Where have all the entrepreneurs gone

An analysis of new business creation in Australia

The economics of politics is what's firing anger over the ABC cuts

Sometimes things that are pretty simple for most people can seriously confuse an economist.  The heat over the ABC cuts is a good example of the blurry line between economics — and the economics of politics.

For economists, this should have a technocratic solution and no one need get angry and shouty about it.  Either the ABC is being run in an operationally efficient manner, or it is not.  Either it is a public good, or it is not.  Either there is market failure in public broadcasting, or there is not.

Invariably these are complex nuanced issues, but while difficult, given enough data, these are questions that can be resolved within a technocratic frame.  And if this is what this is all about, then we should be able to get some economists, or really any other smart people with sharp pencils, to figure this out.  Then we can all get back to being angry about proper things:  such as discrimination, poverty, disease, violence, and the Essendon football team.

That this does not seem to be the case suggests that maybe we're using the wrong sort of economics.  Maybe this isn't actually about managerial economics, welfare economics, media economics, or the economics of public goods and tax efficiency.  Maybe the real issue here is the economics of politics.

The thing about a market society is that it promotes tolerance and other civic virtues.  This is because we don't have to worry about what other people are doing;  we can just get on with living our own lives well.  But in any situation where we all have to pay for a collective service, we start to care about who is using that service and how much.  This rubs against our otherwise natural sense of tolerance for the choices and preferences of fellow citizens.

The economist Richard Wagner in Economic Policy in a Liberal Democracy (excerpted by Don Boudreaux here) explains, in the context of healthcare:

Suppose medical care is financed through state budgets.  Once this happens, a new network of interests is created.  People who make relatively low use of a service form a natural interest group in opposition to those who might make relatively high use.  What was once a matter of a simple toleration of different choices of life-styles under conditions where the choosers bear the costs associated with their choices, becomes a matter of political concern.  In the presence of collective provision or common pricing, activities that entail above-average costs, actuarially speaking, will be shifted partially on to those whose activities entail below-average costs.  The state necessarily becomes involved as a battleground for the adjudication of disputes over personal life-styles.

The heat from the ABC cuts would seem to be coming from the clash of interest groups that have formed about the politicisation of media consumption itself.

In a fully private media market (or one where the public broadcaster stays tightly within the non-commercial space), no one really cares what other people are consuming.  A certain smugness may prevail in one direction, met with mockery from the other.  Snob and slob, as I have heard Australia's different TV broadcast channels being called.  There will be shouting across the aisles, but by-and-large this will be cool and tolerant, a bit irreverent and sometimes funny, not hot and angry.

If person A is paying for the media consumption of person B, then B is going to want to consume more than if they were paying themselves, and A is going to be angry at them for doing that.  And B is going to be angry that A is angry, and will start talking in the political language of rights and obligations, not market failure.  This will make A even angrier.  Then A will want to organise against B, and B will counter-mobilize.

And soon we're yelling at each other on the streets, and probably in the comments thread too.  Now it's become hot and political.

This is the problem with a large public broadcaster operating freely, and now it seems aggressively, in a commercial space.  Economists worry about "crowding out", which is a source of inefficiency, but what seems to be happening is worse — people who make relatively low use of the public service are forming interest groups against those who make relatively high use, and other peoples' media consumption has become a political concern.  Outside of schools of journalism, that's not usually regarded to be a good thing.

Calls for full-scale privatisation or user-pays licensing can only get stronger from here.  And these will be met with an ever more strident push of public broadcasting into direct competition with commercial broadcasters.  The lobbying will be furious.  Maybe this is how this all has to play out now it is irrevocably politicised, but it seems this is no longer about the economics of public broadcasting — it's about the economics of politics.

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Scorched earth as the ABC defends its digital empire

ABC managing director Mark Scott's response to the Abbott government's funding cuts demonstrates exactly why the public broadcaster is long overdue for comprehensive reform.

Scott has made cuts to the ABC in two main areas:  to the parts of the ABC that make it unique, and to those areas that do the most political damage to the government.  And he's used the cover of the funding cuts to invest even more heavily in the parts of the ABC that most directly compete with existing private providers.

All governments have scarce resources.  Money spent on public broadcasting is money that can't be spent (or saved) somewhere else.  If governments fund public broadcasting at all, then it must be to generate the maximum value for taxpayers' dollars.  It doesn't make much sense to subsidise content that is already provided by the private sector.  Public funding can only be justified if it results in the provision of a unique product that would not exist without taxpayer support.

And yet when faced with a relatively modest 4.6 per cent reduction in government funding, the ABC board and management chose to cut regional bureaus, the 7.30 state editions, local sports coverage, Radio National's Bush Telegraph, and TV production outside Melbourne and Sydney.  But these are the parts of the ABC least replicated by the private sector, and which have the strongest case for public subsidy.

It's unlikely to be a coincidence that the cuts also happen to be the areas of the ABC that will cause the government the most political pain.  A drop in the headcount at the ABC's palatial headquarters in Ultimo in Sydney is not likely to register in too many Coalition electorates.  But closing a few regional radio posts and the Adelaide production studio certainly will.  Unsurprisingly, the ABC has obviously declined to take up many of the suggestions made in the review of its operations commissioned by Communications Minister Malcolm Turnbull, who argued efficiencies and back-office cuts could quarantine programming from cuts.  ABC management would know that the more painful the process is for the government, the less likely it is to be repeated.

WRONG TARGETS

Instead of paring back the areas of the ABC that most closely compete with private media providers, the ABC will now invest more than ever in its digital arm, particularly news and current affairs — arguably the most competitive and well-serviced field of media in Australia today.  In the past 20 years, Australians' access to news and current affairs online has exploded.  Thanks to the internet, we can now get the best news from around the world extremely cheaply and from an astounding array of sources.  Lower barriers to entry has meant that dozens of new players have entered the market, such as local offshoots of The Guardian and The Daily Mail, while existing players in Fairfax and News Corporation have significantly expanded their online offerings.

This is not an undercatered market desperate for substantial taxpayer investment.  On the contrary, it's the part of the ABC where cuts are most warranted.

Mark Scott says the ABC is required to invest in digital by its charter.  True, but only since the charter was amended in 2013 by then communications minister Stephen Conroy, and the ABC's investment in digital was by then very well advanced.

But the ABC's charter also requires that it "take account of ... the broadcasting services provided by the commercial and community sectors of the Australian broadcasting system", and it's this part of the charter the management has most openly flouted.  The ABC failed to take into account that Sky News already offered a 24 hour news channel for those Australians who wanted it when it established ABCNews24 in 2010.  It failed to take into account the number of private fact-checking initiatives, such as PolitiFact, when it launched ABC Fact Check in 2013 (who've now been largely crowded out, thanks to the ABC).  And they certainly failed to take account of the cornucopia of free online opinion when it launched The Drum opinion website in 2009.

Though the Abbott government's attempts are laudable, they are simply budget savings and leave wider questions about ABC reform unresolved, such as whether it would be viable as a privatised operation.  The ABC is long overdue for a proper review of the scope of its operations, to ensure it is spending scarce public funds in the areas of greatest need.

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Election campaign a time for politicians to promise what they can't deliver

Election campaigns are incredibly frustrating.

It's not just that they consist almost entirely of promises that we, the voters, have no way of ensuring will be kept.

Elections are just a bunch of claims and counterclaims about what might happen in the future — claims which rely on opaque assumptions and are offered without detail.

Take, for instance, this week's little infrastructure costing spat.  Labor wants to extend the South Morang train line by eight kilometres so that it ends at Mernda.  Labor says that "many aspects of the project are still to be finalised" but they estimate it will cost between $400 and $600 million.

The Coalition disagrees.  Treasurer Michael O'Brien said this week the Department of Treasury and Finance has costed the extension at $700 million.  Thus another Labor black hole.

What are voters supposed to make of this dispute?  Yes, the Department of Treasury and Finance is a more reliable estimator of costs than whatever policy unit Labor has cobbled together in its backroom for the election campaign.  But, then again, Labor's plans are so vague that the track extension could really cost anything.

If Daniel Andrews becomes premier, the South Morang line will be Treasury's problem.  They'll have to make it work — or get the new government to drop it.

The certainties of the campaign ebb away when faced with the responsibility of government.  This is inevitable.  It's like a law of nature.

Andrews offered a rather spectacular illustration of the difference between campaigning and government on Friday.  Labor proposes an independent body, Infrastructure Victoria, to advise on new projects.  Andrews was asked what he would do if it recommended, say, building the East West Link.  The answer was politic.  Labor would consider it.

But recall that East West Link is the project whose contracts Labor says it will rip up, regardless of the extraordinary cost of doing so — both the cost to the budget, which will likely have to bear the penalty for contract cancellation, and the cost to Victoria's reputation with future investors.

Now East West Link 2 is an option?

It's funny how things can change once an opposition gets the big offices.

The Coalition is proud the budget is in balance.  There's a projected surplus of $1.3 billion in 2014-15.  Labor would be secretly chuffed about this too.  The healthy budget is how each side can justify their campaign spending sprees.  But the government only has a budget surplus because it was conservative with spending over the last term.  Voters like spending but they don't like being taxed to pay for it.

Polls say Labor is ahead.  This is not due to any Herculean effort on their part.  If Denis Napthine loses next week it will be because any prudent government is vulnerable to being called "uninspiring".  In politics there are few more devastating epithets.

But reform is Canberra's job now.  The states deliver services and build infrastructure.  Where's the room for inspiration in that?

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The Abbott Government's chance for real reform

The word "deregulation" has been steadily degraded over the last two decades.  Like the word reform, it is both overused and overly abstract.

Earlier this month Malcolm Turnbull's Department of Communications released a discussion paper on the way the government manages the radiofrequency spectrum.

The paper has received little attention.  That's not a surprise.  Spectrum governance is about as interesting and accessible as how the tax office calculates franking credits.

But what's being proposed is rather radical and incredibly important — a move away from the Soviet-style command-and-control regulation of spectrum to market-orientated governance.

It is, in other words, the sort of deregulation that the government is going to have to pursue if it wants to be remembered as a reforming government.

Spectrum is one of the economy's most valuable assets.

We need spectrum for everything from broadcast television to mobile internet access.

The services and technologies that rely on spectrum add billions to the Australian economy.  One British estimate of the economic value add of spectrum in that country was AU$90 billion.

Yet for all its economic significance we regulate and control it in an incredibly retrograde way — through central planning and government allocation.

Think of spectrum a little bit like land.  There's a limited amount of it, but it can be divided up almost infinitely and used in different ways.

And of course, some ways are better value than others.  We're using spectrum more efficiently than we used to (the spectrum that once could only fit one broadcast television channel can now fit many) but we're also demanding more of it as new technologies are adopted.

The Australian Communications and Media Authority (ACMA) dictates how spectrum is allocated — which parts are used by broadcasters, which are free for domestic uses like WiFi, which parts are for military or law enforcement use.

Nobody seriously suggests that ACMA allocates spectrum efficiently — that is, to its best use.  And basic economics tells us that inefficient resource allocation is an unnecessary burden on the economy, on long term growth, and ultimately on our living standards.  And it slows the spread of new technologies.

Indeed, it is the government's tight control of spectrum which has kept the entire broadcast sector so farcically protectionist.  This archaic system of spectrum allocation is why there is so much rent-seeking and crony capitalism in broadcasting.

The commercial television broadcasters have long lobbied against a fourth television network which would undercut their profitability.  When broadcasting moved from analogue to digital, the government gave away masses of spectrum to the existing broadcasters — shirking this once-in-a-century opportunity to inject some competition into the sector.

If you're unhappy with the quality of commercial television in this country, well, blame the government's spectrum protectionism.

Likewise, centralised spectrum management gives the government a stick to control the free speech of broadcast media.  All those hapless ACMA investigations into Alan Jones are based on a threat — however distant — that station broadcasting licenses might be revoked.

Turnbull's discussion paper raises a number of proposals to simplify spectrum management.

But the most important is number 8, under the rather bland title "Facilitate greater user involvement in spectrum management".

Under this proposal, ACMA would devolve spectrum management to users and private spectrum band managers.

Users and private firms would decide how spectrum was allocated, the rules under which it was used, figure out pricing mechanisms, and they'd adjudicate disputes.  ACMA would be reduced to a spectrum watchdog.

Imagine band managers with a financial incentive to allocate spectrum to the highest value.  This would be a big step towards treating spectrum like an economic asset like any other.

Eventually the vast bulk of ACMA's regulatory apparatus should be replaced by a property rights based spectrum regime.  In other words, the market would decide how spectrum is allocated.

The idea that the market could allocate spectrum better than government planners is an old one in the history of economic thought.

The economist Ronald Coase won his 1991 Nobel Prize for a program of work that begun with an examination of how the Federal Communications Commission in the United States prevented the efficient allocation of spectrum.

A paper commissioned and published by ACMA itself in 2007 acknowledged some benefits of granting property rights in spectrum — not least in reducing the inefficiencies caused by command-and-control allocation.

And we've been inching towards a property rights based spectrum regime over the last few decades.

The government has been allocating some spectrum licences through competitive auctions since the early 1990s.  The Gillard government's Convergence Review called for "a market-based pricing approach" for all spectrum, broadcast and non-broadcast.  And the Communications Department is trying to figure out how to create deeper secondary markets in spectrum trading.

In other words, fully embracing the property rights model of spectrum management would be reform in the direction we are already travelling.

The Abbott government has trumpeted loudly its deregulation and red tape reduction agenda.  But it's likely that the real reforms will come outside those highly publicised "repeal days".

Government spectrum management dates back to the Wireless Telegraphy Act 1905, when the Commonwealth decided it wanted absolute control over the new communications technology.

That makes spectrum control one of the oldest and most stubborn regulatory constructs in Australian history.

For more than a century it has been a burden on the economy, a handbrake on the adoption of new technologies, and a weapon for suppressing free speech.

Deregulating spectrum might be one of the most important things the Abbott government could do.

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Why we can't shake off the cultural cringe

The phenomenon Arthur Phillips famously described as the "Australian cultural cringe" is alive and well.  It was on display during the G20 meeting.  The ALP, the Greens and much of the media treated the G20 as an opportunity to have foreign leaders talk about how bad Australia was, in particular the Abbott government's climate change policies.  Barack Obama's cheap and cynical speech in Brisbane was greeted with acclaim because it supposedly represented the opinion the rest of the world has about Australia.  The fact Obama is a discredited lame-duck president was conveniently ignored.

The cultural cringe manifests whenever anything done by an Australian or our government is judged not according to what Australians think of it, but according to what people in other countries think of it.  The cringe is a particular kind of inferiority complex suffered by a particular class of people.  Many ABC journalists are afflicted by it.  Last week in the wake of the US-China climate change "deal", the ABC's Lateline program enthusiastically quoted the Greens claiming Tony Abbott was now an "international pariah'".  The trouble with terms like international pariah, outcast or embarrassment is that they're never defined.  It's as if those who use the term assume that just saying it somehow proves the perfidy of the Abbott government.

Arthur Phillips was a schoolteacher and literary critic.  He taught at Melbourne's Wesley College for 46 years and was a book reviewer for The Age.  Geoffrey Blainey, who delivered the eulogy at Phillips' funeral in 1985, was one of his students.

Phillips championed Australian writers, such as Henry Lawson, and Joseph Furphy the author of Such is Life.  In 1950 in the literary journal Meanjin, Phillips published a seven-page essay entitled The Cultural Cringe.  His argument was that Australian writers and artists had nothing to apologise for and shouldn't feel inferior to their foreign counterparts.  Australians shouldn't cringe and they shouldn't constantly compare themselves to others.  Australians had to overcome the tendency to ask themselves "Yes, but what would a cultivated Englishman think of this?"  Phillips put it nicely:  "It is absurd to feel apologetic about Such is Life or Coonardoo or Melbourne Odes because they would not seem quite right to an English reader;  it is part of their distinctive virtue that no Englishman can fully understand them."

TENDENCY LINGERS

Phillips' essay was concerned with the arts and how artists regarded themselves.  But the tendency he identified in the Australian humanities in the 1950s lingers, particularly in politics and public policy.  Today, the test of any Australian domestic policy is increasingly, "Yes, but what would the United Nations/European Union/World Bank/OECD think of this?"  When the International Monetary Fund's Christine Lagarde recently endorsed an increase in Australia's GST rate, the response wasn't "Who cares what she thinks?  A French bureaucrat is the last person we should be taking advice from."  Instead her opinion was treated as if it actually mattered.

It is because of the cultural cringe that Australians allow themselves to be lectured to by a United Nations Human Rights Council whose members include China, Cuba and Saudi Arabia.

The cringe of the 1950s was born from a genuine feeling of embarrassment.  The cringe of politics in this country today is the product of a distrust of, as Phillips puts it, "the Australian common man".  Or, put another way, the cringe is the product of a distrust and in some cases even a dislike of Australian democracy.  For those who believe this country should have a carbon tax, the preaching of a foreign president carries more weight than the wishes of the electorate as expressed in the result of the 2013 federal election.  The appeal to international opinion comes in handy for those who don't get the result they want at the ballot box.  Appealing to the authority of something that doesn't exist, ie international opinion, is easier than getting someone to vote for you.

Phillips said Australians would overcome our cultural cringe when we mastered "the art of being unselfconsciously ourselves".  Few people in Australian politics are as unselfconsciously Australian as Tony Abbott.  Which perhaps explains why those who suffer from the cultural cringe dislike him so much.

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Less publicly-funded TV is good news for taxpayers ... if not pigs

Malcolm Turnbull's well-telegraphed announcement yesterday that the ABC's funding will be cut by A$254 million over five years is no surprise.  But, broken election promise aside, this is actually something Australians as a whole will benefit from.

There are two broad reasons for this — one involving use of the phrase "Slutsky equation", so let's get to that first:  it sounds fun.

The noisiest concern with the consequences of the ABC cuts seems to be focusing on the ABC itself, such as all the pigs or bananas they're threatening to fire.

Turnbull says he's found lots of efficiencies stacked away in their back office.  It's basically un-Australian not to show love and support for the ABC — even News Corp editorials lead with that line.

About 71% of Australians are ABC customers, a similar amount to the number who are also taxpayers.  The fact all these Australians are on both sides of this market is what makes changes to its compulsory funding an interesting economic question.

The important thing to understand about the funding cuts is they're like the opposite of a tax increase.  You have to pay less — but in return, you get less.  Or, looked at the other way, it's like your own income has gone up (now that you pay less tax), but so has the price of some of the things you're buying (all those government pigs and bananas).

To unpack whether you're actually better off, economists like to use the Slutsky equation, which decomposes a price change into two components:

1. an income effect
2. a substitution effect

When the price of pigs or bananas goes up, with your income unchanged, you're worse off, because you can now consume less pigs or bananas.  That's the income effect (i.e. you would need a higher income to maintain the same happiness level of pig/banana consumption).

But when the price of pigs or bananas goes up, consumers will also tend to make substitutions toward whatever are now the relatively cheaper alternatives:  maybe kittens and pineapples.  This is the substitution effect, and it offsets the income effect.

The thing about the funding cut is that, from the perspective of the taxpayer and consumer, this looks like two things.  The income effect is that taxpayers are now off the hook to the tune of A$254 million, which increases their income by that amount.  (Let's assume the money is not snaffled as it scurries back to the warm pockets it was originally in.)

But what's really at issue is the substitution effect — the extent to which ABC consumers experience, and respond to a rise in the "price" of, the ABC product.

Turnbull says the funding cut needn't affect programming, just back office matters:  he thinks the consumer won't experience any change.  ABC boss Mark Scott has threatened to slaughter every last pig and mash every banana on site.  He wants consumers to experience a change.

Now if operational efficiency really is what this is all about then Turnbull and Scott need to sort that out between them.  But let's say all cuts find their way on screen:  maybe fewer pigs, maybe less back-office support makes for a lower quality pigging experience.

From the consumer's perspective it's all much the same:  it's as if pigs and bananas are now more expensive.  What an economist will expect to observe, once all the squealing quiets down, is some substitution occurring.

Consumers will find pig-like and banana-like media in other places.  It's absurd to think this is not the case.  Almost every media market the ABC is in is highly competitive.  What that means is that while substitution might not be 100%, it isn't 0% either.

A healthy competitive media environment is good for Australia too, and having a large, subsidised producer in the centre of that does not contribute to that outcome.  This is of course a different story if the ABC was serving only the parts of the media market that are unprofitable (remote and some regional news and sports, for instance, or Labor Party hagiographies) or other areas of genuine market failure.  But that is manifestly not what is going on.

Now of course there is public value in media diversity, and there is a certain public good argument to be made in the ABC front-running experimental media programming, formats and technologies.

Emergency warnings and civil defense announcements are obvious social goods.  And the ABC does provide some cross-subsidy in journalistic training.  But these funding cuts do not make a mark on any of these considerations.

Overall, for the average tax-paying ABC-watching Australian, the income effect will likely dominate the substitution effect.

In short:  we will be left better off by the cuts.

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Opinion: ABC cuts smart move to get public finances on sustainable footing

Communications Minister Malcolm Turnbull confirmed cuts to the ABC on this week's episode of Q&A.  But the Q&A audience of about 700,000 don't have much to fear.  Their beloved news and current affairs program is likely to remain a feature of ABC programming even as the ABC slims down.

Far from the former Gillard government's threat of "cuts to the bone" under an Abbott government, Turnbull indicated that the ABC will be asked to reduce its budget by a paltry 5 per cent over the next five years.

Turnbull went on to make an excellent point:  "Anyone here who is in business, has been in business — particularly anyone who has been in the media business — in the private sector that could not manage to find 5 per cent out of efficiencies is not even trying."

This is not a big ask.  The Government would be justified in demanding far more significant cuts than the 5 per cent it has proposed.  And there's a lot of fat to be cut.

That the ABC should be moving to operate on a more commercial basis is an entirely reasonable proposition.

The ABC — with its more than $1 billion a year budget — is a media behemoth with television, radio and online offerings.  It competes, with the backing of the Australian taxpayer as financier, against private media organisations that have to earn an income the old-fashioned way.

But sales and subscriptions are no match for a giant government cheque.

Media organisations such as Fairfax and News Corp Australia have gone through some tough times in recent years.  Following the peak of newspapers in the late 1990s, the pivot to a new media landscape has been a slow and challenging process.

This year, the Fairfax board had to make difficult decisions about their flagship mastheads The Age and Sydney Morning Herald, opting to cut 80 jobs to ensure the company's survival.  This followed a major restructure midway through 2012 when about 1900 job cuts were announced.

The difficulties faced by Australia's traditional media organisations exist partly due to changing consumption choices of consumers due to the emergence of new technology.  But these problems are exacerbated by the existence of a media colossus propped up by the taxpayer.

In an age where traditional media organisations are facing new challenges, the existence of a public broadcaster as a direct competitor is unconscionable.

Employee salaries are one area the ABC ought to review to find savings.  The release of the salaries of a large number of ABC presenters in November last year revealed an extraordinarily generous remuneration culture at the public broadcaster.  The top earners are on more than $350,000.  The ABC spent more than $465 million on staff remuneration in 2011-12, almost half its annual budget.

Some programming may need to be cut.  But it would be surprising if the most popular programs were those on the chopping block.  When the government announced minuscule cuts to the ABC of 1 per cent in the May Budget, ABC managing director Mark Scott questioned whether popular children's show Peppa Pig would continue to be broadcast on the ABC.

These are empty threats from the ABC's chief lobbyist.  The Government should be congratulated for ignoring them.

More likely are cuts to the ABC's overseas news bureaus and state-based news reporting.  Any gaps in coverage left by the ABC will be filled by existing news agencies.  In many cases, those services already exist.

At a time when the Government is working to ensure public finances are on a more sustainable footing, it's right that cuts are made to indulgences like the ABC.  If there's fault to be found in this decision by the Abbott Government it's that these cuts don't go far enough.  Let's hope 5 per cent is just the start.

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Abbott will soon look like a genius for refusing to drag Australia to yet another climate fiasco

Even as he continues to win plaudits from visiting Chinese and Indian leaders, the high priests and priestesses of the fourth estate are in full-throated rebellion against Tony Abbott.  Defensive, embarrassing, timid, insular, clumsy, flawed, weird, cringeworthy — this is just a sampler of media comment on Abbott's performance at the G20 in Brisbane.

But it is perhaps better to see Abbott as someone who refuses to agree at all times with outspoken, self-appointed pressure groups that breed around controversial questions.  He makes an inviting rhetorical target precisely because he embodies that down-to-earth quality in our national spirit that has been all but obliterated by the modern obsession with courting fashionable opinion.  His bluntness — such as his defence of Big Coal or his threat to "shirtfront" Putin — takes him where mealy-mouthed politicians fear to tread.

I say this as someone who disagrees with his stance on Ukraine.  It is one thing to try to subject the Russian-backed rebels to some scrutiny for 17 July;  it is another thing for the leader of a middle power to issue dire threats and warnings to a nuclear power with vital strategic interests at stake in a region that has been in its sphere of influence for centuries.

All things considered, however, Abbott's diplomatic conduct in recent days has been defensible.

Start with the China trade deal, a major victory for our exporters that will add tens of billions of dollars to the economy.  The prime minister promised to clinch unprecedented and lucrative agreements with Japan, South Korea and China by the end of the year.  His foreign affairs and trade team have achieved this goal with aplomb.  All three nations account for about half of all our exports.

The critics were having a field day feasting on Abbott for daring to talk about his government's domestic policy challenges;  never mind that the leaders were invited to the G20 opening session to discuss how domestic politics impede a pro-growth reform agenda.

Then there is the G20 growth agreement itself, which will dramatically improve the lives of people all around the world, so long as nations deliver on their promises.  Even Michael Gordon, one of Fairfax Media's many Abbott critics, has conceded that for the first time the world's richest economies have committed themselves to a specific (and ambitious) growth target and they have been prepared to allow independent bodies to scrutinise their approaches.

We are told that on climate change, the G20 leaders spectacularly wrong-footed Abbott.  Yet he has merely defended the national interest and kept faith with the Australian people who gave him an electoral mandate to abolish Julia Gillard's widely unpopular carbon tax.  We are also told that Paris is the moment when the world will come together to save us from an excess of greenhouse gas emissions.  It's a fair bet Abbott's position will be vindicated at the United Nations climate talks next year.

Shortly before Brisbane, Beijing concluded a bilateral accord with Washington in which they agreed (on a non-binding basis) to begin reducing their annual emissions by 2030.  The understanding is clearly that, since Obama signed up to this deal (and indeed presented it as a triumph), he will not push the Chinese any further at next year's meeting in Paris.

Meanwhile, Obama needs to ask the US Congress to appropriate $3bn for the global climate fund.  Republicans will oppose it, and many Democrats repudiated Obama's energy agenda in the recent midterm elections.  No member of the visiting Washington press corps, judging from the press conference on Sunday, evidently thinks the issue is an American priority.  Congress won't legislate a carbon tax or a national emissions trading scheme.

As for China, their leaders' priority is to grow their economy at 7-8% annually and to reduce poverty;  and the cheapest way of doing so is via carbon energy (president Xi did not even mention climate change in his address to parliament yesterday.)  True, Beijing is investing in renewable energy projects and piloting cap and trade schemes in some provinces.  But China is also building a coal-fired power plant every 8-10 days and its net emissions continue to escalate steadily (on 1990 levels, Australia is set to cut its greenhouse gas emission by 4% by 2020.)

Any "deal" at Paris will merely give China and India a free rein until the 2030s without any binding obligation to be monitored and scrutinised by the west on their actual behaviour.  That is why Abbott is wise to make any Australian climate policies conditional on a legally binding, verifiable, enforceable and genuinely global agreement to replace the Kyoto protocol.  Even the Germans have essentially done that.

What is shaping up now, as Benny Peiser of the London-based Global Warming Policy Forum predicts, is a huge blame game over the likely failure to agree to a post-Kyoto treaty.  China and India will blame the west for its failure to deliver $100 bn per annum — yes, $100bn — that was promised at Copenhagen.  Obama and the left will blame the Republicans.  The EU will blame the Americans.  Climate enthusiasts and developing nations will blame all and sundry.

And Abbott will look like a genius for keeping Australia on the margins of yet another climate summit fiasco.

Abbott deserves only praise for embracing free trade

The economics of trade can be a little counter-intuitive.

This is no more so than for its central lesson, which is this:  the benefits of tariff liberalisation primarily accrue to the countries that lower their own tariffs, not their trading partners.

Or, putting it another way, even if we lived in a world where every single country had high barriers to trade and refused to budge them, it would still be in our interest to lower our own.

So while the China-Australia free trade agreement (FTA) is a big deal, it's not a big deal for the reasons most reports have suggested.

Take the provision in the FTA which phases out Chinese tariffs on Australian dairy for infant formula over a four-year period.

The Age is predicting that this formula market will be "enormously lucrative" for Australian businesses.  The Australian Dairy Industry Council is chalking the agreement up as a win.

But the winners here are really Chinese consumers.

Access to quality infant formula is a serious problem in China.  In 2008, there was an international scandal when it was discovered the largest budget infant formula firm had been adding industrial chemicals to fake protein content.

More than 50,000 children were reported to have become sick from the formula.  Four died.

Now, understandably, Chinese parents don't want to buy domestically produced formula.  The demand for formula imports is so high that Hong Kong and Macau have placed limits on the amount of formula Chinese tourists can bring home with them.

So while it might be true that opening up the Chinese formula market will be lucrative for Australian firms, this seems to miss the point.  The real winners are surely the Chinese people who have been genuinely suffering from their government's dairy protectionism.

A lot of trade discussions are like this — focused on the benefits to firms and workers when it ought to look at how consumers fare.

Of course, most people are both workers and consumers, and are interested in both the supply and demand parts of the economic equation.

But as Adam Smith wrote, "Consumption is the sole end and purpose of all production;  and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer."

Hopefully we all love our jobs, but no doubt what we most love about our jobs is the fact that we get paid to do them, and that money is available to spend on the things we want or need.

So a few happy Australian dairy firms is nothing compared to the millions of Chinese families who will benefit from the FTA.

It is this producers' bias that has led us to a world where the cause of free trade is being driven by two-party trade agreements.

For while it might be easy to demonstrate that — on an academic level — a country will be better off if it lowered its own trade barriers unilaterally, few politicians have the sort of political nous and conceptual clarity to present such a case to the public.

Governments have worked out that the politics of trade liberalisation is easier if it is done on a piecemeal and bilateral level — emphasising what it has managed to get other countries.

This isn't necessarily a bad thing.  Anything that makes beneficial change more politically palatable should be welcomed.

But the fact that trade liberalisation benefits the liberaliser first and foremost suggests that the economics of FTAs are very different from the way they are presented.

Have a look at the official Australian announcement of the deal.  It is completely dominated by reforms China will have to make to allow market access to Australian firms.  There is very little mention of what we have to do.

The deal involves Australia reducing tariffs on clothes, cars, components and electronics from China.  We also will be relaxing our foreign investment guidelines.  Tony Abbott said on Monday that some aspects of the deal would require legislation to be passed.

Politics being what it is, using self-interested producers eager to open up foreign markets to agitate for the reduction of protectionism at home isn't a bad way to build a political coalition for change.

Earlier this year in The Drum, I argued that the bilateral trade negotiation process holds back the cause of domestic reform.  It can perversely encourage countries to hold back unilateral changes as a bargaining chip.

But here's the thing.  The Abbott Government has been criticised for being too eager to sign these agreements.  Bill Shorten says that Labor is pro-free trade but thinks the government is "more focused on booking a venue for the signing ceremony than examining the fine print or getting a better deal".

Yet if we view FTAs as primarily a tool for shifting domestic policy, then what sort of deal are we holding out to get?  Playing the tough negotiator would be counter-productive — harming ourselves by delaying our own reform program.  It is in the interest of the Australian economy to conclude these agreements as quickly as practicable.

And that's why it is in the realm of free trade agreements that the Coalition has been most clearly successful.

For all the Gillard government talked about the "Asian century", it has been the Abbott Government that has given us free trade agreements with Korea, Japan, and China.

Cost-benefit analysis puts corporate tax avoidance in perspective

The growing crackdown on tax avoidance risks ushering in a broader suppression of international tax competition, harming the interests of all taxpayers.

An inevitable consequence of economic globalisation is that supply chains and financial linkages have become dispersed across geographic space, and producers now strive to provide customers with quality goods and services, at affordable prices, on a global scale.

With individual countries maintaining powers to autonomously impose taxes on different bases and with different rates, opportunities emerge for multinational corporations to not only structure their economic and financial affairs to secure general efficiency gains, but to avoid some punitive taxes.

In recent months some tax avoidance schemes adopted by major companies have received widespread media attention, with coverage typically portraying tax avoidance as an evil which "unfairly" starves governments of revenue and slugs non avoiding taxpayers with additional imposts.

In September the union backed Tax Justice Network NGO released a report asserting that tax avoidance by ASX 200 companies was rife, claiming that 84 per cent of the companies paid less in tax than implied by the 30 per cent corporate tax rate.

The TJN went further, saying that one in ten of these companies were paying no tax at all, with tax avoidance practices costing the federal Treasury $8 billion in lost revenues.

More recently, it has been reported that hundreds of companies, including those headquartered in Australia, and even the federal government's own Future Fund, no less, avoided tax by channelling financial transactions through low taxing Luxembourg.

These reports may have dominated front page headlines in recent weeks, and in one fell swoop tainted the reputations of some of our major producers, but the claims of industrial level avoidance of taxation obligations have been hotly contested.

The TJN study has been heavily criticised for failing to take into account the territorial aspect of Australian corporate tax laws, in which only the earnings of multinational companies that are generated by Australian activity, and not from anywhere else, are liable to Australian company tax.

Indeed, it is nonsensical to claim that foreign earnings should also be represented as an "avoided tax" that companies have elected not to pay, as the TJN appears to have suggested.

Nor did the study recognise that trusts don't attract tax liabilities, whereas the holders of their securities pay tax on interest and other earnings received, thus avoiding the problem of "double taxation".

Another blind spot of the TJN analysis is that the effective rate of tax paid by a given company may not necessarily be the same as the statutory rate for a variety of legitimate reasons, including through the treatment of tax credits and offsets, timing issues presented by the use of accrual accounting standards, and so on.

The claims of so called massive tax avoidance in Luxembourg also does not appear to hold much watergiven that, at the very least, the funds invested by companies in that low tax country will eventually be subjected to taxes paid by shareholders (either through dividend taxation or capital gains taxes).

So, the recent reports and attention grabbing headlines are essentially grounded in, at best, a fleeting understanding of taxation laws and principles but, even if the corporate tax avoidance claims are true, is it strictly the case that wrongdoing has been committed?

For a start, there is a world of difference between tax avoidance, involving the application of existing legal provisions, including tax loopholes, to reduce tax liabilities, and tax evasion, involving engagement in illegal activities, such as fraud, to reduce taxes.

There has been no serious suggestion, at least to date, that the tax avoidance activities of firms operating across borders have entailed criminality.

Another point that should be raised is that the coverage given to recent tax avoidance matters, or allegations of them taking place, has not been presented from an economic perspective weighing up the relative costs and benefits of avoidance, to the avoiding taxpayer, other taxpayers, and governments.

It could be presumed that those engaging in tax avoidance acts construe such activities as providing a net benefit to them, even if it takes some effort to avoid taxes, although in the case of large firms there seems a growing risk of a loss of reputation resulting from such activity.

The assertion is often made that corporate tax avoidance costs the non avoiding taxpayer through higher tax burdens, but other factors must be considered when rendering a final judgment.

For example, the taxes avoided by the firm are funds that could be used, instead, to invest and expand business operations, representing gains to shareholders and those situated within the broader economy.

In high taxing countries vulnerable to avoidance activities there may be some deprivation of revenue experienced by government, but that may present a silver lining in terms of less subsequent expenditures on unproductive undertakings.

Further, any costs of tax avoidance borne by high tax countries could be offset, at least in part, by gains in tax revenue and general economic activity within low taxing countries, the benefits of which could spill back over into high tax countries in the form of, say, more goods and services trades.

The fact is high tax countries present just as strong a motive for international tax avoidance as the existence of low tax countries, including tax havens, but we are not hearing the anti avoidance activists and commentators calling for lower, even flatter, income and capital taxes globally.

Inspired by the sensationalist headlines, the emerging policy agenda for a clamp down on tax avoidance should be seen for what it truly is:  a ploy by indebted countries, with overgrown public sectors, to hoover up more cash from productive people and enterprises, stifling tax competition in the process.

It is most unfortunate that Australia, with much to gain in reducing its own hefty company and personal income taxes, is so actively entertaining the avoidance crackdown obsession by the political representatives of economically flabby and high-taxing Europe.

We seem to forget the march toward greater tax competition by advanced economies, from the early 1980s to before the global financial crisis, played a major role in encouraging productive entrepreneurship by the top end of town, as well as promoting upward mobility for those on low to middle incomes.

In their quest to stamp out tax avoidance, Western countries are merely aiming to compulsorily extract revenue from taxpayers more easily, and threatening to drag the rest of the world into a situation where international competition to lower taxes is no longer the norm.

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Victoria's transport policies ruled by the heart, not the head

Possibly the most economically irrational and counterproductive policy of this state election was offered by Labor this week.

You won't be surprised to learn it was a transport policy.  On Tuesday Daniel Andrews' team proposed a freeze on the Napthine government's expansion of the number of new taxi licences.

Over the last few years, the release of new licences has seen the market price of a taxi plate plummet.  Now there are more taxis on Melbourne's streets (a win for consumers) and the drivers themselves are more able to afford them (a win for drivers).  The only losers are investors who speculated on taxi plates hoping the government would keep them artificially scarce.

Incredibly, Labor also wants to establish a compensation fund for licence holders.  (And to think Labor used to be opposed to "rentiers".)

The Napthine government was only doing what scores of economists have recommended over decades:  break the taxi-licence cartel.

But, then, transport policy is ruled by the heart, not the head.

The taxi announcement got little press.  It's not what the parties want us thinking about.  It's just another micro-policy for a micro-constituency.

The Napthine government is pinning its transport vision on one great big project to rule them all:  East West Link.  Andrews is going with everything but East West Link:  most distinctively removing 50 level crossings.

It is fundamentally absurd that the connection between the Eastern freeway and Citylink involves a one-lane crawl through a park, past a zoo, and over a tram crossing.  If we can't fix these sorts of problems Victoria is going to stagnate.

Labor figures giant infrastructure projects are a little abstract, whereas every voter can think of a level crossing between home and their kid's creche they'd like removed.

But that sort of retail politics cleverness is undermined by Labor calling its transport plan Project 10,000 — after the 10,000 construction jobs it will create.  This is weird.  You'd hope infrastructure plans were more about what was being constructed than how many people will do the constructing.  And the label doesn't do much to dispel the impression that Labor is doing the bidding of a militant construction union.

There are a near infinite number of infrastructure projects governments could build.  Figuring out which is the "best" project is a non-trivial problem.  Market-based pricing systems like tolls would offer some guidance to policymakers but these mechanisms are politically unpopular.

The two parties have competing metro rail projects, and competing plans for new ports.  On Friday they both committed to overhaul of the Frankston transport hub.

We're at that end of the campaign.

The parties are honing in on just two or three marginal electorates.

So whose projects appeal most to you?  With the exception of Labor's surrender to taxi rent-seekers, there are few great matters of principle at stake here.

But this is transport.  We're used to that by now.

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Evasion, Avoidance or Simply Compliance? The G20's Most Taxing Issue

In November, Australia will host the G20 meetings in Brisbane.  Included in an overly ambitious agenda is international tax avoidance or, as the OECD (Organisation for Economic Co-operation and Development) has labelled it, "base erosion and profit shifting".  This is an important debate.  Unfortunately, business has been somewhat reluctant to engage in the issues and faces a period of prolonged tax policy uncertainty.

Anti-business activists have already prepared the ground within Australia by producing a report that alleges that many large Australian companies pay little or no corporate income tax at rates well below the 30-percent statutory rate.  The newly elected centre-right government is prosecuting the case with some vigour, with Treasurer Joe Hockey arguing that companies must both comply with the tax law and pay their fair share of taxes.  In times gone by, complying with tax law was paying a fair share of taxation.

In Australia, at least, big business pays a very fair share of income tax.  According to OECD figures, Australian businesses paid 19.7 percent of total tax revenue in company income tax in 2011, compared to an average of 8.7 percent for the OECD as a whole.  In short, there is no reason for the Australian government to believe that it is being short-changed in its company-tax receipts.

Nonetheless the issue is on the agenda, and many governments are keen to be seen to be doing something.  The European Union — a member of the G20 in its own right — and the OECD, in particular, have been very vocal in this area.

Big-government advocates, including government itself, have been able to generate a campaign of misinformation around company tax through anti-business prejudice and rational ignorance.  All this has combined to create a series of tax myths — those beliefs that the public "knows" to be true, yet are entirely misleading, if not false.  One of those tax myths is that business doesn't pay a "fair share" of tax.  Another myth is that declining company-tax rates result in reduced company-tax revenue.  Between the early 1990s and 2006 — immediately before the Great Recession — company-tax revenue within the OECD had increased as a percentage of total tax revenue.

Anti-business sentiment is cyclical.  Rational ignorance is a bigger problem for business.  Many voters find taxation to be boring and highly complex.  In this environment it becomes easy to propagate the fiscal illusion that the tax burden is lower than it actually is or that government adds more value than it actually does.

Take for example the difference between cost accounting, financial accounting and tax accounting.  Cost accounting generates information for management;  financial accounting generates information for investors;  while tax accounting generates information for the tax authorities.  Already some readers are bored.  Yet attempting to calculate effective tax rates from financial accounting data can lead to very misleading inferences as to how much tax companies actually pay.

That is exactly what anti-business activists have been doing in Australia.  Despite the fact that annual financial statements reconcile financial accounting with tax accounting, those activists have managed to create so much public indignation that the Australian Senate has announced an inquiry into company taxation.  The fact that accounting information is put to different uses for different purposes should be understood by any high school student;  yet politicians and bureaucrats either struggle with that notion, or they deliberately obfuscate this point.

In the first instance, then, the prima facie evidence that companies engage in base erosion and profit shifting is an accounting illusion.  While corporate-tax revenue fluctuates with the business cycle, there is no evidence that the trend in revenue has declined, at least not for the OECD overall.  At a time when corporate-tax rates have fallen, stable revenues would suggest the corporate-tax base has expanded and has not been eroded as is claimed.  It is true that companies do not pay nearly as much tax as various governments would like them to spend, but that too isn't evidence of any wrongdoing.  The company-tax system raises as much revenue as it is designed to raise.  If governments want more money from the company-tax system, they should pursue those policies that would result in higher levels of company profitability.

Companies do tend to structure their affairs in such a manner as to minimise the amount of tax that they pay.  This perfectly legal strategy has led UK Prime Minister David Cameron to argue that he was opposed to "aggressive" tax avoidance, and he favoured "tax transparency".  The problem with Cameron's position is that it isn't clear that any of the companies usually singled out as engaging in "aggressive tax avoidance" are being non-transparent.  The famed "Double Irish Dutch Sandwich" tax strategy does not rely on bank secrecy to operate.  Capital mobility, national investment incentives and the existing international tax architecture all contribute to what is now labelled "profit shifting".

A telling fact is that those nations that do have general anti-avoidance or anti-abuse provisions in their tax law seldom use those provisions against large multinationals or, as happened recently in Australia, lose in the courts.  While claiming that aggressive tax avoidance occurs, governments don't take action under existing laws to curb that behaviour.  Although that could change, it is yet another sign that the corporate-tax system raises as much revenue as it is designed to raise.

What is really happening is that governments don't like competition.  In particular, they don't like the competition that manifests itself within their own international tax cartel.  The fact is that companies around the world are subject to the laws that governments have written themselves.  Governments have also voluntarily entered into tax agreements with other nations that bind international transactions and multinational corporations.  In establishing an international tax cartel, governments have both written the rules and divided up the global income-tax share amongst themselves.  As economists have long known, cartels are as unstable as participants have incentives to cheat.  Some members may lower their prices to gain market share.

So it is with taxation.  Some governments have lowered their tax rates to gain economic activity.  The UK, for example, is itself lowering corporate-tax rates in order to attract multinational corporations.  In responding to those incentives, many law-abiding tax-paying citizens and companies get to be labelled "tax cheats".  As if being fully compliant with the law of the land were somehow immoral.

When pushed, some politicians argue that it isn't tax competition per se that concerns them, but rather tax havens are the problem.  Yet this argument doesn't survive scrutiny.  The public perception of tax havens is very different from the mundane reality.  So-called "tax havens" tend to be respectable and well-managed economies.  Australian activists, for example, have been condemning those well-known fiscal "fleshpots" Hong Kong, Malaysia and Singapore as being tax havens.  The fact of the matter is that there are good reasons why any company with an international presence would locate in Hong Kong, Malaysia and/or Singapore.  Activists, bureaucrats and politicians might not know that.  They seldom have any actual business experience or understanding of business practices.  Some may never have held a job in the private sector.

To argue that routine business decisions constitute tax avoidance, and even evasion, requires those activists, bureaucrats and politicians to second-guess those decisions.  There can be no doubt with the benefit of hindsight, and a lack of appreciation for business risk and uncertainty, that many bureaucrats and politicians think that they would make much better decisions than business people ever do.  Yet the state of public finances tends to suggest otherwise.

Then there is the fact that at some level almost all nations are tax havens for some economic activity.  The United States is probably the biggest tax haven in the world — somewhat ironic for a nation that aggressively pursues its own citizens' worldwide income.  The UK has long been a residential tax haven for wealthy foreigners.  Any country that provides any tax concession to foreigners becomes a tax haven.  So it boils down to politicians wanting to offer incentives for investment in their own country, while restraining others from doing just that.

So we have members of a very unhappy international tax cartel meeting soon, with some members hoping to change the rules.  Luckily the biggest player, the United States, is unlikely to agree to any significant rule changes.  After all, many of the companies regularly singled out as tax cheats are American multinationals.  It isn't clear why the US government will agree to having American companies pay more tax to foreign governments.

Despite all the fire and brimstone promised at the G20 meeting — and domestic Australian politics — the international tax cartel will continue under much the same rules as before.  Unfortunately that opens multinational corporations up to the prospect of protracted litigation where individual nations employ their own existing tax rules, or introduce new rules, in an attempt to gain more tax revenue.  These fiscal shakedowns are likely to become common as tax complexity reduces legal certainty and allows governments to raise revenue through the threat of legal action, and companies settle the claims rather than litigate.  The US government has managed to raise $125 billion over the past five years by fining US banks for various regulatory breaches.  We may see that sort of behaviour on a grander scale.  The international business community faces a hard choice:  Greater legal certainty will come at the price of much higher levels of taxation.

It is well known that legal uncertainty depresses economic prosperity.  So, too, do high levels of taxation.  In an environment where economic growth has been anaemic, and is forecast to remain anaemic, bureaucrats and politicians should be concentrating on reducing those risks and lowering the tax burden rather than attempting to increase both.

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Big government, big opportunity for rent-seekers

In the 2012-13 financial year, the Australian Labor Party received $55 million in donations.  The Liberals received $73 million.  The Greens and the Nationals attracted around $8 million each.

Name a large corporate in Australia and their name is almost certainly somewhere on the Australian Electoral Commission's donations register.  Lots of firms even donate to both sides.  And of course the Labor Party has a healthy union donor base as well.

But that's only a fraction of the total amount of money spent on trying to influence government.  Federally, Australia has 590 registered individual lobbyists representing 1,708 corporate and non-profit clients.

Then there's all the money firms spend lobbying with their in-house government affairs staff (who don't show up on the lobbyists register).

Sounds like a lot?  But consider this:  the Abbott Government says it plans to reduce the regulatory burden by $1 billion every single year.

Never mind how accurate that figure is.  $1 billion is an enormous amount.  It makes the amount of money spent on lobbying and rent-seeking in Australia seem tiny by comparison.

Whole industries live and die on the regulations and taxation laws imposed upon them.  A new regulation, or a tiny alteration of an existing one, might destroy an enterprise or create a monopoly.

So the real question is, why isn't there more lobbying?  Why don't firms spend much more money trying to influence the political process than they do?

This is called the Tullock Paradox, named after Gordon Tullock, the great American political economist who died last week at the age of 92.

The puzzle is even deeper because we have lots of evidence that suggests the return on investment from lobbying is enormous.

One American lobby group brags that for the $11 million it charged its clients in fees, it has delivered $1.2 billion in regulatory advantage.  An academic study found that $1 of lobbying resulted in $220 in benefits — an incredible 22,000 per cent return on investment.

There are a few possible ways to resolve the Tullock paradox.

Tullock titled the 1972 article where he outlined this paradox "The Purchase of Politicians".  But perhaps politicians aren't available for purchase, and the examples we have of large returns for small amounts of money lobbying are, in truth, just coincidences — the government was likely to make that decision anyway.

Alternatively, perhaps the returns to rent-seeking are so unpredictable that firms see it as a gamble.  If so, then the big lobbying windfalls are extreme outliers.  Most experiences with lobbying aren't as incredibly successful.

Or businesses might not be aware of the opportunities that lobbying presents — they might be irrationally avoiding easy opportunities for profit, or wrongly believe it's not worth their time to learn their way around the complicated world of rent-seeking.

Perhaps corporate donations are given with no expectation of benefit.  Individuals donate to political parties as a form of expression.  Maybe corporations do as well.  Perhaps, by donating, or even by lobbying, they seek to signal to regulators and consumers than they're in the tent, rather than outside it.  They're cooperating.

Or perhaps corporate executives just enjoy the access to celebrity politicians that being a big donor can assure.  We shouldn't assume that executives, who decide whether to donate and how much, are always acting in the best interest of their shareholders.

Anyway, lots of possibilities.  Some are more plausible than others.

But the Tullock paradox isn't just a little intellectual conundrum, and it isn't just about clarifying how much money is spent on politics.

Rather, it's a window into one of the central dilemmas of government — how can we ensure that government works in the interest of the people who elect it?

Gordon Tullock is most famous for inventing the economic concept of rent-seeking, where private interests influence the government to deliver private benefits.  (He didn't invent the name.  That was Anne Krueger.)

The lesson from the vast literature on rent-seeking that has sprung up since is simple:  where there is political power, special interests will try to capture that power.

It's easy to think of ideas for new laws or regulations or government programs that might, on paper, make us better off.

But these laws, regulations and programs won't be introduced by benevolent and omnipotent dictators.  They'll be introduced by politicians and bureaucrats — plain old humans, swimming in a pool of competing interests.

The more a government does, the more opportunities are presented for rent-seeking.  Rent-seekers thrive in the minutiae of policy detail.  Corporations know much more about how regulations affect their business interests than regulators or politicians do.  It's not hard for lobbyists to take advantage of that knowledge gap.

Resolving the rent-seeking problem isn't as easy as banning or restricting donations, putting barriers in front of lobbying firms, or any of those other solutions we regularly hear.

The Tullock paradox emphasises how enormous the gains from rent-seeking are.

With such great windfalls available, money is going to flow into the system no matter how we try to prevent it.

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Labor Party reluctant to ditch union ties in Victoria

On Friday, Labor's planning spokesman, Brian Tee, insisted he would not resign his membership of the Construction, Forestry, Mining and Energy Union if he became planning minister.

This is rather incredible.

Federally, the Labor Party is slowly, emotionally, wrenching itself through reform to separate the party from the unions.  It's long overdue.  The relationship hurts both sides.

Yet Daniel Andrews, the man who might be Victorian premier, is against this reform program.  Not only that, but he wants to install a CFMEU member in the very portfolio where they could be most damaging — planning.

Nowhere in the country is the relationship between the Labor Party and the union movement as clearly dysfunctional as in Victoria.

Much more than Steve Bracks or John Brumby, Andrews is a creature of the Labor-union nexus;  a party man close to the union interests that financially back Labor.

Last week submissions to the Royal Commission into Trade Union Governance and Corruption alleged the Victorian CFMEU has committed criminal blackmail, breached Supreme Court injunctions and violated the Fair Work Act, Commonwealth Competition and Consumer Act and the Victorian Competition Policy Reform Act.

John Setka, the Victorian CFMEU boss, has a long history of criminal charges, including for assaulting police.

It's all very salacious.  Yet Andrews' Socialist Left faction invited the CFMEU back into its power-sharing agreement.  He relies on their support.  Now the CFMEU gets a say in preselections and what the party's polices will be.

The Coalition has been trying to put the CFMEU-Andrews connection at the front of voters' minds.  Oppositions are usually risk-averse.  You can imagine how much Andrews would like to distance himself from union militancy.  It's revealing that he can't.

Sure, the Labor-CFMEU friendship is fodder for that most off-putting sort of politics — the politics of talking points and condemnations and press releases.  But it does raise serious issues.

So much state government policy has been taken over by Canberra.  This gives what is left a disproportionate significance.  When we vote for state politicians we're really only voting on a few issues.

Spring Street can't set the corporate tax rate.  It has almost no control over industrial relations and a minor influence on the level of economic regulation.  The quality of our health and education — the centre of Labor's message this week — is heavily dependent on how much federal funding Victoria receives.

But Spring Street does decide how open the state is to new building projects.  So giving militant CFMEU interests a lever over development could have long-lasting effects on the shape of Melbourne, and even the Victorian economy.

Earlier this week it was revealed that two Liberal candidates have been interviewed by the Victorian Ombudsman's office relating to corrupt donations and planning decisions.  Labor is understandably excited.  It all sounds very New South Wales.

But Victoria has its own native problems.  What will it mean for business when this old union state gets an old union government?

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George Brandis's solution a cure worse than the disease

In 1776 Thomas Paine wrote:  "For as in absolute governments the king is law, so in free countries the law ought to be king;  and there ought to be no other".

Australians are the fortunate inheritors of this legal tradition.  Founded on the basic principles of the rule of law, our legal system slowly evolved over hundreds of years in England — predominantly as a reaction to the absolute power of monarchs.  And right at the heart of rule of law is the rejection of arbitrary power.

Yet last week Attorney-General Senator George Brandis made a bad law worse by giving himself subjective power to determine whether individual journalists accused of breaching a new criminal law which restricts free speech will face prosecution.

Section 35P of the National Security Legislation Amendment Act (No. 1) 2014 establishes the criminal offence of "unauthorised disclosure of information".  Disclosures attracting criminal liability are those that relate to any "special intelligence operation" conducted by the Australian Security Intelligence Organisation.  The penalty for breaching this new law is five years' imprisonment.

Section 35P is a clear and unjustified limitation on the human right to freedom of speech.  It punishes anyone who publishes information about SIOs.  There is a significant level of ambiguity around what ASIO activities can be granted SIO status and once an SIO has been granted it remains in place forever.

Recently, the debate has centred on the impact that this provision is likely to have on journalists.  The concern is that section 35P puts this particular category of people at a higher level of risk than many others due to the nature of their work.  There is no doubt this is true.  Reporting on the activities of our national security agencies has just become a far more hazardous pursuit.

Many have pointed out this flaw in the legislation.  Foreign affairs editor at this paper, Greg Sheridan, is scathing:  "Section 35P of the National Security Legislation Amendment Bill is a terrible piece of legislation that fundamentally alters the balance of power between the media and the government.  In doing this, it seriously weakens our democracy and will ultimately weaken, in quite practical ways, our security."

Of course, journalists are not the only ones affected by the legislation.  Anyone can fall foul of section 35P.  But that has been the overwhelming focus of the current discussion.  Senator Brandis is clearly feeling the pressure and has grasped at a solution.

Last week, the attorney-general acknowledged the concern that section 35P could be used to gag journalists and announced that "no such prosecution could occur without the consent of the attorney-general of the day."

Senator Brandis' solution to the section 35P problem is quite explicitly political.  The attorney-general is seeking to transform a legal decision into a political one.  The rationale is that prosecuting journalists is an unpopular proposition in liberal democracies like ours.  So if an elected politician has to sign off on the prosecution it is unlikely ever to occur.

This is quite an extraordinary decision by the attorney-general.  It is a deeply flawed solution to a very dangerous law.  It infuses an already hopelessly vague law with further uncertainty.

Discretion lies at the heart of Senator Brandis' resolution.  He has established a system whereby attorneys-general must exercise their own personal judgment in cases where journalists would be accused of breaking the law.  This is an unambiguous challenge to the rule of law.

The English jurist AV Dicey, in his work The Law of the Constitution, directly contrasts the rule of law with discretionary power.  Giving arbitrary decision-making power to an individual allows for personal biases to dictate legal outcomes.  Discretion undermines the certainty and predictability of a legal system built on the rule of law, and it undermines the idea that everyone is equal before the law.

There are also a number of practical problems.  An attorney-general reviewing a potential prosecution under section 35P will have a number of political issues to consider.  Particular problems arise in cases where a journalist has uncovered ASIO wrongdoing.  The political calculation might lead an attorney-general to agree to proceed with a prosecution in the hope of discrediting the journalist and escaping the potentially more significant fallout from such disclosure.

In a 2007 paper on prosecutorial discretion, Nathan Piwowarski pointed out that electoral accountability often translates poorly into accountability for discrete decisions.  This is because elected officials make countless decisions, only some of which capture the public's attention, and the public will reward populist decisions as opposed to those that are legally sound.

Section 35P erodes liberal democratic principles.  But Senator Brandis' proposed solution is a cure worse than the disease.  This is a problem of the parliament's making, and it's up to parliament to find a solution.  The most elegant answer is obvious — repeal section 35P.

Abbott's big win in Washington DC

The results of the midterm elections in the United States on Tuesday are good for Australia and good for Tony Abbott.

The Republicans gained control of the Senate, increased their majority in the House of Representatives, and won additional governorships.  In the Senate there will be at least 52 Republicans to 45 Democrats, in the House 243 Republicans to 179 Democrats, and 32 governors will be Republican against 17 Democrats.  Six years ago the Democrats controlled both houses of Congress and most governorships.

On energy, on climate change, on trade, and on foreign policy the new US Congress will take positions closer to those held by Australia.  If any Democrat could be said to be a winner, it's Hillary Clinton — and even that's good for Australia.

Clinton's position as a centrist Democrat and as a potential presidential candidate has been strengthened against the liberal left of her party, whose policies were repudiated at the election.  If a Democrat were to be elected president in 2016 by any measure Clinton would be the best for Australia — she knows this country and she's not as protectionist and not as left-wing as other likely Democrat nominees.

There's a multitude of explanations for Tuesday's election outcome.  The excuse Democrats themselves are giving is they were defending a greater number of marginal seats than Republicans.  That's true but doesn't explain Republican victories in states that, at the presidential election, had solid pro-Obama majorities.

The one undeniable message from the midterm election is the message that nearly every election sends — it's all about the economy.  At exit polls 50 per cent believe the next generation of Americans will have a lower standard of living than the current one, 70 per cent believe the economy is in bad shape, and 78 per cent are worried about the direction of the economy over the next twelve months.

Unemployment in the US might have fallen to less than 6 per cent, but Americans remain fearful for their jobs and fearful for the future.

JOBS AND ENERGY

During the election campaign, while the Obama administration talked more regulations on business to limit greenhouse gases, the Republicans talked about "America's energy renaissance".  Republicans unashamedly talked of the benefits of more energy from more coal, more gas, and more oil.  The Republicans deliberately and explicitly connected the benefits of more and cheaper energy to jobs and the revival of the manufacturing industry in the US.  In the US, there's nothing controversial about Abbott's comment that coal is "good for humanity".

Republican senator James Inhofe, from Oklahoma, is likely to be the next chairman of the Senate Committee on Environment and Public Works.  He's compared the United Nations' climate change deliberations to a "Soviet-style trial" where "ideological purity trumps technical and scientific rigour".  The chances of the US adopting an emissions trading scheme or carbon tax any time in the foreseeable future are nil.  (It's often forgotten that even when the Democrats controlled both houses of Congress, Obama did not attempt to impose a "price on carbon".)  The new Republican-controlled Congress is more likely to support the US taking a global leadership role on free trade than was a Congress dominated by Democrats beholden to labour unions.  If Obama were to embark on a new round of negotiations to encourage free trade (not that he shows any signs of doing so) he could still leave a significant, positive foreign policy legacy.

After Tuesday, while the White House will remain in control of foreign policy, there'll be in Congress a growing number of Republicans impatient with seeming reluctance of the Obama administration to deal with the threat of Islamic fundamentalism.

A more assertive American presence in the Middle East especially in dealing with Islamic State would be welcomed by the Abbott government.

Probably the only negative for Australia from Tuesday's US midterms is the impact they will have on next week's G20 meeting in Brisbane.  The visit of a lame-duck American president is not that exciting and his speech on American leadership in the Asia-Pacific risks being a non-event.

Because of the drubbing Obama received this week, unfortunately, the G20 will now be a little less glamorous — and a little less relevant.

''Rent seeking'' theorist lifted lid on bureaucratic games

Arguably the greatest economist of our era never to have received the Nobel Prize, Gordon Tullock, who passed away this week, greatly improved our understanding of the "rent seeking" process, bureaucracies, and voting procedures.

Tullock, who passed away in Des Moines, Iowa, at the age of 92, was a leading figure of the "public choice" school of economics, which seeks to explain a wide range of political phenomena using the insights and tools of economic science.

After a spell of US military service during World War II and later completing law school in Chicago, Tullock joined the Foreign Service from 1947 to 1956.

It was those years working in US public sector administration that led him to write his first major work, The Politics of Bureaucracy, exploring in great depth the nature and limitations of bureaucratic modes of public administration.

Tullock's profound, yet still underappreciated, key insight was that motives of self-interest motivated bureaucratic actions as much as anything else, and that this reflected growth in the complexity and scale of bureaucracies which are very difficult for reformist politicians to counter.

If Prime Minister Tony Abbott has ever faced his own "Tullock moment" during his relatively brief time in office, it would be the recent pushback from public sector unions over pay, amidst a severe budget deficit.

Pursuing a fully-fledged academic career by the early 1960s, Gordon Tullock collaborated with the famed economist James Buchanan to write the seminal work in public choice theory, The Calculus of Consent.

This defining work holistically modelled political process as the product of individual choices, of each and every one of us in our roles as either voters, bureaucrats or political representatives.  Those choices were in turn heavily influenced by the framing of institutional rules.

GENUINE CONSENSUS OPTION

Bicameral parliaments were preferred over unicameral parliaments to ensure more genuine political consensus over contentious legislation that could erode individual liberties, while unanimity (or near unanimity) voting rules were preferred over majority voting for much the same reasons.

Politicians who prefer maximum discretion in decision-making, and the greatest ease in passing their programs, would flinch at such conclusions, but Tullock's suggestions represented greater accountability to the people.

And as much as the Abbott government might not like it, this major work by Tullock, along with his colleague Buchanan, represents an implicit big tick for even a hostile Senate filled with members charged with representing different constituencies in this country.

Most economists would tend to agree that Gordon Tullock's major contribution was his theories explaining the rent seeking process.

According to a classic economic article produced by Tullock in 1967, the spending and other efforts involved in lobbying politicians for certain policy outcomes inevitably involved a wastage of scarce resources, not to mention poor policy outcomes for consumers and taxpayers.

Tullock found that the more that lobbyists spent scarce resources to influence the political process, the more inefficiencies incurred.

A large part of the growing criticisms of "crony capitalism", both here and throughout much of the world, centres upon the massively wasted, and often damaging, lobbying efforts that Tullock originally cited all those years ago.

Indeed, perhaps Tullock gained much satisfaction during his twilight years in knowing that arguments against the influence of cronyism in our economic, financial and social policies are fast becoming a cause bringing all sides of politics together.

INTELLECTUAL WINGS FLY FAR

Coming originally from the non-economic background as he did, it was no surprise that Tullock had a tendency to spread his intellectual wings over a wide and varied field.

Tullock was a key player in applying the "rational choice" approach of economics to a wide range of non-economic activities, even to such issues as marriage and sexual behaviour, as aptly illustrated by his 1975 book The New World of Economics.

Although this book was published to the chagrin of Tullock's critics, there is no denying the empirical tractability, and even the popularity, of using economics to answer social questions, if modern efforts such as Freakonomics are any guide.

Some within the economics profession have wondered if the likes of Tullock, and others who have also recently passed, such as Armen Alchian, Gary Becker and James Buchanan, will be replaced by a new breed of economists who could reach out to a broader audience.

In the most obvious sense it is true that Tullock cannot be replaced, with even James Buchanan bestowing upon Tullock the rare and honourable description of being a "natural economist", and the jury is still out as to whether the current batch of economists can reach similar heights.

But there is one thing for certain.

Thanks to the works of Gordon Tullock, we can never think of government, and indeed life, in the same way again.

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Finding a cure for Ebola

The outbreak of Ebola in Africa has demonstrated the need to reduce regulation of the pharmaceutical industry in the United States and elsewhere as a matter of moral urgency.  Ebola is a horrible disease.  According to the US Centres for Disease Control and Prevention the current outbreak in West Africa has infected 13,540 people and killed 4941.

The US Food and Drug Administration (FDA) regulates pharmaceutical production in America.  Currently, for a drug to be "licensed" it costs at least $US500 million and takes 10 years of testing, according to Tim Worstall of the Adam Smith Institute.  As awful as the Ebola outbreak is, the number of people infected is nowhere near high enough to make it cost effective for drug companies to meet the huge costs of getting drugs licensed in the US.

Bizarrely, many have blamed the drug companies for this and have accused them of being "uncaring" and "profiteering" from poor people's misery.  Not only does this imply that commercial businesses should give away their products for free, but fails to understand why profit is a good thing.  In this context, profit acts as an incentive for drug companies to produce lifesaving drugs that save billions of lives.  But it doesn't have to be this way.

With less regulation, pharmaceutical companies can invent and produce more drugs quicker.  Smaller drug companies would be able to enter the market.  Daniel Klein and Alexander Tabarrok of The Independent Institute in the US conducted a review of FDA regulation in 2002 and came up with a range of modest amendments to the current system that could reduce the cost and time associated with producing drugs.  These include enabling seriously ill patients to access unapproved drugs, dropping "proof of efficacy" requirements, implementing more international reciprocity agreements, creating a field of non-government drug-certifying bodies and making FDA approval voluntary.

But drug regulation has also created a tricky situation for western governments who are under severe pressure to fight the Ebola outbreak.  After all, can't the government just step in and pay the drug companies to produce the treatments?

A MINIMUM OF $500 MILLION

Once again, the relatively small size of the outbreak comes into play.  If only a few thousand people are infected, and treatment costs a minimum of $500 million, then clearly limited government resources should be spent on less newsworthy diseases where many more lives can be saved.

Currently, the hopes of those infected are hinging on the development of an experimental drug called ZMapp.  The only reason ZMapp exists is because the US armed forces paid for its development in preparation for the eventuality of Ebola being used in a biological attack.  A paltry seven treatments of the drug existed at the time of the outbreak.  They have already all been used with some positive results.  It won't be until early next year before American drug companies, with the help of the government, can produce treatments numbering in the hundreds let alone thousands.

But Klein and Tabarrok's major recommendation was to revert to a fully voluntary system of drug certification.  In this scenario, drug safety and efficacy would be secured by reputation, non-government certification organisations and "middlemen" such as pharmacists and doctors.  Not to mention the threat of tort law in the event of malpractice on the part of drug companies.

After all, a concerned parent may quite rightly desire certification of medication they give to their child to treat basic conditions like the flu.  But an Ebola patient with days to live may be happy to roll the dice on an uncertified treatment that just might save their life.

It is unclear why the latter option is illegal.  It would seem that that US government thinks people should be free to make decisions on almost every aspect of their lives, except the most important one — their health.

Finally, any economist will tell you that greater innovation occurs in a free market system.  It is no coincidence that what former Professor at the University of Heidelberg Hugo Kibinyi calls "the golden age of drug discovery" ended as the powers of the FDA were being ramped up following the Kefauver-Harris reforms of 1962 and throughout the 60s, 70s and 80s.

Unless the US returns to a system that invites innovation, we may never know the treatments that haven't been created as a result of the FDA's control of drug production.  Some may argue that medical care is fundamentally too important to be left to the free market.  But as the current Ebola crisis shows, it's too important not to be.