Myths for a Mendicant State

There are only two bases for sustainable prosperity.  One is the path of independence:  to provide goods and services that people wish to buy at prices they are willing to pay.  The other is to live off others by coercing or begging an income from them.

The first is the path of an independent citizenry.  The second is the path of the master, gangster or mendicant.

Paul Chapman (The Adelaide Review, January 2000) is very concerned about the basis of South Australia's future prosperity and whether South Australia is getting its "fair share" from Federation.  Specifically, how South Australia should seek to get more wealth transfers from the rest of Australia via the Commonwealth Government.  South Australia, the mendicant state!

Now, it is true that the last 25 years has seen a great growth in mendicancy.  Government expenditure on health, education and welfare has grown from about 11 per cent of GDP to over 20 per cent:  a surge in resources no other sector can even begin to match.  About 30 per cent of those aged 15 and over depend on transfers from government for their income.

One has to say, however, that the individual returns on this are not good.  At least, not for the recipients:  as is both normal and inevitable, the greatest individual returns from such expenditure have gone to the administrators of the programmes themselves.  So, from experience, mendicancy is not a basis for South Australia being a high income state.  Nor, of course, could it be expected to be.  The rest of Australia is hardly going willingly to share enough of the income garnered from actually producing things to support South Australia in the life to which it might like to become accustomed.  The life of a rentier can be very pleasant, but one actually has to have the assets in the first place from which to live.  Pity is just not enough of an asset, even pity dressed up as "fairness".

Why is South Australia so different, why it should be particularly regarded as so special, that the rest of the country has to guarantee its prosperity?  A difficult case to make, one might feel.  The Federation enterprise is now mere months short of being a century old:  time enough to work out for oneself how to make a go of it, surely?

Paul Chapman does not seem to have quite thought things through.  But, then a man who can complain about the retreat of government when the period since the election of Whitlam Government has seen the greatest growth in government in Australia's peace-time history is someone who is perhaps not entirely observant, or aware, of what is going on around him.

But what about de-regulation and privatisation?  I hear you cry!  Yes, indeed, what about them?  They have been mere tactical retreats in an attempt to sustain government's strategic advance.  It is perfectly true that specific markets have been de-regulated, but only in an attempt (largely successful) to increase the efficiency of said markets so that the economy can more easily sustain the ever-spiraling tax burden.  When Gough Whitlam was elected PM, 23% GDP was taken in taxes:  it is now 31%.  Taxes impose costs considerably beyond their apparent level -- costs in compliance, costs in all the economic activity rendered non-viable, costs in diversion of resources.  To have an increasing proportion of one's income taken in taxes is also rather more bearable if said income is rising more rapidly.  Hence an expanding government's increased interest in economic efficiency.

As for privatisation, partly that was in the same (again largely successful) search for increased economic efficiency.  But it was at least as much driven by government welfarist profligacy.  Revenues may have been going up, but expenditure went up faster.  Government rate of saving collapsed and then went into negative.  Debts mounted.  Asset sales become a necessary part of the fiscal spring-cleaning.

As governments desperately look for ways to pay for the voracious fiscal monster that is the Australian welfare state (do you think Howard and Costello asked you to vote for them so they could bring in this big new tax because they thought that was a cunning way to be popular?) they have become less and less impressed with mendicant industries.  The job of industry is to produce wealth that can be taxed to pay for welfare spending, not to be a burden on other industries.  It is perfectly true, as Paul Chapman says, that car making in South Australia involves sunk costs, but governments under fiscal pressure and trying to keep the voters happy while they take more and more of their income in taxes are going to ask the question:  how long should South Australia and Victoria have been allowed to inflict cars which were rather expensive for what one got on the rest of the country?

And again, the tariff-cutting policy has been successful.  Indeed, polling shows the popular approval of Australian car makers (historically, very low) has risen steadily as the quality of their product improves under the pressure of increased competition.  It is quite clear from the long-run economic data, that trade protection is particularly damaging to small economies, as it deprives them of the benefit of economies of scale and scope in the global market (the only ones they can have access to) while their small markets more easily fall prey to exploitative monopolies and cartels.

But the would-be mendicant can always find reasons why they should be blessed with more of others' income:  so Paul Chapman asks for a new subsidy to compensate for the withdrawal of the old subsidy of the tariff and new subsidies to compensate for the withdrawal of old privilege via National Competition Policy.  Sorry:  far too many claimants in the queue ahead of you.  All those people on unemployment benefits, sole parents, disability pensions, student benefits, academics, hospitals, Medicare, child care, indigenous Australians, the arts, etc. etc. etc..

One is put in mind of the economic nostalgics of News Weekly who attempt to maintain the following propositions simultaneously:

1. politicians and bureaucrats have displayed profound, systematic incompetence and betrayal of national interest in their economic reforms over the last 15 years;
2. where government has the most extensive control -- education, welfare, family law, social regulation -- there has been systematic imposition of narrow and unrepresentative agendas in an unaccountable way;  and
3. said politicians and bureaucrats should take far more control over the nation's economic affairs.  But perhaps consistency and nostalgia are not bosom buddies.

In a similar vein, Paul Chapman seems to think the rest of Australia should live on their efforts, and South Australia should live on those efforts too.  Piggy-backing along for the ride.  Not a goer, I am afraid, not even as a generous "top up".

He raises doubts whether the economic reforms have been successful.  The Asian economic crises represents the first time in over a century that Australia has performed better than comparable countries in a global economic downturn.  Not only that, but Australia has managed the almost unheard of feat in a developed economy of generating a systematically increased rate of productivity growth -- productivity growth being the necessary basis of mass prosperity.  No wonder noted MIT economist and commentator Paul Krugman has been calling Australia "the miracle economy" and the Japanese have been sending ministerial delegations to find out how we got it right when they got it so wrong.

Then again, any nation which manages to about halve its net national wealth probably does have to do some soul-searching.  Indeed, net wealth losses from the bursting of the Japanese "bubble economy" are about twice the value (adjusted for inflation) of all the property damage done to Japan by American bombing in WWII.  This time, however, far from costing the Americans, there was actually a major wealth transfer from Japan to the US as Americans bought back assets they had sold much more expensively.

Now, if Paul Chapman really wants to contribute to South Australian revival, he might consider how it could build on its strengths and improve its weaknesses rather than evidencing the sort of thinking that made MITI (the much over-hyped Ministry of International Trade and Industry) what it is today (as one Japanese bureaucrat said recently "we are brain-dead -- we live like vegetables").  The begging bowl is not a basis for State prosperity.  Much better to be one of those being importuned for charity rather than doing the asking.

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