Why We Should Have More Casinos and Gaming Machines

Spending on gaming appears to have grown rapidly over recent years.  Part of this may be due to the recording of previously illegal activity.  However it has also been fuelled by the availability of new gambling forms, in particular casinos, electronic gaming machines (EGMs) and new forms of lottery.

The fundamental approach to assessing the benefits of gaming is to recognise that these represent the preferences that people express in their spending decisions.  Where gambling is prevented, consumers' expenditures are redirected towards goods and services from which they would expect to enjoy less satisfaction.

The increased consumer benefits will not always be recorded in measured estimates of gross domestic product but are, nonetheless, significant.  The benefits are substantial and potentially measurable in the attraction of tourists and the reduction in siphoning of expenditures to areas which enjoy more liberal gambling regulations.  These benefits represent the equivalence of an increase in competitiveness of the area where gambling is liberalised.

Gaming also represents a relatively easy source of taxation revenue.  Although such taxation represents a distortion to consumer choice, the relatively low response of demand to higher charges for gaming and the "guilt" felt by gamblers has meant governments have had little difficulty raising revenues from the sector.  This matter has assumed considerable importance in Australia due to the State Governments' reduced access to certain forms of taxation.  Gaming, which already accounts for up to 15% of the States' own revenue raising, is likely to amount to some one-fifth in future years.  This is far in excess of that imposed on almost all other goods and services.  The "sinful" characterisation of gambling activity facilitates government imposition of punitive taxation rates.

Yet, the freedom of the individual to spend his or her money as he or she sees fit is fundamental both to economic welfare and to individual liberty.

While there is a case for restraining activities that might cause social harm, gambling does not fall within that category.  It is an activity that has long been firmly established in most cultures.  Although small numbers of people are afflicted with pathological problems regarding gambling, these amount to only some one per cent of the adult population.  Their affliction does not threaten the overall peace and security of the community.  Moreover, similar, if not greater numbers are afflicted with eating or alcohol related disorders and a great many more engage in certain sports with what many would regard as recklessness.  It would not be reasonable to curtail the enjoyment that the vast majority obtain from the activity because of a tiny minority.

As well as being very heavily taxed, gambling is and remains highly regulated.  In addition, the tax rate varies considerably both between forms of gambling and between gambling venues.  For example, in Victoria pubs pay an effective 33 per cent more tax than licensed clubs on EGM revenues.  Even if gambling is to remain more heavily taxed than most other activities, there should be some consistency in taxation between the different forms and venues.  Without this there is a distortion to spending patterns and a reduction in the value consumers obtain.

These principles are even more appropriate in the case of the regulatory structure.  Limitations on numbers of gaming machines create shortages and monopoly profits for those operators who have machines.  The high profits are extracted from the benefits that would otherwise accrue to the consumer.

Similarly, the exclusive licences granted to casinos reduce availability of this form of gambling and increase the profits of the operators at the expense of the consumer.  In Victoria, those profits are, in part, required by government regulations or tendering processes to be redirected to other venues in the casino complex.  As a result, they would tend to distort the competitive framework and disadvantage other retailers and activities vying for the consumer dollar.

What then is the appropriate approach of governments to gaming?

First, governments should remove regulations that prevent or impede gambling activity other than those regulations designed to protect minors.  Secondly, taxation of gambling should be reviewed so that it is brought into line with taxation rates on other goods and services;  or at least made consistent across different types of gambling and different venues.  Thirdly, monopolies on the supply of gaming machines and requirements on market sharing for these machines should be abolished as soon as contractual arrangements permit.  And fourthly, although the "property rights" in the form of exclusive contracts that have been extended to existing casinos should not be rescinded, new casinos that do not infringe on those rights should be readily permitted.

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Quiggin wrong over foodless GST

Footnote:

John Quiggin's contributions to these pages show a remarkable tendency to coincide with the policy line of the Australian Democrats.  His recent contribution on food (AFR November 19) is a case in point.  Yes, expenditure per person and (non-alcoholic) drink excluding meals out varies only 10 per cent between the top and bottom quintiles in the ABS Household Expenditure Survey (HES) (from $32 to $35 per week).

But food is an amorphous group of items ranging from bread to caviar.  For example, the top quintile spends almost twice as much per head on soft drinks as the bottom quintile.  As many soft drinks are already taxed, exempting them from tax would favour the rich.

Playing the "find the equal expenditure" among the (tens of thousands of fluctuating) items on supermarket shelves is a game we can all play with the HES.  It is a great deal less important (since we are talking about $3 per person per week in tax) than the costs imposed in collecting the tax.

The less costly it is for sellers (and ultimately their customers) in setting systems to distinguish between taxed and non-taxed items, and fewer distortions encouraging people to use otherwise less preferred items according to ultimately arbitrary distinctions liable to be left behind by changes in consumer preferences and production capacities, the better.

As for Professor Quiggin's claim that taxing food is more distortionary than designing adequate compensation, this is simply nonsense.  Taxing food like other items and giving low income groups an extra $3 per week is, in redistributive and change of behaviour terms, clearly superior to not taxing food.

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The Economic Stimulus of Reform

Why is the Australian economy doing so well?  Everyone -- including myself -- thought that we would be knocked for six by the Asian crisis.  Yet, we continue to grow at a healthy 3% p.a. -- at least so far.

The most important reasons are sound macro-economic policies -- in particular balanced budgets -- and good institutional structures -- such as a stable banking system.  These have given the economy the flexibility and stability necessary to weather the storm from Asia

However, there is another, less well-recognised factor -- rapid growth in spending on infrastructure.  Over the year just finished, infrastructure spending is currently at the highest level since the early 1980s.  This, combined with sold growth in personal consumption, has kept the domestic part of economy ticking along at an annual rate of 4%.

One driving force has been the Olympics and the related increase in of hotels and apartments construction in and around Sydney.  Last year, expenditure on building infrastructure in NSW grew by 29%.  This activity is expected to slow during this year, but still remain at a high level.

There is another set of factors at work.  Even though the budgets of all governments, with the exception of the NSW Government, are balanced, they have increased spending on capital in a very big way.  Expenditure on new fixed assets by the public sector grew by over 13% last year and is expected to grow at a faster pace during 1998-99.

The largest increase in public infrastructure spending took place in basic physical infrastructure including roads (up 31%), bridges (up 19%), sewerage( up 23%) and recreational facilities (up by 31%).  Spending by governments on the usual big-ticket areas -- electricity, gas and water -- decreased over the year to June 1998.  However, this came after two years of high expenditure and comes in part from the shift of facilities from public to private sector hands.

Another factor has been the large increase in privately funded infrastructure including harbours, gas and electricity.  Privately funded road construction decreased over the year, but again from very high levels.  Despite this spending on road works by the private and public sectors has reached a level not experienced since the 1970s

Another major area of expansion has been private and public health infrastructure which increased by 41% over the year just ended to a level of $1.3 billion.  This follows growth of 25% in the previous year.

The largest increase in private and public funded infrastructure spending took place with the Olympic in NSW.  However, Victoria also experienced respectable growth of 36 % in engineering works and 6.3% increase in building construction.

What has driven this expenditure?  First, governments have rightly given higher priority to capital spending.  Second, privatisation and the contracting-out of infrastructure funding removed restraints impose by state borrowing, provided access to new sources of equity and generated additional pressure for expansion.

The nice thing about this infrastructure boom is, not just it timing but the fact that it has been more commercially driven with the risk more fully borne by private interest rather than taxpayers.

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In Search of the Third Way

An Address to the Melbourne Institute Policy Forum:
Economic and Social Policy in Australia:  Is There a Third Way?
University of Melbourne, 11 November 1998

INTRODUCTION

Australia at the Crossroads:  Radical Free Market or Progressive Liberalism by Fred Argy and Civilising Global Capitalism by Mark Latham are two local versions of what has become known as 'the third Way.

In common with Prime Minister Blair in the UK and President Clinton -- the two left-of-centre politicians who have popularised the concept of the third way -- both Argy and Latham argue that some economic liberalisation is good and markets are often the best way to allocate consumption and production.  Indeed both authors argue for more -- in Latham's case much more -- liberalisation in some areas.  They also reject the socialist agenda of government ownership, control of capital and trade.  However, like their fellow travellers from overseas, Argy and Latham believe that too much economic liberalism leads to a lower standard of living, higher unemployment, decline in social cohesion and a loss of national sovereignty.

Although both authors reject socialism and have reconciled themselves with the market, they retain the old values of the left -- an enduring collectivism and anti-individualism.

And these old values are what are wrong with these books.

Although both books share common beliefs and solutions, they nonetheless vary greatly -- in style, purpose, ideas and policy recommendations.

Mr Latham's book is explicitly designed as a reform agenda for the Australian Labor Party.  Mr Latham is a working politician and when he wrote the book was shadow spokesperson for education.  The book has the hallmarks of a working politician.  It is overly verbose and convoluted.  It focuses too much on "the big picture".  It focuses far too much on education -- his current obsession.  It has something for everyone.  It suffers from the restriction to ideas imposed by the party.

Although there were a number of professional attacks on the Howard Government, it is a remarkable evenhanded and well-mannered book.

Although I think the book has a number of serious flaws, its direction is right and the path it advocates is far better than the path the ALP to whilst in government and the path it is currently intent on following.

As Gary Johns said of the book, "Its great strength is that it has been published.  Its greatest weakness is that much of it will remain unread.  The electorate is the better for knowing that there are real thinkers in Parliament, but Latham's thoughts will need to be distilled if they are to generate the renewal he seeks on the left of the political divide.

Argy's book is also political in intent.  It is designed to steer the "political left" away from the economic nationalism.  Indeed it is more overtly political than Latham's book with the last few chapters being a clarion call of political mobilisation to fellow "progressives".

Argy lacks the good manners and even-handedness of Latham.  Indeed Argy is obsessed with moral posturing and constructing and fighting "straw men" and this seriously detracts from the quality and usefulness of the book.

Its most useful function is to inform the progressives that reform in Australia has yielded benefits and has not shredded the social fabric.  The main weakness of the book is that its version of the third way has been tried, it has proven not good enough and there we have to move on to better paths.

I fear the book will probably backfire politically by feeding rather than redirecting the paranoia of the economic nationalist.

KEATING UNPLUGGED

Argy sees the third way in our recent past in a policy stance best described as "Keating unplugged".  His basic argument is that Australia was already going along the third way, until the election of the Howard government.  According to him the past ALP Governments -- in particular the Keating Governments -- were taking a middle road approach, avoiding the stultifying excess of European social democrats, while also avoiding the hard hearted policies of the "far right"

He argues for a return to expansive macro-economic policies of yore -- but, of course, this time done right -- including pump priming, permanent budget deficits, looser monetary policy and less weight given to national savings and to inter-generation equity.  He argues for a return of Keating's grand plan for regional development, job creation and industrial plans.  He see no need for the new fangled ideas proffered by from other "third wavers" such as reform of the welfare, ending the era of big government, or lower taxation of capital.  He is mute about civil society and devolution power.

He recognises that the Keating era had a problem with tax which is that it taxes were not high enough to do what they wanted.  The electorate was simply unwilling to pay more taxes.  One aim of the book then is to unplug government from democratically imposed limit to tax.  He plea is that if we want "humane reform" we need higher taxes -- of course only paid by the rich.  Argy also recognises that the Keating era has an image problem with fellow "progressives".  Keating is blamed for introducing economic rationalism to Australia and in order to re-invent these policies they must be unplugged from the aura economic rationalism.  Argy's solution is to create the fiction of two types of economic liberals:  good ones -- reflective, humane, progressives like him -- and bad ones -- ideological, hard hearted, radical -- well -- like me.  He seeks to redirect the ire of fellow progressive to the evil one.

RADICAL REFORM WITH LIMITS

Latham's route is far more radical and one much more in tune to with Blair in the United Kingdom.

Like Argy, Latham believes in open capital markets including free trade in goods and services open capital markets, greater domestic competition, and privatisation.

He shares with Argy the belief that governments should take a large role in directly providing jobs on a permanent basis.  He shares Argy desire to focus government attention on the regions.

However, unlike Argy -- here the two could hardly be different -- Mr Latham see a much reduced range of roles for government -- though not a diminution in the over all role of government.

He rejects Argy's call for a return to an expansive macro-economic policy.  He does so -- correctly -- on the grounds that at best such polices do not work and or worst they augment an already volatile economy.  He argues that the federal budget should be balanced over cycle, that price stability is vital and that higher levels of national savings is crucial.

This stance -- according to Argy -- makes Latham a "hard-hearted and hard-headed liberal fanatic".

Latham also argues against all assistance to industry -- and therefore presumably in industry plans.  He argues for radical reform of the welfare state -- applying the principles of reciprocity, work or training rather than passive assistance, and tailoring of services to the individual.  He argues for a reduction in government provisioning -- though not in funding -- of social services.  He advocates the elimination of a host of government programs providing assistance special groups eg multi-cultural affairs.

Latham wants government to concentrate its resource on three tasks -- provision of skills and infrastructure;  providing income and job protection, and providing what he calls social capacity.  Nowhere in the book does Mr Latham argue for a larger government sector.  Indeed he makes it clear that there is no political support for big government.

Latham argues for radical reform to taxation and welfare funding designed to promote savings, inter-generational equity and greater personal choice.  In my opinion his ideas on tax and welfare funding are the best part of the book.  Although there is lot of thinking left to do, I strongly believe that his direct is right.

THE MISSING LINK -- INDUSTRIAL RELATIONS

Latham and Argy differ most markedly from the third wave types overseas in the area of industrial relations.  The two Australian want to wind back the relatively minor reforms to the industrial relations system that have taken place in Australia over the past decade and a half.  They want to see a move away from enterprise bargaining back to collective bargaining.  They want a return to an income and wages policy.  They see no need for a reduction in unfair dismissal laws and other so-called workers rights.  They want to expand the "social wage" function of the wages system.  They want a greater role for unions.  Most importantly they see the need to maintain high minimum award wages.

In contrast, overseas third wave types -- at least in rhetoric if not in action -- no longer think of themselves as defenders of organised labour and have come to accept Thatcherite labour market reforms.  There has been little rolling back of labour market reforms by the Blair Government.  It does plan to introduce a minimum wage but this will be at a level not much higher then the US minimum wage.  The Clinton Administration has not attempted to reduce the flexibility of the US labor market or enhance the power of the unions.  It has increased the minimum wage, but the new wage remains relative low to average wages.

FLAWS IN THE ARGUMENTS

Both books suffer from three major defects.

First, they incorrectly assume that market liberalism -- economic freedom -- threatens social cohesion and the poor.

Second, they retain a misplaced faith the capabilities of government.

Third, their minds are closed when it comes to the labor market.

I must emphasise that the flaws are much less pronounced in Latham's and Argy's book.

MARKETS AND SOCIAL COHESION

The main belief of the third way is that economic liberalism or to use another phrase -- economic freedom -- by itself will lead inexorably to the rich getting richer while the poor get poor.  If this occurs as a general tendency, it would be reasonable to argue -- as Argy and Latham do -- that higher levels of economic freedom are not consistent with widespread sharing of the benefits of economic activity and hence not consistent with social cohesion.

But the evidence does not support their claim.

Clearly there has been a tendency for some time in Australia and most other OECD countries for the distribution of income to become more unequal.  Also globalisation, in tandem with economic liberalisation, is assisting the rich to get richer.

In some countries -- perhaps also including Australia -- the living standards of some low-income groups have tended to stagnate over the last 25 years.  This trend varies across the regions within countries, including Australia.

However it is wrong to suggest that the trend towards greater inequality can be attributed to specific measures of liberalisation, or that liberalisation favours the rich rather than the poor, or that growing inequality is a necessarily feature of an more open, less regulated and less heavily taxes economy as is current in Australia and most other OECD countries.

The key to social cohesion is economic opportunity -- as Latham correctly points out.  The main way to create opportunity is economic growth and wealth creation.  The evidence strongly suggests that economic freedom is the best way we have to create wealth and growth.

James Qwartney and Robert Lawson (1998) -- in a project that I have been involved in for a number of years -- has attempted to both define and measure economic freedom and examine it relationship with economic growth.

Although no one suggests that their index is without flaws -- indeed amajor flaw is that it does not yet include data on freedom to work.  Nonetheless, it does provide an objective measure.  Importantly, it reduces the need for a subjective assessment based on "judgement calls" and diminishes the ability of people to "cook the books".  In his book, Argy is highly critical of this index, but his critique lacks the objectivity and rigour necessary to be taken seriously.

What the study finds is, not surprisingly a strong relationship between economic freedom and prosperity.  The countries (Figure 1) that score in the top quintile of the "most economically free" countries had an average per capita GDP of $18,142 -- over twice the income level of the next quintile of countries.  The study also found a positive and significant relationship between economic freedom and economic growth (Figure 2).

Importantly, the study (Figure 3) also found that the greater the improvement over time in economic freedom the higher the per capita growth in GDP.  Specifically, the study found that countries with the most improvement in economic freedom (3 points out on a ten point scale), such as New Zealand, achieved growth of 2.7 per cent, while countries like Australia which achieve increase 2 to 3 point second achieved per capita growth of 2.1 per cent.

This finding is directly contrary to one of Argy's main arguments, which is that beyond a certain point economic freedom does not generate improvements in wealth or economic growth.

This relationship between economic freedom and growth should not be controversial to third way types -- though Argy resists.  Their concern is supposedly about the people being left behind.

But here again, the evidence shows a positive relationship between economic growth and the growth in income of low-income groups.  Bates (1996a, 1996b) found that low-income earners tend to be better off -- indeed much better off -- in countries with higher economic growth and higher level of economic freedom.

How does this happen?  For two reasons, a fast growing economy gives people the opportunity and incentives to help themselves -- work learn and invest.  It also gives people the financial capacity either through voluntary means or through government action to assist those left behind.

This evidence is fully consistent with Australia's record over the last decade -- contrary to Argy -- the case for more freedom and reform.

Over the last 25 years, Australia has made major strides in freeing up it economy.  In 1975 it was ranked 24th amongst 119 countries in terms of economic freedom, in 1997 it was ranked 8th.  Over this period, Australia's growth rate has improved, as has productivity.  It has done a credible job at creating jobs.

However, Australia's record has number of black spots.  First, although productivity has improved in recent years, it remains substantially behind other countries.  Moreover, overall measures of productivity give a false picture of Australia's record on productivity.  Australia has chosen to lock a large proportion of its low skilled-low productive people out of work and on the dole.  Because these low productive jobs and works are not in labour force, the data shows higher productivity.  In other words aggregate measure of productivity cn be a perverse measure of performance.

Second, although the Australian economy has done a good job at creating work for the skilled, better educated and more motivated, it has steadily locked away the unskilled, poorly educated and unmotivated.  Over the last twenty years, the average duration of unemployment has increase from about 13 weeks in 1976 to 53 weeks in 1997.  During the same period the duration of unemployment in the US has remain practically unchanged at 16 weeks.  Australia has created a system where the insiders -- those with jobs -- do well, while those without jobs -- are kept lockout of work.  This is the largest threat to the nation's social cohesiveness.

Importantly it arises not from the reform or from an over-zealous pursuit of economic freedom or from market failure but rather from restrictions on freedom and the market.  The countries rated above Australia in terms of economic freedom -- Hong Kong, Singapore, New Zealand, the US, UK, Argentina and Canada -- all have lower levels of long-term unemployment and -- except Canada -- much lower levels of overall unemployment.

In general, higher economic freedom leads to the lower levels of unemployment and lower levels of long-term unemployment.  This applies across the 119 countries studied and for a sub-sample of OECD countries -- though for latter the relationship is weaker because of the distorting effect of government job creation schemes.  For example Sweden's official unemployment rate is about 10 per cent but this exclude an additional 10 per cent of the population on job creation schemes.

EQUITY AND ECONOMIC FREEDOM

It is true that the income distribution in the US, New Zealand and the UK -- countries which are further up the economic freedom ladder -- have widen more significantly in recent years than in Australia.  Moreover, there is some evidence that Australia has done a better job at maintaining the income level of low-income groups than these countries when measured on after-tax and after-government transfer basis.

Argy puts this down to pursuing too much freedom, too quickly and not redistributing enough of the gains to lower income groups via taxes.

First, attention should focus to a greater extent on whether economic growth and freedom provide opportunities for the poor to improve their lot in an absolute sense rather than as a result of more equal distribution of income.  After all, if the rich get rich whilst the poor also get wealthier there is no problem.  On the evidence this is what happens with move to greater economic freedom.

Second, some widening in the distribution of income is necessary to help people help themselves.  This is particularly the case in NZ and UK, where income distribution was suppressed by socialist policies for decades -- to level far below the range prevailing in Australia and almost all other OECD countries.  In 1975, for example, the distribution of income in the UK was half the range prevailing in Australia.  The compression of income levels -- achieved largely by lower growth and disincentives to work, invest and learn -- did not make the UK a happy and cohesive society and Australia's relative wider distribution of income did not deter the many thousands of British working class migrant from coming to live Australia.

Third, economic freedom does not conflict with a "social welfare net" which concentrates on correcting for the failures of private markets for insurance.  Nor does it necessarily conflict with a policy of assisting those most significantly effected by structural adjustment.  What it does conflict with are policies designed strictly to transfer wealth from rich to poor and more importantly from middle income earner to middle income earner.  Of course all welfare systems are a combination of all three elements -- redistribution, structural adjustment and insurance functions.  Latham appears to have grasped this distinction.  Although Argy seems to understands the diverse elements of the transfer system, he clearly emphasises the priority of redistribution.

Fourth, the biggest failing of the NZ and UK transfer systems, relative to Australia's is not their miserly nature but their poor targeting and inefficiency.  Thanks to reforms to the welfare system -- reform driven by the pressure to restraining the growth of government expenditure -- Australia does a relatively good job at getting transfer payments to low-income groups.

Fifth, within the OECD counties, there is no evidence to indicate that countries with wider distribution of income are less cohesive than those countries with a more narrow range of income.  For example, it is hard to believe that the US with its wider distribution of income is any less cohesive as a society than Italy.

In short the principle on income transfers should be:

"We must learn to see through demands for compassion when its measure is how much the government undertakes.  And we must learn to see through the demands for absolute security at the hands of politicians.  Yes there should be a safety net;  and yes a helping hand should always be there, but not at the risk of total dependence.  Help should be respectful and self-liquidating.  Wherever possible, it should be a pathway to self-support." (Green, 1996)

Latham sees the threat -- not as one of ideas as Argy -- but from a growing structural failure in the economy.  He believes that because of globalisation the economy is no longer able to create the job at anywhere near an acceptable level.  The task, as he sees it, is not to fight globalisation -- that he sees is impossible and counter productive -- but to embrace it.  However, he sees globalisation resulting in what he calls 30-40-30 society, a society where thirty percent of the people benefit directly and greatly from the processes of globalistion, the middle forty benefits indirectly from globalisation though weakly and with greater uncertainty.  According to Latham thirty percent of the population are simply left behind by globalisation.  Latham also argues that globalisation will have a differential impact on the regions.

Globalisation is definitely having a significant impact on labour markets, it is widening the distribution of income, putting a higher premium on skills and requiring greater mobility.  Capital is becoming more mobile and technology is broadening and deepening markets a frightening pace.  Nonetheless, Latham significantly exaggerates the impact of globalisation and underestimates the creativity of people and the market -- without the assistance and guidance of governments -- to create work and prosper.

The fact is that the non-traded sector of the economy in Australia still represents around 75% of the nation's economy and directly accounts for the vast bulk of the workforce.  Indeed, the trade sector today represents just slightly more of the economy than it did at the turn of the century.  The traded sector will expand over time and, as a result of globalisation, put pressure on the non-trade sector to compete international indirect via traded goods.  Nonetheless in developed countries the domestic economy and domestic conditions will drive growth in income and jobs.  For example the wages of a barber in, for example Camberwell, earns an income something like 20 times higher than the a barbers in Dhaka despite exactly the same service.  This arise difference arise from the relative wealth and productivity of the Australian economy and it not going to change much with globalisation -- unless the nation becomes poorer.  In other words, globalisation is not going to drive the wages of the Camberwell barbers to that the level earned in the third world.

Although financial markets have become much more integrated than traded goods, the view there is fully integrated capital market where foot-lose sloshing around the word without restriction is a gross overstatement.  The most obvious evidence is that, within a margin of 2-3 per cent, countries tend to invest as much as they save.  This is one reason why domestic saving is so important.  If there were a single global market for capital, international imbalances would be larger and less of a concern.

It is also wrong to believe that capital is perfectly malleable.  The North West Self project is not going to be transferred off-shore.  It might be closed down or be sold, but the physical assets are no going to leave Australia.

Importantly, the economies that are most open to global forces, for example the US, Hong Kong, Netherlands and UK -- and Australia -- are also the ones with high employment and lower unemployment levels.  In a modern globalised economy, the maxim -- we have the level of unemployment we choose -- remains valid

GOVERNMENT FAILURE

Mr Argy is right to argue that many economic liberals are concerned about the unchecked growth of the state but as David Henderson (1995) has stated

"Liberalism is not to be identified with hostility of the State, nor with a doctrinaire presumption that governments have only a minor role in economic life.  On the contrary, the liberal view of the role of the state both internal and external is positive.  Such a view is consistent with the principal of limited government, for to limit the scope of an institution is not to reject it.  Such limitation is calculated to rather to strengthen it.  Today, as in the past, the authority of the state is weakened not enhanced, when governments engage in interventionist measures as a means of winning or keeping favour of a particular interest groups, with no wider aim in view, or when they assume specific commitments and responsibilities which they cannot effectively maintain.  A captive state, or an over extended one, is not a strong state".

It is beyond dispute that the modern state has and continues to attempt to do too much.

The best indicator of an over-extended state is unemployment.  The main rationale for the growth of the state sector has been that the private sector is incapable of creating enough jobs.  Has this worked?  The answer is a resounding no.  Indeed, there is a general strong positive relationship between the size of government revenue and the level of unemployment.

The tendency of the state to go past the point of diminishing returns should be the main rationale for the "third way".  What the "third way" requires is a "reluctant" collectivist agenda -- one which seeks to establish a social safety net that compensates for the failures in the insurance market, rather than one aimed at redistributing wealth and managing economy.  In other words, it should concentrate on real, rather than fanciful market failure and recognises the limits of the state.

This is something Argy fails to comprehend.  Latham seems comprehend it -- at least most of the times.

One of most serious failing of the modern state has been it use of neo-Keynesian policies to attempt to securing the "optimal" or "warranted" level and pattern of growth.

Of course the Keynesian promise is a dream come true for politicians.  It gives them the ability to promise growth with security, and the ability to play the political cycle with big money.  The result has been disastrous, it has resulted on inflation, bloated government, high taxes and greater macro-economic instability.  Eventually the process had to come to an end, and with the discrediting of Keynesian policies.

Argy's plea for a return of these bad days and claims that the failure to do so is a result of grand conspiracy of right-wing ideology is absurd.  Even by his own assessment, the main cause of lower than "optimal" growth and the growth of structural unemployment over the last two decades has been disruptive macro-economic management.  What he does not seem to realise is that if state financing is intended to stabilise the economy, it must not itself be a major source of instability.

He may well believed that if he were in charge things would be different and more omnipotent.  This is simple just a pipedream.

Most economists -- even most politicians -- have learned from the past and now argue for sound money, sound finances and low taxes.  This consensus is not the result of ideology but rather a long and open debate and the testimony of experience.

Latham, by and large, accepts limits of government.  He rejects a return to activity macro-economic management.  He recognises the limits of the government provision and worries about welfare dependency.

There is one area, I believe, he forgets the limits of government and that is civil society.

Latham is quite right to worry about what is vaguely refereed to as civil society but his proposals may well harm rather than help civil society.

The strength of non-government sector is that it is not government;  that it is they are independent of government in funding, functions, purpose and objectives.  They provide a mechanism for people to work together voluntarily, to solve collective aims in non-commercial manner.  Although it is not widely recognised, the sector is very active in Australia and funded mainly from private or non-government source.

Government funding to NGOs is already high and increasing and there are already reasons for concern about this trend.  When government funds things, particularly things as important and complex as health and welfare, they rightly demand certain standards.  They need to answer for expenditure of public money to parliaments, and will require certain standards of performance, and due process.  This inevitably leads to detailed intervention, which has the potential to fundamentally alter the nature and the basic strength of the sector.  Also, government funding -- at least beyond a certain point -- tends to crowd out voluntary activity.  Why volunteer to do something if government pay other a commercial wages?  Why give to a worthy cause if the government controls the agenda?  Why donate funds if the government will do it for you?

What Latham proposes to do is to shift an even larger proportion of the delivery of social service to NGOs which will greatly exacerbate the problem and thereby undermine the core of civil society.  It will make them more dependent upon the state, and undermine voluntary action.

John Hyde thinks I overstate the problem and that there are ways of sheltering the NGO's from the perverse effects of government fund.  Perhaps, but, not I believe, if the shift is as large as imply by Latham.

IT'S THE LABOUR MARKET STUPID!

Latham and Argy share a common blind spot -- the labour market.  They both want to turn back time by re-regulating the labor market.

They want to go back to a system that has demonstrably failed.  The Australian system has been good for the skilled, the motivated, and the clever.  It has created many high paying jobs.  However, it has left a significant and increasing proportion of Australians behind in long-term unemployment, under employment and out of the work force.

They claim to be reformers, but when it comes to unemployment, they offer nothing new -- just more "I am from the government and I know best".

They claim to accept that markets often work and are keen on greater freedom to trade in good and service but not labour.  They claim to be concerned about personal responsibility, but not if it means that people are free to work at a wage and under conditions of their choose.  They claim to be interested in increasing the skills of workers, but not if means also taking a low- paid job.  They claim to be concerned about regional unemployment, but want to retain a centralised wages fixation system which prices job out of many regions.  They claim to be interested in improving the quality of Australian management, but will not let managers manage their most import asset -- their work force.  They talk about inclusiveness but want to excluded some of societies less privileged people from a livelihood.

The case for greater labor market flexibly is overwhelming The irrefutable fact is that the countries that have more flexible labour market -- lower minimum wages, less union control and more decentralised wage fixation -- have lower unemployment, create more jobs and have a more flexible and vibrant economies.

The agenda for creating jobs is clear.  It includes lower minimum wages over time;  a reduction in the tax levels for low-income earners, with serious consideration given to a US or UK style earned income tax credit;  elimination of unfair dismissal law and a reduction in the power of the Industrial Relation Commission.

Under this agenda the low skilled get jobs and no reduction in income -- there can be no honest claim of unfairness.

The agenda can only added to social cohesion and help the regions adjust and grow.

Job creation schemes can play useful role in easing the problem of "hysteresis" -- the tendency of the working capacity of the long-term unemployed to deteriorate as their time without work increases.  However, we must first know which programs work and why.  Too often politicians and their advisers have desperately cobbled together job creation schemes, without adequate research.  We must also recognise that job creation program are symptom of a problem -- of government failure not market failure -- they are not a solution.

The best measure of cohesive and humane society is not the distribution of income or the size of government, but free and open economy where people -- particularly the unskilled and unmotivated -- can earn a living and advance.

Make ACCC Show a Proposed Merger is Harmful

Last month, Don Mackay, the Chairman of Wattyl Paints, used the platform of his Annual General Meeting to criticise the ACCC for preventing his company from taking over Taubmans.  This resulted in the conjugal rights to Taubman's passing to Barlow Ltd of South Africa.  The ACCC decision was made in spite of the industry leader, Dulux, having a larger market share than Wattyl/Taubman combined.

Merger policy is a central theme of my new book, Australian Competition Policy:  Deregulation or Reregulation?  The book examines the current vogue for regulation in the name of promoting competition.

In 1993, the ACCC obtained increased scope to review merger proposals.  The test requiring mergers be approved was changed from one where mergers resulted in "dominance in a substantial market" to one of "substantial lessening of competition in a substantial market".

This opened up a vast new arena for regulatory oversight.  And although only 5-10 per cent of mergers are opposed by the ACCC, these are often in industries desperately in need of rationalisation.

Mergers contested by the ACCC have included Westpac/Bank of Melbourne and Ampol/Caltex.  In both cases, the ACCC's agreement to the mergers came with onerous conditions.  This is in spite of banking and petroleum being highly competitive markets in which new players can readily enter.

With Westpac/BoM the ACCC went to extraordinary lengths to find a cause to intervene.  It divided banking into six product categories and examined these as if they were self contained within each state.  It then reviewed the combined market share against its competition criteria.  This triggered "concern" because the combined firm's held 9 per cent of the deposit banking market in Victoria! The ACCC's conditions for authorising the merger offered major benefits to the Bank of Bendigo by forcing Westpac to open its payments network to a competitor.

While such an action increases competition in the market in the first instance, forcing an innovator to share a successful network development places a disincentive on innovators to build new systems.  Why go to the expense and take the risks when a regulator will require your competitor to share its success with you?

In another case, Australis/Foxtel, the ACCC's refusal to sanction the merger resulted in the bankruptcy of Australis.  The ACCC's blocking action was taken to help Optus maintain its viability.

Decisions like these that favour one firm at the expense of others require Solomonic wisdom.  And there is no more abundance of this in the ACCC than any other government agency.

ACCC Chair, Allan Fels supports his agency's actions in these and other cases.  He argues that they increase competition and prevent firms co-existing and enjoying a much quieter life.  Yet, a small number of competitors does not mean less intensive competition, witness the vigorous tussles between duopolies like Coke and Pepsi, Ansett and Qantas, and Woolworths and Coles.  Moreover, the usual measure of competitive intensity, lower price outcomes, is an inappropriate yardstick.  If two firms are engaged in unprofitable cut-throat competition, requiring them to remain at loggerheads rather than letting one exit forces the industry to retain resources that could better be employed in other directions.

Industry rationalisation is a permanent feature of successful economies.  But the fact is that without government support, markets are so dynamic that no firm can hold and exploit a monopoly position.  Whenever the ACCC opposes merger actions it is therefore likely to reduce efficiency.  Political considerations may prevent governments removing this policing role.  One solution, put forward by Briggs and Scheelings in my book is to reverse the onus of proof so that the ACCC is required to demonstrate that a proposed merger is harmful.

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Casualties of Truth

In 1987, bored with life on the ship that was taking me to England, I disembarked at Cape Town and spent the following six months hitchhiking around South Africa and neighbouring countries.  Taking advantage of being an outsider, I was able to meet and talk frankly about social and political issues with people of all races.

I was opposed to apartheid when I arrived in South Africa, and my travels only strengthened my hostility.  Race intruded everywhere, distorting all aspects of people's lives, both public and private.  By visiting Africans in their own homes without obtaining official permission, I was actually breaking the law.  Those in the West who still spoke of South Africa as part of the "free world" were degrading the word "free".

Even then, South Africa was a brutal and violent society, although the level of conflict was much less than what came later, as the fight against apartheid intensified.  There was a high level of crime in the black townships, although this was not a matter that particularly troubled most whites, who were largely insulated from its effects.  And the National Party regime seemed invincible.

But beginning in the 1980s, the government began to amend some of the worst aspects of apartheid, such as the pass laws which restricted Africans' freedom of movement.  The government and other white leaders also began both secret and public contacts with members of the African National Congress, the main anti-apartheid organisation.  Yet at the same time, the security forces and their allies were fighting a dirty war against the ANC and other liberation groups.

The eventual creation of a democratic system in which power was peacefully transferred from the National Party to the ANC through the elections of 1994 was a remarkable achievement, one which seemed fanciful only a decade earlier.  The ANC gained well over 60 per cent of the popular vote.

Nevertheless, the apartheid years also created a terrible legacy of gross human rights violations.  Both the supporters of apartheid and their opponents have innocent blood on their hands.  South Africa is still a deeply fractured country, confronted with the problems of massive unemployment and poverty, an appalling rate of crime, and persisting racial bitterness.

In an attempt to come to terms with the past, in 1995 President Mandela established a Truth and Reconciliation Commission, chaired by Archbishop Desmond Tutu.  Such commissions have been used, with varying degrees of success, by a number of countries emerging from a period of repression and conflict.  They promise to allow past abuses to be acknowledged without a resort to widespread prosecutions of people who retain power in the new system, which might jeopardise the settlement that has brought about the political changes.

The commission offered the possibility of immunity from prosecution to people who had committed serious abuses during the struggle over apartheid, provided that they fully disclosed their misdeeds.  This was a compromise between the demands of the former regime for a blanket amnesty, and the reasonable expectations of victims and human rights advocates that people should be punished for their crimes.

Supporters of this compromise argued that without it, the settlement that brought about the end of apartheid could not have occurred.  The only alternative would have been continuation of the armed conflict, with the appalling consequences this would have entailed.  As one of the key proponents of the commission stated, "we sacrifice justice for truth so as to consolidate democracy, to close the chapter of the past and to avoid confrontation".

It is a strong argument.  In effect, individual victims were asked to forgo their rights to justice in the belief that this would both help to prevent any further victims from being created, as well as to lay down the basis for a more just society in the future.

But those who expect others to make this kind of trade-off have a great responsibility to do everything possible to bring about its success.  If the Truth and Reconciliation Commission was to make a real contribution to the process of transcending the past, its independence would have to be beyond question, and its proceedings would have to conducted with gravitas as well as compassion.

In a 1993 enquiry the ANC set up to investigate damaging allegations about human rights abuses made by a number of its own members, the three commissioners were widely accepted as independent, and included two from outside South Africa.  But this time round, too many of the commission's members were ANC sympathisers.  And despite Tutu's international stature, he is probably too sanctimonious and theatrical to have chaired the commission.

A few months ago a major survey amongst urban South Africans of all races found widespread doubts about the commission, with over two thirds believing that it would lead to a worsening of race relations.  The majority of whites also thought that it had not been fair to all sides, although the majority of Africans thought otherwise.

The commission's report, which was released last week, seems to confound those who believed that it would be biased towards the ANC.  As expected, members and supporters of the former regime were indicted for gross violations of human rights.  But so were the ANC and other liberation groups, whose crimes included the torture and murder of their own members and the killing of innocent civilians.

However, the response to the report, particularly from the ANC, has been disturbing, suggesting that the government's readiness to "sacrifice justice for truth" stemmed from an indifference to truth, and a misunderstanding of justice.

The ANC leadership -- though not President Mandela -- argues that the organisation should not be blamed for any human rights abuses because these occurred while it was involved in a just war.  But this fails to recognise a fundamental distinction between a just cause, and acting justly in pursuit of that cause.  It is a failure that does not bode well for South Africa's prospects of becoming a peaceful and decent nation.

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Privatising Public Transport

Next year the Kennett Government will begin its most innovative reform -- the privatisation of the public transport system.

Over the last six years, the Government has achieve significant improvements in the operation of the public transport system.  However, as any frequent PTC customer knows, there remains huge scope for further improvements.  The system continues to require a subsidy from taxpayers of around $800 million per year -- in other words 70% of the average fare is paid by the taxpayer.  Service cancellations remain the highest amongst state public transport systems.  Service delays are running at about 10% of total services -- which is 25% higher than currently experienced in NSW.

Two years ago the government decided that the solution lay in getting the system into private hands.  However, it faced three major hurdles.  First, the system is and will continue to lose money, so no one would buy it without a continuing government subsidy.  Second, the rail network has monopolistic features -- these could allow an owner to mark-up prices.  Third, research has shown that any reform will be harshly dealt with by the electorate if service quality declines.

The Government's solution is not to sell the system out right but to split it up into five firms -- two urban train firms, two tram firms and one non-urban rail firm -- and to franchise these separately for a fixed period to private operators.  The tenders were announced earlier this year and contracts are expected to be signed early next year.

Under this system, the state will retain ownership of the rail networks.  The franchise will buy the rolling stock -- trams and trains -- with the state retaining the right to buy back the rolling stock.

Firms will bid on the basis of the required operating subsidy and, in some cases, on the amount of additional funds they are willing to invest in new rolling stock.

Judging from the response to date, and the experience in the UK with rail franchising, the competition will be intense and substantial reduction in the subsidy and higher investment can be expected.

The key is producing better service.  Here the Government has done five innovative things.

First, it has introduced a Passenger Charter -- the first in Australia -- which guarantees service standards in ten areas including no price rises above the inflation rate.  This charter will be enshrined in the franchise contracts.

Second, contracts will require franchisees to compensate passengers for poor punctuality and cancelled services.

Third, the contracts will include bonuses if franchisees achieve a performance above a set standard and will include penalties for contractors who fail to perform to set standards.

Fourth the franchisees will be able to keep extra revenue received and receive a bonus from the government as a inducement to attract more passengers to public transport.

Fifth, the government will invest much of the saving from lower subsidies, into capital improvements which will increase service levels and quality.

Although the reform has political risks, particularly in an election years, the potential gain are large.  Indeed, it might just allow public transport to regain ground lost to the car, particularly with the introduction of tolls in all major expressways to the city.

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From Workfare State to Transfer State

Backgrounder

The last 40 years have seen great changes in the role of government in Australian life.

During that time, expenditure on government transfers -- income support, health, education and welfare services -- has grown faster than the population, the economy and taxes.  While GDP per person has doubled in real terms -- and taxes have tripled -- expenditure on transfers has gone up five-fold.  A process of "nationalising the household" has occurred with the proportion of the Australian population on government income support more than doubling to close to a third of the adult population.

Although taxes are now at record peacetime levels, they have not kept pace with the expansion in expenditure on transfers and interest on government debt.  The result has been a collapse in government saving, knocking away a basic support of the workfare sector -- government business enterprises and investment -- which has fallen from a third of government spending 40 years ago to a sixth today.

The welfare state -- or transfer state as it is better labelled -- is dependent on the wider economy, yet we are saving and investing less of our income, and income growth is lower, than before the great expansion of government transfers.

Unless and until some permanent check on the growth of the transfer state is achieved, its rising burden will continue to force governments to search for ways to reduce their other costs and liabilities and to increase productivity.  These continuing pressures are why reform has occurred and why it is still needed.

INTRODUCTION

There is considerable commentary around which implies that the economic reform programme known as "economic rationalism" is a mistaken choice which can be easily reversed, with positive social benefits.  If we are to make the right decisions as a society, we need to be clear about what has lain behind the direction of public policy since 1983.  What critics of "economic rationalism" typically do not face is that saving the welfare state was a crucial part of the policy alliance labelled "economic rationalism". ⁽¹⁾  It is not some peculiar ideological madness that overtook policy-makers -- the "public policy as ideological taste-sensation" analysis that many critics of economic rationalism seem to advance -- but a series of considered responses to real pressures and to the failures of past policy.

THE COLLAPSE OF THE DEAKINITE SETTLEMENT

Paul Kelly ⁽²⁾ identified Australia's Federation Settlement as being based on five pillars -- White Australia, Trade Protection, Wage Arbitration, State Paternalism and Imperial Benevolence -- though these pillars were not actually put fully in place until the Deakin Government of 1905 to 1908.  State Paternalism was delivered through government enterprises and government investment -- what might be called "workfare" -- with welfare transfers being dominated by age and service pensions.  Before the Whitlam Government, Australia had a small general government sector by OECD standards ⁽³⁾ but a large, labour-absorbing, nation-building government business sector based largely on public utilities -- water, gas, electricity, railways, telephones, postal services, and road building and maintenance.  (It was an arguable case that, for a young nation, government capital accumulation was appropriate.) These enterprises were often, or became, notoriously "featherbedded" -- for example, the Victorian State Electricity Commission's initials of SEC were said by its employees to stand for "Safe, Easy & Comfortable".  This State Paternalism, along with protected manufacturing (Trade Protection), regulated wages based on the concept of a "living wage" (Wage Arbitration) and limited labour competition (White Australia), constituted the workfare state.

Australia since the Whitlam Government has experienced the unwinding of this workfare state due to increasing pressure from adverse economic shifts, mismanagement of government businesses and the escalating costs of government transfers.  In 1972-73, when the Whitlam Government took office, total government expenditure was 34 per cent of GDP.  Of this, almost a third (or 10 per cent of GDP) was the workfare sector:

• government business enterprises, particularly public utilities,
• investment by the general government sector, ⁽⁴⁾ particularly local governments, Departments of Main Roads and Public Works, Postmaster-General, etc,

while the welfare or transfer sector:

• expenditure on health, education, welfare services and income transfers

was 12 per cent of GDP.

By 1995-96, when the Howard Government took office, total government expenditure was 42 per cent of GDP, ⁽⁵⁾ of which the workfare sector constituted a sixth (7 per cent of GDP) and the welfare or transfer sector was a half (21 per cent of GDP) (Graph 1).

The Whitlam Government unwittingly set in train events that later led to the shift from the workfare state to what is best called the transfer state.  To some extent, the workfare state was already under pressure.  It relied explicitly (through import taxes) or implicitly (through high-cost government infrastructure) on taxing consumers and exporters to pay its costs -- costs which extended beyond the government sector to protected manufacturing.  Much of Australian "free enterprise" was accurately described as being only formally free and only notionally enterprising. ⁽⁶⁾  A temporary surge in the terms of trade -- the average price of what Australia exports in terms of what it imports -- prior to the election of the Whitlam Government gave a quite false impression of Australia's actual economic strength.  In fact, Australia's terms of trade were undergoing a long-term decline (Graph 2) -- they fell 30 per cent from 1963-64 to 1986-87 and by 35 per cent from the "false peak" of 1973-74 to 1986-87.  This greatly undermined the capacity of Australian exporters to continue to fund the workfare state.

Furthermore, during the term of the Whitlam Government, the "resources boom" of the late-1960s collapsed.  By the end of the Whitlam Government, business assets per head were lower, in real terms, than they had been in the mid-1960s (Graph 3).

While these major, adverse, economic shifts were underway, the Whitlam Government kicked off a huge expansion in the transfer state.  Government transfers -- of income, of health, education and welfare services -- jumped from 12 per cent of GDP when the Whitlam Government was elected to 17 per cent of GDP and have since increased to 21 per cent of GDP (Graph 4).  Australia collectively "rewarded" itself with a huge increase in government transfers just as its wealth-producing assets suffered a massive drop in value and as the purchasing power of its exports were on a long downward slide.

The continuing surge in the size and cost of the transfer state necessitated increased government revenue -- the tax take is now the largest in peacetime Australian history (Graph 5).  Welfare expenditure has grown faster than the economy, faster than government revenue and faster than the population.  In real terms, GDP per head has doubled since 1959-60, while taxes have tripled and welfare expenditure has gone up five-fold (Graph 6), with no sign of the increase in welfare expenditure abating (Graph 7).  Indeed, the belief that there is a natural upper limit to demands and expectations made on the basis that "someone else" will pay is itself profoundly deluded.  There is no pre-set level of "need" that can be satisfied -- there will be as much "need" as the political system is prepared to attempt to pay for.  If the state exists to "do good" -- and on the basis that it is competent to do anything it is decided it will do, rather than some defined set of tasks for which it has specific advantages -- there are no natural limits to its growth -- there is always more "good", howsoever defined, that can be done. ⁽⁷⁾

The increase in general government revenue, as a share of GDP, has been more than consumed by the increase in welfare expenditures and interest payments on government debt (Graph 8).  This unending fiscal pressure has had various effects.  Saving by the general government sector -- a major support of the workfare state -- has collapsed, with an increasing tendency to fund recurrent expenditure by borrowings or asset sales, a tendency somewhat ameliorated by the "Peter Walsh" Commonwealth budget surpluses of the late-1980s (Graph 9).  Government investment, as a share of GDP, has also fallen (Graph 10) as governments divert resources from the dying workfare state to the growing transfer state.  Governments have also sought to gain more income from their business enterprises (Graph 11).

The Whitlam and Fraser Governments operated on the basis that the transfer state could be funded in addition to the workfare state.  This was the era of the "Club of Rome", the "Oil Shock" and predicted resource and energy scarcity.  Australia was a resource-rich nation -- so its wealth was "made".  There was, therefore, no need to make painful choices.  So no serious attempt to face up to the pressures from the expanding transfer state -- apart from some fiscal pruning in the early Fraser Government -- was made until the period of the Hawke Government -- governments rarely face painful decisions unless forced to.  Indeed, the workfare state continued to expand, peaking at 14 per cent of GDP in 1986-87, though this expansion was based far more on borrowings than had been the case in the past, due to the collapse in general government saving (Graph 9).  At that point, a series of poor investment decisions -- Tricontinental and the VEDC in Victoria, the State Bank in South Australia, "WA Inc" in WA, serious over-investment in electricity capacity -- forced reforms and rationalisations on the government business sector in most States.  The predicted resources booms based on resource-scarcity and high resource prices of the 1970s became resource-plenty, falling resource prices and bust in the 1980s.

The practical revelation of governments being remarkably poor business managers did much to encourage the reform programme.  The arguments that there is a serious conflict of interest in being both owner and regulator, and that public ownership is not real ownership -- since the notional owners (the public):

• cannot rely on their agents (the government) to appoint board members and hire and fire managers on a commercial basis;
• do not have their personal wealth at stake;
• lack any real incentive (and often the information) ⁽⁸⁾ to keep track of an individual enterprise's health;
• did not, until some recent reforms, borrow on the basis of interest rates connected to the risk associated with the firm's assets;  and
• are not under the pressures involved in the "market for managerial control" of the stock exchange

were given a powerful, practical boost.  (A central part of the appeal of "public ownership" -- that it is ownership without personal effort or risk, ownership "on the cheap" -- goes to the heart of its problems as a form of ownership.) In its own way, and in truncated form, the Australian workfare state showed a similar cycle to that of the command economies -- early successful capital accumulation with growth based on adding inputs became increasing inefficiency and crisis as command-and-control mechanisms and the "pretend ownership" of state control proved unable to adjust appropriately to changing circumstances.

There has been clear and continuing electoral resistance to increased taxation.  People may say in surveys that they would support increased taxes for more spending on certain areas, but it is not how they vote ⁽⁹⁾ -- people are willing to receive benefits but reluctant to pay for them.  Governments faced increased transfer pressures from an ageing population and other demands on government -- though the growth in welfare dependency has been predominantly that of "able-bodied" welfare:  students, unemployed, sole parents (Graph 12).  Much of the increase in transfers was the unintended consequence of policy decisions.  Yet governments also faced limits to increased taxation.  Policy-makers -- both Federal and State, and from both sides of the political spectrum -- have therefore had to find ways of increasing the efficiency of delivery of government services, reducing other financial drains on government and improving the efficiency of the general economy.  Hence the pattern of reform, covering:

• reform of government business enterprises to reduce the financial and risk liabilities of the state, cut costs for Australian exporters and increase the return on government assets;
• microeconomic reform to increase the general productivity and flexibility of the economy, so it was more able to finance the transfer state;
• greater targeting of welfare ⁽¹⁰⁾ and antifraud measures to increase the efficiency, and popular legitimacy, of government transfers;
• increasing coverage of lower-income working families by income and other supplements;
• budget surpluses in the mid-to-late 1980s and late-1990s to reduce long-term debt pressure;  and
• superannuation reforms to cut age-pension liabilities.

The transfer state is ultimately parasitic on the wider economy:  it needs a healthy host to keep going.

The reform programme did more to redirect the state than cut it.  The often-alleged roll-back of the state is a myth -- the state is still larger than when Gough Whitlam left office and government transfers, taxes and legislative activity are all still trending upward.  The "economic rationalists" have not been the enemies of the transfer state;  those in government have tried to keep it healthy and going -- and have, in fact, extended it.  It is true that rationalisation and privatisation of government businesses have seen the public sector share of total employment fall (Graph 13), but the transfer sector has grown dramatically -- community services employment has doubled in twelve years when total employment has gone up only 20 per cent (Graph 14).  Even deregulation has been vastly exaggerated -- while it is true that governments are much less likely to set prices and quantities in markets (with the continuing exception of the labour market, which is considerably more regulated now than it was before the reform process began), ⁽¹¹⁾ the law-making machine spews out ever more law.  As a crude measure, in the six years from 1990 to 1995, the Commonwealth Parliament passed more pages of legislation than it did from 1901 to 1974 (Graph 15) -- in part because so much legislation constitutes operating instructions for the burgeoning transfer state.

Much of the rhetoric of Pauline Hanson and One Nation, and economic nationalists generally, ⁽¹²⁾ is about going back to the situation before the reform process began.  This is not an option.  The workfare state was based on an expanding resource sector and on levels of creation of nation-building infrastructure which are transient.  Dams and roads get built;  the scale of needed extra rural construction declines over time.  The high costs and industrial protection of the workfare state were a burden on the resource sector anyway.  Making sure that exporting industries remain competitive requires a continuing search for efficiencies in infrastructure provision.

The pressures generating the need for reform will not go away.  Far from there having been too much reform, there has been too little -- as the continuing upward trend in unemployment (Graph 16) and the deterioration of government fiscal performance (Graph 9) indicate;  both of which trends pre-date the reform period and were much of the motivation for reform.  Despite recent improvements, it is not clear that Australian governments are reliably on a fiscally responsible path of funding current expenditure from revenue.  Nor has business investment made up for the fall in government investment (Graph 17), even given the inefficiency of much government investment in over-capacity or poorly placed infrastructure;  the slight decline in business investment's share of GDP is remarkable given the retooling which extensive structural change in the economy has required.  The increased volatility of business investment is a further sign of increased economic pressures.

OVER-CAPACITY IN GAS AND ELECTRICITY As experience of other systems became better known in the 1980s, and as financial stringency began to bite, State Governments started to look seriously at cost savings.  The 1989 Industry Commission report on electricity had shown the excess costs that plagued the Australian electricity industry.  There was also evidence of low-cost operations in some of the private generation facilities, notably the relatively small Alcoa Anglesey brown coal station. Queensland, the State with the most efficient system, embarked on reform in 1990.  Even before then, the Cain-Kirner Government had begun to reduce overmanning and goldplating.  The Victorian electricity industry has shed 19,000 out of its previous 25,000 workers.  About 10,000 of these surplus jobs were shed under Labor, a further 3,000 under the corporatised Kennett structure, with the remainder having been shed since privatisation (mainly in the distribution businesses, the workforce of which was left largely unreconstructed prior to privatisation).  As well as reducing job numbers (at a time when demand grew by about 20%), the reliability of the system has increased.  The generators have increased their availability-to-run levels from around 70% to over 90%.  The reliability of the distribution system, according to the measures of the Office of the Regulator-General, has shown an erratic but modest improvement. Victorian Gas and Fuel has downsized from over 6,000 workers in the late-1980s to 1,500, again with about half the reductions taking place in the twilight years of the Labor Government.

Much of the rhetoric of change has talked about cutting government, when in fact government -- outside the workfare sector -- is still growing.  State action is being redirected.  This itself is disorienting, as people are told that government is shrinking -- and can point to jobs being shed, services being cut (school and hospital closures, withdrawal of rural services, and so on) -- while the burdens of government are actually increasing.  Much of the benefits of reform has been captured by the growing transfer sector -- the escalating costs of which have been motivating reform in the first place.  Household income per head of population, after tax but before income transfers, was essentially static from the period of the Whitlam Government to the early Hawke years.  The slow increase since is markedly lower than the rates of increase experienced prior to the Whitlam Government (Graph 18) ⁽¹³⁾ -- economic growth rates tend to decline as government grows above a certain size. ⁽¹⁴⁾  Those dealing with the economic changes are usually taxpayers (and thus generally paying more taxes) yet not likely to be major transfer recipients (and thus not capturing many of the benefits).  It is also open to serious question whether the transfer state is an efficient distributor of benefits.  The transfer system often operates as a badly arranged, inefficient, expensive insurance market where risks and liabilities are very poorly connected, leading to all sorts of moral hazards and other perverse incentives. ⁽¹⁵⁾  The public hospital and school sectors suffer the problems of quality and efficiency associated with public ownership being a very attenuated form of ownership (see above).  Taxes are a very expensive way of funding something -- not only are there the administrative costs of collecting and distributing the funds, and compliance costs imposed on taxpayers and benefit recipients, but taxes also discourage economic activity by increasing costs and decreasing income. ⁽¹⁶⁾  Society has to receive in the order of $1.30 to $1.50 worth of value for every $1 of tax money spent for a net social gain to be achieved. ⁽¹⁷⁾  This is a threshold the less likely to be achieved the more government does -- since the benefit from each extra dollar of government expenditure will tend to decline while the extra costs of taxation tend to rise disproportionately with increases in tax rates.  (This is, no doubt, a major reason for the tendency for economic growth to decline as government increases its share of GDP above about 20 per cent of GDP.) ⁽¹⁸⁾

The consensual interactions of markets and civil society -- where people tend to be committed to their decisions because they are their own choice, and reflect their own preferences, where enforcement costs are much lower, where incentives direct people to pay attention to the preferences of the other party(ies) to transactions and where incentives direct people to put appropriate effort to achieve gains -- are much more likely to generate net social benefits than the transactions of the transfer state whereby one party (the taxpayer) provides the resources via anonymous processes of coercion and the other party (the recipient) has very limited choices and/or qualifies on the basis of demonstrating helplessness or incapacity.  In its favour, the transfer state offers the prospect of receiving benefits the costs of which one imposes on others -- "something for nothing" -- including, particularly via its regulatory structures, the benefits of imposing one's preferences on others -- and irresponsibility is an easy sell. ⁽¹⁹⁾  It also offers career structures for the articulate and the coercively compassionate. ⁽²⁰⁾  Nevertheless, the coercive transactions of the state are only likely to generate net social gains in the rather specific circumstances when, rather than being net displacers of the consensual arrangements of markets and civil society, they genuinely promote such transactions. ⁽²¹⁾

The growing demands of the transfer state put demands on government and the economy which increase faster than revenue growth, economic growth and population growth.  We are not in a stable situation.  The increasing tendency to finance current expenditure by borrowing or asset sales -- flogging Qantas to pay for today's expenditure on pensions or the Commonwealth Bank to balance a budget -- is a sign of a failure to deal effectively with the underlying pressures: ⁽²²⁾  fiscal irresponsibility following social irresponsibility.  The delusion that government -- outside the workfare sector of government business enterprises and investment -- has been cut, or is shrinking, and that its demands are lessening, provides completely the wrong basis to understand our situation.  Those who propagate such falsehoods do great damage to our ability to grapple with the real issues facing Australia.  They add greatly to understandable confusion in the electorate and do much to create fertile ground for "snake oil" merchants.

THE CULTURAL BURDENS OF STRUCTURAL CHANGE

The Hawke Government faced the necessary choice between the weakening workfare state and the burgeoning transfer state -- since both could not be sustained.  It chose the transfer state, a choice repeated around the globe -- as reflected in the world-wide trend to privatisation. ⁽²³⁾  The Hawke Government was also faced with the need to try to put some brakes on the growth of welfare expenditure.  It adopted a policy of targeting transfers.

Targeting transfers is a matter of identifying and targeting losers -- the people who will be helped.  This clearly creates an incentive to be identified as losers, as victims -- what Robert Hughes calls "the culture of complaint".  Much of this targeting was done on the basis of "identity politics", of people being identified as hard done by on the basis of their group membership -- Aboriginality, sexuality, gender, ethnicity, etc.  This not only provided an apparent plethora of special deals and arrangements -- thus weakening any sense of a common citizenship -- the dynamic of victimhood also created a natural tendency to identify alleged oppressors or else Australian society itself, as oppressive.  Those who felt proud of their country, and that they lived in a fairly good, even admirable society -- one which was democratic, free, tolerant, ⁽²⁴⁾ prosperous -- were provided with feelings of alienation and grounds for resentment;  grounds magnified by the fact that their taxes paid for these special arrangements.

In rural and provincial Australia in particular, daily observation of the chronic failure of indigenous programmes does not help belief in the wisdom of a remote Canberra or the validity of victim politics.

A CHANGING PLACE

The period of the decline and dismantling of the workfare state also saw a series of major changes in Australia's interactions with the outside world, raising further questions of Australian identity and providing further stresses from change.  The expansion of global capital markets came home to Australia with the floating of the exchange rate and the expansion of international investment flows -- both into Australia (notoriously in the form of foreign debt) and increased investment by Australian companies overseas.

With this expansion came a dramatic increase in the size and visibility of our interaction with Asia -- as trading partners, as visiting tourists and students, as investors and as migrants.  Asians differ visibly and culturally far more from Anglo-Celtic Australians (who still make up 70 per cent of the population) than the European contacts which were declining in comparative importance.  Much of this change was simply a response to market signals from increasing Asian prosperity.  Some, however, was a result of deliberate policy.  How much ownership many Australians felt of these changes is doubtful.  In the case of immigration -- where the rise of unemployment coincided with a reversal in, previously high, opinion poll support for immigration -- there was explicit action, particularly by many in the media, to close down debate. ⁽²⁵⁾  Significant changes on which public debate is restricted are not changes of which people are likely to feel a sense of ownership, or even acceptance.  A feeling of not being listened to is a very natural source of resentment.

Another source of major change was increasing internationalisation -- the increasing importance of international treaties in domestic politics.  There has been a massive increase in international legal instruments and their coverage.  This was magnified by High Court decisions which lead to increasing Commonwealth power, through use of the foreign affairs power of the Constitution, over areas of public policy which were previously the province of the States.  Since signing and ratification of treaties are acts of the Commonwealth Executive -- not of Parliament -- the level of public scrutiny involved was limited.  The Commonwealth Parliament was able, by such actions, to legislate on a much wider range of matters.  This increasing power to the centre was clearly not something the general public had voted on -- and the history of Constitutional referenda indicates a certain suspicion by the electorate of requests by the Commonwealth for more power. ⁽²⁶⁾  Changes being done on the basis of remote international instruments would hardly be likely to increase any sense of ownership of key decisions.

On top of this, the 1980s also saw the rise of environmental politics -- the 1983 federal election being the first such where an environmental issue (the Franklin Dam) was a major issue.  The typical dynamic of such politics is for some development in rural or provincial Australia -- a Coronation Hill, a Wesley Vale, a Jabiluka -- to be demonised by urban-based environmental groups playing to a largely urban-based "green" vote.  City pieties destroy rural or provincial jobs without any compensation ⁽²⁷⁾ and on the basis of a rhetoric which undermines the legitimacy of the activity of rural and provincial Australians.  This also does not aid social harmony but further undermines the ability of resource industries to fund the expanding transfer state.

Australia will continue to be a party to international treaties.  If transfer expenditures are to be restrained then targeting is inevitable.  Our interactions with Asia will continue to grow.  Environmental considerations will have to be balanced with other social goals.  The question is not whether these things will happen but whether or not they will be done in ways which promote social harmony and incorporate popular ownership of decisions.

FACING CONSEQUENCES

The increase in the transfer state from 9 per cent of GDP to 21 per cent of GDP in the space of 40 years represents an enormous social shift.  It is profoundly naïve to think that this can happen without negative consequences or ill-effects.  As a nation, following the massive expansion in transfers kicked off by the Whitlam Government, we are investing less (Graphs 10 and 17) and saving less (Graphs 9 and 19) of our income.  In particular, because of lower rates of income growth (making saving harder), higher taxes (making it less rewarding) and increased income transfers (making it less personally required), household saving is in long-term decline, with people saving less per head in real terms (from $1,900 in 1974-75 to $900 in 1996-97 in constant dollar terms).  The demands of the transfer state increase taxes and government, thereby tending to lower economic growth, which feeds back into lower income growth.

A country which saves less is a country which generates less of the capital it needs for investment and accumulates less wealth for future use.  Less investment generally means less growth.  Less domestically generated capital leads to more foreign ownership -- the increase in foreign ownership of business assets (Graph 20) mirrors the collapse in national saving (Graph 19).  (Some alleged lack of appropriate controls is not the issue:  the Foreign Investment Review Board was not established until 1976 and foreign ownership was far lower before its creation.) ⁽²⁸⁾

FAMILY LIFE

But it is not only these macroeconomic results we need to be concerned about.  Families are institutions which provide inter- and intra-generational support.  To some extent, increased individual prosperity makes such support less required -- hence, for example, children leaving home at younger ages, increasing measured household income inequality -- while increased mobility and urban living weaken some of the previously operating community sanctions and supports.  Beyond these effects, the transfer state, by providing many of the support mechanisms of families for "free", acts as an alternative for investment in family life, just as the transfer state also operates as an alternative for saving and for investment in infrastructure and other capital works.  The transfer state reduces the costs of negative behaviour and, with public housing, tends to concentrate social pathologies.  We should not be surprised if negative social consequences tend to multiply -- with the transfer state as a causative, rather than merely ameliorating, agent.  Living anonymously off others does not build social interaction, self-respect or personal responsibility.

Australia faces a double challenge:

• to continue on the path of economic reform, so as to fund the escalating costs of the transfer state;  and
• to try to set clear and effective limits on the apparently endless growth of that transfer state.

To a considerable extent, these are overlapping activities.  A central element in both is to decide, as a society, what it is that government has genuine advantages in doing, compared to other social arrangements, and to ensure that government does those things, and no more.  The cycle of irresponsibility -- of "rewarding" ourselves with benefits we expect others to pay for and of supporting government action on the basis of intentions, rather than paying serious attention to actual outcomes -- has to be broken.

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ENDNOTES

1.  An alliance to reduce government control over the economy either for its direct benefits or to ensure that the welfare state could be funded or both.

2.  Paul Kelly, The End of Certainty:  The Story of the 1980s, Allen & Unwin, 1992, pages 661ff.

3.  Only Japan, and the less developed OECD members (Spain, Portugal and Turkey) had lower rates of taxation as a percentage of GDP (OECD, Revenue Statistics 1965-1995).

4.  The general government sector covers all government bodies involved in the production of goods and services outside the normal market mechanisms -- departments, schools, hospitals, etc.

5.  Down from a peak of 49 per cent of GDP in 1986-87.

6.  The Whitlam Government also initiated the move away from protection with its sudden 25 per cent cut in tariffs.

7.  Many seem to believe that government is quasi-omniscient (it has the knowledge to do whatever it sets out to do), quasi-omnipotent (it has the power to achieve whatever it sets out to achieve) and beneficent (its actions inherently bring net social benefit) -- that is, politics becomes a substitute for religion and the state a substitute deity.  Nietzsche suggested that the "will to power" would be the response to the "death of God".  The pervasive twentieth-century belief in the quasi-omniscient, quasi-omnipotent, beneficent state seems to bear Nietzsche out.  Certainly the belief in the salvational or redemptive power of politics -- that the coercive transactions of the state are inherently more "pure" and moral than the consensual acts of markets and civil society -- is widespread.  Particularly amongst critics of "economic rationalism".

8.  The reporting requirements for firms listed on the stock exchange are far greater than those imposed on government business enterprises not so listed.

9.  The Fraser Government's successful scare tactic over a possible ALP tax on the family home in the 1980 election was a precursor to the highly successful anti-GST Keating Government campaign in 1993 (which led to the first two-party-preferred swing to an incumbent Federal Government since 1966).

10.  The Howard Government family assistance changes seem to have weakened the targeting of transfers towards lower income groups.

11.  With unfair dismissals provisions, more complex workers' compensation arrangements, increased discrimination law, increased employer liability for actions of employees, more intrusive occupational health and safety arrangements, superannuation liabilities, etc….  That the 555-page Workplace Relations Act was seen as some major deregulatory step is a sign of how unconnected from reality much public discussion of such issues is.

12.  See R.J. Wood, Odd Bedfellows:  The Economic Nationalists and Why They Are Wrong, Backgrounder, Volume 10/2, July 1998 for discussion of the economic nationalist approach shared by a wide range of critics of "economic rationalism".

13.  Indirect taxes have been deducted as they are ultimately paid by the household sector -- either as consumers through increased prices or as owners of firms through decreased income.

14.  J. Gwartney, R. Lawson and R. Holcombe, The Size and Functions of Government and Economic Growth, study prepared for Joint Economic Committee of the US Congress, April 1998.

15.  The current tax system is arguably even worse for imposing significant social costs -- covering, as it does, a much larger proportion of the population.

16.  Leading to what economists call "deadweight costs" -- displacement of otherwise mutually beneficial transactions.

17.  C.C. Findlay and R.L. Jones, (1982) -- "The Marginal Cost of Australian Taxation", Economic Record, 58 (162), pages 253-262 -- estimate the deadweight loss of income tax as being in the range 23 to 65 cents in the dollar.  Taking deadweight costs as being in the lower half of the range, and adding in administrative and compliance costs, suggests a figure in the order of 30 to 50 cents additional cost for each dollar of tax expenditure.

18.  G.W. Scully, Measuring the Burden of High Taxes, Policy Report No. 215, July 1998, National Center for Policy Analysis.

19.  Despite some progress during the reform period, it remains striking how little real attention is paid to assessing the actual net benefits of government activity.  The working assumption remains that outcomes = resources + intentions.  Indigenous policy in particular has suffered greatly from billions of dollars being spent with little real assessment of its effectiveness:  being seen to "do the right thing" has been much more important than assessing real effects -- a sign of the lack of liability for results (as distinct from liability for process) which is a besetting sin of much government action.  See M. Warby, Past Wrongs, Future Rights:  Anti-Discrimination, Native Title and Aboriginal and Torres Strait Islander Policy, 1975-1997, Tasman Institute, 1997, pages 79-105.

20.  Both in the public sector and in "third sector" organisations increasingly dependent on public funding, such as the Brotherhood of St Laurence.  The latter constitute highly visible -- and "independent" and "altruistic" -- advocates for increased government expenditure.  The Australian Council of Social Services' antipathy to the alleged creation of "working poor" from labour market deregulation is perfectly rational -- an unemployed "welfare peasantry" increases its client base.

21.  A recent IMF study -- V. Tanzi and L. Schuknecht, The Growth of Government and Reform of the State in Industrial Countries, IMF Working Paper, December 1995 -- found evidence of significant improvement in social indicators from increases in government expenditure in OECD up to 1960 -- when government expenditure was overwhelmingly concentrated on social and physical infrastructure -- and little evidence of such improvements from increases in government expenditure since 1960 -- when transfers have taken up increasing proportions of government expenditure and GDP.

22.  The recent upward trend in general government saving (Graph 8) could easily be reversed by a major recession.

23.  Between January 1984 and September 1995, in the area of infrastructure alone, 547 firms in 86 countries were privatised for a total value of $US357 billion.  World Bank, Public Policy for the Private Sector, Note No. 45.

24.  Australians display very high rates of ethnic intermarriage, including between indigenous and non-indigenous Australians -- which is a major reason for the increase in the indigenous population as measured by the Census (Bettina Arndt, "Inter-marriage Is an Intimate Form of Reconciliation", Melbourne Age, 19 December 1997).

25.  Such as the vilification of historian Geoffrey Blainey when he raised concerns about the pace and content of immigration in the mid-1980s.

26.  Brian Galligan, A Federal Republic:  Australia's Constitutional System of Government, Cambridge University Press, 1995, pages 110-132.

27.  The much vaunted eco-tourism which was to be Tasmania's salvation has proved empty.  It is not entirely accidental that the State most affected by "green" politics is also the State with the greatest population loss, as people leave in search of employment.

28.  Wolfgang Kasper, Capital Xenophobia, CIS, pages 40-47.