Tuesday, April 29, 2014

Taxes are no substitute for savings

The government is kite flying a one-off income tax surcharge for the budget, perhaps to be deceptively called a deficit levy, to side-step the "no new taxes" pledge.

Commonwealth expenditure has blown out as a result of long-term commitments made under Rudd and Gillard.  As a share of GDP, it grew from 23 per cent in 2007/8 to 26 per cent this year with that level set to increase gradually over the next decade.

The blowout began in 2008 with windfall payments to lower-income people that fuelled a splurge on flat screen televisions and poker machine gambling.

It progressed to school hall programs, "Building the Education Revolution", "pink batts" home insulation spending, and compensating lower-income taxpayers for the carbon tax.

All those spending decisions were in pursuit of kick-starting the economy by funding consumer spending increases that would, so the Treasury and others said, lead to a new burst of investment and higher incomes.  This would enable the debt from the spending to be paid back effortlessly.  That didn't work in Australia or anywhere else it was tried.  Instead, the spending cannibalised savings and detracted from underlying income growth.

The spending momentum will be maintained by Gonski-recommended educational outlay measures and the program for vastly increased funding for people with disabilities.  In these and other cases, including Bill Shorten's decision to increase payments to the largely government-funded care workers, the payment load is encased in a framework of income-redistribution and higher levels of debt.  The income redistribution involves soaking the better-off, the side effects of which are to adversely impact on savings, investment and work effort.


ONE-OFF CUTS OF LIMITED USE

One-off taxes can only be effective if they carry with them a strong perception that they will not indeed be repeated.  Once a tax is factored into perceptions, it brings adverse consequences in distorting spending, as firms and individuals start rearranging their activities to minimise the impact.  The tax will almost always bring diminished levels of income, though some may cite as exceptions one-off taxes by Jeff Kennett (part of the Victorian electricity market reforms) and a 1981 special UK bank tax Margaret Thatcher implemented.

Whatever the credibility of these two examples, they have no relevance as responses to correct current fiscal imbalances faced by the Commonwealth.  The present dilemma is a budget deficit that goes on forever, created by a spending splurge.  A one-off tax is no solution.

Nor is a more permanent increase in taxation.  The Rudd-Gillard governments ratcheted spending up to new levels and the response must involve spending cuts.  Unfortunately, though the Abbott government has said it will rein in spending, it has also indicated areas of increase, including on carbon emissions, paid parental leave and the (very necessary) increases in defence spending.

I have previously identified $22 billion in annual ongoing savings.  These have ranged from eliminating all but emergency foreign aid, through to privatising the ABC and SBS, and to making massive savings in environmental expenditures and industry handouts.  In addition to these are one-off savings from the negative value-added that is the $10 billion Clean Energy Finance Corporation.  Eliminating the waste of these programs takes us half way towards the required contraction in spending.

For the rest, some bounds to aggregate spending — rather like the tithe of old — must be found.

There is no limit to needy causes that justify government spending but each dollar outlayed on these creates an increase in the demand.

Each program inevitably expands to meet marginal cases beyond its original reach and some recipients opt to place themselves in the supported categories.

In addition, the tax load required to fund the programs reduces incentives to work on the part of those paying the taxes.

There may be areas where tax policies can be tightened — including increasing the age at which aged pensions cut-in and the $800 million a year that education expert Andrew Norton reckons is available from better administering student loan repayments.  But more is required and this means focusing saving measures on the 60 per cent of Commonwealth spending allocated to health, education and welfare.


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Unnecessary impediment to retrieving earth's riches

Major coal-seam gas developers Santos and AGL have agreed with the NSW government to ­obtain permission from landowners before engaging in any exploration for gas.  Federal Industry Minister Ian Macfarlane has referred to this de facto landowner veto over mining development as "an inelegant solution to an intractable problem".

Others have much greater concerns.  They see it as erecting yet another barrier to gas development in the state and spreading to other states and other minerals, undermining Australia's century-old "finders-keepers" mining regime.  That regime involves vesting minerals separately from the land under which they sit with mining rights being transferred from the crown to whoever finds the minerals.

Although some Canadian provinces such as Alberta have similar arrangements, most common law systems vest mineral ownership with the surface landowner.  This automatically resolves farmer-miner tensions, but it means giving a share of exploration success to a passive rent-collector.  The Australian system avoids this dilution of the rewards from success, giving greater incentive to active explorers.

The Australian approach to land ownership has created a very successful mining industry.  Until a few years ago, Australia ­accounted for 20 per cent of global exploration spending, a share that dwarfs our 5 per cent of the world's land mass.  Australia's performance has deteriorated in recent years (to 12 per cent).  This is largely because Australian mining has been battered by tax and regulatory decisions that have increased risks and added costs.  Among these was the Mabo decision in the 1990s, making many areas vulnerable to Aboriginal land claims.  More recently we have seen intensified environmental restraints, industrial relations laws that allow greater scope for union disruption and resource rent and carbon taxes.

The Abbott government is trying to undo these recent imposts but the new landowner veto rights put in place by the NSW government are a backward step.

While mining cannot take place in the 0.3 per cent of Australia that is urban development, mining and farming readily coexist.  Mining, being a highly concentrated activity, has a trivial effect on agriculture.  Naturally, landowners would prefer to be granted ownership of the sub-surface resources — who would look such a gift-horse in the mouth?  And mining interests fully compensate the landowner for damage and inconvenience.

Allegations that mining might bring more widespread damage by, for example, disturbing or polluting the water table are, however, unfounded.  Even a recent highly publicised leak of "uranium contaminated" water near Narrabri was simply water containing naturally occurring and highly diluted uranium that posed no health risk to humans, animals or plants.

Activists' opposition to unconventional gas extraction has brought barriers to the resource's development in Australia.  Although Australia shares a prospectivity potential comparable to the US, government restraints have led to gas exploration running at less than one-20th of the rate in America, where a gas bonanza has reduced the gas price to a quarter of its previous level.  The Victorian government has placed an indefinite moratorium on the search for coal-seam gas, while the NSW government sees the veto provided to farmers as a means of ­allowing it to unblock the severe impediments on exploration in the state.

Behind the different considerations over property rights and vetoes by landowners is a crucial industry policy issue.  In spite of regulatory incursions into the industry, mining has been the crucible of Australia's relatively good economic performance over the past decade.  Exploration has been strong — worth $4.4 billion in 2012-13, despite having dropped 30 per cent this year.

Direct employment in the industry of about 200,000 is vastly augmented by indirect employment.  According to Reserve Bank estimates, once these are taken into account the mining industry's share of the economy is about 18 per cent, with mining-­related jobs totalling more than one million.  In addition, at least until recently, cheap energy has added further benefits.

Mining and agriculture are both sectors of great potential for Australia.  They are natural fits with the markets in the growing Asian economies in addition to offering cheap energy for domestic businesses and households.  The contributions of these industries can be strangled by ill-­designed property rights as well as discriminatory taxes and regulations.

NSW faces an additional early risk of being marooned with a shortage of gas and high household prices.  Resolute government action to restore exploration incentives for gas is an important first step.

We should fear slow growth, not inequality

In 1979, the free market economist Milton Friedman reviewed Margaret Thatcher's first budget in his Newsweek column.  Like Australia today, Britain faced a serious long-term budget problem.  Like Tony Abbott, Thatcher had been voted in to fix it.

Friedman thought her budget was excellent — a rare example of financial prudence in a highly imprudent decade.  It was chock-full of privatisations and tax reforms.  The sort of stuff Thatcher became legendary for.

But, alongside the tax reductions and spending cuts, the Thatcher budget also increased Britain's sales tax to compensate for some lost revenue.

This was a problem.  As Friedman wrote, "From the long-run point of view, it seems to me preferable to resort to a temporarily higher level of borrowing rather than a possibly permanently higher level of indirect taxes."

In other words, if the unpalatable choice is between a deficit and a tax hike, then a slightly prolonged deficit is the lesser of two evils.

Thirty-five years later, the Abbott Government's proposed deficit levy is supposed to be a temporary measure — perhaps limited to four years.

Abbott should listen to Friedman.  "Temporary" taxes are rarely temporary.  Once introduced, they have a habit of staying high and sticking around.

After all, Australia's income tax itself was only meant to be short-term thing.  The Commonwealth Government introduced the income tax during the First World War in order to pay for the high cost of military participation.

Of course, as the Commission of Audit demonstrated dramatically last week, the choice the government faces is not between a prolonged deficit and higher taxes.  The Government could cut spending and abandon its Direct Action and paid parental leave schemes.

There is something faintly ludicrous about a Government fighting its budget battle on two fronts.

For the free market right, the deficit levy is not just a broken promise — we've come to expect broken promises in Australian politics — but a betrayal by a leadership team that, for the last six years, has been claiming to favour low taxes above everything else.

For the left, the Commission of Audit represents a fundamental attack on the Australian social democratic settlement.

The audit commission report is remarkable.  It is incredibly rare to see major government reports so explicitly driven by philosophical beliefs about the proper scope of government.

This is something Australian politics could do with more of, not less.  Bold premises, radical conclusions.  It's similar in a way to what came out of Kevin Rudd's 2020 Summit, but the audit commission is more coherent and doesn't bother pretending to be the result of Ruddian consensus politics.

Yet to what end?  The Abbott Government won't do much with the report.  What is radical in the audit commission is unlikely to be adopted.  The policies which will be adopted have been floating around forever.

There is no way that this Government will be returning income taxes to the states.  Sure, Tony Abbott has gone through an evolution of his views on federalism since he wrote his 2009 book Battlelines.  He is apparently no longer a myopic centraliser.  But there is no one in Government with appetite for such epoch-making reforms.

The things that will be adopted — like selling Medibank Private — have been obvious low-hanging fruit for many years.

So in many ways the audit commission reveals the Abbott Government's lack of reforming ambition rather than its radicalism.

The deficit levy underscores that timidity.  Don't be fooled by the recent polls.  Compared to cutting spending, raising taxes is the easy option.

The basic political economy problems with deficits and taxes are similar.

The reason it's important to return the budget to surplus is to ensure that there is constant pressure on politicians to spend only what the tax system brings them.  This is because every political incentive goes the other way.  The best way to ensure a voting bloc supports you is to offer them financial support.  Unchecked, governments want to spend more than they tax.

The only real constraint on this runaway spending dynamic is the fiscal norm that says budgets need to be returned to surplus.  Short-term governments rarely worry about long-term consequences.

So it is important that we reduce the deficit as soon as possible.  But not by any means possible.

Because, as Milton Friedman cautioned Margaret Thatcher, while the long-term dynamic of forgiving budget deficits would be bad, the medium-term dynamic of introducing higher taxes would be far worse.

Yesterday morning Tony Abbott said "in the long run the voters will thank us for doing what is absolutely necessary".

Maybe.  But in the long run voters should have no confidence that this Government — or a future Labor government — will happily forego the new stream of revenue the deficit tax will provide.


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Is Gen Y getting a raw budget deal?

Special interests representing older Australians are crying foul over prospective budget cuts, but we should spare a thought for the indebted and unemployed millennial generation.

The first budget of the Abbott government is due to be released within the next fortnight, and public speculation has well and truly reached fever pitch concerning exactly how the government intends to end "the age of entitlement".  The focal point of this speculation has centred upon certain expenditure programs, which are particularly sensitive to old age-related demands, in the areas of welfare and healthcare.

The government is proposing raising the age pension eligibility age threshold to 70 years by 2029, or reducing the maximum investment income one can earn before pensions are reduced.  Within the healthcare sphere the reform option of a modest Medicare co-payment of $6 has been put forward as a prospective aid to the overall fiscal consolidation task (the National Commission of Audit has recommended a $15 co-payment in its report released on Thursday).

Rather unsurprisingly, assorted interest groups representing the financial interests of pensioners and other retirees have generally reacted in a caustic fashion to these and other policy thought bubbles floating in the pre-budget air.

Seniors groups are among some of the most highly organised vested interests in the country, given the rapidly growing demographic representation of older Australians, and there seems little question their perspectives will hold even greater political sway in coming years.  But in this era of big government crippled by a structural budget emergency, policymakers and members of the general public should be very mindful of the fact that persistent growth in age-sensitive spending will hinder, rather than help, people in other age brackets.  Indeed, as the Abbott government looks to start partaking in the daunting exercise of budget repair, it should perhaps be thinking of the future prospects of Generation Y, or "Millennials", born from the early 1980s to early 2000s, first and foremost.

It is true that Australia's Millennials are among the wealthiest, healthiest and smartest cohort of young people history has ever seen, by virtue of the unparallelled economic and social starting points bequeathed to them by previous generations.  However, government policies, by and large, do seem to have let them down terribly, and this needs to change.

The worst aspect of federal policy to harm the interests of Millennials has been the rapid accumulation of government debts in Australia over recent years, as part of one of the fastest deteriorations in public sector balance sheets witnessed in the Western world.

The latest Mid-Year Economic and Fiscal Outlook statement, released last December, showed gross federal general government sector debt ballooning from $55 billion, in the last full year of the Howard government in 2007-08, to an estimated $310 billion this financial year and rising in the out-years.

Taking into account some of the more liquid asset holdings of the government, net debt has also skyrocketed, from minus $45 billion (implying a net financial asset position) in 2007-08 to $192 billion in 2013-14, and estimated to further rise to $281 billion by 2016-17.  The repayment of these debts will be shouldered, in the main, by the Millennial generation, and perhaps by generations that follow them, in the form of tax burdens that would be greater than would otherwise be the case.

That future taxation of Millennials without representation is being politically organised by baby boomer, and to a lesser extent Generation X, politicians seems reprehensible enough from a democratic accountability perspective, but this is by no way the end of the matter.

What makes the radical upscale in debt particularly odious for young people is that the borrowings would have largely, but not exclusively, been directed towards welfare handouts primarily benefitting politically powerful seniors, as well as mainly middle-aged families.  We know this is true, in one respect, by an examination of the structural composition of federal general government expenditures.

Social security and welfare spending alone accounts for 34 per cent of the total estimated general government expenditure of $412 billion this financial year.  If we add health and housing expenditure, much of which is subsequently redistributed to the states as tied grants, then this welfare state spending accounts for about half of the federal budget.

Most economists would tend to agree that government debts would be put to best use if their proceeds are being directed to genuinely productive, long-lasting infrastructure assets.  Putting aside the important question as to whether federal capital spending is productive in all instances, privatisation and other policy developments has meant that investment now makes only a fairly minor contribution to the overall federal government spending profile.

The notion that the debt boom has primarily not been to the advantage of Millennials is corroborated by statements in previous budget papers that borrowings were conducted to cover perceived revenue shortfalls, primarily affecting the general government sector that increasingly spends for redistributive reasons.  Finally, the Bureau of Statistics figures on the distribution of taxes and benefits across households illustrates that, on average, young households pay more in taxes than they receive in government cash transfers, whereas the reverse clearly applies for retiree households.

The debt-for-handouts political culture was excoriated by economists such as James Buchanan, who once characterised it as "placing claims against future incomes, with no future offsetting benefit stream".  Even more dramatically, Buchanan pictured the use of borrowings to finance the welfare state as "bequeathing negative capital value to future generations in our capacities as members of the body politic".

This fiscal harm meted out against the Millennials does not include other pressing policy problems, such as prescriptive labour market regulations contributing to unacceptably high youth unemployment rates, and housing taxes and land supply restrictions contributing to a lack of housing affordability.  While young people will perhaps always tend to do it tougher, since they are still building up their human capital base and generally discovering what life has to offer them, it is incumbent that government policies not hold them back, as they presently do in key respects.

The coming federal budget might well contain some spending-reduction measures baby boomers might not like, but they should at least accept that fiscal consolidation potentially presents an opportunity to short-circuit the politically induced conflict between generations.  Older Australians were themselves young and hampered in so many ways by authorities once, but it does not make it right that they use political processes to extend economic and fiscal discriminatory treatment against the Millennials.


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Tuesday, April 22, 2014

Election promises are there for the breaking

What are election promises for?  Who on earth do they convince?

Tony Abbott walked into a trap during the 2013 campaign when he excluded a bunch of policy areas from budget reductions.

Those include the pension ("no change to pensions"), the public broadcasters ("no cuts to the ABC or SBS"), Commonwealth health spending ("no cuts to health"), and Commonwealth education spending ("no cuts to education").  Watch the video, Abbott was unequivocal.

Now, to bring the budget back to surplus, the Government is looking at changing the pension and cutting ABC and SBS.

No one can forget the enthusiasm with which the Coalition pursued Julia Gillard for her "no carbon tax" pledge.

As a consequence, one theme of Abbott's stint as opposition leader was his attempts to bind his future acts in government.  But the Abbott obsession with promises predates Gillard's carbon tax backflip.  In 2010 he even physically signed a "contract" that the Fair Work Act would not be amended.

I've put the word contract in quote marks because a contract that cannot be enforced is not a contract at all.

That contract would mean nothing if the Coalition announced tomorrow that the Fair Work Act was going to be abolished.

This is the promises dilemma.  Elections are commitment games.  We vote for the candidates and parties whose values and policies are most appealing.  But how can we be sure they'll follow through?  All we have is their word — their assurance they will act in a certain way under certain circumstances.

Of course, commitment problems are common across all spheres of human endeavour.  In the marketplace we often pay up front for services to be rendered later.  But we have courts to enforce commercial contracts that have not been fulfilled.  In politics there is no institutional mechanism by which voters can enforce the pledges that their elected representatives have made.

H.L. Mencken famously defined an election as "an advance auction sale of stolen goods".  He was not cynical enough.  Voters bid without any guarantee that the auction will proceed to settlement.

So the mystery isn't why promises are broken, but why they are kept at all.

The most likely explanation is that politicians want to be re-elected, and a reputation for promise breaking is likely to damage their re-election chances.

But elections are weak discipline.  They're only held every three years.  And three years is a long time to wait to enforce a contract.  Elections are an imperfect control.  Sure, voters weigh up the honesty of candidates, but honesty is not the only factor that determines an election.  Sometimes it's better to re-elect a liar than risk a potential incompetent.

There are other constraints on breaking election promises.  A dissatisfied electorate, even in non-election years, can make it hard to pursue your agenda.  Politicians may even be constrained by personal ethics ... who knows?

This 2009 survey of election promise studies across Europe and the United States found that political parties kept on average 67 per cent of their campaign commitments.

The inherent difficulties of measuring political promises aside, 67 per cent is surprisingly high.  But how would voters react if they were plainly told that one out of three promises would be broken?  How would consumers feel if one out of three products were lemons?

If politicians really wanted to demonstrate a credible commitment to the electorate, as the economist Robin Hanson writes, they would post personal bonds — say to their homes — that would be forfeited if a promise was broken.  Then we'd know they had skin in the game.  Of course no politicians do this.

One objection might be that in a representative democracy we do not vote for representatives as agents to do specific enumerated tasks, but instead install independent delegates who we trust to follow their own conscience.

And it's exactly what the Abbott Government is claiming now — that its general mandate to fix the Australian budget trumps any nit-picking over what was said or wasn't said in opposition.

But then why the elaborate, interminably detailed promises?  The Abbott Government, like the Rudd government, released dozens of policy documents in the lead up to 2013 — full of specific itemised policies they planned to implement in government.

Here's one answer.  Parties don't see election promises as promises in the plain English meaning of the word.  Instead, promises are signals designed to express a deeper character of the political party.  When Abbott promised not to change the pension and not to cut public broadcasters he was trying to signal that his would not be a radical government;  that he was firmly targeting the median voter.

After all, why give the SBS promise?  Did it win any marginal votes?  Surely not.  But it did suggest to the electorate he had no secret plan to burn through Australia's institutions.  Promises like that increase the political cost of radical action.

This practice is of course deeply deceptive — election promises as signals rather than genuine commitments — but it's a deception we're used to.

Voters are rational.  We know campaign nonsense when we see it.  As this interesting 2004 paper points out, voters infer the true policy position of candidates for office despite the thicket of untruths.

Obviously Coalition failures deserve to be treated as harshly as Labor failures were.  Perhaps more.  The Coalition swore to be guided by higher ethical standards than its predecessors.

But let's not pretend to be surprised.  Australia is one of the world's oldest democracies.  We've been voting for broken promises for a very long time.


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Saturday, April 19, 2014

Attack on tobacco availability in ACT is wrong and sure to fail

Recent proposals for tobacco control are another instance in a long line of paternalistic, yet futile, attempts by political elites to force their preferences upon everyday Canberrans.

To great fanfare last year, ACT Health Minister Katy Gallagher launched the report Future Directions for Tobacco Reduction in the ACT 2013-2016 to coincide with World No Tobacco Day.

Following that release, a discussion paper canvassing options for restricting access to tobacco was distributed for public comment with a range of suggestions all intended to conform with a Council of Australian Governments objective to reduce smoking prevalence in Australia to 10 per cent by 2018.

In essence, there are two key ideas in the discussion paper intended "to minimise tobacco-related harms through a reduction in tobacco product availability".

The first is that existing tobacco licence holders, and prospective ones, should be liable for a significant escalation in the annual licence fee:  the current $200 would increase in future by increments of $200 or even $500 a year.  The discussion paper suggested that fee indexation could also apply, to provide "an incentive to a licensee to give up the license to sell tobacco".

The second is that a new regime of access restrictions would be added to the already prescriptive regulatory regime surrounding the sale of tobacco products in the ACT.  Some options presented include introducing a "fit and proper" person test for holding a tobacco licence upon application, and to restrict the time of day in which the sale of tobacco can actually occur — say, from 8.30am to 5pm, or two periods during a given day.

In addition, the proposal has been publicly canvassed to limit the amount of tobacco that customers can buy in any one transaction — ranging from, say, a single pack to a carton of cigarettes.

But the assertion made in the paper that these proposed policies would reduce tobacco consumption across Canberra is laughable, as it ignores the incentives of people to avoid highly discriminatory fiscal or regulatory treatments.

Recent research for Australia alludes to a discernible growth in the illicit tobacco market.  A report by consultancy KPMG says the share of tobacco consumption attributable to non-taxed, illicit products is close to 14 per cent.

The consumption of counterfeit, contraband or unbranded loose cigarettes has risen, although 70 per cent of the price of a legal pack is comprised of federal excise and plain-packaging laws have been ineffective in stamping out the illicit trade.

For a small, landlocked jurisdiction such as the ACT, it would appear highly likely that any measures to greatly restrict legal cigarette sales within Canberra would be easily nullified by a simple car drive across to Queanbeyan, Yass or elsewhere over the border.

And what would prevent people involved in the illicit tobacco trade from pocketing a healthy return for themselves, should the ACT government decide to try to restrict cigarette sales to certain times of the day?

The government places great weight on a paper first published last year, in the Tobacco Control journal, which claims South Australian moves to radically increase tobacco retail licences from $12.90 to $200 a year subsequently cut the total numbers of licences held.

While the conclusions of the study are debatable, given the lack of control variables — such as the effects of the 2008-09 global financial crisis on business entries and exits — the study did acknowledge that tobacconists might be harmed more severely than multi-product tobacco retailers, such as supermarkets and petrol stations.

If tobacco licence fee hikes, or restrictive licence quotas, were to be applied, this would greatly harm the continuing prospects of small-scale specialised tobacconists, relative to the already well-established supermarket chains in Canberra, that can more readily accommodate the consequences of any proposed changes put into effect.

When all is said and done, it seems the ACT government is locked in to a predetermined position, borne by a distaste of smoking practices enjoyed by a declining, but still considerable, cohort of Canberrans, regardless of the consequences.

The Gallagher government appears not to have paused to consider its policy settings in light of the experience of Canberra's own fraught history of paternalistic controls on certain lifestyle products, either.

In 1910, firebrand parliamentarian King O'Malley persuaded the federal government to issue an ordinance prohibiting the sale of alcohol in the Canberra area, thus enforcing his personal teetotalling preferences upon 1700-odd residents at the time.

But even O'Malley baulked at the idea of restricting the distribution and possession of alcohol in the Federal Capital Territory, given that wet Queanbeyan was right at Canberra's doorstep but under NSW state jurisdiction.

You don't see similar wisdom pervading the Gallagher government discussion paper on tobacco control, though, which implicitly, yet foolishly, treats the ACT as having closed borders.

The shipment of alcohol from NSW, and the subsequent enjoyment of these beverages within the ACT, meant that, according to a 1927 Canberra Times article on the "liquor farce", "liquor pours into the territory night and day".

O'Malley could initially persuade the then territories minister to impose a prohibition on local alcohol sales, but the paternalistic policy could not withstand the hordes of thirsty federal politicians and public servants relocating from Melbourne over a decade later.

Following a local referendum on the matter in 1928, one of the first actions of the federal government in the new Parliament House at the time was to end Canberra's alcohol prohibition law.

Surely much to the chagrin of O'Malley, who had long departed from the political scene by that stage, the repeal of prohibition struck a positive blow for freedom, as local hotels, clubs and "alcohol cafes" enjoyed the right to sell brew to Canberrans.

In advocating stringent restrictions on tobacco availability, the ACT government risks a repeat of the futile early 20th century alcohol prohibition exercise, thereby failing in meeting its own contemporary policy objectives.

The tobacco control proposals should be seen for what they truly are:  an illiberal attempt to impose arbitrary political preferences on ordinary citizens.

Although most Canberrans today are non-smokers themselves, it would be no foregone conclusion that, if they had a direct vote, they would restrict the freedom of smokers to continue legally indulging their harmful habits.

After all, not only did the people of Canberra vote in favour of ending alcohol prohibition, but they later voted against the very self-government that has since sought to impose nanny-state paternalism upon them at every turn.


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Friday, April 18, 2014

The new curriculum's rubbish history books

Ever since Christopher Pyne announced the review of the national curriculum in January this year, the national curriculum has been a topic of heated debate, and no area of the curriculum has received more attention than history.

On the one hand, proponents of the history curriculum — many of whom were directly involved in the drafting process — have accused Pyne of "politicising history" and have claimed the existing document is somehow immune to bias and is entirely objective.

On the other hand, critics of the national curriculum — myself included — have maintained that the existing curriculum is biased in many respects, and that it denigrates Australia's western heritage and reflects a distinctly socialist and materialist view of history.

While the debate rages on, the much-critiqued Labor history curriculum has already been rolled out into many Australian classrooms across the country.  Not only that, but a select number of national curriculum-compliant history textbooks are now appearing on booklists everywhere, all of which closely reflect the contents of the curriculum.

I came across the some of these textbooks while writing my own critique of the national curriculum, and purchased a number of them from Years 7 to 10 to see what they revealed about how the curriculum was being implemented in classrooms.  What I found was a selection of books which contained so many outrageous statements and factual errors that they were worthy of a critique on their own.

The errors and distortions found in these textbooks are not just problematic for their own sake:  they reveal the fundamental ideological biases of the national curriculum itself.

Most schools across Australia are now using at least one of them for Year 7 to 10 history classes.  Three that stand out as especially popular are the Jacaranda History Alive books (or the equivalent Retroactive series in New South Wales), the Oxford Big Ideas — History books, and the Pearson History series.

Given this, I took a sample of history textbooks from all the major publishers.  The sample included the Year 7 Pearson, the Year 8 Macmillan, the Year 8 Cambridge, the Year 9 Jacaranda, and the Year 10 Nelson/CENGAGE Learning.  I also had a look at the Oxford Year 7, 9 and 10, because these books most closely reflect the contents of the national curriculum and were written by some of the academics who were directly involved in the drafting process.

To be clear, not everything about these textbooks is bad.  The best of them are glossy, colourful, filled with bright and interesting images, and also very pleasant to leaf through.  And some are much better than others.  The content and quality of some sections is also excellent.  Usually, they provide very good — if somewhat superficial — introductions to World War One and World War Two, and generally they provide some excellent content on technological advances and changes in the economy during the Industrial Revolution.

Nevertheless, these history books often appear to be filled with factual errors, controversial statements, and unwarranted generalisations.

For example, just a brief survey of the Pearson Year 7 chapter on "Ancient Rome" reveals some of the fundamental problems that pervade most of the textbooks.  My short assessment of this 39-page chapter found 61 obvious factual errors.  These aren't statements that are debateable or contested in scholarship, although there were many of these as well;  there are 61 factual errors that can be refuted swiftly with easily available evidence.

Some of these were as simple as confusing "BC" and "AD" or citing the wrong dates.  For example, the textbook claims that the Romans built the main part of the Appian Way in 32 BC.  The correct date is 312 BC, around the time Rome established control over Italy.  It also says that Cicero became consul in 63 AD.  The correct date is 63 BC, before the Republic collapsed.  It also says in a timeline on page 222 that Caesar became consul in 50 BC and invaded "France, then Britain".  In actual fact, Caesar was consul in 59 BC, and after his consulship ended he led campaigns in Gaul, Germania, and Britannia in 58-50.  He returned to Italy and crossed the Rubicon in 49, thus beginning the Civil War.  Once again, the chronology in the textbook is wrong.

These errors are irritating, but not so irritating as to provide a completely warped version of Roman history.  Some of the other errors, however, do much more to distort the historical narrative.  One particular example is on page 217, where the following statement appears on the glossy page:

By 212 BC, part-citizens were given full-citizenship.  This meant that free-born men living in the Roman Republic now had citizenship, and therefore the right to be involved in politics.

This left me confused, wondering if I had missed something important in my own studies.  Why would Rome's Italian allies (socii) have gone to war largely over the citizenship early first century BC if they had already been full citizens?

In fact, the textbook had been referring to the Edict made by the emperor Caracalla of 212 AD — about four hundred years later.  The Edict did indeed grant full citizenship to all free men in the Roman provinces, but by that stage the circumstances were radically different.  The Republic was long gone and the empire was rapidly descending into a serious crisis.  In this increasingly turbulent period of Roman history, the only way the average citizen could reasonably expect to "elect" a government was to gain control of an army or stab the existing emperor in the back (indeed, Caracalla himself was assassinated by his bodyguard in 217 while urinating on the side of a highway).  Since there were no longer regular elections and the old Republican offices — including that of "Consul" — were mostly honorary, the Roman citizenship may not have meant much to the majority of people by that stage.  Caracalla's motives are contested by modern scholarship, but if Cassius Dio is anything to go by, it was done largely for administrative purposes, and not to confer then-redundant voting rights upon the inhabitants of the empire.

When dealing with Roman history, confusing "AD" and "BC" is an easy enough typing error to make, though an embarrassing one.  Unfortunately, the textbook qualifies this error when it says that the citizenship was granted to everyone living in the Roman Republic.  Even more unfortunately, the original error — "212 BC" — is repeated a second time on the following page.  This was evidently no mere typo.  Presumably, the people writing this textbook were genuinely confused and couldn't be bothered checking the facts.

These are only a handful of examples.  Other examples of the errors scattered through the those 39 pages include the repeated confusion of ancient legends with modern scholarship — as when it claims "historians generally agree that 753 BC was the year when Ancient Rome emerged as a town with political power" — and some generalisations so absurd they don't even need to be refuted — for example, "in small towns the amphitheatre usually provided the only entertainment," "all Romans went to the public baths," "most people lived in crowded apartment-style dwellings, up to six storeys high, called insulae" and "Romans thought of all people living outside the Empire as barbarians or uncivilised savages.  They had little regard for barbarians."

Elsewhere, the diagrams of Roman clothing look like they have been drawn from a cheap party costume catalogue.  They appear vaguely "Classical", but are certainly not accurate depictions of the standard garments Romans wore throughout most of the Empire's history.  The book cites the great historian Livy — who was actually quoting someone else — as evidence of "Rome's intentions in the Mediterranean region" in the early days of its expansion, many centuries before Livy was writing.

It asserts that "barbarians conquered all parts of the Empire, including the city of Rome" in the fifth century, suggesting that the writers were completely unaware that the eastern half struggled on in some form for another thousand years.  It says that "all Roman laws were called the Twelve Tables" — an error roughly akin to saying that all Australian laws are called "The Constitution".  It says that Cicero was the first plebeian consul in 63 AD.  Even putting aside the fact that the date is incorrect, this statement is completely wrong:  in fact, it had been required by law that one consul each year be of the plebeian order (i.e. not a patrician) ever since the Lex Licinia Sextia of 367 BC — just over three centuries before Cicero actually did become consul.

These are not mere errors.  Often they betray the authors' crude-Marxist assumptions about class divisions.  The textbook erroneously says that "the plebeians in Rome were the social class who were poor, uneducated and low in status".  This might have been the case before 367 BC, but by the late Republic, the plebeians no longer formed a strict "social class":  they are better described as all Roman citizens who were not patricians.  This included the hungry, landless masses of Rome, as well as many smallholders from the countryside, successful equestrian businessmen, and even some nobiles — men from consular families.  During the early empire, the distinction between "patricians" and "plebeians" became largely irrelevant, and wealth was a more important indicator of status.

For example, Marcus Licinius Crassus — popularly thought of as one of the wealthiest men of the ancient world — was technically of the plebeian order.  Equally, some patrician families were extremely poor by the dying days of the Republic.  The patrician dictator Lucius Cornelius Sulla grew up impoverished.  The other dictator of that century, the famous Julius Caesar (another patrician), was bankrupt for much of his early career.  He relied heavily on financial support from — guess who? — Crassus.

Roman society in the Late Republic may not have been especially mobile, but it was not simply a case of poor and oppressed plebeians being ruled over by wealthy and privileged patricians.  Yet the Pearson textbook (just like the Oxford textbook, oddly enough) ignores this.  It instead offers a simplified, highly-stratified, quasi-Marxist depiction of Roman history, in which no plebeian became consul until about a hundred years after the Republic had fallen.

The Pearson textbook is not the only one with significant errors, of course.  The Oxford Year 7 equivalent also has its fair share of outrageous statements, such as when it says "one must be born a Hindu to be a Hindu," insists that Jesus Christ was born in Nazareth, and refers to "a modern artist's depiction of Professor Binns, Harry Potter's History of Magic teacher".  I struggle to think of where anyone would find a depiction of Professor Binns that is not "modern".  It also refers to one "Cornelia Gracchus".  Note that "Gracchus" is a masculine form of the name, and therefore it does not agree grammatically with the name "Cornelia" and is very bad Latin above all else.  It also dates the construction of St. Peter's Basilica to 315 — which is slightly incorrect itself — and then follows it up immediately with an image of the existing 16th century St Peter's Basilica, as if to imply that it is the 4th century building.

The Year 8 Cambridge history is similarly not immune.  In one example, it says that "Christianity took hold in parts of the Byzantine Empire" and "by the eighth century Spain, North Africa and areas to the east had largely converted to Islam".  Never mind that the western half had not yet fallen when Theodosius I made Christianity of the Nicene Creed the sole official religion of the Roman Empire;  and never mind that the regions that supposedly "converted" to Islam by the eighth century were essentially conquered through military force — and some of them, like Spain, during the eighth century, not before.  It appears to be confused when it says that Venice was an important naval power by the eighth century, insists that Turkish Baths were an inheritance from Central Asia without mentioning the Greek/Roman/Byzantine influence, and implies that what is now France was divided between Burgundians, Visigoths and Franks when Charlemagne came into power (the Burgundian and Visigothic Kingdoms had both ceased to exist by that time).  A large image of the iconic 6th century Byzantine cathedral, Hagia Sophia, also features on the title page of a chapter on the Ottomans.

It is, of course, a time-consuming and futile exercise to detail every error and strange statement on every page of every textbook (and there are a lot of them).  How could they be this bad?  It probably has nothing to do with the fact that the writers are not qualified to write them;  seven of the fifteen authors listed in the Cambridge Year 8 textbook, at least, were professional historians.  Many of them hold prestigious academic posts at well-known universities, albeit mostly in gender studies and social history.  Yet in the internet age, even someone with very little background in history would be able to look up these topics online to get a more accurate account and see where these books are wrong.

What makes this even worse is the fact that none of the textbooks surveyed here contained a bibliography, let alone a basic referencing system.  Most of them fail even to cite the passage when it quotes primary sources — for example, it might say "Polybius, Greek historian" and this is about as far as it goes towards providing a proper reference.

Equally, they never explain where they found some of their more controversial arguments.  When the Pearson Year 7 textbook says that "some historians speculate that the shift from the hunter-gatherer way of life to the settled life of farming was one of the worst mistakes humankind ever made," it does not provide a reference or a bibliography to explain to which historians it is referring.  When the Nelson Year 10 says that "a review of the film (an Inconvenient Truth) by some climate scientists has found it to be factually correct," it does not indicate exactly which review this was and which "climate scientists" were involved.  Not only do the textbooks often include outright errors and controversial statements, but they routinely fail to back anything up by citing the sources.

Apart from the factual inaccuracies, it is important to note that the writers and publishers cannot be held entirely responsible for all the shortcomings of these textbooks.  The Labor government's national curriculum claims that Islamic civilisation "invented" the astrolabe, libraries and public hospitals, so any textbook author striving for historical accuracy is starting from behind.  The national history curriculum is extremely prescriptive, and does not leave much room to manoeuvre.  It is so detailed that, if it were actually enforced, it would essentially prevent teachers in affected schools from teaching much about civilisations and historical periods that are not explicitly covered in it.

All the Year 7 textbooks, for example, include a historical overview of the early migrations of humans and chapters on "historical skills", ancient Egypt, ancient Greece, ancient Rome, ancient China, and ancient India.  All the Year 8 textbooks include chapters on the Vikings, Medieval Europe, the Ottomans, Renaissance Italy, the Khmer Empire, Japan under the Shoguns, the Polynesians, Mongols, the Black Death and the Spanish conquest of the Americas.

All the textbooks also share the same notable omissions.  The two hundred years between the end of the Renaissance in Italy and the French Revolution are not really adequately covered in any of the textbooks, for example, because these years are only scantily covered in the curriculum.  There is usually little mention, therefore, of the Reformation, or the English Civil War, or the Glorious Revolution in these textbooks, and the rise of the British Empire is inadequately charted.  The curriculum includes "the spread of Christianity and Islam" in the overview content but does not mention the early Islamic conquests.  Generally, the textbooks do exactly the same.  Often, the writers seemed to omit the fact that Islam spread through military conquest at all, as if to imply that it spread without war through trade networks, like Christianity had centuries earlier — and yet, the spread of Islam was probably the single most important episode of the post-Roman Mediterranean up until Charlemagne was crowned emperor of the Romans on Christmas Day in 800 AD.

In most Year 9 textbooks, "liberalism" is omitted from the "key progressive ideas and movements," because the national curriculum also omits it (the Jacaranda History Alive 9 is an exception, but then sours this by implying that only those of the "middle class" could hold liberal values).  On the other hand, much attention is usually given to socialism and the trade union movement.  Most of the national curriculum's Australian history depth study in Year 9 is about the plight of indigenous people, and this is reflected in the textbooks.

Perhaps the most concerning omission in these textbooks, however, are the most recent parts of our history.  In all cases, the historical content in the textbooks essentially cuts off at the end of the unit on the Second World War, which varies in quality depending on the publisher but is usually more-or-less adequate.  One would expect these chapters to be followed by another on the post-war world and the Cold War.  This is not the case.  Instead, the Second World War chapter is always followed by chapters on protest movements — human rights movements, environment movements, immigration and refugee rights, and "pop culture" — all of which, with the exception of "pop culture" perhaps, regularly provide slanted and clearly political accounts of the events of the last half-century.  In none of these chapters does the Cold War feature as an important part of history.  In fact, at the most, the entire Cold War period is covered in the space of a few pages at the beginning of each book as part of the "historical overview" content, as prescribed by the curriculum.  The very few pages on the Cold War usually include a few basic facts about the Cuban Missile Crisis and the fall of the Berlin Wall, but virtually nothing on the conditions in the Soviet Union or why communism didn't work.  At any rate, a few pages and a few hours of history lessons is not really adequate to explain the Cold War and why it occurred, but the national curriculum and the textbooks based upon it leave very little scope to do more.

Since "Asia and Australia's engagement with Asia" is supposed to be one of the cross-curriculum priorities, it is further astounding that the curriculum and the textbooks fail to cover some important parts of Asia's recent history.  Japan's astonishing recovery after 1945 is left almost entirely unmentioned.  And there is only one mention of Mao Zedong in the Nelson Year 10 textbook:

In 1949 China, the largest nation on earth, fell to the communists when Mao Zedong led the Chinese Communist Party to victory.  Australia viewed communist China as the new threat to Asia.  The communists were often called "Reds", after the red flag that was the colour of revolution.  People spoke of "Red China" and of the expanding "red menace".

This is the extent of the explanation.  There is no attempt elsewhere in the book to explain why communism was a threat or the enormous harm it did.  The depth study on "Asia in the modern world" in Year 9 is the only one that is specifically about Asia in the modern era, and yet in some textbooks — especially the extremely popular Jacaranda History Alive — the chapter is almost entirely about the cruelty of the colonists to the Chinese, and how they were mistreated and forced to agree to unfair treaties.

The Jacaranda Year 9 textbook chapter ends with a section titled "Positive outcomes?"  In its words, "few historians disagree that during the nineteenth century there were not many positive effects of foreign influence in China".  However, this chapter cuts off when the communist party comes into power in 1949.  The curriculum and textbooks have very little, if anything, to say about what has happened there in the half-century since.  There is absolutely no attempt anywhere to explain that Mao oversaw one of the greatest atrocities of the twentieth century, or that the Chinese economy is only growing now because it has opened its borders to foreign (capitalist) markets.  Though it is supposed to have an "Asia" focus, the history curriculum and all of the textbooks based upon it miss the crucial elements of Asia's recent history.

These books are also often blatantly biased, appearing to cater to an environmentalist, socialist and sometimes almost Marxist agenda.  Above, I saw that both the Pearson and the Oxford textbooks include flawed sketches of Roman society and the characterisation of the plebeians and patricians as two static and rigid "social classes," while the reality was far more complicated.  I have also seen that the textbooks and the curriculum lack a detailed account of the reasons for the Cold War and what communism looks like when it is put into practice.

Perhaps the most astounding example of these textbooks catering to a certain agenda is in the Year 7 Pearson textbook, which makes the following comment on page 11 under the heading "A very successful way of life":

Some historians speculate that the shift from the hunter-gatherer way of life to the settled life of farming was one of the worst mistakes humankind ever made.  Studies by anthropologists of the few existing hunter-gatherer societies, such as the !Kung San of the Kalahari in Africa, show that they work far less hard than neighbouring farmers and have a better and more varied diet.

Archaeological evidence provided by Ice Age fossils from Greece and Turkey also shows that early humans were better off as hunter-gatherers.  In these places men had an average height of 175 centimetres and were strong and healthy.  Studies of later fossils show that by 3000 BC the average height was only 60 centimetres, and there is evidence of malnutrition and disease.  There is also some archaeological evidence that average life expectancy fell in the new farming societies.

This is followed by the following "learning activity" on page 15:

In a group of three, carefully read the section "A very successful way of life" ... Prepare a five-minute debate in the style of a television talk show on the topic:

Should modern humans return to the hunter-gatherer way of life?

At first, this looks like a joke, but the textbook appears to be suggesting that humans should never have abandoned the hunter-gatherer way of life and should never have settled or moved into cities, and that modern humans should become hunter-gatherers.  It appears to reflect a kind of anti-modernist or extreme environmentalist agenda.

Other examples of a socialist bias abound.  While there are usually better sections in the chapter of the industrial revolution that mention something about entrepreneurship, economics, and improving living standards, a large part of these chapters is usually spent describing the poor working conditions of the people involved.  Both the Jacaranda History Alive and the Oxford Big Ideas Year 9 books include extensive quotes from Marx and Engels on the working conditions.  These chapters usually include much on the trade unions, the Luddites, the Chartist movement, and — above all — socialism.  The Oxford Year 9 textbook says, "socialist theories became increasingly popular as the realities of an unrestricted capitalist economy saw increasing poverty among those who only had their labour to sell".  They also emphasise the environmental cost of progress.  In the words of the Oxford textbook, "the Industrial Revolution left humanity dependent on carbon fuels."

All of this is followed in the Jacaranda and Oxford books with a chapter on early Australia up to 1914, which concludes with a few pages on the labour movement.  The Oxford textbook has much to say about "economic imperialism", and on one page — in which it praises the work of International Labour Organization and World Vision — it implies that working in sweatshops is the same as slavery without providing any further explanation.

At times, the books seem to reflect radical views.  For example, in the chapter on the environment movement, the Nelson Year 10 textbook includes lengthy descriptions of events like the Blockage of Franklin Dam and Lake Pedder, and profiles of people such as Jack Mundey, Peter Garrett and groups like the Rising Tide Newcastle and Greenpeace.  It then insists that the debate over anthropogenic climate change is settled and that scientists find An Inconvenient Truth to be "factually accurate."

The chapter on immigration features a detailed profile and several pages on Arthur Calwell, who was "closely involved in and responsible for some very significant migration history," and especially to "overcome Labor's traditional resistance to large-scale migration".  Later, this is followed by another profile of Al Grassby — referring to his "legacy of tolerance and his work in fighting racial discrimination" — and a discussion of Whitlam's role in ending the White Australia policy.  While it does mention the role that Harold Holt played in ending the White Australia Policy and outline some developments that occurred in the Menzies era, it does not include a similar profile of Holt (or of Menzies, for that matter) and remarkably omits the fact that all of these developments occurred under Liberal governments.  It preaches the "multicultural" line by remarking that, after Whitlam and Grassby, "Australia was no longer to be a European outpost in Asia but would increasingly become an ethnically and racially diverse nation in the Asia-Pacific region," notwithstanding that the overwhelming majority of inhabitants still speak English as their mother-tongue and that Australia's institutions are essentially British.  At least the Nelson textbook arranges its narrow and selective version of history into a well-structured chronological narrative.

Australian parents should be deeply concerned about the quality of the mainstream textbooks that are currently being used in many classrooms across the country.  Yet the confusing structure, omissions, and bias inherent throughout these textbooks are all fundamentally due to the prescriptiveness of the national curriculum.  It is because of this that all are largely the same, and even the better fact-checked ones — for example, the Macmillan books — share the same shortcomings.

At least one thing is clear from this analysis:  a good introductory history textbook, aside from including a bibliography at the very least, would need to ignore the constraints of the national curriculum altogether.

Wednesday, April 16, 2014

The ABC should share the burden of spending cuts

This year, pre-budget speculative fear and loathing is gripping the public sector more intensely than usual, as the Abbott government floats various options for tightening its budgetary belt.

One option being tested in the public domain is that an "efficiency dividend" of reduced government funding, at least in the short term, ought to apply to the ABC.

There are some estimates indicating that a 2.25 per cent efficiency dividend, in its first year of application, would reduce the ABC's $1.03billion budget by about $22.5million, with additional savings in each year the dividend is enforced.

The political dimensions of the proposal are intriguing, and reveals much about the prevailing expenditure policy in Australia.

The pre-election economic statement of the former Rudd government exempted the ABC from an increase in the public service efficiency dividend to 2.25 per cent, which, in turn, was anticipated to yield budgetary savings of about $1.8billion over the three years to 2016-17.

There was little doubt the intention of this policy was to smoke out then opposition leader Tony Abbott regarding his spending policy intentions towards the national broadcaster.

The Labor strategy came to nought as the highly disciplined Abbott stuck to his "small target" rhetorical approach, even maintaining on election night that there would be "no cuts to the ABC or SBS".

How times change when an incoming government knows it has a "budget emergency" on its hands, but can only get access to the budget books, in all of their shambolic state, once the outgoing government vacates the ministries.

If reading between the lines on the pre-budget rhetoric coming from the Abbott government is any guide, it would seem it will want to convey the perception, at the very least, that the pain of fiscal consolidation is being fairly evenly spread across the Australian population.

This was the strategy adopted by the former Howard government in its first budget, covering the 1996-97 financial year, and efficiency dividends were part of the mixture of significant spending cuts announced at the time.

Interestingly, it was through the first Howard budget that an efficiency dividend last applied to the ABC, a one-off dividend of 2 per cent which clawed back about $11million in savings to the budget.

With the state of the budget arguably in far worse shape today than it was in the first year of Howard's long reign, it is entirely appropriate for the ABC to share in some of the pain of reduced expenditure that the rest of us also face.

It has been reported that the ABC has already made spending reductions to its children's, comedy and drama programming in recent months, and an efficiency dividend might encourage ABC management to discover new ways of doing more with less.

By the same token, nobody should kid themselves into thinking a belated efficiency dividend for the ABC poses as the beginning and the end of reforms the national broadcaster desperately needs.

Putting aside concern the ABC harbours a left-wing bias on economic and social issues, the proposed dividend would do nothing to address the more pressing concerns about the distorting effect of a government-owned broadcaster in an increasingly competitive media market.

Through its ABC2 and ABC3 channels, the broadcaster provides saturation coverage of children's programming deterring the commercial free-to-air networks from doing more in this space, whilst ABC News 24 competes against free-to-air nightly news bulletins and SkyNews.

The incentive for the commercial free-to-air television stations to provide more quality current affairs programming is not assisted, either, by the taxpayer-funded Lateline and Q&A programs.

The independent fact-checking outlet PolitiFact Australia effectively closed down after the ABC received $10million in government funding, early last year, partly to run its own fact checker.  There is also a growing level of consternation about the perceived conflict of interest between the role of the ABC as a news-service provider, and its soft Asian diplomacy conducted through the Australian Network.

These important matters lend weight to the argument that the ABC should be privatised, rather than kept under government ownership and subjected to the vagaries of efficiency dividends.

Indeed, privatisation would be a far superior option for long-term cost control than politically-determined efficiency dividends, as ABC management would be accorded far greater discretion to balance cost-control concerns against quality programming objectives.

The ABC should certainly play its part in getting the budget back into the black, but efficiency dividends are not the silver-bullet answer for reforming the national broadcaster.


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Tuesday, April 15, 2014

Bilateral trade deals simply a political plaything

Bilateral free trade agreements are political confidence tricks.

Far from encouraging trade liberalisation, the trade negotiation process holds it back.

Bilateral agreements make international trade seem like a game that countries win or lose.  They encourage countries to hold back on domestic reform, seeing tariffs as bargaining chips for future negotiations.  And worst of all, they bury the interests of consumers in the morass of international diplomacy.

The Abbott Government is currently signing bilateral trade agreements across Asia.  They've finalised one with Japan, another one with South Korea, and they're trying to get one with the really big fish — China.

These are described as free trade deals but they're really more like mutual long-term tariff reduction pacts.  When the Japanese agreement is in full force in 2029, Japanese consumers will still be paying a 19.5 per cent tariff on imported Australian frozen beef, and 23.5 per cent on fresh beef.

Twenty-three per cent is nobody's definition of "free".  Beef tariffs are bad for Japan and Australia alike.

In 1817 David Ricardo demonstrated conclusively that free trade is mutually beneficial to all involved.  Two centuries later Ricardo's law of comparative advantage is still what both left and right-leaning economics professors teach their students.

The textbook Principles of Economics, written by the Harvard professor and former Bush advisor, Greg Mankiw, tells students that "the best policy, from the standpoint of economic efficiency, would be to allow trade without a tariff".

Economics, by the Nobel-winning Paul Krugman, agrees:  "The vast majority of economists would say that international trade is a good thing from the point of view of the nation as a whole."

But here's the thing.  The biggest benefit we get from free trade deals isn't that other countries lower their tariff barriers.  It's that we lower our own.

Lower tariffs in Australia means cheaper consumer goods and a higher standard of living.  Protectionism only favours a few well-connected industries, and does so at the expense of everyone else.

In other words, the chief benefit of trade deals is that they provide an excuse to liberalise domestic trade barriers at home, while placating Australian producers with promises of new markets abroad.

This makes the incredibly complex bilateral trade agreements a much less appealing proposition.

Why not lower tariff barriers unilaterally?  In a 2010 report into trade agreements, the Productivity Commission recommended that we do exactly that.

Indeed, the greatest trade liberalisation in Australian history was unilateral — the surprise 1973 decision by the Whitlam government to cut tariffs by 25 per cent across the board.

But the diplomatic focus on trade agreements makes it unlikely we would do this sort of autonomous liberalisation again.

Modern trade agreements are still, to a very large extent, shaped by memory of the Great Depression.

One of the first and most damaging responses of policymakers to that economic calamity was to immediately raise trade barriers.  But protectionism only made the slump worse.

As a consequence, when policymakers were rebuilding the international economic system after World War II, they wanted to set up formal institutions that would bring about long-term tariff reductions around the world, and try to guarantee such mistakes were never made again.

One of the big issues at the 1944 Bretton Woods conference (which set up the International Monetary Fund and the World Bank) and the 1947 Geneva conference (which set up the General Agreement of Tariff and Trade, the precursor of the World Trade Organisation) was the preferential trade deals the United Kingdom had set up with the rest of the Commonwealth in the middle of the depression — a policy called imperial preference.

The solution was multilateral trade agreements through the GATT.  These rounds ended imperial preference and ate away at the barriers that had built up around the world.

But in the 21st century multilateral trade deals have become bogged down.  The Doha round, which is trying to get a trade deal between 159 countries at once, has been going since 2001 and looks unlikely to conclude anytime soon (despite modest progress in Bali last December).

As multilateralism has become dysfunctional, individual countries have filled in the gap by forging individual agreements with each other.  Regional trade deals are also being developed.

But the irony here is that those individual and regional agreements are the same sort of preferential trade deals that multilateral trade liberalisation was designed to wipe away.

And they're being instituted for largely the same reason.

Imperial preference was less an economic policy than a political one.  It was seen by politicians in London as symbolising the strength of the British empire in adversity.

Likewise, today's trade agreements are more about forging diplomatic relationships than benefiting consumers.

This may be why politicians and the press gallery get excited by trade deals but economists and consumers less so.

Perversely, the rise of bilateral trade agreements creates an incentive to keep trade barriers high.  The Abbott Government has provided a classic illustration of this dynamic.

The Coalition went into the 2013 federal election promising to tighten controls on foreign investment, for instance lowering the threshold for Foreign Investment Review Board scrutiny of agricultural land deals to deals worth $15 million.

Now that promise is apparently being used as a bargaining chip in the negotiations over the Australia-China trade agreement deal, to be dealt away in return for liberalisations in China.

In part this is because Australia is a relatively open economy already.  There are not that many tariffs to bargain with.

But mostly it's because free trade agreements have little to do with the virtues of free trade.  They're about politics and diplomacy, not economics.


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Friday, April 11, 2014

It's the tax debate we have to have

The pity about the debate we're having on the GST is that it's not a debate about how to cut taxes and how to cut government spending.  The debate is not a debate at all.

Almost no one is talking about reducing the overall tax burden.  Instead a handful of former public servants led by former Treasury secretary Ken Henry, and supported by current Treasury secretary Martin Parkinson, are trying to drum up support for the higher taxes they claim are to pay for the extra government services they assume the public wants.

There are few things more dangerous than public servants pronouncing on what they think the public wants.

When voters are asked if they want more spending on health, they say yes.  When they're asked if they want lower taxes, they also say yes.  Sometimes quiz questions to voters don't prove much.

(Henry and Parkinson have a habit of getting things wrong.  They both thought a carbon tax was a good idea.)

Discussion about the GST has now been going a few decades.  But perhaps the best insights about the tax appeared on these pages back in February 2001 in an exchange between myself and Paul Keating.

Keating is, as he was in 2001, a retired politician.


THE RISE OF HANSON

I had written an opinion piece on how the Howard government should deal with the rise of Pauline Hanson.

I said:  "The first step is to stop the demonising of Hanson and One Nation.  She may be a spiteful, ignorant populist, but so are a large number of other politicians, commentators and so-called experts.  She is less spiteful than either Phillip Adams or Bob Ellis, is no more ignorant of economic issues than Robert Manne and is no more populist than Bob Brown or Bob Katter."

I explained the Coalition could attract voters disillusioned with the two main parties by doing something different and championing small government.  The GST at the time was "sucking up more money than ever expected [and the Howard government's] much-heralded income tax cuts did no more than give back a little bracket creep".  Further, the government had also "jacked up taxes on petrol, booze and smokes under the guise of tax reform".

It was my remark about the GST that set Keating off.  Two days after my article, Keating fired back under the headline:  "Dopey Right wakes up on tax."

Keating's reply was 900 words of invective against everyone who did not see the world as he did, which included, and he named them:  the Business Council of Australia, the Australian Council of Social Service and the Commonwealth Treasury.


AGREE ON GST POINTS

Despite their differences, we actually agreed on some key GST points.

We agreed the GST makes it easy for the government to spend money.  As Keating put it (and remember this was from a former Labor prime minister) — "If the tax take rises, over time the political system will spend the money," and "Tax is off and running and nothing will stop it."

Keating and I also agreed that the large cuts to personal income tax were promised as a result of the GST, never happened.  About this Keating had a nice line — "big business luminaries were in the GST push largely because they thought the high marginal tax rates on their incomes would come down ... and what happened?  They were conned, too.  The top marginal rate has not changed.  The lower cut-in point for the top rate would not save them enough to buy a cashmere jumper."

This is relevant because there's no indication that if the GST was raised (either by a Coalition or ALP government) in say 2016 after the next federal election, that what happened when it was introduced would not happen again, ie, the GST goes up but income tax does not come down.  Finally, Keating and I agreed the GST does nothing to solve fundamental problems plaguing the federation, which have the commonwealth government raising the money that the states spend.

Before Tony Abbott and Joe Hockey do anything about the GST, they should go back and read The Australian Financial Review from February 2001.


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Revenue lobbyists should leave the GST alone

Australia should get its excessive spending under control without resorting to the tempting but unwarranted consumption tax grabs we have recently seen in other countries.

That's why the current institutional arrangements for managing the GST should be preserved in the face of recent pressure from revenue lobbyists like Martin Parkinson and Ken Henry.

As a mid-ranked bureaucrat in the Commonwealth Treasury during the late 1990s, I witnessed first-hand the first agreement signed by the Commonwealth and state governments concerning the distribution and administration of the GST.

Signed by former prime minister John Howard and treasurer Peter Costello along with the state premiers and some senior bureaucrats, the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations ensured that the states receive all GST revenues (less administrative collection costs).

Importantly, the agreement also contained a set of provisions aimed at protecting Australian taxpayers from policies to increase the GST.

The original agreement stated plainly (Part 3:  32-36) that changing the GST rate or base required unanimous support from the Commonwealth and all states and territories, as well as the successful passage of legislation through Parliament.

These arrangements have been maintained in a revised Intergovernmental Agreement signed in 2008, and remain in force to this day.

The importance of this GST "fiscal constitution" becomes clear when one recognises the frequency of increases in similar taxes in other developed countries.

From 2000, when the Australian GST was introduced, to 2013, central governments across OECD economies increased value-added tax or GST standard tax rates on 35 occasions, including 22 times during the aftermath of the 2008-09 global financial crisis.

Australia hasn't needed an increase to its own GST rate or base to record a dramatic increase in its GST revenue — it has increased from $23.9 billion in 2000-01 to an expected $50.2 billion this financial year simply as a result of a nominal growth in consumption.

This GST revenue growth was equivalent to an annual growth rate of 6.4 per cent;  well in excess of the average annual increase in general prices throughout the Australian economy.

As painful as the GST is, particularly for poorer individuals and families, the prohibition of unilateral GST structural changes has, at least, spared Australians from the extreme discomfort of quicker and easier consumption tax grabs experienced elsewhere.

Even so, politicians, bureaucrats, academics, special interests, and other members of the "revenue lobby" occasionally advocate that all governments band together to loosen the fiscal constitutional constraints, which would allow them to help themselves to more GST revenue.

In his first appearance as prime minister, Kevin Rudd proposed to claw back 30 per cent of GST revenues from the states, in order to boost Commonwealth funding of the states' public hospitals.

This plan was abandoned after several jurisdictions, particularly Western Australia, raised concerns that the partial federal confiscation of GST would further reduce the states' fiscal autonomy, and invite future GST revenue grabs for other federal policy purposes.

As well, responding to the growing popularity of online shopping, some state governments and interest groups, such as retailing associations, have suggested lowering the $1,000 threshold below which GST is not payable on imported goods purchased online.

Taxpayers can breathe a sigh of relief — at least for now — knowing that the recent Council for Federal Financial Relations meeting between Commonwealth and state treasurers failed to come to a decision on that base-broadening proposal.

By and large, the GST fiscal constitution has stuck, but a recent round of tax proposals by current and former senior bureaucrats illustrates that the revenue lobby won't let go of their GST hike dreams too easily.

In a much-publicised speech last week, outgoing Treasury Secretary Martin Parkinson suggested that those authoring a forthcoming White Paper on taxation should "consider the mix of taxes, including whether there is a role for a greater contribution from indirect taxes".

Parkinson's immediate predecessor as the head of Treasury, Ken Henry, claimed a GST increase is inevitable, stating, "Raising the GST rate one day will be seen as necessary to underpin fiscal sustainability."

These, and similar, proposals to increase the GST tax burden are usually couched as part of a broader shift in the taxation mix from mobile income and capital taxes in favour of immobile consumption taxes.

This tax substitution is generally adjudged by economists to improve economic efficiency, but a key consideration, often overlooked in the contemporary debate, is that any resultant growth in revenues from tax reform is likely to be spent by governments on wasteful programs and activities which, in itself, would hamper the attainment of efficiency gains.

Another dimension of the GST debate which perhaps deserves more attention is that the poor, who generally pay little in income taxes in any case, are likely to financially suffer as a result of increasing the GST because more of their disposable incomes are directed toward everyday consumption items.

It is surprising that many calling for a GST increase probably identify themselves with political-left causes, although there are still some voices from the left arguing the traditional position against raising the burden of the regressive GST.

Politicians generally do not respect fiscal rules for too long, as attested by precedents stretching from the federal government keeping surplus revenues from the states in order to fund age pensions, through to the recent abolition of the federal statutory debt ceiling.

If Australia can overcome its excessive government spending problem, as it should, without fiddling with the structure of the GST, then that would rank as a minor miracle.


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Tuesday, April 08, 2014

Micro-parties tap into dissatisfaction

The 2013 federal election was a remarkable election, and Saturday's Western Australia Senate re-run has confirmed just how remarkable.

In September, nearly a quarter of Australians (23.5 per cent) voted against all the major parties — that is, against Liberals, Nationals, Labor and Greens — in the Senate as their first preference.

This is an enormous figure.  In 2010 only 13 per cent voted against the major parties.  In 2007 it was 11 per cent.  In 2004, 12 per cent.

In other words, the non-major vote has suddenly doubled.

(I'm counting the Greens as a major party.  They've been around for two decades and deserve to be treated as part of the mainstream.)

Nor was the anti-major vote a fluke, or a mistake voters are eager to rectify.

In September, 19 per cent of Western Australian voters voted against the non-major parties in the Senate.  On Saturday that figure increased to 25 per cent.

Yet you wouldn't know it.  The response of our political class has been to try to paper over this profound, revealed dissatisfaction — to focus on side issues and avoid tackling the deeper malaise.

Virtually at dawn on September 8 last year there were claims the electoral system needed urgent reform because micro-parties had gamed preference flows.

Nobody is suggesting our voting system is perfect.  Every system has trade-offs and there's no reason to believe our system is the most optimal.  But gaming preferences is something the major parties have been playing at for a very long time.

All such reform would do is hide the basic issue of 2013:  given a choice between Tony Abbott, Kevin Rudd and Christine Milne, a quarter of Australians chose "other".

(One thing electoral reform would do is help the major parties protect their second and third Senate spots.  If you assume that political parties work in their own self-interest — a big assumption, I know — there's good reason to be wary of any proposed changes.)

Be sceptical of anyone who tells you they know how Australian voters really wanted to vote.

To what extent do unusual voting patterns reflect voter confusion, and to what extent are they reflections of democratic choice?

Distinguishing between ignorance and intention is particularly hard in Australia because our compulsory voting system requires those who are disengaged and uninterested to vote.

A case study is the Liberal Democratic Party's (LDP) success in New South Wales in September's Senate vote.  There are anecdotal stories of people being confused between the Liberal Party and the LDP.  It is also clear the LDP benefited from being first on the ballot in that state.

But confusion is hardly the only possible explanation for their large showing.  Disaffected Liberal Party supporters looking for a liberal-y alternative would have found a substitute at the start of the ballot paper in the LDP.

The advantage with these sorts of explanations is that they don't immediately assume voters are too stupid to recognise the name of the party they want to vote for.

But more importantly, they fit the bigger nationwide trend.  The rejection of major parties manifested itself in different ways in different states.  It wasn't confusion that led to Nick Xenophon's support nearly doubling in South Australia.  Nor was it confusion that gave Clive Palmer more of the vote than the Greens in Queensland.

And that trend makes the criticism of micro-party success completely misguided.

Virtually by definition, micro-parties are too small to take a Senate spot by themselves.

Think of a vote for a micro-party as a vote against the mainstream, rather than intellectual support of the full platform of, say, the HEMP Party or the Secular Party of Australia.

(Not everybody rigorously compares party policies.  Again, voting is compulsory.)

All those micro-party votes pool together through the preference system and throw up a micro-party representative.

In past elections micro-party votes would just dissipate, because the micro-parties weren't working together and there weren't as many Australians voting against the big players.

Yes, Ricky Muir of the Australian Motoring Enthusiast Party got a tiny number of direct votes.  But it's not about him.  A Senate seat isn't a personal reward.  Muir represents all those in Victoria who voted "other".

If we rewrote our electoral system to prevent micro-parties from preference aggregation we would, in a very real way, be disenfranchising those who rejected the majors.

The Clive Palmer phenomenon is slightly different.  He has the money to elevate his party's profile above the noise.  That allows him to take advantage of the dissatisfaction without having to play the preference game.

But the key thing is this:  Palmer's money didn't create the demand for non-majors.  It simply helped funnel that demand towards him.  When a disengaged but frustrated voter goes into the booth they remember the gregarious billionaire who hates Canberra and has all the yellow ads.

Of course Palmer is in politics for himself.  A dissatisfied voter might ask:  what's new?

The real question is why so many voters are unhappy with the usual political choices.

One argument is there's a longer-running decline in trust in the Federal Parliament.  Yet this Essential Vision report suggests a more complex dynamic in the medium term.  After a precipitous fall in 2012, trust in Federal Parliament has begun to recover.

An alternative is that many voters simply hated the choices on offer this time around.

The latter would only be comforting if you believed major parties choose their leaders and policies essentially randomly — that is, they do not reflect the internal structure and values of the party itself.

Either way the major parties have no interest in publicly discussing why so many voters dislike them.

They'd rather talk about kooky micro-parties, as if those parties aren't a symptom of the deeper failures of the majors.

But micro-parties weren't the issue in 2013.  Nor was Clive Palmer.  Dissatisfaction was.


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Friday, April 04, 2014

Beware of wolves wrapped in climate change

In The Wolf of Wall Street, Leonardo DiCaprio's mentor says, "Nobody knows if the stocks will go up, down, sideways" and explains that the stockbroker's job is to "Move the money from your client's pocket into your pocket".

There are similarities with the climate change game.

Nobody knows whether global temperatures will rise, fall or stay the same.  But there are multitudes of political entrepreneurs trying to persuade us they will rise and do so at alarming rate.  Among these entrepreneurs are political operators, including many scientists seeking grant monies from taxpayers.  They also include wind farm and solar panel producers, needing special prices for otherwise uncompetitive products.  And they have the support of agitators convinced that mankind's prosperity, founded on cheap fossil fuels, can never be sustained.

This week witnessed a jamboree in Yokohama where publicity was given to the latest forecasts (the Fifth Assessment Report) of the Intergovernmental Panel on Climate Change (IPCC).  The IPCC spokesmen distilled synopses of thousands of scientific and other papers into a 44 page "Summary for Policymakers".  Led by Indian economist, Rajendra Pachauri, these spokesmen are political appointees, few of whom have appropriate scientific credentials.

There are two generally agreed features about long-term climate changes.

First, over the millennia natural phenomena have caused the earth's temperature to rise and fall around 4 degrees Celsius either side of current levels.

Previous IPCC reports maintained that current temperatures were at unprecedented and rising highs and resembled a "hockey stick".  That contention, which featured prominently in Al Gore's film, An Inconvenient Truth, is now discredited.  Virtually all scientists accept that it was warmer in Roman times and again a thousand years ago when the Vikings colonised Greenland.

Secondly, we are half way through a century during which human use of coal, gas and oil means carbon dioxide within the atmosphere may double from its previous 0.03 per cent.

This is not harmful to health — much higher levels have prevailed in the past and carbon dioxide concentrations in greenhouses are more than treble the atmospheric level.  But one likely outcome is a global temperature increase of one degree Celsius.  Any further increases in carbon dioxide levels would have no additional effect.

IPCC spokespersons argue that direct carbon dioxide effect will be amplified by other factors bringing a warming of 2-4 degrees Celsius and perhaps more.  Other scientists contest this.  The truth will only be evident once we observe temperature trends but the fact that global temperatures have not risen for 17 years suggests that there is no amplification.

In the battle for public opinion the doom-mongers are making little headway.  A recent survey commissioned from Galaxy has shown most people remain unconvinced that harmful human induced climate change is upon us.  And fewer than 4 per cent said they are prepared to pay $1000 per year to reduce human emissions, even though the bill required to meet Australia's current official target for 2020 is $2,000 each per year.

Pressures for taxes and regulations to reduce emissions however remain.  But money moved out of the pockets of consumers and businesses in response to the climate change scare means reductions in real income levels.


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A restriction on secondary boycotts is a restriction on free speech

The federal government's proposal to further limit secondary boycotts would be a restriction on freedom of speech, but environmental activists are also wrong to ask for special treatment.

Secondary boycotts are campaigns directed at consumers and suppliers of a company.  They differ from primary boycotts, where an organisation campaigns directly to convince consumers not to buy from the targeted company.  For example, if a group of customers decide they don't like the privacy policies of a particular telecommunications company, they might lobby banks that fund the company to stop providing credit as a way of exerting pressure for change.

Australia's competition laws already restrict secondary boycotts.  Section 45D of the competition and consumer act 2010 is the legal provision used to take activist groups to court, but exemptions apply to campaigns run by environmental and consumer groups.

The rationale for the introduction of this law was to stop militant unions from threatening suppliers of companies with whom they were negotiating.  That's a very real and serious problem, but restricting secondary boycotts doesn't put an end to belligerent unions:  the real disease is the extensive range of legislative privileges given to unions under industrial relations law.  These protections should be removed.  The problem of entrenched unions should be tackled at the source so that businesses can operate on an even playing field.  Not everyone agrees.

Yesterday, parliamentary secretary for agriculture Richard Colbeck said secondary boycott laws should be changed to ensure environmental campaigns were "accurate".  Certainly, the change is needed — but not the kind Colbeck is proposing.  Secondary boycott restrictions should be abandoned wholesale.

There is no doubt that the exemption made available to environmental and consumer organisations is outrageous.  The legislation specifically identifies this category of activist groups for special treatment.  It grants a legally enshrined privilege to particular groups and denies it to others.  It's arbitrary and illiberal.

Freedom of speech is vitally important for a properly functioning economy.  Liberal democracies should never be in the game of clamping down on an individual's freedom to express their values in the choices they make through the market.  Advocating for or against a particular company's practices is an important part of that equation.  This advocacy is at the heart of the intersection of political and economic freedoms.  Secondary boycotts are merely the legitimate extension of this important idea.  And as such, a restriction on secondary boycotts is a restriction on free speech.

One objection raised by industry groups is that some secondary boycotts are based on misleading information and outright lies.  There's no doubt this does happen.  But individual consumers and suppliers can decide for themselves whether a campaign is truthful or not.  And there's no suggestion that companies subjected to dishonest campaigns should sit idly by and watch their brand suffer.

Companies spend a lot of money marketing their products.  In 2012, Australian companies spent well over $10bn on advertising alone.  Some of this ad spend is aimed directly at the competition.  The Duracell and Energizer bunnies have been at it for decades now.

An attempt to convince consumers not to buy a product for reasons of your own market share is just as legitimate as doing so for any other reason.  If a company knows a campaign is based on a lie they can point this out, discredit the organisation running the campaign — even turn a crisis into a success story.

In a case now studied in MBA and PR courses worldwide, PepsiCo turned a crisis around in 1993 after an alleged case of can tampering.  A woman complained that she discovered a syringe in a can of diet Pepsi.  CCTV footage showing the woman who made the original complain inserting the syringe into the can she had just purchased was enough to exonerate the company.  But PepsiCo also went aggressively on the offensive, releasing a series of videos explaining the company's canning process, and using media appearances to reassure consumers about the safety of the product.  Within weeks, sales didn't just recover — they increased.

Proposed changes to restrict secondary boycotts run counter to the Abbott government's stated "freedom agenda".  Restoring freedom of speech is a worthy goal.  But if the government is serious about this agenda it should remove restrictions on boycotts that clamp down on our right to freedom of speech.