Union militancy just doesn't fly

Qantas is fighting for its life and had no option but to take strong action.

The Qantas action to bring its disputes with unions to a head is justified.  The federal government's fair work system, combined with rising union militancy, has led to this very serious impasse.

The bargaining for agreements with the three protagonist unions has been exhaustive.  Negotiations with two of the unions commenced more than 12 months ago and the parties have held more than 200 meetings.

The scenes of union members marching through terminals were confronting.  They wore vests, carried banners and were shepherded by union officials bellowing into megaphones.  It appeared the chants were meant to convince travellers the delays they were to experience were justified.

The disputes have been fierce.  There have been reports of intimidation of workers who didn't join union action, threats, and damage to property.  Inflammatory comments have emanated from both sides.  Union leaders have warned us against flying with Qantas before Christmas.  It now appears many travellers took heed.

The parties say they have settled significant parts of the claims.  The confrontation appears to come down to a fundamental issue:  the airline needs to be able to run its own business.

The pilots' association wants Qantas pay and conditions to apply on all flights with subsidiary airlines.  Jetstar would be less competitive and its current agreements would be overruled.

The engineers' union wants to protect jobs by refusing to entertain work changes that accommodate procedures for new generation aircraft.

The Transport Workers Union, which covers baggage handlers, ground staff, catering and freight employees, is trying to limit, if not prevent, the use of contractors and labour-hire employees to meet peaks and troughs in operational demands.

Qantas claims the industrial action was causing losses of $15 million a week.  The unions were sending signals of intensifying the industrial action.

Qantas was faced with draining losses over a long period.  Acceptance of the unions' more contentious claims would jeopardise the survival of the company.  Qantas management is to be congratulated for refusing to stand by and let this happen.  In the end Qantas had no option but to take strong action.

Why did the dispute get to this juncture?  The tactics adopted by the unions are symptomatic of other disputes.

Union officials are using the new bargaining rules to orchestrate protracted negotiations for an enterprise agreement.  Industrial campaigns involving bans, strikes, belatedly cancelled strikes and media attacks are now common.  Qantas is the most recognised example, but similar protracted campaigns have affected Toyota, BHP coal mines, customs, police, buses and public servants.

Australian Bureau of Statistics data show an increase in most measures of industrial disputation for the June quarter of this year.  Working days lost rose from 20,000 in the March quarter to 66,000 in the June quarter.

Construction industry numbers are the worst for seven years.

The unions now display a confidence that the Fair Work Act has given them an enhanced ability to beat employers into submission.

Union militancy may have been tolerated in decades past, but it is an economic anachronism in today's connected and competitive world.

Unsurprisingly, militancy is not helping the unions.  Membership remains stuck at low levels.  Coverage has fallen to 14 per cent in the private sector and 19 per cent overall.

Unpleasant outcomes are on the horizon.  A short-sighted game is being played.  It will unravel when the economy deteriorates, if not before.

Workplaces with diminished employer/employee engagement will be less efficient.  Inflexible agreements and rules constraining employment options will limit responses to tough trading conditions.  Employers will respond by driving down labour costs, employing fewer people and transferring jobs offshore.

The ramifications of this dispute will play out for a long time.  It should become a catalyst for change to the rules governing bargaining and agreement making.  Union militancy should be consigned to history.  If not, Australia will continue to suffer economic damage.

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A throwback to union militancy

The television scenes last week of union members marching through airport terminals were arresting.  They wore vests, carried banners and were shepherded by union officials bellowing chants from the ubiquitous megaphone.  It appeared the chants were meant to convince travellers the delays they were to experience that day were justified.  To me it was further proof that Australia's union leadership is losing touch with the Australian community.  It was a throwback to the days of union militancy and arrogant union officialdom.

The federal government is today seen as disconnected from the issues and concerns of many Australians.  The disconnect apparently applies to those Australians categorised as its traditional heartland, the workers.

One frequently identified problem for the ALP is that too many of its parliamentary representatives are former union officials.  This predicament is now exacerbated as union officials themselves increasingly appear to be out of touch.

Both organisations joined in 2008 to leave Australia with an awful legacy, a fair work system that has major faults.  A system that is damaging workplace efficiency and the capacity to optimise incomes and jobs growth, while also entrenching union privilege, notwithstanding an alarming fall in union membership.

A major fault with the system is rapidly becoming registered in the public's mind.

Union officials are using the new bargaining rules to orchestrate protracted negotiations for an enterprise agreement.  Industrial campaigns involving bans, strikes and belatedly cancelled strikes are commonplace.  Qantas is the most recognised example.  Similar protracted campaigns are affecting Toyota, BHP coal mines, Customs, police and public servants, while campaigns are being planned for health and other areas of public sector employment.

Behind these campaigns, which target large employers, is a malaise affecting smaller businesses.  The new multi-layered system of National Employment Standards, awards and agreements is a disincentive to pursue creative agreements with workers.  Most take the easy option of paying the standard award or copping the union-endorsed agreement for their particular industry.

Union officials are also determinedly pursuing two other damaging strategies.  They are attempting to expand their rights of entry to workplaces.  Many workplaces that hardly ever saw an official are now logging numerous entries.  Clauses that expand the right are now commonly sought when bargaining for new agreements.

Independent contracting and labour hire are generally beyond union control.  As a result, unions now seek to limit the capacity of firms to engage contract labour on terms that suit the employer and help the business remain competitive.

Union militancy may have been tolerated in decades past.  But it is an economic anachronism in today's connected and competitive world.

Unsurprisingly, militancy is not helping the unions.  Membership remains stuck at very low levels, with coverage falling to 14 per cent in the private sector and 19 per cent overall.

Unpleasant outcomes are on the horizon as a short-sighted game is being played.  It will unravel when the economy deteriorates, if not before.

Workplaces with diminished employer-employee engagement will be less efficient.  Inflexible agreements and rules constraining employment options will limit responses to tough trading conditions and employers will respond by driving down labour costs, employing fewer people and transferring jobs offshore.

An inquiry into the fair work legislative framework is scheduled and it has the hallmarks of a whitewash.  A thorough review is needed.

We have to urgently consider reforms to the labour market that will take up the opportunities of our current strong economy and consolidate the gains for future prosperity.

The features of the system that encourage arrogant union militancy must be changed.  Union leaders need to become more mindful of the aspirations of most Australians.

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''Occupy'' must understand there is nothing fundamentally wrong with banking

It is all too easy to dismiss the Occupy Wall Street protests in the United States and elsewhere over the past month.

After all it was almost inevitable that the assorted groups, ranging from communists to environmentalists and every other professional grievance movement in between, would tend to lack focus about what they're marching and camping out about.

Even so, it does appear that some of the anti-market sentiments expressed by their loudest protesting mouthpieces do reflect some ingrained, but mistaken, beliefs about the nature of the economy.

Some of the angered messages uttered by the occupiers are in fact similar to those one might occasionally come across in conversations with decent, hardworking, non-protesting kinds of folks in the outer suburbs.

A key criticism from some spokespeople in the protest movement concerns the workings of the financial system, and the bank bailouts during the 2008-09 global financial crisis.

There is no doubt that the financial system and its participants, including banks and traders of financial securities, have long been the subject of antipathy.  Even the Bible says that ''the love of money is the root of all evil''.

The economist Friedrich Hayek reckoned that hostile attitudes towards market activities are especially prominent in cases in which intangible services, rather than the exchange of physical goods, are being rendered.

Financial market services in particular tends to agitate those who believe that because a transaction is of an intangible nature, such as the lending of money at interest or the purchase of securities with the promise of a return later, then it is worthless at best or the product of black arts at worst.

Furthermore, it is claimed that any profits gained from such financial transactions must be underhanded in a zero sum manner in which the creditor or financier gains and the debtor or purchaser loses.

Perhaps to a great extent some of these hostile feelings towards the financial system might be due to a misunderstanding, or lack of comprehension, about the beneficial role of a functioning financial system for economic prosperity.

Fundamentally, the role of the finance sector in the modern economic system is to connect those in the economy who have saved part of what they earned with those who desire to borrow funds to invest in various ventures.

In other words banks and other financial institutions, when they function normally, play a constructive role in transferring financial assets to more highly valued uses.

And the beauty of a truly global financial system is that borrowers may tap into a greater pool of savings therefore securing credit at lower interest rates, while lenders have greater opportunities to diversify their financial portfolios that secure healthy financial returns.

That innumerable private sector operators, large and small, had to borrow funds to fill their financing gaps before producing the everyday conveniences we enjoy today is a point that seems to be lost on the Wall Street occupiers, and many non-occupiers for that matter.

And just like any other business, financial intermediaries have an occasional tendency to go bust.  While no financial institution or investment broker in Australia ceased operations during the 2008-09 global financial crisis episodes of bank failures, including as far back as the 1890s, have been a recurring feature in Australian economic history.

There is little question that the closure of any business, whether they be a corner store grocer to a bank with a multinational presence, is of great inconvenience to those personally involved in the venture.

That said the exit of firms usually acts as something of a cleansing process, in which private entities that cannot generate sufficient value get driven out of the market in favour of those who more effectively please their customers and thereby generate economic value.

It is from this perspective that the bailout of firms by governments, at taxpayer expense, is particularly reprehensible and should be opposed at every turn.

By preventing the closure of financial institutions on grounds that they were ''too big to fail'', governments effectively rewarded the practices of bank managers who engaged in overly risky financial practices prior to the GFC as well as shareholders who selected the managers who caused the banks to get into trouble in the first place.

The implicit transfer of wealth from poor taxpayers to rich bankers, who are prevented from being rendered poor as a consequence of bailouts, is another aspect of the bailouts that have not been lost on the Occupy Wall Street protestors.

Arguably the greater problem is what might occur down the track.

Having been rescued from almost certain insolvency by governments in the recent past, financial market participants expect that future governments will repeat a similar bailout strategy should another global economic downturn or significant episode of financial market dysfunction materialise.

And so an element of ''moral hazard'' becomes ingrained into the financial system whereby financiers are prepared to finance riskier economic ventures or purchase more securities of dubious financial backing, than would otherwise be the case, safe in the knowledge that a future government will rescue them anyway.

While it is convenient for the occupiers, with an inherent bias against market capitalism, to sheet home the entire blame for these unwelcome developments to the financial sector lobbyists who no doubt secured bailout arrangements much to their liking, they seem to miss the point.

As Germany's post-war Finance Minister, Ludwig Erhard, once said it is imperative for functioning markets to have strong-willed governments that are impervious to rent-seeking pressures from all vested interests who seek to transform the state into nothing more than booty to be ransacked at the expense of the general public.

To put simply the private sector banks and investment houses would not have received assistance, through the US government's Troubled Asset Relief Program (TARP) or other GFC bailout packages introduced throughout the OECD, if politicians credibly maintained a position not to negotiate with rent seekers and lobbyists.

In the United States, the epicentre of the GFC, there was precious little evidence of this stance being held by the Bush administration in any event.  In September 2008 then Treasury Secretary Henry Paulson hastily cobbled together a plan for legislative approval, including obligating the US Treasury to purchase up to US$700 billion of risky mortgage-backed financial securities.

Despite the confidence of President Bush that the bailout package would pass Congress, the House of Representatives initially rejected the plan on 29 September 2008.  With two-thirds of Democrats voting in favour of the plan the outcome hinged on the refusal by Tea Party Republicans to support the move.

Although the 2008 Tea Party position on this specific issue was virtually indistinguishable from the position of the 2011 occupiers, the Tea Party were nonetheless severely criticised for not bending to a strategy that rewarded financial market failures and extended the interference of the state in economic affairs.

Unsurprisingly the most trenchant critics of the Tea Party Republicans at the time were the political and business establishment that stood to gain from the deal.

The hysterical commentary in response to the initial fall in the Dow Jones share market index (which incidentally occurred just before the actual 29 September vote took place) only emboldened the rent seekers and weakened the resolve of politicians to reject, as a matter of principle, the socialisation of private sector financial losses.

There is certainly merit in the arguments that the responses by governments to the GFC not only consigned ordinary citizens to confront the overhang of unsustainable levels of public sector indebtedness, but it corrupted the integrity of the market process which is essential for the promotion of improved living standards and not to mention the amelioration of poverty.

But because of their prior disposition against markets, elements of the protest movement are not only arguing against bank bailouts but, on some accounts, for the abolition of private sector financial institutions and money itself.

If there is any example of throwing the baby out with the bathwater, this would be it.  For example if money as the medium of exchange were abolished then how could the coincidence of wants between individuals be reconciled?  Would the protestors successfully be able to barter their hand-woven baskets and hemp shirts for food, iPods, mobile phones or computers?

For some reason, that's perhaps little more than a hunch, I don't like their chances.

That the Sydney arm of Occupy Wall Street recently asked for state and local taxpayers to fund coal-fired electricity, wi-fi internet connectivity, motor vehicle parking spaces, tents, umbrellas and other paraphernalia would suggest even they realise they'd have a hard time in a world without money or capitalism.

While the denigration of the role of the financier in economic life represents something of a sport for the protest arm of the political left, a policy acceptance of the Occupy Wall Street positions on many aspects of capitalism would do nothing but cause irreparable damage to the lives of millions.

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Why doubt free trade with China?

On Wednesday Tony Abbott told The Age that he would make a free trade agreement with China less of a priority than one with Japan -- because China, he pointed out, is not a market economy.

Of course, there's nothing sacred about bilateral free trade agreements.  They're a poor cousin to multilateral agreements.  They can be written well or poorly.  A lot rides on their negotiation, and interest groups and rent seekers will want their say.

But the pros and cons of bilateral agreements plainly have little to do with the Opposition Leader's scepticism about a trade deal with China.

Last week's comments are not isolated.  Abbott also wants tougher laws against anti-dumping, to penalise goods subsidised by foreign governments.  With these policies, the Opposition Leader is close to endorsing retaliatory protectionism.

Abbott says he wants to ensure a ''genuinely level playing field with a fair go for Australian companies''.  In recent interviews, he has begun to talk not about ''free trade'' but ''free and fair trade''.

Abbott is not alone.  Barnaby Joyce also talks about his full-bodied support for free trade but only if it is ''genuine'' free trade.  The AWU's Paul Howes says, ''If trade is going to be on, it's got to be on a level playing field.''

Of course, the entire point of free trade is that the playing field isn't level.  The world isn't flat.  The world is very bumpy.  Different products are made more efficiently at different places.  Environmental, geographic and social conditions vary wildly.  If anything, the process of globalisation has emphasised just how different parts of the world are.

Free trade is beneficial precisely because the world is heterogeneous, not homogenous.

This applies even when those differences are created by deliberate public policy choices, not ''naturally''.

Yes, China is not a market economy.  As John Lee pointed out in Crikey last week, it would be flattering to even call it a mixed economy.  It is led and dominated by the state, rigged so state-owned enterprises are the main beneficiaries, and corrupted by industry plans and subsidies.

These are all bad things.  But to retaliate -- or, to use less-loaded language, compensate -- by bumping up our trade barriers would be compounding one error upon another.

We should feel sorry for Chinese taxpayers when they are asked to stump up for ever more industry subsidies, not resentful of them.  China is a developing country.  Yet it is taxing its citizens in order to prop up businesses.  Which then go sell their products below the market cost to rich countries.  These subsidies are a direct wealth transfer from third-world taxpayers to first-world consumers.

As Professor of Economics Donald J Boudreaux describes this perverse strategy:  ''To make its country's exports artificially more abundant and artificially less costly for foreigners to buy, a government taxes its citizens, effectively forcing people within that country to bestow benefits on people outside its boundaries.''

It's tragic.  But Australians are the beneficiaries of such misguided policies, not the losers.

There is no reason to believe the efforts of foreign governments to build industries using subsidies and industry plans will be any more effective for them than it has been for us -- that is, it will be entirely fruitless and extremely expensive.

So foreign subsidies do nothing to undermine the case for free trade.  Self-sufficiency is no virtue.  Just as it is nonsensical for an individual to make everything they need themselves, it is nonsensical for countries as well.  Free trade would be beneficial even if Australia was the only country in the world that believed in it.

The union movement offers one further objection to trade with China -- the Chinese government artificially undervalues the yuan, deviously making their exports more competitive than if their currency had been floated.

Perhaps.  Currency demagogues in the United States (where the strength of the yuan is a major political issue) have long pointed to the Economist's Big Mac Index, which compares the price of the iconic hamburger around the world.  It's a rudimentary but evocative test of currency health.  It measures a standardised product, allowing us some indicative comparisons.  The Economist found the yuan could be undervalued as much as 44 per cent.

At least it did until the index was drastically revised this year.  Big Macs should be cheaper in countries with low labour and land costs.  The index was adjusted to take account of that obvious complication.  Its revised data suggests the yuan is much less undervalued than everybody originally thought.

The Big Mac Index is certainly crude.  But we know an artificially low yuan is bad for China itself.  An undervalued currency is an effective subsidy to exporters at the expense of domestic consumers, raising the price of imports and increasing costs across the economy.

In the last 12 months domestic pressures have been getting more intense.  The Chinese growth model is a ticking time bomb.  What we're seeing is not cunning manipulation of a currency to undermine international competitors.  We're seeing an economy teetering on the edge of the abyss -- and Chinese policymakers know it.

It seems bizarre to claim economic self-harm in China justifies economic self-harm in Australia.

But that is exactly what Tony Abbott, Barnaby Joyce, Paul Howes and other free trade sceptics now recommend.

Most important to avoid the perception of crony capitalism

While there is a tradition of former bureaucrats moving to business or even politics, Ken Henry provides an interesting challenge to Australian governance.

There is no doubt that Henry has very valuable skills;  he has management experience in a large organisation, a sound knowledge of the economy and political influence.  It is not surprising that the private sector would want to employ him.  Similarly, it is entirely appropriate that he earn a return for those skills.

The challenge Henry poses is that it isn't clear where he sits in the accountability spectrum.  He wishes to serve on the boards of private organisations as a director while also serving the commonwealth as a public servant.

Ordinarily that couldn't happen.  But Henry isn't an ordinary public servant.  Since resigning his position as Treasury secretary he was appointed (part time) as a special adviser to the Prime Minister under section 67 of the Constitution, a provision that is rarely used and usually only for the head of the Australian Secret Intelligence Service.

The existence of a potential conflict of interest shouldn't be problematic in itself.  Conflicts always exist and it is how they are managed that is important.  What isn't clear is how any potential conflict of interest will be managed, or even if they can be managed.

There are clear separations of power in our political economy.  Executive government is accountable to parliament and bound by the courts.  Business executives are accountable to boards of directors and shareholders.  So, too, political power and corporate power should be separate.  Of course, the odd corporate executive is often a consultant to government, but never actually as an employee.

Contrary to what the Occupy Wall Street movement thinks, the same people who wield political power don't also wield corporate power.

Conflicts of interest are usually managed through trade-offs and common sense.  Not so in this situation.  The conflict between corporate power and political power is actually managed by prohibition.  The Reserve Bank governor, for example, must be sacked if he engages in paid outside work.  Cabinet ministers are expected to place their investments in blind trusts.  In other words, our system of governance has a clear separation between corporate and political power.

Henry potentially will be breaking that model of separation.  He will be firmly straddling the divide between the highest political office and high corporate offices.

The argument to consider is whether the Henry situation really matters.  After all, he is a man of great ability and integrity who, in theory, would be in a position to accomplish a great deal of good in almost any role he could take on.  If Australians are a pragmatic people, then having Henry across corporate and political decision making is very pragmatic.

While that kind of argument sounds sensible, close relations between government and business have the potential to quickly degenerate into crony capitalism or corporatism, which is why the principle of separation has existed.  It is always easier to define and explain the profit motive than the public interest.  A lack of separation between business and government has the potential to lead to government providing special privilege to business.

Business is already the beneficiary of special privilege.  Some is socially beneficial;  limited liability, for example, allows the corporate sector to raise the vast amounts of capital necessary to finance their activity.  Bankruptcy laws allow business to break contracts.  Laws that restrict trade and competition, however, do not benefit the broader community.  Not only has crony capitalism resulted previously in poor outcomes but the probability of future success is even poorer.

US blogger Arnold Kling highlights the differential between knowledge and power.  In the modern economy knowledge is becoming ever more diffuse, while power is becoming ever more concentrated.  Good policy relies on knowledge.  Just when government has greater power to make policy, so the likelihood of good policy declines.

Diffuse knowledge is best managed through markets and not government.

So the ''commanding heights'' model is unlikely to work well in future irrespective of the personalities involved.

This brings us back to Henry.  He has a skill set that could work well in either the public sector or the private sector.  It is unlikely that his skill set could add value to the public and the private sectors at the same time.

Close relations between government and business also would create the impression of impropriety.  Given what we know of crony capitalism it would be very difficult to credibly demonstrate an arms-length relationship between government and business when a high-ranking public servant is also a high-ranking private sector decision maker.

All up, despite what we know of the man himself, a man of integrity and ability, having Henry occupy influential positions in both sectors is going to generate a lot more heat than light.

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Taxing claims hot air

From July 1 next year, Australia is going to discover a carbon tax and trade barriers have the same disastrous economic impact.

Trade Minister Craig Emerson argues that the introduction of a carbon tax ''points to Gillard Labor governing in the Hawke-Keating tradition''.

The Hawke-Keating ''vibe'' that Emerson argues the Gillard Government is channelling is that policy changes presently being introduced, including the carbon tax, will provide foundations for a more flexible, dynamic and competitive economy.

But the economic benefit of trade liberalisation and floating the dollar cannot be compared with the introduction of a carbon tax.

At its heart, the past three decades of positive economic reform led by the Hawke-Keating and Howard governments removed barriers and distortions in the economy that misallocated economic resources and stopped Australia pursuing its comparative advantage.

Or, in layman's terms, producing things that we can most competitively to reduce costs to households and be internationally competitive.

Importantly, those reforms scrapped the false foundations that tariff and non-tariff trade barriers created for protected industries.

This stands in stark contrast to the carbon tax and its successor emissions trading scheme.

A carbon tax is designed to tax out of competitiveness otherwise-viable businesses within Australia's comparative advantage, and tax into competitiveness those that are not.

It's precisely why government Treasury modelling assumes so many foreign permits will be traded into Australia's scheme.

Our lack of capacity to cut emissions is not a result of absent enthusiasm.  It's not something we are competitive at because our emissions profile is dominated by burning coal for electricity, and the tax price needed to successfully tax it out of competitiveness is absurdly high if we want to keep the lights on.

If the rest of the world had emissions trading, Australia would be one of the last developed countries on earth you would try to cost-effectively cut emissions because it would always be cheaper to do it elsewhere.

A carbon tax operates as an ever-increasing internal tariff.  A carbon tax acts as false foundations to give lower-carbon industries an artificial boost, which will escalate over time as the tax rate goes up and permits are removed from an ETS, increasing the price of emissions permits.

Trade barriers, such as tariffs, act in the same fashion as a carbon tax, by taxing out of viability imports that compete with otherwise uncompetitive domestic production.

Non-tariff barriers ranging from abused quarantine standards, rules of origin certification requirements and compulsory labelling standards to prompt consumer boycotts have the same effect as tariffs, through a less transparent economic profile.

And the havoc trade barriers caused in distorting the unsustainable allocation of economic resources in the Australian economy from World War II until the start of reforms in the 1970s will be repeated.

The only scenario where an internal carbon tariff won't cause economic harm is if every other major competitor country takes on equivalent self-flagellation.  But that clearly isn't happening.

Such proposals aren't even being discussed in the US.  A recent commissioned review panel report recommended that New Zealand engage in liberalisation of its planned phase-in of its scheme.

Only Europe has made equivalent steps in the same direction as Australia, with the massive allocation of free permits though Europe's emissions reduction has occurred from reduced economic activity from the global financial crisis, exporting industries and jobs offshore to countries without equivalent carbon prices and the purchase of permits from developing countries through international emissions trading.  But the latter isn't looking like a viable ongoing option, with the World Bank recently reporting that the international carbon market is in recession as the world waits for the elusive successor agreement to the Kyoto Protocol to be negotiated.

That's why Japan and South Korea, understandably, are holding off introducing any scheme that acts as an internal carbon tariff.

The only commonality between the Hawke-Keating reforms and Gillard's carbon tax is that through the lifetimes of the government the rates imposed will change.

But unlike Emerson's 1980s employers, who gradually phased down the rate of false foundations and misdirection of capital in the economy, the Gillard Government is set only to increase them into perpetuity.

Idealism turns us on, but reality bites

There's a particularly idiotic moment in the 2003 movie Love Actually when British Prime Minister Hugh Grant loses it.  Grumpy at President Billy Bob Thornton for hitting on No. 10 staff, he breaks off script at a press conference, describes his American ally as a ''bully'', and abandons the ''special relationship''.

Unbelievable?  Absolutely.  But what really throws this scene into the realm of high surrealism is the grinning faces of the PM's political and policy team.  Their leader has threatened the leader of the richest and most powerful economy on the planet.  And Grant's staff -- who would have to deal with the consequences -- are over the moon about it.  Hooray!

Pop culture doesn't do politics very well.  The depictions of government (and the people we elect) in movies and television are either wilfully naive, or naively conspiratorial.  Take The American President, where a Michael Douglas administration is inspired by the love of a good woman to decarbonise the US economy.  Right now, in 2011, radical climate change action by America is pretty unlikely.  But it was ludicrous to imagine when the film was made in 1995.  In more pessimistic and dramatic films, politicians and governments head up elaborate conspiracies -- they manufacture fictional wars (Wag the Dog), run military actions in secret (Clear and Present Danger) and cover up murders (State of Play, Absolute Power, and Enemy of the State).

But here's the funny thing.  All of these conspiracies pretty much work.  They're successful -- at least until the movie's hero intervenes.  Doing the wrong thing might be wrong, but the movies assume it will be simple.

In the movies, covering up a conspiracy is no big deal.  When needed, the wheels of government move effortlessly.  It's the same in the films with a more optimistic view of political leadership.  Prime Minister Grant or President Douglas only have to put their foot down to get stuff done.  Governments in the movies are competent.  They're nothing like the real world.  In the real world, government projects are characterised by disappointment and compromise.  Political operatives, not experts, make the final decisions over policy.  Petty leaks and cheap betrayals are commonplace.  Political favours are used like currency.

Even the worst fictional depictions of politics typically exclude the sad reality of policy botches, bureaucratic waste, and politicians with an exaggerated sense of self-importance.

More than anything else, the television show The West Wing has demonstrated pop culture's bizarre faith in the competence of government and the goodness of politics.  The show has a cult following among political boffins.  No wonder:  The West Wing flatters the political class by its suggestion that every person involved in politics is well informed.

And extremely well-intentioned.  The West Wing's President Bartlett is incorruptible.  Power has done nothing to him.  If anything, holding the most powerful office on earth has made him more honourable.  And his staff are all dedicated to public service, extolling self-sacrifice and duty.

Something's wrong here.  In The West Wing's depiction of politics, there appears to be no politics.  As Gene Healy, the author of the book Cult of the Presidency, has written:  ''Fans of the show never saw the sort of infighting, backstabbing and jockeying for position that appear in real-world accounts of White House life.''

No wonder virtually every character in The West Wing has an unwavering faith in government action as the solution to every problem.  They never come up against incompetence or dysfunction.  And barely any opposition.

This matters because these portrayals of politics shape in a big way how we understand real-world politics.  Rather than pointing at the inevitability of much government failure -- caused by its plodding bureaucracy, its base politics, and the inevitability that power will be used to pursue private interests -- movies and TV trivialise it.

If only the good people were in charge.  If only Mr Smith really had gone to Washington.  If only political leaders didn't use their powers for evil.  If only politicians weren't weak.

Politicians have tried to exploit these sorts of sentiments, but the dull, sad reality of government always sinks in.  Reforms go off the rails.  Supporters lose faith.

There are rare exceptions, like Yes, Minister, and the more recent, even more cynical The Thick of It.  But these are great because they are depressingly authentic compared with what we usually see on our screens.

Even in the darkest political thriller, pop culture's overwhelming vision of government is optimistic, almost utopian.  Shame the real thing can't live up to the fiction.

Democracy means doubt

Those business leaders bleating Tony Abbott's promise to repeal the carbon tax should remember one thing.  That's the price of doing business in democracy.  If they want certainty, they can move their company to Russia.

They should also ask themselves what would be the reaction of their shareholders if they, as a chief executive prior to their re-election as a director at the company's annual meeting, promised not to do something and then, following the meeting and the re-election, they went ahead and did it anyway?  And if they did it against the wishes of most of their shareholders?

The double standards in the debate about the repeal of the carbon tax are delicious.  A spokesman for Climate Change Minister Greg Combet claimed a few days ago that ''business needs certainty'' and blamed the Coalition for being ''irresponsible''.  Presumably that spokeman wasn't working at the ACTU when Comber was campaigning to overturn the Howard government's Work Choices legislation.

Kevin Rudd promised to get rid of Work Choices, and he did.  In principle, there is no difference between Labor repealing Work Choices and Abbott (if he becomes Prime Minister) repealing the carbon tax.  There are 11 million employees in Australia, all of whom are governed in one way or another by the nation's industrial relations system.

The goverment likes to claim that only ''big polluters'' will pay the carbon tax.  This is what Prime Minister Julia Gillard said in July:  ''Around 500 big polluters will pay for every tonne of carbon pollution they put into our atmosphere.''

You'd think those companies who wouldn't be required to pay the tax if the Coalition wins the next election would welcome Abbott's promise.  Not so.  Apparently some of those companies are unhappy that both sides of politics can't agree to impose the tax.

According to AGL Energy chairman Jerry Maycock, ''Clearly, if you had a bipartisan view on the price of carbon it would reduce uncertainty''.  So there you have it.  Australia in 2011 is the scene of a world first.  Company executives complaining they may not have to pay a tax.

Politicians aspiring to introduce new taxes in future should remember what we've learned from the episode of the carbon tax.  When faced with a choice of the certainty of Labor imposing a tax and the uncertainty of the Coalition removing a tax, some Australian business leaders prefer the former.  Maybe they have calculated the advantages to their companies from having to pay the tax.  Their own business might suffer but a competitor's business might suffer more.

Or maybe they've worked out how much better they'll be after receiving billions of dollars in government handouts to compensate for the tax.

The problem for a future Coalition government is, of course, that the carbon tax isn't just a tax.  It is a tax, an emissions trading scheme, an accounting process, and a bureaucratic regime all rolled into one.  Plus it's been designed to be integrated into the personal income tax system and the social security system.  Plus it attempts to invent an entirely new category of property rights.  And it's governed by more than 300 pages of legislation administered by 1000 public servants in the Climate Change Department.

It is much, much more than just a tax on 500 companies.  A ''price on carbon'' is the vehicle of the economic ''transformation'' of the Australian economy -- which is exactly how Penny Wong described Rudd's emissions trading scheme when she was climate change minister.  Gillard's carbon tax is no less transformative than Rudd's ETS.

It's precisely because of the enormous impact of the tax that it should not have been implemented the way it has.  Something such as this tax, that has as its objective the kind of economic transformation Labor and the Greens hope for, should only ever be implemented with support from both sides of politics.  Such measures should also have some degree of public support.  Neither of these condition apply to the carbon tax.

It's true that unwinding the tax and all its apparatus will be complicated, time consuming, potentially costly, and will cause headaches for companies.  If business wants to blame someone for this mess, it should look to the people who are proposing the tax in the first place, not those promising to repeal it.

Why cling on to an outdated refugee convention?

The United Nations 1951 Convention Relating to the Status of Refugees is not fit for purpose.

The 60-year-old convention was designed for an era we no longer live in;  an era where the causes and trajectories of global migration were quite different to today.

Yet the convention still dominates our understanding of migration, with its archaic and artificial distinction between legitimate and illegitimate irregular migrants.

The problems go deeper than historical quirks of drafting.  The convention deeply distorts our understanding of 21st-century immigration.  It makes humanitarian approaches to refugees harder, not easier.  Australia should withdraw from it.

The refugee convention was developed in response to the World War II refugee crisis.  Between 20 to 30 million people were displaced in Europe alone -- ''one of the greatest population movements of history'' as one US State Department report described it at the end of the war.

But that was in 1945.  Six years later, the idea of coordinated global action on those refugees was already anachronistic.  Half a billion (mostly American) dollars had been spent resettling the majority of those who had been displaced, save a problematic ''hard core'' of 400,000.  The United States did not want sole responsibility for all refugees in the future, so the convention placed the burden on countries which the refugees themselves approached.

And by this time, refugee questions had already been subsumed into Cold War politics.  The new wave of European migrants was mostly comprised of those fleeing communism.  The Soviet Bloc did not help draft the refugee convention.  It did not want to help ''traitors who are refusing to return home to serve their country''.

As a consequence, the convention defined a ''refugee'' as someone who had a ''well-founded fear of being persecuted''.  This is the formula our Immigration Department and Refugee Review Tribunal apply to contemporary asylum cases in 2011.  But it's clearly a formula specifically designed for the Cold War.  Communist states actively persecuted returning citizens.  The consequences of sending such refugees back across the Iron Curtain was unambiguous.

While convention was designed to handle those who could not return home for political reasons, our contemporary requirements are vastly different.  The bulk of today's refugees are displaced not because of politics, but because of economic hardship or conflict.  They do not flee totalitarianism but poverty and insecurity.

By any layperson's definition, virtually all those who reside in 21st-century refugee camps would be considered ''refugees'' but it has been estimated the bulk would not fit the convention's ''well-founded fear of being persecuted'' standard.

The decisions of Australia's Refugee Review Tribunal record the often farcical attempts by migration lawyers and judges to shoehorn the complex reasons someone may migrate into this frame.

The convention did not even work as intended during the Cold War.  Gil Loescher's The UNHCR And World Politics documents how the USA sidelined the United Nations High Commission on Refugees and built a parallel system to attract refugees from the Soviet bloc.

Of the 233,436 refugees admitted into the United States between 1956 and 1968, only 925 were from non-communist countries.  They were accepted into the West not because of the dictates of international law but as part of the great geopolitical game.  Contrast America's embrace of Cuban refugees with its relatively cold shoulder to those from Haiti.

The end of the Cold War undermined the political foundations of the refugee framework.  We have now almost no genuinely totalitarian dictatorships persecuting their citizens, but we also have more refugees than at any time in the last half century.  The distinction the Refugee Convention makes between political refugees and the rest no longer makes any sense.

In fact, it's worse than that.  Today even people fleeing totalitarianism typically believe they are doing so for economic reasons, not political ones.

North Korea is the most politically repressive state in the modern world.  Yet according to a survey of refugees in the recent book Witness To Transformation:  Refugee Insights Into North Korea, fully 95 per cent of North Koreans said they left the Hermit Kingdom because of poverty.  Only 2 per cent cited political persecution.  Absolutely, if a Korean refugee turned up in Australia, they'd change their views after five minutes with a refugee lawyer.  But their initial beliefs are indicative.

The convention's archaic distinction badly distorts the popular understanding of refugee issues.

The denigration of ''economic refugees'' -- so widespread in the Australian press -- is particularly absurd.  Few realise the concept of legitimate refugee they rely on was formulated primarily to embarrass Joseph Stalin.

Our views on what is a moral approach to refugees also diverge sharply from those implied by the convention.

As Michael Pearce pointed out in The Age in September, Australians feel obligation to those in the far away refugee camp ''queue'' more than those who arrive in our country.  The Malaysia Solution pivoted on this feeling.  But that is an almost exact reversal of the convention's approach, which is silent on the queue, and concerns only those who land on our doorstep.

One argument for the convention is that it acts to restrain the political response to asylum seekers -- keeping things at least reasonably humane.  Yet it's not clear it does.  Other signatory countries are no more rigorous than Australia at complying with the convention.  Non-signatory countries host the majority of refugees.  Here, as around the world, domestic policy is set by domestic politics, not international law.

Yet the biggest problem is not merely how it defines ''refugee'', but how the refugee convention distorts our understanding of the entire immigration issue.

Rather than viewing refugees as a subset of general global migration, the convention requires us to see them as a separate thing entirely.

It's a false dichotomy.  Migration is not either forced or unforced.  There are many degrees of voluntariness in modern migration.  But it's a dichotomy on which our political parties rely.  The Greens support asylum seekers but wish to limit skilled migrants.  The Coalition and now Labor want to stop the boats yet invite more foreign workers.

Immigration is shaping up to be the big issue of the 21st-century, in the way that trade was the big issue of the 20th.  There's nothing wrong with trying to migrate to find work and a better life.  We should, indeed, encourage that.  However, we will not be able to come to terms with the age of migration if our policymakers cling to the obsolete refugee convention.

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Carbon trading will fail because property rights cannot exist for gases

Economically sustainable markets are built on the back of secure property rights, but because secure property rights cannot exist for greenhouse gases, emissions trading has a structural flaw that will ultimately unravel.

In a speech to the Liberal Party's Menzies Research Centre think tank, Tony Abbott has warned businesses not to buy auctioned emissions permits to participate in the Gillard government's planned emissions trading scheme operating after 2015.

Abbott is correct to warn business, but not for the reasons he outlined.  His motivation is to remove the stumbling block of compensation to companies that purchase emissions permits if he is in a position to scrap the carbon tax legislation after the next election.

The Gillard government argues that if the permits are diminished the property right paid for by permit holders will trigger compensation under the Constitution on the grounds that the government has acquired their property.

Ironically, it's precisely the same argument tobacco companies are running against the government's plain packaging plan.

In both cases the relevant legislation treats the property right as akin to physical property rights.  In both cases the government isn't seeking to use the property for their own purposes, which has been a core argument of those who argue that plain packaging doesn't amount to acquisition.

But Abbott's instinct is accurate on a much deeper level.

Emissions trading is a beautiful idea in economic theory.  However, it fails the practicality test.

Markets are built on credible, tradable property rights.  Physical property rights are definable and can be isolated for the purposes of ownership.

These dimensions enable them to be traded.

Even intangible intellectual property rights meet these criteria through their design, but greenhouse gas emissions cannot meet them.

One person's emissions cannot be differentiated from another's.  They are the same chemical compounds, whether emitted by another or created naturally.

As a consequence, imposing a local price in the absence of a global price, when the externality of greenhouses gases is also global, fails the test of economic logic.

It doesn't compare with previously trialled sulphur dioxide emissions trading, which created a local price mainly to address the localised externality of acid rain.  And sulphur dioxide isn't a by-product of the energy engine of our entire economy.

The impossibility of identifying local greenhouse gas emissions in isolation to attach a technical property right provides the basis for the right being attached to the process of emitting.

But emissions permits carry the same structural flaw because carbon accounting standards aren't as accurate as traditional financial accounting.

In traditional accounting practices, dollars can be traced and accounted for retrospectively, but retrospectively calculating profiles for exhausted emissions relies heavily on manipulable assumptions.

Only a small number of centralised emissions can be calculated with a high degree of accuracy, such as electricity generation, which is based on the profile of fuels burned, and output.

So can air flights, by breaking down the share by passenger seat of the emissions calculated from the distance and height the plane travelled and the fuel consumed.

That's why they've both been big-ticket items in the European Union's emissions trading scheme.

But even then their exact emissions profile cannot be perfectly calculated.

The EU's planned carbon tariff on purchased tickets for inbound international flights will be based on assumptions for a plane's expected activity, but as soon as a plane is stuck in an extended holding pattern the cost will no longer reflect the emissions.

Because of the deep inaccuracy of carbon accounting standards, the government requires carbon taxpaying companies only to attain 95 per cent accuracy in their records.

The carbon cops exist because the opportunities for fraud are extensive, and the incentive for engaging in that behaviour by using generous assumptions in calculating emissions profiles increases as the carbon price rises.

Worse, if a long-fabled comprehensive international emissions trading emerges, made possible by governments establishing schemes equivalent to that proposed for Australia, they have a substantial incentive to cheat in their emissions reduction reporting to boost international competitiveness.

That's why international external monitoring, reporting and verification of emissions reduction has been a stumbling block in negotiations for a new international climate change pact.

A tonne of emissions in Beijing, Bendigo or Boston cannot be distinguished once it is in the atmosphere, and claimed reductions cannot be verified.

That's why emissions trading will unravel.

Buying and trading emissions permits requires an extremely high level of trust that participants are reporting accurately, under standards that don't require them to do so, because it is basically impossible.

Of most concern is that we are redesigning our entire economy on the basis of a known house of cards.

Carbon policy sacrifices nation's wealth

When Adam Smith famously pointed out that ''there is a great deal of ruin in a nation'', he had in mind the foolishness of its political leaders.  The passage of the carbon tax through the House of Representatives, underscores his insights.

It is far from unprecedented for a government to sacrifice its nation's wealth and income the way the Labor-Green coalition is doing to Australia with its carbon tax.

The Bolsheviks' abolition of capitalism consigned a Russia that was the world's fastest growing economy in the early 20th century to poverty from which it is only just escaping.  Mao Zedong did it in China after 1949 and Fidel Castro's economic destruction of Cuba is yet to be unravelled.

In all these cases a minority government seized power and proceeded on policy paths involving a change in the structure of their nations that could not be undone.

They also considered the changed structures would prove popular with key supporters and eventually lead to superior economic outcomes to those that would otherwise have prevailed.

But it must be unique for a nation to deliberately sabotage its own competitiveness by shackling the industries that represent the highest value in terms of productivity:  coal and electricity.  It would be worse than the United States abandoning IT or Denmark deciding that dairying should be phased out -- worse because of the ubiquitous nature of fossil fuel sourced energy in the economy and because the alternatives come with very low levels of productivity.

In light of the impending legislation, the wholesale price of energy for the fourth quarter of 2012 compared with the current year will rise $20 per kilowatt hour, or more than 60 per cent, in NSW, Victoria and Queensland.

Proponents of the carbon tax concede, albeit reluctantly, that their policies will mean lower income levels than under business as usual.  They do so because the Treasury modelling which lends them respectability says that will be the case.  That modelling elevates Treasury into the world of technological forecaster since it assumed all these new technologies -- carbon capture and storage, low-cost wind and the like -- will emerge.  And this comes on top of the heroic assumptions, against all the evidence, that the whole world will swing behind the tax.

Perhaps even more importantly, Treasury has not drawn its willing political supporters' attention to the fact that its modelling is circular -- it shows increased productivity because this is one of the assumptions.  No matter how heavy the sledgehammer taken to economic drivers, the model would inevitably forecast increased national income.  This would be the case if the carbon tax was at $23 or $1000 per tonne.

Although the Treasury forecasting arm tells the Labor-Green coalition that, even with its fantasy assumptions, according to the modelling income levels will be lower, ministers don't really believe it.  They keep saying how we are getting in on the ground floor with these new industries on the back of which we will have the incentive to develop Obama's Solyndra-like factories that will take the Chinese and Indian markets by storm 20 years hence.

Well Solyndra went down spectacularly, as did its smaller-scale variants like the Victorian windmill blade factory that got taxpayer funding to open up a new world conquering infant industry and promptly went bust.

Government-created industry champions just never seem to cut it.

Some industry bodies that previously supported ''putting a price on carbon'', like the Business Council of Australia, have at the 11th hour realised what disaster the proposal, as it stands, will wreak on the Australian economy and their members' shareholders.

Its concerns are especially focused on the loss of competitiveness the tax will bring in the absence of other nations following our lead.

All this is rather late -- the business establishment concentrated on seeking specific exemptions and caveats.  This reinforced the government's view that the wealth creation process is inevitable and its flexibility makes it immune from the effects of taxes and regulations.  The Prime Minister is already boasting, that the costs cannot be rescinded and perhaps she's right.

Meanwhile, the Treasurer is echoing the Bank of England's warnings that the world is heading for another global financial crisis.  That would trigger an early recognition of the carbon tax's damage to Australia, an outcome far preferable to the slow strangulation that would follow from steady growth of the international economy.

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Carbon tax an ever-increasing tariff

From July 1 next year, Australia is going to discover a carbon tax and trade barriers have the same disastrous economic impact.

Last Monday, Trade Minister Craig Emerson argued that the introduction of a carbon tax ''points to Gillard Labor governing in the Hawke-Keating tradition''.

The Hawke-Keating ''vibe'' that Emerson argues the Gillard government is channelling is that policy changes presently being introduced, including the carbon tax, will provide foundations for a more flexible, dynamic and competitive economy.  But the economic benefit of trade liberalisation and floating the dollar cannot be compared with the introduction of a carbon tax.

At its heart, the past three decades of positive economic reform led by the Hawke-Keating and Howard governments removed barriers and distortions in the economy that misallocated economic resources and stopped Australia pursuing its comparative advantage.

Or, in layman's terms, producing things that we can most competitively to reduce costs to households and be internationally competitive.

Importantly, those reforms scrapped the false foundations that tariff and non-tariff trade barriers created for protected industries.

This stands in stark contrast to the carbon tax and its successor emissions trading scheme, which brings back these false foundations back.

A carbon tax is designed to tax out of competitiveness otherwise viable businesses within Australia's comparative advantage, and tax into competitiveness those that are not.

It's precisely why government Treasury modelling assumes so many foreign permits will be traded into Australia's scheme.

Our lack of capacity to cut emissions is not a result of absent enthusiasm.  It's not something we are competitive at because our emissions profile is dominated by burning coal for electricity, and the tax price needed to successfully tax it out of competitiveness is absurdly high if we want to keep the lights on.

If the rest of the world had emissions trading Australia would be one of the last developed countries on earth you would try to cost effectively cut emissions because it would always be cheaper to do it elsewhere.

A carbon tax operates as an ever-increasing internal tariff.

A carbon tax acts as false foundations to give lower-carbon industries an artificial boost, which will escalate over time as the tax rate goes up and permits are removed from an ETS, increasing the price of emissions permits.

Trade barriers, such as tariffs, act in the same fashion as a carbon tax, by taxing out of viability imports that compete with otherwise uncompetitive domestic production.

Non-tariff barriers ranging from abused quarantine standards, rules of origin certification requirements and compulsory labelling standards to prompt consumer boycotts have the same effect as tariffs, through a less transparent economic profile.

And the havoc trade barriers caused in distorting the unsustainable allocation of economic resources in the Australian economy from World War II until the start of reforms in the 1970s will be repeated.

The only scenario where an internal carbon tariff won't cause economic harm is if every other major competitor country takes on equivalent self-flagellation.

But that clearly isn't happening.  Such proposals aren't even being discussed in the US.

A recent commissioned review panel report recommended that New Zealand engage in liberalisation of its planned phase-in of its scheme.

Only Europe has made equivalent steps in the same direction as Australia, with the massive allocation of free permits -- though Europe's emissions reduction has occurred from reduced economic activity from the global financial crisis, exporting industries and jobs offshore to countries without equivalent carbon prices and the purchase of permits from developing countries through international emissions trading.

But the latter isn't looking like a viable ongoing option, with the World Bank recently reporting that the international carbon market is in recession as the world waits for the elusive successor agreement to the Kyoto Protocol to be negotiated.

That's why Japan and South Korea, understandably, are holding off introducing any scheme that acts as an internal carbon tariff.

The only commonality between the Hawke-Keating reforms and Gillard's carbon tax is that through the lifetimes of the government the rates imposed will change.

But unlike Emerson's 1980s employers who gradually phased down the rate of false foundations and misdirection of capital in the economy, the Gillard government is set only to increase them into perpetuity.

The costs of taxation and other Laffering matters

The Laffer curve is nothing new.  The philosopher Ibn Khaldun (1332-1406) wrote in his 1375 masterpiece al-Mugaddimah:

''At the beginning of the dynasty, taxation yields a large revenue from small assessments.  At the end of the dynasty, taxation yields a small revenue from large assessments.''

Adam Smith, JB Say and John Maynard Keynes have all written similar comments.

John F Kennedy famously said, ''It is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now''.  Critics who dismiss the Laffer curve as being ''wrong'', or a joke, or discredited, or belonging to some fringe element of ''voodoo economics'', forget it has a long and distinguished ancestry.

This curve plots the hypothetical relationship between tax revenue and tax rates.  When tax rates are zero, no revenue is raised, but when tax rates are 100 per cent, no revenue is raised either (because nobody will work for nothing).  In between those two extremes there are two tax rates associated with every level of tax revenue -- a high tax rate and a low tax rate.  At some point there is a tax rate that maximises tax revenue.  For those economies on the ''wrong side'' of the Laffer curve a decrease in tax rates will lead to an increase in tax revenue, while an increase in tax rates will lead to a decrease in tax revenue.

Textbook writers are usually hostile to the Laffer curve.  Many make the argument that tax revenue fell in the US after the 1982 tax reform.  But the US was in recession at that time.  Tax revenues could be expected to fall.

Over the decade of the 1980s, however, a very different picture emerges.  Despite a huge decline in marginal tax rates, the tax revenue from the top 1 per cent of taxpayers increased by 51 per cent after inflation.  Tax revenue for the bottom 50 per cent of taxpayers fell by 9 per cent after inflation.  In other words, a decrease in the top marginal tax rates had a progressive impact on tax revenue.

The US budget deficits under Reagan, and subsequently Bush II and Obama, were due to increased expenditure.  Any government that expands expenditure relative to revenue will always experience a deficit, irrespective of the tax rates.

So we know that cutting tax rates in the US increased revenue in the 1980s.  But increased tax rates increased revenues in the 1990s.  What about tax revenues closer to home?  The Howard government cut capital gains tax rates (for individuals) in the early 2000s and saw revenue increase.  So the Laffer effect works if and when tax rates are on the wrong side of the Laffer curve.

The more interesting question though is whether government should maximise the revenue that it could earn from taxation?  Clearly some people suggest ''yes''.  The more money government has the more it can spend on the apparent good things in life.

Yet that view overlooks the fact that raising tax revenue is a costly process.  Over and above the actual cost of running the tax system (quite small in comparison to the amount of revenue raised) there are opportunity costs associated with taxation.  Economists call these ''deadweight costs''.

The Henry Review estimated that the personal income tax had a cost of 24 cents in the dollar.  The corporate income tax costs 40 cents in the dollar.  Payroll tax has a massive 41 cents in the dollar.  Economists argue that deadweight costs are a function of the square of the marginal tax rate.

So the challenge facing government is how to raise the revenue needed to finance necessary government expenditure at the least cost, while still being equitable.  The most efficient tax is the very regressive poll tax.

The point being that even if the economy is on the ''correct'' side of the Laffer curve, government should always be looking to lower the tax burden, not on equity grounds, but because the costs of taxation are often high compared to the revenue being raised.

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Baillieu needs to move on reform

Nobody is accusing the Baillieu Government of intemperate haste in rectifying the Bracks-Brumby era's unrestrained spending programs and regulatory excesses.

In real terms, between 2000 and 2010, Victoria's government spending increased by 57 per cent.  We got scant value from this, thanks to ballooning public service numbers and a wasteful infrastructure program, including the desalination plant and the Sugarloaf pipeline.

The Productivity Commission estimated excess costs from Labor's water policies at $3 billion, though it also said the Baillieu Government's regulatory proposals for water recycling were excessively expensive.

The first Baillieu Government budget failed to reverse Labor's swollen government spending.  Though it claims to have made $500 million of savings, the bottom line is a 5 per cent increase in this year's spending.

And the Premier has telegraphed only a gradual reduction in public service numbers, which account for half of government operating expenses.

As well as excessive spending, a plethora of new regulations characterised the Brumby years.

Federally, Julia Gillard has boasted about her Government's additions to Australia's regulatory thicket.  But even she would baulk at US Congressman Keith Ellison's claim that regulations create jobs because businesses have to hire people to help them comply.  In fact, forcing firms to incur costs destroys jobs.  It undermines efficiency, competitiveness and customer value.

The Victorian Labor government advocated deregulation policies, but failed to deliver.  Its regulatory control agency, the Victorian Competition and Efficiency Commission, claims to have brought in annual savings in regulatory costs of $90 million.

If accurate, this represents a decent return on VCEC's $4.5 million costs.  But even if the $90 million contains no creative accounting, it is small change in Victoria's $300,000 million economy.

Moreover, regulatory rollbacks were overwhelmed by a cascade of new regulations, many having fictional benefits.

This is clearly true of the $1807.6 million benefit dreamed up to justify the Brumby government's Victorian Energy Efficiency Target (VEET) regulations that force higher energy appliance costs on to consumers.

The Baillieu Government is considering abandoning the VEET and has already used planning regulations to impede new, high cost wind farms.  But it has also doubled consumers' requirements to use high cost renewable electricity.

Ted Baillieu has announced a 25 per cent target for cutting red tape, but the target has no accompanying implementation program.

A wafer-thin majority is one rationale for moving cautiously on over-spending and over-regulation.  But change is more difficult the longer things are left.

Jeff Kennett faced down strikes and protests from unions and public servants whose privileges were threatened.  His radical reform program provided the economic base that did much to cushion the misgovernment of the Bracks-Brumby years.

Many agree with the Governor of the Bank of England that the world is on the cusp of the worst recession in 80 years.

The states and countries that cut back on superfluous spending and costly regulations will fare best in such conditions.

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Rudd continues to struggle with economics

Recent musings by Foreign Minister Kevin Rudd provide a timely reminder that economic policy remains his Achilles heel.

Speaking in New York last month Rudd depicted the global economy as a ''wild beast'', and that the task of policymakers is to ''tame the beast to the greatest extent we can''.

What Rudd was alluding to is the recent recurrence of downward volatility in share markets around the advanced economies, which in fact has represented a general pattern for equities so far in 2011.

The United States S&P 500 share index closed at about 1,272 points on the first day of trading for this year.  At the time of writing it has trended down to close at 1,195 points.

It is notable that the index plunged 20 per cent between 22 July, when it closed at about 1,345 points, and 5 August at about 1,119 points.  During that period, of course, the US debt ceiling crisis unfolded and Standard and Poor's downgraded the credit ratings for US government bonds.

The value of the Dow Jones Industrial Average has also fallen, albeit slightly, over the course of the year so far.

The equity value of companies on the famed index couldn't escape the wrath of adverse financial market sentiment against the US debt ceiling deal, as the overall index fell by ten per cent between late July and early August.

Across the Atlantic similarly bearish sentiments have taken hold of European share markets.

The British FTSE 100 index, another important barometer of global financial market sentiment, has fallen from about 6014 points on the first day of trading for 2011 to 5399 points at the time of writing.

This represents a decline in average share value on this market to the tune of ten per cent, with traders also reacting negatively to the US debt issue and the rolling European debt crisis.

Similar trends can be readily seen with regard to the DAX share market of Germany, the effective bankroller of Greece and other heavily indebted countries on the European Union periphery.

It shouldn't take aggrieved Mum and Dad investors and holders of superannuation accounts tied up in shares to know that Australian share markets have followed the global downward trend, with the S&P/ASX 200 index falling by 11 per cent over the year to date.

Among the assortment of financial and economic indicators available, movements in share market indexes provide some of the more important insights into the vibrancy of national and global economies that one can find.

While economists might quibble the extent to which changes in share market values efficiently reflect financial and other relevant information, they do nonetheless provide invaluable insights about perceptions regarding changing economic circumstances.

If market conditions, or government policies which alter those conditions, are perceived to erode the profitability of publicly listed companies seeking equity capital on the share market then the value of shares will, other things being equal, tend to decline.

To some degree, domestic policies can affect share market sentiment which in turn influences company share values.

When the federal government announced the details of its carbon tax in July the S&P/ASX 200 index fell by about two per cent on the previous day, with significant falls for manufacturing and mining stocks in particular.

There is also international empirical evidence to suggest that share markets returns are lower and volatility is higher when legislatures are in session, which is not altogether surprising given the role of taxation and regulatory policies on the economic climate for private sector activity.

But it is important to also recognise that international policies can also influence share market performance.

The continued reluctance of American and European authorities to repay their burgeoning public debts through credible fiscal consolidation programs, centred upon spending cuts, is being perceived by share market traders as being an important inhibiting factor for future economic growth.

And that, in turn, translates into weaker profitability for companies listed on share markets, many of whom have an international presence, than would otherwise be the case.

It is therefore a bit rich for Kevin Rudd to blame participants in global share markets for responding the way in which they have been doing in recent times.

Indeed, the politicians and their fiscally profligate conduct, rather than the markets as Rudd claims, which need to be brought to heel.

This would entail nothing less than a return to the basic principles of sound public finance, including balanced budgets underpinned by low spending and healthy fiscal balance sheets, rather than kicking debt cans up a hill through endless bailout packages and other political compromises.

The sound bites by Rudd do more than demonstrate his inclination to leapfrog other senior government ministers such as Treasurer Wayne Swan, and Prime Minister Julia Gillard for that matter, to hog the limelight.

It shows that Kevin Rudd hasn't learned the basic economic lesson that economic growth, be it at a national or global level, can only be led from the front by a private sector unencumbered by the unsustainable debts, uncompetitive tax regimes and onerous regulations of big governments.

However Rudd's lack of economic nous, demonstrated through his approval of the wasteful and growth-retarding 2008-09 fiscal stimulus, doesn't appear to dent his undiminished public popularity which might prove pivotal to his return to the top job in the land.

And, if a return of a Rudd prime ministership occurs within the next two years, that could spell a repeat of economic policy trouble for Australia if another global recession lands on our doorstep.

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Carbon tax an ever-increasing tariff

This is an edited extract of my speech given to the Liberal Party’s Modest Members group on Wednesday 12th October.

Last Monday, Trade Minister Craig Emerson argued that the introduction of a carbon tax ''points to Gillard Labor governing in the Hawke-Keating tradition''.

The Hawke-Keating ''vibe'' that Emerson argues the Gillard government is channelling is that policy changes presently being introduced, including the carbon tax, will provide foundations for a more flexible, dynamic and competitive economy.  But the economic benefit of trade liberalisation and floating the dollar cannot be compared with the introduction of a carbon tax.

At its heart, the past three decades of positive economic reform led by the Hawke-Keating and Howard governments removed barriers and distortions in the economy that misallocated economic resources and stopped Australia pursuing its comparative advantage.

Or, in layman’s terms, producing things that we can most competitively to reduce costs to households and be internationally competitive.

Importantly, those reforms scrapped the false foundations that tariff and non-tariff trade barriers created for protected industries.

This stands in stark contrast to the carbon tax and its successor emissions trading scheme, which brings back these false foundations back.

A carbon tax is designed to tax out of competitiveness otherwise viable businesses within Australia’s comparative advantage, and tax into competitiveness those that are not.

It’s precisely why government Treasury modelling assumes so many foreign permits will be traded into Australia’s scheme.

Our lack of capacity to cut emissions is not a result of absent enthusiasm.  It’s not something we are competitive at because our emissions profile is dominated by burning coal for electricity, and the tax price needed to successfully tax it out of competitiveness is absurdly high if we want to keep the lights on.

If the rest of the world had emissions trading Australia would be one of the last developed countries on earth you would try to cost effectively cut emissions because it would always be cheaper to do it elsewhere.

A carbon tax operates as an ever-increasing internal tariff.

A carbon tax acts as false foundations to give lower-carbon industries an artificial boost, which will escalate over time as the tax rate goes up and permits are removed from an ETS, increasing the price of emissions permits.

Trade barriers, such as tariffs, act in the same fashion as a carbon tax, by taxing out of viability imports that compete with otherwise uncompetitive domestic production.

Non-tariff barriers ranging from abused quarantine standards, rules of origin certification requirements and compulsory labelling standards to prompt consumer boycotts have the same effect as tariffs, through a less transparent economic profile.

And the havoc trade barriers caused in distorting the unsustainable allocation of economic resources in the Australian economy from World War II until the start of reforms in the 1970s will be repeated.

The only scenario where an internal carbon tariff won’t cause economic harm is if every other major competitor country takes on equivalent self-flagellation.

But that clearly isn’t happening.  Such proposals aren’t even being discussed in the US.

A recent commissioned review panel report recommended that New Zealand engage in liberalisation of its planned phase-in of its scheme.

Only Europe has made equivalent steps in the same direction as Australia, with the massive allocation of free permits — though Europe’s emissions reduction has occurred from reduced economic activity from the global financial crisis, exporting industries and jobs offshore to countries without equivalent carbon prices and the purchase of permits from developing countries through international emissions trading.

But the latter isn’t looking like a viable ongoing option, with the World Bank recently reporting that the international carbon market is in recession as the world waits for the elusive successor agreement to the Kyoto Protocol to be negotiated.

That’s why Japan and South Korea, understandably, are holding off introducing any scheme that acts as an internal carbon tariff.

The only commonality between the Hawke-Keating reforms and Gillard’s carbon tax is that through the lifetimes of the government the rates imposed will change.

But unlike Emerson’s 1980s employers who gradually phased down the rate of false foundations and misdirection of capital in the economy, the Gillard government is set only to increase them into perpetuity.

It's time for tax reform

Australians are over-taxed.  And, to paraphrase Kerry Packer's immortal phrase, governments don't spend our money well enough to deserve any more of it.

Australia is generally a very business-friendly country.  Indeed, we routinely rank at the top of free-market indices.  This year's ''Economic Freedom Index'' ranked Australia as the third most free market country in the world, behind only the hyper-capitalist city-states of Hong Kong and Singapore.  We even outranked the former bastion of capitalism, the United States, and other well-credentialed pro-market countries like New Zealand, Canada and Chile.

As the index argues, there is an overwhelmingly strong correlation between economic freedom and prosperity.  The world's richest countries dominate its upper ranks.  This observation is supported by reams of academic literature, and basic economic theory -- free markets create wealth, and government regulation hampers it.

It makes intuitive sense too.  We all know that it is the entrepreneurs who take risks and have great ideas that are the growth engines of successful economies.  The best thing that government can do is get out of their way and let them concentrate on running their businesses.

Yet there is one area of economic freedom that Australia sadly lags behind in:  tax.

Despite ranking third overall, Australia doesn't even make it into the top 100 in terms of freedom from taxation.  With a top personal income tax rate of 45% and a company tax rate of 30%, that's hardly surprising.

It's not just tax-havens and developing nations (who struggle to levy high taxes on their poorer citizens) who offer more attractive taxation arrangements to businesses and entrepreneurs.  Australia's major competitors in natural resources, such as Canada, much of South America and the resource-rich chunks of Africa all offer lower tax rates to individuals and investors.

Low taxes are good for three main reasons.

Firstly:  both capital and, increasingly, labour are internationally mobile, and therefore it is important to offer better tax arrangements than our competitors.  Failing to offer competitive tax arrangements will mean that talent, ideas and investment will go elsewhere.

Secondly:  high taxes don't just risk losing people and capital overseas.  They also depress economic activity in their own right.  People respond to incentives, particularly those who are willing to take big risks to generate wealth.

Thirdly:  taxes can distort economic activity away from productive sectors.  Punitive taxes on the mining industry, for example, could lead to less investment there and more investment in lower-taxed but much less efficient industries elsewhere in the economy.

Of course, there is a moral element here too.  Why should government take a massive proportion of your money?  By definition that assumes that you can't be trusted to spend your own money wisely, and that a group of experts could put it to much better use.  Recent examples of appalling government waste and mismanagement at every level persuasively suggest that is not the case.

But while lower taxes are good, tax reform is also important too, because not all taxes are created equal.  Some are much more ''efficient'' at raising revenue than others -- that is, they cause fewer distortions in the economy.  Some taxes, particularly those at the state level such as stamp duty, are very inefficient.  Taxes which discourage work and investment should be avoided, where possible.

But good tax reform is not just about collecting revenue efficiently, and it certainly shouldn't be about collecting more revenue.  For example, imposing a carbon tax and then allocating the revenue to politically favoured groups is not tax reform, despite the audacious spin put on it by some government ministers.

That's why the report by Treasury Secretary Ken Henry into Australia's tax system in 2010 was so disappointing.

The few good ideas contained in the report, such as minor reductions in company tax rates, were bizarrely linked to increasing taxes elsewhere.  It's as if the report was written from the perspective that government revenue must be preserved at all costs.

It was a missed opportunity to cut taxes, and also to reform them.

And yet there is much to do.  For a start, our high company tax rates must be reduced to internationally competitive levels.  Next, our high personal tax rates should be cut.  Some have even suggested that the current multiple rates be consolidated into just two or three, to flatten the system out and remove the current disincentive to earn more.

It is reasonable to ask how this should be paid for.  After all, government does perform some functions, such as national defence, that must be funded somehow.  Personally, I'd like to see government doing far less, and playing a much smaller role in our lives and the economy.  But even if you think the current size of government is the right one, tax reform is still possible.

Government subsidies to private businesses, for instance, could easily be removed to help fund business tax cuts.  After all, corporate welfare is just as distorting as welfare for individuals.  Loopholes in the personal income tax system could also be eliminated to help pay for lower rates.  Income spent on accountants to help navigate complex deductions and avoid a higher tax bracket is not an efficient use of capital.

Tax reform is not politically easy, as the former Treasurer Peter Costello discovered with the GST.  But it is important.  Too important, in fact, to be cast into the too hard basket, particularly amid fears of a second global financial crisis.  Some are already suggesting that additional fiscal stimulus will be necessary to avoid recession.  While the failure of stimulus to kickstart the global economy following the GFC should be a salutary lesson, if we do have to have it, there's a much more efficient way of doing it than $900 cheques, pink batts and school halls:  tax reform.

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The capitalist heroes we forget

The death of Steve Jobs has offered us a symbol which is surprisingly rare:  the capitalist as a hero.

The tributes to the Apple co-founder have praised his vision, entrepreneurial drive, single-mindedness, how he defied convention, and developed a business model centred on innovation.

These attributes are not unique to Jobs.  He is an icon because of our relationship to the products he developed.  And Apple made a point of showcasing Jobs -- he launched their new products personally.

But his death reveals a peculiar cultural blindness.  We don't often celebrate the achievements of capitalist entrepreneurs, in life or in death.  Military leaders, political figures, religious and royal icons, yes, but not capitalists.

August this year saw the death of Keith Tantlinger, the American inventor and entrepreneur who, with his business partner Malcom McLean, developed, marketed and sold the modern shipping container beginning in the 1950s.

The standardised container sounds simple, but it was revolutionary.

Before the container, goods would be stuffed, manually and arbitrarily, into the irregular shaped holds of ships.  This incurred enormous labour costs, theft and accidental losses.  Armies of unionised longshoremen would load a ship by hand, unload it by hand, load the cargo onto trains and trucks by hand, and helped themselves to samples.  The expense of all of this had to be factored into the price of consumer goods.

McLean and Tantlinger had to face down unions protecting their members from the threat of a standardised, secure, labour-saving container, and the automation those containers made possible.  They had to face down regulators protecting the trucking industry from competition.  Ports unsuited to the new containers confronted closure.  Gone are the old ports of New York.  The great ports of the world are now in Le Havre, Busan, Felixstowe and Tanjung Pelepas.

This largely unheralded story is told in a 2006 book The Box:  How the Shipping Container Made the World Smaller and the World Economy Bigger by Marc Levinson.  It is not much exaggeration to say that we owe a great deal of the last half-century of globalisation to their big metal box.  Thanks to the container, the cost of transporting goods is near zero.  Markets which were local are now global.  Manufacturing networks are spread across hemispheres.

It is that box which allows Apple to produce the iPhone and iPad at lowest cost in Shenzhen and Brazil.  And that box which facilitates the production of the iPad's competitors.

Not to diminish Steve Jobs, but there is no person on earth who hasn't benefited from the entrepreneurial drive of Tantlinger and McLean.

Yet when these two died, they met with a tiny fraction of the acclaim we've seen for the Apple boss.  No prime minister or president was asked to reflect on their achievements.  No newspaper rejigged its cover for the inventors of the shipping container.

The news aggregator Factiva records 23,133 separate stories on Steve Jobs in the first four days after his death on Wednesday.  Keith Tantlinger only received 26 stories in the entire month after his death.  When Malcom McLean died in 2001, he was mentioned 41 times.

It's not a competition.  But it is a revealing comparison.  Jobs is exceptional in the public eye not simply because he was an exceptional capitalist -- although he undoubtedly was -- but because his products are in the front of our mind.

We know we're using an iPad;  the touch, design and functionality is clear.  We don't know that the only reason we can is because someone else invented and constructed and marketed and sold a container to bring it to us.  The achievements of McLean and Tantlinger are entirely in the background.  Virtually every single mass-produced item in the world finds itself in one of their boxes at some stage during the manufacturing and distribution process.

Jobs has breached the unwritten rule that only statesmen, or intellectuals, or others who spurn profit can be true heroes.  Even though it is capitalists more than anyone else who have built the world.

Indeed, the idea of a hero entrepreneur is almost entirely absent in popular culture.

Amazon.com lists 33,000 biographies of political, military, and royal figures -- nearly 50,000 if you include religious leaders.  It lists only 3,000 biographies of business leaders.

Extraordinarily few films depict business people in a positive light.  Two biopics stand out:  Martin Scorsese's The Aviator is one of the rare pro-capitalist genre, as is the largely forgotten Tucker:  The Man and His Dream, the Francis Ford Coppola film based on the automobile innovator Preston Tucker.  They offer portraits of individuals who were both heroic and tragic.  Howard Hughes and Preston Tucker were innovative risk-takers whose success rested on filling the demands of their consumers.

And in both of these films, the dramatic obstacle they have to surmount is not just commercial but political.  Competitors allied with governments tried repeatedly to frustrate both Hughes and Tucker by raising the regulatory barriers to innovative entrants.  The same happened with McLean and Tantlinger.  Any truly great innovation necessarily upsets the interests of the status quo.

Steve Jobs' achievements were substantial.  Anybody who brings a product to market that so many consumers want is worth celebrating.  But there are many other stories of capitalists and entrepreneurs who have shaped our social and economic lives.  In light of the huge reaction to Jobs death, we might think about broadening our search for heroic icons to the profit-making world.

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Rebels without a cause indulge in delusions of revolution

Comparisons between the Arab Spring and Wall Street protests are facile.

It's hard to imagine a comparison more trite than that made between the Arab Spring and the Occupy Wall Street protests in New York.  The former involves millions in the Muslim world revolting against dictators and autocrats.  For decades, police states have squashed dissent and violated human rights.

The latter is a small protest against consumer capitalism.  The Wall Street protesters don't like executive salaries, industrial agriculture, drug patents and personal debt.  They're annoyed with corporate influence on politics and society.

The Occupy Wall Street protest has spread to 100 American cities.  It seems no press report on it is complete without reference to events in the Middle East.

On ABC's Q&A last Monday, journalist Mona Eltahawy said the American movement was directly inspired by the Arab revolts.  And the organisers of a local Occupy Melbourne -- convening next Saturday to avoid weekday traffic -- claim kinship with those who paid with their lives to rise against Muammar Gaddafi.  That's not just trite;  it's insulting.

It's hard to detect much of a relationship beyond their shared use of Twitter and Facebook.

When Arab revolutionaries talk about their human rights being violated, they refer to murder, torture and looting.  The Occupy Wall Street crowd refer to having to repay college loans or a mortgage.

Yet the comparison is made, just as it was with the London riots.  We now know that three-quarters of the rioters had existing criminal records.  Commentators claimed the riots were a social revolution like Egypt.  They were just opportunistic lawlessness.

If Occupy Wall Street is nothing like the Arab Spring, what is it?  The protest was conceived by counterculture magazine Adbusters.  It shares the mag's unfocused anti-capitalist ennui.  And its belief corporations play the US government like a cheap violin.  Occupy Wall Street is mostly occupying the wrong place.  The bank bailouts were obscene.  Yet it seems the protesters think government should spare no expense keeping the economy afloat.  It's hard to work out what their critique is -- apart from saying bankers are rich.

If the protesters are truly incensed about the taxpayers' money given to bankers, they'd be better off blockading the White House.  ''We Want The Sacks Of Gold Goldman Sachs Stole From Us'' stated one placard.  Stole?  Those sacks were handed over willingly by the political ''representatives of the people''.

Their other prominent complaint concerns the widespread housing foreclosures.  But those foreclosures are the result of decades of legislators and bureaucrats chipping away at lending standards in pursuit of social goals.  Again, Washington is to blame.  Instead, Occupy Wall Street and Occupy Melbourne talk simply about standing up to the ''dictators of capital''.

Sure, juvenile social rebellion is common.  But many journalists and commentators are eager to believe 2011 is a year of discontent -- that the financial crisis has led to a global mutiny against ''neoliberalism''.

Celebrities give the protest a carnival atmosphere.  Danny DeVito.  Susan Sarandon.  Alec Baldwin.  Michael Moore, of course.  Another supporter, Rosanne Barr, said she'd use a guillotine on Wall Street's ''worst of the worst''.  Barr's rhetoric could come from the Arab Spring, but from the dictators' side.

Many people imagine great economic crises must spark great social revolts.  In the past few years, economic growth in the Middle East has been slow but still among the highest in the world.  Middle Eastern protesters are angry about tyrants, not student debt and other people's salaries.  By comparing themselves with the Arab Spring, all the Occupy Wall Street crowd demonstrate is that people in the First World have nothing like the problems of those living under autocracy in the Third.

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