A nanny state on IR policy is the Liberal choice

In politics, sometimes it's best not to go into detail.  This is the lesson Eric Abetz learned after he explained part of the Coalition's industrial relations policy last Thursday.

Abetz told the Australian that, under an Abbott government, the Fair Work Commission would not approve workplace agreements that raised real wages unless there had been ''appropriate discussion and consideration of productivity'' (paywall).

Why?  So ''lazy companies don't just give wage increases because it's the easiest thing to do.''

It is one of the founding assumptions of Australia's system of industrial relations that workers are unable to negotiate with bosses in their own best interest.

Around this paternalistic assumption we have built a superstructure of industrial relations law, tribunals, and controlled wages unique in the developed world.

Now the Coalition seems to think some bosses are just as incapable of looking after their interests.  And that a government regulator knows how to run a business better than the business itself.

If true, one wonders how the labour market functions at all.

The Coalition's policy is patronising, illiberal, and fundamentally anti-market.

Now we know the true legacy of WorkChoices.

The fight over WorkChoices represents the moment the Coalition turned its mind from liberalising industrial relations to regulating it.

More on that in a moment.  On Friday poor old Senator Abetz was accused by his colleagues of ''freelancing'' — that is, speaking only for himself — and advised to avoid interviews for the next few weeks.

But the Coalition's official workplace policy document does, in fact, say ''before an enterprise agreement is approved, the Fair Work Commission will have to be satisfied that the parties have at least discussed productivity as part of their negotiation process.''

If anything, Abetz softened the policy, suggesting Fair Work will only second-guess agreements if they give pay increases above inflation.

That's how sensitive the Coalition is to the WorkChoices tag — even talking about its own policy is off-message.

Industrial relations has a special place in the Australian political compact.  It is Labor's raison d'etre;  the world's oldest party was born as the political wing of the union movement.  Obviously they have a deep interest in wages policy.

In the Liberal Party there have always been free traders and protectionists, conservatives and liberals, fans of both big government and small.  But one thing has bound the party together since conception — an antipathy to union power and prominence.

So Labor supporters recount our political history as a contest between employees (labour) and employers (capital).  For Liberal supporters our history is a contest between sectional interests (union thugs) and the mainstream (Forgotten People).

Yet eight decades of the Australian Settlement concealed a few subtleties in the Liberal view.

For all that time, being opposed to union power and supporting greater market control over wage price setting was, effectively, synonymous.

When, during the Hawke, Keating, and Howard eras, labour law was slowly liberalised, this equivalence was superficially reinforced.  As labour markets became freer, unions declined.

But then Kevin Rudd repealed WorkChoices.  Rudd's move was the first time since the reform era began that a liberalisation — in any sector of the economy — had been reversed.  In 2007 Australia hit the market reform wall.  This was very disorientating.

(I've described WorkChoices here as ''liberalisation'' because that's what all sides of politics imagine John Howard's policy was.  In fact it was a complex regulatory takeover of workplace relations by the federal government.  Still, perception is what matters.)

Now the Liberal Party has to figure out what its industrial relations priority is:  to pursue a free market in labour, or to battle the unions.

Put another way, is Australia's industrial relations dilemma that it is too highly regulated?  Or is the dilemma that unions are too prominent?

After the 2007 defeat, there are many on the Liberal side who say the latter;  many who imagine they are fighting a guerrilla war against the union movement.  There are hints of this attitude in the Australian article.  Abetz says the Coalition's policy was developed ''in response to unions 'bragging' that they had secured productivity-free pay increases.''

The Coalition's solution to such hubris?  Increase workplace regulation.  If the government has to nanny lazy companies to reduce union power, then so be it.

Never mind that both sides of a mutually beneficial exchange should be ''bragging'' about the great deal they got.

It's worth pointing out that unions would exist in a free society.  They would have no privileged position in the law, and no coercive power, but, as Friedrich Hayek once wrote, everybody ''ought to have the right to join a trade union.''

The dust from WorkChoices has settled.  Now that Coalition is preparing to form government again, what does it really want for industrial relations?  Labour market freedom, or just defeat of the union movement?

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The True Costs Of National Debt

The Public Debt Problem:  A Comprehensive Guide
by Pierre Lemieux
Palgrave MacMillan, 2012, 226 pages

Among the estimated 3.5 billion websites around the world, there is one that is almost guaranteed to keep adults lying awake at night and force horrified children to run for cover.  It is the global public sector debt clock website maintained by the Economist Intelligence Unit.  At the time of writing, total public sector debt owed by governments across the globe amounted to over $50 trillion, and the debt shows little sign of arresting its growth momentum.  Until the recent past, the average person would have been forgiven for thinking that unsustained public indebtedness was only reserved for tin pot African or Latin American dictatorships, whose leaders aspired to live high on the hog through a process of sending their countries into hock.

While rising public sector debt has been admittedly something of a simmering issue for the United States and Europe since the 1970s, the return of the economics of John Maynard Keynes and Abba Lerner during the 2008-09 "global financial crisis" signalled an extraordinary act of synchronised borrowing gluttony by all Western countries.  Even if the near wall to wall state Labor governments during the Howard era were unwinding the borrowing parsimony of their predecessors, the fact of the matter is that Australian governments, especially at the federal level, unashamedly signed up to the new global debt club once the GFC horse got galloping.

According to a historical public debt database maintained by the IMF the gross debt of the Australian general government sector, expressed as a percentage of GDP, rose from 11.8 per cent in 2008 to 16.9 per cent in 2009.  In other words, the gross debt to GDP ratio increased by 43 per cent during a period in which former Treasury Secretary Ken Henry exhorted the Commonwealth government to respond to the GFC by "going early and going hard".  Gross debts incurred by Australian general governments have continued to grow since that period, rising to 24.2 per cent of GDP in 2011.  In internationally comparative terms, Australia has been one of the debt growth front-runners with general government gross debt to GDP increasing by 106 per cent from 2008 to 2011, only behind Ireland (140 per cent) and Slovenia (113 per cent) in the OECD.

These figures necessarily understate the debt burden, however, since governments own and operate public utilities which are covered by at least implicit guarantees of debt funding.  After incorporating these utilities, the non-financial public sector gross debt to GDP ratio for Australia jumps to 15.1 per cent of GDP in 2008 rising to 28.6 per cent in 2011.  With proposals for governments across Australia to borrow more heavily, for example on a raft of infrastructure projects with questionable economic returns, taxpayers have been confronted with some basic questions that require answers grounded in sound economic theory.  Is public debt a problem?  What are the consequences of increasing public debt?  Should rising debt prove to be economically harmful, what should be done to reduce debt?

A recent book written by French Canadian economist Pierre Lemieux, The Public Debt Problem:  A Comprehensive Guide, serves as a most timely accompaniment for any taxpayer seeking to arrive at the answers to these pressing questions.  Firmly grounded in the public choice theoretical approach, The Public Debt Problem depicts the ruling political class as an emperor who overspends and borrows, but who nonetheless does not realise that his inclination to raise debts with near impunity will eventually render him economically exposed.  It is well known in the economics literature that increasing public sector debt will eventually crowd out private sector investments, in turn acting as a drag upon economic growth, whereas taxes raised to repay debts distort economic activities and hamper market processes.  Lemieux depicts a perpetuating cycle, which seems particularly evident in Europe, whereby public debt that reaches a critical mass compromises economic growth outcomes, reducing the capacity of government to raise revenues and service its debts, and even more debt burdens reduce growth, and so on.

The book draws upon empirical research to support that point, for example quoting a notable recent empirical study suggesting that a ratio of gross debt to GDP exceeding 90 per cent leads, on average, to a cumulative 24 per cent loss in gross output.  One of the more important discussions in The Public Debt Problem concerns the complex web of financial relationships between indebted governments and financial intermediaries, such as large banks, many of whom benefitted from a range of bailouts during the GFC.  Financial sector regulations have contributed to a process in which governments ensnare private financial institutions within their gravitational pull, thus allowing governments to more easily borrow, for example, by putting obligations on banks to purchase their securities on favourable terms.  The GFC era practice of central banks radically lowering their interest rates has also been used to assist governments to alleviate the interest costs of debt, even if the rock bottom interest rate strategy implies the destruction of productive capital in the longer term.  Finally, Lemieux carefully weighs various options all of which have been openly canvassed in public policy discourse about what the US should do to resolve its debt problem.  Should the government announce an open default on its debt obligations?  Should it undertake a stealth default through inflation?  Should government expenditure be reduced?  Should nothing be done whatsoever?  Doing nothing is ruled out in The Public Debt Problem as a sustainable course of policy action in an era of high debt, as it would perpetuate the current run of economic under-performance and may, in any case, amount to an eventual disorganised default fraught with numerous economic risks.  The stealth default option of repaying the debt through money printing, otherwise known in the common parlance as "quantitative easing", is dismissed as a feasible option, in that the eventual costs of price inflation would create serious distortions in real markets.  A default through the backdoor of inflation would likely raise the prospect of other policies, such as tariffs and capital controls, exhausting opportunities for economic exchange, and could even have disastrous political consequences should voters crave for a "strong leader" to resolve the problems caused by government policy in the first instance.

Lemieux maintains a fairly sanguine view about the merits of an open default of existing debts, labelling it the least bad alternative "if feasible and if spending cannot be deliberately reduced".  However The Public Debt Problem canvasses a number of important caveats militating against the feasibility of such an option, including potential resistance by powerful creditors, a loss of reputation in capital markets, potentially reduced access to financial markets for repudiating governments, and lost opportunities to institutionally restrain large public sectors.

Ultimately, Lemieux's first preference, is for a significant reduction in government spending, particularly focussed on the rationalising the welfare state and reducing government roles in productive functions that can be readily undertaken by the private sector.

As desirable as it would be to starve the fiscal leviathan and force politicians to reconfigure their spending priorities, Lemieux is under no illusion this is a seemingly monumental task:  "government missions have been creeping up, and sometimes exploding, for more than a century.  Give Leviathan an inch, and he will take a mile."  However the realisation of systemic reductions in government expenditure, according to Lemieux, would yield the significant upside of a restoration of liberty and prosperity enjoyed by previous generations.  As he describes it, "it is in the whole Western world that the sovereign debt crisis provides an opportunity to chain Leviathan".

Although The Public Debt Problem is primarily written for an American audience it contains more than sufficient conceptual material that can be universally applied to explain the debt problem, and the mechanics of public borrowing described in the book are similarly applied by most Western governments including those in Australia.  As a more practical matter, the spiralling debts confronting the United States and Europe continue to weigh down those respective economies, with significant flow on implications for economic performances of Australia and other Western economies.  In other words, it is essential that Australians understand the problems of the US and Europe to appreciate why the world seems stuck along a slower lane of growth post GFC, and why we should at every turn refuse to travel down the failed Northern Hemisphere path to fiscal penury.

Written in a style comprehensible to the intelligent layperson, Pierre Lemieux's The Public Debt Problem:  A Comprehensive Guide injects welcome clarity and insight into an issue that has long been held hostage by the empty rhetoric and false analysis of proponents for larger government.

Free Market Misunderstood

The Financial Crisis and the Free Market Cure:  Why pure capitalism is the world economy's only hope
by John A. Allison
New York: McGraw-Hill, 2012, 289 pages

If you only looked at the Occupy movement as a collection of angry, naive university students and yuppie bloggers, then you probably missed the true message of the movement.  Don't feel bad if you missed it, the recorded minutes of Occupy Melbourne show most of the protestors didn't know the message themselves.

"Most people lost money in the global financial crisis.  Those people still have money.  Therefore, they are selfish and evil" was the tone of the movement.  No one would argue that poor decisions by some banks contributed to the crisis, but to only look at their actions is to ignore the true cause ― excessive government interference in the business world.

This is John A. Allison's key argument in his book.  Allison is overqualified to write on the crisis:  He is the longest-serving CEO of a top 25 financial institution, having served as Chairman of BB&T for twenty years.  Having retired in 2008, he is now the president and CEO of the influential US libertarian think tank, the Cato Institute.

Allison provides incisive and measured analysis of the reasons for this collapse, and provides his solution for it.  In a refreshing change of pace from the current debate, his plan does not involve the US government becoming more involved in business, but a return to the free market system that made America great.  Though the book dives deep into economic thought and analysis, it doesn't require multiple economics degrees to understand.  Without compromising his analysis, Allison's writing ensures the content is accessible and informative to any reader.

The interference by the US government in the world of business guaranteed that, eventually, something had to give.  The last three US presidents have the most dirt on their hands but the roots date back to President Lyndon Johnson's "Big Society".  The free market was cast aside by these presidents, who opted to institute "crony capitalism" (which Allison refers to as "crony socialism") by financially supporting banks and other industries because they were "too big to fail", rather than letting them fall because they were "too poorly managed to succeed".

The presidents, Clinton in particular, also made banks give loans to people who would otherwise be turned away because they would struggle to repay, and continued the practice of stuffing the Federal Reserve with political appointees.

As Allison says, if banks believe the government will be there to support them if they make a wrong decision, they have no need to fear taking large risks with their business.  Allison conveys many examples of rival CEOs who acted poorly with that exact belief in mind.  But when many banks failed with the collapse of the real estate bubble, the government couldn't save them anymore.  And from there came the crisis.

The problem explained, Allison moves to the solution.  This is not an academic concern ― as Allison points out ― the US government is on track for bankruptcy by 2025.  To fix the mess, the government has to stop financially supporting private companies and over-interfering with business decisions through regulation (the total cost of federal government regulations in 2008 was $1.75 trillion), or another crisis will come.  Allison knows that this will be a seismic shift in the business world and people may be hurt in the short term.  But, as with business, we must value long term growth over the short.

This extends to allowing big banks to fail and not giving them taxpayer money so they can make the same mistakes.  This means ensuring that important monetary decisions are not made by lifelong politically-charged bureaucrats by severely limiting the power of the Federal Reserve.  And, as explained in one of the most interesting chapters in the book, we need to convey to future generations that making money for oneself is not evil, and that state-enforced altruism is not good.  Then, we can move to recovery.

An Austere President

Coolidge
by Amity Shlaes
New York: Harper, 2013, 576 pages

It's a well-worn cliché that those who do not learn the lessons from history are doomed to repeat its mistakes.  If the wrong lessons are drawn from previous events, then such mistakes are a certainty.  It is therefore regrettable for us all that events since 2007 have proven that previously received wisdom on the Great Depression was largely false.  Western economies are currently paying the price for these errors;  errors which could have been avoided had we paid more attention to the career of Calvin Coolidge, the thirtieth president of the United States (1923-29).

That Coolidge is probably the most unrecognisable president of the 20th century helps to largely explain why latter-day history has sadly forgotten both his achievements and his mistakes.  His unassuming demeanour and unexpected ascent to the presidency certainly didn't help his legacy, though he has nonetheless been the unfair victim of those seeking to apportion blame for the Depression years.

Received wisdom is that the laissez faire policies he pursued as president were the primary cause of the 1929 Crash.  The existence of this mythology is displayed in numerous polls conducted in the US over many decades.  FDR is revered by all Americans (even conservatives) whilst Coolidge is regularly ranked below non-entities and outright disasters like Chester Arthur, George W. Bush and even Hoover himself.  Coolidge by Amity Shlaes aims to redress this wrong.

This book has been eagerly anticipated.  Shlaes, who is a financial journalist at Bloomberg and the Wall Street Journal, was responsible for the surprise 2007 bestseller The Forgotten Man that caused us to rethink the Depression.  We now know that, contrary to popular myth, Herbert Hoover actually pursued an incredibly Keynesian economic policy.  Franklin D. Roosevelt was no hero either and made the slump even worse (it's often forgotten that US unemployment peaked in 1936).  FDR bizarrely sent farmers to jail for selling chickens too cheaply, amongst his many other ill-conceived New Deal policies.

Coolidge is the prequel to this important revision of history.  It is very well-researched and easy to read.  It is a must for all who enjoy American politics or economic history.  Coolidge provides a real world example of the practical success of supply-side economics.

Shlaes is careful not to overstate the impact of Coolidge's presidency.  He may not deserve to be bracketed with the unfortunate William Harrison and James Garfield, but neither does he belong in the "hall of fame" with Ronald Reagan and Abraham Lincoln.  He would be long forgotten by all had he not inherited the job upon the death of Warren Harding.  Coolidge was no military general, Hollywood actor or Kennebunkport patrician.  He didn't have the gravitas to win nomination on his own terms;  though he made up for this with a humility and honesty that was (and still is) all too rare amongst politicians.  He gave the oath of office to his father by the light of a kerosene lamp.  There were no crowds, no press and no marching bands.

It was however his commitment to fiscal austerity that stands him out from the crowd for attention ― particularly in light of events since 2008.

Born to a Vermont dairy farmer and shopkeeper in 1872, his family was comfortable, though not wealthy, and he endured the hardships that accompanied both his mother and sister dying when he was a teenager and he never forgot the painful memories of relatives who spent time in debtors' prisons.  These experiences taught Coolidge the value of thrift (he preferred the word "economy") and hard work as the antidote to all problems.  His austere character was so marked that he was later famously described as "looking like he was weaned on a pickle."

After moving to neighbouring Massachusetts to practice law, Coolidge spent over two decades working his way through the various political ranks and offices at local and state levels until he became Governor of Massachusetts in 1918.  His great strength, and the reason such a quiet, plain man was able to progress so far, was that from early on he had a very clear philosophy about the role of government (it should be limited) that he doggedly pursued and eloquently enunciated.

Becoming governor provided him with his big break.  Many Western nations were at the time in the grip of a post-war Bolshevik scare.  Coolidge stood up to a general strike by the Boston police that was threatening to set a nationwide precedent.  By winning this fight, Coolidge came to national prominence in juxtaposition to the socialist sympathies of the Democrats and President Woodrow Wilson.

Warren Harding successfully campaigned for president in 1920 on the promise of a departure from the policies of Wilson (the slogan was a "return to normalcy").  Coolidge was an obvious candidate to reinforce this message by being his running mate.  That Coolidge never partook in the "game" of politics highlights how deep his strength of principle and resolve must have been to rise to this level.  Harding was notoriously corrupt yet the Party still wanted an unimpeachable character like Coolidge by his side (or perhaps in spite of him).  Coolidge was always the dutiful Protestant family man.  There was never a hint of scandal about him.

As vice president, Coolidge was determined to apply his personal principles to the nation.  "If an individual ought to avoid excessive indebtedness, then why not a government?" is paraphrasing the motto.  Harding inherited a deep recession and a huge public debt from Wilson.  GDP sank by seven per cent between 1919 and 1921, unemployment rose by to 11.9 per cent and the Dow Jones bottomed out at 47 per cent below its post-war peak.  As a point of reference, the 2008-10 crisis saw a 5.1 per cent contraction, unemployment peaked at 10 per cent and the Dow Jones bottomed out 54 per cent below its 2007 high.  The parallels are worth noting.

Once again, Coolidge was the right man for the right problem.  Inspired by Coolidge and Treasury Secretary, Andrew Mellon, Harding's response to the crisis could not have been different from that taken by the Fed and Treasury in 2008.  Harding commenced a program of swingeing budget cuts ― the like of which had never been seen before or since.  Within two years, Federal expenditures had been halved, which allowed Coolidge and Mellon to commence their goal of tax reform.  By the time Coolidge had finished his opus in 1928, only two per cent of Americans paid any federal income tax and the top marginal rate had come down from 73 per cent to 25 per cent.

It's worth taking time to just absorb the magnitude of those cuts.  We live in an era where we are told by the usual rent-seekers that life will be a misery if we cut public expenditure by a few billion dollars.  In inflation adjusted figures, Coolidge and Harding enacted $2.5 trillion worth of cuts in just two budgets.  It was a breathtaking achievement.

The proof that austerity works comes from what followed.  The US economy grew by an average four per cent annually between 1921 and 1929, unemployment was down to three per cent by 1923 and US Treasury receipts were higher than when tax rates were at Soviet-style levels.  For a man supposedly weaned on a pickle, it's ironic that the "Roaring Twenties" were basically conceived and borne by Coolidge.  Jay Gatsby arguably owes his existence as much to Coolidge as he does to F. Scott Fitzgerald.

The economist Paul Krugman has tried to distinguish this period of history by pointing out that US Federal Reserve interest rates peaked at seven per cent in 1919 and were back down to four per cent by 1922.  In his opinion, the recovery came as a consequence of the expansion in the money supply that this looser monetary policy enabled.  Nice theory, except it doesn't stack up when one considers that interest rates between 1929 and 1931 fell from five per cent to 1.5 per cent, yet the Depression dragged on for almost a decade as the money supply continued to contract.  Shlaes shows us that the price of credit was not the deciding factor in either crisis.

After Harding's death, Coolidge stayed the course and continued to lead by small government principles.  He repeatedly vetoed bills to increase agricultural subsidies (despite his rural background) and he initially refused to believe that government had any role to play in relation to the disaster wreaked by the 1927 Mississippi River flood.  Though he later relented under pressure from Hoover, a Keynesian, Coolidge's gut instinct was that those affected ought to pay for the levees themselves.

Small government proved electorally popular too.  At the 1924 election, Coolidge received a similar majority to Harding, despite the fact that he lacked the charisma of his predecessor.  In fact, Coolidge did so well that he remains the last Republican presidential candidate to have carried New York City.

Though he declined to run in 1928, by reason that convention limited him to two terms (a convention soon to be flouted by FDR), his success and popularity were the major contributors to Hoover's victory.  It shows how badly the electorate has become addicted to welfare in the 21st century that politicians are scared to pursue austerity policies that worked well and were once wildly popular.

Coolidge of course had his faults and these are acknowledged by Shlaes.  Coolidge opposed non-western European immigration on racial grounds, though he claimed to have American-Indian blood and he did much to counteract the influence of the KKK in the South.  His foreign policy was muddled and this almost certainly contributed to the eventual failure of the League of Nations.

Shlaes' main mistake however is in downplaying that Coolidge's biggest errors were his omissions.  His indifference to protectionism made the 1931 Smoot-Hawley Act possible;  he did nothing to reform Wilson's Federal Reserve Act of 1913 (the legislation that precipitated the mass banking collapse after 1929 that was the major cause of the Depression) and he provided continued public support for Hoover, despite his personal disdain for the man.  Coolidge may have inherited these problems from his predecessors and, neither were they necessarily foreseeable, but they happened on his watch and he therefore bears ultimate responsibility for them.

But for all his faults, Coolidge remains the last president to have never presided over a budget deficit.  Compare this to Barack Obama, who will never preside over a budget surplus.  Who deserves to be more forgotten by history?

Bigger Is Not Always Better

To Promote the General Welfare:  The Case for Big Government
by Steven Conn
New York: Oxford University Press, 2012, 256 pages

I thought it was only classical liberals who ― when attempting to caricature socialists ― spoke of the government as a "saviour".  I was wrong ― advocates of big government have become a parody of themselves.

To Promote the General Welfare:  The Case for Big Government is a collection of essays defending the idea that government should play a dominant role in our lives.  Steven Conn has brought several scholars together to write on a range of areas including transport, education, banking, housing and the arts.

The great tales of government success in To Promote the General Welfare fall well short of reality.  Often, deep defects in government programs are papered over as mere teething problems.  Complications are ironed out in the end and government always comes out as the good guy.

The immense failures of the US government over the years are either completely ignored or viewed through a warped lens where government can do no wrong.  There is no mention of prohibition, the utterly embarrassing state of the US criminal justice system, the unintended consequences of massive ethanol subsidies or the costly war on terror.

The flawed perception of government as benevolent is far from a new idea.  Nor is it novel to claim that policies which haven't worked are a result of implementation or funding issues rather than the philosophy behind the program itself.  In fact, many of the examples of government programs examined in the book are reminiscent of Milton Friedman's famous observation that if a government program fails it receives additional funding.

But that's not all Friedman said.  He went on to contrast government with private enterprise ― "if a private company fails it goes out of business".  This simple message about competition is an idea that lies at the heart of the free market.  It is perhaps unsurprising that advocates of big government ― who are hostile to the idea that problems can be solved through voluntary exchange and without government interference ― therefore feel compelled to attack it.

With a chapter title that could only come from a book advocating socialist ideals, "Transportation and the Uniting of a Nation" informs readers about the effects of deregulation of interstate transport.  One of the most obvious positive outcomes was lower costs to the consumer.  But we are also told about "bankruptcies, layoffs, slashed wages and ― for smaller markets and smaller shippers ― diminished service or higher rates".  The argument is that free markets have both good and bad outcomes and government's essential role is to step in and fix the bad stuff.

For these authors, sometimes government doesn't even need to go that far.  Just having some goals can be enough to pronounce success.  A key George W. Bush legacy in education policy is the No Child Left Behind program.  NCLB mandates testing children for proficiency in reading and math and penalises schools that fail to demonstrate improvement.  Simply having the "goal of educational equality" is enough for the authors to give the federal government marks.  This bizarre analysis leads the authors to make statements such as the following:  "whether [NCLB] has 'worked' or not is in some sense beside the point:  it has underscored the problem, which is always the first step towards solving it."  Considering NCLB is the most expensive federal education program the US has ever embarked upon, the idea that it is simply an exercise in identifying a problem would fill even the mildest taxpayers with outrage.

Examples like this can be found throughout the book and they highlight the extremely shallow analysis that the authors have engaged in.

The authors have fallen into the same traps that big government advocates always fall into ― they emphasise the benefits of government programs without taking proper account of associated costs, they judge policies by intentions rather than outcomes and they think government spends money that grows on trees.

These fallacies add up to a complete mis-judgement of the success not only of particular programs but of government intervention overall.

The irony of this book is that government very rarely promotes general welfare ― and less so the bigger government becomes.  We have hundreds of years of history and stacks of empirical evidence that clearly demonstrate this point.  Instead, government hands out favours in accordance with the preferences of those who wield political influence.

The apparent paradox of the market is that the best way to promote general welfare is for individuals to pursue their own self-interest.  The voluntary exchange between individuals that naturally arises has always been the best way of achieving both individual satisfaction and general welfare.

Gough Was No Messiah

Gough Whitlam: His Time, The Biography Volume II
by Jenny Hocking
Carlton: The Miegunyah Press, 2012, 596 pages

Two volumes on one of the nation's most controversial prime ministers should be a landmark event in Australia's political historiography.  Unfortunately, Jenny Hocking's second volume, appearing some four years after the first, completes a disappointing double.

When it was published late last year, the key selling-point of the second volume was that it contained important revelations about the dismissal of the Whitlam government in 1975.  Hocking is the first to have done extensive research in the archives of Sir John Kerr and thus claimed to have unearthed dramatic new evidence about the role of the so-called "third man", Anthony Mason, who advised Kerr in the lead-up to 11 November 1975.

Her revelations about Mason's role in advising Kerr were described as "significant and stunning" by Paul Kelly in The Australian, but, as Gerard Henderson and others pointed out, this material was not completely new.  The identity of Mason as the "third man" had come to light in 1994, initially revealed by Sir Garfield Barwick in a television interview and augmented by Henderson at that time, making public some information Kerr had told him in the 1980s.

Nonetheless, Hocking deserves credit for her archival digging and the fact that the publicity prompted Mason to go public with his version of his role, which in part disputed some of the details contained in the notes in Kerr's archives.  Thus, the net effect of Hocking's research provides a valuable contribution to dismissal studies.

Given her research on the topic, it is probably no surprise that Hocking's book has a heavy weighting towards the dismissal with the narrative taking from page 240 when Malcolm Fraser's blocking of supply is announced to page 362 when the crisis concludes.  Hocking's account is nothing if not partisan, being totally sympathetic to Whitlam, aggressively antagonistic to Kerr and letting Fraser off far more lightly than the Left used to, before he became one of their own.

One striking omission from her account is the fact that the Labor Party, when it had been in opposition, had regularly asserted the right of the Senate to block supply.  This cannot be from ignorance on Hocking's part, as one of her previous biographical subjects, Lionel Murphy, had been the most vehement in asserting the Senate's right to block money bills.  She often exaggerates to make her case:  for instance, she writes that Liberal Party members in South Australia were against blocking supply ― no doubt some were, but she implies it was all of them.

Yet, even though Hocking's treatment of the dismissal is flawed, it is at least lively and interesting.  It is the best part of the book.

There is too much material about ASIO, UNESCO and the Sankey case, counterbalanced by some extraordinarily light treatment of some other events.  The 1975 election campaign takes up a mere six pages, but even this is a lot better than the 1977 one which merits a mere two paragraphs.  One might think that this was Hocking trying to gloss over elections where Labor was thrashed, but even the 1972 campaign gets sparse treatment, largely falling between the two volumes.  Anyone interested in how Whitlam campaigned, what innovations he brought to campaigning, which aspects of it he enjoyed and which he did not, and how campaigning changed during his career will be disappointed.  There is a bit more on the 1974 election campaign, which Hocking irritatingly refers to more than once as the "forgotten election".  "Forgotten" by whom one has to ask.  Her lack of interest in, or understanding of, electoral matters is exemplified by her comment that the Senate which Whitlam faced in 1973 had "not been called to an election" in 1972.  She implies that this was a matter of choice, but a half Senate election could not be called until after July 1973, as the new Senators could not take office until 1 July 1974.

Hocking's attitude towards the competing political parties is reflected in the adjectives she uses to describe them;  generally pejorative ones for those representing the Liberal and Country parties, while she writes of one Whitlam speech that it was "electric ... meticulously researched, hard-hitting and riveting".  She paints Whitlam as the benign victim of malevolent opponents, claiming that Whitlam, being "the son of a disinterested public servant first and a politician second", imagined he would have to deal with a constructive opposition, rather than one that actually opposed what he was doing.  In Hocking's view, opposition to the Whitlamite program must always be due to improper motives rather than conviction.  For example, the medical profession's objections to Medibank are described as a "scurrilous campaign".

Hocking recognises that economics was not Whitlam's forte.  It is seemingly not hers either as she struggles to provide a coherent critique of the Whitlam government's handling of the nation's finances.  In the lead-up to the extraordinarily profligate 1974 budget, she dismisses Treasury advice to moderate spending as "a conservative political manifesto masquerading as economic strategy", but paradoxically is also highly critical of Treasurer Frank Crean for failing to aggressively push the Treasury position in Cabinet and of other ministers for seeking to make the budget even more expansionary.  The 1975 Budget is only mentioned belatedly and briefly in the context of the dismissal, rather than in its own right as an important sign that reality had finally struck the government.

As well as Whitlam's lack of economic competence, Hocking occasionally recognises other flaws in her subject such as his failure to handle his caucus well, verbosity, volatile temper, and poor judgement in relation to political realities and people's character.  She describes Whitlam's decision to resume his European tour, after returning to Australia in the wake of Cyclone Tracy, as one that "defied comprehension".

However, even if the book is not a complete hagiography to Whitlam the person, it is very much a hagiography of the Whitlam program, or at least the Whitlam program as Hocking imagines it.

Hocking's blindness to the reality, as opposed to her idealised version, of what the Whitlam government actually did is underlined when she describes the unwinding of its policies by the Fraser government.  She claims that under Fraser "the total immigration intake plummeted to its lowest level since World War II".  In reality, one of the first decisions of the Whitlam government was to cut the planned immigration intake for 1972-73 from 140,000 to 110,000 and by the end of their period in government it was down to a mere 50,000.  So, yes when Fraser came to power it was at a modern low.  However, far from cutting, as Hocking implies, the Fraser government gradually increased numbers back to almost 120,000 in 1981-82.  Whitlam was a virulent opponent of letting Vietnamese refugees into Australia, only allowing in one thousand in 1975 (the year of the fall of Saigon) and telling Cabinet in 1975 that he was "not having hundreds of f------ Vietnamese Balts coming into this country".  There is an argument that Whitlam was the most anti-immigration prime minister between Scullin and the present day, but that does not fit the Hocking image of her hero.  Of course, her hero would also not have sold out East Timor to the Indonesians, so she is at pains to defend him from any such accusations, from the Left or Right.

The book maintains the pattern of the first volume by making lots of silly factual errors which tend to reduce the authority of any opinions that the author expresses.  In the first volume, my personal favourite was Whitlam's father catching a train across the Harbour Bridge before it was built.  Here, a typical example is Edward Heath being given the title Sir when he met Whitlam in 1973.  In fact, he refused such an honour until 1992 but, in Hocking's world, all tories are undoubtedly titled in some way.

Perhaps even more of a problem than the bias and the sloppy mistakes is that, at times, this book is dull.  Making Gough Whitlam dull is quite an achievement given his larger-than-life character and the drama, colour and scandals of his government.  If you want to get the true flavour of the Whitlam era, reading one of former Labor politician Barry Cohen's books of anecdotes might be just as informative, and certainly more entertaining, than Hocking's effort.

The Future Is Bright

Abundance:  The Future is Better Than You Think
by Peter H. Diamandis & Steven Kotler
Free Press, 2012, 400 pages

Over-population, food shortages and an environment on the brink of collapse.  It's easy to be pessimistic about the world's future.  This is why it is a relief to find that there are some scientists who still believe that the world might not be on the brink of collapse.  Abundance:  The Future is Better Than You Think outlines how human innovation is going to save us from the world's greatest dilemmas, just as it always has.

Peter Diamandis, a space entrepreneur turned innovator, and Steven Kotler, a renowned science writer, lay out a vision for the future in which the basic needs of the world's nine billion people are easily met.  Within two decades there will be no hunger.  No thirst.  And education and health services for all.

Diamandis and Kotler focus on the power of small groups of individuals to take on grand challenges and overcome them for the benefit of themselves and humanity as a whole.  With history as our guide, we see that technology has always continued to improve our lives exponentially and there is no reason that it won't continue to do so.  They argue that we should no longer see the poor as a burden and a problem we must fix.  Rather we should start recognising the poor as creative entrepreneurs and empower them to help change the world from the ground up.

Abundance is a book all about science and yet it isn't heavy to read which explains why it has been such a hit.  If you are a fan of New Scientist then you will definitely get caught up in the exciting technologies that lay before us, and which hold the key to solving the world's problems.

Some of the basic problems which have forever plagued the poor will soon be eliminated as the book explains in great detail.  The "Slingshot", for example, can transform raw sewerage, salt water or contaminated water into high quality drinking water for less than one cent per litre.  And that is just one of the plethora of new technologies on the horizon that will change the world forever.

The book contradicts all the gloomy rhetoric that environmentalists drone on about such as the impending Armageddon, and leaves you with a sense of pride about where the human race has come from and is going.  Abundance argues that the answer is not to "try to slice our pie thinner ― rather it's to figure out how to make more pies".

Our lives have never been safer or more abundant with everything we can need or want and yet we seem more worried and risk-averse than ever before.  As Diamandis and Kotler write, "When seen through the lens of technology, few resources are truly scarce;  they're mainly inaccessible.  Yet the threat of scarcity still dominates our world view."

That's not to say that there aren't serious problems.  And we shouldn't underestimate them.  Billions remain in poverty suffering from hunger, preventable disease and without access to safe drinking water.  By 2050 there will be 10 billion mouths to feed on the planet.  It is this daunting fact that leads greens and others to call for population targets and new constraints on human consumption such as the carbon tax.  The answer for them is to try and hold back the human race.  To constrain it and control it.

China's one child policy has resulted in 300 million fewer births according to the Chinese government.  A major victory if your concern is population control.  But the results have been barbaric.  Bribery, corruption, suicide, backyard abortions, infanticide and forced sterilisation.

For the authors, the answers lie not with government restrictions or programs run by the United Nations.  Instead we should look to philanthropists, innovators, and entrepreneurs.  At the heart of the solution is the individual.  A Do-It-Yourself technical revolution where maverick innovators can accomplish what was once only conceivable by large governments.  With the technology that is within our reach not only can we feed and shelter everyone on the planet within two decades, but we can bring freedom to all of the people of the world as well.

Capitalism's Enemy: Cronyism

Liberalism and Cronyism:  Two rival political and economic systems
by Randall G. Holcolmbe & Andrea M. Castillo
Mercatus Centre, 2013, 144 pages

Randy Holcombe is a professor of public finance and public policy at Florida State University and a scholar in the style of the James Buchanan school of Public Choice economics.  Holcombe was on Florida State Governor Jeb Bush's Council of Economic Advisors.  So you can probably guess the line on capitalism and politics that you're going to get in this book.  Andrea Castillo is a program associate at the Mercatus Centre at George Mason University, which is the crucible in this modern era of most solid thinking on economics and economic policy, so you know what you're going to get there too.

This is a book about crony capitalism, but it is not the sort that will mollify those known as Occupy protesters.  Indeed, it is the sort of book that could really ruin the day of any earnest student of democratic politics who will analytically separate political from economic systems and then argue all night the finer points of why progressivism differs from majoritarianism, how socialism and fascism are clearly opposites, and why corporatism is the enemy of environmentalism, which is of course a form of social justice.  Holcombe and Castillo have bad news for anyone who believes that there really are many different political systems, or that political activism is a civic duty, or that democracy should be muscular so that it might represent the true will of the people (and fight mightily against the depredations of capitalism).

First, political and economic systems are interrelated systems of rules and those rules always have subjective discretionary aspects.  These discretionary aspects mean that there is always the potential for some groups to benefit from political connections.

Second, there are ultimately just two forms of political and economic system ― liberalism, where there is protection of individual rights and voluntary agreement when dealing with others;  and cronyism, a system in which people (cronies) receive benefits from personal connections that are not available to others who are outside the group.

"Capitalism is the economic embodiment of the principles of liberalism" and all other systems of political organisation and resource allocation involve some people exploiting the subjective discretionary aspects of rules to direct the activities of others toward inside groups (cronies).  Socialism, fascism, communism, environmentalism, corporatism, progressivism, despotism, majoritarianism, social justice and industry policy are not distinct political and economic systems, but different manifestations of cronyism.  There is ultimately only a choice between two types of political and economic system ― liberalism or cronyism.

Holcombe and Castillo argue that most political systems eventually succumb to cronyism and that the pathway is the same in every case, namely through the growth of government and with it the increased ability for some people to control the resources of others, and that those who are connected to those people will economically benefit, and in turn, that they will seek to keep those same people in political power.

The main body of the book outlines each of the various political "isms" explaining how they all succumb to cronyism through this same mechanism.  This is the teaching part of the book ― presenting example and explanation of why communism and fascism and progressivism and environmentalism are all not so different in the core respect that each furnishes a system of political and economic rules that can be used to benefit a group of connected insiders (the cronies) at the expense of others, and that those insiders will seek to keep the political coalition that grants these benefits in power, and that outsiders will seek ways to become insiders too.  All forms of cronyism are sustained by the power of government.  This is of course the mainline of public choice analysis through Mancur Olsen, James Buchanan and George Stigler, among others, but the clear contribution of this book is to focus on the concept of crony capitalism.

It is only by understanding the sense in which crony capitalism is the manifest enemy of capitalism (as the economic form of liberalism) that we can clearly see how cronyism lies at the root of so many other political economic pathologies.  In particular, Holcombe and Castillo make clear that "pro-business" arguments that seek special treatment through tax breaks and subsidies or other protection, and "pro-government" arguments from those who seek greater government intervention and regulation in the economy are essentially the same argument.  This is crony capitalism, seeking to benefit business insiders through exploiting connections to the state ― they cite the financial bailouts of car and insurance companies and the loan guarantees given to favoured alternative energy producers as examples.  They see no substantial difference between this and other forms of seeking to use the implementation of economic and political rules to benefit favoured groups, whoever they are.

The cure to crony capitalism is not then a more muscular and powerful state, because big government is the cause of the problem in the first place.  "Ultimately," they write "the only way to limit cronyism is to limit the government's power so that there is little benefit to participating in cronyism rather than productive activity."

An Australian Ruling Class

The Lucky Culture and the Rise of an Australian Ruling Class
by Nick Cator
Harper Collins, 2013, 293 pages

In 1964 Donald Horne's The Lucky Country was published.  Horne had one basic argument ― "Australia is a lucky country, run mainly by second-rate people who share its luck".  By the mid-1960s an emerging class of tertiary-educated professionals found a lot to like about Horne's criticism of their country.  This new class disliked Australia's prosperity, its success, and its conservatism.  According to the members of the new class, Australia would be a much better place if it was run by people like them ― instead by "second-rate people".

Gough Whitlam was the hero of this new class.  As Nick Cater brilliantly explains in The Lucky Culture and the rise of an Australian ruling class Whitlam understood that the new class could deliver his vision of social revolution.  He made the Labor Party the party of intellectuals.  In 1965 Whitlam proclaimed "Intellectuals and white collar people know that their decisions will be more effective and their advice will be heeded more under Labor.  The Liberals regard them just as employees.  We regard them as well-trained people to be heeded ... This party needs intellectuals and intellectuals need this party."

A few years earlier the editor of The Sydney Morning Herald had cried "What Australia badly needs is not a ruling class, but an educated class".  Whitlam made his new class Australia's ruling class.  It is the class that today rules the tax-payer-funded broadcaster, the bureaucracy, many of the professions ― including teaching and law, and much of the public debate in this country.

Cater charts the rise of the Whitlam's intellectuals and explains in devastating and thought-provoking detail what happens when those intellectuals get to rule.  Andrew Bolt being taken to court, and the Gillard government's attempts to regulate freedom of the press, and under the guise of "harmonising anti-discrimination law", to make it unlawful to tell a political joke that offended someone are just some of the results of a process that's been going on in Australia for half a century.

In 1970 Kim Beazley Sr famously said "when I joined the Labor Party, it contained the cream of the working class.  But as I look about me now all I see are the dregs of the middle class."  Three years earlier Gough Whitlam had been made federal leader.  Whitlam was a lawyer, his deputy in the lower house Lance Barnard was a teacher.  The Labor leader in the senate was Lionel Murphy a lawyer, and his deputy was Samuel Cohen, also a lawyer.  As Cater says, Labor's leadership, then as now, was less interested in nationalising the banks and the airlines, and more interested in nationalising the business of everyday life by "social engineering, supervised by technocrats trained for the task".

Social engineering was justified because social engineers believed themselves not simply "better off but better than their fellow Australians".  The new class was "cosmopolitan and sophisticated, well read (or so they would have us believe) and politically aware.  Their presumption of virtue set them apart from the common herd;  they were neither racist nor sexist, claimed to be indifferent to material wealth [and they] ate healthily [and they] drank in moderation ..."  Cater highlights the inevitable as the "class that claims the moral high ground will be tempted, sooner or later, to resort to censorship, since notions that challenge good ideas are, by necessity, bad".

Social engineers don't like freedom of speech, and they don't have much time for democracy either.  A former president of the Human Rights Commission once admitted that human rights are "much too important to leave just to governments".

Cater emigrated to Australia from Britain in 1989.  Back then "sneering was taboo in the Australia I arrived in;  today it is ubiquitous".  The new class sneer at their country and those who enjoy their McMansions, their McDonald's, and their air-conditioning.

For Cater it's Australia's culture that made the country lucky.  A combination of Australia's history (namely being settled by the British), geography, and environment gave rise to deeply egalitarian and democratic disposition.

Egalitarianism is the nation's primary operating principle, the key to its success and its saving grace.  There is no other country where egalitarianism is held in such high regard, nor where any hint of aristocracy has been so firmly slapped down.  Egalitarianism fosters enterprise in a pioneer society where settlers put the old ways behind them to build civilisation afresh."

In 1847 after being in Australia only four years, John Stephens the editor of the South Australian Register published an article in London designed to lure workers to the colony ― it was entitled Address to the Starving or Suffering Millions of Great Britain and Ireland.  Stephens summed up what made Australia special:

"Our laws are essentially English, and equitably administered according to the forms in use in Great Britain.  It is true that we have not as yet the power of self-government, but our taxes are light, impartially imposed, and easily collected, and there are no class interests to lead to class legislation.  There is one law for all, and it is administered without fear or favour by salaried and responsible functionaries ... I need scarcely add, that the press being free, the complaints of the poor man are as readily made known as the just pretensions of the rich."

It doesn't fit the narrative of Australian history as every school student in the country is going to be taught under the National Curriculum but there was once a great deal of enterprise and ingenuity in the country.  Not everything was a fight to the death between bosses and unions.  There was the merino sheep, the stump-jump plough, and HV McKay's Sunshine harvester.  While Henry Ford was establishing mass production lines, McKay was doing the same thing.  When McKay died in 1926 his factory employed 2500 workers.  At the beginning of the nineteenth century The Westminster Gazette reported:  "Australia is apparently destined to rival America in time in the matter of inventions of world-wide application and utility".  That Australia didn't was because of the deliberate government policy of industry protection and centralised wage fixing.  Australian businesses faced little competition and capital and labour became complacent and lazy.

In May this year I had the privilege of hosting Geoffrey Blainey at the Melbourne launch of The Lucky Culture.  Not that it's necessary to provide any more evidence of the validity of Cater's contention other than what he provides, but nonetheless within a few months of the book's publication yet another example emerged of exactly the phenomenon that Cater identified as so dangerous.

At a public forum discussing tax, Bernie Brooks the chief executive of the retailer Myer made the perfectly obvious point that if consumers paid higher taxes they would have less money to spend in shops.

He was commenting on the effect on consumer spending of higher taxes to pay for the Gillard government's national disability insurance scheme.  He was not remarking on whether the scheme was a good or bad thing.  In response to what Brookes said the Disability Commissioner, Graeme Innes (one of seven commissioners) launched a campaign against Myer via the leftwing website Change.org.

Innes said on Change.org that "Myer CEO Bernie Brookes' comments that a levy to fund the national disability insurance scheme is 'not good for our customers' and 'is something that would have been spent with us' are incredibly disappointing.  They demonstrate a lack of understanding of Australians with a disability, half of whom live below the poverty line ... I appreciate Mr Brookes has issued an apology, but I'd like to see Myer to commit to an employment target of 10 per cent of people with a disability by the end of 2015.  This would be a real demonstration of Myer's commitment to both people with disability and the broader Australian community."  There is no legal requirement on Myer to any such employment target.  The petition on Change.org that Innes started got 38,554 signatures.

Neither Innes or Gillian Triggs, the president of the commission explained why it was appropriate for Innes to use his taxpayer-funded, government-appointed position to launch a campaign against a private company whose chief executive had made a wholly unremarkable statement of fact.

What Cater says about the Human Rights Commission was proved absolutely true in the case of Bernie Brooks.  The Commission regards itself as outside the democratic process, yet uses the legitimacy of government to pursue its own agendas.  It doesn't fight to protect freedom of speech, but it does fight against companies whose CEOs have the temerity to comment about tax increases.

"Interventions in public debate by human rights commissioners are given the moral authority once afforded to bishops;  their reports into discrimination, social exclusion, sustainability, rights and restitution are afforded the status of sacred encyclicals and their integrity is rarely challenged.  The commissioners are treated as neutral umpires, sitting above the cut and thrust of popular democracy, immune from any suggestion of self-interest, status or empire-building."

No-one at the ABC would enjoy The Lucky Culture.  The mindset of the ABC hasn't much changed since the 1970s.  Back then the prevailing approach of the ABC's editorial line was described in an academic study quoted by Cater as:

"doctrinaire, intolerant, even illiberal ... [it has] a tendency to place beyond the pale all those who do not share the conglomerated values and beliefs of the moralisers.  And the interests of those oppose the ideologically determined goals and policies are seen, prima facie, as illegitimate and not deserving of any consideration."

When Cater appeared on the ABC's Q&A program earlier this year to talk about The Lucky Country, the host Tony Jones admitted he'd read the book, but then declared "I am not recommending it!"

Surely there can be no better endorsement for this wonderful work.

The ''shut up'' that spoke volumes

In 1980 during a US election debate, the challenger Ronald Reagan quipped to the president, Jimmy Carter, ''There you go again''.  It summed up everything Reagan wanted to communicate about his opponent, namely Carter's negativity, his inaction, and his constant complaining.  Reagan won the election easily.

Tony Abbott's line to Kevin Rudd at their debate on Wednesday night was nearly as good as Reagan's.  It's the line of the campaign so far.  In fact it's probably the most interesting thing to have happened in the entire campaign.  It's no surprise that Abbott's line dominated Thursday's media headlines.  George Brandis, the shadow attorney-general was spot on, ''I think it was one of the great moments in the history of Australian leaders' debates''.

''Does this guy ever shut up?'' encapsulates much of the Coalition's portrayal of Kevin Rudd — someone who talks a lot but whose achievements are minimal.

What Abbott said was so effective it was probably scripted — if it wasn't, it should have been.  The Opposition Leader, who has been so disciplined and so controlled for so long, showed in a moment the humanity that he's been intent on hiding.

The Coalition hopes that Abbott's words sum up what undecided voters feel about the Prime Minister.

Not everyone thought Abbott's comment was a masterstroke.  Some thought it was Abbott's ''Latham handshake'' moment.

In the 2004 election campaign, Mark Latham, the Labor leader, crossed paths with John Howard on the campaign trail at the ABC studios.  The image of Latham towering over Howard in what was widely regarded as an aggressive and menacing way was devastating.  It was devastating precisely because it confirmed some people's preconceptions of the opposition leader.  Labor's Penny Wong said Abbott's comment revealed he's ''a pretty aggro bloke''.  The ALP have promised to make this supposed evidence of Abbott's aggression a focus of their campaign.

What Abbott said at Wednesday's debate shows why election debates are important.  The debates are not really about policy — any party leader with a modicum of preparation should be able to defend their own policies and attack those of their opponents.  The reason debates are important is because they reveal the character of candidates.  How candidates speak and their presentation and demeanour give voters a chance to assess how candidates will behave in office.  Politicians change policies and break their promises all the time.  Character is more difficult to alter.

Political leaders are continually confronted by challenges and crises for which they don't have a policy.  How they respond to the unexpected is not a question of policy, it's a question of character.  Therefore, a much better guide to future performance is not a candidate's policies but their character.  Politics and policy-making is a flesh and blood process that doesn't often conform to the theory presented in the public administration textbooks.

In 2007 Rudd famously presented himself to the Australian people as a fiscal conservative.  At his campaign launch he said:  ''Today, I am saying loud and clear that this sort of reckless spending must stop''.  That commitment lasted five minutes.  What the electorate didn't appreciate at the time, but which the polls indicate they do now, is that the question of character was not about whether Rudd was a fiscal conservative, instead it was a question of whether he was simply saying what he thought would win votes.

We'll never know whether ''Does this guy ever shut up?'' helped Abbott achieve the Holy Grail of politics — having voters believe the candidate thinks what the voters themselves are thinking.  The outcome of his comment will only ever be able to be discerned indirectly when the votes at the election are counted in two weeks' time.  No doubt, rusted-on Labor voters like hearing the sound of Rudd's voice — and no doubt they'll think Abbott was rude and that what he said reveals more about his own character than it does about Rudd's.

But in this election, it's not rusted-on Labor voters who will decide the result.

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Behold the dance of the travelling salesmen

On Sunday Tony Abbott announced his government would provide $10 million to upgrade the Brookvale Oval in New South Wales.

As the Coalition's press release puts it, ''Brookvale Oval is the only ground between Sydney Harbour and Gosford that meets NRL standards''.  Furthermore, ''Only the Coalition can be trusted to deliver the Brookvale Oval upgrade and better sporting facilities for the Northern Beaches.''

Such is the high stakes of federal politics.

Every election carnival has its major attractions — the set-piece debates and the big announcements that consume half a week's worth of media coverage.  Think of Tony Abbott's corporate tax cut.  Or Kevin Rudd's northern Australia policy.

But in between these major announcements, there's a whole lot of filler.  Stadium revamps.  Road extensions.  Oval upgrades.

We've grown so accustomed to the stream of spending promises that accompany elections, we rarely reflect on how absurd they are.

For these critical few weeks, when Australians decide who is best to lead, the election campaign subordinates the serious task of distributing public revenue to theatrical opportunism.

We hope for the clash of political visions.  But we get rival groups of travelling salesmen, each trying to one-up the others' offer.

The Brookvale Oval promise has received a bit more scrutiny because the ground is already getting its upgrade — Labor's Anthony Albanese committed to it a few weeks ago.  And the money was already allocated in the May budget.

Few of the usual handouts get that sort of attention.

Over the past two weeks, Abbott has announced he would, if elected, provide money for an Antarctic research centre, a Hobart Airport upgrade, a netball centre in Queensland, a sports centre in Penrith (also announced by Albanese earlier), and a recreation centre in Victoria.

Kevin Rudd would like to be elected so he can hand taxpayer cash to a discovery centre in Melbourne's east, a sports complex in Launceston, a refurbishment of the Hobart Showground, a gymnastics centre in Mackay, and a natural gas research centre.

There's clear no rhyme or reason to any of these promises.  From the outside they seem completely arbitrary;  a scatter plot of spending.  They're sometimes handed to marginal seats, but not always.  Hopefully they have some internal logic.

But it's hard to imagine a single vote being swung on whether the Brookvale Oval or Hobart Showground gets federal funding.

We should distinguish these promises from another group of similarly forgettable announcements meant to reinforce specific messages.  Does anybody remember Abbott's pledge in 2010 to set up an ''Office of Due Diligence'' in the prime ministers' department, to vet new spending programs?  Of course not.  It wasn't a serious policy suggestion:  it was promised solely to remind voters that Labor was wasting taxpayers' money.

The challenge for any opposition is to convert their core argument — the government is terrible — into deliverable policy.  Much policy devised during an election campaign is like this.

Different again are the big, headline-grabbing infrastructure spends.  Take Abbott's promise to put $7 billion into the Bruce Highway in Queensland or $1.5 billion into the East West Link in Melbourne.  At least these are subjected to some public debate, and even — occasionally — a cost-benefit analysis to demonstrate they are actually worth doing.

In 2008 the Labor government created an independent body, Infrastructure Australia, to scrutinise such spending.  The idea was to avoid pork barrelling.  A lovely thought.  But the Coalition feels no need to abide by the body's recommendations.  And Labor ignores them when convenient.  (The Parramatta to Epping Rail Link in Sydney, a last minute pledge of Julia Gillard in the 2010 election, was never favoured by Infrastructure Australia.)

Anyway, minor showground renovations are well below the threshold for Infrastructure Australia, which only looks at ''projects of national significance''.

That is, it only looks at things the federal government should be doing.

If upgrading the only ground between Sydney Harbour and Gosford that meets NRL standards is a desirable use taxpayers' money, perhaps it could be paid for by state or local governments, whose citizens will directly benefit.

But then federal politicians wouldn't be able to claim credit.

The purpose of the pork barrel road show is impressionistic rather than specific.  It is spending as white noise — designed to give a potential voters a feeling that a Labor or Coalition government will be generous with federal funding.  Not generous anywhere particular, but everywhere.

Tony Abbott says he would like to be considered an ''infrastructure prime minister''.  He's promising ''cranes over cities'' like so many storks around a watering hole.

The sociologist Thorstein Veblen coined the term ''conspicuous consumption'' to describe consumption that was valued for the impression it left on others, rather than the utility it bought the consumer.

So much of what passes for policy during an election campaign is conspicuous investment — not important for its own sake, but to demonstrate how freely money would flow under the next government.

After all, if Brookvale Oval gets its funding, who knows?  Maybe your pet project could be next.

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Scare campaigns aside, GST on food is a no-brainer

Let us thank Kevin Rudd for reminding voters that ''great big new tax'' scare campaigns are a bipartisan affair.

The sole hook for Labor's claim that the Coalition will increase the GST is Joe Hockey's promise to conduct a review of Australia's taxation system that would include the GST within its terms of reference.  (Kevin Rudd's Henry Tax Review specifically excluded the GST.)

From that, Rudd has concluded that the price of Vegemite will rise 50 cents under the Coalition.

Pretty deceitful, but such is politics.  And let's not be precious.  Recall the often farcical tabling of electricity bills by the Coalition in the last parliament.  When a politician wants to make an argument — right or wrong — they'll stretch the truth to breaking point.  Whatever works.

But the carbon tax has nothing on the GST.  The GST is the great bogey-tax of our generation.

Thirty-eight years after it was first formally proposed in Australia, the GST still retains its power to spook the political class.

In 1972 William McMahon's government commissioned the first full-scale review of the Australian taxation system since the Great Depression.  The review, chaired by NSW Judge Kenneth Asprey, concluded that the key to a simple and efficient tax system was a broad-based tax applied uniformly to all goods and services.

By the time Asprey's report was released, it was 1975 and the prime minister's name was Gough Whitlam.  The only tax reform Labor was interested in was that which might suppress Australia's skyrocketing inflation.

Malcolm Fraser's cabinet toyed occasionally with a goods and services tax, but ultimately left it alone.  Paul Keating proposed a GST which was then scuttled by Bob Hawke.  John Hewson put it officially back on the political agenda, but an opportunistic Keating tore it down again when he tore Hewson down.  And John Howard had to denounce the GST before he could introduce it.  By comparison, introducing the carbon tax was a cakewalk.

No surprise our politicians don't want to revisit all that pain.

But any self-respecting tax review has to include the GST.  And any review would conclude that broadening the GST's base — that is, applying the GST to food — is a no-brainer.  Excluding food increases the GST's complexity and reduces its efficiency.

The argument that a GST on food would disproportionately hurt the poor is misconstrued.  Yes, the smaller your income, the more you're likely to spend on food as a proportion of your income.  But the food exemption doesn't just make food cheaper for the poor.  It makes food cheaper for everyone.  There are much more targeted better ways to help people on lower incomes — direct welfare payments, for instance, or varying the income tax schedule.

If you were a benevolent dictator designing a tax system from scratch, the GST would apply to all consumption goods and services.  The ideal system might even set the GST higher than 10 per cent.  There are a lot of inefficient, complex taxes that target production which could be replaced by a simple GST that targets consumption.

(This is important.  Free marketeers tend to favour GST reform not because they love taxes but because the GST should replace more distortionary ways of raising government revenue.  Any GST tax change ought to be revenue neutral.  Hopefully the Coalition remembers this in government.)

Of course there is no benevolent dictator, and we wouldn't want one.

Policy thought experiments like this are an economists' fallacy.  They assume the best policy can be modelled on a computer or detailed in a white paper and then imported holus-bolus into a nation's legislative framework.  The world doesn't work like that.  The elegant, uniform, and broad-based consumption tax envisaged by the Asprey review was shredded when it came into contact with the Australian Democrats.

One of the current furphies is the idea that Tony Abbott couldn't change the GST even if he wanted to — it would need to be renegotiated with the states.  This is wrong, at least on the face of it.  The GST is a Commonwealth law, and a Commonwealth law can be changed by the Commonwealth parliament whenever it likes.

But there appears to be an evolving political norm that would compel the Commonwealth to negotiate to change the GST, even though it technically does not have to do so.

Such a constraint is a good thing.  The GST is, after all, supposed to be the states' tax.

And we know from experience that a tax unconstrained by norms or rules can become a monster.

One of the major taxes that the GST replaced — the wholesale sales tax — was introduced by James Scullin's Labor government in 1930.

The wholesale sales tax was originally levied on a selected range of goods at a uniform rate of 2.5 per cent.  But by 1940 the government had hiked the tax to more than 8 per cent, varied the selection of goods, and introduced multiple rates.  The rate and the schedule changed repeatedly over subsequent decades.  Scullin's simple wholesale sales tax became a complex behemoth that the federal government couldn't stop tinkering with.

The GST has so far avoided this fate in large part due to the trauma involved in implementing it.

Maybe we should also thank Kevin Rudd for ensuring the GST remains a toxic tax.

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Increase the GST to 20%? Yes, but I wouldn't recommend it

It looks like the GST will feature prominently in yet another election.  The government is running a scare campaign on whether the Coalition will raise the GST after the election.  In the meantime Tony Abbott has stared down the camera lens and said, ''There will be no GST increase under a government I lead''.  Well, actually no;  he didn't say that at all.

What he has said is that the GST isn't going up.  Period.

It isn't clear to me that hammering this point is good for the ALP.  It does invite comparisons with the carbon tax.  In 1996 John Howard said ''never ever'' to a GST, but then changed his mind and campaigned on introducing a GST at the 1998 election.  He defended that choice at the 2001 election.  By contrast Julia Gillard's carbon tax wasn't taken to an election and isn't being defended at this election — it has been abandoned.

The point being that tax policy is hard policy and good policy is never rushed.  It takes time to garner community support for new taxation.  This has been the lesson of the last six years — if anything it has been tax policy that cruelled the Rudd-Gillard government.  It was the mining tax that eventually killed Rudd Mark I and Gillard never recovered from breaking her ''no carbon tax under a government I lead'' commitment.

The question remains, however, would it be good policy to increase the GST or to change the GST tax base?  I got asked this question yesterday on Radio National and my answer was very typical of a two-handed economist.

In short;  yes but no, I wouldn't actually recommend it.

I can imagine a situation where Australia had a 20% GST with no exemptions.  I would also reduce taxation in some other areas.  For example, personal income tax can and should be lowered — especially for high-income earners.  Corporate income tax could be lowered too.  The academic literature suggests that high rates on personal and corporate income tax retards economic growth.  Conversely inefficient state taxes could be eliminated.

Eliminating the exemption on fresh food would reduce the compliance burden that retailers bear in administering the GST.  It would also raise additional revenue.  Increasing the GST rate to 20% would massively increase the GST revenue gathered and increase spending on the kinds of services most Australians would like to see.

Whenever we have a tax debate in Australia and tax cuts are mooted, people always worry about spending on police, education, health, and the like.  Those functions are state government responsibilities and if you worry about those sorts of things then it is the states which need to raise more revenue, not the Commonwealth.  Higher GST means more spending at the state government level.

Mind you, that would only happen if the Commonwealth kept handing over all the cash to the states.  We saw when Kevin Rudd was trying to take over the hospital system that the Commonwealth could easily keep some, or all, of the GST revenue.

The Henry Review indicated that the GST had a deadweight loss (the loss of value that occurs when a tax is imposed) of some 8 cents in the dollar, compared to 24 cents for personal income tax, and 40 cents for the corporate income tax.  So increasing the GST and reducing income tax rates looks like a win-win for everyone.  On a purely economic assessment that is what many economists would recommend.

But there is much more to the story.

The GST is a regressive tax — for some this is viewed as a positive feature.  It forces low-income earners to make more of a contribution to the public purse than does an income tax.  For others, however, the regressive nature of the GST is an anathema.

Then we need to worry about the so-called fiscal illusion aspects of the GST.  Raising GST revenue is very easy — it is almost lazy.  If community acceptance of changes to the GST were to occur, very quickly we'd find ourselves paying more and more in GST.  That is very much the European experience.

In their monumental study The Power to Tax, Australian economist Geoffrey Brennan and Nobel laureate James Buchanan make the argument that the ''low rate and broad base'' tax arguments that economists often make are not necessarily efficient from a taxpayer perspective.  Politicians cannot credibly commit to not increase taxes in future.  Taxpayers know that politicians can and will overtax them and so they make it hard for politicians to raise new taxes.

So it comes to the GST.  If we were governed by angels I would happily recommend a higher GST.  As James Buchanan has argued, too many economists give advice to politicians ignoring the political realities and constraints of democratic governance — the GST falls well within that constraint.

Voters and taxpayers do not want Canberra to have too much access to easy tax dollars because they know full well the power to tax will be abused.

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Big government leaves a big bill

One of the fundamental issues that electors should grapple with during this election campaign is an answer to the question:  should government be larger, or should it be smaller?

The simple reason for this is that the scope, and size, of government can have a profound effect on our living standards, through the intensity and ways in which politicians and bureaucrats intervene in economic decisions made by individuals and businesses.

The extent to which the federal government has grown, across several key dimensions of government size, over the past six years has been breathtaking.

In a parliamentary democracy, approved legislation confers authority upon a government to undertake its fiscal activities in the first place.  As US economic historian Robert Higgs once said:  ''Authority comes first:  no authority, then no taxing, spending, or employment.''

During its period in office, the Rudd and Gillard governments enacted 975 acts, comprising 37,371 pages of legislation, including 134 acts with 3256 pages in 2013.

The average annual number of pages of legislation enacted from 2008 to 2012 was 6823 pages, compared with an average of 6071 pages from 1996 to 2007.

A significant feature of the sausages produced by the parliamentary sausage machine during the past two terms of government was their distinctly centralist flavour.

This included new legislation consenting to a federal IR system;  greater federal powers over disability services, hospitals and schools;  and even approval for a now abandoned referendum on direct federal funding of the states' local government authorities.

Assented fiscal legislation accorded the Rudd-Gillard government political authority to compulsorily acquire revenues through a large number of taxation and non-taxation sources, ranging from the buffalo levy ($5124 in 2011-12) to personal income tax ($148 billion).

As indicated in the recent economic statement, aggregate tax and non-tax receipts rose from about $295bn in 2007-08 to about $350bn in 2011-12.

Although these receipts declined as a share of gross domestic product over this period, partly as a consequence of weak corporate profitability and consumption expenditure growth outside the mining states, this outcome was not for want of trying by the government.

Over the past six years, a raft of new and increased taxes, fees and charges have been introduced, including new taxes on carbon dioxide, coal, iron ore and alcopops;  increasing taxes on tobacco, ethanol, LPG, luxury cars, superannuation, and income tax surcharges;  and rising visa application fees.

As the multiple-year budget deficits attest, the government fervently sought additional funds from domestic and global capital markets, raising the gross debt-to-GDP ratio from 5 per cent to 18 per cent in one of the fastest loan acquisitions in the developed world.  Using the current revenues collected from individuals and businesses, and then some, a spending spree of enormous proportions was launched into, lifting general government expenses from about $280bn in 2007-08 to about $378bn in 2011-12.

As a share of GDP, federal government spending increased from 23.8 per cent to 25.7 per cent.  Some of the major contributors towards this spending growth were in non-constitutional areas of responsibility such as transport, housing, education and health.

Taxpayers should know that interest payments on commonwealth government debt increased from less than $4bn in 2007-08 to about $11bn in 2011-12, exceeding the entire transport and communications budget of about $9bn.

Reflecting its multi-dimensional nature, modern government is also a major user of real resources in competition with the private sector.

The Australian Bureau of Statistics estimates there were 250,000 people employed by commonwealth government entitles (excluding permanent defence force personnel, diplomats and others working overseas) as at June 2012, up from 237,100 employees in June 2008.

Regular administrative changes render it difficult to provide a consistent count of the number of agencies that employ federal government employees, but it is well known that many new entities have been developed over the past six years.

These included the Fair Work Australia IR monolith, which has been criticised for increasing labour costs;  climate change regulatory and renewable energy financiers, raising the cost of living for families;  and a Preventive Health Agency concocting policies to paternalistically override private consumption choices.

The brief of statistical evidence presented here suggests that statism itself has been thoroughly stimulated during the previous two terms of government, and these developments should be of great concern from an economic perspective.

Numerous studies overwhelmingly find a negative correlation between growth in the fiscal measures of government size and economic growth, and this result comes out more strongly in recent analyses reliant upon richer data sets and empirical innovations.

The basic intuition behind these findings is that larger government impedes growth due to higher distortionary taxes, resource misallocations by politicians and bureaucrats, and the diversion away from productive activity as individuals and businesses turn towards seeking political favours.

Those with a vested interest in larger government usually dismiss these concerns by quoting Keynes, stating that in the long run we are all dead.

Nothing could be further from the truth.

In the long run, we are consigned to pay the bills and clean up the economic mess that political spendthrifts and regulatory zealots leave behind.

Issues concerning the size and scope of government matter, and ought to be top of the agenda this election campaign.

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The blame lies with past policies

This week, after the Reserve Bank cut interest rates to their lowest level in half a century, Treasurer Chris Bowen welcomed the decision and said lower interest rates were a ''good thing'' for Australian families and businesses.

On that reasoning, if Australia's official interest rate of 2.5 per cent is a good thing, then the European Central Bank's interest rate of 0.50 per cent must be a great thing.

In 2009, in the midst of the global financial crisis, Kevin Rudd said the cash rate then of 3 per cent was at ''emergency levels''.

The point is it's all about the context.  Which is exactly what shadow treasurer Joe Hockey highlighted in the wake of the Reserve Bank decision.

He simply said that if the performance of the economy was as good as the federal government claimed, interest rates would not be at record low levels.

(In typical fashion, Hockey's statement of the blindingly obvious was portrayed by the ABC as a gaffe.) Hockey understands what the Labor government (and the ABC) do not.  Low interest rates are not an unalloyed good for households with mortgages if one of the reasons that interest rates are low is because economic growth is slowing and workers are less confident about keeping their jobs.

On Thursday, the unemployment rate remained at 5.7 per cent, but only because the number of people looking for work declined.  Treasury predicts unemployment will rise to 6.25 per cent.

FOUR INGREDIENTS OF POST-BOOM ECONOMY

The governor of the Reserve Bank, Glenn Stevens, talked about confidence, and in particular confidence in the business community, in an important speech in Sydney last week.  He listed the four ingredients he believed necessary for Australia to make a successful transition to a ''post-boom economy.  They are:  a degree of global growth;  appropriate domestic fiscal and monetary policy;  Australian companies being internationally competitive;  and finally, confidence.

The global economy is out of our control.  But the other three ingredients are not;  they are the result of decisions made in this country.  Stevens was correct when he said it is ''somewhat concerning that the business community's confidence has been quite subdued in recent times''.  That's a statement of fact.

However, Stevens was not right when he said something else, and any person running a business and employing staff would have been able to correct him.  Stevens said:  ''Unfortunately, it is not a straightforward thing to turn sentiment around.  There's no such thing as the ‘confidence policy lever'.''  He's wrong — there is, actually.  The confidence policy lever is called the government.  It's impossible to discuss business confidence (or the lack thereof) without talking about the host of rushed, ill-considered and dangerous decisions the federal government has made over the past few years.  In the past two weeks alone we've had tax changes affecting the banks and car companies.  To go through the details of all the taxes and all the regulations Labor has imposed since 2007 that have hurt business confidence would take weeks.

CONNECTION NOT MADE

Stevens gives every indication of being knowledgeable and smart.  He would understand what the federal government has done to business confidence as well as anyone.  He even acknowledged in his speech the importance of having a regulatory framework that didn't ''inadvertently make it harder for businesses ... to take a chance on a new product, a new investment or a new worker''.  Yet he spoke in the future tense and in hypothetical terms.  Nowhere did he make the connection between why business confidence is ''subdued'' and what's happened since 2007.

The governor of the Reserve Bank might be on a seven-year contract and be paid a million dollars a year, but ultimately he's still a public servant — so what he can say is limited.  Nonetheless, his words and actions carry weight, which is why it's so important that when he talks of business confidence he should either be honest or not say anything at all.  Business confidence in Australia is not some ethereal and magical concept beyond the realm of domestic politics and policy.  The decisions governments make have a direct and immediate impact on business confidence — and we should never forget that.

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