Government regulators being outflanked by technology

Governments cracking down against the likes of the Uber taxi-booking app, and other online tools, risk ultimately waging a losing battle against technologies empowering consumer choices.

Complaints about the performance of the taxi industry are legion, not only in Canberra but in other capital cities and large regional towns across Australia.

Government licensing regimes to operate a taxi have severely curtailed the supply of taxis for the paying public, characterised by astronomical licence fees running into the hundreds of thousands of dollars across the states and territories.

In a 2010 study of the ACT taxi industry it was estimated that the average fee for perpetual taxi licences leased from the government was more than $270,000.

Similar studies indicate the licence fee to operate a taxi in Sydney is over $350,000, and more than $400,000 in Melbourne.

The effects of inflated government licences upon the industry are significant, as owners pass hefty fares onto customers to help pay for the licence whereas many taxi drivers earn a pittance, leaving them on a precarious fare-by-fare existence.

The large licence fee has long created a significant barrier to entry into the taxi industry, contributing in turn to poor service availability (especially on weekends), unkempt vehicles, and some poorly trained drivers with little awareness of local conditions.

For the privileged owners of taxi licences, though, there is very little incentive to change this unsatisfactory situation, because they sit on a government-created goldmine whereby they lease out their licence rights to taxi operators for a princely sum.

Where there exists inflated fares and heavily constrained supply, eventually aspiring new entrants often seek to enter the industry and outperform the complacent incumbents, providing customers with a better, and cheaper, service in the process.

Enter the latest alternative, offered through smartphone community ride-sharing apps such as Uber, which connects people with drivers, not necessarily of the licensed taxi or hire-car varieties, for a cheaper price.

In response to complaints from the taxi industry, the NSW government declared uberX, the service run by non-licensed drivers, illegal under that state's Passenger Transport Act, whilst the Victorian government is issuing $1700 spot fines to Uber drivers.

While governments may have demonstrated a swift regulatory zeal to protect the taxi monopoly all of their own making, they are in many cases well behind the "sharing economy" trend behind apps and online applications that threaten heavily regulated industries.

In the US, various state and local jurisdictions have been attempting to protect the established hotel industry by stifling services provided by the Airbnb and Roomarama apps, which allow people to share their own apartment or home with a guest.

Another app has emerged, EatWith.com, which connects people wanting to eat cooked meals in other people's homes, an online trend which, on this occasion, has drawn the ire of food safety regulators in the US and elsewhere.

There is also the not insignificant matter of the open source, peer-to-peer Bitcoin global digital currency network, whose existence threatens the state's monopoly on money and has left regulators struggling to decide if Bitcoin is currency or property for taxation purposes.

In addition to these technological developments is the financing innovation known as "crowdfunding",which allows individuals and groups to advocate for causes that other people may be prepared to directly donate to online.

As demonstrated in the cases of successful crowdfunding efforts by the Climate Change Council, and organisers of the Queensland Literary Awards, it is entirely conceivable that a variety of functions financed by government can be readily transferred to civil society for subsequent crowdfunding.

The pitched battles between shared economy participants and, to a lesser extent, crowdfunders with governments, both here and abroad, provide a few object lessons about the role of government in the modern, innovative world.

The responsiveness of governments to the demands of established industry players to crimp emergent e-competition illustrates, in no uncertain terms, that the institutions of regulatory design and enforcement often promote the very interests of the regulated industries.

Contrary to the oft-expressed claims, regulatory objectives are not necessarily directed toward the generalised public interest of all members of the community, but against politically disconnected industry competitors and, through that, the general public in their capacities as consumers.

In addition to perverse incentive effects posed by the "regulatory capture" problem, the suppliers of technological innovations presented to the marketplace will, more often than not, be a few steps ahead of government efforts to stifle them on behalf of established corporate players.

And the romantic socialist idea that innovation can thrive under very prescriptive government regulations is little more than a pipe dream, since political actors lack the wherewithal to establish their own industries, and direct structural changes, for the benefit of consumers.

Rather than underwrite monopolies and cartels through maintaining discriminatory barriers to entry, shouldn't governments instead embrace the sharing economy which fosters service diversity, lowers transaction and other costs, and gives consumers what they want?

To do so would possibly necessitate a fundamental revision to the regulatory stance assumed by the public sector, to instead preside over abstract, general legislation that does not discriminate against the onset of new, and often unforeseeable, technological applications inducing winds of "creative destruction" through markets.

This "no fear, and no favour" approach to regulation would be in stark contrast to the flood of prescriptive, and in some cases even prohibitive, legislation informed by political "technopanics" in response to new waves of innovation which creatively and spontaneously emerge from economic processes.

There is also a plausible argument for the frequency of regulatory reviews to be escalated rapidly in acknowledgement of the rapid pace of technological change, such as that typified by Moore's Law, which states that computer processing speeds double every two years.

Sunsetting provisions could be affixed to government legislation, ensuring that statutes are reviewed every two years, or thereabouts, helping to ensure that public sector regulatory standards become more relevant against ever-changing economic and social circumstances affected by technological innovations.

Government might well pose as a great, even mortal, threat to elements of the peer-to-peer sharing economy, as it was for the likes of Napster and Silk Road before it.

However, for as long as people keep demanding cheaper and better quality products, the odds are in favour of the prospect that technology just might drive politics into the ditch of economic irrelevance.

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A carbonless economy comes at too high a price

Economists estimate that if increased carbon dioxide emissions raise global temperatures by a degree or two over the next century, world income might be 1 or 2 per cent lower than it would otherwise be.

In the context of overall income doubling over the same period that's tiny, especially since the costs do not account for the massive disruption in moving to a carbonless economy.

For electricity alone, Australia's energy taxes and regulations increase bills by 25 per cent.

Labor and the Greens want to see emissions falling to 20 per cent of their current levels.

This could only be met by blasting our living standards to below those of our great grandparents.

Even then, meaningful emission reductions would require the rest of the world to adopt similar measures.

The fact is that cheap energy is the key to modern living standards.

Without this everything from the ABC to zucchinis would be as unattainable now as they were 200 years ago.

Terry McCrann correctly pointed out that removing energy taxes and renewable requirements on electricity is more important to the economy than passing the Commonwealth Budget.

This week Victoria moved in the wrong direction when Energy Minister Russell Northe spinelessly surrendered to green alarmism by banning gas drilling.

Last week, however, he took a positive step by closing Victoria's Energy Efficiency Target (VEET).

Abandoning the scheme saves Victorians $700 million over the next 15 years and reduces household electricity bills by $50 a year.

The VEET scheme was introduced by the Labor Government which idiotically claimed that without it Victoria would obtain insufficient industry development.

One spin-off, a taxpayer investment in a windmill blade factory, was to take the world by storm.

Like all such Pollyanna projects dreamt up by wide-eyed politicians, it closed after a few months.  Since then another $140 million has been wasted on pie-in-the sky low emission proposals under the state's grandly but inaccurately named Energy Technology Innovation Strategy.

The VEET also helped to attract $2 billion investment in hopelessly uneconomic renewable energy which costs three times its worth in electricity production.

Victoria is following the Commonwealth in lightening the regulatory load on electricity.

As well as repealing the carbon tax and reviewing the damaging Renewable Energy Target, Canberra has cut $5 billion in carbon-reducing subsidies.

This entails dismantling the Australian Renewable Energy Administration (ARENA), the Clean Energy Finance Corporation and monies spent on chasing the mirage of carbon capture and storage for coal.

However, in setting up these bodies, the Gillard/Milne government sought to make them immune from any future government's attempts to curb their wasteful spending.

And they ensured the agencies were led by green zealots, supported by over-remunerated public servants — the Clean Energy regulator gets $486,000 a year and the head of ARENA $358,000.

Government measures to reduce carbon dioxide emissions have proved costly to the economy and the consumer.

The process of dismantling them has commenced but ALP obstructiveness will make reform difficult.

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Inquiry a chance to roll back civil rights curbs

The freedoms inquiry presents the Abbott government with a real opportunity to wind back restrictions on civil liberties and fundamental legal rights.

Commonwealth Attorney-General George Brandis has asked the Australian Law Reform Commission to review all commonwealth legislation to "identify provisions that unreasonably encroach upon traditional rights, freedoms and privileges".

The inquiry has a wide brief.  It will identify laws that restrict liberal democratic rights such as freedom of speech, religion, property rights, association and movement.  As importantly, the ALRC has also been asked to identify provisions that grant legislative power to the executive, reverse the burden of proof, apply retrospectively, and undermine the right to silence.

These are areas in great need of repair.  For example, forthcoming research shows there are 112 current commonwealth laws that restrict the right to silence.  These provisions, and many others that limit fundamental legal rights and civil liberties, must be removed if the government is serious about increasing liberal democratic freedom.

It's doubtful the ALRC has ever been given a more important task.  Expanding our liberties is a job that will ultimately fall to the parliament, but identifying the provisions that give rise to these restrictions is a critical first step.

This presents a serious test of competence for the ALRC.  Its most recent foray into the public debate gives cause for concern.

Can the body that advocated a massive new restriction on free speech earlier this year in the form of a privacy tort really be trusted to advise on existing laws that restrict our freedoms?  It's a valid question given the lack of a basic appreciation for the importance of liberal democratic rights within the organisation.

Even Labor recognised the significant problems with a privacy tort.  As attorney-general in 2013, Mark Dreyfus acknowledged that allowing people to sue each other for breach of privacy had restricted free speech in other jurisdictions.

But in March, Australian Law Reform Commissioner Barbara McDonald doubled down and publicly advocated for the new tort.

While in opposition in 2012, Brandis attacked Labor's push for a privacy tort as part of a "gradual, Fabian-like erosion of traditional rights and freedoms in the name of political correctness".

It was an excellent observation.  And the fact that the freedoms inquiry has been launched demonstrates a stark contrast of intentions between this government and its predecessor.  Under the previous Gillard government, the trend was very clearly in the opposite direction — it was away from freedom rather than towards it.

This authoritarian streak was expressed in the form of several dangerous policies.  Perhaps the most egregious was then attorney-general Nicola Roxon's dangerous Human Rights and Anti-Discrimination Bill 2012.

This extraordinary bill would have made it unlawful to offend or insult another person on the basis of their political opinion.

The bill would have presumed defendants to be guilty until they proved their innocence, and they would have to pay costs even if they were found to be innocent.

At the same time, then communications minister Senator Stephen Conroy was attempting to impose massive new government controls over the media through his media regulation proposal.

The list goes on.  The proposal to force internet service providers to store data on customers' internet usage through a mandatory data retention regime, the proposal to introduce an internet filter, and other proposed laws would have placed restrictions on some of our most important human rights.

Each of these laws would be caught by the terms of reference now in the hands of the ALRC.  And we're all better off that none of them became law.

But there are dozens of existing laws that do restrict these freedoms, and they must be repealed.  Section 18C of the Racial Discrimination Act is the most prominent example.  To the Abbott government's credit its exposure draft legislation represents almost a full repeal.

The freedoms inquiry represents a departure from the unrelenting willingness of previous governments to place increasing restrictions on liberal democratic rights.  The ALRC inquiry is a welcome first step but it won't achieve anything without action from the government.

The Abbott government must prosecute the case for nothing less than liberal democracy — that human rights don't need to be rebalanced, they need to be restored.

Labor's feeble appeal to enterprise

In Chris Bowen's budget reply speech to the National Press Club last Wednesday we were introduced to an apparent change in direction for Labor's economic policy, with welcome acknowledgment of the important role entrepreneurs can play in Australia's future economic growth.  But it was hard not to see the disingenuousness in Bowen's rhetoric given how damaging the previous Labor government's policies were to Australia's entrepreneurial culture.

The 21,000 new regulations introduced during the six years of Labor government — leading to Australia being ranked 128th in the world in terms of "the burden of government regulation" by the World Economic Forum — are testament to this.  While the regulatory burden impacts all businesses, it inevitably falls hardest on the smallest operators that lack the resources, or the time, to complete the seemingly endless stream of government paperwork.

Nonetheless, some of the ideas put forward in Bowen's speech must be welcomed, particularly creating a new visa class for entrepreneurs.  Such moves have had success overseas, and the idea of providing visas for job creators would be easy to sell to the electorate.

Bowen is also right to highlight the inane regulations that restrict the use of crowdsourced equity funding in Australia.  Crowdfunding websites allow innovative start-ups and rapidly growing companies to access capital from a diversified group of investors through online channels.  As it stands the Australian Securities and Investment Commission categorises crowdfunding websites as an unauthorised financial service.  However, this issue has been apparent to Australian entrepreneurs for a long time, much of it while Labor was in government.  It is therefore strange to see Bowen seemingly chastise the Abbott government for its lack of action, when Labor also failed to act while in office.

Indeed, it is hard not to see the hypocrisy in Bowen's attempt to position Labor as the party of entrepreneurs and small business.  His government oversaw the implementation of regulations that saw upfront taxation of employee share options in 2009.  Cash starved start-ups rely on these schemes to attract high-quality employees.  By imposing the tax in advance, the Labor government added a layer of red tape that many tech start-ups found difficult to overcome.

REGULATION ACTS AS A DISINCENTIVE

In fact, a recent survey by Deloitte and Norton Rose found that 82 per cent of technology businesses found the regulation so complex that it acted as a disincentive to issuing share options.  Speaking earlier this year, the co-founder of Atlassian, an Australian tech company recently valued at $3.3 billion, Mike Cannon-Brookes, noted it was the primary roadblock to tech start-ups in Australia — "everything else is secondary," he said.  But Labor showed complete disinterest in the damage caused by this impost.

Changes in industrial relations were equally damaging.  The introduction of the Fair Work Act in 2009, and the bloated bureaucracy that has accompanied it, has strangled small business with onerous regulation and reduced flexibility.  In its first full year of operation, there was a 110 per cent increase in the number of cases brought before the Fair Work Commission.  Further overreach of the system in the form of anti-bullying provisions which came into operation on January 1, introduced by the previous Labor government, will no doubt add to the litigious nature of the system.

The difficulties faced by entrepreneurs and small business owners do not stop there.  2012 research conducted by Philip Lignier and Chris Evans found that smaller enterprises with less than 50 employees spent an average of $28,000 and around 500 hours a year just to comply with their tax obligations.

The international literature in this area shows beyond doubt that the most effective mechanism to increase entrepreneurial activity within a country is to increase economic freedoms.  Government programs are inevitably misdirected and crowd out the private sector from doing what it does best.

Bowen described the government as one "that has no faith in its people and no confidence in our ability to meet the challenges".  But he fails to realise that having faith in entrepreneurs means getting government out of their way.

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Chifley's time bomb 70 years in the making

Joe Hockey's father named his son "Joseph Benedict" after Ben Chifley.

Little did the family expect their child to be struggling with the legacy of his namesake at the most critical moment in his political career.

Hockey's first budget is haunted by a political bait-and-switch Chifley made way back in 1942 and 1943.

The story goes like this.  Wars are incredibly expensive.  During WWII, the Australian government inflated the currency and borrowed massive amounts of money.  Nevertheless, when Labor took power in 1941, there was still a huge budget shortfall that needed to be addressed.

And like the Coalition today, Labor had made much political capital opposing the previous government's taxes, particularly those levied on low income earners.

Once in government, the new Prime Minister John Curtin doubled down.  When the first uniform tax case came before the High Court (which effectively eliminated state income tax in favour of Commonwealth income tax) Curtin promised the electorate that the Commonwealth's new power would not be used as an excuse to raise income taxes.

Labor's no-tax pledge was unsustainable.

Throughout 1942 it became clear to Curtin and his treasurer Chifley that the government had to close their huge revenue-expenditure gap.

There was a war to be fought, so cutting spending was out.  Printing money was out too.  Inflation was already a problem.  There would have to be some additional taxation.  And some would necessarily hit those on incomes below £400 per year.

(There was another rationale for higher income taxes being pushed by the government's young Keynesian advisors:  the need to suppress excess consumer spending during war.)

The solution devised by Chifley was a classic example of policy misdirection.

For the previous decade, parliament had been debating whether to introduce a national social security scheme.  One of the key questions in this debate was whether it should be funded by general taxation, as Labor traditionally favoured, or individual contributions, as the conservative Lyons government had proposed in the late 1930s.

So when Chifley announced that they would increase income taxes on rich and poor alike, they also announced a "National Welfare Fund" alongside it.

This National Welfare Fund would fund welfare measures like pensions, unemployment relief, child endowments, even health care.  The fund is often seen as the launch of Australia's welfare state.

Unlike a contributory scheme, the fund would be financed by the new income tax increases.  But there were two tricks.

First, Chifley said the revenue from the tax increase was specially earmarked for the National Welfare Fund.  Thus Labor wasn't breaking its promise not to increase the burden on low income earners — they would be getting social security for their money.  (Think of the fund like our Medicare Levy today.)

And second, most of the great new social services weren't to start until after the war.  Cabinet agreed that only £5 million of the estimated £40 raised would be directed towards immediate social spending.  Money is fungible.  The rest could quietly be used for the war effort.

As the historian Rob Watts points out in his book The Foundations of the National Welfare State, what looks like groundbreaking Chifley welfare reform was really just a smokescreen for unpopular wartime tax rises on lower income earners.

The Menzies government folded the National Welfare Fund money into general revenue a few years later.  (It is good budget practice not to hypothecate specific revenues to specific programs).  But the fund remained in name until the 1980s.

The social contract has always been a complex mish-mash of popular mythologies about what the state owes to the citizen.  We are still living with the political consequences of Chifley's clever little political ploy.

His scheme made it seem like the Australian tax system was a quasi-contributory and fully-funded insurance program.

One former Department of Social Security employee summed up this belief well in Green Left Weekly:  "In the late '60s and early '70s, many applying for the pension would say, 'I'm only getting back the money I paid into the National Welfare Fund'."

The National Welfare Fund has long passed into historical obscurity.  But the mythology of welfare contributions it engendered remains — one that imagines the welfare state as a giant piggy bank.

In 2014, Joe Hockey has come smack-bang up against Chifley's fiscal illusion.

Hockey says he wants to end the Age of Entitlement.  But welfare measures like the pension feel a lot less like unjustifiable entitlements to those who believe they've already paid for state retirement benefits.

As one aggrieved person told the Treasurer on Q&A, "many pensioners have worked all their lives and paid tax in order to receive the pension and Medicare".

In other words, the piggy bank model of welfare is not about the well-off supporting the less fortunate.  It's about churning everybody's money back to them.

So there's no place for means testing if welfare is less an old-age safety net and more a de facto retirement savings account.  (In fact, quite the opposite.  The more you put in the piggy bank the more you deserve what you get out).

If the welfare state is just a big piggy bank, there is no case — for instance — to include the family home in the pension assets test, something the Audit Commission recommended.

It's easy to ridicule people living in multi-million-dollar homes clinging on to the pension.  Yet, thanks to Chifley, many Australians worked and paid taxes all their lives believing that was exactly what the social contract made possible.

Is Chifley's welfare-system-as-piggy-bank good policy?  Certainly not.  Over time it will fade away as superannuation carries the burden of the pension system.

But right now, as Joe Hockey has learned, it is a very real constraint on economic reform.

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Poor are not carrying the budget

"Poorest families pay most in the budget" was the headline in Thursday's Sydney Morning Herald.  That headline exactly demonstrates why it will be so hard for Tony Abbott (or anyone else) to repair the federal budget.

Treasurer Joe Hockey was right to talk about the need to end the age of entitlement.  The problem is, though, that two decades of prosperity have made the public accustomed to their entitlements and have made politicians accustomed to handing out those entitlements.  It could be years before the expectations of the public catch up and correspond to fiscal reality.  Based on the reaction to the budget so far, that transition could be quite traumatic.

Mr Hockey's first budget made only about a quarter of the changes necessary to secure the country's fiscal sustainability.  Last week's budget was the start of a process that will continue for years.

The Herald's headline was to an article explaining how analysis from the National Centre for Social and Economic Modelling (NATSEM) at the University of Canberra showed "the poorest 20 per cent of Australian families will pay $1.1 billion more into government coffers than the richest households as a result of the budget, highlighting the huge inequity in the government's four-year blueprint for fiscal repair".

Included in the article were calculations of the budget impact on the benefits received and taxes paid by different income groups.

A working couple earning in total $60,000 a year with two children would by 2018 potentially see a reduction of 11 per cent in their disposable income.  Meanwhile a similar couple earning $200,000 would be unaffected.

NATSEM's figures might be right, but it's quite wrong to, therefore, claim they prove the budget is inequitable.

LESS IS NOT ALWAYS LESS

There's a world of difference between the government giving you less of something that isn't yours to begin with, and the government taking something from you that is yours in the first place.

What NATSEM also showed is that the earning of $60,000 a year will get an additional $4736 in welfare benefits, taking their total disposable income to $64,736.

A couple earning $200,000 will pay $67,547 in tax, making their total disposable income $132,453.

The alleged inequity of the budget lies in the fact that the couple receiving more from the welfare system than it pays in taxes will have its benefits cut, while the couple paying the taxes that pay for those benefits won't be required to pay even higher taxes.

This is a complete perversion of any notion of equity.  Somehow equity is now deemed only to apply to people receiving welfare paid for by the taxes imposed on others.  No one talks about whether it's equitable for the government to take close to half of what some people earn.

The misconception about the meaning of equity is reflected in the comment in the Herald that "the poorest 20 per cent of Australian families will pay $1.1 billion more into government coffers than the richest household..."

Nothing could be further from the truth.  The poor don't pay anything into government coffers.

BENEFIT CUT NOT A PAYMENT TO GOVERNMENT

If the government previously gave you $200 in welfare benefits and then because of budget cuts the government only gives you $150, you don't pay $50 difference to the government.  All that's happened is that you've lost a benefit you once had.

As NATSEM's figures demonstrate, even after the inequity of this budget, in four years time a couple with two children that has zero earnings from employment will have a disposable income of $43,547 — all of which will be government welfare.

A couple with earnings of $40,000 will have a disposable income of $58,120, again the difference between their earnings and their income being the $18,120 they receive in welfare.

It's quite legitimate for the welfare lobby to argue about, for example, whether welfare payments are adequate and what should be required of recipients of welfare.

But the welfare lobby should be held to account for its claims that a reduction in welfare benefits is somehow a payment to the government.

The welfare lobby should also not be allowed to get away with demanding that the only way a reduction in welfare benefits can ever be equitable is if taxes go up at the same time.

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Dollar-based aid debate misses the primary point

The furore surrounding Australia's foreign aid budget misses the point.  Rather than a facile comparison of dollar figures, what we really need to talk about is the purpose of our aid program.  I don't mean our aid effectiveness but our aid philosophy.

The thinking behind the program is that poverty is a technical problem to be solved by social engineers and technical experts.  This view holds that for poor people to become healthy and rich, they need a certain number of vaccines, a certain variety of fertiliser for their crops or a certain type of infrastructure.  Proponents of this argument are dismayed by the budget because they believe foreign aid can make a poor country rich if we just gave a bit more.

However, rich countries have given poor countries $US2.3 trillion in aid since World War II, and the vast majority of them remain poor.  Indeed, economists William Easterly and Ross Levine believe that, on average, African countries were as poor in 1995 as in 1960 despite receiving hundreds of billions of dollars in foreign aid.

Government-funded foreign aid has failed for a range of practical reasons.  Aid agencies suffer from the same practical shortcomings as government departments:  they lack accountability, information and the incentive to do the job they were created to do.

But the real reason government-funded foreign aid has failed is philosophical.  Foreign aid's technical experts and social engineers operate and implement their programs with and through the mostly authoritarian governments of developing countries.  But it is these governments that have created poverty in the first place.  To leave poverty behind, poor people need individual rights and legal, economic and political institutions that protect them from these governments and allow them to fulfil their destinies unimpeded:  individual rights such as freedom of speech, freedom of association, freedom of religion and economic freedom;  and institutions such as the rule of law, free markets, private property rights, and democratic and decentralised government.

China's evolution towards a more open economy is a prime ­example of how institutional reform and even a limited improvement in individual rights have lifted hundreds of millions out of poverty.

Botswana made a commitment to free markets, private property rights and the rule of law in the 1960s.  It went from being the third poorest nation in the world to a middle-income country by the 90s and is one of Africa's few success stories.

And the West managed to develop from being as desperately poor as anywhere in the world to its present level of prosperity through the development of individual rights and institutions.

The success of rights and institutions is down to the fact global poverty is complicated and diverse.  It can't be solved with one-size-fits-all solutions from foreign experts sitting in head ­office.

The people who know most about poverty are the poor themselves.  Individual rights and institutions give local people with local knowledge the opportunity to solve local problems.

It is the sum total of these efforts that will eventually cause the tide to turn on poverty.

Government-funded foreign aid's challenge, therefore, is to find ways to strengthen these rights and institutions, not roll out large national programs that consolidate and legitimise authoritarian governments.

Easterly describes these two approaches as authoritarian development v free development.

The establishment of individual rights and the development of institutions is undoubtedly difficult to achieve — much more difficult than, say, pouring money into the broken government education bureaucracies of developing countries.  But it is not as difficult as many think and there is significant low-hanging fruit to be grasped.

In Cambodia, it takes 85 days and an average year's salary to register a business, making it difficult for grassroots entrepreneurs to participate in free markets.  Here, getting an Australian Business Number is free and takes minutes.

In Uganda, all it took for a dramatic reduction in corruption in the education department was a media storm surrounding the release of a study by researchers Ritva Reinikka and Jakob Svensson that identified that corruption was, in fact, occurring.

And comparatively cheap private property titling programs in Peru have been shown by researcher Erica Field to increase women's empowerment, investment in agricultural and urban infrastructure and labour market participation.

None of these measures is expensive or particularly difficult, they all address individual rights and institutional reform, and they would all have genuine long-term, sustainable benefits compared to foreign aid in its present form.

That's not to say there is no room for practical interventions in our aid budget in areas such as health and education.

Indeed, these programs have been shown to work better in a stronger institutional environment.  But these need to take place with the endgame of individual rights and strong institutions in mind.

This is the point foreign aid has been missing for almost a century.

It would be a great day for the world's poor if the aid debate in this country ever went beyond childishly comparing dollar figures.  A debate that re-imagines foreign aid's task as strengthening individual rights and legal, political and economic institutions in developing countries would be a genuine step towards ending global poverty permanently.

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Budget creates a new state of play for premiers

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The end result of Howard's centralism was WorkChoices — a federal takeover of industrial relations.

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

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

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

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

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

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

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

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

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

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Subsidy scam hurt the energy sector

In addressing climate change spending and regulatory costs, the government has made some impressive first steps.  Few of these are in the wrong direction.

Labor went to last year's election with more than $5 billion a year in budget outlays for its climate change programs.  This included more than $2bn a year to be spent by the Clean Energy Corporation.

In addition, Labor's carbon tax would be raising $13bn by next year (though Kevin Rudd had foreshadowed reducing this) and its renewable energy target would be raising electricity bills — by $5bn a year by 2020.

In all, Labor's planned spending on reducing greenhouse gas emissions was ramping up to $23bn a year, similar to the entire defence budget or twice the annual spending planned by the present government on transport and communications, which house its signature infrastructure areas.

In its first move to cut back the climate change impositions, the Coalition put beyond doubt any question of keeping the carbon tax.

The budget reinforces this by curtailing many other programs, though painfully slowly in some cases.

There have been backward steps.  Among these is the creation of the Green Army, a sort of "young pioneer" corps of the unemployed doing landcare repair to prepare themselves for future taxpayer-funded environmental jobs.  The program's objectives avoid mentioning climate change but, starting at $48 million this year, spending is ostensibly hurtling towards $230m annually.  This is an expensive attempt to deflect green dudgeon.

We have also seen the first spending step of the Direct Action program.  Limited to $75m in the current year, this is planned to increase but remains a far cry from the $1bn-a-year spending the Coalition once proposed.  "One million roofs", once flaunted as a $100m program, has been dropped.

Outweighing these new spending measures are many program cuts within the environment and industry departments.

These include savage cuts to the adaptation and international negotiation spend — no more of those 114-delegation team visits such as the one that accompanied Rudd to Copenhagen in 2009.

The budget abolishes the Australian Renewable Energy Agency (ARENA), saving $1.3bn.  However, ARENA's chairman, the World Wildlife Fund's Greg Bourne, like his counterpart at the Clean Energy Finance Corp, said he would continue "delivering funding to worthy projects" until the agency's bank account was closed.

Also to be terminated, with a saving of $460m, is the scandalously wasteful carbon capture and storage program, though its commitments might mean it soldiers on to 2017.

Similarly, the government has closed the $17m "clean coal" initiative and axed the $20m a year Clean Technology Innovation program.  Also gone is the Green Car Innovation Fund, which became redundant as a result of labour laws and regulatory-induced increases in energy prices that made motor vehicle manufacturing unprofitable in Australia.

Ever so gingerly, Joe Hockey has begun paring back the profligate scam that is ethanol subsidies, grabbing back $120m a year.

The government's own published estimate of aggregate climate change expenditure is that it falls from $5.75bn this year to $500m two years hence.  This includes spending by the Clean Energy Finance Corp.

But it excludes some spending, such as that of the CSIRO, which, when it saw its interest was in being active on climate matters, claimed that about 50 per cent of its budget was being spent in these directions.  CSIRO can count itself lucky to have escaped with a mere $33m haircut, less than 5 per cent of its direct budget.

Outside the budget is the renewable energy target, presently under review by a panel headed by Dick Warburton.

Renewable energy from wind and solar, the two major subsidised supply types, remains non-commercial.  It is three times the cost of electricity sourced from coal.

Renewable energy lobbyists have done wonders in getting governments to force consumers and other producers to pay $18.5bn on worthless assets.

Even with the carbon tax repealed, according to the electricity market regulator, next year will have renewable subsidies and associated schemes bringing about a 75 per cent increase in the wholesale electricity price.

Those arguing for the retention of the subsidies on renewables nonsensically claim that they reduce overall electricity prices.

In fact, the privileged position of renewables, if left untouched, would entail bankrupting the commercial providers, leaving a legacy of much higher prices and less reliable supply.

It is also claimed that early termination of the renewables program would introduce an element of sovereign risk into Australia's investment environment.

This is untrue.  The withdrawal of a privilege does not constitute a government seizure of property which would undermine investor confidence.

Nobody suggested compensating the motor-vehicle assemblers for the billion or so dollars they have written down as a result of losing government supports.

Nor has Spain suffered from reputational loss since it wound down its previously agreed wind and solar subsidies.

Wind and other renewables should be left to stand on their own feet commercially.  Their ongoing subsidisation severely weakens the national economy and should be terminated immediately.

The cuts to Australia's energy subsidies will force the entrepreneurs who have been so successful in grabbing government favours to make their fortunes elsewhere.

This is a gain to Australia and ways should be explored to allow earlier terminations of wasteful schemes that have been put in place.

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Minimum wage is anti-jobs and should be abolished

Audit Commission proposals to reform the minimum wage will not resolve the problems of a system which hurts the poor and harms the productive potential of the Australian economy.

One of the surprises contained within the 1200-odd page Commission of Audit report was the discussion about amending the Australian minimum wage regulatory system, presently mandating that a worker must receive at least $622.20 each week.

But why did the minimum wage, of all things, enter the reform frame for the commissioners, when the commission terms of reference primarily relate to government scope and spending efficiency?

It did so because, as stated on page 146 of the Phase One report, an "important dimension to government programmes designed to get people back to work is the relationship between the rate of income support and the minimum wage".

The commissioners then observed that "if the minimum wage is too high relative to income support then many unemployed people — particularly the low skilled and inexperienced — will be priced out of the labour market and struggle to find employment".

Under the present minimum wage arrangements, it is illegal for an employer to hire somebody for less than $16.37 per hour, consigning people who cannot create additional economic value, that covers their wage cost, onto the dole queue.  The resulting employment restrictions expose the government to a great fiscal burden, all else being equal, through an increasing uptake in the Newstart unemployment allowance.

To put no finer point on the devastating impact of welfare dependency for working-age people on their living standards, 62 per cent of Newstart recipients (currently over 340,000 people) are in receipt of the payment for longer than a year, whereas the median duration of payment is 88 weeks.

A point missed in much of the debate over the minimum wage, and most certainly by union and employer organisations in their submissions to the Fair Work Commission annual wage review, is that the higher the minimum wage the more employment is restricted.

Drawing upon empirical evidence, most notably a study by former academic and now senior Labor federal parliamentarian Andrew Leigh, it is possible to indicatively estimate by how much labour demand by employers would fall in response to a minimum wage increase.

Based on Leigh's "wage elasticity of labour demand" estimate, and official data on employment in Australia, last year's minimum wage increase of 2.6 per cent would have reduced overall labour demand by about 0.75 per cent, the equivalent of close to 88,000 jobs.  In other words, the minimum wage only serves to put upwards pressure on an unemployment rate which has remained naggingly higher than those rates recorded prior the 2008-09 global financial crisis.

And compounding the employment disincentive effects of the minimum wage is its interaction with the aforementioned welfare system, which forms an artificial zone of effective wage rates in which employment prohibition applies.

As mentioned previously, the current minimum wage stands at $622.20 per week, and this compares with the Newstart Allowance rate for singles (without children) at $255.10 per week.

This means an employer is discouraged from pulling an individual away from the indignities of welfare dependence by paying them anywhere between $255.11 and $622.19 per week.

The Commission of Audit report raised another important issue for discussion, and that is that the federal minimum wage covers just about every worker, with the main exception of state government employees, irrespective of their location.  The centralisation of minimum wage determination for private sector workers is a significant problem within our federal system, since "having a uniform national minimum wage ignores substantial differences in local job markets".

According to the commission report, the prevailing arrangement also "disadvantages workers attempting to gain a job in states like Tasmania and South Australia where wages and the cost of living are generally lower than in other states".

Whilst the audit commissioners adroitly conveyed the difficulties created by existing minimum wage regulations, they presented a confusing and overly complex solution to resolve the pressing set of problems posed.

To help reduce the gap between Newstart and the minimum wage, it was suggested in the report that the minimum wage be eventually set at 44 per cent of national average weekly earnings (compared with 56 per cent today).  Getting there would require applying a rule to restrain minimum wage growth, and so the audit report suggested an "indexation factor" of the consumer price index less one percentage point be used, over the period of a decade.

This would ensure the minimum wage would keep growing in nominal terms, but at a slower rate than at present, and after 10 years the minimum wage would be indexed in line with national average weekly earnings growth.  In addition, the states would be empowered to apply different minimum wages reflecting their circumstances.

The specific recommendation is that the minimum wage in each jurisdiction could move towards a benchmark of 44 per cent of national average weekly earnings, or 44 per cent of state average weekly earnings, whichever is lower.  But the complex minimum wage proposals canvassed by the commission raise some obvious questions.

If the minimum wage is so problematic for people with lower skills, harming their economic prospects, then why keep it?

Furthermore, why keep the minimum wage but replace the Fair Work Commission adjudication process, as admittedly costly and time-consuming as it is, with a complex administrative system giving federal Department of Employment staffers greater effective control over minimum wage determination?

There simply needs to be a better way to economically emancipate vulnerable Australians, across all parts of the country, from experiencing the minimum wage poverty trap, and the optimal solution would be to scrap it altogether.

Abolishing the minimum wage would enable more of the poor to build their human capital base, by acquiring economically desirable aptitudes and skills in the workplace, and earning much-needed experience to find a better paying career into the future.

The audit commission has rebooted a conversation about an important feature of IR reform, and this, in itself, is most welcome in an environment where our most vulnerable need more opportunities to work.  But, in the end, the commission's reform proposals would, at best, only modestly ease some of the minimum wage pain upon the poor.

Let's do even better by fixing this longstanding policy problem:  end the anti-jobs, anti-social justice minimum wage for a fair go and a stronger economy.

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Budget won't slow government spending

For all the fire and brimstone that accompanied last week's commentary on the budget, the bottom line is simple:  under the Coalition, government spending is going up, not down.

This is the long-term significance of Joe Hockey's first budget.

A modest 1.7 per cent real reduction in expenditure next financial year will be more than offset by 0.4 per cent growth the year after, 2.1 per cent growth the year after that, and 2.6 per cent growth in the 2017-18 financial year (the end of the Treasury's forward projections).

And tax?  Well, while this year the government will collect $363 billion, by 2017-18 it plans to collect $467 billion.  That's a jump in the tax take from 23 per cent of GDP to 24.9 per cent.

Yes, the budget does things like abolish 70 government bodies and 230 programs.  Some of that is great.

But, ultimately, a party which was elected promising to reduce the size of government and reduce taxes, will preside over large expenditure growth and is hiking, not axing, tax.

It's widely appreciated that deep down Tony Abbott is a tax-and-spend conservative.  Now we know his is a tax-and-spend government.

But there's a lot of trickery in the budget to conceal that fact.

The most controversial policies (like the "learn or earn" welfare changes, the increase in the pension age, and the university reforms) sound like classic austerity measures but in truth don't alter the fiscal equation all that much.  They're social reforms being smuggled in under the cover of a budgetary crisis.

And most of the big spending cuts to health and education have been punted far into the future — beyond the next election, and many out past the Treasury's forward estimates.

Hockey says it would hurt the economy to cut hard immediately.  Here's a more cynical explanation.  He's hedging.  The Treasurer is pledging but delaying cuts in the hope the Coalition will be able to rescind those cuts for future election sweeteners.

The budget is also full of policies that superficially look like aggressive cost reductions but are in fact new spending.

For instance, the $7 GP co-payment is, astonishingly, being poured into a huge new medical research fund.  It will apparently be the biggest in the world.

This is a bizarre decision.  The policy case for a co-payment is that introducing price signals will give patients a financial stake in their healthcare choices.  But using that money to fund an entirely new government program makes the $7 charge look less like a co-payment and more like a research tax.

Likewise, the reindexation of the fuel excise isn't to fix the budget emergency, but for new road projects.  This is so Tony Abbott can live up to his self-applied "infrastructure prime minister" nickname.

Abbott said in August, 2013 that "the only party which is going to increase taxes after the election is the Labor Party".  It's worrying the Coalition now pretends no such commitment was made.

In opposition Coalition spruikers said Abbott offered two things:  the integrity Julia Gillard lacked, and the fiscal discipline Kevin Rudd lacked.  After this budget, what's left?

So this is a significant budget.  In opposition, the Coalition was rhetorically committed to reducing the size of government — probably more so than any opposition since the time of John Hewson.

But now it has power, it can't bring itself to make significant long-term change.

Abbott is no Gough Whitlam-of-the-right.  He has no plan to redefine the relationship between state and citizen, despite his stirring oratory from opposition.

Nor, contrary to Joe Hockey's assertions, has the age of entitlement come to an end.  The paid parental leave scheme puts a lie to that little fantasy.

Governments think election to election.  But Australia's fiscal problem is measured in decades, not electoral cycles.  Political logic means spending is popular and taxing is not.  This encourages governments to go into deficit.

When the next economic crisis arrives, it seems unlikely a government of whatever stripe will be able to resist the calls for deficit-financed stimulus.

If the budget has not recovered by then — if we do not have the sort of surplus that was available to Kevin Rudd in 2008 — we're going to be in trouble.  The European fiscal death-spiral was driven by the fact that their budgets were ruined before the Global Financial Crisis hit.

Politically, however, Joe Hockey's budget may work.  At least for a bit.

Until now the Abbott government has lacked that patina of authority which marks a confident government.  Things like reintroducing imperial honours have made the Coalition look indulgent.

The budget itself will be unpopular but it has at least given the government a purpose.

But the question the Coalition needs to ask is this:  how will voters respond when they realise that, for all the harsh measures in the budget, it's for very little?  All that pain, and still both spending and taxation are going up.

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Beware the border force fetish

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

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

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

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

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

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

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

"Like national defence, protecting Australia's borders is core business for any national government."

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

This is stirring rhetoric but very strange.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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The PM and his Bush snr moment

The parallel with Tony Abbott's deficit tax on high-income earners is not Julia Gillard and her broken promise on the carbon tax — it's George Bush snr and his "Read my lips:  no new taxes" pledge.

Gillard broke an election promise so a centre-left government could implement a centre-left policy.  Abbott is at risk of breaking an election promise so his conservative government can implement a centre-left policy, which is exactly what Bush did.

Bush uttered his "Read my lips" promise in a speech accepting his party's nomination for president at the Republican National Convention in August 1988.  He went on to easily win that year's election against Michael Dukakis.  In 1990 Bush raised taxes (including lifting the top rate of income tax to 31 per cent).  In 1992 Bush was easily defeated by Bill Clinton.  Clinton's campaign advertising featured Bush's speech at the Republican National Convention.  As Gillard saw it, she broke a bad promise for the right reasons to get a good policy outcome.

That's not the case with the deficit tax.  The Coalition is breaking a good promise for the wrong reasons to get a bad policy outcome.  At least Gillard was breaking a promise to achieve something she'd always wanted.  Abbott is breaking his promise of new taxes so Australia can have among the world's highest marginal tax rates.

The pity is that if Abbott is going to spend his political capital breaking promises, he should at least break those he should never have promised in the first place — like his promise not to make any changes to the industrial relations system before the next election.

What the deficit tax reveals is that when the budgetary going gets tough, the Coalition is just as willing as Labor to soak the rich.

In 2011, to pay for the Queensland floods clean-up, the Labor government instituted a "flood levy" that increased the top marginal tax rate for those earning $100,000 or more by 1 per cent.

HIGH EARNERS PAY MORE THAN THEIR FAIR SHARE

The idea that an additional tax on high-income earners is needed so the burden of fixing the budget is "shared" across the community ignores a key point.  High-income earners already bear more than their fair share of the burden of providing for the rest of the community.

In 2011-12 (the most recent year for which such information is available), the 293,540 Australians who earned more than $180,000 a year paid a total of $37.8 billion in income tax.  The wealthiest 2.3 per cent of taxpayers paid 26.2 per cent of all income tax.  It would be interesting to know how much more of the tax burden Coalition MPs think these people should bear.  At the other end, the 5,850,595 Australians who earned less than $37,000 a year paid a total of $5.3 billion in tax, which was 3.7 per cent of all the income tax collected.

Professor Sinclair Davidson of RMIT University, on the Catallaxy Files blog, has charted the changing share of income tax paid by classes of taxpayers over time.  In 2011-12, the top 25 per cent of taxpayers paid 67.4 per cent of all income tax;  15 years earlier the figure was 60.8 per cent.  In 2011-12 the middle 50 per cent of taxpayers paid 29.9 per cent of all income tax;  15 years before, it was 36 per cent.

There's been lots of talk about seemingly alarming future trends produced by things such as an ageing population, but no one wants to talk about the trend of an ever-diminishing share of Australians paying an ever-growing proportion of tax.

Just last Sunday, on May 4 in Boston, George Bush snr was awarded the 2014 Profile in Courage Award by the John F Kennedy Presidential Library and Museum for the "bravery" he displayed by raising taxes.  The citation from the library reads:

"He [George Bush] had promised Americans no new taxes during the presidential campaign two years earlier and he was voted into office with that promise.  But he had also promised to serve his country, and he decided that was the promise he would keep ..."

Whether in 24 years' time Tony Abbott's deficit tax will result in him winning a "Profile in Courage Award" from the Julia Gillard (or Kevin Rudd) Memorial Prime Ministerial Library remains to be seen.

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The state of Australia: cultural economy

Naturally, federal budgets are fretful times for economic sectors underwritten by discretionary public expenditure.  The arts and cultural sector is composed of parts that rely heavily on public funding (such as heritage, museums), parts that are a mixture of public and private (such as film, television, radio), and parts that are largely private (fashion, design, video games).  Obviously, some parts of this sector therefore have more reason for trepidation than others.

The recent report from the Commission of Audit makes clear that there is indeed a budget crisis — although not everyone would see things that clearly.

But if we can accept for a moment there is such a crisis, political reality indicates it will need to be met with expenditure cuts as well as tax increases (although the Abbott government did make an election promise not to do this).  As I previously noted on The Conversation, those spending cuts — come May 13 — will probably not have much impact on arts and culture in this budget cycle (although the Commission did recommend that Screen Australia face funding cuts).

So what then is the state of culture in Australia?  Basically, it's in rude health.  We know this from government data itself.  The Australian Bureau of Statistics collects a variety of statistics, although as with most aggregate economic data, there are several years of lag between gathering and reporting.

In February of this year the ABS released an experimental set of cultural and creative activity satellite accounts.  These are for 2008-9.

How we're doing now

The ABS Satellite account for 2008-9 shows the contribution of the cultural and creative economy to Australian GDP was A$86 billion, which is almost 7%.  Cultural activity makes up A$50b of that, and creative activity is larger, at A$80b (a A$42b overlap of cultural and creative explains how these numbers add up to A$86b).

Public cultural spending was A$7.6b.  Some A$2.3b of this was from federal spending, about half of which was for public broadcasting.

A 2010 survey carried out by the ABS indicates that Australians get a regular fix of culture, with about 85% reporting attending a cultural event, the most popular being cinema, but with music festivals, parks, and museums and galleries not too far behind.

Private cultural spending in 2010 was just under A$20b, with television, books and film capturing the bulk of that spending.  According to the Australian Tax Office, just A$28 million was donated to cultural organisations from tax-deductible private ancillary funds.

By industrial sector, gross value added (GVA) estimates run to A$65b, the majority of which was broken down as:

• design (A$26b)
• literature and print media ($13bn)
• fashion ($12bn)
• broadcasting, digital media and film ($8bn).

The cultural and creative sector produces more GVA than health care, but less than construction.

There were about 1 million employees in this sector, with a quarter of those working in cultural and creative occupations outside the cultural and creative industries.  There are more than 160,000 business or non-profit organisations in the cultural and creative industries sector.

International comparisons are plagued by definitional consistencies, but the ABS reports that Australia's cultural and creative sector is very similar to that of Canada, Finland, Spain and the UK by most measures.  (The largest, on a per-capita measure, is the US.)

How we got here

There is much more detail that we could report from the above statistics.  Yet we don't need to worry too much about the lags in the data or the crude aggregations because a few overarching findings and long-run trends stand out.

The first is that the cultural and creative industries are large, vibrant and growing, and it is the creative, market-facing parts that are doing most of the heavy lifting.

That is entirely unsurprising, and nor — I will stress to add — is it an ideological point.  These sectors can grow because they face not just millions of Australians but billions of global consumers.

The single most important factor driving and shaping the Australian cultural and creative economy is the global marketplace.  And within that, Australia's single greatest advantage is that we are a multi-cultural English-speaking nation, meaning that we have a comparative advantage in cultural content production for a global market.

The factor most accelerating this is the rise and spread of digital and computational technologies into all corners of cultural and creative production.  This lowers the cost of production and distribution, increases access and variety, creates new platforms, and makes possible new business models.

A further significant trend is the long-run growth in household wealth globally, not just in Australia.  This increases the quantity of household spending and, consequentially, demand for cultural and creative content.  Furthermore, as demonstrated recently in the UK, a strong case can be made connecting the growth of the arts and cultural sector with GDP growth.

These three factors — globalisation, technology and wealth — are not the only things that matter, but to a first order of approximation they are most of the story of how we got here.

The next ten years

The most important policy forces affecting the cultural and creative economy in Australia are not those from within Australian cultural and creative industry policy.  They are the factors affecting Australia's position vis-à-vis the global economy, digital technology development and adoption, as well as the factors affecting household wealth.

These are factors relating to bilateral trade agreements (and the intellectual property provisions written into these), the state of the National Broadband Network, Australian tax policy, the vibrancy of the mining sector, and so on, will likely continue to have a far greater impact on the state of Australia's cultural economy than, say, specific details pertaining to the funding of the National Gallery.

What is likely to change?  We might usefully distinguish among the cultural economy between those parts that are more in the manner of public goods (such as national galleries, museums, and so on) from those that are subsidised industries (such as public support to the film industry).

Public goods suffer free-rider problems, and are best supplied through public funding.  We can expect that Australian cultural public goods will continue to be funded, and maybe even receive greater funding as Australian wealth grows.

But the subsidised industries part of the cultural sector will face a tougher time.  These can survive through lobbying and scare campaigns.  But they also tend to be eventually defeated by innovative competition and new technologies.

It's unclear where, for example, Australia's public broadcasters fall on this spectrum.  In the early years they very clearly were a public good.  They still are in the case of some remote and regional broadcasting.  But they are a purely subsidised industry in most urban markets and many media segments.

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The Man Who Taught Us What We Cannot Know

The Market & Other Orders
by F.A. Hayek, edited by Bruce Caldwell
University of Chicago Press, 2014, 472 pages

Friedrich August von Hayek was the greatest and one of the most under-rated classical liberal philosopher(s) of the twentieth century.  He won the economics Nobel in 1974 ― yet it is fair to say that his contribution to economic theory is largely ignored by academic economists.  Fellow economics laureate James Buchanan, for example, argues that Hayek's greatest contributions are his 1944 opus The Road to Serfdom and establishing the Mont Pelerin Society.

Hayek's greatest economic contribution was in information economics.  That contribution has been collected and republished in volume 15 of his Collected Works under the title The market and other orders edited by Bruce Caldwell and published by the University of Chicago Press.

He made what many non-economists might consider a trivial methodological point.  Decision makers often never have the information that economists ascribe to them.  The "perfect information" assumption that underpins much of neoclassical economics is nonsense.  Or, as Hayek said, the economic problem society faces isn't making "the best use of the available means", but rather, how best to utilise the knowledge we have, given that it is highly dispersed across individuals and time.  This observation, now known as the knowledge problem, contained in his famous 1945 essay, The use of knowledge in society, is his most important economic insight.

There are profound implications that flow from that point.  Grandiose plans that rely on large amounts of information will fail.  Decision makers should be humble and modest in their ambitions.  More importantly, the price mechanism operates to coordinate and allocate resources, including dispersed information, better than bureaucrats ever can.  This can be summed up in the observation that human action trumps human design.

Despite all that, Hayek was not an anarchist.  He imagined a large role for the state in enforcing contracts, setting standards and maintaining the rule of law.

Non-economists might be tempted to dismiss all this as simply being common sense.  The sad reality, however, is that economists continue to build models by simply assuming that the knowledge necessary to operationalise them exists, and governments continue to conduct their affairs as if they did actually have that knowledge.

While academic economists conduct their affairs in some ignorance of Hayek, it seems that the real world has not.  In 2006 then ALP leader Kevin Rudd launched a blistering attack on Hayek claiming that Hayek had founded an "intellectual sect" that had become "public policy orthodoxy" following the Thatcher and Reagan revolutions.  It is quite clear that even if Rudd had read Hayek's work he certainly hadn't understood it.

In 2009 then prime minister Kevin Rudd had another go at Hayek;  blaming him for the intellectual climate that had led to the Global Financial Crisis.  The events of that year, in Rudd's mind, represented the triumph of Keynes over Hayek.  But that was always bluff and bluster to cover over the problems within his own government.  Indeed the very problems that Hayek would have predicted ― one man simply could not micromanage the entire government.

I have some mixed feeling about this book.  On the positive side it contains in one place many of Hayek's important works relating to the knowledge problem and his defence of the market economy.  Yet it doesn't contain his work on the socialist calculation debate ― the most important manifestation of the knowledge problem.

It does contain his previously unpublished 1961 lectures to the University of Virginia.  These four lectures will be of great interest to Hayekians as they symbolise the end of Hayek's career as an economic theorist as opposed to philosopher and applied economist.

Hayek had been known as a theorist prior to the war and the Keynesian revolution and had wanted to return to the field.  Yet in giving those lectures he came to the view that he had no additional insights to offer.  It is clear from Buchanan's recollection of those events that he too was of a similar view.  It is an open question as to why Hayek never published these lectures in his lifetime.  However, what is most disappointing is that the editor has reproduced Hayek's hand drawn diagrams and didn't think to have them professionally redrawn.  It is one thing to be true to original, but we know that the editor has silently corrected typos and minor errors throughout Hayek's writing ― he tells us so, in the introduction.  A minor quibble in what is otherwise a magnificent collection of Hayek's writing.

The essays in this volume are largely drawn from three of Hayek's collections, his 1949 Individualism and economic order, his 1967 Studies in philosophy, politics, and economics, and his 1978 New studies in philosophy, politics, economics, and the history of ideas.  Their appearance in this volume indicates that these three collections will not themselves be reproduced as part of the Collected Works.  All of the essays will no doubt appear as part of the collection, but they will do so in a manner that the series editor and individual book editors choose.  There is value in reading the essays as part of the collections, and in the order that Hayek chose.  That is lost.

Hayekian purists are likely to be disappointed with the Collected Works as a series.  The series has been slowly dribbling out for over 25 years and is still incomplete.  The now definitive The Road to Serfdom and the definitive The Constitution of Liberty are magnificent volumes ― yet it isn't clear why it has taken so long to publish the entire series.  I suspect that part of the problem is that there is no "Hayekian sect" to demand the process be sped up.  Then there is the fact that his most well-known books have never been out of print.

Frustrations surrounding the management of Hayek's Collected Works shouldn't detract from this particular volume.  For readers new to Hayek's work on information and knowledge it contains his important work, and a comprehensive introductory essay.  It is well edited with Hayek's errors corrected or noted and references checked.  It brings some of Hayek's finest work back into print.

Our Rights and Their Ancient Origins

The Power of Habeas Corpus in America:  from the King's Prerogative to the War on Terror
by Anthony Gregory
Cambridge: Cambridge University Press, 2013, 432 pages

Habeas corpus is an ambitious topic to tackle.  Its mythic status makes it all too easy for researchers to get romantic about this legendary writ.  The eighteenth century jurist Sir William Blackstone described habeas corpus as "another Magna Carta".  But, as Anthony Gregory demonstrates in The Power of Habeas corpus in America, reality is less straightforward.

Today, a writ of habeas corpus is used to bring a prisoner before a court to determine if their imprisonment is lawful.  In practice, this means people cannot be jailed without charge.  Habeas corpus (literally translated from Latin:  "you have the body") is a key right in the modern era but its birth in the medieval era was happenstance, and its function was the complete opposite of what it is today.

The "right" of habeas corpus came into existence as a tool to get people physically into a court.  As the author notes, the writ was used to "process detention, not to set them free".  From that observation, Gregory launches into staggering detail onto the myriad twists and turns of habeas' history.  His is a definitive and valuable addition to the historiography of one of our most important legal freedoms.

Gregory's coverage of the United State's adoption and development of the "Great Writ" of habeas corpus is breathtaking in its detail.  His focus is the implementation of the Writ in America, but he still acknowledges its inception within Britain.  Like most histories though, he rushes through the medieval foundations of habeas corpus to what is perceived as the more "important" legal aspects of the Renaissance and beyond.  Yet the foundations of the law that we champion today have their roots in medieval Europe and deserve greater attention.  The twelfth century, the height of the medieval renaissance, is arguably the legal century of Western history.  It is in this era, that we not only see the development of habeas corpus, but also common law itself, the jury system and the foundations of trial procedure.

The author's research into the nation's embracement of the Writ is both enthusiastic and exhaustive.  The English colonists not only transplanted their way of life to the new continent, but their common law too.  The New World created a radical interpretation of the Great Writ that would shape the first few centuries of the new nation.  Keen to create their own legal system free from the restraint and interference of the Crown, the colonists were excited by the habeas corpus' potential.  Instead of Americans viewing habeas corpus as "something bequeathed to them by the Royal State", they instead focused on its ability to curb the government's power to detain free citizens.

The American colonists valued English common law in its idealised form, focusing not so much on its precedent but the intent of liberty behind the maxim.  Magna Carta and habeas corpus were their rallying cries for individual freedom.  They were innately suspicious of the legal system that had evolved under kings, yet claimed habeas as their own "American" ideal.

As growing discontent grew to outrage over Britain's treatment of the colonies, it was habeas' guarantee that, as a free people, they should not suffer the contempt of the British Crown.  A power that had developed in Britain as a means for the Crown to force people before its courts morphed into the radical ideal of the American colonies that habeas corpus would limit the power of the government so that no man would be held against his will.  The War of Independence is the pinnacle of the Great Writ's power as a force for freedom.  Individual liberty via the Writ was guaranteed in statue throughout the colonies and held in highest regard by its Founding Fathers.  However, the author regretfully notes that this "decentralised, anti-royal, revolutionary conception of habeas corpus did not last long."

The War of Independence saw habeas' greatest influence in its history but sowed the seeds for its own subjugation to executive power.  The new, centralised government of the United States, like all bodies of power, did not want its authority curtailed.  The fledgling United States emphasis on the power of the individual and that government drew its authority from the people, naturally developed a bottom up approach to habeas corpus.  As a result, the greatest enforcers and protectors of the Writ were the states themselves.  The constant power play between the states and the federal government often resulted in the states forcing to concede more of their powers to the central authority of Washington.  As its greatest champions weakened, so did the importance of the habeas corpus.  Instead of being used as a defence of freedom, the federal government used it as a promotion of their own centralised power.  The Civil War and its aftermath saw Washington further consolidate its centralised influence.  Habeas was readily suspended in order to incarcerate thousands who "obstructed the war effort", under the martial law that the United States government bequeathed upon themselves during the bloody years of bitter fighting.  Ultimately, habeas' fate and its treatment were cemented in the nineteenth century as "the US government attained supremacy over the states, limiting their authority and amassing power in the name of checking the vagaries of state government."

The wars of the twentieth century saw habeas curtailed even further.  Mass detentions of saboteurs, suspected Nazis and Japanese and Italian Americans were the executive's response in World War Two.  Most occurred without even the pretence of judicial process.  Gregory notes that the history of habeas corpus reflects that liberty always gives way to expediency.

The whirlwind analysis of centuries of legislation and case law halts to give a serious and ruthless assessment of habeas corpus in twenty-first century America.  Gregory notes that US presidents have often been guilty of "habeas hypocrisy", yet President Barack Obama took it to another level.  Decrying the abandonment of any pretence of judicial process in his War on Terror, President George W. Bush's program at Guantanamo rightly came under fierce fire by the then-Senator Obama.  Yet once he was in office, not only did he renege on his promise to reinstate due process and habeas principles, Obama would "ratify and even amplify Bush's claims of executive power".

Detention is key to Gregory's hypothesis as to why habeas is so eroded in the twenty first century.  Not just in the jurisdictionally dubious prisons such as Abu Ghraib, but also in their own domestic prisons.  The United States makes up 5% of the world's population, but 25% of the prisoner population.  The author argues that the US citizenry and government have become too comfortable with locking up people that should never be in jail in the first place.  Dealing with such vast number of prisoners, parolees and accused is a monumental task, and the system is simply not coping.  A plea of habeas corpus is beyond the reach of most accused because it is simply too long a process to complete.  On average it takes ten years;  most prisoners would end their sentence before they would hear the verdict.

Habeas corpus cannot hope to succeed in the modern detention state.  The detention monolith is unwieldy and impossible to properly run.  Overcrowding and corruption is rife, resulting in a prison system that has "staggering rates of violence and sexual abuse".  There is simply not enough money or resources to insure the safety of the inmates.  They may be criminals, but justice is not served by brutality.

Thus the State is inflicting on its prisoners the same deplorable acts that it is punishing its criminals for committing in the first place.  Gregory contends that too many people who have not physically hurt anyone (such as drug users and tax evaders) are put into a system which is dangerous and suffer extreme (though unintended) violence from the State.  When no one is concerned that the accused are routinely detained before trial, and those who have committed "victimless crimes" are subjected to horrendous abuse, there is something very wrong with the system and the society.

In the face of such a proportion of the population being made criminals by the State, the author asks Americans to remember St. Augustine's contention that an "unjust law is no law at all".  Laws should not be there simply because the government wills it.  The law should be a reflection of community ideals:  natural laws such as murder are enforced in legislation because it is abhorrent, not because it is the whim of the executive.  Laws passed by the legislature and executive may be valid, but only if it is in the best interests of the people they are purportedly serving.

Gregory is right to note that:

"All governments endanger freedom.  The powerful modern state presents particular threats to freedom.  Whereas habeas evolved in medieval England amidst a legal atmosphere of competing, overlapping, and concurrent jurisdictions and power centres, today's states and certainly the American state represent a much more vertically integrated and even more monopolistic power structure.  Habeas corpus has become nationalised so as no longer to serve as a meaningful decentralist check on the central state's detention policies."

The Americans of the Revolution understood the importance of freedom, and rallied around the idea of individual liberty.  They adopted habeas corpus and made it their own, imbuing with it the unshakeable belief that no government should ever have the power to detain a free man against their will.  With the gradual centralisation of power to Washington, Americans have become complacent and accepting of their freedoms being curtailed.  It is not enough to just hide behind the ideals of the Great Writ and hope that the executive and judiciary will respect its authority.  America, and all democratic citizens, need to believe that our freedom is always worth the fight.

Since its introduction to the colonies, the fluctuating power of habeas corpus has reflected the extent to which Americans value their freedom.  If they themselves are not willing to stand up to the unchecked might of the State, habeas will be powerless to stop those freedoms from ebbing away.