Testing times make for great (and awful) leaders

Tim Fischer, deputy prime minister in the Howard government, thinks John Monash, the legendary Australian military commander during the First World War, deserves a promotion.

Fair enough.  But Fischer has stumbled upon a bigger issue in Australian history — the mendacious jingoistic hopelessness of one of our most famous prime ministers in one of the most important times in the development of the nation.

In his new book, Maestro John Monash:  Australia's Greatest Citizen General, Fischer argues that Monash was denied the rank of Field Marshal because Billy Hughes, prime minister between 1915 and 1923, was both jealous and anti-Semitic.  Monash had both German and Jewish ancestry.

A promotion is not the only honour Fischer would like for Monash.  He would like the main street in Monash's childhood home of Jerilderie to be renamed John Monash Parade.  He'd like a bridge Monash helped build in Benalla to be renamed the John Monash Bridge.  He'd like London's Imperial War Museum to recognise Monash's contribution, and some newspapers that downplayed Australian war efforts a century ago to rectify that error.  Along the way he'd like some WWI battles renamed, for clarity.

(Yes, Maestro John Monash is a very policy-oriented biography.)

Fischer says the idea of promoting Monash to Field Marshal has precedent.  The cause has been taken up by the Assistant Treasurer Josh Frydenberg.

But the real spotlight here has to be on the bad guy in Fischer's story — Billy Hughes.

Historians tend to be most impressed by active prime ministers.  Usually those that govern during war do well on that measure.  Testing times make for great leaders.  Take John Curtin, who has been the subject of more hagiographic praise than any other PM.  (John Hirst makes the case against Curtin's greatness in his 2010 book Looking for Australia.)

Billy Hughes benefited in his lifetime from the patriotic enthusiasms of the First World War.  Now he's largely faded into old Labor legend as the archetypal "rat".  Otherwise he's best remembered for his two failed referendums on conscription during the war.

But in retrospect it is hard to think of a worse Australian Prime Minister than Hughes.

Hughes' record is dismal.  His support for conscription is bad enough.  (Ronald Reagan once described conscription as the "assumption that your kids belong to the state".)

Hughes fostered a split in the Labor Party and created an alliance to hold government united by nothing except aggressive wartime patriotism.  This Nationalist coalition represents the final death knell of classical liberalism as a political force in Australia.

As an administrator he was a failure.  Even as sympathetic a biographer as Donald Horne had to say that Hughes was an "incompetent wartime prime minister".

At the Versailles peace treaty he was the most extreme supporter of German reparations.  He even wanted Germans to compensate Australians who had financed their purchase of war bonds by taking out mortgages.  The final harsh reparation settlement contributed to the later German economic collapse and the rise of Nazism.

Just as consequential was his aggressive and passionate support of the White Australia Policy.  A Hughes biographer, W Farmer Whyte, writes that "nobody had fought harder than Hughes to place Australia's immigration laws on the statute-book".

When Japan proposed in 1919 that the covenant of the new League of Nations should have a clause defending the principle of racial equality, Hughes was the clause's most aggressive critic.  He was worried it would threaten White Australia.

The historians Geoffrey Blainey and Margaret MacMillan have both argued there is a clear relationship between the defeat of the racial equality clause and subsequent Japanese belligerence towards the West.

Either way, there is no doubt that thanks to Hughes, Australia's contribution to world peace at Versailles was an unmitigated disaster.

Poor old Billy McMahon is regularly pummelled as the worst prime minister in surveys (Wikipedia has an overview here).  Left and right like to argue that either Robert Menzies or Gough Whitlam was the worst.

But none of these leaders' flaws can possibly stack up next to Hughes — who was incompetent during the First World War and the biggest supporter of mistakes which led up to the Second World War.

Hughes' incredibly poor leadership is the embarrassing counterpoint to the Anzac heroism we are remembering during the WW1 centenary.

Australians don't have a deep political memory.  We don't debate our political past as, say, the Americans do.  Our newspapers aren't filled with comparisons between political events and their historical precedents.

But our political history matters.  Hughes was an inept leader who benefited from the patriotism of wartime.  He was sustained by a political class who valued his populist touch more than good government.  There are some lessons there we could file away for the future.

So should John Monash be promoted to Field Marshal?  Monash was a great military leader, and deserves to be judged on his merits.

But, then again ... if by doing so it further exposes our worst prime minister for the failures of his time in office, it might be worth it.

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Teachers need a flexible career structure

There is a popular view that keeping the best teachers in classrooms can be solved by simply paying all teachers more.

It is only natural that teachers want to be paid more.  But simply increasing overall salaries won't achieve what teachers want.

Archaic structures surrounding teacher employment get in the way of rewarding the best teachers in our schools.

My review of all government school enterprise bargaining agreements, reported in The Australian yesterday, shows that the key to maximising further investment in schools, and in teachers, lies in taking a more flexible approach to teaching career structures.

The EBAs agreed to between state departments of education and teacher unions are negotiated on the flawed premise that all teachers deserve the same pay at the same stage of their career.

Teachers are viewed as one category of interchangeable workers, without recognition of specialisation or subject expertise.  Salaries are rigidly and explicitly set, without regard for the demand for the skill set a teacher brings to their school, whether they are teaching in a topic area with a skills shortage or their impact on student achievement.

Lower-performing teachers benefit from this system, which also prevents high-performing teachers from being paid more.

At the entry level, there is no opportunity to recognise a teacher's specialist subject knowledge or experience.  A PhD scientist, for example, must start teaching on the same salary as a new university graduate.

Teachers who demonstrate high-quality teaching can pro­gress only through time-based increments.  Movement through the increments can be accelerated in some states but not skipped.  Teachers are unable to increase their earnings once the top of the salary band has been reached.

Some states are planning to shift from automatic, time-based progression to a standards-based approach, aligned with national teaching standards.  But this will not change the inherent problems of a fixed structure.  One set of ­career-staged salary bands simply will be replaced by another requiring highly bureaucratic and costly demonstrations of teacher ­practice.

In NSW, for example, the new structure to be introduced from 2016 has three salary bands of "graduate", "proficient" and "highly accomplished".  Highly ­accomplished teachers are rewarded with higher salaries.

But to access the higher salary band, teachers are required to produce documentary evidence of their teaching practice, annotated to demonstrate their achievement against each of the seven different standards of the national standards for teachers.  This evidence must be accompanied by a report of their supervising teacher and reports of external observations of their classes, before being submitted to an external agency for review and accreditation.

Instead of creating an incentive for teachers to continually work with principals and their colleagues to improve their teaching to best meet the needs of their students, teachers will be encouraged by this new system to simply meet the requirements of a bureaucratic process in order to increase their salary to the maximum level.  Higher salaries will be paid to teachers who hold this certification — not necessarily those offering higher quality teaching to students.

Teachers will be rewarded for adherence to process, not excellence in teaching.

Principals themselves acknowledge the existing structure of teacher employment arrangements are unsatisfactory.  Less than one-third of secondary school principals view the current arrangements as providing an effective way of attracting or retaining teachers to their schools.

The answer for teachers, and our schools, is a more flexible career structure, one that is accompanied by school funding models that allow principals to manage the cost of their staff.  This can be achieved only through a new, more flexible approach to negotiation between teacher unions and ­governments.

Restrictions on the maximum amount that classroom teachers can be paid should be removed.  Limitations that prevent the free progression of individual teacher careers must be axed.  And schools need to be allowed to negotiate ­arrangements to attract teachers to hard-to-staff areas.  Greater flexibility would allow deserving teachers to be paid more and schools to make better use of their salary purchasing power.

Great Barrier Reef: a shore thing muddied by misconceptions

Visitors to north Queensland who come to see the reef and rainforest are often perplexed to gaze from their hotel balconies out on to a wind-ruffled, muddy grey to brown-coloured sea.

What happened to the sparkling blue waters, they ponder.  Fuelled by dim memories of media misreports, they usually jump to the conclusion that human pollution must be the cause.

Those who live along the Queensland coast, as opposed to those who preach about it from the concrete and glass metropolitan jungle, know that muddy coastal water is an intrinsic part of the natural tropical system, generated by the resuspension of seabed mud by constantly blowing southeast trade winds.

Indeed, special types of coral reef — turbid-water reefs — have evolved to live happily in just these muddy near-shore waters.  The Great Barrier Reef itself — growing luxuriantly in pellucid blue, oceanic waters far offshore — is recognised in textbooks as one part of a larger mixed carbonate-terrigenous complex of both muddy (inshore) and bluewater (offshore) reefs with a long, robust geological history.

Along the Queensland coast, the shoreline is made up of sandy beaches and adjacent sandy-mud coastal lagoons and estuaries, punctuated by spaced rocky headlands.  The nearby inner shelf seabed is almost flat and covered by a blanket of sandy mud and mud up to several metres thick that has accumulated during the past few thousand years.

This coastal-inner shelf system has been built, and is still nurtured, by sand and mud delivered to the coast from the Queensland hinterland at times of riverine flood — mostly after cyclones.

Dilute muddy water from even the greatest cyclonic floods only reaches from the coast to the offshore bluewater reefs about once every 10 years.  It persists there just briefly before being dispersed by waves and currents, and in being dispersed introduces rare nutrients into a nutrient-starved locale.

The coastal wetlands are important ecosystems for mangrove growth and provide a nurturing environment for fish and invertebrate larvae.  Also, shallow embayments with sandy low tide and subtidal beach flats provide the conditions for seagrass growth — an essential habitat for dugongs.

Prior to European settlement, this system existed in precarious but dynamic "balance", with major cyclones causing immediate coastline erosion, followed months to years later by fairweather shoreline accretion and restoration, fed by sediment contributed by the same and earlier cyclones.  It is possible that historical tree-clearing and grazing inland has increased the amount of sand and mud delivered to the coast in post-European time, with one computer model estimate of a two- to four-fold increase.

If true, such sediment enhancement is no bad thing.  First, the pre-European shoreline was, and remains, deficient of enough sediment to maintain its position without continuing sand nourishment, especially at locations away from river mouths.  Second, more sediment nurtures not just the shoreline beaches but feeds nutrient into the ecologically vital coastal wetlands.

Ports and their access channels have been dredged along the Queensland coast since the late 19th century, and the spoil dumped at sea.  Over a period of months to years, this spoil is redistributed across a wide area and merges insensibly into the sandy mud, inner shelf substrate.

The briefly enhanced turbidity caused by dredging and dumping activity represents but a small, localised disturbance within a dynamic oceanographic background that sees constantly varying rates of mud resuspension caused by wind, and by the regular interchange of shelf waters within a few days to weeks by tidal and other marine currents.

Not surprisingly, therefore, despite expensive nutrient and water quality analysis in the past 30 years, no measured evidence exists for changes in water quality on the near-shore GBR shelf in post-European time.

Furthermore, the historical dredging and spoil dumping on the shelf has had no other known significantly adverse effects either, especially not on the bluewater reefs in the distant offshore.

Spoil has sometimes been dumped at the shoreline to reclaim areas for port development — the Brisbane and Townsville ports are prime examples.  Given the value of the land created, this is an entirely sensible procedure when undertaken (as it has been) as an environmentally efficacious and cost-effective commercial venture.

It is simply fallacious for conservationists to trumpet that the GBR is threatened by near-shore dredging, and it is risible and disgraceful that an international agency (UNESCO) is involved in unscientific grandstanding on the matter as well.

Caving in to activists, the federal government has rejected the two best environmental options for the spoil — either seabed dispersal or land reclamation.  Instead, Environment Minister Greg Hunt has opted for the worst and possibly the most expensive environmental option — that spoil dredged from near Abbot Point will be dumped on land.

A more perfect combination of scientific ignorance and environmental stupidity would be hard to find.

Joe Hockey's budget woes overshadow all else in 2014

When Australia's political historians look back at 2014, they will see it as a year defined by its May budget.

Economic policy dominates everything.  Apart from elections, budgets are the focus of the Canberra calendar — the pivot on which governments turn.

Yet even by those standards, this year's budget was truly epic.  Eight months later, it lingers over everything.

For sheer political significance, it is on par with Arthur Fadden's 1951 "horror budget", which boosted taxes, crashed the economy, and nearly cost the Menzies government the 1954 election.

Fadden said after his budget, "I could have had a meeting of all my friends and supporters in a one-man telephone booth."  Poor old Joe Hockey must sympathise.

But today Fadden's horror budget is remembered more fondly — particularly by the Commonwealth Treasury — as it broke the back of the Korean War inflation.  A decade of prosperity followed.

So the question is whether Hockey's budget will look like temporary political pain for future gain, as the 1951 budget was, or a tragically missed opportunity for needed reform.

Put aside, for a moment, the argy-bargy over the budget details and its mixed messages.  The sad fact is that the budget exposed how the political class does not have a directed vision for the future of Australia.

It showed that neither side of politics really has any idea of how to lift the economy out of its slow but steady decline.  Neither side has any real idea of what Australia ought to look like in 10, 20 or 30 years.

To be fair to the Coalition, governments reflect the times.  They do not create them.

Fadden's 1951 budget was the first counter-inflationary budget inspired by John Maynard Keynes.  No doubt if Labor were in power it would have had almost exactly the same horror budget.

Likewise, it's fun to mythologise the great economic reforms of Bob Hawke and Paul Keating but Hawke and Keating were only doing what was also being done around the world.  Ronald Reagan and Margaret Thatcher did the same stuff, in much the same way.  So did many other leaders, from New Zealand to Sweden.

Even the vision of Gough Whitlam, who died in October, was not unique.  He was a man of his times.  The new biography of Dick Hamer by Tim Colebatch emphasises how much policy affinity there was between the Liberal Hamer and Whitlam.  Harold Holt's biographer, Tom Frame also claims Holt practised Whitlamism before Whitlam did.

Economic vision does not come from the people in charge, or even the governments in power.  It comes from the zeitgeist.

In Parliament, Labor and the Coalition hurl insults at each other as if that was the most important thing in the world.  Yet, in government, both are advised by the same bureaucrats offering variations of the same ideas.  That's the essence of the Westminster system.  On the upside, this system ensures continuity of government.  On the downside, it enforces policy conformity.  And it can create a serious problem:  what happens when the public service does not know what to do next?

That conformity is why Hockey's long-term economic strategy looks a lot like Wayne Swan's economic strategy.  The idea is to control spending at the margins, but, for the most part, hope that the economy will grow its way out of trouble.  But the Mid-Year Economic and Fiscal Outlook, released a fortnight ago, confirmed Hockey's forecasts have been just as optimistic as Swan's.

Yes, Prime Minister Tony Abbott has reshuffled the top echelons of the public service.  There is a new Treasury secretary and new secretary of the Department of Prime Minister and Cabinet.  Yet those top executives are themselves being fed the same advice their predecessors were.

It is not that the two major parties are Tweedledum and Tweedledee.  They profess strikingly different ideologies.  Yet, in government, they are constrained by the policy ideas available and the advice they receive.

Labor supporters might object here that there's no way their party would implement a budget as deeply unfair as the Abbott government's.  Yet, it was the Hawke government that reintroduced university fees and first proposed a medical co-payment.

Nothing in the 2014 budget was beyond the pale.  It was all within the normal range.

Of course, the opposition has an interest in pretending otherwise.  This has been a great year for Labor for the simple reason that the party has not been in a debilitating state of civil war.  High poll numbers are a bonus.  No wonder Opposition Leader Bill Shorten looks chuffed.

Shorten says 2014 was a year of "unity and resistance" and 2015 will be the "year of ideas".

Let's hope so.  Truth is we know less of Shorten's plans than we did of Abbott's in his first year as opposition leader.  Back then, it was clear the Coalition wanted to repeal the carbon tax, stop the boats, and introduce paid parental leave.  Abbott's problem is that his agenda was never developed much further.  Yet, it was still more substantial than what Labor offers now.

In his press conference announcing the reshuffle last weekend, Abbott said the new cabinet was all about "jobs and families".  The economy would be "front and centre" in 2015.

But it always is.  The real question for 2015 is whether the government's advisers have any new ideas to boost economic growth.

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The world needs more internet freedom, not less

To keep the Internet as the socially empowering and productivity-boosting tool it is today, we should guard against government attacks on internet freedom.

Late last month, the American based non-governmental organisation Freedom House released the latest edition of its annual Freedom on the Net report, which assesses the extent to which citizens in 65 countries are able to access and use the internet without legal and other restrictions.

The report establishes an internet freedom index using measures capturing obstacles to access (including government blocking of apps and technologies), limits on content (such as filtering and blocking websites and social media censorship), and violations of user rights (through surveillance and legal restrictions of online activities).

On a global scale, internet freedom had deteriorated for the fourth consecutive year, Freedom House said.

That is mainly the result of repressive tactics adopted in autocratic, or increasingly autocratic, regimes such as China, Russia and Turkey, which included blocking political dissent through social media, increasing surveillance of web users, and governments putting pressure on internet providers and online companies to censor themselves.

While the merits of the disclosure of United States National Security Agency activities by Edward Snowden continue to be debated, it is unfortunate that governments around the world are using the NSA revelations increasingly as an alibi to crack down on free expression over the internet.

And there have been some recent concerns raised about the effective future Balkanisation of the World Wide Web resulting from the United States, which has traditionally dedicated itself to promulgating an open internet, considering scaling back its role in global internet governance of web addresses and domain names.

Australia was ranked the 17th-freest country for internet access and usage — a position it has held the past few years — behind Iceland, Estonia and Canada in the international rankings of internet freedom in 2014.

This country is lauded for its relatively affordable, high quality internet and digital media access, and people's ability to discuss controversial and sensitive political and social issues freely online without the threat of political persecution.

However, the latest report points to some stormy clouds on the horizon, which threaten to wash away some of Australia's prized internet freedom.

The mandatory data retention proposal announced by the Abbott government is a key threat, with Australian internet service providers (ISPs) obliged to monitor, collect, and store information from all users' communication for the previous two years.

Aside from the obvious concerns about the costs borne by ISPs to adhere to the government's dictates, with the costs to flow to consumers, the objective of the proposal is proving to be a worrisome moving target.

Initially, the federal government suggested mandatory data retention was necessary to help fight terrorism and maintain national security.

But since the proposal was suggested, politicians and law enforcement agency representatives have said data retention might also be used to target general crime, and even deal with civil matters such as copyright infringement.

It is proposed that government agencies could access our data without a warrant, which could represent a significant threat to our internet freedom.

The government has also proposed draconian measures to stymie online copyright infringement and illegal downloading.

These include requiring ISPs to issue warnings to users who infringe copyright when downloading songs, movies and other material, using a graduated response of severity that could culminate in an ISP disconnecting users from the internet.

Another suggestion is that ISPs be obliged by the government to block websites that enable the downloading of pirated material.

These options come with the risk that due process would be violated, since copyright infringements are not always clear, and that website blocking would resemble the internet restrictions seen commonly in unfree parts of the world.

The public policy discourse is regrettably littered with other proposed inhibitions on our freedom to use the internet.

They include, for example, cyberbullying proposals to take down social media and other online content deemed harmful to children, and restrictions on commerce if the GST is extended to smaller online transactions.

The astounding properties of the internet in altering our economic structures and breaking down social barriers across the globe stands as a shining beacon in a world in which governments have eroded economic and social freedom.

Consider how important our internet freedom is, and how much we take it for granted.

Thanks to the internet and the digital economy, we access vast amounts of knowledge that were once enclosed in the world's great libraries, accessible to a few.

The internet allows us to truck, barter and exchange locally, nationally or globally at the press of a button and without massive search and other transaction costs.

Our great industries have received a productivity boosting shot in the arm, thanks to e-commerce and modern computing technology, while old modes of production have been swept away by the automation of entire economic processes.

As a consequence of the internet we can build social capital and shorten social distances, by conversing with other people, regardless of our nationality, ethnicity, religion, age, gender, or sexual preference.

The internet is so wonderfully prevalent in our modern, wired — and increasingly wireless — lives that we can even find love online.

It is true that technology throws up a host of challenges to conventional modes of living, and raises fresh concerns about privacy and safety among other issues.

But we should be reticent to adopt precautions against the continuing evolution of the internet.

The stance of governments towards the internet should generally be to embrace a "permissionless internet", in which regulators and other authorities embrace a non-prescriptive, hands-off approach to innovations.

This would allow skilled entrepreneurs to offer even more online, and innovations to transform our lives for the better, while losing none of the flexibility associated with public education campaigns and nimble self-regulation to deal with online challenges as they arise.

With the new year quickly approaching, let us hope that 2015 will be a year in which Australia, and the world, makes great strides toward more internet freedom.

Welfare plans an assault on our freedom

Last Thursday Kevin Andrews, then minister for Social Services, wrote in The Australian that income management — the practice of "quarantining" a portion of social security payments for approved purchases like food and accommodation — is central to the Abbott Government's welfare reforms.

Four days later he was replaced in the social services ministry by Scott Morrison.  This has been seen as somewhat a demotion for Andrews, who now takes Defence.

But it is in no way a repudiation of Andrews' plans.  Far from it.  Morrison was lauded at the reshuffle press conference as a minister who gets things done.  One of the things to be done, no doubt, is the expansion of income management.

This is not a good thing.  Income management is paternalistic and illiberal.  It's counter-productive, too:  far from discouraging welfare dependency, it encourages that dependency.

Yet income management has bipartisan support.

Income management was first introduced as part of the Northern Territory intervention in 2007.  The idea was to prevent the sort of child abuse and neglect that had been described in the Little Children Are Sacred report.  The policy was originally imposed on a few dozen specifically nominated vulnerable communities.

The original idea was to use income management as an emergency measure in a moment of deep social crisis.  But policies that are introduced in a crisis tend to stick around.  They entrench themselves in the policy landscape as bureaucrats build reputations on their success — and try to hide their failure.

So the Rudd and Gillard government decided income management ought to be rolled out to at-risk populations across the country.  Income management is now being tested in areas like Bankstown in New South Wales, Shepparton in Victoria, and Logan in Queensland.

Last week the Government released a commissioned report that found that income management had not substantially changed what welfare recipients buy.  Nor had income management reduced alcohol purchases or problems like running out of food.  (You can read the report here.)

It's absurd that governments say they want to reduce welfare "dependency", yet at the same time actively encourage such dependency by taking freedom of choice away from welfare recipients.

And instead of encouraging "financial literacy", income management appears to reduce it — by treating welfare recipients as incapable and incompetent.

Right now income management affects very few people.  Most Australians might not even be aware the system exists.

But it is peculiarly central to the debate about the proper size and shape of the welfare state.

One of the great philosophical arguments concerns how we understand the concept of "freedom".  In the classical liberal story, people are free when they are not being coerced by external forces like governments or other people.  This is a negative conception of freedom.  It's all about the absence of constraints.

Social democrats have long criticised this idea of freedom by saying that it takes more to be truly free than just no constraints.  A free person is someone who has the capacity — the resources — to pursue their own goals.

Thus, the goal of the welfare state is to enhance a positive conception of freedom, by giving all members of society not only the right to live lives of their choosing, but the ability to do so.

But those welfare recipients who now have their purchases micromanaged by Centrelink are unlikely to feel very liberated.

As this paper from 2013 points out, income management allows government to monitor shopping habits with attendant costs to privacy and feelings of autonomy.

Indeed, decades of paternalism applied to welfare recipients has undermined the idea that government-provided social security is in any way "liberating".

Those placed on work for the dole schemes obviously do not feel more free for being conscripted to do menial tasks below minimum wage for non-profits.

And would those who would have been subject to the punishing high numbers of job applications proposed in the May budget — 40 applications per month — have felt that they were enjoying any sort of positive liberty?  Of course not.

It is certainly possible to imagine a welfare state not built around paternalistic mutual obligation requirements.  But, in Australia at least, it seems that every political incentive is driving our real-world welfare state towards them.

A person must not lose their rights the moment they receive government assistance.  It would be incredibly dangerous to think otherwise.  Governments have involved themselves in so many facets of our lives that there are few people who do not receive some form of assistance.

In 1944 the economist Friedrich Hayek wrote his bestselling book the Road to Serfdom, where he suggested that social democracy's expansion of government control would undermine civil liberties.

Hayek has been ridiculed for that argument ever since — post-war Britain did not turn into a totalitarian dictatorship.

But 70 years after Hayek published his book, welfare paternalism is demonstrating that when government is involved, coercion almost always follows.

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What is a taxi? Regulation and the sharing economy

The "sharing economy" has emerged because new technologies such as the internet have drastically reduced transaction costs.

Embracing these developments, budding young entrepreneurs have launched businesses that help individuals exchange resources.

Examples such as the ride-sharing Uber and the accommodation-sharing Airbnb are making exchange more efficient by helping to coordinate information about mutually beneficial transactions.  These businesses make money by taking a fee for facilitating the trade.

Why has the sharing economy emerged?  The underlying reason is transaction costs — the costs of coordinating an exchange.  This includes the discovery, bargaining, and policing costs of exchange.

As these costs fall it becomes more feasible for consumers and producers to transact.  Transaction costs have now fallen so low that buyers and sellers can exchange the excess capacity of their existing resources with ease and convenience.  Hence the emergence of the "sharing economy".

The phenomenon is not limited to cars and houses, there are also sharing economy models for finance (Zopa), investment (Kickstarter), everyday tasks (Airtasker), and household tools (Open Shed).

These companies do not sell the "resources" mentioned above.  Rather, they sell the software, the matching algorithms, and the reputation of their business.  This package provides a service where private parties can discover, bargain and police their own transactions.

Private parties are fast flocking towards these new platforms because of their advantages over traditional exchange:  more sustainable use of scare resources by utilising idle capacity;  often lower costs for consumers because of decentralised transactions;  the ability to customise the details of the exchange;  and flexible employment opportunities particularly for the unemployed.

But the future of these benefits is all but smooth sailing.  The debate involves regulators, governments and incumbent industries.  This is expected with any disruptive innovation.  Incumbent industries scramble to protect their valuable position using the political process.

The underlying question of these debates is not really over whether the sharing economy has economic benefits.  The question is over who is more effective at regulating emerging markets — governments or civil society?

My recent report, The sharing economy:  how over-regulation could destroy an economic revolution, explores how misguided and heavy top-down regulations could crowd out the benefits of the sharing economy.

Much of the problem stems from a misunderstanding of the costs of government intervention on one hand, and the increasing ability for markets, businesses and consumers to self-regulate on the other.

To be sure, these debates over government imposed control and evolving self-regulation will continue.  But it is not sufficient to approach each issue on a case-by-case basis;  decisions must sit within a broader regulatory design framework that provides the flexibility and adaptability to future challenges.

This post provides three such design principles.

Regulation should not be by default;  it should be the second alternative if bottom-up governance fails.

Regulators must avoid hasty regulation.  Imposing rules on an emerging industry naively assumes that regulators understand the future of that industry.  Rather, the reaction of regulators should be to encourage and enable the development of bottom-up, organic, self-regulating institutions.

Some may recognise this as Adam Thierer's idea of Permissionless Innovation.  Governments too often follow a "precautionary principle" — that is, regulating against the possibility of hypothetical harm.  This locks entrepreneurs into rigid rules that stifle innovative activity.

The sharing economy has a large potential for self-governance.  This is an alternative to government control.  It is common for sharing economy platforms to have reputation mechanisms and insurance systems that fill some of the void where government regulation is assumed to sit.

These solutions are often cheaper, quicker and more flexible than their government alternative, and over-regulation can destroy these complex structures.  It is the nature of politics that regulation is rarely able to evolve as technologies and industries evolve.

Moving away from occupational licensing as a signal of quality.

Occupational licensing is government deciding who can supply what services in the market.  Licensing is often justified on the basis that it signals quality and safety for consumers.

This is all well and good, but occupational licensing also has costs.  It is widely recognised that government-imposed licenses create supernormal profits for insiders, and are highly inflexible to changes in industry structure.

The sharing economy has created significant tension around occupational licensing.  This is because private parties can now easily provide services — like transport and accommodation — through unconventional and decentralised markets.

The solution is to encourage alternative approaches such as professional certification to signify quality.  Certification does not legally prevent individuals from providing certain services;  it allows the market to decide.  The benefit is that private parties determine whether the benefits of the certification outweigh the additional costs of providing the good.

We must encourage the sharing economy to create, test and refine their own certification bodies.  For example, AirtaskerPRO is an additional screening process including an ID check and an in-person interview to obtain a badge on the user profile.  These need to be embraced.

Make regulation technology-neutral to avoid entrenching industry structure.

Technology-specific regulation only survives the test of time when there is little innovation.  Yet traditional industry structures are continually being displaced.  Creative destruction is a good thing.

However, when governments regulate an industry, these regulations by their nature define and determine the structure of the industry.

Many sharing economy regulatory contests come down to questions such as "what is a taxi?" or "what is a bank?"  As industries shift and innovate, these definitions blur.  But regulatory frameworks tend to be fixed, based on the assumptions built into the industry structure that they were original designed to govern.

If governments want to encourage the sharing economy, they need provide a reliable, predictable, technologically-neutral legal system that both keeps industry-specific regulation to a minimum and favours private solutions to regulatory problems over public ones.

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The only real tax reform is lower tax

It is a myth that Australia is a low-tax country, because we're not.  In fact we're on the verge of becoming a country with higher than average taxes.  If, next year, we're going to have a debate about tax reform, at the very least we should have the facts in front of us and know what we're talking about.

The claim that Australia is a "low-tax" country is based on data collected and presented by the Paris-based Organisation for Economic Co-operation and Development (OECD).  It is a claim the Commonwealth Treasury department regularly repeats.  Treasury's Guide to the Australian Tax System says, "Australia's tax-to-GDP ratio is low by international standards".  The Henry tax review said the same thing.  Last week the OECD released its most recent tax data, which was from 2012.  The OECD calculated that in 2012 the tax-to-GDP ratio across all its 34 member countries was 33.7 per cent.  Australia's tax-to-GDP ratio was asserted to be 27.3 per cent.  This figure was unquestioningly reported by the media as proof of our "low" tax burden.

The trouble is that, put bluntly, the OECD is not comparing apples with apples.  What the OECD is doing, and has been doing for years, is more like comparing oranges with vacuum cleaners.

When the OECD calculates taxes in Australia, it includes taxes collected by local, state and federal governments.  However, compulsory superannuation contributions paid by employers are not counted as taxes, nor are the private health insurance premiums Australians are required to pay to avoid the imposition of the Medicare surcharge.  Superannuation and private health insurance are not regarded as taxes by the OECD because they're not payments to the government.  In contrast, the OECD does count as taxes in other countries the amounts paid through the tax system to fund retirement benefits.

This point about the problems with the OECD's methodology is not original, it's been made many times.  In these pages over the years former senior Treasury officials such as Greg Smith and Geoff Carmody have identified how you can't compare tax systems without acknowledging Australia's unique system of compulsory superannuation.

When superannuation and health insurance are counted as taxes, Australia's tax-to-GDP ratio starts to look very different.

I did the calculations as part of my research for a recently published report, The Australia "low taxing country" myth.  If superannuation and health insurance are counted as taxes, Australia's tax-to-GDP ratio in 2012 was 33.5 per cent.  That's at a lot closer to the OECD average of 33.7 per cent than the figure of 27.3 per cent that got all the publicity.

Early next year the Abbott government will launch its white paper on tax reform.  Already the preferred direction of the government is obvious.  But increasing the GST is not "reform".  And simply swapping one tax for another isn't tax reform either.  The only reform worth talking about is that which cuts the overall tax burden — and the chances of such an outcome from the white paper process are practically zero.  Instead of arguing whether the GST should be 10 per cent or 15 per cent or 18 per cent, the government could spend its time far more productively if it talked about the policy reforms that need to be done urgently, instead of the reforms that are simply nice to have.  Changes to industrial relations are urgent.  And deregulation is urgent.  The costs that businesses face are a bigger issue than the taxes they pay.  As Gina Rinehart said recently, her new Roy Hill iron ore mine in the Pilbara required 3000 separate approvals and licences.

Some people worry Australia is on its way to becoming like Europe.  Well, they shouldn't worry.  With a tax-to-GDP ratio of 33.5 per cent we're already there.  Our employment laws are European-like, only worse.  Last year when Ford announced it would stop making vehicles in Australia, the local head of the company, Bob Graziano, said it cost twice as much to build a car in this country as in Europe.

Australians are starting to realise they live in a country that is heavily regulated and has high costs.  Soon it will begin to dawn upon them they're not living in a low-tax country either.

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Stop putting it off: we need a surplus ASAP

The Mid Year Economic and Fiscal Outlook forecasts yet another budget blow-out of the sort that we've become used to over the last decade.

This time the budget papers predict a surplus in financial year 2019-20.

That'd be during the Abbott Government's third term.

For the last few years we've constantly heard the government has "obsession" with surpluses.  Take this piece by David Richardson in The Drum here, or Alan Kohler in Crikey here.

MYEFO has demonstrated, beyond a doubt, why that "obsession" is so necessary.

Budget repair is not a trivial task that can be delayed until it is more convenient, or just sidelined in favour of social policy reform.  It's never convenient.  And there's always another social program that can be introduced.

Back in 2011 Wayne Swan wrote in an essay for the Fabian society "If we are going to be Keynesians in the downturn, we have to be Keynesians on the way up again."  That is, having splurged money while the economy was going down, they should save money when the economy is back up.

It's a shame that none of the Rudd, Gillard, or Abbott governments have ever had the strength or desire to make good on their words.

I wrote a grumpy piece for The Drum on the eve of the 2013 election after the Treasurer-in-waiting Joe Hockey downgraded his surplus promise.  What had begun as a pledge to get the budget into surplus immediately became an ambition to be "on-track" for a surplus at the end of Coalition's first term.

At the time, Hockey's downgrade could have looked like prudent expectations management.  In retrospect it was the entire political class throwing in the towel.

Budget politics is incredibly hard.  Politicians don't win friends when they cut spending.

Yes, Labor is much at fault here — they made the deficit, and they're doing nothing to help clean it up their mess.

But there's a deeper story below all the political argy-bargy.  And it's to do with the advice both Swan and Hockey have been receiving.

For a few months Hockey has been offering variations along the lines that the Australian economy is too weak to cut drastically.  On Monday this assumed a more rigorous formulation.  The budget is now a "shock absorber" for the collapse in commodity prices.  If the government cut the budget harshly, "Australians would lose jobs and we will lose our prosperity."

The economic theory behind this is pretty orthodox Keynesianism.  Under this style of thinking, the government's budget is a lever with which to manage the macroeconomy.  Government spending doesn't crowd out private spending, it substitutes for it.

That's why Treasury don't want the Coalition to introduce new, large-scale spending cuts.  They reason that a drop in government spending would lower economy-wide demand.

Almost all the cuts in MYEFO are designed to offset new spending announced since the May budget.  The government's national security program and the conflict in Iraq are substantial new costs which have to be paid for.  Hockey has sought out savings but only with the goal to leave the overall budget position where it is.

Can't the government just raise taxes to get into surplus?

Well, in the Keynesian story an increase in taxes would have the same macroeconomic effect as a reduction in government spending — suppressing demand and confidence.  Hockey suggested as much in his brief press conference yesterday.

One Keynesian alternative is that tax cuts might help boost the economy.  But by reducing revenue, those cuts would make the budget bottom-line even worse.

So, with the advice Hockey is getting, there's nothing to be done on the revenue side.

What we're left with is a sort of vulgar Keynesianism that relies on just one tool — spending, not revenue — to manage the economy's ups and downs.  Monetary policy is seen as secondary.  The real work is done by government spending.

In 2008 and 2009 the Rudd government adopted a kind of one-shot Keynesianism — a single, giant increase in spending to try to prevent Australia going into recession.

This was a sort of intellectual revolution for Treasury.  Ever since the 1990s it had been sceptical about the virtues of stimulus spending.  Sometime in the last years of the Howard government, Treasury changed its mind.

Rather than viewing fiscal policy as a break-glass-in-case-of-emergency fire axe, now Treasury is beginning to see fiscal policy as a way to micromanage the economic cycle, year by year, budget by budget.

We've had experience of this approach to fiscal policy before.  In the post-war era, policymakers were mesmerised by the possibilities of the John Maynard Keynes' ideas.  Grasping copies of his 1936 book, General Theory Of Employment, Interest And Money, they pored over the tea leaves of economic statistics and tried to match the budget to the economy's headwinds.

But this post-war budget Keynesianism was chaotic and unpredictable.  Australian governments were derided as "stop-go" economic managers.

It would be nice to think that Treasury is better at micromanaging the economy in 2014 than it was in 1960.  We're so much smarter than our grandparents.  We have more and better theory, and more and better data.

But so far the only thing that confidence has given us so far is a surplus pushed further and further into the future.

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Need for grand reform is pressing as Australians face income recession

Australia needs to convene a serious discussion about our economic and fiscal problems, and effective solutions to deal with them.  The latest National Accounts data, released by the Australian Bureau of Statistics last week, illustrates key production and national income statistics have been trending in the wrong direction thus far this year.

A key measure of the value of final production in the economy per head of population, GDP per capita, has grown by a subdued 0.9 per cent over the past year.  But what is perhaps more concerning is that quarterly growth in GDP per capita, in trend terms, has slowed from 0.4 per cent in the December quarter last year to zero in the September quarter just gone.

When GDP per capita is adjusted for movements in our export prices, we see that the resultant "real gross domestic income" statistic has actually fallen by 0.2 per cent in the September quarter.  If we consider the seasonally adjusted data, Australian real gross domestic income has fallen over the last two consecutive quarters, which has led some to conclude we are facing an "income recession".

What this all means is that we are still producing more valuable goods and services, although at a worryingly slow pace, but we are earning less from that additional production than before.  Almost every economist in this country has sounded warnings in recent years that the good fortune of sky-high prices for our traded commodities would not last.

And so it is that the end of the Mining Boom Mark II is coming to pass, with iron ore prices, for example, plunging from about $US180 ($218) a tonne in 2011 to about $US70 a tonne today.

A continuation of such trends would surely compromise our ability to continue to enjoy decent living standards and that alone ought to serve as a wake-up call for reform-shy politicians and vested interests, as well as the Australian public at large.

Outgoing Treasury Secretary Martin Parkinson outlined the nature of the task at hand in the following way:  "unless we tackle structural reform, including fixing our fundamental budget problem, we will not be able to guarantee rising income and living standards for Australians".

For better or for worse, we have faced situations before when the world has become far less willing to pay top dollar for the stuff we produce, and we have had to adjust accordingly.

During the late 1970s, for example, strong global demand for coal, including in response to oil price shocks during preceding years, translated into a doubling of global coal prices and a fresh optimism for significant mining investment domestically.  In exuberant anticipation of a massive lifting in production and incomes, unions demanded, and received within the framework of a centralised IR system, significant wage increases, feeding into strong price inflation.

But a global recession began soon afterwards, and the associated slump in coal prices left key mining investments stranded and contributed to economy-wide increases in unemployment.

In 1980 a group of economists, including Wolfgang Kasper, Richard Blandy and John Freebairn, co-wrote an influential study which was to inform the policy stances of governments arguably for decades to come.  Their book, Australia at the Crossroads, painted a gloomy scenario of low GDP per capita growth, of 1.7 per cent a year, for an Australia which refused to embrace supply-side reforms over a 20-year period.  They said that by contrast, if a comprehensive agenda for reform was pursued GDP per capita growth would almost double from 1973 to 2000.

Although Crossroads was written from the perspective of Australia's much longer economic underperformance from World War II, it helped serve as a lightning rod for a bipartisan political acceptance of a wave of structural reforms during the 1980s and 1990s.  The benefits of that reform agenda have been unmistakable, with Australia enjoying continuous economic growth for two decades and displaying a better capacity to flexibly respond to beneficial terms of trade booms and adverse external shocks alike.

But the economic good times, especially over the decade before the GFC, lulled policymakers, and perhaps many Australians, into a false sense that reforms could be paused, or even that frivolous policy escapades could proceed without cost.  The experience of these past few years, and even of recent months, should well and truly cast those false beliefs aside.

The accumulations of extravagant public spending, wildly prescriptive regulations and an uncompetitive tax regime, which stymie productivity gains when growth is on the slide and incomes are waning, suggests that, once again, Australia is at a crossroads.  No amount of careless political clarion calls for Australians to fritter away their disposable incomes on consumables, reflexive demands for the Reserve Bank to further cut ultra-low interest rates, or another bout of loose fiscal Keynesianism will get us out of the emerging mire.

We need to recognise that even half of the reform agenda outlined during the 1980s and 1990s, including in Crossroads, which would expand Australia's productive envelope and secure future living standards, has yet to be embraced.

Australia remains encumbered by a massive governmental role in redistribution, bureaucratic regulation continues its relentless march, and policy consistency is still dashed by the cut-and-thrust of lobbying and political concession-making.  Ending the federal budget emergency should be a starting point upon which all political actors, whose primary concern should be long-term living standards for ordinary Australians, ought to agree.

Clearly, there has been precious little agreement to date, but perhaps there is a prospective solution in the offing, composed in two parts.  To avoid the political pain for the government of "losing" interest groups because of selective expenditure reductions, perhaps the government should pursue equi-proportional spending cuts right across the board.  The "unfairness" accusation levelled against ad hoc fiscal consolidation would be quelled in an instant.

This strategy could be coupled by a comprehensive agenda of deregulation, which economically emancipates individuals, especially people on lower incomes, from the stifling strictures of bureaucracy.  The states and local governments should also be willing participants in this grand reform venture.  In tandem, the proposals would catalyse a new growth wave, without strict reliance on a new commodities boom, and ensure that Australians innovatively and productively trade their way out of the national income slump.

We would have nothing to lose but our languid growth record and receding national income.

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The Murray inquiry wants regulation — but why?

Financial sector inquiries have played a peculiarly central role in Australian history.

In 1937 the Royal Commission into Monetary and Banking Systems set the framework for what was to become Australia's insular and credit-constrained post-war economy in the Menzies era.

The Campbell committee, which reported to the Fraser government in 1981, was an even bigger deal.  It sparked the deregulation era that opened Australia's economy to the world.

Yet it's unlikely that historians will see Abbott Government's Financial System Inquiry in these sorts of epoch-defining terms.  The inquiry, chaired by former Commonwealth Bank chief David Murray, released its final report on the weekend.

Here's why.

In 1979 Keith Campbell was asked to conduct his inquiry "in view of the importance of the efficiency of the financial system for the Government's free enterprise objectives and broad goals for national economic prosperity."

Campbell and his fellow committee members took those three words — "free enterprise objectives" — and ran hard with them.  They presented a program of wholesale deregulation of the financial sector so ambitious it had to wait for the Hawke government to implement it almost in its entirety.

Joe Hockey didn't offer David Murray anything as direct as that.

Rather, Murray had the rather anodyne command to offer recommendations for "an efficient, competitive and flexible financial system, consistent with financial stability, prudence, public confidence and capacity to meet the needs of users."

Indeed, the philosophy of financial regulation was one of the things the terms of reference was asked to decide.  (To "refresh the philosophy, principles and objectives underpinning the development of a well-functioning financial system".)

So it's hard to be shocked that the Murray inquiry has recommended big regulatory increases.

Indeed, David Murray told ABC's 7:30 last night his inquiry represented a "paradigm shift" away from the regulatory philosophy of the Howard government's more market-trusting Wallis inquiry.

Murray's central recommendation is that banks should be required to hold more capital as a buffer against a future financial crisis.

The idea is that higher capital will lead to fewer bank failures and therefore less pressure on the government to bail out banks.  (I wrote about the inevitability of government bank bailouts on The Drum when the Murray inquiry released its interim report.)

Murray says that at most this would only reduce Australia's GDP by less than 0.1 per cent.  Sounds piddly, right?  But as regulatory imposts go, that would constitute one of the single largest new regulatory burdens in the last few decades.

Yes, larger capital buffers might reduce the whole privatise-the-profits, socialise-the-losses problem.  But here's the thing:  Australia hasn't had a proper bank crisis for 121 years.  The last was in 1893.  Neither the Great Depression nor the Global Financial Crisis saw any major bank failures in Australia.

Now, there's nothing to say that we're not on the brink of a catastrophic bank collapse.  And all else being equal resilient banks are better banks.

But we shouldn't delude ourselves into thinking that we understand why banking crises hurt so badly, nor the best regulatory restraints to place on banks to help them ride out those crises.

The very idea of "systemic" significance is a relatively new one.

At best, it's a hypothesis based on observations about what seems to have happened during the Global Financial Crisis.  At worst, it's a collection of guesses about what could have happened if the American government hadn't bought up toxic assets.

By calling for higher capital, the Murray inquiry is really just following the cues of the international Basel committee, which now drives financial regulation around the world.

Murray wants to make Australian banks "unquestionably strong" by ensuring they're in the top 25 per cent of global banks when it comes to capital buffers.  So Australia's theory about what constitutes a safe bank is pegged to whatever other banks are doing.

This sort of cocktail napkin reasoning is a bit of a worry.

But that's how it is.  Governments regulate banks like they regulate everything else — according to a bunch of common assumptions, stylised factoids about the past, and half-remembered textbook theory.

As the economist and historian George Selgin wrote on the weekend, all these debates about banking rest on a collection of assumptions about how banks would act in a free market — assumptions almost never explicitly stated, let alone borne out by the historical record.

In the United States, massive, nation-wide banking failures during the Great Depression led to the establishment of a national deposit insurance scheme.  The idea has been copied around the world, including in Australia.

But many scholars now blame deposit insurance for the fragility of the banking system.  (See, for instance, here.)

One forgotten aspect of the Campbell committee was that while it recommended deregulation almost everywhere, it also recommended new controls to make banks more stable.

Yet as two scholars wrote at the time, the failure of the Campbell committee to back its call for more control with careful economic analysis was "disconcerting".

One could say the exact same thing about the Murray inquiry.

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Anti-terrorism law reform follows legislate in haste, repeal at leisure approach

The national security debate over the past four months has been one of the most revealing about Australian political culture in a long time.

It's exposed serious weaknesses in parliamentary oversight.  It's offered a case study of how big reform needs careful work.  And it's demonstrated how easily public debate slips into well-worn factions.

On August 5, the Abbott government launched its national security legislative agenda — three giant tranches of new anti-terror laws.

For good measure it also announced it was abandoning the proposed reforms of Section 18C of the Racial Discrimination Act.  They were, apparently, a "complication".

This was as complete a philosophical reversal as Australian politics has ever seen.  One day the government was wholeheartedly dedicated to restoring freedom of speech.  The next day Prime Minister Tony Abbott was saying that the delicate balance between liberty and security would have to shift, and not in favour of liberty.

But there were actually good reasons for the government to be in such a rush.

A knee-jerk reaction against any and all national security changes is not merely wrong, it's dangerous.  There is no more basic responsibility of government than security.

It's hard to believe now, but until the 9/11 attacks anti-terrorism policy was the responsibility of the states, not the federal government.  The first proper Commonwealth anti-terror legislation was enacted in 2002.

Even after more than a decade, in 2014 there is still a strong case for national security law change.  The security environment has materially changed over the past 12 months.  The Islamic State has attracted more foreign fighters — Australians travelling to be militants for the caliphate — than any other conflict since the war on terror began.

This is a big problem.  A study published in the American Political Science Review last year found that one in nine Islamist foreign fighters between 1990 and 2010 later attempted terrorist attacks in their home country.

So we need to be talking about passport control and how to prosecute somebody under the Crimes (Foreign Incursions and Recruitment) Act 1978.  Many of the Abbott government's legislative changes reflect recommendations along these lines by the Council of Australian Governments and the Independent National Security Legislation Monitor.

It's all complicated stuff.  It's highly technical and legalistic.  It concerns marginal changes to existing legal frameworks.

Yet the debate over anti-terror law changes has been dominated by that school of thought which believes that to offer anything less than uncritical support of government proposals is to downplay the threat of terrorism.

This is incredible considering the number of extra security changes the government has pushed through the parliament over and above those targeted at the foreign fighter problem — and over and above those recommended by the many inquiries into counter-terrorism law in recent years.

The government hasn't explained why the particular threat of foreign fighters means we need to make it illegal for journalists to report on ASIO operations.

Nor has it explained why IS means we need mandatory internet data retention, a requirement that internet service providers store vast databases of information about their users for two years.

The government's national security laws look more like a shopping list of security desires rather than a targeted response to the specific foreign fighter threat.

Indeed, if you add all the legislative tranches together, it constitutes a reform program of incredible size.  It's a much more ambitious reform program than anything else the government has pursued, even including the budget.  It's more ambitious than you'd expect from any government in its first year.

But pushing through a reform program of this size in such haste has created problems.

For instance, last week parliament passed a follow-up bill to a security bill that was passed in October, designed to fix problems identified in the earlier legislation.

The debate has exposed some remarkable ignorance of the details of the legislation being proposed.

Take Anthony Albanese's objection that the security measures threaten freedom of the press.  This only came after he had supported those measures in parliament.  Labor is terrified of looking soft on security, but that's no reason not to do due diligence.

Likewise, the Attorney-General George Brandis seems to have been caught off guard by the details of his own bill.  First Brandis denied that the restrictions on releasing information about ASIO operations was targeted at the media, then he tried to assure journalists he wouldn't personally approve the prosecution of one of their number.

These issues should have been resolved while the legislation was being drafted.  Not weeks after it was passed.

Then there are the problems the national security reforms have caused for the government's economic agenda.

The time the government spent negotiating with the crossbench on national security issues not directly related to the urgent foreign fighters threat was time not spent negotiating the $7 medical co-payment and the higher education changes.

Now politics has been reset to where it was left in August.  Parliament's focus is back on the budget and the economy.

The foreign fighter threat is likely to ebb when it becomes obvious to Western jihadis that a trip to the Islamic State is a trip to certain, pointless, death.

But the hurried security decisions made in the past few months will stay on the books for a very long time.

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Relevance won Victoria for Labor

The reason the Coalition lost the Victorian state election was not because it wasn't left-wing enough.  And it wasn't because of Tony Abbott.  It was because Labor had policies that were more relevant to more people — and Labor communicated the benefits of those policies more effectively.

It's a myth that Victoria is more "progressive" than other states.  And it is a myth that to be elected the Victorian Coalition has to pretend to be like the Labor Party.  These are myths up there with "Tony Abbott is unelectable".  Abbott won the 2013 federal election, and came within inches of winning the 2010 election.  If a few things change, Abbott will prove himself electable again.

Writing in The Age after the election, the veteran and astute observer of Victoria, Tim Colebatch, said:  "The Coalition wins in Victoria only when it presents an attractive moderate alternative, as Dick Hamer did in the 1970s and Ted Baillieu in 2010, or when it fans a sense of crisis requiring radical change, as Jeff Kennett did in the 1990s."

Leaving aside the fact that in the early 1990s Victoria actually was in crisis — Kennett didn't have to invent it or "fan" it — Colebatch's analysis doesn't explain what happened on Saturday.

The Baillieu/Napthine government couldn't have been more moderate, yet it still lost.  The Victorian Coalition enthusiastically supported federal Labor's health and education policies, fought against restoring freedom of speech, and banned onshore gas exploration.  While during the election campaign the Coalition (correctly) identified the industrial problems likely to emerge under a union-dominated state Labor government, it was the Baillieu government itself that in 2011 refused to direct the police to remove unlawful union pickets.  The Coalition was so moderate it even banned solariums.

On this page on Thursday, Mark Latham wrote that Daniel Andrews "campaigned as if he was running to be mayor of Victoria".  Latham's right.  And the point to note is that not much of Labor's campaign in Victoria was moderate or progressive.

AVOIDING TALK OF CLIMATE CHANGE

During the campaign Labor did everything it could to avoid talking about the great progressive cause of the moment — climate change.  In fact the ALP was attacked by the Liberals for not being sufficiently supportive of renewable energy.  Labor's key promises, such as paying paramedics and firemen more, and removing 50 railway level crossings, were not particularly progressive.

In reality, the evidence that Victoria is a "moderate" state is thin.  The argument traditionally relies on the vote in Victoria at the 1999 republic referendum, and Victorians' support (or lack thereof) for parties like One Nation.

It's often claimed that Victoria was the only state to support a republic.  In fact what happened is that on election it looked like the "yes" vote in Victoria would be more than 50 per cent.  But when counting was concluded, Victoria was like every other state in rejecting the republic.

And it is just as feasible to claim the Victorians don't like populist parties because they're seen as an interstate phenomenon as because Victorians don't support their policies.  At last year's federal election, the national Senate vote for the Palmer United Party in Victoria was higher than in NSW.

In truth, the Greens vote in Victoria is not very different from the rest of the country either.  The Greens' vote for the lower house at the last state election in NSW in 2011 was 10.28 per cent.  On Saturday in Victoria the Greens vote in the lower house was 11.02 per cent.

What is different about Victoria is that about 75 per cent of the state's population lives in a single city, Melbourne.  This is a higher concentration in a single metropolitan area than any other state except South Australia.  In NSW 64 per cent of people live in Sydney;  in Queensland the figure is 48 per cent.

In Victoria the effect of this demographic concentration is that the impact of the Melbourne media, particularly the ABC and The Age, is magnified.  What Victoria's state election has just demonstrated, though, is that what worries the ABC and The Age are not the things that decide elections in that state — no matter how much some people might wish it to be otherwise.

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Company directors lose out in attack on legal rights

Fundamental legal rights in Australia have been eroded by successive governments of every political stripe.

This is the concerning story told by new research, which has uncovered 262 provisions that reverse the burden of proof or abrogate the right to silence, privilege against self-incrimination and the basic principles of natural justice.

But our analysis reveals an even more troubling issue:  that specific groups have been singled out for discriminatory treatment.  A comparison between companies and their directors and agents, and unions and their officers and agents showed dramatically differential treatment.

No less than 48 provisions remove the legal rights of company directors, while just three remove the rights of union officials.  Eighteen legal rights breaches apply to both groups.

The odds are stacked so heavily against company directors that one wonders why anyone would choose to be one in 2014.

In many cases, the right to silence is removed and company directors are held to be vicariously liable for the conduct of company employees.

For example, section 1316A of the Corporations Act 2001 provides that a corporation is not excused from providing information even where that information may tend to incriminate the corporation.  Under section 769B of the Corporations Act 2001, a company director may be held liable for the conduct of company employees.

This is an appalling state of affairs for a country whose legal system is ostensibly based on the rule of law.

One of the reasons for the uneven treatment of company directors is that areas of law that affect them are affected most heavily.

Laws in the areas of tax, finance, trade, commerce, employment, and the environment have become special targets for the erosion of legal rights.  There are 33 breaches in tax and finance law, compared with just six in the area of government and administration.

The raw numbers are appalling.

We've discovered 48 provisions that reverse the burden of proof.  These laws overturn the idea that a defendant is innocent until proven guilty.  The idea that the burden of proving a case is placed on the party bringing a claim to the court is as old as our English common law system.  For hundreds of years this has been a key protection of liberty.

Provisions that reverse the onus of proof hold defendants to difficult — sometimes impossible — standards in order to demonstrate they are not in the wrong.

There are also 92 laws that place limits on natural justice.  These laws remove basic legal rights to a fair hearing, to an unbiased judge and to appeal.  They are a violation of the separation of powers.

The legislature cannot dictate the role of the judicature, one important aspect of which is to apply the law created by the parliament.

There are 122 laws that remove the right to silence and the privilege against self-incrimination.  Perhaps the most rudimentary legal right of all is the right to silence.  Over hundreds of years, the common law has protected the right of defendants to remain silent, especially in the name of self-preservation.  Parliament should never seek to remove it.

Australia does not have extensive constitutional protections for legal rights such as those that exist in other countries.  The United States Constitution, for example, provides explicit protection for several legal rights, particularly in the case of criminal investigations and trials.

In Australia it's largely left to the parliament to defend our legal rights and safeguard our liberty.  This is not cause for despair, however — quite the opposite.  This provides the parliament with a significant opportunity.

The Abbott government must launch an ambitious reform agenda in this area.  The parlous state of fundamental legal rights presents Attorney-General George Brandis with an issue where he can make his name.  And the groundwork has already been laid.

The Australian Law Reform Commission's Freedoms Inquiry is a good start.  If Brandis is successful in making significant gains he will be one of the great reforming attorneys-general.  My research shows him the way.

Handing out money is no substitute for reform

Some might think the 2014 Victorian state election was a referendum on the East West Link.  But they overlook the vital $209,000 investment in a mattress recycling facility that would have graced Ballarat had the Napthine government been re-elected.

Sadly, despite the need for serious economic reform, it was the trivial and meaningless that dominated this year's Victorian state election campaign.

The lasting legacy of the Victorian Coalition government is Premier Daniel Andrews and his CFMEU-backed government.  Under the state's new administration, Victoria risks being a drag on the national economy.  But the damaging policies of the Andrews government are only half the reason.  The Coalition's neglect of meaningful economic reform for a full term in government is the other.  An enormous opportunity for economic reform has now been lost over the four years under Ted Baillieu and Denis Napthine.

The only way to grow an economy is to allow enterprise and entrepreneurship to flourish.  Taxation and regulation restrict the ability of businesses to innovate and grow.  Any government that is serious about growing an economy and growing jobs must tackle these impediments to economic success.  Taking money from taxpayers and spending it on projects approved by a government bureaucracy doesn't grow an economy, it shrinks it.  If the opposite were true, Cuba's economy would be a thriving beacon of success.

But these policy areas have been deserted by the Coalition.  The state Coalition government made only minor changes to the regulatory system, despite appointing the eminently qualified John Lloyd to the newly created position of Red Tape Commissioner in January 2013.  Although recommendations were made to the government, only a handful were ever pursued.

Tax has been another area of policy neglect.  One of the only tax policies of the Baillieu/Napthine government was to cut payroll tax cut from 4.9 per cent to 4.85 per cent.  Announced in the 2014/2015 budget, it moved Victoria in the right direction but was incredibly modest, and was not part of a much-needed broader tax policy.  The answers to deeper questions about why the state government imposes a direct tax on employment were never given because the question was never asked.

It has been odd to read some commentary suggesting that a major reason for the Coalition's defeat at this election was the Abbott government.  This is quite clearly not the case.

Many have pointed to the problems the Victorian government faced in its first two years.  But although there was a recognition that problems existed, the solutions to those problems were never found.  As premier following the 2010 election, Baillieu failed to develop and implement an agenda of economic reform that Victoria still desperately needs.  One of the arguments for switching leaders in March 2013 was that the new leader would have time to turn the ship around before the election in November 2014.

At that time there was more than 18 months until the state election.  But the new Napthine government did not seize the opportunity for reform.  Instead it continued down the same path that got the Coalition into a mess in the first place.

Some of the first acts of the Napthine government involved spending more money.  In his very first week, Napthine announced $200 million in new funding to the TAFE sector and explored the idea of a new government-backed recycling scheme.

Imposing a moratorium on coal seam gas exploration was one of the most damaging decisions the government made in relation to energy policy.  The decision, in November 2013, cut off a market where Victoria could have a very significant advantage.

During the state election campaign, this habit became even worse.  The Napthine government was responsible for a rolling flurry of announcements.  The frenetic pace of spending commitments alone was quite extraordinary.  No sooner had journalists reported on one spending commitment then another, of even greater magnitude, was being made.

If any requests for government funding were rejected during this campaign, you wouldn't know it from the outside looking in.  At the very least, the promise of $283,000 in joint federal-state funding to expand a Reservoir-based ice cream maker suggests that the threshold for releasing taxpayer funds was very low indeed.

The Coalition government does deserve some credit for maintaining a AAA credit rating when other states couldn't, and for its budgets projecting surpluses throughout the forward estimates.

One good thing Napthine has done is call for renewal.  In his concession speech in Melbourne on Saturday night, he said:  "It is time for renewal, it is time for change."

The Liberal Party must learn that outspending the Labor Party, trying to beat them in areas where the ALP has a natural advantage and pandering to special interests, does not pave the path to success.  Committing to the principles upon which the party is based, presenting an alternative to the ALP and putting forward positive reform policies is the only way back for the Coalition.

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Fixed terms made a farce of Victorian politics

It's true that on Saturday the Coalition government became the first one-term Victorian government in more than half a century.

But it's also true that the Coalition was the first government to form under the new constitutional arrangements — the four-year fixed-term system.

The fixed term nurtured Ted Baillieu's instinctive lethargy.  It created an environment in which it was plausible to roll a premier two years into their first term.  And it led to the constitutional crisis that prevented Denis Napthine from regaining any sense of movement.

The Victorian election has already been raked over for its federal implications.  Denis Napthine tried to run an "ideology-free" government.  As I wrote in The Age today, "the risk-averse, moderate, cautious approach to politics favoured by state Liberals is no guarantee of re-election".

Institutions matter.  All this happened under the shadow of the new fixed term.

In 2003, the Labor government under Steve Bracks introduced fixed terms as part of a broader suite of constitutional changes.  The idea was to facilitate long-term thinking and allow governments to get on with governing.

The flip side is that long fixed terms reduce any sense of urgency.

Nobody expected Baillieu to win in 2010.  When the Coalition got into office, there was no agenda ready to go, and no eagerness from the premier to push ahead.  The "star chamber" vetting process for ministerial staff meant that it was months before offices were even working at full capacity.

One line was the Coalition had "hit the ground walking".

Of course, fixed terms aren't unique to Victoria.  They've done nothing to limit the popularity of the New South Wales Coalition Government.

But government is a marathon.  It needs pacing.  Faced with a new and unfamiliar electoral cycle, the Victorian Coalition got the pacing badly wrong.

The fixed term also played a role in the March 2013 leadership change from Ted Baillieu to Denis Napthine.

That spill was remarkable because it came so shortly after the spill of Kevin Rudd, which was being seen by almost all participants as an unmitigated disaster.

With that unhappy precedent, the spill in Victoria was only plausible because of the newly extenuated parliamentary terms.

Julia Gillard became prime minister on the cusp of an election.  By contrast, Napthine had years to run as premier.  A four-year term gives ample time to reset and rebuild a government.

Yet ultimately the Victorian Liberals made the same mistake as did Labor federally — a sudden change in government leader without explanation.

Which brings us to Geoff Shaw, the former Liberal member for Frankston.  Napthine's attempt to reset the government was hostage to the parliamentary soap opera played out between Shaw and another angry rogue Liberal, the former speaker Ken Smith.

The specific ins and outs of this debacle are known only to the participants.

Shaw and Smith created a serious constitutional problem.  The Coalition only had a parliamentary majority of one, including Shaw.  (Incidentally, that tiny margin was the defence Baillieu supporters offered for the early-term go-slow strategy.)

With the Parliament in such a precarious way, Napthine should have called an election.  That's the Westminster way.  But under the fixed term he couldn't.

The only way for an election to be held early was if Labor introduced a motion of no confidence in the government.  (Antony Green outlines the procedure here.)  At one stage Shaw was willing to support such a vote, giving it the majority needed.

Daniel Andrews didn't want an early election.  The worse the Parliament looked, the better it was for Labor when the election was held at its regularly scheduled time.

Instead, we were treated to an obscene and undemocratic debate about whether Parliament should expel or just suspend Shaw, a legitimately elected representative.

It looked terrible.

Every budding reformer has their own pet change they'd like to make to Australia's political system.  Perhaps they'd like elections to be run differently, or restructure the levels of government, or "get money out of politics", or change the preferential voting system, or fiddle with upper houses.

Fixed terms were one of those reforms.  Only a few months after it was introduced in Victoria, Steve Bracks was urging the Commonwealth to follow his state's lead.

But it would be hard to see that fixed terms had delivered the sort of long-term thinking that its supporters prophesised.

Rather, it left Victoria with a sluggish government, encouraged a leadership spill, and turned a tight parliament into a farcical parliament.

There's another sense in which the Coalition loss on the weekend isn't that strange.  The journalist Paul Austin pointed out in 2007 that a premier who lasted two terms would now expect to be in power for eight years (assuming they were not rolled in the meantime).  While most Victorian governments have lasted longer than a single term, few lasted as long as eight years.  Jeff Kennett only managed seven.

The fixed term isn't the reason Denis Napthine lost.  But it's impossible to understand why they lost without understanding how it shaped the Coalition's time in power.

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Liberals shouldn't have abandoned their principles

Losing government after one term is a tragedy for Victorian Liberals.  But they should be even more disappointed that they didn't use the four years they had to implement the Liberal reform agenda Victoria desperately needs.

The Victorian Liberal Party cannot afford to ignore the lessons of this disappointing defeat.  Attributing much of the blame to the federal government is an implausible excuse.  The reality is that the Victorian Liberals trailed their opponents in the polls for almost all of their four years in government, long before Tony Abbott was elected Prime Minister.

One thing is unambiguously clear from the result — the risk-averse, moderate, cautious approach to politics favoured by state Liberals is no guarantee of re-election.  Simply arguing that Liberals will be better managers of services is not a sufficient argument to stay in power.  In fact, by failing to emphasise liberal values of small government, individual liberty and personal responsibility, the Coalition denied itself its best chance of retaining government.

The Baillieu-Napthine era is certainly not without achievement.  Its budget management is the envy of the federation, with a prized AAA credit rating and budget surpluses forecast for the foreseeable future.  It unquestionably delivered on its promise to get tougher on law and order.  Planning reforms have increased the sorely needed supply of housing.  The government's much-maligned vocational education changes were clearly necessary.  Long-overdue reform of the taxi industry was enacted.  The hard line on industrial relations was welcome, although the failure of police to enforce the law in the Baiada Poultry dispute was disappointing.

But the truth is few Liberals honestly believed they were going to win the 2010 election.  As a result, the deep thinking about a policy reform agenda that should take place in opposition largely did not occur.  Renewal of the parliamentary party did not go far enough.  Unsurprisingly, this meant the government got off to a very slow start, and in the absence of their own clear agenda, too many ministers took the lead from their departments with little regard for whether their recommendations were consistent with Liberal principles.

Sadly, this culture affected many areas of government.  In education, the government bowed to union pressure and backed away from introducing performance pay for teachers.  They happily signed on to Julia Gillard's left-wing and substandard national curriculum.  In health, they uncritically advanced nanny-state policies such as banning solariums and smoking outdoors at restaurants.  In transport, they promised "free" tram travel in the CBD — a policy straight out of the Greens playbook.  The government picked an unnecessary and unhelpful fight with the federal government over freedom of speech, and neglected to address widespread concern about the impact of the human rights charter on Victorians' freedoms.

On jobs — a key issue for voters — other than modest rebates on payroll tax and Workcover premiums for businesses employing long-term unemployed youth, the government's plan was to hand private businesses grants of taxpayers' money in the hope this would create employment.  This is not only economically ludicrous but also politically unconvincing.  Where was the all-encompassing Liberal pro-growth agenda of tax cuts and deregulation?  An ambitious agenda for reform like this could have captured the attention of the electorate and convinced voters the government had a vision for the future.

Instead, the government's re-election strategy appeared to be to try to convince Victorians that Liberals would be more generous with taxpayers' money than Labor.  That's not a fight the Liberal Party will ever win.

The result was a stunning rejection of auction politics.  The Liberals' efforts to outbid Labor with more lavish election promises were a complete failure.  Premier Denis Napthine's frenetic and extravagant spending announcements clearly failed to save his government, or meaningfully dent Labor's lead.

It's even clearer at a seat-by-seat level that this approach didn't work.  In the marginal seat of Yan Yean, the Coalition's promises tallied an extraordinary $1 billion — almost double the figure pledged by Daniel Andrews.  And yet on the counting so far, the swing against the Napthine government in Yan Yean is actually marginally above the statewide average.  In Shepparton, the Coalition government didn't just promise cash for voters — they already delivered it in the form of a $22 million bailout to SPC Ardmona.  And yet the Nationals have suffered a 32 per cent swing in their second safest seat and look set to lose it to an independent.

Like far too many of the decisions made by the government, the bailout of SPC was utterly divorced from liberal principles.  Thankfully, the next generation of Liberal leaders are more obviously committed to adhering to liberal philosophy.  Both former treasurer Michael O'Brien and former planning minister Matthew Guy are thoughtful proponents of classical liberal ideas.

Whoever prevails in the leadership contest this week, the new leader will need to set a clear example from the first day.  The Victorian Liberal Party needs to explain to voters why their values equip them to bestlead the state.  Every policy must be tested against liberal philosophy.  They must offer an ambitious agenda of reform.

The alternative, of de-emphasising liberal values and instead simply auditioning to be the best service-delivery manager, is a proven failure.

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