From Work-fare to Welfare: The Budgetary Imperatives

Paper to H.R. Nicholls Conference
After Whitlam:  George Reid's revenge and the Fall of the Deakinite Settlement
Melbourne, Saturday, August 28 1999

Paul Kelly, in his book The End of Certainty, refers to what he calls Australia's "Federation Settlement" as a set of five fundamental principles of policy:

• Imperial Benevolence -- postulated a latently hostile international environment in which Australia needed a Great and Powerful Friend;
• White Australia -- explicitly aimed at stopping labour competition from non-whites;
• State Paternalism -- the use of state power to provide services and protect people from the vagaries of the market;
• Wage Arbitration -- the use of state power to set wages and conditions;  and
• Trade Protection -- the deliberate insulation of Australian manufacturers from international competition.

Kelly described the underlying story of politics in the 1980s as being the dismantling of this Settlement.

This theme of a change of direction was also picked up in Michael Pusey's 1991 book Economic Rationalism in Canberra which kicked off the so-called "economic rationalism" debate.  Pusey's work had the subtitle of A Nation-Building State Changes Its Mind.

The change of direction of Australian policy both writers refer to is best described as the unravelling of this Settlement.  This unravelling is still going on, sometimes with great public drama, as with last year's waterfront dispute.  The move to greater use of market mechanisms in some areas of public policy came primarily came from problems within the mix of state policy.  In particular, the consequences of change in one part of the Settlement -- State Paternalism -- under the Whitlam Government.  Yet, despite the extent of the economic reforms, we have not really dealt with the underlying problems, we have merely ameliorated them.

1905 TO 1972

The term "Federation Settlement" is something of a misnomer.  While White Australia was speedily installed as part of Commonwealth policy and Imperial Benevolence was inherent in the entire structure of federating colonies under the aegis of the British Crown in a Constitution whose original legal power came from being an Act of the Imperial Parliament, State Paternalism, Arbitration and Trade Protection were not firmly established as Commonwealth policy until the Deakin Government of 1905-8.  Due to the agnostic position of the cross-bench party -- the ALP -- the first Parliament had a narrow protectionist majority in the Representatives and a narrow free trade one in the Senate.  It was not until Arbitration was accepted as intimately tied to Protection that the tariff moved beyond being a "revenue" tariff to being a genuinely protective instrument.  It was also the Deakin Government which founded the Commonwealth welfare state.

The Deakinite settlement had been first tried in Victoria, urged on by David Syme, maker and breaker of governments.  Protection, wages boards and labour market regulation, massive government borrowings, all came to grief with the 1893 crash, the effects of which were much worse in protectionist Victoria than in free-trading NSW, not least because a run on the banks was mishandled by the local authorities.  Between 1891 and 1901, the Victorian male workforce fell by 1 per cent while NSW's grew by 19 per cent. ⁽¹⁾  NSW had far less of the borrowing-financed railway development, and accompanying land speculation, that had blighted Victoria.  Many thousands of unemployed Victorian men went to the WA gold rushes to support their families, where they voted in due course for Federation.  (The general pattern was to be repeated in the 1990s recession, with the VEDC, Tricontinental and migration to Queensland).  NSW was a bit apprehensive about Federation in part because it sensed that Victoria was going to share its debts with NSW.  That apprehension was wholly justified.

The first signs of revolt against the Deakinite Settlement came early, with the election of farmer candidates from rural seats, coalescing together as the Country Party in 1920.  The net costs of the system were being paid by exporting industries -- the Deakinite Settlement in its pure form being based on extraction of rents from the rural-based export industries of agriculture and mining by urban-based groups through the operation of public policy.  This was an obvious route for Australian policy to go.  Urban voters dominated the national electorate while Australia's status as the wealthiest society in the world at the end of the nineteenth century rested in large part on the resource base of an entire continent being efficiently extracted and exported and the returns then being distributed across a very small national population.

The rural revolt was "bought off" by the Earle Page-led Country Party being incorporated in an expansion of Deakin's system through marketing boards, agricultural tariffs, subsidies and rural infrastructure.  The costs of the expanded system were supported by government borrowing, ⁽²⁾ leaving a highly indebted Australian state extremely vulnerable to the savage impact of the Depression and the destruction of international trade that followed the "beggar-thy-neighbour" protectionism triggered by the Smoot-Hawley tariff in the US.

This is why Australian politics of the Depression were so dominated by issues of public debt -- Australian level of foreign indebtedness being, in proportion to the economy and asset base, far higher in the 1930s than any time since.  This foreign debt was overwhelmingly government debt.

The long postwar boom saw public debt recede as an issue.  This postwar boom is now seen as something of an economic "golden age", a period of low inflation and low unemployment.  It was the period where the Deakinite Settlement seemed to have achieved status as settled policy, particularly in economic policy.

Yet, even here Australia under-performed:  Australia's rate of per capita GDP growth from 1960 to 1972 was 70 per cent lower than the industrial country average.  Where, on average, per capita GDP increased by more than half in those years in industrial countries, in Australia it increased by less than a third. ⁽³⁾

But such relative under-performance is not the stuff of policy crises.  Australian public policy continued on its way.  "Black Jack" McEwan sought a similar rural inclusion as the Bruce-Page expansion of Deakin's "New Protection" -- though, to be fair to McEwan, his policies also rested on moderately sophisticated exchange rate policies and aggressive seeking of export opportunities (in particular, early recognition and exploitation of Japanese trading opportunities).  The minerals boom of the late sixties put off the day of reckoning for at least a decade.

Just as it had in the 1920s, all seemed sunny in the 1960s.  There was no sense that the general framework could not continue to deal with any new problems that might arise.  The program of the incoming Whitlam Government encapsulated the mood that what was needed was better management of the fruits of growth.  So the Whitlam Government undertook a massive expansion of State Paternalism -- just as the 1973 Oil Shock and global recession of 1973-74 hit.

THE WORKFARE STATE

By the post-war period, the Deakinite Settlement had created what is best described as the "workfare state".  At the time of the election of the Whitlam Government, Australia had a somewhat different balance of government activities compared to other OECD countries.  The Australian welfare state was smaller than most OECD countries.  Yet this was combined with very extensive government ownership of major utilities without, however, much government ownership of non-utilities.  There were some exceptions -- government-owned printing business, State butcher shops, brickworks and so on -- but Australia lacked the "commanding heights" ownership of coal mines, steel works and other manufacturing enterprises that was common in Europe.

The extensive government ownership of utilities distinguished Australia from the US.  The more modest scale of the welfare state, as well as the lack of extensive ownership of resource and manufacturing industries, distinguished Australia from Western Europe.

The Australian "workfare" state employed a very large proportion of the workforce -- 22 per cent of employment was in the public sector at the time of the election of the Whitlam Government.  The expenditure on the "workfare sector" -- government business enterprise outlays plus investment by the general government sector -- was, at almost 11 per cent of GDP, about equal to recurrent government expenditure on health, education and welfare services plus income transfers.

This workfare state was, very consciously, about nation-building.  Public investment was seen as the best available means, perhaps the only means, of getting the infrastructure investment a young, growing nation needed.  And its positive impact on provincial employment was no small point.

Furthermore, with Protection and Wage Arbitration, the ambit of government action extended far into the commercial life of the country, particularly the labour market.  Ever since Mr Justice Higgins' 1907 Harvester judgement, the operation of labour market regulation had been explicitly focused on achieving welfare objectives.

Similarly, a situation where manufacturers typically relied for 35 per cent of their unit return on tariff and other protective policies, was one where much of the focus of firms was displaced from making commercial judgements to lobbying Canberra.  The idea of using Australia as a base for a global enterprise was confined entirely to the resource industries, and not common there.

The Deakinite system was "formalised risk-transference capitalism" with underlying similarities to what has become known as "crony capitalism".  In the case of "crony capitalism", commercial risk is replaced by political guarantees through corruption and political connection.  In the case of the Deakinite system, commercial risk was displaced by political guarantees in the form of legislated privileges delivered through political networks ratified by formal inquiry processes. ⁽⁴⁾  Explicit corruption was largely avoided, the building up of systemic risk was not.  In either case, risk was transferred to political mechanisms not well able to manage them, particularly if circumstances changed substantially. ⁽⁵⁾

As one wit remarked, Australian free enterprise was only formally free and only notionally enterprising.

THE FATAL BLOW

It was not the intent of the Whitlam Government to undermine this workfare state.  Indeed, the workfare sector expanded.  The "workfare" sector of government outlays peaked at 14 per cent of GDP in 1985/86 and 1986/87.  The public sector share of employment peaked at 26 per cent of total employment in 1983-84 and 1984-85.

The Whitlam Government's 25 per cent tariff cut -- a response to the economic crisis of the time -- increased competitive pressures within the system.  The Whitlam Government also ostentatiously completed the process of abolishing White Australia begun by the Holt Government. ⁽⁶⁾  But it was the dramatic increase in welfare expenditure which was to have the greatest long-term consequences on public policy.

In 1971-72, expenditure on health, education and welfare totalled 11 per cent of GDP, out of total recurrent government expenditure of almost 24 per cent of GDP.  By 1975-76, expenditure on health, education and welfare totalled almost 17 per cent of GDP out of total recurrent government expenditure of 29 per cent of GDP.  This sudden upward shift was followed by continuing increases.  Health, education and welfare expenditure now reaches almost 22 per cent of GDP, with total recurrent general government expenditure being over 33 per cent of GDP.

Given that the workfare sector continued to expand until the early to mid-1980s, how did the Whitlam Government deal a fatal blow to the traditional workfare state?

Well, the effect was delayed, but the blow was fatal nonetheless.  The first effect was that the expansion of the Australian welfare state saw a collapse in general government saving.

By the end of the Whitlam government, the Australian general government sector had gone from a saving rate of about 2-4 per cent of GDP to barely saving in 1975-76 to a pattern of negative saving -- that is, the financing of non-capital expenditure by borrowing or selling assets -- more often than not.  The expenditure received being more popular than the taxes to pay for such, the extra welfare expenditure was accommodated by eliminating government saving, later by outright borrowing and sale of assets.

Enterprises only have three possible sources of capital accumulation.  One is from retained earnings, one is from borrowing, one is from equity injections.  General government saving was the workfare sector's equivalent of an equity market.  It was now effectively eliminated.  This left government business enterprises reliant either on retained earnings or increased borrowing for their required capital.  The increasing revenue demands of government largely eliminated the former, leading to increased reliance on borrowing.  From there, given the governance problems which riddled the sector, it was an easy path to the debt-disasters of SA State Bank, VEDC, WA Inc, the undermining of public ownership and the forced sale of government assets. ⁽⁷⁾

Politicians put off facing hard choices as long as possible.  While the Fraser Government did manage to slow the expansion of the welfare sector, the choice between workfare state and welfare state was not faced.  Cutting welfare seriously was seen as politically too hard, while painful economic reforms seemed unnecessary. ⁽⁸⁾  This was the era of "resource scarcity" a la Club of Rome and Oil Shocks, where a resource-rich Australia had the prospect of "resources booms".  We could become "the blue-eyed sheiks of the South Pacific" in Doug Anthony's words.  We could have our workfare cake and eat welfare too.

Except we couldn't.  The Club of Rome had blithely extrapolated demand lines without serious consideration of price effects (either short term or long term).  The sudden rise in oil prices had predictable effects in drops in energy intensity of production and stimulation of exploration and extra energy supplies.  Resource scarcity and booms turned with extraordinary speed into resource gluts and busts.  Predictions made in the early 1970s of oil reaching the equivalent of US$100 to US$150 by the end of the century turned out to be ludicrously off the mark -- oil is currently $US21-23 a barrel, having recently been as low as US$12 a barrel:  in real terms, it is only about two-thirds the price it was after the first Oil Shock of 1973.

Australia's terms of trade -- the price of its imports in terms of its exports -- deteriorated steadily during this period.

While the Oil Shock helped trigger an asset price collapse in Australia and the US comparable in scale to the stock market crash of 1929, a world Depression was avoided:  perhaps because memories of the Depression, expressed institutionally in the General Agreement on Tariffs and Trade, stopped a catastrophic collapse in world trade through "beggar thy neighbour" protectionism. ⁽⁹⁾

The fiscal pressure on government has been relentless.  Government revenue has increased:

but the increase in welfare expenditure has outpaced it

The growth of income transfers in particular did not primarily come from the ageing of the population, but from growth in able-bodied welfare recipients -- sole parents, unemployed, students.

Let us be clear about this.  The welfare sector has been steadily growing, not shrinking.  Government resources per Australian have been increasing.

The growth in community services jobs (child care, nursing homes, etc), for example, has dramatically outstripped general employment growth:

The collapse in government saving was part of the response to this fiscal pressure.  Another was a winding back in government investment which meant a further movement away from the workfare state.  But there has certainly be no real lack of government resources:  just an expansion of ambition in excess of revenue, and in excess of any full examination of the costs and benefits. ⁽¹⁰⁾

FACING THE CHOICE

Coming to office in the tail end of the 1982-83 recession where, true to its twentieth century form, Australia had performed worse than comparable countries, the Hawke Government faced the choice between workfare state and welfare state and chose the welfare state.  The Hawke government's policies of floating the exchange rate, freeing capital markets, corporatising and privatising government activities, reducing tariffs and selective other deregulation of markets -- a program of reform enacted to varying degrees by State governments as well -- became known as "economic rationalism".  Those reacting against the program -- such as Professor Pusey -- typically saw it as some weird "economic fundamentalism" that had invaded Canberra/Australia/Anglo-Saxon countries:  a free-floating delusion completely unanchored in any real policy problems or issues.

In reality, similar choices were being confronted by governments all over the world.  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.  Corporatisation and marketisation also occurred on a large scale around the globe.  The global scale of privatisation on its own makes a complete nonsense of the view that the move to privatisation and market reforms is some specific Australian or Anglo-Saxon madness. ⁽¹¹⁾

Indeed, fiscal crisis leading to liberal reforms is a very old pattern in Western history, reaching back into the late Medieval period.  The public sector is more tolerant of waste and failure than the commercial sector, for reasons which are quite straightforward.  Businesses have to build their income out of continual dispersed acts of consent.  People can just withdraw, or not give, their support as easy, individual decisions in situations where they directly feel the benefits, or not, of a service.  By contrast, public sector incomes are based on centralised coercion.  Once the decision to fund something is in place, it is hard to reverse beyond periodic pruning, particularly against entrenched interests, as the taxpayer is so distant from decisions and their effects.  This is why, down the centuries, liberal reforms have typically been driven by fiscal crisis -- it takes a general funding crunch to break through the logjam of special interests.

As Milton Friedman has said, capitalism is a profit and loss system and, of the two, loss is by far the more important.  It is the elimination of what doesn't work.  All societies accumulate "barnacles" -- social formations which consume more value than they provide and impede the general operation of society.  The trick is to have effective systems which regularly eliminate such "barnacles".  Market economies do:  command economies, for example, don't.  Democratic states, being more accountable, also have advantages in "barnacle removal" over authoritarian states, though these are not as pronounced as that of market economies over command economies.  (Democracy is the political form most like a market, but still represents the operation of centralised coercion). ⁽¹²⁾

If one is going to pay for a growing welfare state, one needs a growing economy.  The "policy alliance" which later became known as "economic rationalism" brought together economic liberals with those who wanted to ensure the welfare state could be paid for.  We have recently seen the same alliance come together for tax reform.  The welfare lobby now understands that without adding the "S" to the current GT, the capacity to maintain and extend the current welfare state, as services increasingly dominate economic activity, will decline.

Freeing up of capital markets and the exchange rate was part of this process of increasing the general efficiency of the economy to ensure an affordable welfare state.  The reform and privatisation of government-owned utilities and the abandonment of Trade Protection likewise delivered major efficiency gains, which are now compounding, year by year.

The 1980s saw the start of major reform in the government business sector.  Even without the massive commercial failures previously alluded to, faced with the relentless upward pressure on revenue of the ever-growing welfare sector, governments looked to government business enterprises for income and as assets to be sold for debt relief and the cutting of interest bills.  It is no accident that the government business sector became a centre of economic reform, leading to increases in efficiency of capital use, through "corporatisation", exposure to competition and privatisation.

The relatively low return on capital that government business enterprises had provided became an issue only under fiscal stress.  That low return was a natural result of the lack of an effective owner of capital government ownership entails:  the problem of "unowned capital". ⁽¹³⁾  But it is precisely because government ownership provides poor incentives to attend to the efficiency of capital use that it is capable of tolerating low returns almost indefinitely.

One of the major supports for the old workfare sector had been use of its monopoly or otherwise privileged position to extract economic rents from consumers.  Under the pressure of falling tariffs and adverse terms-of-trade, the costs this imposed on business became increasingly unacceptable, turning the issue back to reform of the government business sector.  Thus the processes of reform tended to reinforce each other.

CONSEQUENCES

One has to say that the reform program has only been a partial success.  It has achieved greater economic efficiency.  The Australian economy is more adaptive than it was -- the "Asian" crisis is the first global economic crisis this century in which the Australian economy has performed better than comparable countries.  Indeed, it has done spectacularly better, Australia and the US being the only major economies currently growing above long-term trend.  The floating exchange rate worked as it is supposed to, cushioning the external shock of the collapse of many of our Asian trading partners.  Our exporters, focused on market realities rather than Canberra's subsidies and legislated privileges, re-directed sales to the US and Europe, the lower $A making our exports suddenly much more competitive in those markets. ⁽¹⁴⁾

This success has exposed a central weakness of the Deakinite Settlement.  The Deakinite system reduced individual risk -- security being the reduction of risk -- at considerable cost, by increasing the risks faced by those on the margins of society, and by increasing overall systemic risk.  In each external economic crisis faced by Australia while the Deakinite system was operating, Australia fared more poorly than comparable economies. ⁽¹⁵⁾  The inbuilt rigidities of the Deakinite system made it very difficult for Australians to respond successfully to sudden crisis, or indeed to change generally.  Every time we have attempted to extend the Deakinite Settlement, the economy has suffered a crisis.  A system which was supposed to make Australia and Australians less vulnerable to external pressures, made them more so when circumstances changed dramatically.

The reality is, however, that none of the problems which lead to the dismantling of the Deakinite Settlement have been solved.  The demands of the welfare state continue to increase faster than the economy.  No real structural halts on those demands have been put in place.

A further sign of fiscal stress was government resorting to the "inflation tax" where government prints money beyond the demand for it, thereby creating exchange-value available for its own expenditure but reducing the value of holdings of money. ⁽¹⁶⁾

A settled regime of inflation discourages the holding of money (such as bank deposits) as assets, because inflation constantly devalues the value of the money in terms of the goods and services it buys.  In Australia, with high reliance on income tax which treated interest income as ordinary income, the "deferred consumption" which saving consists of was taxed twice.  The income earned from which any saving would be made had already been taxed:  then the interest income on the deferred consumption was also taxed and the value of the money was taxed by inflation.  This decreased the value of future consumption compared to current consumption, discouraging saving.  Given the expanded role of the state in guaranteeing people against ill-fortune, the insurance role of saving was also reduced.

It is therefore no surprise that national saving has not recovered, with the collapse in government saving being accompanied by a (less precipitous) fall in private saving. ⁽¹⁷⁾

In fact, we have been transferring resources more or less directly from national saving to welfare transfers.  The correlation between the two series is -0.92, almost perfect.

The consequence has been continuing foreign debt and growing foreign ownership, as capital is imported to cover investment and other capital demands.

Government continues to be increasingly intrusive.  It took the Commonwealth Parliament 84 years to pass its first 50,000 pages of legislation, and a mere 12 to pass its next 50,000 pages.  In the eight years 1990 to 1997, the Commonwealth Parliament passed more pages of legislation than it did from 1901 to 1980.

To put it another way, eight years marked by no great national emergency apparently required more legislation than the establishment of the Commonwealth jurisdiction, two World Wars, the Depression, postwar prosperity and the Whitlam reforms combined.

This is a legislative engine gone mad.  Even given much of this has been operating instructions for the burgeoning welfare state or rewriting of previous law, the coherence of Commonwealth law is steadily being lost.  Nor is this production of law subject to anything even vaguely resembling careful cost-benefit analysis.  It is precisely the type of wasteful, process-oriented, quality-control- deficient output public sectors have become notorious for.

THE LABOUR MARKET

The area of most striking failure has been the labour market.  The almost 30 years from the end of the Second World War to the 1973 Oil Shock was the only period this century when Australia has enjoyed full employment.

Since the 1970s, Australia has been moving further and further away from full employment.  The period since the Whitlam Government has seen Australia's worst sustained period of unemployment this century -- 22 years during which annual average unemployment rate has not fallen below 6 per cent.

Australia has been experiencing what might be described as the "rising mountain" pattern of unemployment, where the peak of unemployment in each recession is higher than in the previous recession, and unemployment generally does not quite recover to its low at the peak of the previous economic boom.

Part of this increase in unemployment has been attributed to the increase in the labour force to a historically high proportion of the population, largely due to the entry of women into the workforce.

The declining proportion of the working-age population in full-time employment and the fall in the proportion of the working-age population in employment during the later 1970s and early 1980s tends to undermine any such argument.  More fundamentally, it is reasonable to expect economic institutions to be able to adapt to reflect changing preferences.  There is no known limit to the useful goods and services that might be produced if people are permitted to produce them at prices that people are prepared to pay.  The more that is produced, the greater the resources of the community as a whole.

International comparisons weaken even further the argument that unemployment is caused by the increased supply of labour, and provide more evidence of the deterioration in Australia's overall labour market performance.

Throughout the OECD nations, an increased proportion of women have entered the paid workforce yet, prior to 1975, Australia's rate of unemployment was consistently below the OECD average.  From 1975 to 1988 it moved up to around the OECD average.  Since 1988 it has been above the OECD average.

Yet another stark indicator of Australia's deteriorating labour market performance is shown by comparison with the United States.  Prior to 1974, Australia and the US had very similar proportions of their working-age population in employment.  Since 1974, the US has employed a higher proportion of its working-age population than Australia, a gap that has tended to increase over time.

In the United States, where women have entered the workforce in great numbers, a greater proportion of the population is working age is in the labour market than in Australia, yet unemployment is lower there than in Australia.

A final piece of telling evidence that labour markets can cope with people who want to work is the manner in which Australia itself absorbed the return of the troops, and then high levels of post-war immigration, without suffering unemployment.

Economic adjustment are not necessarily immediate.  A sudden increase in the supply of labour can cause temporary unemployment, but that is not what Australia is facing.  What is more, the experience of Hong Kong was that, when refugees caused a sudden and unexpected increase in the number of people seeking work, these were absorbed very quickly by the colony's relatively unfettered labour markets.

If unemployment is not cause by the increased supply of labour, then another cause of Australia moving up to the OECD average rate of unemployment, and the diverging Australian and US employment/population ratio, must be found.  These tendencies began with the wage surge of the Whitlam years.  The Australian labour market was not able to recover full employment afterwards -- in contrast to the greater wage surge in the Korean War "wool boom".  In the wool boom case, however, the wage surge had been a result of a genuine upward shift in national income from a dramatic increase in exports.  Employees were sharing the increase in national wealth.  The Whitlam-period wage surge was a result of political deals at a time when Australia was actually under significant negative economic stresses.  While the lower earnings growth of the later 1980s was associated with higher employment growth, the Australian labour market has not yet regained full employment, nor does it seem likely to.  A highly-regulated system generating wage-surges not based on genuinely improved economic conditions, preventing their reversal and imposing additional costs upon employment.  (The last would, if wages were totally responsive to supply and demand, not cause unemployment but lower wages instead.  Wages are, however, not totally responsive.)

An even more stark indicator of Australia's declining labour market performance has been the increase in the average duration of unemployed, from about 13 weeks in 1975 to about a year now.  This is a record which contrasts markedly with the USA's generally steady average duration of unemployment.

The failure to substantially improve the deteriorating performance of the Australian labour market is the most powerful evidence that the Australian political system, in practice, rates more highly goals other than restoring full employment -- such as not antagonising the advantaged labour market "insiders".  Indeed, so far from being, in practice, seriously interested in reducing unemployment, the political process has regularly produced outcomes whose most likely effect would be to make unemployment higher than it would otherwise have been -- such as unfair dismissals legislation, legally-imposed wage minimums unconnected with productivity, legally enforcing benefits to employees, increased employer liability for employee actions and increased legal obligations consequent on employment.

Wage Arbitration remains the last great survival of the Deakinite Settlement.  Indeed, with the exception of some very partial freeing up under the Howard Government, the labour market has been a conspicuous holdout from the process of de-regulation in factor and product markets, becoming steadily more regulated during the reform period whether through unfair dismissal laws and affirmative action and equal opportunity legislation, or indirectly, through health and safety regulations, welfare changes and so forth.  The perverse interaction of the first two sets of laws -- where unfair dismissal laws raise the general risks of employing someone new, since it is harder and more costly to get rid of dud employees, while equal opportunity legislation has increased employer liability for aberrant behaviour by employees -- exemplifies the problems generated by the explosion of statute law.

The massive expansion in the Australian welfare state since Whitlam Government has not been good for earned incomes, as is demonstrated by household income data.

Wage Arbitration exemplifies the inflexibilities and risk transfers mentioned earlier.  For example, the increased security of those in jobs which unfair dismissal laws provide, results in lower chances of employment for those not in jobs.  The complex job demarcations in awards which provide useful weaponry for union organisers reduce the efficiency of, and ultimately the returns to, labour.  And so forth.

As is typical of political action, debate tends to concentrate on the intention of regulation rather than their actual costs and effects.  Indeed, to raise concerns about the same is often taken to indicate a wicked hostility to the good intentions.  Needless to say, this is not an intelligent way to conduct public policy.  Many people, however, become quite angry at any suggestion that others might be bearing unreasonable costs for their warm inner glows. ⁽¹⁹⁾  That many of these costs are things which don't happen -- such as all the extra staff people don't take on, or take on as casual rather than permanent employees -- makes it even harder to assess net benefit.

Even here, however, there are clear signs that Deakin's legacy is fading away.  Increasing use of part-time, casual ⁽²⁰⁾ and contract labour all represent attempts to evade the imposed rigidities of the system.  The relentless pressure of international competition forces even the most myopic, quiet-life, "IR-club" company management eventually to face the need for change.  Just as the expenditure demands of the welfare state drive policy-makers to eliminate inefficient government provision of services and to phase out the resource mal-allocations of protectionism, so the revenue costs of unemployment are (slowly) driving policy-makers to confront the last great mal-functioning factor market -- the labour market.  The "Kernot-Reith" Workplace Relations Act does allow significant award simplification, though the comparative advantage which larger companies enjoy in complex arrangements that disroportionately penalise smaller competitors and new entrants (unless they avoid the award system altogether) means such opportunities are still being resisted.

Trade Protection and Wage Arbitration are, indeed, intimately connected.  The costs of the welfare state have driven Australia to eliminate Trade Protection.  The pressures of free trade and the costs of the welfare state will, sooner or later, drive Australia to abolish Wage Arbitration.  George Reid, first Commonwealth Leader of the Opposition and the great advocate of Free Trade, will have the last laugh on Deakin's pretensions.  The framework of the Deakinite Settlement has been shattered and it is not possible to put Humpty-Dumpty back together again.  And it was Gough Whitlam's expansion of the welfare state which was the prime cause of that shattering.

BANKRUPTCY OF THE CRITICS OF REFORM

Little or no sense of any of this can be gained from perusal of the outpourings of most of the critics of "economic rationalism".  These critics typically ascribe the reforms to the abstract delusions of pro-market economists, not as responses to pressing and urgent budgetary problems.  Since they will not acknowledge the existence of those very real problems, they have nothing useful to say in response to them.  (Of course, it could be that their lack of answers is what drives their refusal to acknowledge the problems).  They are locked into the good person = advocate of more government / bad person = someone who sees problems with this simplicities within contemporary moral vanity.

In particular, the perennial demand to increase spending -- with an implicit or explicit agenda of tax increases to go with it -- flatly refuses to grapple with the experience of all OECD countries that there is no level of taxation which is somehow magically "enough".  If it is believed that the role of government is to do good, and there is no accepted limit to the "good" it can do, there is no limit to the growth of government, since there is always more "good" to be done.  If governments can always increase taxes to cover budget problems, then there is no reason to accept any set budget constraint.  It is only by serious acceptance of the limits of government competence, acceptance which is then built into institutional structures, that the growth of government can be halted.

Government is not omni-competent:  it is not always, or even usually, the best social mechanism to do anything which the broadsheet scribblers might think it should do.  The typical problem of the critics of economic reform is that they are committed to the idea that government is omnicompetent, so have nothing useful to say as policy-makers grapple with the limits to government.

Economic reform will continue, precisely because the critics have nothing useful to offer as an alternative response to the relentless fiscal pressure.  The critics' fulminations in Op.Ed. pages on the airwaves will certainly make reform slower and more difficult, by contributing to a hostile climate of opinion, but their own policy vacuousness will ensure that that is their only effect.

Note:  This paper in was developed from our Backgrounder, From Workfare State to Welfare State:  Where We Were and Why We've Changed, August 1998.

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ENDNOTES

1. The female work force was much less affected, growing by 42 per cent in Victoria and 46 per cent in New South Wales, leading to an 8 per cent growth in the total Victorian work force and a 24 per cent growth in the total New South Wales work force.  Vamplew, W. (ed.), Australian Historical Statistics, Fairfax, Syme & Weldon Associates, 1987, Sydney, P.147.

2. The term "general government" is a statistical definition used in the national accounts system to refer to government departments and authorities not classed as government business enterprises (themselves divided into public trading enterprises and public financial enterprises).

3. Other factors included Australia being relatively undamaged by the War (so not getting "easy" high growth from recovery) plus high population growth diluting returns from Australia's resource base.

4. As a device to increase capital formation in a society felt to suffer from certain inherent deficiencies in capital formation it has some similarities to the "Asian" model of development.  See Wood, R.J. Renewing the Miracle:  Economic Development in Asia, February 1999, particularly pages 2-5.

5. As with the "1940 system" in Japan (see Peter Hartcher's excellent article in the National Interest "Can Japan Come Back?", Winter 1998/99), the Deakinite system failed to cope well with significant change in circumstances.  In fact, it proved less resilient to the pressures of the 1970s than the Japanese variety of corporatism, which did not fail until the late 1980s.  Conversely, Australia's willingness to engage in real reform actually spared Australia the level of failure Japan has since experienced -- it has been estimated that the loss of wealth inflicted on Japan by the failures of the 1940 system are, in real terms, twice the value of the wealth destroyed by American bombing in World War Two.  Moreover, the loss was accompanied by a massive wealth transfer to the United States, as Americans bought back at much less cost assets they had previously sold to the Japanese (a process that also occurred to some extent in Australia).

6. The Whitlam Government marked the end of the protection of Anglo-Celtic identity via public policy.

7. When a public enterprise was faced with a bad debt, it was easier to cover up the problem and hope it would go away rather than writing debts off (embarrassing) and changing commercial practices.  As a result, bad debts snowballed as poor practices were not terminated early.  See footnote 12 for references on government ownership as being one of "unowned capital" and thus insufficient incentives for concern with efficiency of resource use.

8. That the low-return on capital workfare state was unable to provide sufficient employment was clear enough:  that it had longer term problems was not.

9. That monetary authorities did not respond to an asset collapse with contractionary policies, unlike 1929-30, certainly helped, as did the fact that the economic down-turn was not centred in the US, again unlike the case in 1929.

10. There are many reasons to suspect that the full costs of government are not taken into account.  The displacement costs of taxation and regulation (all the mutually-beneficial transactions that do not take place because of taxation and regulation) are things which do not happen, so do not get accounted for.  (The central difference between poor societies and rich ones is the things which do not happen in poor ones, but do in rich ones).  The compliance costs of taxation and regulation are borne by citizens and firms, not the political process and political actors.  There is little or no systematic examination of the benefits of government expenditure and regulation, much of which takes place on a basis where there is no systematic feedback or incentive structure connecting what is done to benefit delivered.  Appearing to do the right thing (often on what is implicitly a very simplistic basis of outcome=intentions+resources) is much more important than actual effects.  Expenditure on indigenous policy shows this particularly invidiously, not least because debate on indigenous issues have been highly restricted due to the very narrow range of views which have been deemed acceptable by the media, though there have been some signs of a broadening of the debate recently.

11. Our study The Changing Fortunes of Economic Liberalism:  Yesterday, Today and Tomorrow (1999) and Lord Skidelsky's brilliant essay The Road From Serfdom:  The Economic and Political Consequences of the End of Communism (Penguin, 1995) demonstrate the vacuousness of this view.

12. The central difference between the US and the old Soviet Union was the difference between a society with a huge and vibrant commercial sector which rewarded success and punished failure, and where the public sector is and was more accountable than is the rule even in most Western societies, and a society where public sector waste and failure dominated everything and suffered under a government which was completely unaccountable.  The delusion that there is something inherently ennobling about government activity has been amply demolished by the corruption, violence and rapacity of post-Soviet Russia, where the effects of 70 years of socialism (i.e. the operation of centralised coercion as the principle of action) on social morality have become abundantly clear.

13. The analysis of government ownership as creating "unowned capital" is based on the extension of Jensen, Fama and Mecklin's analysis of agency problems in firms (see Jensen, M.C. & Meckling, W.H. [1976], "Theory of the firm:  managerial behaviour, agency costs and ownership structure", Journal of Financial Economics, 3, pages 305-360;  Fama, E.F. [1980], "Agency problems and the theory of the firm", Journal of Political Economy, 88, pages 228-307;  Jensen, M.C. & Fama, E.F. [1982], Separation of ownership and control, University of Rochester, Managerial Economics Research Center, Working Paper No. 82-14, Rochester) to publicly-owned enterprises by Peter Hartley and Chris Trengove while they were at the Centre of Policy Studies, Monash University (see Trengove, Chris, Improving the Performance of State Enterprises, paper prepared for EPAC, Research Paper B10, Centre of Policy Studies, November 1984, Hartley, Peter & Trengove, Chris, "Who Benefits from Public Utilities?" The Economic Record, 1986, pages 163-179).  The argument is further developed in Hartley, Peter;  Warby, Michael, et al., Public or Private?:  Setting the Boundaries, a paper for The Infrastructure Forum, Tasman Asia Pacific, August 1998.

14. Privatisation and competition policy also led to a boom in private investment in infrastructure investment which had positive demand effects at a fortuitous time.

15. While Australia was, under the operation of the highly economically-orthodox Premier's Plan, one of the first countries to begin to come out of the Great Depression, its initial experience was very severe.

16. With government taking (through taxes, transfers and regulatory intervention) increased responsibility for social outcomes, interest groups' claims on incomes could not be effectively adjudicated through consensual exchanges in the (increasingly constrained) marketplace, and as the political system is heavily biased against being seen to deny interest groups, this led to intense inflationary pressures.

17. Some of the fall in private saving may be benign, such as higher gearing in response to financial de-regulation and lower interest rates.

18. Information on female average earnings is not available prior to September quarter 1981.

19. Indeed, making such matters open to genuine debate undermines their "moral assets".  If, for example, the value of arbitration and labour market regulation is genuinely debatable, one cannot establish one is a "good person" merely by supporting arbitration and extensive regulation.

20. The proportion of employees working as casuals rose from 17 per cent in 1986 to 27 per cent in 1998 (ABS Cat No. 6325.0).

New Economy, New Workplace

The combination of sustained non-inflationary growth and falling unemployment in certain Western economies is challenging traditional economic theory.  Economists are puzzled that low unemployment is no longer creating wage-induced inflationary pressure.  Yet the explanation for this can be found in the recent emergence of competition within firms to complement the competition between them.

For most of the 20th century it has been assumed that the firm should protect the people in it, particularly management, from external competition.  Economic theory correspondingly assumed that competition operated between firms but not within them.

Management has tried to create internal monopolies mainly by encouraging employees to believe their jobs were secure and expecting loyalty from them in return.  This model of the firm has been reinforced by governments through externally imposed labour regulation and institutions.  In Australia, labour monopolies have been enforced by the Industrial Relations Commission.

This regime of external labour regulation has been defended by reference to the unequal power relationships in the workplace and the need to protect workers.  In reality, the primary function of labour regulation has been to support management in the creation of internal monopoly.  Unions have tacitly connived in this objective.

The Australian commercial building industry is a prime example.  Limited numbers of near-monopoly participants can, by colluding on workforce arrangements with the unions, ensure that competition is limited.  CFMEU documents refer to "cartels" of companies where a "captive market [is] delivered to them by the unions" to have "the effect of limiting the numbers of players in the market".  This anti-competitive activity is enhanced by the operation of the industrial relations system.

In key Western economies, this internal monopoly business dynamic is collapsing.  What is happening in countries such as the US and the UK, and beginning to occur in Australia though apparently not yet in Continental Europe, is that the major props of labour regulation are being removed and monopolistic practices inside firms are collapsing.

In their place, management practices are emerging that treat all staff as self-managers who are not protected from the consequences of poor performance.  In this internal firm marketplace, individual competition and creativity flourish, so driving up firms' performance.  Firms which do not take this approach risk death by competition.

In such an environment, collective action is unable to secure artificially induced wage increases.  The only factor which can allow increases in individual incomes inside the firm is the firm's ability to pay its way in a competitive environment.

For example, the British oil firm BP Amoco has destroyed its centralised structure, eliminated middle management, and operates through 140 competitive performance-based units.  In this profit-zoned structure it is impossible for poor performers to hide within a bureaucracy.

This one example does not amount to a trend.  But if it is repeated in millions of workplaces, the outcome is likely to be the sustained growth, falling unemployment and stable prices that we are now witnessing.

Further evidence of increasing intra-firm competition is the growing chorus of complaint that we are working too long and too hard.  This claim has suddenly eclipsed the opposite complaint (all the new jobs are part-time and low-paid) that used to be levelled against labour-market reform.

One of the sources of the complaint is the Australian Centre for Industrial Relations Research and Training (ACIRRT), a Sydney University-based consultancy whose recent book Australia At Work advocates re-regulating Australia's labour market so that workplace conditions are not dependent on the productivity of the firm but reflect "community standards".

ACIRRT subscribes to the traditional assumption that the workplace is an arena of unequal power and zero-sum conflict between employers and employees.  Although its book shows that about 50 per cent of employees still work 35-40 hours a week, it claims that allegedly long hours of work are evidence of the growing power of management at the expense of employees.

ACIRRT therefore proposes new regulations limiting the number of people who are allowed to work;  setting minimum and maximum hours worked over a week, a month and a year;  introducing policies to control overtime;  and forcing Australians to have more leisure time.

Much of this agenda seems inspired by the European Union, where a maximum 48-hour working week has been decreed.  But it is increasingly obvious that such regulations are largely responsible for the 10 per cent-plus unemployment levels that blight the EU.

ACIRRT's agenda will appeal to people who believe that collective and external institutions can recover for them the job security of the past.  In fact, that is a recipe for high and growing unemployment, especially for the young.

If we are to retain and improve our prosperity, we must welcome more individual responsibility at our workplaces, and recognise that the waning of the old (and ultimately unsustainable) certainties of the past is not a loss but a source of new opportunities and rewards.

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Mr Privatisation has Transformed Victoria

When the NSW Liberals fell in an ignominious heap at the recent NSW State election after having offered their patched-together "cash in hand" electricity privatisation proposal, there were plenty of commentators saying that it "proved" that privatisation was on the nose.

So, if, as seems likely, Jeff Kennett -- the Mr Privatisation, Mr Economic Rationalism of Australian politics -- is re-elected in his third landslide on September 18, what will they say?

The alleged electoral poison of economic rationalism was always a beat-up.  The Hawke-Keating Government showed that economic rationalism was perfectly compatible with being the longest-serving federal ALP Government in Australian history, with Bob Hawke taking the honours as the second-longest-serving PM.

Kennett is one of the most able operators in Australian politics.  Kennett the Premier is notably better than Kennett the Opposition Leader, because he needs the extra discipline that being in government provides.  And his most shamelessly irresponsible intrusions in the policy debate -- trade protection, immigration and foreign affairs -- are all in areas which are completely outside the ambit of a State premier.

The transformation of the Victorian public sector which has taken place under Kennett has certainly had its glitches.  Nevertheless, given the scale of the changes, one cannot help but be impressed by the professionalism with which the changes were executed.  To be sure, a majority in both Houses of Parliament certainly helped, but that could also have been an excuse for sloppiness.

There are many aspects of the success of Kennett and his retiring State Treasurer Alan Stockdale one could focus on.

The point that is not often properly grasped is the importance of well-thought out ideas.  Much of the strategy for the transformation of the public sector was originally developed by Project Victoria, an initiative of the Tasman Institute and Victorian business.  Project Victoria covered water, ports, electricity, public transport and worker's compensation and the Government built on it for roads, hospitals, prisons and schools.

It is precisely because the general direction was clearly and rigorously thought out, that it could be prosecuted and argued for with such success.  Making it up as you go along is a recipe for disaster.  Failing to articulate a clear and understandable direction is a recipe for being unpersuasive -- ultimately fatal in democratic politics.

Kennett has consistently outclassed a Labor Opposition saddled with the "Guilty Party" image.

Kennett has also played well his enormous advantage of being naturally in favour of working class fun -- cars, sport, the Crown Casino -- against an ALP Opposition with a fatal penchant for trendy, inner-city wowserism.

The only real public defeat for the Premier was handed out by the social conservatives of the Victorian Liberal Party, who could not stomach his social liberalism on marijuana, though his attempt on the matter certainly did him no harm with young voters.

The Victorian ALP has replaced the "Guilty Party" individuals and is seeking to become a modern social democratic party.

While this transformation is not far enough advanced to be likely to threaten Kennett in September, that, combined with loss of experience from a rash of ministerial retirements, will make post-September Victorian politics a very different matter.

But as the Blair-transformed British Labour Party is the greatest marker of Margaret Thatcher's triumph, so a Victorian ALP seeking to be a "party for business" would be Kennett's.

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Who's not playing fair: the PM or the press?

It is dangerous for Australian politicians to have ideas or convictions.  It is dangerous because much of the media is very ready to punish any politician who engages in such untoward practices.

The media has a couple of ways of punishing politicians for having ideas.  The first is to search for any possible clash with the prevailing party line or the position of the party leader.  If such can be construed, then the headlines scream "disunity" or "threat to the leader's authority".  Articulating ideas then becomes a politically risky business.

If, as in the case of the Liberal Party and the debate on the republic, there is no party line, then the politician can be attacked for being a "spoiler" or being in some other way improper.

No wonder politicians have such low standing in our society -- about as low as journalists, though still above used-car salespeople -- if that is the way they are going to be reported.

Which leads us to the very odd situation where large sections of the media apparently think it is wrong for the Prime Minister to have monarchist convictions -- or at least to act on them.  Or for Peter Reith, to publicly express a belief that any President should be directly elected -- even though that it is entirely consistent with Reith's long-expressed support for citizen-initiated referenda.

It is an odd democratic process when a senior politician expressing views which happen to accord with those of about two-thirds of the electorate is treated as some sort of "spoiler".  Given that we are, in a few months, going to vote on whether Australia should become a republic with an indirectly elected President, one wonders when Peter Reith's journalistic critics think it would be proper for Peter Reith to express support for a directly elected President?  Presumably, only when it doesn't matter.

What we have is a situation where it is held to be proper for the media to overwhelmingly have -- and express in their reporting -- convictions in favour of a republic and an indirectly elected president yet it is held to be improper that the Prime Minister and a senior politician have, or at least express, contrary convictions.

That much of the media is so willing to display in their news reporting a particular and common preference on this question is a collective abuse of position.  Conversely, it is entirely appropriate, that senior politicians from all parties express what they think should be the constitutional order.

In particular, the implication that the Prime Minister, if he cannot support the yes case, should be a public cipher on the issue is ludicrous.  What makes this case so different from the other 42 constitutional amendments that have been put to the Australian people?  Nothing, except a breathtaking level of collective partisanship on the part of most of the media, particularly the Canberra press gallery.  Oh, and the unique instance of a constitutional amendment being put to the people with which the Prime Minister of the day does not agree.

This says something about John Howard's sense of fair play.  The abuse he has been receiving from much of the media over it says a lot about theirs.  And their sense of professionalism.

We're all owners, Mr Dodson

Pat Dodson's declaration that Aboriginal people own Australia is hardly likely to advance the cause of reconciliation

Aboriginal leader Pat Dodson, former chair of the National Committee on Reconciliation, has some news for all of us.

Those of us who think that we own our own homes and that Australia is a country we jointly own, are quite mistaken.

On Radio National early last Thursday he announced that "Aboriginal people are owners of this country".  Of the proposed constitutional preamble "if they want to put anything in there, put the fact down that we own Australia".

This statement is nonsense.  Australia is a nation created from the processes which flowed from European settlement.  Before that invasion, this continent was inhabited by 200 to 300 separate cultures, which had no common language or identity.

The sense of a common Aboriginal identity has been created out of the experience of displacement and absorption into the Australian nation.

Though there is much to be ashamed of in the treatment of indigenous Australians in that process, Australia is a free, democratic and decent society.  A society built up by the efforts of millions of people from a wide range of origins.

Before glibly dispossessing the more than 98 per cent of the Australian population who are not Aboriginal, Pat Dodson had disparaged Democrat Aboriginal Senator Aden Ridgeway.

Senator Ridgeway, commenting on the proposed constitutional preamble, had said that, given their dictionary meanings, kinship was a better description of Aboriginal relationship with the land than custodianship or stewardship.

Pat Dodson's response was not to debate the issue, but to attack Senator Ridgeway's capacity to articulate Aboriginal cultural ideas.

"Aden ought to go back and learn what customary law's about rather than what the English have to say," he said.

In Mr Dodson's somewhat totalitarian universe, Aborigines can apparently only have one view to accurately reflect Aboriginal cultural concepts, and Mr Dodson can tell us what that view is.

Senator Ridgeway appears to have conducted himself with considerable sense and dignity in the negotiations between the Prime Minister and the Democrats.

The Senator Ridgeway presumably also takes the view that he is a Senator for New South Wales, not merely the 1 to 2 per cent of that State's population who happen to be of Aboriginal descent.

By saying these remarkably silly things, Pat Dodson is playing to the role of "approved" Aborigine.

The idea that there is some specific "Aboriginal" opinion which approved Aboriginal spokespeople can articulate may flatter the pretensions of the moral-vanity brigade, but it is a condescending simplification of a very wide range of opinion amongst Aboriginal Australians.

If we stop treating people as individuals, capable of having their own thoughts and making their own decisions, we deny them an essential part of their humanity.

Of course, if Dodson were Pauline Hanson, saying that Australia belonged to the people of European descent and that John Howard ought to go back and learn what Anglo customs really were before talking about Australian culture, few would fail to identify such offensive nonsense for what it was.

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Definitely not in favour of slavery

Letter to the Editor:

I object to being criticised for things I did not say and don't believe.  Despite what Mark Uhlmann says (CT, July 31) , I did not imply (CT, July 24) that large-scale movement of labour in the 19th century was either good or bad, merely that, in some important ways, the scale of globalisation was greater before 1914 than now.  I am not in favour of any form of slavery or semi-slavery, and Uhlmann's implication that I somehow disagree with Deakin (and Reid's) objection to the same, is contemptible.  It is, however, pretty condescending to think that persistent voluntary movement of labour is not in the interests of the movers.  The experience of Hong Kong and Singapore shows that protection is not necessary for industrialisation.  To the extent that protection permitted higher wages in some industries, it did so only because their privileges generated political rents paid for by other Australians -- one of Reid's main objections to protection was that it was a highly regressive tax.  Deakin's policies initiated the urban-rural struggles for political redistribution of benefits which have not been good for Australia.  When lauding Deakin's political success, Uhlmann failed to note that Deakin was forced into alliance with Reid because Deakin's electoral support collapsed, while Reid's remained solid.  Reid's social concern was certainly not less than Deakin's, and his political foresight was greater.

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Comfort for the Jobless

The poor are generally getting richer

Do we as a society want to lean more towards a European-style model -- large, interventionist government with a well-developed social safety net -- or to the US model of more reliance on markets and individual responsibility?

The economic nationalists argue for moving more in a European direction.  The economic rationalists, the market reformers, look more to the US model.

One of the strongest arguments against the US model -- used again by Wayne Swan in these pages ("All talk, but no trousers" July 5) -- has been US levels of poverty and inequality.

The US labour market is held to produce large numbers of working poor -- 13 per cent of live in poverty.  American income distribution is very unequal -- the top fifth of households receive about 49 per cent of the national income, the bottom fifth less than four per cent.  Since 1970, the income of the top fifth of US households has gone up 50 per cent, whereas that of the bottom two-fifths has been stagnant.

But the American ideal is about people doing better during the course of their lives.  It is not a static, pattern-oriented ideal such as material equality, but a dynamic ideal about opportunity.

The power of the US model becomes evident from what happens to households over time.  The increased income inequality is largely a result of much greater changes in income in different life-stages because of the shift to an information economy.

In 1950, people in the peak income years of 35-44 typically earned about 50 per cent more than 20-24 year olds.  Now the peak income years are 45-54;  and their average earnings are three times as much as 20-24 year olds.  The US is a highly mobile society.  Of households in the bottom fifth in 1975, fewer than five per cent were still there in 1991, a mere 16 years later.  Far more, 29 per cent, had made it to the top fifth of US incomes and a whopping 80 per cent were in the top three-fifths.  Poverty in the US is generally a temporary state of affairs.  Half of the poverty spells people experience are of four months or less.  The long-term poverty rate is only four per cent.

As for working poor, the highly regulated Australian labour market produces a similar proportion of working poor as that in the US.  The Australian system has also, since 1974, provided jobs to a lower proportion of the population and, since 1983, a higher rate of unemployment.  The average duration of unemployment in Australia is more than four times that of the US.

As a would-be measure of absolute poverty, the official US poverty line suffers from problems in measuring income and inflation -- particularly improvement in product quality -- and the largely temporary nature of US poverty.  In 1994, poor US households had an equivalent level of possession of washing machines, clothes dryers, dishwashers, freezers and cars as was the US average in 1971.  They had a higher rate of possession of refrigerators, stoves, microwaves, colour TVs, VCRs, personal computers and air-conditioners.

Poverty does not mean the same in the US as it used to -- the poor are getting richer.

By adapting the official poverty benchmark of income -- three times the income required to provide a nutritionally adequate diet for all household members -- economist Daniel Slesnick has tracked consumption levels.  He found that the proportion of Americans in poverty on the basis of consumption patterns fell from 31 per cent in 1949 to 13 per cent in 1965 to two per cent at the end of the 1980s.

The American dream is far from an empty one.  Germany's Social Democrat Chancellor Schroder noted earlier this year that the US economy can produce employment growth when GDP growth is as low as 0.7 per cent;  the German economy requires at least 2.5 per cent growth to do the same.  Between the early 70s and mid-90s, both Europe and US increased public sector employment by over 6 million.  Yet private sector employment grew by 3 million in Europe -- and by over 40 million in the US.

Europe, focusing on the static ideal of preserving particular patterns of social outcomes, has sacrificed the dynamism which is central to both American success and ideals.  In seeking what to adapt for our own purposes, there is a clear contrast between the dynamic model of the US and the more stagnant model of Europe.  The IT revolution which is transforming our lives came out of the US:  Europe is struggling to catch up.

The US is already embracing the biotech revolution:  Europe is turning its back on it.  The US is model is about having confidence in yourself and the future.  According to international opinion polling, Americans are far more optimistic than Europeans.

So, do we opt for dynamism and optimism or pessimism and stagnation?  The choice -- about choice itself -- is ours.

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Indigenous Policies Upset Left and Right

Imagine that you are an unemployed Aboriginal teenager living an aimless life on a settlement or in a declining country town.  Is suicide a rational response to your situation?

Earlier this week, the Sydney Morning Herald published a peculiar article suggesting that the answer might be "yes".  Professor Colin Tatz, a political scientist at Macquarie University, wrote about a report on indigenous youth suicide that he has just prepared for the Australian Criminology Council.

According to Tatz, it is wrong to believe that Aboriginal youths who committed suicide were suffering from some kind of mental disorder.  Quite the contrary, says the professor, who recently received the Order of Australia "for service to the community through research on social and legal justice for people disadvantaged by their race".

His research supposedly indicates that most Aboriginal youth suicides are a rational attempt to find meaning, freedom and respect.  Young people who committed suicide were reacting against authority, "whether police, custody officers, teachers, parents".  Among other things, their actions are a rebuke "to 'us' in mainstream society", and to the past experiences that Aborigines have endured at our hands.

Tatz explicitly states that this history is a "primary cause of suicide".  In his words, "no other group has a comparable history to Aborigines:  wardship, minority status in law, effective exclusion from the state school system from 1900 to the mid 1970s, wholesale removal of children, whole population relocations, incarceration on reserves and 'missions', and economic and social discrimination".

But there is a fundamental problem here.  Tatz himself said that Aboriginal suicide was "unknown until perhaps 30 years ago" (although this probably overstates matters).  So why has Australia seen an epidemic of indigenous suicide after this history largely came to an end, and amongst those who never really suffered it?  The trend in Aboriginal suicides is precisely the opposite of what we could expect if past dispossession and powerlessness were a major factor.

On the other hand, "perhaps 30 years ago" does happen to coincide with the general spread of the welfarist mentality amongst Aborigines.  This is the notion, encouraged by "progressives" and a self-serving bureaucracy, that the circumstances of indigenous people entitle them to receive "assistance without reciprocation", as Noel Pearson has expressed it.  But if Tatz suspected that there might be some link between these two 30 year old developments, he did not share such insights with his readers.

Certainly, if we wish to understand a contemporary problem, we usually require some knowledge of the past.  It is wrong to pretend that Aborigines did not go through a long and unhappy history of discrimination and injustice after Europeans settled in Australia, or that the effects of this history do not continue to reverberate into the present.

But equally, if we take human freedom seriously, we must accept that people have the capacity to transcend even the most horrific experiences.  This is not just a theoretical possibility -- Australia has many refugees from totalitarian regimes whose experiences are worse than anything Aborigines encountered this century, and who have managed to put shattered lives together and raise reasonably well-adjusted families.

The real question is how best to ensure that people do not become imprisoned by their history.  Common sense suggests that one way is to discourage them from using it as an alibi, and to remind them that dignity and respect come to those who set their face against the poisonous temptations of victimhood.  But if you want to trap people in a destructive fog of despair, keep telling them that their feelings are justified by their history, and create incentives that allow them to avoid taking personal responsibility for their own lives.

Noel Pearson has suggested that those who hold stereotyped views of Aborigines are unlikely to change their attitudes whatever happens.  Indeed, these people are actually dismayed by stories of Aboriginal successes, because such accounts make it more difficult for them to justify their prejudices.

I imagine that Pearson had right wing "rednecks" in mind, but I think his remarks apply just as strongly to many people, particularly on the Left, who present themselves as being "deeply concerned" about Aborigines.  For them, Aboriginal social and economic disadvantage is an important psychological crutch, one which helps to validate their dislike of market based liberal democratic societies in general, and Australia in particular.

The last thing that these people wish to see is Aboriginal economic and social equality, unless it involves a complete transformation of the wider Australian culture and society as well.  Aboriginal needs must take second place to their ideological preoccupations, their guilt, and their moral vanity.  This is the "black man's burden", and it is destructive to the nation as a whole.

Perhaps this is why the new approach Aboriginal Affairs Minister John Herron has brought to the portfolio has occasioned such hostility from the country's intellectuals and the Aboriginal industry -- they fear that he might actually bring about significant improvements in health, housing, community services and economic development where decades of leftist breast beating and welfarism have failed.

It may also explain why there is such a reluctance to encourage a wide ranging and open debate about indigenous policies.  When it was released three months ago, I naively hoped that Noel Pearson's discussion paper, "Our right to take responsibility" would release a flood of commentary from the numerous denizens of our universities who are working on Aboriginal issues.

Pearson's paper challenges shibboleths of the Right as well as the Left, and he cannot be dismissed as a tool of the Federal Government or other forces of reaction.  Whatever one may think of his ideas -- and I certainly disagree with some -- they are considered and courageous, and deserve to be taken seriously.

But so far, it seems that few supporters of the Aboriginal industry or of the Left have really sought to engage with Pearson's arguments.  These people can see where the arguments might lead, and it is not a place where they care to go.

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Don't hobble our smart food

Over the weekend, tv news showed footage of British consumer activists, clad in white, raiding a farm, bobbies in pursuit, to destroy a genetically modified crop.  That particular stunt backfired:  the people-in-white destroyed the wrong crop.

Genetically modified food is taking over from the "green revolution" based on hybrid plant varieties, that got underway in the 1960s.  Genetic modification modifies plants' DNA so that they need less water, less fertiliser or less pesticide.  Like the technology of the "green revolution", genetic modification has a vast potential.  The reduced costs it brings mean that it will be incorporated in virtually all major crops -- already it dominates the North American soy and maize plantings.

Today, Commonwealth/State Health ministers are addressing the issue of labelling foods that incorporate genetically modified ingredients.  Decisions at that ANZFSC meeting have the capacity to put Australia on a road to increased, unnecessary and costly regulation.  The outcome could be a cost to Australian consumers similar to that of a GST on food and a loss of export competitiveness and income for Australian farmers.

These costs emerge if comprehensive labelling is required of any food containing an ingredient derived from genetically modified plants.  The costs arise, not from the label itself, but the vast new auditing and duplication of handling required to ensure the label is accurate.  Some estimates in the UK have put this at a 50 per cent increase in the basic food.  Such a cost impost would halt the productivity gains from genetically modified improved food.

Comprehensive labelling of all food that might contain genetically modified ingredients is an objective of the Australian Consumers' Association.  wants, even if the food is no different.  If carried through, this will require the entire food chain to be streamed into products that contain and products that do not contain genetically modified ingredients.

This segregation is known as Identity Preservation.  Rigorous streaming would call for considerable duplication of processing equipment, a comprehensive auditing process and a large new bureaucracy.  It is estimated to increase the costs of basic food raw materials by up to 50 per cent.  is made a requirement d , as the Australian Consumers' Association and its activists allies.

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Hyperbolic flim-flam on gaming goes over the odds

The Productivity Commission's Draft Report on Gambling has opened up the potential for considerably more regulation of the industry.  This is unusual because Productivity Commission reports invariably promote reduced levels of government oversight.

It is also regrettable because it injects the Commission into social policy for which it has few skills and sets it on a trawling expedition seeking spillovers to justify government intervention.  The appointment of former ACOSS chief Robert Fitzgerald as a Commissioner also brought an amplified social perspective.

The Commission's findings include:

• a contradictory case that restrictions on competition not be introduced but that caps on the number of machines could be considered
• greater information be mandated at venues about the odds of winning or likely rate of loss
• restricting the availability of ATMs at gambling venues
• not reducing gambling taxes.

For many, the central finding stems from the Productivity Commission's economic analysis (some would say sophistry) that estimate a bottom line benefit to the economy from gambling of between $150 million and $5.2 billion annually.  It may have expected the debate to be focussed on this benefit, and so it eventually might.

However, several of its key findings have set the regulatory train heading for the buffers at a speed that could take it off the rails or at least jolt its passengers.  One of these was the estimate that 2.3 per cent of Australians are problem gamblers.  This is a rather higher number than found elsewhere and the Commission magnifies it by saying that each one affects some 4-10 others.  Suddenly "problem gambling" is an issue that mathematically could impact on 25 per cent of the population!

In addition, the Commission's surveys showed 75 per cent of the population thought gambling did more harm than good and a whopping 92 per cent wanted no further increase in gaming machines.

It's no wonder that the report should have politicians ducking for cover.

The Gambler as the Loser

Yet, wagering is an ancient activity.  If there is more spending on it now, that reflects people's preferences on how they spend their own money, the free exercise of which is central to liberty.

Much of the Productivity Commission's report addresses the losses from gambling.  It often seems to forget that gambling venues are places where people can meet to conduct the wager, often in the context of visual or contextual reinforcement of the satisfaction the activity brings.  That context can range from the macabre, accompanied by Russian Roulette as depicted by the Deer Hunter in the dying days of the Vietnam War, through the glitz of a modern casino down to the homespun surrounds of a domestic living-room.  And while Russian Roulette outrages the laws of civilisation, the venue's percentage (and the government tax take) is simply the amount that people will pay for the accoutrements.

These costs of the wagering institution are no more wasted than the high mark-up we pay for food in a fine restaurant rather than buying take-away.

Some of the Commission's Prescriptions

The Productivity Commission calls for venues to advertise the rate at which losses are statistically certain to occur.  These might be legitimate but their rationale could equally apply to requiring other sellers to advertise their products' shortcomings.  Thus, car retailers might be required to indicate to their customers the increased chances of accidental death through car travel rather than travel by rail or air.

The report counsels against tax reductions on gambling.  It estimates the tax rate on gaming is on average 52 per cent and impacts most harshly on the poor.  Even so, it opposes reducing the rate on the grounds that taxes on other goods (tobacco, alcohol) are also regressive.  Aside from the 52 per cent being an understatement -- it excludes licence fees like the $597 million paid by Tabcorp and $376 million paid by Star City -- this sets an unfortunate precedent.  In the past, the Commission has rejected arguments against reducing particular tax or tariff distortions because of distortions elsewhere.  Were it to have done so, tariff reform may never have taken place.

The draft report will certainly have pleased two of the Productivity Commission's key constituents:  the Treasurer and the Labor Party.  A report hostile to an industry, that is seen to have Premier Kennett as its high priest would please the Treasurer whose brother will have coloured his personal views.  As for the ALP, it might be deflected from its policy of abolishing a Commission that shows itself to be willing to graft social policies onto its "economic rationalism".  But avoiding this kind of self-serving distortion is the reason why we have a Commission in the first place.

Even with this baggage, the Productivity Commission is institutionally unable to deliver a thoroughly bad report.  Beneath the hyperbolic flim-flam of social distress caused by gambling, it does make a valiant attempt to demonstrate there are net gains.  Moreover, it rejects limiting competition through provision of monopoly or more favourable taxation of clubs over pubs.

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The truth about guns

In public debate in this country it is agreed that the United States' love affair with guns is stupid and explains why the US is such a crime-prone country.  Commentators all furiously agree with each other and we can all sneer at those dumb Americans.

There are a few problems with this simple-minded self-righteousness, however.  First, murder in the US is overwhelmingly a problem of black America.  Afro-Americans make up only 12 per cent of the adult population, but commit over 50 per cent of the murders.  A black American is eight times more likely to be a murderer, and seven times more likely to be murdered, than a white American.

It is not obvious why this pattern has anything much to do with gun availability.  It would seem to have far more to do with the social disasters in many US inner cities, particularly as middle-class suburban blacks are much more like mainstream US in their crime rates.

And America is not a high-crime society for other times of crimes.  England has higher rates of burglary, robbery and assault than the US -- and the rates in England are rising, those in the US are falling.

Take African-Americans (as perpetrators and victims) out of the figures, and the US is a relatively low crime-rate society.

Furthermore, a May 1998 study by Professor John Lott -- More Guns, Less Crime -- examined crime rates in all 3,054 US counties over an 18-year period.  Lott found that in those States that introduced laws permitted the carrying of concealed handguns, murder rates fell on average by 8 per cent, rapes by 5 per cent and aggravated assault by 7 per cent compared to states without such laws.

Criminals are opportunists, something we are all aware of in our behaviour.  It is why we lock our cars and our houses, put bars on our windows, etc.  They are all steps to deter crime.  If potential victims are more likely to be armed, they are less attractive as targets.

The murderous duo at Columbine High, Colorado (a state which does not have a concealed handgun carry law) and the gunman in the recent Atlanta stockbroker shooting did not decide to shoot up a police station full of armed police.  They went where they knew their potential victims were not likely to be armed.

As it happens, there have been several incidents over the years in the US where armed teachers or other staff have prevented or stopped killing sprees at their schools -- but such events are far less newsworthy than a successful massacre.  Nor are mass public shootings confined to the US.

Lott has done a further study of multiple victim public shootings, analysing the 14 US states that adopted conceal handgun carry laws between 1977 and 1995.  Lott found that the number of people shot in multiple-victim public shootings declined after such laws were introduced, while in other states it either did not decline or did not decline as rapidly.  One is never quite sure which potential victim might be armed ...

In Switzerland, there is a military assault rifle in practically every home and pistol shooting is a favourite national sport.  Switzerland also has low crime rates.  (But who is going to take up burglary in a country with a trained possessor of a military assault rifle in almost every house?)

A very preliminary study by the Australian Institute of Criminology suggests that the tightening of gun laws in Australia after Port Arthur has led to a drop in firearm-related deaths -- mainly through less gun accidents and suicides (excluding the 35 killed at Port Arthur, gun homicides actually went up slightly from 1996 to 1997).

The news is a bit less good than it first appears, as evidence also suggests some displacement for suicide and crimes such as armed robbery to other methods or weapons.  So the effect on crime appears -- on very preliminary figures -- to be very limited.

Between 1973 and 1992, the number of privately-owned firearms in the US almost doubled, the number of handguns more than doubled, yet the homicide rate and the proportion of homicides perpetrated with guns both declined.  It is very difficult for a country the size of the US to successfully deprive would-be killers and criminals of weapons when it is already a relatively high gun-ownership society (there are estimated to be 240 million privately-owned guns in the US).  Making it easier for potential victims to defend themselves is, on the evidence, a better choice for US policy.

But in Australia this debate is a case of "don't confuse me with the facts".  Believing American gun laws prove Americans are stupid is a much more congenial piece of simple-minded self-righteousness than thinking things through.

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