  Tony Abbott is keen to brand the Government's flood levy as a ''great big new tax''.  And that would be fair enough, if he were consistent, but voters don't seem to be buying the rhetoric.  Perhaps the public might be more tolerant of the Opposition's war on taxes if it hadn't proposed quite so many.  Abbott's memory might be short but voters have not forgotten such gems as the Ansett levy, the gun buy-back levy, and, a personal favourite, the milk levy;  because the dairy industry couldn't possibly survive the vagaries of deregulation on its own.  Abbott also manages to conveniently leave out the Opposition's own paid parental leave scheme, which, as a 1.5 per cent levy on company incomes over $5 million, certainly qualifies as ‘great', ‘big', ‘new' and a ‘tax'.

Tony Abbott can make legitimate complaints about the Government's willingness to increase taxation without engaging in substantive tax reform.  But when his own record -- in government and in opposition -- is so poor, his complaints tend to ring a little hollow.

As we become more confident with perceiving ourselves as consumers in a global economy, so too do we tend to commodify our politicians.  More than ever, we are unwilling to give our politicians the benefit of the doubt when it comes to poor performance;  it seems we've realised that we can indeed vote for new ones after only one term.  Political brand loyalty has gone the way of the Nokia phone.

For some, this may seem to lend credence to the current political strategy of appeasing short-term voter irritations.  But this is a paternalistic view that conceives of voters as self-interested and unable to see a few months past their noses.  Voters are smarter than that.  The 2010 federal election was a perfect example of just how uninspiring the current brand of politics is:  a non-result for an election characterised by non-policies.

One would've thought that both the Government and the Opposition had learnt in 2010 that we expect more.  And yet, last Thursday at the National Press Club we saw exactly the same dispiriting cycle.  Cash for Clunkers quietly and unceremoniously dumped, masked by the announcement of the flood levy -- a cover-up policy, a lazy tax to disguise an unwillingness to make budgetary cuts.  From Tony Abbott, even more of the same, opposition without an alternative.

The challenge for both Government and Opposition in 2011 is to give us a vision worth voting for.

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