Don't be too transported with delight

We should not be blinded by the euphoria over public transport's success in servicing the Commonwealth Games.  Public transport can work well when lots of people are converging on a common destination and can operate smoothly (if at a cost) if it vastly increases its staffing.  Even before the Games started, there were claims of an imminent resurgence of (presumably commercially viable) light rail and suggestions that it is car users not public transport users who are subsidised.  And there have been many suggestions that the steady decline in the share of public transport is being or could easily be reversed.

In his article (Business, 7/3), Joshua Gans suggested an approach involving road pricing and making public transport free, for which he accepts an estimate of costs at $340 million a year.  He believes these two policies could considerably relieve congestion.

It might well make sense to charge more accurately for the costs of the road space used at the time of that use.  This is notwithstanding that people already pay twice as much in fuel and registration taxes as governments spend on roads.

That said, road pricing is a one-sided approach.  Public transport is even peakier than road usage.  Would it not make equal sense to charge public transport users in a similar manner to road users?

This would be even-handed;  and surely this is preferable to having governments making people's choices for them.  As public transport is highly peaked (and in any case fares cover only 20 per cent of the costs) the logic would be to charge considerably more for peak-hour travel.

A further problem is one of monopoly.  As government has the exclusive power to allow or to prevent the building of new roads, might it not see road pricing as a taxation bonanza?  The prospect of obtaining increased tax revenue would prove irresistible to some governments and encourage them to allow a scarcity of road space to develop.  Governments' enthusiasm for this would be constrained only by fears that they might deprive the city of the transportation services it needs to flourish.

These matters aside, although free public transport would certainly attract more patronage, it would not attract as many as its advocates think.  This can be tested by observing the transport choices of workers in the public transport industry, who already actually travel for free.  The number of workers' cars parked at tram, train and bus terminals is testimony to the attractions of car travel even to people who are far from affluent and work within the industry itself.

Sadly for those favouring public transport, the tide of demographic history is a swift current running against them.

Public transport needs high concentrations of people.  A rule of thumb is that rail-based systems require 40,000 people per square kilometre to be viable.  Such a system therefore works, after a fashion, in Hong Kong, which has that population density.  Express bus systems need 26,000 per sq km.

Melbourne's density is 1500 people per sq km and reaches only 5500 even in the densest suburb (Port Phillip).  On top of this, concentration levels have been falling for decades in spite of land rationing by successive governments, which is designed to promote denser urban living.  Even an intensification of this government-created shortage of land would not reverse this trend.

The estimates of what is required for a viable public transport system with growing patronage levels are also being pushed up due to the changing nature of work places.  More and more trips are cross-town.  These trends are exemplified by a declining share of employment in central areas, where radial public transport systems work best.  The proportion of jobs in central Melbourne fell from 55 per cent to 28 per cent of the total between 1961 and 2001.  In that latter year, the central business district accounted for only 10 per cent of jobs.

This has immense ramifications for planning, especially road development and public transport.  Not only is Melbourne getting less dense but the trip profile is becoming far more dispersed and difficult to jam into a public transport service.

The car is the preferred means of transport unless parking is expensive.  Trying to discriminate against it not only offends against personal choice but will reduce the value of the city and jeopardise its future attractiveness as a living, working and leisure centre.

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Labor has lost touch with what matters to Australians

It is easy to blame your enemies when something goes wrong.  For many in the ALP, the fact that their party hasn't won a federal election since 1993 is entirely the fault of right-wing commentators in the tabloids and on talkback radio.

In two public speeches over the previous fortnight, Julia Gillard, aspiring Labor leader and its health spokeswoman, has explained her understanding of the conspiracy.  The commercial media has an "overwhelming pro-Howard bias", and the Government has "stacked" public bodies such as the ABC and the High Court.  According to her, the outcome of all this is that the ALP has lost the debate about Australian culture and values.  Her solution is to vigorously "fight the right" and for her party to start talking about its own values.

Gillard's analysis provides a convenient excuse for the failures of the ALP, but it is fundamentally wrong.

To begin with, the ABC after a decade of the Coalition is no different from how it has always been, and the Government has probably appointed to the High Court as many judges who vote Labor as who vote Liberal.  A key public institution that Gillard did not mention, our taxpayer-funded universities, continue to be overwhelmingly populated by academics who are anything but right-wing.

If the right really does have the sway Gillard imagines, then it might be expected that this would be reflected in state politics.  But it isn't.

Australia has wall-to-wall state Labor governments.  The difference is that at the state level the ALP is largely conservative and pragmatic, while federally the left of the ALP has largely taken control of the party's debate about values.

It is not Labor's opponents that are making federal Labor unelectable.  It is Labor and its values that are making the party unelectable.  And the proof of this is revealed in the attitude Gillard displayed last week.

She made great fun of John Howard as a throwback to the 1950s and "the monocultural world he remembers, of white picket fences shielding white families".  In 1988 John Howard's policy statement Future Directions famously featured a father and a mother and their two children standing outside a house surrounded by a picket fence.  For as long as Gillard remains obsessed with the colour of the faces and the colour of the fence, there's no hope for Labor.

The images of Future Directions are of three things:  a job, a family and a home.  Gillard might laugh and think that the desire for those things is old-fashioned, but that just demonstrates how out of touch she is.  And if she believes that it is only white Anglo-Saxons that aspire to those things, she is sadly mistaken.  From the 1940s to the present, migrants and refugees of every skin colour have come to this country in search of the very things that Gillard scoffs at.

The irony of Labor's situation is that it was once proud to champion the values of prosperity, family and the economic security embodied in a home of one's own.  Now it seems that it would prefer not to talk about them.

Certainly the nature of the family has changed since the 1950s, but the reality is that individuals would still prefer to live in a loving and caring family relationship.  One of the few groups in society not afraid to discuss the role of the family are the evangelical Christian churches, and it is no coincidence that Labor is profoundly uncomfortable in dealing with them.  Rather than trying to understand the rise of the new Christian churches and their attraction to hundreds of thousands of Australians, Labor simply dismisses them as the "religious right".

During the last federal election campaign, the ALP could not counter the claim that the Coalition was the better at handling the economy.  So instead, what the ALP did was to imply that any voter concerned with their home mortgage interest rate was only being selfish.  There are significant elements of the Labor Party that have always held in contempt the skills of effective economic management, but whether they like it or not, it is the economy that is the source of people's employment.

Joblessness in a household is one of the major causes of family break-up.  In her speech to the Fabian Society last week, Gillard did not once mention the economy.

She spoke of the need for Labor to offer "a vision of the future based on values that endure".  Eventually Labor will understand that those enduring values are centred on people's work, their family and their home.

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Victoria must play role in tax reform

The Commonwealth Games are nearly over.  They have been well managed, great fun and the athletes have been magnificent.

But have you ever wondered how the Government has been able to foot the very sizeable bill with almost effortless ease?

Well, Steve Bracks and his team have experienced one of the largest revenue windfalls in this State's history and they are actively spending it, including on the Games.

From 2000-01 to 2004-05, the Bracks Government received a revenue windfall of $17.6 billion, or a 20 per cent increase in expected revenue.

The main generator of this largesse has been the State's own taxes.

When the GST was first introduced in 2000, the tax cuts as part of the GST deal were expected to result in sharp cuts in state tax revenue.  This was not expected to be recovered for at least seven years.

The prediction turned out to be far off the mark.  The economy boomed.  The State's three growth taxes -- payroll tax, land tax and conveyancing fees -- pulled in money at a record rate.  Total tax receipts were $7 billion or 18 per cent higher than expected over the past five years.

Then there was the GST.  Over the first five years of its existence, revenue from the GST and other Commonwealth grants exceeded expectations by $4 billion.

In the main, the Bracks Government has done little more than maintain the status quo on tax and GST.

It has twice, with great fanfare, announced tax cuts.  However, these have been minor changes with little impact on revenue collections.  And it inherited the GST deal and has met its commitments.

The Kennett Government undertook many reforms but did nothing on tax.  It raised a number of non-business taxes to help reduce the budget deficit.  It subsequently did not lower these or other taxes, so the Bracks Government inherited one of the most aggressive state tax systems.

As such, Steve Bracks has been able to do little while the money has rolled in at an increasing rate.

The Bracks Government, meanwhile, has increased receipted fees, fines and user charges by 25 per cent over the past five years.

A small proportion of the revenue windfall -- $2.4 billion or 19 per cent -- has been spent on expanding the State's infrastructure base.  The rest -- $15.2 billion -- has been consumed.

About a third of the windfall has been consumed on more and higher-paid staff including front-line staff.  But for every additional teacher, nurse, doctor and police person hired, the Bracks Government has hired an additional bureaucrat.

The remainder of the windfall has been consumed in an ongoing spending spree, including the Games.

Ron Walker has warned that we may suffer a bout of depression when the party is over.  I suspect he is right.

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Let business get on with it

We would be better off if the government stopped meddling in R&D.

Who was in charge of the development of personal computers?  The answer, of course, is that nobody was in charge.  The evolution of computers is the story of individual firms competing to make better products to meet the needs of consumers.

Politicians and industry lobbyists should remember this obvious truth whenever they talk about the need for national leadership on science and technology.  The point about the evolution of computers is made by English economist John Kay in his recent book The Truth About Markets and it highlights the perils of thinking that all that is required to turn Australia into the research and development (R&D) capital of Asia is a little bit of planning.

Occasionally government can assist in commercialising technology.  However, most of the time government only succeeds in getting in the way, and indeed this is one of the main findings of a study by the Business Council of Australia released last week.  The report found that corporate governance procedures are "killing" innovation and the "accountability industry" is creating a risk-averse culture within companies, while high levels of personal tax restrict the capacity of firms to attract highly qualified people from overseas.

The Productivity Commission's inquiry into science and innovation policy announced earlier this month could take the Business Council's report as its starting point.  The issues the commission will examine include the impediments to "the effective functioning of Australia's innovation system" and the impact of R&D spending on the country's economic performance.

The commission might consider whether it is even appropriate for Australia to have an innovation system at all.  Innovation is the last thing that can be squeezed into a system -- particularly a system run by the government.

In its first term the Howard government cut back allowable deductions for private R&D spending to stop the rorting of the scheme.  The outcry was so loud and continued for so long that in 2001 the coalition was forced to invent Backing Australia's Ability, which promised $50 billion of government spending on science over 10 years.  That additional money was far in excess of what had been saved as a result of the coalition's earlier decision.

A draft report from the commission is due within 12 months, although it shouldn't take it that long to establish three basic facts.

First, there is no relationship between a country's spending on research and its economic growth.

According to the Organisation for Economic Co-operation and Development in 2003 (the most recent year for which data is available), Australia devoted the equivalent of 1.6 per cent of its gross domestic product to R&D expenditure.  The comparable figure for the United States was 2.6 per cent, for other countries in the OECD it was 2.2 per cent, and in Sweden, usually cited as the paragon of R&D virtue, it was 4 per cent.

However, when it comes to average annual growth rates over the 10 years to 2004 the story is very different.  Growth in Australia was 3.7 per cent, in the United States it was 3.3 per cent, and across the OECD it was 2.6 per cent.  Sweden's growth rate was little better than average at 2.8 per cent.  Australia's record over that decade was no fluke and wasn't simply the result of the mining and energy boom of the past few years.  Clearly there are many more factors to economic success than just R&D spending.

Second, the level of national spending on R&D is an outcome of the structure of a country's economy.  Australia doesn't have, for example, the high-tech military or aerospace industries that sustain high levels of R&D.  For the foreseeable future the services sector will be an important driver of growth for our economy, but on traditional measures, services generate relatively little R&D.

Third, there is no relationship between a company's spending on research and its business success.  As the Business Council report recognises, it is one thing to spend money on research but it is an entirely different thing to create wealth from research and ultimately to make a profit on it.  The most innovative firms are not necessarily the ones with the largest research budgets.

While it is unfashionable to say so, the best way that government can encourage companies to undertake R&D is to get out of the way.  The only problem is that governments find it much easier to spend money than to remove the regulations that prevent businesses from going about their business.

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Can the future be made future-proof? Directions for telecommunications, media, and public policy

HV McKay Lecture on Technology,
Melbourne, 7 March 2006

It is a great privilege to deliver the H.V. McKay Lecture on Technology for 2006.  H.V. McKay has been one of my heroes for more than 10 years.  I learned of Hugh McKay in Lismore during a lecture tour around Australia in 1995, when I visited nine cities -- beginning in Melbourne and ending in Cairns.

In Lismore I discussed with state and local leaders how regional institutions are used in the US to improve the quality of life in sparsely-populated regions of the American West -- a region very much like Australia.  During these discussions, I learned about Australia's Royal Flying Doctor Service.  McKay's support for the RFDS inspired me to learn more about him and I was fascinated by his biography. ⁽¹⁾  McKay's business interests focused on manufacturing farm machinery, where he operated the nation's largest industrial plant in the early 1900s.  But he also pioneered advances in mass production techniques;  and he stands out as one of Australia's early large-scale exporters, selling his invention, the Sunshine harvester, around the world -- from Argentina and New Zealand to Chile, Russia and South Africa.

McKay's sensibilities are very relevant to contemporary Australia -- not the least because of his unending commitment to make investments to advance the national interest.  McKay used much of the wealth he accumulated from his wide-ranging business interests to finance public interest projects like the Flying Doctors.

He also showed a strong interest in major infrastructure projects -- including social infrastructure such as parklands, schools, libraries and other public buildings.  In the spirit of the evening's namesake, I want to use my time to address some of the lessons from the life of H.V. McKay including:

• how inventions can change the course of a life and a society.
• why investments must be profitable.
• the importance of building social and physical infrastructure.
• our civic responsibility to focus on improving standards of living.
• the quality of life for all Australians, no matter where they live.

AUSTRALIAN CULTURE

Even though I have been out of Australia for about eight months, people still ask me, "What has surprised you most?"  I spoke in Canberra in early December last year to answer that question in relation to government and politics.  Tonight, I would like to answer that question in relation to Australian culture.

Aspects of Australian culture that I have enjoyed the most include events at the Opera House, Aussie sports and Aussie films -- from The Castle and The Nugget to more recent releases, such as The Oyster Farmer.  Of course, I should include the made-for-TV episodes of Kath & Kim.  Truth-to-tell, I have watched only four of the 24 episodes -- a gift of my Aussie cultural guru.  As for the remaining 20 ... can't really say when I will get to them.

I love the movie The Castle.  As you know, it's a theme I keep coming back to -- mums and dads trying to save their property from Government confiscation.  When I recently reminded a friend of mine of the important lessons from the The Castle -- including the fact that the mums and dads beat the system -- he said, "Remember, it's only a story."

FUTURE-PROOFING

Still, there are a couple things about the culture of public discourse that both surprise and fascinate me.  One, in particular, is "future-proofing" -- and especially the way elected and civic leaders, the media and the public in general appear to accept this notion of "future proofing".  I had never heard this phrase before outside of Australia.

It is a curious and bewildering phrase to my way of thinking.  There are lots of things I want to be "proofed" from.  I want to be:

• bullet proof.
• fire proof.
• burglar proof.
• water proof.
• fool proof -- especially fool proof.

But "future proof?"  Those words suggest you don't want to be surprised or that somehow you want to control the future.  It's like saying you don't want anything to change.  If that is the case, that would be a very boring life.  Imagine, no more:

• surprise birthday parties.
• inventions.
• revolutions.
• marriage -- or for real surprises, marriages.
• kids.
• family life.
• work and bosses.
• politics.

Almost everything that makes life interesting involves surprises.  Think about the world of technology, where we are surprised all the time.  New technologies -- like the micro chip -- are not only surprises, but, even more importantly, they typically have impacts and consequences that were never anticipated by their inventors and pioneer users.

Consider the railway.  The application of technologies that were integrated into what we call the modern railway included things like:

• trackage.
• rolling stock.
• steam engines.

The invention of the railway led to many surprising innovations -- including:

• the Pullman sleeping car.
• Westinghouse air brake.
• electronic signalling systems.
• refrigerated freight cars.
• remote electronic switching.
• standardised rail separations that permitted the inter-connection of passenger and freight cars from one railway to another.

But the real economic, social and cultural importance of the railway extended way beyond improvements that were made in the technologies and practice of moving rail cars over fixed trackage. ⁽²⁾

The impact of the railway was huge and had enormous spillover effects.  For example:

• The railway had major economic impacts, especially in the economic development of the US, Russia, Canada, Australia and other large, continental countries.  Reason:  Railways reduced the costs of transportation and increased the speed to market -- especially for agricultural goods that were often produced in the hinterland.
• The railway led to social inventions.  For example, the need to develop reliable railway schedules led to the establishment of time zones -- which occurred first in the US and quickly spread to the rest of the world.
• The railway led to the demographic decentralisation of society, with human settlements able to prosper away from seaports and inland waterways. ⁽³⁾
• You can even make the case the railway led to what we call the "green revolution" -- advances in agriculture that ended famine and starvation that were regular features of life in India, China and many other parts of the world.  But that is a story for another time. ⁽⁴⁾

Consider the automobile.  The impact of the automobile is much bigger than:

• electric starters.
• power steering.
• paved roads.
• traffic control signals.

The biggest impacts were cultural, changing the way we live, work and play.  The automobile led to:

• drive-in movies.
• motels.
• more sexual freedom.
• drive-through fast food.
• suburbs.
• sprawl.
• more personal freedom and mobility.

The same goes for the compass.  The compass was more than a better way to find your course around on the planet especially on the oceans where the traveller-navigator had no landmarks for using dead-reckoning methods of navigation.

The improved ability to navigate on the oceans created by the compass led to: ⁽⁵⁾

• the ability to sail in all kinds of weather since the compass relieved the navigator of the need to be able to see the stars or track the shoreline.
• the construction of larger ships because the compass dramatically reduced the dangers of running aground, ⁽⁶⁾ and the ability to sail long distances, opening up global trade routes which, in retrospect, we now know, sparked unprecedented wealth creation. ⁽⁷⁾

The point is that future proofing can't be done ... and shouldn't be done.  Policies required by future proofing will inevitably prevent innovation and stifle creativity.

This is not to say we shouldn't practice risk mitigation and risk management -- e.g., "fix the roof while the sun is shining" or strategies for adaptation in the light of new technologies or changing consumer needs.  But these are dynamic, outwardly-focussed concepts and are very different from the static and defensive concept of "future proofing" as it used in Australia. ⁽⁸⁾

Static, defensive, micro-managed notions of the future are bewildering to me because, to my way of thinking, man was created to make the world a better place.  That means to change things,

• to invent things.
• to upgrade, advance, and perfect.
• to engage in a process of continuous improvement. ⁽⁹⁾

THE FUTURE DOESN'T NEED PROOFING

Indeed, both non-religious secular philosophies and most of the world's great religions affirm that we are created -- or evolved, take your pick -- to make the world a better place and especially that little part we can influence -- our kids, our family life, our communities, the enterprises we work in -- to leave that part of our world a little better that we found it.

So, I would think that the worldviews that most of us hold -- whether secular or religious -- would throw doubt at the notion of being "proofed" against the future.

Of course, I understand that those who call for "future proofing" in Australia are concerned that some people -- especially those in the bush -- might be "left behind" by the process of change.

PUT FAITH IN MARKET MECHANISMS

But market mechanisms, not more government controls, remain the best way to ensure progress -- in the case of telecommunications, that new and better services continue to be delivered to everyone.  If market forces are not used, the alternative will be -- favoured companies, favoured technologies or government-owned or government-directed facilities.  Government intrusion that tries to "pick winners" or decide how private enterprises should plan, manage and deploy capital is asking for future agony, not future proofing -- as innovation is stifled and investment dries up.

In fact, if you encourage investment, leave the market to innovate, and remove barriers to the deployment of new technologies and services, the often-regretted digital divide will be bridged.  Where natural markets do not exist, vouchers or other market-based mechanisms can be used to create market forces that will attract private sector providers to provide services in rural and remote areas that are otherwise beyond commercial arrangements.

Where markets are imperfect there is a role for Government to make sure the benefits of new technologies is shared as widely as possible.  However, this role is not to be a builder or operator that will freeze consumers into a static system.  The last thing we need is a communications "industrial policy" with a technology and service delivery bias based on onesize-fits-all, the default approach of government.

Keeping up with the future requires change, innovation and removing barriers to investment.  It didn't take government "future-proofing" for Hugh McKay to develop the Sunshine Harvester which brought enormous benefits to rural and regional Australia.  And, today, no amount of "future proofing" is going to keep rural and remote Australia from falling behind if all they have is a government-driven network built piecemeal by a government-funded private company "consortium".  Instead, rural and remote Australia need what the rest of Australia needs:  A wall-to-wall, full-service Next Generation Network (NGN).

SUSTAINABILITY

"Sustainability" is another concept that is widely used around the world -- including the US, but especially in Australia.  The notion of sustainability -- that you shouldn't do anything that is not sustainable over a long period of time -- is now commonplace.  It sounds so good, so ... well ... simple.  But the opposite is true.  Moreover, those who talk about sustainability almost always overlook central ideas of economics -- especially markets and price -- and that is why they are so often wrong.

Pricing and market mechanisms are pretty good at allocating resources.  And they are pretty good at signalling to consumers when they should start looking for substitutes.  That's why, where free markets are allowed to operate, that most societies are able to cope.  And that's why it is correct to say that "We will never run out of oil".  There are two reasons:

• First, as the price for oil increases, guess what, we find more of it.  The reason:  The size of a mineral reserve is an economic concept, not a physical concept.  The higher the price of oil, copper, iron ore -- or even broadband services -- the more you will get.  When oil rose from $3.00/barrel to $40/barrel, we started finding new sources of oil and gas all over the world -- from Prudhoe Bay and the North Sea to Mexico and Venezuela.
• Second, as the price of oil or any other commodity goes up, inventive people start looking for substitutes.

There are all kinds of examples:

• coal for wood.
• plastic for copper tubing.
• ethanol (grain) for petrol.
• aluminium studs for wooden studs in home building.

This basic consideration -- understanding the role of prices and markets -- was ignored in the famous Limits to Growth studies led by Dennis Meadows and the Club of Rome in the early 1970s.

It is also found in the present time in the writing of Jared Diamond in his best-selling book, Collapse:  How Societies Choose to Fail or Succeed.  In this book Diamond shows how careless use of resources led to the collapse of civilisations, but in nearly every case critical decisions were shaped by tribal leaders and other "wise men" who were undisciplined by prices and markets.

There is another problem with embracing the ideas of sustainability and future proofing too closely.  The reason is this:  If public policy embraces only those actions that aresustainable, then somebody, someplace has to decide what is sustainable.  If public policy is going to embrace future proof, then somebody, someplace has to be given the power to say what technologies or practices will work in the future and what will not.  When a society goes down this road, it risks turning its future over to the experts.  And what happens is predictable:

• problems get professionalised.
• issues get nationalised.
• solutions get bureaucratised.
• grassroots civic leaders lose control of their lives and their communities. ⁽¹⁰⁾

In the end, the victim is democracy and self government.  We should not be afraid of change.  We should not be afraid of trying things that may not work forever.  We should have confidence in our ability to adapt and to change things that are not working.  Still, we should not over-estimate our ability to know the answers.  Because the answers are more likely to be an incremental process of trial and error.

Rather than upholding the notion of absolute future proofing, the best that we can do is pass on to the next generations an environment that nourishes creativity and innovation.  That's why you hear me so often talking aboutthe dangers of regulatory intervention.

CONCLUSION

In closing, let me end with a story.  One of my colleagues has a beach house at Pt. Lonsdale -- about 120km by road from Melbourne via Geelong at the entrance to Port Phillip Bay.

Alongside the town cricket ground is the "Marconi Memorial".  The text on the memorial reads as follows:

From This Spot
On 12 July 1906
The First Overseas Wireless Messages
Were Sent By:
Lord Northcote, Governor General;
Sir R. Talbot;
Hon. A. Deakin, Prime Minister;
Hon. A. Chapman, Postmaster General;  And,
Hon. R.A. Crouch M.P.
For Corio
...
Equipment
Supplied and Operated By
Marconi Wireless Coy Ltd.

That was 100 years ago -- a century.  Marconi Wireless is now owned by Ericsson, which is headquartered in Sweden.  The Postmaster General (PMG) no longer heads up the telephone company;  instead it is governed by an independent board of directors, has 1.6 million Aussie shareholders, and provides advanced telecommunications services to people, businesses, government and communities in Australia.

Lots of changes.  However, during these past 100 years, one thing hasn't changed:  The old PMG -- now called Telstra -- is still the only company that provides telecommunications services to all Australians, no matter where they live.  And all this happened without future proofing.

---

REFERENCES

1.  See J. Lack, "The Legend of H.V. McKay", Victorian Historical Journal, vol. 61, pp. 124-157.

2.  This account draws on Peter Drucker, "The Age of Transformation".  The Atlantic, November, 1994.

3.  In the US, for example, the railway led to the opening of the American West and transformed the U.S. into a truly continental country, enriched by natural resources and cultural diversity that were found west of the Mississippi River.

4.  The railroad's contribution to the "Green Revolution" happened in the US.  The link:  the establishment of the land grant college with departments of agriculture, agriculture experiment stations and the agricultural extension service including university-based county agents probably the most sophisticated and most successful institutions for systematic innovation and technology diffusion in the history of human civilisation.  This all happened because members of Congress from the Midwest and Atlantic regions of US needed to be given "inducements" for the many benefits that were being given to the railroad for the benefit of Western states and territories.

5.  On these points, see, for example, Amir D. Aczel.  The Riddle of the Compass:  The Invention that Changed the World, New York:  Harvest Books, 2001;  or Alan Gurney.  The Compass:  A Story of Exploration and Innovation.  New York:  W.W. Norton, 2004.

6.  In The Compass:  A Story ... Gurney writes that "the cry of 'breakers ahead!' was the first warning that the navigating officers had made a dreadful mistake in the dead reckoning ..."

7.  This story is told most recently in Thomas Friedman.  The World is Flat:  A Brief History of the Twentyfirst Century.  New York:  Farrar, Straus, 2005.

8.  The term "future proofing" was first used in telecommunications, as far as I can see, in the Estens Report.  See Regional Telecommunications Inquiry, Connecting Regional Australia (Dick Estens, Chairman), Department of Communications, Information Technology and the Arts, Canberra, 2002.  For a contemporary rendition, see Helen Coonan, "Connect Australia:  Future Proofing the Nation".  Address to the Sydney Institute, August 23, 2005.

9.  Recognising, of course, that you will never get there because the inevitability of progress and perfectibility of man are false hopes.

10.  This is exactly what happened in the US at the turn of the last century, when the Progressive Movement advanced "reforms" at every level of government that took power from the people and elected institutions and gave it to elites, primarily professional elites.

Losers need to refocus

The Liberals face a formidable set of hurdles to win any state government in the foreseeable future.  This is possible only if they go back to basics and set out to win the policy agenda.

NSW Liberal Nick Greiner did it from deep opposition in the late 1980s.  Victorian Liberal Jeff Kennett did it in the early '90s, albeit with the help of Joan Kirner.  And federally the Howard Government won an election in 1998 that focused tax reform on the GST.

The flaws in the approach of the ALP state governments not only exist but will grow more severe in the years ahead.  Exposing these and developing alternatives is the Liberals' opportunity -- and the purpose of an opposition.  Unfortunately, the Liberals appear to be adopting a low-profile approach to the big issues, trying to outspend and out-regulate the ALP.

There is no doubt that the GST combined with a reform-charged economy has made oppositions' tasks difficult.  Since the introduction of the GST in July 2000 the state and territories have received a tax-grant windfall of $50 billion.  That is, the GST and their own taxes have generated $50 billion or 12.5 per cent more revenue than predicted back in 2000-01.  On top of that, most governments entered the century in good fiscal shape with little debt, budget surpluses, few loss-making enterprises and slimmer public services.  This has provided state governments with the capacity to spend big and be fiscally responsible at the same time.

And spend they have.  The states have used the windfall gain from commonwealth tax generosity, overwhelmingly on wages and other recurrent programs.

This has allowed them to soothe the concerns of virtually every interest group and put more resources into health, education and police.  It also allowed them to undertake record levels of capital spending funding without going heavily into debt.

In situations such as this, it is hard for an under-resourced opposition to make a mark, to be heard and to be taken seriously.  This applies at the federal level as much as the state.  The Howard Government has gone on its own spree, which has helped keep the ALP in opposition federally.

However, the task of demonstrating fiscally deficient approaches is far from impossible and will get easier.  The easy money of the past five years has made for sloppy, uncreative government.  Moreover, while the leadership of all current ALP governments is conservative and mainstream, the left wing of the party still holds sway in a number of policy areas and is being given a great deal of head.  The union movement, which is rapidly becoming dominated by public-sector unions, holds too much sway over ALP governments.

Twenty years ago, Greiner began developing the arguments for and approaches to putting state business enterprises on more competitive, transparent and neutral footing.  In so doing he attacked what was then a key edifice of government -- the big-spending, all-powerful government business enterprises.  He started this task from opposition.  It helped him win government.  Of course, the idea spread and changed the government in every state for the better.

A similar task now needs to be developed and articulated for schools and hospitals.  The focus needs to be on empowering consumers with choice, information and funding.  This is not as radical as it sounds.  The commonwealth government has been moving along this path for decades with funding for private schools, private health providers and, more recently, private health insurances, and it has proven to be popular.

The states have been reluctant partners in this reform.  They have tended to concentrate on empowering the state's providers -- health department, school bureaucracy, nurses and teachers unions -- rather than patients, parents or their agents.  Their reluctance has led to lower quality, higher cost and less suitable services.

The starting point needs to be a debate on concepts.  The debate on fiscal management is not over.  The fact is that the lion's share of the tax-grant windfall received by the states to date was a one-off.  It was generated by the consumption and housing booms.  As these booms fade, as they already have in NSW, revenue growth will slow, exposing unsustainable commitments, particularly on staffing.

Most state governments have made the classic error of using temporary funds to fund long-term commitments.  Over the past five years staffing levels have increased by 12 per cent and the wages bill by a massive 50 per cent across the state sector.  On top of this most states have locked in increases in wages.  The dilemma of growing budget deficits and excessive staffing levels confronting Morris Iemma in NSW is likely to spread to other states.  This should be natural ground for the Liberal Party to occupy.

There is also a need to focus on regulation reform.  The fact is that the states are the main generators of red tape.  During the past decade the body of state laws and regulations has grown more rapidly than in the commonwealth and become more intrusive and expensive.

The agenda for Liberal revival at the state level is available.  It needs leadership and long-term commitment.

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Whoever said that laws had to be logical?

Whoever said that laws had to be logical?  In NSW however work safety laws seem to be going to extremes to prove that logical has no role to play.  Take this example.

If you buy a microwave oven, as a consumer you are able to rely on consumer laws in the event the microwave blows up and injures someone.  The microwave manufacture could face prosecution but you wouldn't.

But if you run a business, even a small one and you take the same microwave to work and it blows up and injures someone you will be prosecuted.  Why?  Simply because NSW work safety laws introduced in 2000 state that anyone running a business "must ensure" the safety of all workers.

The words "must ensure" are unique to NSW.  They create a god-like responsibility on business owners and managers to never have a work safety incident.  Plenty of people have been prosecuted under the laws.  And the statistical chance of defending a prosecution is about 100 to 1 against you.

It's not surprising then that there are firms sending promotional flyers around NSW inviting you, to pay them, to check your business microwave ovens.  Imagine the money spinner "checking" thousands of perfectly good microwaves every six months!

But here's the real problem.  If you have received one of these flyers and ignore it, and a work microwave happens to blow up, the fact of receiving the flyer and ignoring it becomes evidence of your guilt.

As one Central Coast manager is now contemplating, it's probably safer to throw the canteen microwave away.  But then you'll probably be prosecuted under NSW industrial relations laws for failing to provide worker amenities.

At least one thing is consistent in NSW this sort of "logic" is consistently illogical.

Agriculture Isn't Bad: A guide to food, its production and the environment

Facts

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Gridlock?

The Queensland Government has foreshadowed major changes in its electricity businesses.  Its two retail distributors, Energex and Ergon, though active as retailers in the southern states, face little home state competition.

The Government is now committed to opening the retail market fully to interstate firms.  It has, however, stated a determination not to sell the lines businesses, a resolve strengthened by the blackouts stemming from inadequate investment.

In leaving unsaid its intentions regarding the retail operations, the Government has created an expectation for possible sale.  One issue, whether or not retailing is to be sold, is whether consumers should have a single retailer or the choice of Ergon and Energex.

Dwarfing these issues is the matter of generation.

In the 10 years from 1990, the state built only one major power station and its precarious balance of supply and demand was immediately revealed once the electricity market went live during 1998.

Shortages that had been hidden were immediately reflected in wholesale prices that were double those of the southern states.

Remedying this was essential.  And, since Queensland, along with parts of NSW, probably has the lowest cost abundant quantities of coal in the world -- remedying this was straightforward.

Over the five years to the end of 2005, Queensland increased its electricity generating capacity by a quarter, adding 2100 mW.  In that period, Queensland accounted for two thirds of the new capacity within the Australian National Electricity Market.

Having already overhauled Victoria as a producer the state is now fast catching up with NSW.  New projects include Babcock and Brown's 450 mW Braemar peaking plant and CS Energy's 750 mW Kogan Creek.  These two plants comprise most of the National Electricity Market's expected new capacity.

There are, however, some dark clouds surrounding the apparently comfortable picture of generation.

As part of its initial catch-up in capacity, the Government encouraged private investment to enter the market.  A Shell-dominated consortium built the 850 mW Millmerran power station in 2002.  That consortium also took a half share with the Government's CS Energy in the 920 mW Callide C station, which was completed a year earlier.  The 450 mW Tarong North, started in 2000 and completed in 2003, also had a mixture of Government and private funding.

Soon after entering the market, Shell clearly felt its investment had turned sour and steadily sold down its interest.

The final one quarter share went for $US226 million in December 2003 to China Huaneng Group.  Perhaps the Chinese bought well, but the transaction valued investments that had cost some $2.2 billion at only $1.2 billion.

It was an unexpected continued building of capacity that led to this devaluation of worth.  There is much to be said in favour of new infrastructure investment.

However, investments undertaken on non-commercial terms using government funds will undermine all investments.

The latest of these investments was the decision (announced in May 2004) to build Kogan Creek.

Queensland's electricity growth is rapid and will be spurred on further by the Aldoga aluminium smelter, which will start operations in late 2006.

Even so, the production growth is outstripping demand.

The private sector businesses argue that the Queensland Government, having enticed investment into baseload power, has then accepted non-commercial rates of return from the power stations it owns.

Energy Minister John Mickel has declared that he sleeps easier if he has 25 per cent surplus generation capacity.  Well and good.  But a corollary of such a supply margin is a collapse in prices and in the value of assets.

This financial year spot prices in Queensland have been 30 per cent below those of NSW.  And prices in NSW were themselves considerably reduced by the export of surplus power from Queensland.

Even so, the more attractive prices across the Tweed have encouraged the Queensland Government to seek more robust transmission capacity to take advantage of NSW prices.  But state-owned NSW generators see their market as being infected by surplus Queensland capacity and low prices from oversupply.

The irony is that in establishing a more robust link with NSW, the original rationale for new investment -- a 25 per cent surplus -- is lost.  The stronger the link, the less Queensland can rely on its own capacity to be dedicated to its market.

More importantly, the loss of profits by private sector investors has left them shy about the future, especially to baseload power.  This risks the creation of a vicious circle under which all future investments will be state funded.

The Government will then be trapped into management of an industry that, unlike distribution, does not have monopoly characteristics as justification for public ownership.

Electricity is one of the last industry sector playgrounds for politicians.  But their posturing and overriding of market forces brings risks of instability.  Politicians must exit the power industry and do so quickly or see a renewal of the waste and inefficiencies that the national market was established to combat.

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Self-employed are coming up smiling

It won't surprise many people but it may annoy some.  International research has shown that self-employed people are happier at work than the employed.

Why will this fact annoy some people?  Because the idea of self-employment is deeply confronting to people who are wedded to traditional ideas of labour regulation.  These ideas maintain that workers are always powerless and always under the control of bosses.

Self-employed people are in fact independent.  They control themselves and their work.  They are businesses of "one" and their own boss.  Oddly, this idea is offensive to many with an ideological commitment to the politics of the "wage slave".  Some union officials even declare that independent contracting is always a sham.

And when research shows that the self-employed are happier at work than employees, even the labour regulators can react with denial.

There's a simple explanation.

Self-employed people are independent contractors.  What distinguishes them from employees is that they earn their living using the commercial contract instead of the employment contract.

These two forms of contract are starkly different and are regulated differently.

Regulation under employment contracts makes lawful the fixing of labour prices and allows for monopoly control of labour arrangements.  That's what industrial agreements effectively do.

However, regulation of commercial contracts forbids price control and monopoly creation -- this is a result of the Trade Practices Act, for example.

When an individual works under a commercial contract they must accept that they cannot collude with other individuals to fix prices.  Employees, however, organise with unions to force businesses to pay set prices.

Unions say that self-employed people compete with, and undermine, the ability of employees to fix labour prices.  Consequently, independent contractors are seen as a threat to unions' political power.  This explains unions' suspicion and even hatred of independent contractors.

But with a surprising 28 per cent of the private-sector workforce in Australia now working as independent contractors, this is a movement that cannot be ignored.  And this shift to independence at work is world-wide.

The research on happiness -- "Being Independent Raises Happiness at Work", comes from Zurich University in Switzerland and was published in the Swedish Economic Policy Review.

The research was undertaken in response to the recognition of the global rise of independent contractors.

It is based on a 23-country survey supplemented by further detailed attitudinal surveys from several European countries.

The key findings show that greater happiness has a direct link to greater independence and autonomy.

This happens even though independent contractors earn, on average, marginally less than employees.

Further, employees looking for happiness at work value the same work characteristics as enjoyed by the self-employed.

And the findings are the same across different cultures.

The researchers say this has important implications for economic theory and government policy.

The findings force a rethink in the standard economic concepts of human wellbeing.  They unsettle the idea that price is everything in economic activity.

People put a non-monetary value on being independent.  This is similar to the value people put on democracy.

Consequently, governments have to take a radically different approach to self-employment because most often government policies discriminate against the self-employed.  This happens in many different ways.

The NSW Government, for example, recently sued independent contractors for workers compensation premiums when they subcontracted work to other independent contractors.  Yet all of Australia's workers compensation schemes ban self-employed individuals from registering in the schemes.

In addition, considerable numbers of employed people aspire to be self-employed.

The researchers refer to this as latent entrepreneurship that, if released, holds the prospect of increased creative economic activity.  They reason that, with changes in technology and production organisation, more self-employment is likely.

For independent contractors the research is no surprise.  Being independent at work is normally the result of a conscious decision, frequently made for lifestyle purposes, often to achieve a better family-work mix.

People seek the satisfaction of being their own boss, but it should not be assumed that independent contracting is work perfection.  In fact, being self-employed can be hard work.  You have clients to look after rather than an employer who is supposed to look after you.  You sometimes work for nothing in the hope of picking up new business.  In effect, you make an investment in your own belief in yourself and it is this self-belief that produces a marginal increase in work happiness.

That this is treated with disdain by some unions and regulators is unfortunate -- it is a human approach to work that should be welcome.

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The future of food

I have seen the future of food manufacturing in Australia, and it's not the European conglomerate selling organic food to the Asian yuppie market, as predicted by the experts.

Nor does it feature on any of the Bracks Government's high-priced ads which flood our TVs nightly.

On the contrary, it's a local, family-owned business making meat pies and other traditional pastries in Bairnsdale, selling to the local market.  It's Patties Pies.

The food manufacturing sector has long been high on potential but low on performance.

Indeed, the sector has actually been going backwards in recent years, with investment and production moving offshore in search of a better environment.  The decline has been greatest in Victoria.

There are many causes of the sector's failings;  however, the most significant is the prevailing workplace culture and the institutions that bolster it.

The problem does not lie solely, or now even primarily, with the unions.

Management in the sector has generally abrogated its responsibility to manage, and allowed an unproductive culture to rule.

Management in the sector has been plagued by the short term horizons of senior managers, a reluctance particularly of multinationals to "rock the boat" and the absence of entrepreneurs and risk-takers.

Some are different, including Richard Rijs, CEO of Patties.

Richard is in the industry for the long haul.

His father started the company.  His family owns it.  He and several of his five brothers work at the company, including some on the factory floor.

The company is located in rural Victoria.  Aside from low-cost land, a supportive community, proximity to suppliers and a team-oriented workforce, Bairnsdale is far from the workplace madness that often prevails in the city.

Patties Pies accordingly has been able to take a different path than other firms.

It operates a non-union shop, not to keep the union out per se but to stop a distant third party from undermining the team.

Patties' has long had a profit-sharing arrangement to allow workers to share in the success of the team.

Patties has also long emphasised multi-skilling and team based decision-making.

It has also taken a long term perspective on skill development and is wedded to its community.

In 2001 Patties built a new, larger factory.

While organic growth of the business was good, it needed more to keep jobs and productivity up.

In 2003 Patties bought the pie and pastry business from the US multinational Simplot.

While Simplot's brands, which included Four'n Twenty, were highly successful, the company was losing money because of the workplace culture in its large, modern Kensington factory.

Patties took over the brands and relocated some of the equipment.  The Simplot workforce was made redundant.

Pie production was moved to Bairnsdale where 85 new jobs were created.

The plant now operates 24/7.

Patties brand's are gaining market share and export markets are being explored -- particular to America.

Patties is not alone.  There are others like it and they are the future of the sector.

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ALP lost in policy vacuum

After the Australian Labor Party lost the 1949 federal election to the Coalition, Labor leader Ben Chifley told his party not to worry because the electorate would quickly recognise the terrible mistake it had made in choosing Robert Menzies as prime minister and the ALP would soon be back in power.  The rest, as they say, is history.  Twenty-three years and three opposition leaders later Labor finally did return to government.

The factional warfare in the Victorian ALP in recent months has been about the installation of new candidates in safely held Labor seats.  The fact that no one is willing to fight over the marginals suggests that few are willing to make a Chifley-like prediction about a Beazley government in 2007.

The delusion experienced by defeated political parties is not uncommon.  The creation of the idea that voters didn't really know what they were doing and that their choice must somehow have been corrupted by deception or misunderstanding is perhaps a natural reaction.  It is a way of dealing with the trauma of an election defeat.  But while such a belief might be comforting it is profoundly undemocratic.  Even worse, it does nothing to prepare parties for opposition and for the rigours of making alternative policy.

After the 1996 election the ALP was delusional about the causes of their loss, and they've suffered for a decade.  Worse, the party's friends didn't help it overcome its affliction.  The academic Left continues to blame the stupidity of the masses for Labor's losses.  Some even suggest that attempts to influence the electoral process should be abandoned and that power should be sought through the judicial system and the manipulation of non-government organisations.

Last week, in the midst of the celebrations of the Coalition's 10 years in power, many commentators pointed out that the anniversary also represented 10 years of Labor in the wilderness.  Comparing what has occurred to ALP over the past decade with what happened to others in similar predicaments is instructive.

Before John Howard's election, the Coalition had been in opposition for 13 years.  Before the election of Bob Hawke, Labor had been in opposition for seven years.  When previously out of power, both the Coalition and Labor changed dramatically.

In 1983 the Coalition was desperately clinging to the last remnants of century-old economic prescriptions.  The fight between the wets and the dries was bloody, and in electoral terms costly, but there was no alternative.  Even though it was not in government, and even while battling itself, the Liberal Party succeeded in framing the terms of the intellectual debate during the 1980s and Labor had no alternative but to respond.

In 1975, when Labor was sacked, Gough Whitlam was leader and Bill Hayden was treasurer.  When Labor returned to office, it was with Hawke and Paul Keating.  The men of the 1960s and 1970s reared in the tradition of socialism and class hatred were replaced with people like Peter Walsh and John Dawkins.

Certainly a recession helped the ALP accommodate itself to economic reality.  And it is also true that the transformation of the party towards financial responsibility quickened once it was in government, but the groundwork has been laid years before.

For all of its faults the Accord, first conceived while the ALP was in opposition, signalled a major shift in attitude by the party and union movement.

By contrast, what are the outcomes of Labor's policy development over the past 10 years?  Unfortunately, the answer is not much.

After the 1996 election, instead of trying to keep the party and the factions united, Kim Beazley would have performed a greater service by encouraging diversity and dissent.  The spectacle wouldn't have been pretty but it could not have been much worse than what transpired.  Until recently one of the ALP's best thinkers, Lindsay Tanner, was not even in shadow cabinet, while Craig Emerson, one of the few Labor MPs who understands the need for tax reform, languishes on the back bench.  Tearing up Work Choices, implementing Medicare Gold and punishing private schools are knee-jerk political tactics -- they're not policy.

One reason Labor has been reluctant to lift the lid on policy debate is that it has been afraid of what it would find.  There's a chance that the party might realise it has become completely out of touch with the community.  The biggest issue facing Labor is not its factions.  It is its policies.  Simon Crean's re-endorsement for Hotham this week is the least of Kim Beazley's problems.

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Growing organic demand indulgent

What does the future really hold for Australia's enthusiastic organic farmers?

Last week former NSW Democrat MP, Richard Jones, from Possum Creek complained in a letter to The Land (It's not our future, March 2, p12) that a new Federal Government report featured a whole section on why the State Government bans on genetically modified (GM) crops should be lifted, yet no discussion of the fast-growing organic food market.

I agree with Mr Jones.  The report, Creating Our Future, should have included information about organic farming and this growing niche market.

But in the end, and despite the emotional attachment to organics, it is only modern high yield agriculture that can secure the world's future food needs.

Thirty years ago, concerned about the exponential increase in the world's population, Professor Paul Ehrlich of Stanford University wrote in a best selling book that the battle to feed all of humanity was over.

He predicted that by the late 1970s the world would undergo famines -- hundreds of millions of people would starve to death.  He also predicted that life expectancy in the United States would drop to 42 years as a consequence of the use of pesticides.

Interestingly, life expectancy has continued to increase.  In fact we now live to more than twice the age we did just 100 years ago.

Technological innovation -- including the use of pesticides, high yielding crop varieties and irrigation -- has enabled the world's farmers to produce about double the amount of food from essentially the same area of land.

Australian producers -- including rice, cotton and sugar growers -- are amongst the most efficient in the world on a tonnes per hectare basis.

In the early 1980s, about 30 percent of people in developing countries were malnourished.  By the year 2000 this figure had reduced to 18 percent, even though the world's population continued to increase, passing the 6 billion mark in 1999.

This massive population increase is not due to women having more babies, but rather to a dramatic fall in the death rate as a result of improved access to food, medicine and clean water.

So, people are in general better off than they were 20 years ago, but more people places more stress on the environment, and still many people go hungry every day.

Against this reality, I find it hard to reconcile the increasingly strong demand for organic food and even harder to accept the claim that the organic market if for the "intelligent consumer".

As the founder of a new chain of organic supermarkets in Sydney and Melbourne recently explained, organic food is more expensive because organic farmers have smaller yields.  Typically organic agriculture yields around 30 to 50 percent less than crops grown on conventional farms.

This new organic supermarket chain even sells organic toilet paper.

Given over 6 billion people wake each morning needing to be fed, and given the pressure this already places on the world's limited natural resources, I find the growing demand for organic food in places like Sydney and Melbourne extremely indulgent.

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Housing Affordability

An Address to Housing Industry Association,
July 2005

THE HOUSE BUILDING INDUSTRY

Housing, as a good that is not internationally tradeable has its costs determined by the efficiency with which the supply of housing stock is made available to buyers and the demand for the product itself.  Unlike tradeable goods housing is not subject to disciplines of import competition.

Prices therefore are determined by local or at best national supply and demand situations.

Prices will vary according to:

• The pressure of demand on the existing stock which at any one time is unlikely to be able to be expanded by more than a few percent
• The cost of expanding supply which in turn depends on
• The efficiency of the supply industry
• The regulatory arrangements that might increase its costs
• The ability of the existing housing stock to be adapted and traded, itself a function of regulatory and taxation considerations of

In terms of efficiency of supply, Australia has the benefit of a house building industry that is low cost and readily adapts to provide consumers with the product they want.  The industry is readily open to new competition and its main feature is cross-contracting among independent businessmen -- sparkies, brickies, plumbers, chippies -- freely contracting with each other.  The Australian house building industry, with efficiency levels that are inferior to none in the world, operates in stark contrast to the union controlled construction sector which is pregnant with outdated and inflexible work practices.

HOUSING AFFORDABILITY IN AUSTRALIA

The Demographia International Housing Affordability Ratings examines about 80 different locations in North America, Australia and New Zealand.  It arranges an affordability index base on the average price costs as a multiple of average earnings.  All seven of Australia's major capital cities are placed in the top dozen least affordable cities.

This affordability spectrum is not purely a matter of income levels.  In the US, Miami, where houses are unaffordable, is not a particularly high income city.  On the other hand Dallas and St Louis are two relatively high income cities with highly affordable house prices.

Nor is it a matter solely of pressure on resources.  Though cyclical price rises and falls occur in the industry, two of America's most affordable cities, Little Rock and Dallas are also seeing high urban growth.  We saw a variation of that ourselves with the experience of South East Queensland during the mid-1990s.  A Rapid increase in the demand for housing due to inter-state migration was accompanied by a supply response possibly due to the availability of land.  The net result was a major jump in new housing activity with little pressure on prices either in the new or estalished housing markets, especially on the urban fringe.

Table 1:  Least Affordable Cities

Country	Least Affordable Cities	House Price ($US)	Ratio to Average Household Earnings	Smart Growth Policies
USA	Los Angeles	649,450	10.1	YES
Australia	Sydney	505,000	8.8	YES
USA	Honolulu	460,000	8.1
USA	San Francisco	646,800	7.9	YES
USA	Miami	281,400	7.3	YES
USA	New York	398,800	7.1
Australia	Melbourne	373,800	6.9	YES
Australia	Adelaide	248,800	6.2	YES
Australia	Hobart	242,300	6.2	YES
Australia	Brisbane	300,000	6.0	YES
NZ	Auckland	352,000	5.9	YES
USA	Las Vegas	276,550	5.8
USA	Sacramento	319,200	5.6	YES
USA	Sarasota	267,600	5.6
Australia	Canberra	361,900	5.6	YES
Australia	Perth	255,700	5.4	YES

Table 2:  Most Affordable Cities

Country	Most Affordable Cities	House Price ($US)	Ratio to Average Household Earnings
USA	Dayton	119,100	2.6
USA	Allas	140,650	2.6
USA	Todeo	115,400	2.6
USA	Omaha	33,650	2.5
USA	Pittsburgh	116,150	2.4
USA	Tulsa	114,550	2.4
USA	Indianapolis	127,200	2.4
USA	Columbia	120,700	2.4
USA	Little Rock	110,650	2.4
USA	St. Louis	132,400	2.4
USA	Wichita	106,250	2.2
USA	Rochester	110,000	2.2
USA	Buffalo	95,600	2.1
USA	Syracuse	98,700	2.1
USA	Forth Wayne	99,150	2.1

Clearly Australia is in a situation of high cost housing when measured against the US and Canada.  How did this come about and has it always been with us?

PC evidence of costs increases is best encapsulated in Figure 1 which was included in the First Home Ownership Inquiry Report.

Figure 1:  Housing cost increases, 1986-2002

As the chart shows, house prices have outpaced inflation.  In real fact new house/land package prices have doubled over the period with all of this increase due to the higher costs of land, taxes and development requirements.

The HIA has assembled as good a source of statistics as is available and the following will be familiar to many of you since it is taken from Rod Pearse's DR Dossetor lecture in June 2005.

When we examine this data against real wage trends, the overall deterioration in affordability is not quite as serious, at least outside of Sydney.  In gross wage terms an average new house in Melbourne requires seven years income which is a little higher than in 1976/7 and 1992.  In the case of Sydney a strong increase in prices is clear -- house prices have gone from five and a half times annual earnings to 11 and a half times.  (The numbers differ from those estimated by Demographia largely because of different house prices).

In the case of Sydney, had land prices and associated land development charges been kept to the real level that they were in 1976/7, instead of a house land package of $565,000, we would now be seeing prices of under $400,000.  Had prices for land and its development increased along the lines of the consumer price index, as they did in the lower cost US cities, both Melbourne and Sydney would now be far more affordable.

Placed in simple terms, the key aspects of the increased costs are the scarcity value created by urban planning and the imposts heaped on developers by government regulations.  Over the past thirty years the share of land in the housing package costs in Sydney has increased from 32 per cent to 62 per cent and in Adelaide from 16 per cent to 44 per cent, with other states showing comparable increases.

The urban planning system is the chief culprit.  For Melbourne the 2030 Strategy has essentially replaced zoning as the determinant of costs.  Soon after this was introduced land inside the Urban Growth Boundary, say around Whittlesea, could be seen to be selling at some $600,000 per hectare with comparable land outside the area selling at $150-200,000 per hectare.  At 15 houses per hectare this escalates the basic land cost from $10-13000 up to $40,000.  And the value outside of the residentially zoned area already had a premium due to speculation that the area would eventually be zoned residential.  Indeed, the value of the land without such an expectation would be likely to be of the order of $4,000 per hectare.

On top of this are mandatory charges for development.  Many of these would be required in any event but some are clearly extortionate.

In Australia, the cost of building has increased slightly ahead of general inflation over the past two years, though the main culprit in escalating new home prices has been the price of land, there is a disturbing trend towards increased regulations adding to costs.

One builder provided evidence that the increased documentation required for new house building in NSW cost an additional $9,958 per dwelling over the past few years.  The HIA estimated that the regulatory "tax" on new subdivisions in western Sydney was $60,000.  Though some of this is arguably for infrastructure directly contributing to the value of the subdivision, much of it is for social infrastructure like "affordable housing contributions", local community facilities, public transport contributions and the employment of community liaison officers.

Table 3:  Most Affordable Cities

Table 4:  Typical New House and Land Prices by Capital City, 1976 to 2005

	1976-77	1992	2005
Sydney
House	$49,010	$189,800	$565,000
Land	32%	44%	62%
Melbourne
House	$63,200	$169,000	$340,000
Land	24%	24%	38%
Brisbane
House	$46,280	$164,690	$362,000
Land	21%	39%	41%
Adelaide
House	$46,280	$125,970	$272,000
Land	21%	26%	44%

Over recent years we have seen considerable "economic" deregulation (tariffs, airlines, telecoms, energy etc.)  However, this has been accompanied by a vast increase in "social" regulation.  This covers requirements for occupational health, safety, energy savings, assistance to people with handicaps, environmental conservation and so on.  Perhaps the best economy wide means of measuring this is in terms of new regulations enacted each year.  Those for the Commonwealth and for Victoria are illustrated in Figures 2 and 3.

Figure 2:  Pages of Victorian Legislation passed 1959-2003

Figure 3:  Pages of Commonwelath Legislation passed 1901-2001

THE REGULATORY BURDEN

The housing industry is not unique in facing a mounting onslaught of cost impositions, many of which are responses to heart-tugging issues facing our fellow citizens, some of which are designed to press forward energy and water saving measures and still others may be designed purely to increase government revenues.  The net effect is a considerable burden on the home owner -- especially the new home owner who, not presently owning a home, is likely to be less forceful in articulating any objections.

One outcome, in addition to lower new home building activity per se, must be a reduction in levels of home ownership as a result of the increased cost impositions.  As well as distorting consumer choice, this might have a wider adverse community impact so far as home ownership is a great force for social stability and the creation of an aspirational society that has done much to transform living standards over recent times.

We face a confusing picture with regard to the housing industry's regulatory future at the present juncture.  On the one hand we have evidence of deregulatory moves with the Productivity Commission report on Reform of Building Regulation and forceful report on Energy Efficiency, in which housing features prominently.  We also have the Victorian review of housing.  On the other hand we see a plethora of regulatory measures being introduced or proposed covering energy, the disabled, zoning, environmental matters and so on.

The open nature of the Australian housing market and its network of extensive sub-contractors has served the consumer well over the years and clearly contributed to low prices, especially compared with the heavily unionised commercial building sector.

In simple terms the pure house price has moved in line with the Consumer Price Index.  The basic house itself has increased in size and in its features.  Material input prices have fallen slightly but it is the labour arrangements within the industry that have kept down costs and prices.

Not that we can just sit back and continue to enjoy the cost competitiveness that is such a feature of house building.  The industry's low costs are vulnerable from two directions.  The first is the union movement, increasingly desperate to arrest its slow decline (only 18 per cent of private sector workers are now members of unions and far more than that -- 28 per cent are self employed).  Because of unions' close ties to the Labor Party, we can expect continued assaults on the non-unionised nature of the housing industry, assaults which if they were to prevail would markedly raise costs.

Secondly unions are now vulnerable to the roaming industrial safety officers like union bosses Bill Shorten and Martin Kingham, ever willing to bring on a dispute as the means of justifying their union fees.  These men, master wreckers of workplace efficiency, have done a four day course that under Victoria's Occupational Health and Safety Act entitles them to invade any workplace and investigate safety concerns.  The job started by the Hawke Government in curbing such practices by setting up a Royal Commission was only half done and construction costs in Australia remain twice those of the world's best practices found in southern USA and Singapore.

By contrast, the housebuilding sector is a haven of industrial tranquility.  There are however disturbing increases in regulation and evidence of regulatory barriers being erected to new competition.

In New South Wales, builders are now required to ensure that all power tools used on a building site are checked for safety by a qualified electrician every three months.  It is hardly necessary to have expensive checks on 50 or more tools, some of which are used only once a year.  It is even more doubtful that "tools" like portable radios and the kettle for morning tea should be as regularly and rigorously tested as heavy equipment.  The home buyer pays for this nonsense.

Builders are supposed to meet every visiting contractor on site and discuss their work practices with them, no matter how experienced the tradesperson or how simple the job to be done.  Builders and site managers are even expected to be responsible for ensuring their workers protect themselves against the sun.

Other measures have been taken that will adversely impact on house prices.  In the main these have been the result of regulatory "capture" and a symbiosis between regulators and the occupations they control.

In the past, the house builder was normally a tradesman who gained sufficiently wide experience to take on a management role in the project.  The system of sub-contracting greatly facilitated this.

More recently there has been a rise in credentialism.  Unlike in the past, builders now have to take written tests and demonstrate to the authorities a knowledge of the system that has not proved to be necessary in the past.  One outcome has been an increase in people purporting to be "owner-builders" to escape the regulatory restraint.

This in turn has led to a vast expansion in the so-called owner builder applications which accounted for 37 per cent of building permit applications in Victoria last year.  One facet of this has been the considerable limitations on the ability of an owner-builder to construct new houses and major extensions.  As a result, provisions have been introduced in Queensland, NSW and recently in Victoria that are targeted against the owner-builder.  In some cases they require the would-be owner-builder to attend a completely useless building course to force up the regulatory costs of opting for this method of building.  These provisions have no effect in terms of the safety or functionality of the work (mandatory insurance is necessary in any case and there is no evidence that owner builder work is any less satisfactory than that built by registered builders).  In fact, owner-builders are based on the same sub-contracting principles that prevail throughout the industry -- nobody actually lays the bricks or installs the roof trusses.

Governments have introduced increased cost impositions on new houses.  NSW has an array of measures that must be incorporated into new houses and which involve the unfortunate new home buyer with unwanted costs.  In Victoria, similar measures were introduced with the Plumbing (Water and Energy Savings) Regulations 2004.  Under these regulations, people buying new houses must install low pressure water valves.  In addition, they have a choice of installing a 2000 litre rainwater tank or a solar heating system.

COST IMPOSITIONS ON HOME OWNERS

That new set of regulations was introduced after a Regulation Impact Statement (RIS) had been prepared, an RIS that was woefully inadequate.  This cited but failed to quantify savings from reduced greenhouse gas emissions.  It made no attempt to quantify the reductions in consumer satisfaction that the RIS admits will result from the implementation of the proposals, or to acknowledge them via a sophisticated integration of quantitative and qualitative elements.  In addition it relied on Keynesian multiplier effects (e.g. increases in employment, gross state product etc) to reach its conclusions, when these "benefits" are not accepted as a legitimate element of economic and/or cost/benefit analysis by a great many experts.  The increased activity from regulatory forces was considered as a benefit, whereas in fact such measures merely involve a transfer of expenditure into areas that would not be preferred absent the regulatory coercion.

The net benefit for the water to the individual household storage alternative is based on cost savings estimated at $11 per annum.  These savings offset capital costs of $1895 added to which would be costs of loss of useable space and maintenance costs that will be incurred.  Even without these other costs, it is doubtful that the effect of these outcomes on individual households could be positive at any feasible discount rate.  This reinforces the case for ensuring that the government quantify the social and environmental benefits that are expected.

The new home buyers' alternative regulatory choice, solar heating, involves an up-front outlay of $2000.  This is for an unreliable energy supply that costs three times as much as conventionally generated electricity.

THE FUTURE OF PLANNING LAWS

The Victorian Competition and Efficiency Commission is conducting an inquiry into building rules and hopefully this will be the prelude to a much needed bonfire of these regulatory measures, and will flow on to other states.

The restraints on supply together with the imposts placed on developers have clearly been the major, if not the only, factors in pushing up the prices of housing.

It is odd that there is not a massive protest about this on the part of the perpetually indignant.  After all, we are talking about speculators, local government corruption and extortionate rental profits being amassed by the "passive" landowner.  These forces are aided and abetted by very prosperous individuals living in areas that are relatively close to major urban areas but have features of remoteness and exclusivity that would be disturbed by influxes of riff-raff.

All this is at the expense of the weakest and poorest members of society -- the mainly young first home buyer.

Gradual relaxation of restraints, restricting area restraints only to areas of great natural beauty such as national parks and so on.  Considerably restraining requirements on builders to set aside land for public use.  Developer-builders are in an intensely competitive system and they need no prodding by socially active regulators to press them in directions that their customers want.

The housebuilding industry and its construction counterpart are chalk and cheese.

But a deep shadow has been cast across the industry.  State governments seem intent on throttling the industry and on smothering the attempts of first home buyers to get a foot on the property ladder.  The most visible aspect of this is the escalating stamp duties especially in NSW and Victoria.  However this is only the tip of the impositions the industry and its would-be customers must carry.  Housing is vulnerable to do-gooder regulators, social engineering planners and corrupt political entrepreneurs.  This has meant regulatory cost impositions piled one on the other.

The clearest area of this is in access to land.  Government zoning laws magnify the spectrum of land costs so that land worth a few hundred dollars in undevelopable rural areas increases to a value of $100,000 plus for newly rezoned sites.  Constrained land zoning, lengthening approval processes, increased requirements on developers for "sustainable and sensitive" land utilisation, the need to employ well connected consultants to shepherd proposals through the planning process all take their toll.

The Productivity Commission shows that while the building costs of houses increased by 100 per cent over the past 20 years (partly because house size has increased) land blocks over the same period increased by 250 per cent -- in spite of blocks sizes being reduced.  The upshot is that typical housing costs on the periphery of Sydney account for only 37 per cent of the house/land package;  in Melbourne the share is 47 per cent.

The unwitting new home buyer pays all for all of these extra costs.

In addition the plethora of agencies to "advise" on issues ranging from good design, noise insulation greenhouse mitigation, improving housing accessibility, and so on is creating an avalanche of additional costs.  This is most significant in NSW.  Not only is NSW the state where ALP social engineers and fix-it men have become most rusted onto the business of government, but the Carr nanny has now lost the restrainer of Treasurer Egan and replaced him with a socialist who will fan the flames of regulation rather than curb the Ministry's regulatory zeal with a damp cloth.

In May, compared with an increase in new dwellings of 13 per cent in the rest of Australia, NSW saw a 22 per cent decrease.  This is party because of the constraints of development land around Sydney and the cost loadings on that land that the government has imposed.  But, added to these are the increased costs of regulations on energy use and water targets for all new homes built in NSW.  The State's Building Sustainability Index (BASIX) requires costly energy and water saving measures.

Victoria is not far behind.  An inquiry into housing by the Victorian regulator has already missed its June 30th deadline for the publication of its draft report.  One deadline that was not missed was the introduction of State's new 5 star housing regulations.  Jubilantly announced on the 30th of June by Ministers Hulls and Thwaites, these foist onto the hapless new home buyer unwanted and costly energy saving requirements, water tanks, additional water piping better glazing and, wait for it, "clever" internal design.

Victorian developers and home buyers got in quick and registered record approval rates in the month before the latest regulatory slug came into effect.  But the new costs will work their way through the system.  Their effects will please middle aged armchair environmentalists secure that their own real estate values are immune from such charges.  But their acts of supposed public service are at the expense of young, less well off aspiring home owners.  The new building charges are yet another cruel blow from the Baby Boomers on their children's generation.

Grants subsidy bad medicine for Tassie

For proof of how our federal system is failing, look no further than the election campaign under way in Tasmania.  Opinion polls indicate 17 per cent of voters plan to support the anti-growth Greens party.  The Greens are committed to stopping the planned $1 billion pulp mill, stopping logging of old-growth forests, banning agricultural biotechnology, phasing out electricity from non-renewable sources, expanding the state's already large stock of national parks, reducing areas allowed for fishing, and restricting large developments, particularly in coastal areas.

If the Greens got anywhere near the share of votes now indicated in the polls they would help form a minority government.  And they have promised to push their views to the hilt, including blocking supply.

At the same time both major parties, while committed to private-sector growth, are offering the seductive lure of a large spending splurge without higher taxes or additional borrowing.

Why would so many Tasmanians risk economic destitution?  The state already has the country's highest unemployment, lowest rate of job creation, worst rate of poverty and the smallest percentage of young people completing secondary school.  Why would Tasmanians, who have limited capacity to pay tax and have recently experienced the cost of previous unfunded spending, fall for the lure of endless government largesse?

In short, it is our federal system, which compensates states for anti-growth action with higher grants.  It compensates for policies that reduce the private sector with a larger public sector.  And with the introduction of the GST it has pumped billions into the Tasmanian government's coffers, allowing it to spend at little cost to Tasmanians and to generate a false sense of security.

Under our unique system of commonwealth grants to the states, administered by the Commonwealth Grants Commission, funds are allocated to states and territories so as to allow them to provide the same set and levels of services irrespective of their ability to raise revenue, or of the cost of providing these services.

Tasmania, with its smaller private sector and higher levels of poverty and welfare dependency, receives substantially more than all other states.  The CGC report released last week recommends that Tasmania should next year receive $3400 per person in GST grants -- or a subsidy in excess of $1500 per person from mainland taxpayers to the Tasmanian government.

While the CGC tries to make the system policy-neutral, it fails to do so.  If the Greens get their way and stop industrial development, as they promise and as they have done in the past, Tasmania will eventually be compensated, albeit only in part, with higher grants to make up for these lost opportunities and higher welfare costs.

The distortions of the system are dynamic and cumulative.  The system has been in place for decades and its effects have become entrenched.  Tasmanians in search of prosperity and opportunities have left the state in numbers, and have been increasingly replaced by people wedded to the state and a low-cost, albeit poorer, lifestyle.  This has diminished the constituency for growth and provided scope for the Greens.

The GST has augmented this distortion greatly.  When the GST was introduced it significantly increased the volume of funds pumped to the states through the CGC's system, resulting in a windfall for the Tasmanian government.  Since its introduction GST receipts have grown at 9 per cent per year, delivering windfalls to the states.

The Tasmanian government has, at least in the last few years, done what all states have done with their GST windfalls -- spend, particularly on more and higher-paid public servants.  Over the past two years spending on public service salaries in Tasmania has growing by a massive 23 per cent and much more is being promised in the election.

This massive transfer of wealth has boosted the Tasmanian economy.  It is not only a gross misallocation of national wealth, but it has badly distorted the Tasmanian economy and its body politic.  Sooner rather than later the flow will wane.  When that time comes it will be intriguing to see what the Greens' policy on the pain of economic and political adjustment will be.

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