Politicians are powerless over Australia's economy

Australia is a very small country with a very open economy.  These facts are sometimes easy to forget.

No matter what they say during the upcoming election campaign, neither Kevin Rudd nor Tony Abbott will have much control over Australia's economic fortunes in the next term of government.

Wrapping up his National Press Club address earlier this month, Kevin Rudd said Labor governments ''manage transitions ... sketch the future ... harness the energy and ambition of our people'' and ''put the changes in place that best secures our future.''

Tony Abbott has used the same sort of hyperbole.  A Coalition victory would immediately trigger prosperity.

Such boldness is par for the course at election time.  But it is a confidence trick.

The fate of the Australian economy — the big ups and downs of the economic cycle — will be determined by global conditions, not domestic ones.

No-one knows this better than the workers at Holden and Ford, for whom global exchange rates are more important than any subsidy or tariff our elected representatives can devise.

This has always been so.

A sudden increase in the cost of bank lending in London caused our first true depression — the largely forgotten Depression of the 1840s.  We suffered along with the rest of the British Empire.

Our better-remembered second depression occurred in the 1890s.  What little modern Australians know of the Depression of the 1890s is perhaps the housing boom in Melbourne which preceded bank failures and unemployment.

But the Australian episode is only part of a story that encompasses the near collapse of the London-based Barings Bank, sovereign debt crises in Latin America and the Mediterranean, a gold panic in New York, and a mining market collapse in South Africa.  Our trouble — as traumatic as it was — was just one crisis among many.

The Great Depression was even more clearly imported.  No way were we going to avoid suffering from the stock market crash of October 1929 or the collapse of world trade.

Historically our good times correspond with good times in the global economy too.

We boomed in the 1950s and 1960s along with everyone else.  We suffered stagflation in the 1970s along with everyone else.

And the recession we had to have?

Well, that recession had to be had by the United States, Canada, New Zealand, the United Kingdom, and Japan as well.

This all makes sense.  Australia is tiny.  Overseas there are cities with more people than our entire country.  We're almost entirely dependent on imports for consumption and exports for economic growth.  And we need foreign capital for investment.  A small country highly integrated into the global economy is going to be very sensitive to international crises.

Yet for each of these historical episodes there exists a cottage industry trying to explain the unique Australian factors that caused them.  The 1840s Depression is blamed on problems in the Australian wool industry.  The 1890s Depression is blamed on reckless Australian banks.  The depth of the Great Depression in Australia is blamed on our obsession with balanced budgets.

It goes on.  We've all heard Paul Keating blamed for the recession of the early 1990s and John Howard credited for the subsequent growth.

If there is growth or recession in the next term Abbott or Rudd will take the blame or credit.  They probably won't deserve either.

In the past I've mentioned research that suggests political success is more about dumb luck than virtue or competence.  In truth Rudd or Abbott will win government then cross their fingers.

But political debate struggles with powerlessness.  Voters like to assign blame and give credit for things that are actually outside any domestic politicians' control.

Kevin Rudd rightly points out the global financial crisis dumped a bucket on Labor's first term.  The policy agenda of any party would have been drowned out by the global consequences of America's subprime collapse.

But then he claims his decision to artificially stimulate the economy was responsible for Australia's relative endurance.

Not, for instance, Chinese demand for West Australian minerals.

In other words, Rudd believes the disease was entirely foreign, but the cure was entirely domestic.

Yet even if you are a card-carrying Keynesian — that is, you believe the government can and should spend more to boost the economy in a downturn — it is just as plausible that China's enormous stimulus package in 2008 is responsible for our prosperity, rather than Labor's smattering of insulation and community projects.

Australia spent around $90 billion to stimulate its economy.  Sounds like a lot?  Well, China spent over half a trillion dollars.  And nearly three quarters of that spending went towards the infrastructure whose raw materials we supply.

Our politicians pretend they can steer the economy like a ship.  But we have a very small ship and it's a very big ocean.  During an election, it pays to remember our economic future is determined by the wind, not the sails.

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Hold Treasury to account

Opposition Treasury spokesman Joe Hockey has gone beyond simply criticising government policy and criticised Treasury.  This is unheard of in the Westminster tradition.

If Hockey doesn't trust the Treasury he must outline how public trust can be restored.  This is not a trivial issue — if elected, Hockey must think very carefully about the role Treasury plays in developing and advocating policy.  It is clear that the ''Washminster'' hybrid we've seen over the past six years is unsatisfactory.

The relationship between Treasury and the Coalition has been fraught for some time — even before Treasury apparently found an $11 billion hole in Coalition costings at the last poll.

If the country independents are to be believed, this played some part in their choice to install Labor after the 2010 election.

Over the life of this government there have been incidents, and mistakes, that have seriously tarnished Treasury's reputation.

It was Ken Henry who advocated the ''Go early, go hard, go household'' mantra that the first Rudd government adopted in its response to the GFC.  The cash handout that was mostly saved, instead of being spent, was wasted money.  The perfectly good school halls that were demolished only to be rebuilt made for fine Keynesian economics but poor policy.

Henry should never have been in the kitchen cabinet advocating specific policies as opposed to being a functionary of the Treasurer after the fact.

The 2010 budget papers provided an analysis ''proving'' that those economies that had adopted a ''go early, go hard'' approach to stimulus had performed well during the crisis.  Unfortunately for Treasury I was able to show that the data in that analysis had been cherry-picked and there was no evidence to support the ''go early, go hard'' fiscal stimulus.

During the 2010 mining tax debate Treasury — through the Henry review — advocated a massive tax that it didn't understand.  This left the government arguing that banks would lend mining companies money on the basis of vague government promises.  Treasury also didn't know how much tax the miners paid.  They relied on an unpublished PhD student's paper to argue that miners paid 13 per cent in tax when public ATO data showed they paid close to 28 per cent.

Then there were the ambitious claims as to how much money the tax would raise.  This is an area where Treasury's performance has been particularly poor.

How the original resource super-profits tax was modelled is something of a mystery.  The minerals resource rent tax was expected to raise $2.4bn in 2013-14 but raised only $120 million.  This is a consequence of the design features of the tax — again it appears that Treasury didn't understand how the tax would work.  Yet the revenue forecasts were included in the budget and the money spent.

If Treasury had simply gotten the mining tax wrong, our budget might not be in such difficulty.  But Treasury has been making large systematic errors in forecasting tax revenue — especially corporate tax revenue.  A review into these errors revealed that Treasury hadn't consistently modelled corporate revenues and depreciation expenses, resulting in higher forecasts of corporate income tax revenue.

Then there was the carbon tax modelling — at best an exercise in wishful thinking.  Treasury and its modelling have been at the centre of political disputes over the past six years.  In itself that isn't a bad thing — it is the timing of the errors that is particularly problematic, and earned the Coalition's ire.

The argument is that the government fudged the books in an election year and Treasury let it get away with it.

At the height of the GFC in 2009, Treasury forecast tax revenues of $321bn for the 2012-13 financial year.  The last budget figures reveal tax revenues of $326bn in 2012-13.  So Treasury was pretty accurate.

Yet in 2010 — an election year — expected tax revenues were ramped up, and the money spent.  That happened again in 2011.

We now keep hearing about tax revenues falling — yet all that has happened is revenue has fallen relative to unrealistic expectations.

While politically dishonest, it shouldn't have mattered much that the government fudged the books in an election year.  The Pre-election Economic and Fiscal Outlook should have corrected any government bias in the budget papers.

But rather than provide a better understanding of the budget situation, the PEFO made things worse.

Deficits were revised down and the then expected budget surpluses were revised up.  Some figures were horribly wrong.  The PEFO forecast a deficit of $10.2bn for 2011-12.  The actual figure came in at $43bn.

In other words, it portrayed the government's economic policies in a very good light.  Adding insult to injury, Treasury then found ''errors'' in Coalition costings.

Unsurprisingly, the Coalition is somewhat mistrustful of the process.  Mind you, a process it devised in office.

To be sure, if elected, an incoming Abbott government will need to make changes to the senior management at Treasury.

But that isn't enough.  The Coalition has identified a gap in the Charter of Budget Honesty and should fix it.

The Gillard government clearly gamed the disclosure process at the 2010 election, making it very difficult for Treasury to offer up very different economic forecasts than the government's own choice of forecasts.

To remedy this, serious changes need to be made to the Charter of Budget Honesty.

For example, budgets and budget documents should be audited after the fact and individuals held to account for false or faulty information.  This is standard in the private sector.

Treasury should have to make continuous disclosure, or at least regular disclosure, as its forecasts and economic assumptions are updated.  Again this is standard in the private sector.

There is no good reason why the nation's finances should be held to a lower standard than that of any publicly listed company.

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Economic reality is too hard to sell

The next federal election, which now may not be until the end of September, will be the country's first ''post-prosperity'' election.

It will be the first election since the end of the boom.  Saying we're entering a post-prosperity era is not to claim that Australia won't remain prosperous.  By regional and world standards Australia is a very rich country, and it's likely we'll stay that way for some time yet.  But what is different in a post-prosperity environment is that Australians can no longer assume their living standards will continue to improve.

In 1900 Australia had the second-highest standard of living in the world (behind New Zealand).  By the 1970s Australia had the tenth highest standard of living.  In the 1970s, of course, the country was still rich and still prosperous — but compared to other countries it was not as rich as it once had been.  The pattern of Australia's economic rise then relative decline is at risk of repeating in the coming decades.

Two decades of prosperity has made politicians complacent.  It's said that ''generals always fight the last war''.  The parallel is that politicians always legislate for the boom that's already ended.  In a boom politicians believe they can legislate and regulate without cost, or at least at a cost that's affordable;  the carbon tax is the best example.

The problem is booms end.  Costs that businesses and consumers might have been able to absorb in a boom become unsustainable once rising incomes are no longer guaranteed.

Boasting about legislation

An example of just how out of touch MPs are was revealed when Rob Oakeshott, the retiring independent MP, boasted that one of his main achievements in the last Parliament was helping pass more than 500 pieces of legislation.  Only someone who didn't have to run a business would define success in such a way.  Some of the legislation Oakeshott helped pass is the reason why it costs twice as much to build a Ford car in Australia as it does in Europe, and four times as much as it does to build a Ford in Asia.

These figures, revealed by Ford boss Bob Graziano as he announced the company would stop building cars in Australia in 2016, received about a day and a half of media attention.  If ever simple statistics sum up the challenges Australia faces, it's these from Ford.

Yet both Labor and the Coalition seem to take it for granted that Australia will remain a high-cost, high-regulation economy.

In June, on the day Kevin Rudd was sworn in as Prime Minister (for the second time) he talked about the global economy and how ''there are a lot of bad things happening out there''.  That was certainly a welcome recognition of reality.

What was unreal was when the PM then talked about the opportunities in ''processed foods and agriculture, in the services sector and also in manufacturing''.

The reality is that as PM the first time around Rudd reregulated the labour market and dramatically increased the costs in all those industries he mentioned.

Coalition seems just as sanguine

At times, the Coalition seems just as sanguine about costs and productivity as the Labor Party.  Tony Abbott has promised the Fair Work Act will be reviewed by the Productivity Commission and he would seek a mandate for any major changes at a future election.

That means major labour market reform under a Coalition government could be three or four years away — at best.  Such is the chilling legacy of John Howard's Work Choices.

The big-spending policies around which Rudd wants to fight the election, such as the national broadband network, more money for schools and more money for disability services, are a throwback to 10 years ago when policies like these were affordable.

It takes a brave politician to point out that the biggest threat to Australia's future prosperity is not the lack of a high-speed internet connection to every home.

The last politician who used an election campaign to level with the Australian public about the country's economic condition was John Hewson, seven federal elections and 20 years ago.

John Howard tried to do the same in 1987.  Needless to say, both men lost.

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The lessons for Australia from Detroit's painful decline

The announcement that the city of Detroit, the heartland of modern American manufacturing, has filed for bankruptcy is an event seemingly lifted out of an Ayn Rand novel.

Originally published in 1957, Ayn Randʼs greatest work, Atlas Shrugged, portrayed a dystopian world in which economic activity was collapsing under the weight of government interventions and anti‑capitalistic social sentiments.

The mass ''capital strike'' devastated many communities, and perhaps none more than the small, mid‑western American town of Starnesville, originally established by entrepreneur ''Jed'' Starnes to house up to 6,000 workers at his motor vehicle manufacturing plant.

The collapse of Starnes' Twentieth Century Motor Company, expedited by a disastrous collective bargaining agreement in which workers worked according to their ability but were paid according to their need, soon led to the decline of the town and a precarious existence for its remaining inhabitants:

''A few houses still stood with the skeleton of what had once been an industrial town.  Everything that could move, had moved away;  but some human beings had remained.  The empty structures were vertical rubble;  they had been eaten, not by time, but by men:  boards torn out at random, missing patches of roofs, holes left in gutted cellars.''

That some of Detroit's precincts, strewn with abandoned apartment blocks and shuttered factories and small business outlets, offers a real‑world analogue for the fictionally downtrodden Starnesville has not gone without notice.

An important point to draw from Atlas Shrugged is that entrepreneurs and suppliers didn't ''shrug'' off the excesses of government taxes and regulations, and contend with the social animosities towards market conduct, by abstaining from productive activities altogether.

Rather, the productive ''shrugged'' by moving to places more hospitable to economic creativity and wealth generation, most notably the secluded, but welcoming, haven of ''Galt's Gulch''.

It is here that Rand's fiction, again, contains a grain of truth of what has transpired for Detroit.

In recent decades, entrepreneurs and business owners fled high-cost Detroit in favour of other American locations, notably low-taxing, ''right-to-work'' jurisdictions such as Texas, or to other countries altogether, taking their prized capital and knowledge with them.

Aspirant workers, and others looking for a better life for themselves and their families, had also left Detroit, once America's fourth largest city, in droves, with the city's total population falling from 1.9 million people in the 1950s to a little over 700,000 today.

A long term process of de-population of this magnitude inevitably spells trouble, through fewer local economic interactions to sustain a vibrant market economy, and a smaller revenue base with which to provide core government services.

One culprit underlying Detroit's problems, that should have been avoided, have been the anti-competitive activities of the union movement, as represented in both the private and public sectors, in efforts to secure wages and conditions at odds with the objectives of providing efficient commodities and public services.

Under pattern bargaining arrangements enforced upon General Motors, Ford and Chrysler over many years, the United Auto Workers union had succeeded to secure lavish benefits for their members.

Prior to the unconscionable auto bailouts of 2008, automotive workers in Detroit enjoyed $70 per hour in wages and benefits, seven weeks of paid vacation, and generous pensions after 30 years of employment.

These elevated costs of employment contributed to the production of expensive local American vehicles, which were increasingly superseded in the market by cheaper, and resultantly more popular, imports.

The union strategy of treating companies as cash cows for their members could not be economically sustained in such an environment, which has been compounded in recent years by sluggish economic conditions within the United States.

Aggressive public sector union demands over a long period led to a regime of exorbitant pensions and other benefits for municipal government workers, typically far exceeding those enjoyed by most private sector workers.

It is estimated that about $9.2 billion, or half of the total debts owed by the City of Detroit, are represented by pension and health benefits, with the bulk of the remaining debts owed to municipal bondholders.

In a scenario whereby the public sector worker becomes master as opposed to servant, it is unsurprising that basic services would suffer to the detriment of the needs of local communities.

For example, the average police response time to a call-out is just under an hour in Detroit, while two-thirds of ambulance services remain idle.

Whilst many Australians will probably view Detroit's woes with a sense of passing curiosity at best, the troubles besetting the city should, rather, serve as an object lesson regarding the need to ensure economic competitiveness as comprehensively as possible.

Demands for better wages and employment conditions by unions should be grounded on solid evidence of improved workplace productivity, and have due consideration to the overall economic environment faced by firms.

For their part, governments should lay out a ''welcome mat'' of low taxation, streamlined regulations, and efficient spending to enterprising all-comers from around the world, and without the need to resort to ''corporate welfare'' subsidies or other specific assistance.

To safeguard our prosperity, Australia should be economically mindful of doing everything that Detroit hasn't managed to do.

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On the positive side, thousands more may find refuge

It's been four days since Kevin Rudd announced that every single asylum seeker arriving by boat would be sent to Papua New Guinea and either resettled there or returned home.

The political class is still shocked.  They shouldn't be.

It has become an item of faith that Australian politicians are personally responsible for the choices made freely by asylum seekers, and are to blame for the risks they choose to take.

So this was inevitably how the whole thing would end — completely and formally closing down any chance to seek asylum by boat in Australia.  For as long as this policy lasts, no boat person will be settled in Australia again.

Our refugee politics are very cynical.  And sometimes they are xenophobic.  But not always.  The defining moment was the December 2010 Christmas Island boat disaster, when 48 people died as their boat was smashed against the rocks.

The anguish that tragedy caused among policymakers and the public was real.

From then on, both sides of the debate became single-mindedly focused on how to stop boat drownings.  This became the sine qua non of refugee policy.  Even many refugee activists began framing their arguments on this ground.

On the conservative side, many of the Howard-era arguments about national sovereignty were quietly put to bed.

The PNG plan is unlike every other plan and policy adopted until now.  It is not a deterrence scheme.  To describe it as deterrence is a category error.  It does not make it hard or uncomfortable to enter Australia by boat.  It makes it impossible.

It's the difference between a policy of deterrence on the one hand, and a policy of exclusion.

That difference is the key to understanding why John Howard's Pacific Solution stopped the boats — for a time.

As Tim Hatton points out, the Howard policy didn't just reduce the number of asylum claims from those arriving on boats.  It reduced the number of asylum claims from everywhere.  The Pacific Solution created a perception that Australia was completely closed to refugees.  The policy's success rested on this perception.

Yet the perception couldn't last.  When it became clear the vast majority of those detained on Nauru were eventually resettled in either Australia or New Zealand, the bluff was over.  Potential refugees understood a stint in detention was the price of asylum.  Boat arrivals started picking up from 2006 onwards, as this parliamentary document demonstrates.

With every iteration of asylum policy over the last few decades it has been a reasonable bet that if you hop on a boat you could end up — eventually, and not without taking some risk and suffering some hardship — receiving refugee status in Australia.

Kevin Rudd's PNG plan puts an end to that.  It replaces the asylum gamble with the certainty of a trip to Papua New Guinea.

Is the PNG plan cruel?  Absolutely.  But let's not be revisionist.  The status quo is extremely cruel as well.  It is designed to be cruel.

The ''no advantage'' policy, introduced by Julia Gillard in 2012, has left thousands of people in limbo.  This policy was never fully fleshed out.  That was the point.  Boat people were to be left in the Australian community for an unknown period.  They weren't allowed to work.  Their miserable uncertainty was supposed to discourage others from coming.  It didn't.

No advantage was going to get worse.  The Coalition immigration spokesperson floated sending no advantage asylum seekers to work camps.  The Labor immigration minister thought that was a very interesting idea.

For nearly a decade Australia has had the worst policy combination possible:  our border controls are both punitive and ineffectual.

For all the political anguish about drownings off the Australian coast, the PNG scheme does nothing to make global refugee trails any safer.

Asylum seeker deaths are heartbreakingly common.  One estimate has 17,306 people dying trying to enter Europe between 1993 and 2012.  Border patrol statistics record around 400 deaths on the US-Mexico border every year.

These figures are understated.  In their book Globalization and Borders, the Australian criminologists Leanne Weber and Sharon Pickering point out that for every body that washes ashore in a first world country, two bodies are never recovered.

Unauthorised migrants drown while swimming rivers.  They suffocate in cramped spaces.  They dehydrate while crossing deserts.  They are killed in vehicle accidents.  Such tragedies can occur long before the migrants arrive at a first world border to be counted.

Kevin Rudd will not reduce the number of people willing to risk their lives for a better life.  They will just risk their lives elsewhere, safely away from our guilt-ridden politicians.

That's not important if you consider stopping the boats to be the sole fundamental goal of Australia's asylum policy.

But there are alternative goals:  finding a safe haven for people in need, increasing the migration intake, or lowering barriers to the free movement of people.

If those goals appeal then the most important thing about the PNG plan was contained in a virtual footnote to Kevin Rudd's press conference last Friday.  The government is looking at increasing the total refugee intake from 20,000 a year to 27,000 a year.

The intake was just 13,000 a few years ago.

For all that has been said about the PNG deal, that increase would be a very good thing.  Seven thousand more people safe and free in a rich developed country.

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Property rights and the ETS

Emissions trading schemes are a regulatory imposition to achieve reductions in greenhouse gas emissions, not a free market solution built on private property.

In Wednesday's Climate Spectator Tristan Edis suggested I helped clarify his thinking about the merits of an emissions trading scheme over a carbon tax:

''On ABC television he [Tim Wilson] said he concurred with Abbott that an emissions trading scheme wasn't a real market.  According to Wilson, it's just a regulatory impost dressed up in drag to look like a market.''

The statement certainly reflects my sentiment;  but more on that below.  Mr Edis went on to write:

''The IPA is a champion of the concept of property rights ... [and] thinks development of these property rights was a fantastic thing.  But they seem to forget it involved government regulating ownership of land, instead of just allowing a free-for-all.''

He is certainly right that my bedfellows at the IPA, and I, believe private property rights are a wonderful thing.

But before columnists attack critics of emissions trading for abandoning their free market principles, they should understand what free market principles are, and how they apply to ETS.

Without wanting to give a long economics history lesson, physical private property can be owned and traded without government.

Before government recognised modern property titles, people owned property.  It was just through customs where others recognised each other's territory, someone literally squatted on it, or someone just had the biggest stick and could beat others away.

Peruvian development economist Hernando de Soto's The Mystery of Capital provides a quality discussion on the nature of property rights when formal title systems do not exist.

The role of government is to make transactions easier by creating clear and tradable titles, not the creation of property.

Emissions trading is not equivalent.  Emissions trading schemes establish a regulated tradable title to emit into the commons.

If we are going to be all pure about it, the free market solution to addressing the tragedy of the contemporary atmosphere commons is not to establish emissions trading;  it is to privatise the atmosphere.  That isn't realistic or achievable.

In response, advocates for cutting emissions have looked at what was achieved in the sulphur dioxide trading scheme where permits are allocated and progressively decreased.

But the lessons learned from sulphur dioxide trading cannot be simplistically translated to greenhouse gas emissions.  The externality of sulphur dioxide (acid rain) occurred close to the source of emissions.

The ‘global' in global warming suggests that isn't the same in this case.  That's why only an international regime to mitigate emissions will be effective.  That doesn't exist, and is unlikely to any time soon.

More importantly, emissions trading is not a free market solution.  It is a technocrats solution.  In their efforts to dress up carbon cutting regulation in the language of free markets, advocates for emissions trading have conveniently confused ‘free markets' and ‘market-based'.  They are not the same thing.

The term ‘market-based' merely means something is traded, and in the case of the ETS it is an emissions permit.  A ‘free market' is a market with light, or no, regulation.  They are entirely different concepts.  In a free market, emissions permits are unlikely to exist.

Unlike traditional (or even intellectual) property, emissions permits only exist because government created them, even though they can be traded.

Before anyone screams that intellectual property acts like emissions permits and does not exist without government, I shall clarify that is not correct.  Natural intellectual property exists — it is called a secret.  Whether policy should trade the veil of secrecy for an exclusive right, and on what terms, is another article entirely.  But carbon permits and intellectual property are not comparable.

Without the government there is no viable market for regulating greenhouse gas emissions through permits, as evidenced by the collapse of the now defunct voluntary Chicago Climate Exchange.

To be fair, there is a free market for carbon dioxide, it even has a price.  The free market price for carbon dioxide is about $6 — $10 per kilogram ($6,000 — $10,000 per tonne) and can be purchased at your local service station (price may increase if you don't have a refillable cylinder).

In an emissions trading scheme the government creates a market and sets the volume of permits (supply) and those that have to purchase them (demand).  Without the government doing so, people are highly unlikely to buy them.  A floating price carbon tax is essentially just the financial reflection of government-imposed climate regulation.

And that market is then heavily influenced by how the government changes the supply or demand, including being influenced by political considerations.  The gaping, structural flaw of emissions trading is that to be effective to drive investment the permit has to be very high (arguably in the hundreds of dollars) with certainty and predictability it will stay there for a long period of time.  But because the supply and demand of permits is always open to political considerations that confidence struggles to exist, despite the best efforts to achieve it through ''independent'' authorities.

The only relevant matter for free marketeers in defending the property rights of emissions permits is that if the government establishes them, requires them to be purchased, and then they are significantly devalued by government action, there should be compensation to owners.  Sadly, protection of private property in the Australian Constitution makes compensation unlikely should a government do so.

In that context, emissions trading and Direct Action are different sides of the same regulatory coin.  Both are undesirable solutions.  On that basis the criteria to assess the relative merits of each is long and would require another article.  For example, emissions trading schemes are arguably more efficient, but ‘Direct Action' is more proportionate to comparable action in other countries.

The free market solution to cutting emissions is innovation of low-carbon technologies that can stand on their own two feet.  Necessity is the mother of invention and there is already global demand for abundant, cheap, renewable energy that doesn't require fossil fuels.  The problem is that despite the cost of extraction, fossil fuels remain competitive.  The challenge is how to bridge the gap.

For many that gap should be met by taxing existing technologies out of competitiveness through emissions trading to spur innovation.  But I'm in rare agreement with Kevin Rudd's former chief economic adviser, Alistair Jordan, who argued in an essay:

''Unfortunately, both the political rhetoric and the conventional wisdom are wrong.  Emissions trading schemes will find the most efficient way to reduce emissions from existing technology (his emphasis), but they are not particularly effective in bringing forward the technologies of the future.''

It's illogical to use taxes and regulation to deploy technology that is nowhere near standing on its own two feet.

The most important factor to ensure success in innovation is keeping markets open so capital continues to flow and investors have the confidence to put their money down for worthy projects.  Similarly, barriers for free trade for low-carbon technologies should also be opposed.  That's why I've aggressively defended open markets and the importance of intellectual property rights for low-carbon technologies in the past as the best solution to cut emissions.

Innovation is the best, free market way that uses property rights to drive sustainable economic and environmental change, not trying to tax uncompetitive technology into competitiveness.

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Every glimmer of economic hope has a sting in its tail

After six years of economic misery in the developed world everyone is desperate for growth to resume.

Every sliver of good news is greeted as a hopeful sign, only to be dashed by other indicators offering contrasting evidence.

For example, this week saw a welcome increase in US employment but this was followed by stories that France and Italy are shedding jobs and seeing their economies shrinking further.

Then we are presented with upbeat evidence from the UK, followed by data about falling German exports.  And even the good news contains barbs.

Thus, in the US, where the economy has the benefit of highly flexible wages, little union power and a bonanza in shale oil developments, this year's projected growth turns out to be a mere 2 per cent.

And this is underpinned by unsustainably low interest rates.

Moreover, although US employment appears to have increased over the past two years, it remains below the levels of five years ago in spite of an increase in the workforce.

And, as in Australia, the US has seen a fall — 10 per cent in Australia's case — in hours worked per employee.

The UK forecast growth in 2013 is actually a minuscule 1 per cent and it is accompanied by an anticipated decline in private investment, the all-important support for lasting growth.

Weak private investment is the most worrying feature of the current recession.

Investment in Europe, the US and Japan is low and, as a share of national income, remains well below pre-2006 levels.

These major developed countries have seen negligible economic growth with living standards now lower than prior to the recession.

The contrast could not be greater between these established economies and China, India and the Newly Industrialised Countries (NICs) of Korea, Taiwan, Singapore and Hong Kong.

Government social spending is prominent in the sluggish economies of Europe, the US and Japan, where it accounts for 38 to 50 per cent of national income (36 per cent in Australia).

Developing Asia has avoided this — governments account for 21 per cent of national income in China and the NICs, and 28 per cent in India.

As a result of their more responsible levels of government spending and supportive regulatory frameworks, the developing Asian economies have shown considerable growth throughout the recession.

Driven by an investment surge, China and India are now more than 50 per cent richer than they were in 2006, and the NICs more than 20 per cent richer.

As a supplier of energy and raw materials, Australia has enjoyed comfortable growth on the back of Asia's booming demand.

Had it not been for Government-imposed taxes on energy and mining, mounting regulatory impediments to development and the creation of union-inspired labour inflexibilities, we would have done even better.

But more difficult times are ahead as indicated by the downbeat findings of business surveys issued by the ACCI and the NAB this week.

Unfortunately, the Government's response has been to legislate for increased social spending on education and the disabled, and to provide greater powers to unions and union-dominated industrial tribunals.

This policy direction is especially ill-advised in the face of the more troubling economic conditions we confront.

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Rudd may be riding the party rank-and-file tiger

If rank-and-file members of the Labor and Liberal parties have a say in choosing their parliamentary leaders, as Kevin Rudd wants to have happen in the ALP, there are some potentially significant consequences.

Because of his support for an Australian republic, Malcolm Turnbull might forever be ruled out from becoming Liberal leader.  And Julia Gillard, for whom many Labor Party members felt a degree of sympathy, might never have been replaced by Rudd.

Changing how party leaders are picked also has implications for the parties' policies.  That's because party members often have policy positions stronger and more ideological than those of their elected MPs.  Any MP aspiring to be leader of their parliamentary party and aiming to get the votes of rank-and-file members will have to take this into account.

The phenomenon whereby the opinions of MPs are more moderate than those of party members is well known.  It's called May's Law of Curvilinear Disparity.  In 1973 in a seminal research paper, University of Queensland academic John D. May explained that because MPs need to get elected they therefore hold opinions closer to those held by the average voter than to those held by party members.

Politicians and party members have quite different motivations.  Politicians seek elective public office and they get the power and the prerequisites that come with office.  Many think of themselves as ''a national legislator first and a partisan second'' — and the skills they prize are technical knowledge, rhetorical ability and parliamentary adroitness, regardless of the issue they're taking about.

Rank-and-file party members are quite different.  Those who don't seek preselection for themselves have the prospect of few tangible rewards.

Our system of voluntary and amateur political parties ''attracts zealots in the party cause, and particularly so at the local leadership level, where there are many routine political chores which only the devoted are likely to perform.  Principles, not professional careers, are what matter here.''

Party members have long been a nuisance to party leaders.  At the beginning of the 20th century the British Conservative politician Lord Hugh Cecil said his party activists were often ''knots of vehement, uncompromising, and unbalanced men''.  On the Labour side, Sidney Webb said his cadres were ''unrepresentative groups of nonentities dominated by fanatics and cranks and extremists'' who risked their party's chances of winning office.

George Washington in his Farewell Address in 1796 spoke in theoretical terms about the need to for leaders in democracies to control the extremists in their own ranks in order to achieve stable government.  There's also a practical reason why MPs tightly manage both their policy and personnel.  It comes back to the desire of MPs to win elections.  As the American political scientist Herbert Kitschelt has noted ''when party activists internally democratise parties and remove the leadership's freedom of appeal to marginal voters'' it becomes difficult for MPs to balance the radical ideological programmes sought by the membership with the preference of swinging voters towards the status quo.

When Robert Menzies founded the Liberal Party in 1944 he made sure that party members had no say over policy.  Partly he wanted to limit outside influences, but it was also to control the ideologues in the membership.  For Menzies, having party members choose the parliamentary leader would have been even more dangerous than letting them decide policy.  Menzies' legacy continues through to this day.

A few months ago when Liberal party members in Victoria wanted to debate a motion at their state council to sell the ABC, Tony Abbott said no.

Giving all party members a say in policy and in choosing the parliamentary leader is good.  The result would be more diversity and debate.

Whether Kevin Rudd, or indeed any political leader, actually wants that sort of outcome is doubtful.  If only Rudd had not announced his plan in the midst of his ersatz election campaign, then the public might be less cynical about his motives.

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No wonder Rudd looks overseas for economic comparisons

The tongues of the political punditry may have wagged over Tony Abbott's absence from an economic debate with Kevin Rudd, but this is not by any means the most significant facet of today's events at the National Press Club.

What really counted is whether the go-it-alone speech by Rudd signals a change in economic direction by the reinstalled Prime Minister, acknowledging the failings of fiscal and monetary policy management over the past six years.

On the basis of listening carefully to Rudd's speech as it was being broadcast live, it seems he has regrettably failed this important litmus test.

Rudd presented a number of charts, duly prepared no doubt by Treasury staff, extolling the government's supposed economic policy achievements.

These charts provided international comparisons of recent cumulative economic growth, government expenditures, net debt, budget balance, and the unemployment rate, showing Australia's favourable position against a number of underperforming OECD economies.

The political imperative regarding economic statistics is always to present oneself in the best possible light, but one could dare well say that comparing Australia against bankrupted European nations, with little hope to achieve sufficient growth to absorb the worrying large numbers of unemployed, is not a very difficult hurdle to jump.

Comparisons of economic and budgetary statistics between Australia and Europe (which comprises the bulk of OECD members) also conditions the Australian public to complacently assume, or perhaps even embrace, low expectations about economic performance.

Most Australians do not actively plan to relocate to another country, and so the more relevant statistical collections concern movements in Australia's own economic and budget aggregates over time.

In all fairness there are no prizes for guessing as to why Rudd chose not to present bar or line graphs of recent changes in Australian economic conditions, because most of these are unflattering to the government he leads.

Cumulative real GDP growth from the first full year of the Rudd government in 2008-09 to 2011-12 was 8.1 per cent, compared with 48.4 per cent over the life of the Howard government from 1996-97 to 2007-08.

However this statistic is not terribly meaningful given the variations in political longevity of the two governments, and so a better option would be to compare the average annual growth rates of real GDP under the two governments.

According to the ABS data, real growth under the current government stood at an average annual rate of 2.6 per cent, compared with 3.7 per cent under Howard.

In terms of government spending, the budget papers released in May this year indicate that federal general government payments as a share of GDP averaged 25.3 per cent under the Rudd-Gillard government, and 24.1 per cent under the Howard government.

At no time has general government spending under the current government been below 24 per cent in a given year, compared with five occasions under the previous government.

The net debt-to-GDP ratio under the Rudd and Gillard governments has averaged 4.5 per cent of GDP from 2008-09 to 2011-12, which is lower than the 5.2 per cent over the life of its predecessor.

Even so, the use of averaging masks the substantial decline in net debt under Howard from 17.3 per cent of GDP in 1996-97 to minus 3.8 per cent in 2007-08, a trend which conservative politicians can justifiably laud as a policy achievement.

Reflecting this government's inability to attain budgetary balance, Australia has incurred budget deficits averaging 3.2 per cent since 2008-09, which compares most unfavourably against the average budget surplus of 0.9 per cent from 1996-97 to 2007-08.

While the unemployment rate is subject to significant monthly variations, the trend increase in the unemployment rate, from 4.7 per cent in December 2008 to 5.2 per cent in June 2012 and up again to 5.7 per cent last month, under the Rudd-Gillard government is of concern.

By contrast, under the Howard government the trend unemployment rate fell from 8.5 per cent to 4.5 per cent as continuously strong economic growth saw more job opportunities materialise.

In his speech, Kevin Rudd raised the dreaded spectre of austerity under a Tony Abbott-led Coalition government, making the claim that Britain's economic performance has struggled under the weight of austerity programs initiated there.

It is fair to say that the term ''austerity'' has been elevated into something of a fashionable scare-word by reform-adverse politicians, designed to dissuade the public against supporting necessary measures needed to attain enhanced economic outcomes.

Specifically, if austerity is meant to depict a set of policies to facilitate the enlargement of the private sector — including reductions in government expenditure, lower taxes and deregulation — then the actual experience of Britain and Europe largely contradicts this austerity program.

As French economist Veronique de Rugy has outlined in systematic research of the European fiscal environment, there is scant evidence of absolute reductions in government spending undertaken in recent years.

If anything, there is a growing catalogue of anti-growth taxation and regulatory policies that are stifling the very opportunities that Europe desperately needs to provide meaningful jobs for its restless citizens.

The Australian Government has embraced the failed European economic agenda, evidenced by its unwillingness to reduce its aggregate spending, its preparedness to inflict new energy, resources and other taxes upon business, and heaping new regulations upon entrepreneurs.

The National Press Club address reveals a worrying sign that Kevin Rudd has failed to heed the lessons of the economic policy failings under his first stint at the prime ministership.

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Dumping the carbon tax without dumping anything

When Julia Gillard promised in 2010 that there would be no carbon tax under a government she led — but that her government would pursue an emissions trading scheme — she probably thought it would defuse a toxic debate and help secure victory.

Like so many of Labor's ploys in that election, it was far too clever by half.  Tony Abbott dined off Gillard's no-tax promise for three years.

Now it's Kevin Rudd's time to dine.  On Sunday we learned that he wants to transition from a fixed-price carbon tax to a full-blown floating-price emissions trading scheme one year ahead of schedule.

Here's the riddle:  why?

It seems strange to bring this up now.  Over the last year or so, anger about the carbon tax has dissipated.  Australians like the status quo.  The GST swung elections back in its day.  It destroyed leaders.  John Hewson was one victim.  The Howard government almost lost in 1998 because of its proposed great big new tax on everything.  But now the GST is completely settled.

Furthermore, Rudd's fiddling with the carbon scheme isn't costless.  It creates a $4 billion hole in next year's budget.  It exposes the government to charges of policy disarray.  The way it was announced (a bare leak to the Sunday papers) recalls one of the worst habits of Rudd's first outing as prime minister — the obsession with impressive sounding but light on detail ''announceables''.

But we forget how Gillard's 2010 bungle completely realigned the debate over Australian climate change mitigation policy.  Three years later, her broken promise allows Labor to market Rudd's minor scheduling change as ''dumping the carbon tax''.  Even better, they don't have to actually dump anything.

The distinction between ''tax'' and ''trading scheme'' has always been a triumph of semantics over clarity.  An emissions trading scheme is a tax.  It just happens to be a very complicated one.  Just like a simple carbon tax, it prices an externality — pollution.  The trick is that firms are allowed to trade their tax liabilities with each other.  But that doesn't make it any less a tax.

(Here's the Oxford dictionary definition of ''tax'' if you're sceptical:  ''a compulsory contribution to state revenue ... added to the cost of some goods, services, and transactions''.  Under a floating scheme, the added compulsory cost would be the European price of around $6 a tonne.  The current fixed Australian price is about $25 a tonne.)

Gillard's broken carbon tax promise has ruled the debate over climate change policy in these last three years.  Before the promise, Tony Abbott was calling Kevin Rudd's emissions trading scheme ''a great big new tax on everything''.  Afterwards he targeted Julia Gillard's ''bad tax based on a lie''.

There is a subtle but important difference in these talking points.  The focus on the lie eases political pressure off the policy itself.

Thanks to the Coalition's rhetorical realignment, it is the carbon tax that is remembered as Gillard's folly, not the entirety of the climate change program.

Long forgotten is the protracted and contentious debate about mechanisms and international agreements and subsidies and targets and the assumptions of Treasury modelling and the Garnaut Report.

We haven't heard much about all this in recent years.  Australia's climate mitigation programs include everything from industry subsidies to renewable energy targets to efficiency regulations.  Thanks to the broken promise, the whole debate was anthropomorphised.  Climate policy was given human form by Julia Gillard and her tax.

Now Gillard is gone and it has all become a bit confused.

Kevin Rudd plans to recoup the $4 billion in lost revenue by cutting climate-related industry assistance, tightening tax concessions for salary-sacrificed cars, and imposing a further efficiency dividend on the public service.

Take the efficiency dividend with a grain of salt — it's the magic beans of public finance.

But cutting industry assistance is a great idea.  Rudd should have taken the opportunity to go further.  The Productivity Commission counted $5.1 billion in direct budget support for private industry in 2011-12.  If you want to reduces expenditure, surely that's the first place to look.

Unfortunately, the Opposition is lumbered with an absurdly expensive, ludicrously inefficient and gimmicky hodgepodge of climate change policies clumped under the banner of Direct Action.

The Coalition's shadow climate minister, Greg Hunt, insists his plan is the true ''market solution'' to climate change, but has not been able to convince anybody of that.

We shouldn't place too much faith in market mechanisms.  Tony Abbott was mocked for his comments about invisibility yesterday but his basic point was right.  An emissions trading scheme is not a real market.  It is a highly regulated approximation of a market, where supply and demand are artificially created by the government to meet a political goal.  (I detailed this argument in the Drum in 2011.)  Of course, Abbott's attack on artificially created markets should apply double to his Direct Action program.

In retrospect, it seems obvious the Coalition's plan has been propped up by the unpopularity of Gillard's no carbon tax promise.

As has the whole climate change policy debate.  Not for the better.

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Abbott should welcome a debate on the economy

Kevin Rudd wants to debate Tony Abbott on Thursday.  Abbott should welcome it.

Obviously, the proposed debate, to be held at the National Press Club on the economy, is a political ruse.  Obviously.  And it's easy to understand why the Coalition doesn't want to play Rudd's game.

But party tacticians spend too much time obsessing over the day-to-day pranks of the other side.

More important than saving face, or ''winning the cycle'', is this simple fact:  Labor cannot be allowed to control the high ground of Australian politics.

Kevin Rudd has changed Labor's story about the Australian economy.  But he hasn't any policy to back it up.

Julia Gillard and Wayne Swan told us how wonderfully the economy is travelling, and how we ought to be grateful for their skilful economic management.

Lord knows why.  This has been a famously bad political strategy ever since Harold Macmillan told the British people they'd ''never had it so good'' in 1957.

Nevertheless, just two days before she lost the leadership, Gillard doubled down.  She attacked ''irresponsible'' commentators for their ''unreasonable pessimism'' about a potential downturn.

Business commentators have been going through a particularly glum stage, talking about recessions and other demonic things.  Don't stress.  They do that every once in a while.

Rudd has reversed Gillard's line.  Rather than talking about how well the economy has done so far, he's talking about how everything could fall apart in the future.

In his first press conference, the restored Prime Minister made much of the end of Chinese demand for resources.  Rudd turned first to what this would do to the terms of trade, then what it would do to our living standards, then to — gasp! — unemployment.

It's a big change from Gillard's ''don't worry be happy''.  Probably an effective one too.  Fear is a better motivator than gratitude.

But we're talking here about marketing, not policy.  Kevin Rudd is good at looking serious and ruminating on future challenges.  This is easy — it is always easy to find challenges.

Translating challenges into legislative solutions is harder.

The last time the Prime Minister tried to fulfil his promise of a diversified and resilient economy, he revived old-style industry policy.

Industry policy was a big part of Labor's 2007 election platform.  The industry spokesman, Kim Carr, spoke about thumping tables in foreign cities to bring manufacturing deals home to Australia.

In government, Labor pinned its industrial hopes on car subsidies.  We all know the result.  Ford plans to leave the country in 2016.

For all of Rudd's solemn warnings, there is not much in the government's policy armoury to deal with the challenges he's talking about.

For instance, it would be a brave Labor hagiographer who claims the National Broadband Network will help us through the end of the mining boom.  The disability scheme might be a good idea, but if so, it is not because it will boost aggregate productivity.  And even the most optimistic analyst wouldn't claim the benefits from secondary education policy wash through to the real economy in less than a decade or two.

The policies Rudd inherited from Julia Gillard are designed for the good times of stability, not the uncertain times of structural change.

So, yes, Kevin Rudd is good at sounding serious.  He speaks with authority.  He loves to dwell on specifics.  But that seriousness is colour, not substance.  Abbott needs to press Rudd on exactly how he plans to reform the economy out of the sort of disruption he foresees.

The Coalition is actually on strong ground here.  On Monday, they relaunched their red tape and regulation policy.  It has problems (I detailed some of those in the Drum in April).  But its objective is admirable.  An economy's resilience depends on its flexibility.  Over-regulation ossifies markets, restrains entrepreneurs, and ultimately makes an economy less adaptive to change.

Sure, the deregulation plan is inadequate.  But inadequacy is better than nothing.

More promising is the Coalition's desire to revive National Competition Policy.  This was originally a Keating-era initiative to make economic reform methodical and deliberative after the often hasty and opportunistic reforms of the 1980s.

If done right, National Competition Policy would tackle things like Part IIIA of the Competition and Consumer Act, which requires private companies to share ''significant'' infrastructure facilities with other companies.

Part IIIA slows investment and helps create those infamous infrastructure ''bottlenecks'' Kevin Rudd was so passionate about clearing in the 2007 election campaign.

Part IIIA isn't sexy.  Nor is it likely to displace boats from the front page of our newspapers.

Yet the obvious economic reforms have already been undertaken.  The dollar can't be floated again.  We can't re-privatise Qantas or Telecom.

Kevin Rudd wants to talk big picture.  He wants to talk about structural change and China and the dollar.

But unless he has something to announce, it's all just a superficial exercise in branding, not a deep engagement with economic reform.

A debate on Thursday would give Tony Abbott a chance to call Rudd's bluster out.

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Debt shuffling puts us in danger

The public policy dysfunction in the Western world since 2008 has not been restricted to persistent budget deficits, escalating public sector debts and anti-growth regulations.

Central banking practices in response to and following the global financial crisis, particularly in the US, Europe and Japan, have featured unconventional and extremely risky monetary policies.

The monetary policy exotica pursued in much of the West have largely come in two forms, under the seemingly innocuous acronyms of ZIRP and QE.

ZIRP, or zero interest rate policy, has been enthusiastically adopted by many central bankers, with short-term interest rates ranging from zero for the Canadian, Japanese and Swiss central banks to 0.5 per cent in the eurozone and Britain.

With official rates affecting the determination of interest rates by financial institutions, and against growth in prices hovering at about 2 per cent across the advanced economies, real interest rates in many large economies are negative.

The second strange monetary policy beast to be set loose has been QE, or quantitative easing, increasing liquidity in the financial sector with the intent to again encourage economic activities in the private sector.

QE entails central banks purchasing assets, chiefly longer-term government bonds and risky mortgage-backed securities, from financial institutions, giving them greater liquidity in exchange.

QE has been portrayed as a process of central banks effectively printing money to buy up financial assets at a rapid rate.

This policy has been adopted most vigorously by central banks in the OECD, especially the US Federal Reserve with its multiple QE forays, but the practice is widespread, with the Bank for International Settlements recently reporting that global central bank assets have doubled to $20 trillion since late 2007.

Economic debate on the likely effects of ZIRP and QE on price inflation has often been cast against the background of Milton Friedman's famous statement that ''inflation is always and everywhere a monetary phenomenon''.  Most critics of the Friedman position point to relatively well-behaved consumer price indexes as evidence of the benign effects of unconventional monetary policies on price levels.

But prices for certain assets, commodities and equities have rocketed in recent years, which to some extent may be influenced by the desire of investors to seek greater returns than those from financial deposits affected by ultra-low interest rates.

It is notable that the recent announcement by Federal Reserve chairman Ben Bernanke of his intention to wind back the QE policy led to a two-day freefall in the share markets.

Despite central banks flushing the financial sector with additional cash, lenders have been reluctant to lend, and borrowers to borrow, in slow-growing economies.  Nonetheless, the fear among some economists remains that once widespread confidence returns, excess reserves will be unleashed, sparking new rounds of price inflation eventually affecting consumers.

The effects of unconventional monetary policies on the real economy should not be ignored, since the ZIRP and QE experiments may unwittingly sow the seeds of the economic downturns to come.

Artificially low interest rates discourage the savings needed to fuel future investment, and induce price inflation as credit creation outstrips the growth in productive output.  In addition, artificially low rates make long-term investments relatively more attractive than short term investments, with the risk of fomenting an unsustainable capital boom.

Whether intentionally or not, unconventional monetary policies have raised questions about central bank independence, particularly during periods when the relationship between fiscal and monetary policy authorities turns from arm's length to knuckle length.

There can be little doubt a major beneficiary of the ZIRP and QE policies has been the overspending and heavily indebted Western governments, since the central banks have assumed a mass of cheaper government securities onto their heftier balance sheets.

Governments have dragged their heels on fiscal consolidation and deregulation as the central bankers continue to bail out unsustainable fiscal positions.

It will be interesting to see if or how central bankers resist the political complaints about the rising interest costs of public debt as interest rates eventually rise, as they must.

The Reserve Bank of Australia has sidestepped the worst of the monetary policy misadventure afflicting the rest of the Western world, although recent interest rate reductions are of concern from the perspective of avoiding overly low rates.

Australia is not immune from the global economic threats of future price rises, the erosion in global savings, and the growing drag of excessive public expenditure and indebtedness.

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Rudd's carbon plan threat to our sovereignty

If you thought Julia Gillard's broken carbon tax promise was bad, Kevin Rudd's plan to let European politicians and bureaucrats set the carbon tax rate is worse.

Everyone knows Julia Gillard's broken promise — ''there will be no carbon tax under a government I lead''.  Yet Gillard and Rudd both voted to impose a tax of $23 per tonne of emissions last year, which increased to $24.15 yesterday.

Now it is reported that Rudd wants to swap the carbon tax for a floating price emissions trading scheme.  But, despite the name change, the impact of both is essentially the same.

Both impose a tax by forcing businesses to buy permits that reflect their emissions.  Because so many emissions in Australia result from electricity generation the cost flows through to consumers in higher electricity bills.  A business that doesn't pass on its full costs goes broke, so every business's final carbon tax cost is paid by consumers through higher prices.

At the moment the government directly sets the price of a fixed-rate carbon tax.  What Rudd is proposing is switching it to be set by the government indirectly through a floating price in an emissions trading scheme.

But the government will have little control over the rate of a floating carbon tax.  The rate will be set by Europe's carbon market.

The Gillard government allowed European permits to be traded in Australia's carbon tax market.  That's why it is expected the price of a floating carbon tax is expected to plummet from $24.15 to a little over $6.

The reason it will drop so much is because Europe's carbon tax market covering an economy of 500 million people will consume Australia's of 20 million people.

A 2011 World Bank report concluded that 97 per cent of the global carbon market was run by Europe.  That means Australia is handing national sovereignty over its floating carbon tax rate to European politicians and bureaucrats out of Brussels.

That's fine if Australians think European politicians and bureaucrats have the best interests of our economy at heart.  That seems unlikely.  Rudd's objective of floating the carbon tax rate is to reduce criticism from business and the cost on consumers.

There's an easier way of doing that — abolishing the carbon tax altogether.

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The GFC debate we never had

Almost as soon as the initial trauma was over, the Australian political class repressed its memories of the Global Financial Crisis.

It has been four and a half years since the Rudd government announced its flagship $42 billion Nation Building and Jobs Plan, in February 2009.

This was a big deal at the time.  Kevin Rudd declared neoliberalism over.  Keynesian stimulus spending was back.

But within 18 months, the two men that had fought the political contest over this extraordinary stimulus package, Kevin Rudd and Malcolm Turnbull, had been dumped by their respective parties.

Others followed.  Lindsay Tanner, easily the most economically credible leader in the Labor government, left politics.  Another key figure, Treasury secretary Ken Henry, retired the following March.

The survivors of Labor's kitchen cabinet, Wayne Swan and Julia Gillard, stopped talking about the crisis.  They made a few vague and defensive claims about having saved the country, but the Rudd years were apparently too painful to go into detail.  Tony Abbott did not ask them to elaborate.

So little is remembered about the Australian response to the GFC other than a couple of iconic phrases.  Pink Batts.  School halls.  Labor debt.

Flicking through the best book published on the episode — Shitstorm, by Lenore Taylor and David Uren — is like entering a lost world.  Who now recalls the panicked ban on short selling, imposed just a few days after the collapse of Lehman Brothers?  Or the sudden prominence of a usually obscure regulator, the Australian Prudential Regulatory Authority?  Or Australia's attempt to make the G20 the centre of international economic diplomacy?

The return of Kevin Rudd is the return of the spectre of the Global Financial Crisis.

In his first press conference on Friday, Rudd recounted the moment in September 2008 when it looked as if the American Insurance Group was about to collapse.  He called George Bush to lobby for the firm to be bailed out.

It was conspicuous anecdote, and a deliberate one.

Then Rudd challenged Abbott to a debate on debt and deficits.  That is, the debt and deficits incurred because of his government's massive stimulus spend nearly five years ago.

His new team has suggested the election is likely to be delayed until after the G20 meeting Russia in early September.  Not only is this very same G20 that Rudd extolled in 2008, but he cheekily asked Abbott to accompany him to Saint Petersburg.

On Thursday in Parliament, Pink Batts and school halls were the Coalition's first lines of attack against the reinstalled prime minister.  They were used as they have been over the last few years:  placeholders for the ideas of waste and incompetence.  But Pink Batts may not be as compelling in Saint Petersburg as they have been on Sunrise.

During the Gillard years, conservatives and free marketeers were lulled into a belief they won the debate over Keynesian stimulus.  The insulation program was a small part of the total package, but, since it was implicated in the deaths of four people, has come to define it.  And Swan's inability to get the budget out of deficit has been a massive political liability.

Yet two facts remain.  First, the government said it was spending a lot of money to stop the economy going into recession.  Second, the economy didn't go into recession.

Whether one led to the other is moot.  Most people believe they did.

In late 2011 an Essential Poll asked who should lead Australia if there was another global financial crisis.  Kevin Rudd topped the list at 24 per cent.

Another poll suggested half of respondents believed the way to protect jobs in a crisis was increased government spending.  (Nearly a third said they didn't know.  This is definitely the most honest answer.)

For all their complaints of waste and incompetence, the Coalition never seriously challenged the wisdom of activist fiscal policy.

Malcolm Turnbull supported the initial stimulus packages.  He only baulked at how much was eventually spent.

And last week, shadow treasurer Joe Hockey said he would take ''well-considered government action'' in an economic downturn if monetary policy and automatic fiscal stabilisers were ineffective.  But he wouldn't be ''sending $900 cheques to dead people'' or buying ''overpriced school halls''.

It's a standard opposition ploy.  You agree with a substance of a government policy but claim only your team can implement it competently.  Garbage, sure, but effective politics.

The ploy worked fine.  By the end of 2009 the Kevin Rudd caravan had moved onto Copenhagen and Malcolm Turnbull had been ousted.

The rest of the world has been engaged in a grand debate about Keynesian stimulus, deficit spending, and monetary policy.  Australia has not had this debate.  The Coalition has not had this debate.

Thanks to our China-led resilience and the purge of our political leadership, Australia has largely forgotten about the whole financial meltdown and economic panic.

Kevin Rudd wants to bring the crisis up again.  It's not clear the Opposition is ready.

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What is Rudd's real position on economic reform?

The return of Kevin Rudd to the prime ministership raises more questions than answers with regard to numerous aspects of policy.

Chief among these is whether the Rudd has learned from the economic policy errors committed during his first tenure as Prime Minister from 2007 to 2010?

Casting our minds back prior to the November 2007 election campaign, then Opposition Leader Kevin Rudd sought to reassure voters that post-Hawke, Keating Labor would not pose as a risk to the largely bipartisan economic policy settings maintained from the early 1980s.

These settings could, for simplicity, be represented as a combination of fiscal and monetary macroeconomic policies emphasising consistency and stability for the benefit of private sector decision makers, and microeconomic policies focussed upon reform of labour, capital and product markets for the sake of more efficient resources allocation.

Although business cycle fluctuations remained, most notably in the form of the horrendous 1990/91 recession, Australia's real GDP per capita rose from about $43,300 to $61,000 over the subsequent fifteen years with minimal macroeconomic disruption.

With most economic commentators in late 2007 conceiving that this ''Great Moderation'' would continue unabated, the obvious political task for Rudd at the time was to convey the perception he would not upset the prevailing economic policy apple cart.

Accordingly, Rudd described himself as a ''fiscal conservative'' and, at federal Labor's official campaign launch, lambasted the Howard government for excessive spending and promised to apply a ''meat axe'' to an overgrown Canberra bureaucracy.

However, the seeds of subsequent policy contradiction were also sown by Rudd during this period, particularly in the guise of promised labour market reregulation that would empower Labor's union paymasters, and a suite of promises to act on climate change which would further distort energy markets.

After an initial twelve months in office laying down the basis of its committed retreat from microeconomic reform of product and factor markets, the Rudd government found itself compelled to react to a synchronised global economic downturn borne by policy-induced dislocations in US financial and housing markets.

Confirming the far greater economic risks posed by a political class beset by policy panic, the Rudd government conducted an entirely disproportionate response to the ''global financial crisis'', which continues to this very day as a weight upon Australia's economic saddlebags.

In a definitive account of the haphazard political process besetting Rudd and his inner circle of ministers and advisors, Lenore Taylor and David Uren, in their book Shitstorm, estimated that almost $80 billion in expenditure was committed from October 2008 to May 2009 on Keynesian-style ''fiscal stimulus'' measures.

The spending programs put in place, such as overpriced school halls and flammable home insulation installations, were highly controversial even at the time they were being delivered, but undeterred Rudd sought to justify his actions in a weighty 7,000 word tome which appeared in The Monthly magazine.

Prime Minister Rudd depicted sinful private markets wracked by instabilities with ruinous effects on employment, which could only be redeemed by the corrective policy actions performed by benevolent and omnipresent politicians and bureaucrats.

The debate about the economic effects of the Rudd spending measures during the GFC will undoubtedly remain the subject of academic and popular debates, but there is no question that, by early 2009, Rudd the fiscal conservative and market friend was well and truly dispatched, in office, by Rudd the fiscal radical and capitalist nemesis.

A range of issues, not least Rudd's autocratic style of organisation perhaps crafted during his appointment as head of the Queensland government's Cabinet Office in his early thirties, engendered his June 2010 downfall at the hands of Julia Gillard, Wayne Swan and Bill Shorten.

During his time in leadership purgatory, Rudd made minimal contributions to the Australian economic policy debates, save for the occasional speech defending the supposed mass employment-retention powers of his $80 billion spending spree in the half-year to May 2009.

In his first, and perhaps only, parliamentary question time as a returned Prime Minister, Kevin Rudd largely limited his economic commentary to international comparisons of macroeconomic and economic policy statistics, although he also appropriately expressed regret about the deaths caused by the grossly mismanaged home insulation program.

There can be little doubt that an answer to the question as to whether Kevin Rudd has learned from the economic policy errors, conducted under his initial watch as Prime Minister, will be revealed in the coming days and weeks, as Rudd unveils his claims for the current government to extend its six years of existence.

Indeed, the Australian public will need the answer, as it assesses who will be politically best placed to reverse the policy-induced damage to the Australian economy, including massive budget deficits and public debts, and rising labour and energy costs, of recent years.

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Canberra power grab is driving referendum

Every Victorian should vote ''No'' to attempts by politicians to buy constitutional change that will increase Canberra's power at the expense of local communities.

That's what Australians are facing with the coming referendum to allow the Federal Government to directly fund local councils.

The referendum might sound well intentioned, but in practice it will lead to a massive concentration of power in the hands of Canberra politicians and bureaucrats.

The change isn't just to allow Canberra to fund councils, it also allows them to attach strings to every dollar based on Canberra's priorities.

We know how this has worked in practice.

The Federal Government already gives tied grants to states based on what makes it easier for Canberra bureaucrats to tick a box on a form, not local need.

Canberra's indifference to local knowledge is why school halls were duplicated under Labor's BER.  It is also why we got disastrous consequences of Canberra's pink batts program.

Such wasteful programs are occasional.  But allowing the Federal Government to directly finance councils will make them a regular event as programs are imposed on communities.

That won't be the end of the problems.  Increased regulation and costs will be tied to every funding decision.  That means costs will rise, rates will rise and services will be cut.

Canberra bureaucracy will also blow out.  Bureaucrats will fly all over the country to provide oversight of how our money is spent.

Our political system already lacks accountability.  This referendum will make it worse.  Sadly, local councils are more attracted by invitations to the Lodge for tea and the glittering pot of Canberra gold at the end of the referendum rainbow than defending local services based on local need.

The president of the Municipal Association of Victoria said that constitutional recognition ''will remove legal risks that place existing federal programs for roads and community infrastructure under a cloud of doubt''.

But there is no risk.  Programs such as Roads to Recovery are not at threat.  The argument is based on a misrepresentation of the opinion of Sydney University constitutional law professor Anne Twomey.

Prof Twomey has highlighted that the process the Federal Government uses to fund Roads to Recovery may be unconstitutional, but giving money for roads is not.

She also said that Constitutional recognition will lead to road funding being allocated based on need, not a fair state-by-state model, and Victoria will get less money.

There is nothing stopping the Federal Government funding councils through the states.  States are in better position to deliver programs because they are closer to the people they serve.

The real risk is from the power imbalance between Canberra and councils.  It doesn't take a genius to figure out who will have more negotiating power between a local mayor and the prime minister.

Last week showed how far Canberra is prepared to go to buy this change.  The Federal Government announced that $10.5 million of public money will be provided to campaign for the referendum.

Of that, $10 million is being given to the ''Yes'' campaign.  Only $500,000 is being given to the ''No'' case.  Nationwide, $10 million is also being raised from ratepayers for the ''Yes'' campaign, taking total public funds to $20 million.  That's 40 times what is being given to the ''No'' case.  That is not just unfair, it is wrong and shows how far politicians are prepared to go to buy an outcome that increases Canberra's power.

Considering the state of the nation, the question every Victorian should ask themselves is whether they think the country would be better off if Kevin Rudd and Tony Abbott ran our councils as well.

If the answer is ''No'', then that is how Victorian should vote on election day.

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