The Dries have it: The past and future of economic reform

Over Christmas Jim Carlton, one of the leaders of the most pivotal political movements of recent times, died.  Malcolm Turnbull's success could well depend on whether Carlton's successors are preparing the ground for future reform.

An unfortunate consequence of the ideological makeup of Australian historians is that one of the most important political and intellectual movements in 20th century Australia is still poorly understood and underappreciated.

Every factional nuance of the Labor Party and union movement has its own dedicated history.

By contrast, the Dries — the parliamentary and extra-parliamentary grouping that drove free market thinking in the Liberal Party;  that laid the foundations for the deregulation of the 1980s and '90s;  that held the Liberals to their private enterprise beliefs during those reforms against the attraction of populism;  that seemed to flame out with the failure of Fightback! at the 1993 election but whose program has been vindicated by decades of bipartisan economic change — has been largely ignored.

At best the Dries receive a perfunctory paragraph in political histories, dismissed either as Margaret Thatcher copycats or the ciphers of business interests.

Over Christmas one of the leaders of the Dries, Jim Carlton, passed away.  You can read Malcolm Turnbull's comments commemorating Carlton's life.

Carlton should be seen as one of the pivotal figures in Australian political and economic history.  This importance is not necessarily obvious from his CV.

Carlton entered parliament in 1977 as member for the Sydney seat of Mackellar.  He was the minister for Health for a short time in the Fraser government before it lost power.  He was shadow treasurer under John Howard during the 1980s, and left parliament in 1994.

Yet it was his role in building the Dry movement, and establishing a parliamentary group, the Society of Modest Members (along with the other core members of John Hyde and Peter Shack), that assures his long-term significance.

In the late 1970s and early 1980s the Dries were opposed to the Keynesian post-war consensus and advocated the monetarist approach to macroeconomic policy expounded by Milton Friedman.  They opposed the high tariff barriers that Australia placed between itself and the world.  They called for the industrial relations system — one of the most restrictive in the developed world — to be dismantled, and wages to be set by the market rather than judges.

The Dries had a love-hate relationship with the Fraser and Howard governments.  They were disappointed in Malcolm Fraser's failure to kickstart necessary reform;  a failure made more politically bitter by the fact that the Labor Party under Bob Hawke filled the gap.  It is a sign of the ideological success of the Dries that their view about the Fraser government — as a "missed opportunity" for reform — has become the dominant one in the modern Liberal Party, rather than more common idea of Fraser as a welcome return to the stable, middle-of-the-road government of the Menzies years.

It was thanks to Dry pressure that Fraser and his treasurer, John Howard, instigated the Campbell committee into the Australian financial system and gave it the philosophical direction that shaped the deregulatory movement for two decades later.  Hawke and Keating would not have been able to do what they did to the financial sector without these foundations.

Howard was affiliated with the Dries under Fraser and then during the Hawke years.  Yet Howard never fully signed up to the Dry program, in part by temperament, and in part due to a conscious effort at striving for the political mainstream.

Indeed, the Dries operated as a counterculture within the Liberal Party — albeit an extremely influential one.  This idea that the political mainstream would be influenced by the political margins was part of the Dry identity.  Carlton's Society of Modest Members was named after Bert Kelly, the Liberal member for Wakefield between 1958 and 1977, whose quasi-serious, quasi-comic "Modest Member" columns were a fixture of the Australian press for decades.  Kelly was a gadfly urging conservative governments to pursue tariff reduction and market liberalisation.

In 2011 the Society of Modest Members was revived within the federal Liberal Party, as an attempt to recapture the intellectual ferment of the era of Kelly, Hyde, Shack and Carlton.  This reconstituted group was, like the original society, an implied critique of the prevailing orthodoxy within the Liberal Party.  Free market Liberals believed that Tony Abbott needed some prodding if he was to bring about market-oriented economic reform, and needed an internal bulwark against big spending promises like paid parental leave.

Yet the new Society for Modest Members seems to have come to little, and Abbott's term in office is likely to be seen as another missed opportunity.  The original Dries were first and foremost an intellectual movement.  Turnbull's success depends on whether today's Jim Carltons are preparing the ground for future reform.

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Turnbull government little different to Abbott regime but its positive tone wins fans

Leadership transitions are revealing.  Not so much about the characters of the vanquished and victor — although the vast differences between Tony Abbott and Malcolm Turnbull are obvious — but about what hasn't changed.

Whether 2015 is seen in the long run as the end of the instability that has characterised Australian politics since Julia Gillard challenged Kevin Rudd, or just another episode of Canberra's soap opera, it is clear neither Abbott or Turnbull are fully masters of their own destiny.

Yes, Abbott's captain's calls hurt him.  Turnbull's relatively steady hand has helped him.  But both men have really just been pushed around by economic winds, geopolitical squalls, and wherever the permanent bureaucracy wants the ship of state to travel.  George W. Bush once remarked that the biggest surprise he had during his presidency was how little power the leader of the free world really had.

Consider Abbott's attempt to shape the narrative of the spill as a conservative icon cut down by the forces of the Liberal left.  It has been both disingenuous and revealing.

For example, last weekend he warned the Turnbull government not to pursue tax reform for tax reform's sake, arguing that the only good tax reform was that which cut taxes.  Yet in potentially raising the GST to 15 per cent, the Turnbull government is merely following the process set in train by Joe Hockey.  A higher GST is obviously the Treasury line.

For that matter, Abbott's love of lower taxes is hard to reconcile with the deficit levy that the 2014 budget imposed on high-income earners.  There's an interesting little detail in the book Battleground by Peter van Onselen and Wayne Errington that Turnbull opposed the deficit levy in cabinet.

Even the debate about whether the government should focus political attention on the dangers of Islamism rings hollow.  This is a "debate" Abbott could have launched as prime minister, but didn't.  Presumably he was following the same advice Turnbull is receiving now from our security agencies.  It's sadly ironic to see Abbott once again presenting himself as defender of free speech.

And no one should doubt that putting Australian boots on the ground in Iraq and Syria to fight Islamic State is almost entirely dependent on whether the Americans ask for our help, regardless of who the prime minister is.

The continuities between the two governments are even starker, and more worrying, when we turn to economic management.  Every treasurer faces a steep learning curve, and Scott Morrison deserves his chance to grow in his role.  But early signs show a great deal of similarity between Morrison and Hockey.  Where Hockey had poor communications skills, Morrison has brought way too much over from his performance as immigration minister.  The Treasury portfolio demands detail, explanation and argument, not stonewalling.

More importantly, Morrison hasn't yet shown much dexterity navigating the highly complex and controversial issues which the treasurer has to master.  The last thing Australia needs is another treasurer who acts as a figurehead for his department.  Morrison's claim last week that government spending can't be seriously cut because it would harm the economy is exactly what Hockey was saying this time last year, and is as questionable now as it was then.  Another obvious Treasury line.

And yet while there is remarkable policy continuity, it is undeniable that the government is very different after the spill.  The Coalition polled terribly last year, it polls brilliantly now.  This poll reversal is a rudimentary but interesting confirmation of the argument that voters are less interested in policy specifics than what the individual parties seem to symbolise.  Voters know their votes don't count, in any literal sense — no single vote is going to swing an election.  So when they vote they tend to vote as an expression of their values.

Where Abbott looked back to the Labor years, a perpetual opposition underdog looking for something bigger to fight, Turnbull seems to look forwards.  Same policies, different tone.  And tone matters.

This is the big lesson of the spill, and indeed, the big lesson of politics in 2015.  Governments need positivity.  They need to offer the public a sense that things are going to get better.  Negativity works in opposition.  But what successful national leader has been a negative national leader?  Even Abbott's hero, Winston Churchill, offered a sense of hope during the worst days of World War II.

In December Turnbull released the innovation policy package which he had been building up since the spill, and which was to serve as a statement of his priorities as leader.  Policy for policy it was a damp squib, a collection of the standard wasteful spending and ineffective tax credits that have been the mainstay of innovation policy for decades.  But so what?  It sounded great.  Agile.  Innovation.  Technology.  The future.  Isn't it wonderful to be alive.  And sounding great is a big part of politics.

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Gloomy headlines shroud positive reality

With headlines dominated by violence and political rivalry, we have forgotten how much good news there has been in 2015.

If the major news events of this past year are any guide, one could be forgiven for thinking the world was heading toward hell in a hand basket at an increasingly rapid rate.

Deaths and injuries from terrorist attacks, from the heart of Western cities to the farthest flung regions in the developing world, have wreaked havoc and are fuelling demands for governments to reduce freedom of movement and speech, and to restrain trade and financial flows.

Natural disasters took their toll on lives and property in 2015, as they are unfortunately always prone to do, with earthquakes in Nepal, Atlantic and Pacific Ocean hurricanes, floods in the United States and Columbia, and bushfires in Australia among the events causing major damage.

The political system was depressingly effective in what it was designed to do, and that is to foment conflict between rival factions within society, with destabilising political machinations and the rise of political reactionaries being key features of the year.

One commentator recently depicted 2015 as an "overwhelming sea of awfulness" marked by terrorism, political excess, and xenophobia.  But we should probably recalibrate our strangely inbuilt biases toward fear, pessimism and worry with a reminder this year was not all bad.

Actually, there had been good news throughout the year, and plenty of it.

The need for faster rates of economic growth and productivity is a legitimate concern but even with the economic performances we currently have the world is still managing to reduce poverty.

As I noted a few weeks ago, the World Bank estimates the numbers of people living in extreme poverty globally will fall below ten per cent of the total population this year, and that is based on a higher international poverty line of US $1.90 in earnings each day.

The global extreme poverty rate, at the new poverty line benchmark, fell from 12.8 per cent in 2012 to an estimated 9.6 per cent this year, and that means we are creating wealth for the poor more quickly than we are creating more human beings.

Although global investment and trade flows remain patchy in this low-growth, post-GFC environment, another bright economic spot was news that global employment rose to an estimated 3.2 billion people this year allaying fears that we will all be rendered obsolescent by machines.

Over the last few decades there have been some impressive, even if uneven, social advances in which more minorities and other groups throughout the world won hard-fought improvements for their rights and freedoms.

In May this year the people of Ireland voted to amend their constitution to enable partners of the same sex to be married, in an affirmation of the rule of law when it comes to recognising relationships by the state.

A month later, the United States Supreme Court made a historic ruling enabling same-sex couples to lawfully marry each other.

The Court declared ʻthe Constitution promises liberty to all within its reach,' referring to its landmark 1967 Loving v. Virginia decision, ending a ban on interracial marriages, as a precedent in this regard.

On another promising note, more girls and women around the world are participating in schooling and education than ever before, even in spite of powerful cultural and theological forces opposing such moves to unleash individual talents and aspirations.

There has certainly been a vigorous policy discussion, both here and abroad, about reinvigorating innovation to kickstart global prosperity, but if developments in innovation, science and technology during 2015 are an accurate guide the spirit of human ingenuity remains very much alive and well.

One of the most amazing technological breakthroughs of the year was the successful initiative by a bionics company, in a world first, to 3D print a robotic hand for a British man born without a hand.

The vast potential for 3D printing to improve health care does not necessarily end there, with news this year that surgeons have devised techniques to develop virtual models of their patients and 3D print knee and hip joints tailored to each individual.

Here in Australia, researchers have invented a new kind of bionic heart, pumping blood around the body without a pulse, with the expectation that human transplants will be conducted in about two to three years from now.

The world's first malaria vaccine, which had taken about thirty years to develop, started its roll-out during the year, with preliminary studies indicating it could prevent up to one in four malaria deaths in young children, particularly in sub-Saharan Africa.

Another major scientific achievement for the year was the successful reconnaissance mission by the New Horizons space probe to Pluto, passing within 12,500km of the dwarf planet before an even lonelier journey through the outer-rim Kuiper Belt.

New Horizons not only provided us with breathtaking images of Pluto, with its vast mountain ranges, ice volcanoes and hazy atmosphere, but has already given researchers new insights into the formation of our solar system.

There are intense concerns about the availability of energy supplies to power our economies and make our living environments more pleasant, even in spite of massive endowments of coal and oil, so innovators have been responding by testing new modes of energy provision.

German researchers earlier this month activated a new, experimental fusion reactor, which took nine years to construct, while Tesla's Elon Musk announced a battery product for installation in homes.

As the positive developments of this year have illustrated, the reality is the bulk of humanity continues to enjoy improvements both in terms of material circumstances and quality of life.

Given the basic human inclination for curiosity, entrepreneurship and ingenuity, there is no reason to believe that optimism for even more good news in 2016 is misplaced.

It is true that much of our daily public narrative seems to be filled up with conflict, horror, sadness and torment, but that is only because the good news enveloping our daily lives is mainly unexceptional and, thus, not newsworthy.

As an eventful 2015 draws to a close, it might be worthwhile to ponder how we might like to play our own parts making 2016 even better for ourselves, our loved ones, and the communities in which we live.

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Democracy ill-served by compulsory voting

That nearly 1000 West Australians have been convicted for the crime of not voting in last year's Senate election is more proof that it's time to make voting voluntary.

The special election — essentially an election repeat — came about because electoral commission staff lost 1375 ballot papers that may have determined the election outcome.  Now, 964 people have been convicted for failing to vote in what was the third election in 13 months for West Australians.  Worse still is the amount of informal votes.  Senate voting is relatively uncomplicated, as you only need to tick one box "above the line".

That almost 33,000 voted informally is more likely a sign that though people were compelled to turn up, they didn't much care what became of their ballot paper.  It is a sign, too, that coercing voters into turning up to booths is not the best way to run a democracy.

In simple terms, democracy does mean the majority rules.  But Australia is a liberal democracy, and the right to vote is not a duty to vote.  Indeed, the right to vote is the liberty to vote — or not, if one so chooses.  So obvious is this around the world that Australia is one of the few countries to enforce compulsory voting.  One need only look at our closest cousins in the Commonwealth — New Zealand, Canada and Britain — to see voluntary voting is possible, and works in a Westminster parliamentary system.

The question put is:  which system best encourages civic engagement?  The traditional argument is that by compelling people to turn up to the voting booth, then people will be compelled to consider their choice before casting a vote.  There is little evidence to support this point of view.  If there was, we would not see so many informal votes in elections.

Perhaps the better question is:  what is civic engagement?  Turning up and lodging a vote on election day is only the final step a person takes when taking part in the political world.  On the first level, you have political discussion and debates held publicly and privately.  After that, you might volunteer your time to a political cause you believe in.  Or volunteer your time in election campaigns and make donations to candidates.

Considering all this, which system works best for enabling civic engagement?  One unavoidable consequence of compulsory voting is that major parties devote their efforts in chasing the vote of the undecided and the less engaged.  This means presenting a "least worst" option, and offloading core beliefs.  Except core beliefs are the reason many would join a political party in the first place.

Inevitably, when neither political options are offering what supporters want, the supporters fall away.  This is reflected in long-term data that shows membership of political parties has plummeted and continues to fall away.

At the same time, as people have become disaffected from those political parties, we see political parties effectively compensated by the public purse.  The perverse incentive for the parties is to rely more and more on government largesse and less and less on party faithful.  Correspondingly, government grows ever larger and spending ever higher.  This all paints a picture of overall civic engagement suffering.  And yet, compulsory voting is meant to "encourage" civic engagement?  It just doesn't add up.  What does add up is that with compulsory voting, you see more informal voting.

The informal vote is a legitimate political expression and a measure of how people view the political system.  In the 2013 Federal election, more than 400,000 Senate votes, and 800,000 House of Representatives votes were informal.  Such a significant informal vote suggests dissatisfaction goes beyond just the major parties — even the mainstream protest parties are being avoided.

Compulsory voting certainly isn't fixing this, but it does needlessly add to the workload of electoral commission staff.  That we see lost ballots is perhaps not so surprising.  If voting was voluntary, the parties would need to balance the interests of their own supporters, along with the swing voters.  MPs in ultra-safe seats would no longer be able to rely on the automatic support that compulsory voting turns out.  This would make politicians more representative and politics more democratic.

There are plenty of reasons to support the introduction of voluntary voting.  And who knows — maybe under voluntary voting, the Australian Electoral Commission won't be inundated with ballots from people who didn't want to vote in the first place and voters won't need to be sent back to the polls for a mistake they didn't make.

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Christmas carol ban is out of tune with society

Victoria's public schools are the frontline in the war on Christmas.

In an extraordinary decision of the Andrews government, Education Minister James Merlino issued a diktat to state government schools that has the effect of banning Christmas carols.

You may need to read that sentence one more time.

In an attempt to secularise public schools, a directive was issued last month to the principal of every Victorian public school.  These new rules restrict the way in which teachers, parents and volunteers talk about religious ideas in our state schools.  The most shocking aspect of the rules is that the teaching and singing of traditional Christmas carols will now be banished from the classroom.

"Praise music", defined as "any type of music that glorifies God or a particular religious figure or deity" will be banned from music classes beginning in January.  This is the last year parents will be allowed to volunteer their lunchtimes to teach kids Christmas carols for the end-of-year concert.

Most children aren't even aware there's a religious dimension to Christmas carols.  It's Christmas, and singing carols is just what people do.  Silent Night has taken on its own significance beyond anything that may be characterised by some government bureaucrat as "praise music".  Christmas carols now form a unique genre of music, and removing them from schools has the same effect banning any other genre of music would have;  it ignores an important part of the complex tapestry of musical history.

In fact, the motivation behind a ban on Christmas carols today is remarkably similar to that which parents and teachers of children growing up in the 1950s and 60s shared in relation to rock 'n' roll.  Sixty years ago, older generations worried Elvis Presley and Chuck Berry would lead a generation to juvenile delinquency.  Today, the concern is that Christmas carols may lead to alarming ideas about religion and the meaning of Christmas.  Christmas carols are the new subversive influence on youth that parents and teachers should be concerned about — a nonsense idea ironically given life by the fact the elite are attempting to ban them.

Of course, the government hasn't banned all Christmas carols, just those that refer to God.  So while drab, contemporary Christmas songs such as Rudolph the Red-Nosed Reindeer will be spared, the traditional carols — those that drip with a rich Christmas spirit — such as Once in Royal David's City, Hark!  The Herald Angels Sing and O Come, All Ye Faithful are verboten in Victorian public schools.

But it's far bigger than all that.  This is a cultural turning point.  The Victorian government isn't just banning Christmas carols;  this is an attempt to strip away the meaning of Christmas.  It's an overt attack on one of the most significant events in the Christian calendar.

The decision goes to the heart of good education.  Christmas, and all the ceremony and custom associated with it, has been a significant religious and cultural ritual for 1700 years.  A ban on these traditions is a denial of our history.  Suppressing aspects of the Christmas celebration denies a cultural heritage that has formed the basis of Western civilisation and that underpins our understanding of life and liberty.

A well-rounded education should include lessons on Christianity and its contribution to who we are today.  We can't expect the next generation to defend the values of Western civilisation if they don't know what they are.

The inflammatory decision of the Andrews government to ban Christmas carols in Victoria's public schools must be reversed immediately.  Former Victorian attorney-general Robert Clark is to be congratulated for taking a stand on the issue.  In parliament Clark called on the government to "withdraw this appalling edict and make clear that students at government schools are entitled to learn, sing and enjoy Christmas carols as they have for generations".  In the meantime, and while I'm still able to say it — merry Christmas!

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Is cultural appropriation the bogeyman it's made out to be?

A spectre is haunting the planet:  the spectre of cultural appropriation.

To appropriate symbols from cultures that are not one's own is apparently now disrespectful, insensitive and offensive.

A student body at the University of Ottawa has banned yoga classes as an example of "cultural genocide" and "Western supremacy".  Student unions at the University of East Anglia have targeted Mexican sombreros for "discriminatory or stereotypical imagery".

At Oberlin College in Ohio, it is food that is problematic.  The student dining hall is accused of modifying "traditional" Asian recipes "without respect".  The "undercooked rice and lack of fresh fish" offered in sushi "is disrespectful".  The Banh Mi sandwich, served on ciabatta rather than a baguette, is "uninformed", a "gross manipulation" of this "traditional" Vietnamese dish.  And the General Tso's chicken dish is prepared with steamed chicken, rather than fried chicken — another disrespectful appropriation.

These complaints are apparently serious.  They could just as well be satire.  Because each of those named foods are themselves the result, not the victims, of cultural appropriation.

Sushi has an ancient history in Japan but what many people in Japan and the West now see as good sushi — with its rich slices of tuna and salmon — is the result of Japanese chefs adapting their traditional dish to the tastes of American GIs during post-war occupation.

The Banh Mi is a fusion dish of French baguette — brought to Vietnam through French colonialism in the nineteenth century — and Vietnamese flavours.

And General Tso's chicken?  It dates back, at the earliest, to the 1950s, has nothing to do with the nineteenth century general Tso Tsung-t'ang, and only became famous when it was first served in a New York Chinese restaurant.

Sure, it's easy to mock a few uninformed university students.  So let's continue.

The sombrero comes not from Mexico, but was brought from Europe by the Spanish — Don Quixote is often depicted with a flat-topped Spanish sombrero.  The sombrero was then culturally appropriated by early American cowboys and evolved into their distinctive cowboy hat.  For their part, the Spaniards got the sombrero from the Mongolians.

Modern yoga is so far from the ancient Indian tradition that it is better seen as a totally separate endeavour.  The typical modern yoga fitness class draws on gymnastics, calisthenics and Indian wrestling.  Its relationship to the fourth century Yoga Sutras of Patanjali is like the relationship between the cowboy hat and the Spanish sombrero:  related but far enough apart to be considered substantively different.

Why is this important?  Because the history of culture is the history of cultural appropriation.  What we see as traditional national or ethnic cultures today are the just the current manifestation of a long evolutionary process.  Traditional foods, religions, dress and practices are constantly changing as they are exposed to other cultures, picking up and integrating the most appealing or adaptable parts.

In her important 2013 book, Cuisine and Empire:  Cooking in World History, the food historian Rachel Laudan documents the many ways so-called "national cuisines" are almost always an amalgam of foreign influences, incorporating plants, animals, techniques, spices and styles that have been pushed around the globe by politics and economics.  There are no "authentic" cuisines, no "traditional" foods.  Everything is fusion.

The same story could be told for language, architecture, dress, religion, music, art, literary culture and on and on and on.

So the issue here is not just that the criticism of cultural appropriation is historically illiterate.  It's deeply ironic.  The critics of cultural appropriation claim to be progressive.  But they are in fact engaged in a deeply conservative project:  one which first seeks to preserve in formaldehyde the content of an established culture and second tries prevent others from interacting with that culture.

Appropriating other cultural symbols is not empty, cynical role-playing, it is development.  By appropriating we add meaning, creating complex new rituals and relationships.

Take, for instance, the most prominent example of cultural appropriation and evolution in the modern West:  Christmas.

It is well understood that Christmas is an amalgam of Christian beliefs and Pagan rituals.  The Christmas tree comes from Germany, Father Christmas from England, and Christmas carols from Roman-era Christian hymns.  Most people would class candy canes as one of the secular icons of Christmas but they may have been meant to represent the shepherd's staff.

To observe a nativity scene (a first century AD stable in Bethlehem) next to a Christmas tree (an evergreen winter climate plant) is to see that there is a lot going with this apparently simple holiday.

Why is gift-giving part of the way we celebrate of the birth of Jesus Christ?  Not solely because of the Three Wise Men.  We might as well ask why Jewish families in the United States enjoy a plate of General Tso's chicken on December 25.  Lots of reasons.

Cultural evolution is like that:  a contradictory, rich, unstable mix of tradition and change.  To attack cultural appropriation as offensive, or insensitive is to attack culture itself.  And just as absurd.

How we're getting the whole GST debate so wrong

The GST reform debate is a complete mess.  If this was in doubt, the Council of Australian Governments meeting last week made it unambiguous:  the Government is pushing ahead with a solution to a problem that it has not yet defined.  The solution is a 15 per cent GST.  Does anybody know what the problem is?

Most economists have a good, clean answer to that question.  Basic tax theory tells us that consumption taxes are more efficient than most alternatives.  Taxes that are easy to evade or substantially alter our behaviour are less efficient.  Yet consumption taxes play only a small part of Australia's overall tax mix.  The ideal tax from an efficiency perspective is low, broad, simple and does not encourage people to avoid saving.

Hence the Henry Review's position that "a broad-based consumption tax is one of the most efficient taxes available", and why lots of serious people these days talk about raising the GST and expanding it to fresh food and financial services.

But theory and practice are very different things.  At last week's COAG meeting the state and commonwealth governments were discussing a complicated tax bargain, where two levels of government would trade off fiscal favours with each other.  In the Australian Financial Review, Phillip Coorey has a good run down of the proposals.

Jay Weatherill's plan is that the Commonwealth Government would keep the revenue from a GST increase, which could be used to finance income tax cuts and compensation to low income households, while the states would be allocated a fixed percentage of the commonwealth's income tax take to spend at their discretion.

An alternative model is that proposed by Mike Baird, where the states would receive $5 billion between now and 2020 to recover some of the funding increases cut from the 2014 budget.  After that, the states would be allocated the revenue from income tax bracket creep — the steady tax increase that occurs thanks to inflation every year.

Neither of these plans have much to recommend them.  They would further entrench the fiscal imbalance in the federation — the distorted political incentives that arise from the fact that the states do not raise the money they spend.  But Baird's plan is particularly awful.  Not only does it rely on maintaining bracket creep as a fixture of the Australian tax system, it would create a constituency — the states — that would lobby hard against any future income tax relief.

The states are obviously clamouring for money.  Having lost any real revenue base of their own, they've been reduced to begging the commonwealth for scraps.

The real question is why the Commonwealth Government is indulging any of this.  The efficiency gains from replacing income tax with a consumption tax are unlikely to be realised once the Government starts compensating low income holders and bargaining with the states.  Those compromises will impose their own efficiency costs — costs that do not get captured in the blackboard modelling that informs the debate — but those costs might swamp the benefits from tax reform.

There is a vast gap between an ideal, perfectly implemented tax system and the necessarily compromised and complicated system that emerges from the process of democratic bargaining.

The Government is correct to say that our tax system comes from an older era, and correct to point out that many of our tax rates are punitively high — particularly the income and corporate tax rates.  But piecemeal changes could tackle these problems.  Every budget includes its own minor changes to the tax system.  Why not work through the normal budget process?  Why the need for big-bang reform?

When the GST was first introduced by the Howard government, it was designed to replace the wildly inefficient, complicated and obscure wholesale sales tax, as well as stamp duties, taxes on financial institutions, and bed taxes.  The one fell swoop approach suited our tax reform needs then.  It does not anymore.

The flaws of the existing system have been created by the same political dynamic that makes a revolutionary jump to a substantially better system unlikely.  And if the trade-off for a higher GST is to lock in bracket creep forever, as the Baird plan would, tax reform will have been worse than pointless:  it will have been genuinely harmful.

The Turnbull Government can't even convince its own economic elders about the desirability of reform.  Peter Costello (who brought in the GST in 2000) warns that a GST debate "will swamp everything".  Peter Reith (shadow treasurer when John Hewson presented his GST plan) urges the Government to "shut down this discussion before Christmas".  Neither of these two are the sole founts of wisdom on tax, of course, but something has obviously gone badly wrong.

On Tuesday the Government will release its Mid-year Economic and Fiscal Outlook, which will reportedly show that government expenditure is around 26.2 per cent of GDP.

This means the Australian government now spends more than it spent when the Rudd government was trying to pump-prime the economy during the Global Financial Crisis ("just" 26.0 per cent of GDP was spent in the 2009-10 financial year).  We are at permanent emergency levels of spending.  This — not marginal changes to the efficiency of the tax system — is what Malcolm Turnbull should be spending his political capital on.

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Do Plantoids Dream of Electric Arts Council Grants?

I was at the Blockchain Workshop in Sydney last week, whereupon among many wondrous things I did happen to see the very future of the arts economy in what Primavera De Filippi, a researcher at the Harvard Berkman Centre and founder of the Okhaos artist collective, calls the Plantoid.  A Plantoid is to a plant, what an Android is to a man.

The Plantoid hires artists to make copies of itself.  Now I appreciate that this might sound a little crazy, but I'm completely serious:  our new robot plant overlords need your bitcoins to hire artists in order to replicate and evolve.

Let me start at the beginning.

The tangible aspect of the Plantoid is a pretty standard although aesthetically-pleasing gears-and-steel contraption controlled by a Raspberry Pi processor.  What's more interesting is its intangible aspect, its soul perhaps, which is an Ethereum-based smart contract on the blockchain, making the Plantoid an autopoietic decentralised autonomous organisation (DAO).

Even the smartest and most worldly of Conversation readers will probably struggle with at least some of the concepts in that last sentence, so work through the links:  that's what they're for.

But the basic idea is that Plantoid is a new species (it's a new species of "plant", which are no longer carbon-based, but rather blockchain-based) that exists as both a physical presence and also as a virtual legal and economic presence on the blockchain through the techno-legal agency of bitcoin and smart contracts.  It's a "blockchain-based entity", as De Filippi explains.

The Plantoid interacts with the real world through its DAO, providing explicit contractual incentives for artists, and other humans, to participate in its reproduction process by feeding the Plantoid with bitcoins.  The Plantoid has its own Bitcoin wallet.

How did the Plantoid get these bitcoins?  Someone else gave them to it, because they liked it, because it did something valuable for them.  The prototypes at the Sydney Blockchain Workshop did a little wiggle and dance, with a glittery noisy light show.  It's primitive perhaps, but it was a form of appreciation.  And it was evolutionary successful, in the sense that the Plantoid got bitcoins.  When they get enough funds, the Plantoid's smart contract triggers the reproduction process by calling for bids from artists to submit ideas as to how the Plantoid could replicate.  Those who initially funded the Plantoid will evaluate these submissions, and once consensus has been reached, the Plantoid will hire and pay the artist to produce a new copy of itself.

Do you see how that works?  Real plants use insects to pollinate and reproduce;  the Plantoid uses humans and bitcoins to reproduce.  The funds are not directly given to the artist, but rather to the Plantoid which accumulates capital, through its Bitcoin wallet, until it can afford to hire an artist to reproduce.  The hiring is done automatically, through a Bitcoin transaction issued as a result of the governance structure encoded in the Plantoid's smart contract.

This model is a further elaboration of the open-source model of production, which enables artworks to evolve on their own, regardless of the will of their original creators.

The actual mechanism by which Plantoid reproduces is pretty interesting, and incorporates an internal reward incentive or pyramid scheme.  The Plantoid is connected to its ancestors and its descendants who it can transact with through the blockchain.  It is also connected with its patrons, who gave it bitcoins.  Those patrons get to vote on the submissions from artists vying for the reproduction contract.  As the Plantoid cannot decide on the merit, humans help it with the decision, thanks to a blockchain-based consensus mechanism.

And the contracted artist gets to reinterpret the Plantoid, within the confines of its founding protocols or DNA.  In this way the Plantoid adapts and evolves into different directions, which each constitute a particular evolutionary branch.

The artist is incentivised not just because of their contract for service, but also because they will become part of its future inheritance.  The Plantoid uses most of the bitcoins for reproduction, but it also passes some back at each stage to its ancestors (a 5% royalty in the debut configuration), and the artists who made them.  Hence, the more successful a Plantoid is, the more it will be able to reproduce, and thus the more money will pass back to the original creators.  Primavera points out that this is actually an evolutionary self-sustaining pyramid scheme.

The Plantoid is a fascinating and enormously fun conceptual experiment that shows some of the radical promises the new blockchain technology may bring.

First, it enables the artwork itself to be an independent agent, which is both autonomous and self-sufficient.  The artist doesn't own the artwork.  In fact nobody can own the artwork:  that would be equivalent to slavery.  The artwork owns itself and hires the artist to create a replica of itself.  That's what it means to say that it is a decentralised autonomous organisation.

Second, this creates a new arts economy and ecology that has no need for intellectual property.  This means that the constraints of intellectual property, such as restrictions on use, are also unnecessary and even detrimental.  Indeed, the Plantoid (and its creators) actually benefits from encouraging dissemination, reuse and remixing.

Third, the Plantoid need not be a rapacious profit-hungry beast (although it could be).  The COALA Plantoid has its protocols set (and inherited by all descendants) to make it a charitable artwork, as 50% of all profits it accumulates for reproduction are transferred to the COALA organization.  So different governance structures are not only possible but are actually desirable as Plantoid seeks to survive and prosper in different human environments.

So send bitcoin to the Plantoid, so it can hire an artist to reproduce itself.

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Death taxes punish the living

Reintroducing inheritance taxes would be a backward step for Australia that falls short on both economic and ethical grounds.

A feature of the fiscal policy debate this year has been the unstinting efforts of numerous interest groups reframing the narrative about the nature of, and solutions to, Australia's immense budget problems.

Contradicting the bare facts of general government sector overspending, with current expenditures by all levels of government exceeding revenue collections by $24 billion last financial year, the pro-revenue lobbies claim our public sector is wasting away because of a "revenue deficiency".

Against the background of a federal government encouraging a free-for-all discussion about policy changes, proponents of a greater national tax take have recently argued for a reintroduction of taxes on inheritance transfers between donors and beneficiaries.

Before their staged abolition during the 1970s and 1980s, first led by the Bjelke-Petersen government in Queensland and followed by other states and federally, Australia generally taxed the estate of a deceased person.

In an attempt deter avoidance, Australian governments also taxed gifts made between people while they were living.

As a result of the tax reform initiatives led by the quixotic former Queensland premier, succeeding generations of Australians have been spared the economic, financial, and even personal, pains of having to effectively transfer over to government a share of properties bequeathed to them.

Although the raft of dreaded inheritance taxes are now a historical relic of the Australian tax system, any diligent divorce or estate lawyer would sensibly contend it is erroneous to think that taxation circumstances may not change, in a detrimental fashion, in the event of somebody's death today.

A recipient of an inheritance, say in the form of either shares or an investment property, is likely to be affected by capital gains tax, with the amount of liability likely to be affected by issues such as the inheritor's residential status, the date of the asset purchase, and other practical matters.

The beneficiary of a deceased person's superannuation fund could also be liable to substantial tax liabilities if they are a non-dependent person, that is if they are not the spouse of the deceased person or are not aged under 18 years.

The death of a loved one can even mean an increase in income tax liability for the surviving spouse, because most couples tend to structure their affairs so that they share their income.

In other words, Australia's tax system complexities mean there are numerous stealth "death taxes" that could financially ensnare those grieving the passing of their parent or partner, quite apart from the general efficiency costs of taxes, which reduce capital accumulations over successive generations.

It may be claimed, as the federal government does in its March 2015 tax discussion paper, that a tax on a deceased person's estate would be unlikely to greatly impact savings relating to adequate retirement funding, at the very least because of the way in which working Australians are compelled to hold over money in superannuation funds.

But to introduce a tax on inheritances would act as another bias against savings, in addition to anti-savings taxes such as capital gains and income tax, further constraining our long-term economic potential if implemented.

This is because inheritance taxes would tend to discourage donors from bequeathing their estates to beneficiaries, which would be reflected in increased consumption, and accordingly reduced savings, by those who would otherwise wish to pass on more assets upon death.

With savings representing the effective feedstock of investment activity by the private sector, the imposition of an inheritance tax would, in turn, deter growth in the domestic capital stock to some extent, thereby dragging down future growth.

It is worth remembering that taxes that discourage capital accumulation will hurt workers, in the form of slowing growth of their take-home pay, because working people need to use machinery and equipment to become more productive.

Making matters potentially worse, some start-up entrepreneurs find it difficult to formally access funds from financial institutions, so they rely upon other sources of finance, such as cash endowments from relatives, which could be subject to an inheritance tax.

Even from the perspective of the taxman, seemingly eager to discover as many sources of revenue to financially validate as many forms of spending regardless of their efficiency or effectiveness, it is not even clear that inheritance taxes are worth the effort to implement.

From past Australian experience, not to mention the contemporary experience in Europe and the United States, it is well known that inheritance taxes are prone to avoidance by potential payers, even in the presence of pre-death gift taxes.

Numerous studies have also shown that the costs of complying with inheritance taxes are steep, and not justifiable given the somewhat paltry amounts of revenue raised.

In any case there is some evidence that donors are changing their strategic giving to beneficiaries, for example parents and relatives buying a better education for their children, which would not be well captured by inheritance taxation.

But perhaps the most powerful argument in favour of imposing taxes on inherited assets is that the receipt of supposedly effortless inheritances by a beneficiary leads to an unjustified worsening of material inequalities.

But encouraging a donor to draw down on their savings and blow a potential inheritance on expensive holidays and other consumables, an inheritance tax risks exacerbating the degree of inequality in consumption across the population.

It may well be the case that beneficiaries themselves could consume the inheritance, but such an act, in any event, would tend to dissipate the wealth inequality which persists across generations.

To reduce the degree of wealth inequality in this country it would be far better to target reforms against wealth accumulation which are encouraged by government policies, for example action to deregulate land use which artificially inflates property values.

If there is one tax the Turnbull government ought to safely rule out at this time, it should be the inheritance tax, which does so much to punish the living.

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Innovation Statement? The government doesn't even allow lemonade stands

The story of what happened to Chelsea-lee Downes reveals everything that's wrong with Australia's attitude to innovation and risk-taking.  Malcolm Turnbull and Chris Pyne's Innovation Statement released on Monday is a good start.  Less important than the statement's billion dollars of handouts is its recognition that our attitude to innovation must change.  And of course, the biggest source of opposition to innovation is always government.

Something is wrong if a kid isn't even allowed to run a lemonade stand.

Chelsea-lee Downes is an 11-year-old girl in Bunbury in Western Australia.  This time last year to make some money for Christmas she wanted to set up a stand selling homemade lemonade, cupcakes, and lemon meringue pies.

Encouraging children to sell lemonade is all the rage at the moment.  In July Time magazine ran a long feature "What running a lemonade stand can teach budding entrepreneurs about business".  More lemonade stands was the winning idea at a government innovation "hackathon" in October.  And Lucy Turnbull is the patron of a not-for-profit organisation, DICE Kids, (Digital, Innovative, Creative and Entrepreneurial) that will promote a National Lemonade Day to "embed business skills in schoolkids".

Chelsea-lee was innovative, using social media to advertise.  On the day her stand was to open she was up at 4am to cook.  She organised furniture, and a fridge and ice were on hand.  Chelsea-lee's only problem was that officers from the Bunbury city council had been alerted to what she was up to by a helpful member of the public.

Chelsea-lee didn't get the chance to sell anything.  The council officers shut her down before she could open.  To be fair, the council's environmental health manager, Sarah Upton, was just doing her job.  What she said is revealing.  Ms Upton said, "The city applauds her efforts in trying to be entrepreneurial, but it is important to seek professional advice in relation to legal requirements."  If lemonade stands do take off around the country, advising 11-year-olds on their legal requirements could be a growth market for Australia's 60,000 practising solicitors.

Chelsea-lee wanted to sell products containing custard and cream, which according to the council's Ms Upton were "very high-risk products".  Ms Upton promised that if Chelsea-lee could somehow make her cupcakes and lemon meringue pie in a commercial kitchen there was the "possibility" the council might then allow her to sell them.  Getting a commercial kitchen to make the cakes for a lemonade stand seems, though, to defeat the purpose of the entire exercise.

COMMON SENSE

Chelsea-lee's stepmum, Marissa, spoke a lot of common sense.  "We understand the principle, but I just think customers go there knowing it's an 11-year-old girl's stall.  If you don't want to buy, then don't."

The tale of Chelsea-lee's lemonade stand is repeated every single day across the country.  For more and more business owners it's just getting too hard to do what they love.  Government should be making it easier — not harder — to run a business and to innovate.  It is no surprise that my research identified in October that there are now fewer new businesses starting in Australia than a decade ago.  In 2003-04, 326,000 new businesses started;  In the year for which we have the most recent figures, 2013-14, that figure was 284,000.  That's despite the fact that during that time our population has increased by nearly 20 per cent.

When it comes to the innovation of lemonade stands, Uber, Airbnb, bitcoin or anything else, government always has trouble letting go of the control it wants to exercise.  Innovation also threatens entrenched interests.  Last week Uber was declared illegal in Victoria.

Importing second-hand cars isn't particularly innovative, but it does challenge the entrenched privilege of the sellers of new cars in Australia.  It is ironic the Turnbull government is telling business to embrace the creative destruction of innovation, when the same government continues to enforce what is basically a decades-long embargo on the importation of second-hand cars into this country.

Encouraging children to run lemonade stands is a great idea — at a young age they'll discover how to fight bureaucracy.  And trying to operate a lemonade stand will teach children that before they do anything they should get a good lawyer.

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Innovation v regulation: How Turnbull's pitch fell short

The fundamental problem with the Turnbull Government's innovation statement is that it is a category error.  The only thing governments can do to the "culture" of innovation is hurt it.

When he first took the leadership, Malcolm Turnbull was right to describe our economic growth challenge as one of boosting innovation.  The problem has always been what on earth that means.

Now we know.  The policies in Monday's innovation statement try to do two things.  Unfortunately, they're both underwhelming.

First, the Government wants to buy innovation.  All those tax offsets, capital gains tax exemptions, and adjustments to the way the tax office treats company losses are trying to trade government revenue for corporate innovation.  Same with the money for the CSIRO and the incubator support program, money for "landing pads" in Silicon Valley and Tel Aviv, and money for quantum computing.

Can governments buy innovation?  Unlikely.  This is a longstanding debate in innovation policy.  It is certainly true that if you throw an unlimited amount of money at professional researchers they will eventually research something useful.  But as I have pointed out, the OECD is unable to find any relationship between economic growth and public spending on research and development.  The OECD speculates that public spending on research crowds out private spending on research.

More prospective is the second approach taken by the Turnbull Government's innovation statement:  clearing existing regulatory barriers to private sector risk taking and entrepreneurship.  In this category are the insolvency reforms — which reduce bankruptcy periods from three years to one year — safe harbours for insolvent trading, and changes to the law governing employment share schemes.

Yet these policies are miserly in comparison to the generous policies on the spending side.  They barely scratch the surface.

The thing about regulatory barriers to innovation is that they exist for a reason:  either because they have constituencies who support them, special interests who rely on them, or politicians who lean on them for populist benefit.

The real barriers to innovation are those steadily accumulating regulatory burdens that hold new products and services back for government approval and divert the attention of entrepreneurs to regulatory compliance.

Think how data retention has gunked up the internet industry, how the regulatory uncertainty of the NBN has slowed down telecommunications investment, how financial innovation is held back by the labyrinth of regulatory controls on financial products.  The Australian Government's left arm doesn't know what its right arm is doing.

For instance, it takes a special kind of cognitive dissonance to ignore the fact that while the Government is trying to create Apple-like and Google-like companies in Australia, it is at the same time trying to target the real Apple and Google for what is alleged to be corporate tax avoidance.

One of the big reasons these firms have apparently low tax profiles is because they take advantage of the research and development tax credits successive governments have introduced to boost innovation.

The other reason that they have low tax profiles in Australia is simply because they're not Australian companies, and much of their economic activity occurs offshore.  Yet under the Federal Government's multinational tax avoidance legislation (which passed both houses last week) the tax office will estimate how much tax they reckon multinational firms like Google and Apple should be paying, rather than how much they are strictly liable to pay under current tax law.

This legislation creates enormous uncertainty and is almost guaranteed to push economic activity and innovative firms out of Australia.  Why would multinational companies risk being taxed twice?  How on earth can the Turnbull Government reconcile its anti-global approach to corporate tax with its apparently pro-global vision in the innovation statement?

In the specific case of Google, the difference between innovation rhetoric and policy practicality is even more stark.  Under our archaic intellectual property laws, an Australian Google would be unlawful.  Google in the United States relies on a fair use defence in copyright legislation to copy the text of websites onto its servers for searching.  But we have no equivalent fair use provision to allow such uses.  Google would be legally vulnerable in Australia:  our copyright laws constitute "a significant and unacceptable level of business risk".

Yet the Australian Government has repeatedly rejected introducing a fair use exemption for copyright, despite the advocacy of the Government's own law reform commission.  Movie studios and record labels don't want fair use, and have lobbied hard to prevent it.

The economist Mancur Olson developed an influential and depressing theory of economic growth in his 1982 book The Rise and Decline of Nations.  In Mancur's view, innovative, entrepreneurial economies develop powerful special interests over time that can prevent the sort of regulatory reform that economies need to grow.

So ask yourself this.  Are there any major special interests who will be upset by what the Turnbull Government proposed in their innovation statement this week?  Not really.  Sadly, for all the Government's sound and light, very little has been "disrupted".

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Labor should back Turnbull to end book import restrictions

The sixth major review in three decades has again recommended restrictions on the importation of books be abolished.  The Harper competition review echoes earlier advice from the Productivity Commission, the Australian Competition & Consumer Commission and the ­Prices Surveillance Authority as far back as 1989.

The response from book publishers and their authors has been true to form.  For nakedly self-interested and absurd rhetoric, author Richard Flanagan takes the cake.  According to Flanagan, the abolition of parallel import restrictions on books is "ideological vandalism" that would consign "Australia's most successful cultural industry into a desert" and mean that "Australia as a nation will have had its tongue torn out".  He was joined by Peter Carey and Thomas Keneally in an open letter to claim Australia will again become "a colony of the mind" if the changes proceed.

In his submission to Harper, Michael Heyward of Text Publishing claimed "any proposal to dismantle territorial copyright is in fact a radical instrument of cultural engineering".

It was threats such as these that cowed the Rudd government in 2009, when ministers Emerson and Chris Bowen brought a proposal to cabinet to liberalise book imports following the Productivity Commission's unambiguous advice.  Labor shouldn't make the same mistake twice.  This time, Labor should side with consumers and back a reform that will deliver cheaper books for schools, students and the poor.

For the changes to proceed, the government will need to amend section 44A of the Copyright Act (1968).  Passage through parliament, without potentially messy negotiations with the crossbench, is assured only with Labor's support.

Despite being incorporated in the Copyright Act, parallel import restrictions do not protect intellectual property and are in fact a restriction on trade.  Parallel import restrictions prevent booksellers here from importing legal copies of a book from overseas if a local publisher has negotiated an agreement with the copyright holder.  The government in effect stops the importation of legal copies of a book to protect the profitability of local publishers and their international partners, at the expense of consumers.  The claims by publishers and authors boil down to one tenuous argument:  because parallel import restrictions allow publishers to make higher than usual profits from exclusively importing overseas titles, they are able to take more risks on new Australian authors and effectively cross-subsidise local books.

But there's no compelling evidence for this claim.

On the contrary, all the available evidence shows parallel import restrictions are an ineffective tool for promoting Australian ­literary content, with many unintended consequences.

The Productivity Commission found that, on average, consumers here paid 35 per cent more for books than their US counterparts.  The report also found the benefits of these higher prices often accrued to the printing industry and foreign copyright holders rather than Australian authors.

In 1998 the New Zealand government embraced this reform.  A review six years later for the government was glowing.  It found income earned by local publishers grew substantially, book prices fell below Australia's, and New Zealand-printed book exports nearly doubled.

The same year Australia enacted the same reform for CDs.  As a 2009 report by Tim Wilson showed, following liberalisation the number of recording artists and the amount they received from royalty payments grew strongly.  At the same time the average wholesale price of CDs fell by 32 per cent between 1999 and 2008, to the benefit of consumers.

In 2003 the government removed parallel import restrictions on software, with no adverse effects.  A partial deregulation of book imports in 1991 did speed up the importation of foreign titles but had no measurable effect on prices because it maintained restrictions on parallel importation if the book was made available in a reasonable timeframe.

The government has announced it will proceed with the changes, but only after yet another Productivity Commission inquiry, this time into intellectual property arrangements, due in August next year.  There's no reason for further delay.  No new report will contradict the six previous reviews that backed the change.

The government should also reconsider its opposition to equivalent changes in the importation of cars, again backed by the Harper review and the Productivity Commission.  Many of the arguments about liberalising book importation apply to cars.  The restrictions mainly benefit domestic car sellers at the expense of consumers.  When we had a car manufacturing industry this policy was a misguided attempt at protectionism.  It's even more ludicrous now that car manufacturing will cease and there are no domestic jobs to protect.

Consumers will continue to pay higher prices as long as the Coalition and Labor fail to reject special-interest pleading.

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Keep unions out of superannuation funds

The industry superannuation model is in dire need of reform.  The scandals that arise because of the conflicts created by union involvement in the financial services industry must be dealt with urgently.  Super governance legislation being debated in Parliament this week enforces at least one-third independent directors on superannuation funds.  This is an important step in the right direction.

Superannuation funds under management in Australia total more than $2 trillion.  Funds fall into one of five categories:  retail, corporate, industry, public sector and self-managed.  Industry super funds have a unique governance structure.  Industry fund boards are split between employer representatives and employee representatives.

The "equal representation" model is explicitly provided for under the Superannuation Industry (Supervision) Act 1993.  A significant problem with this model is that trade unions are taken as proxies for employees.  In 1992, when compulsory superannuation was introduced in Australia, that assumption made more sense than it does in 2015.

The Superannuation Guarantee (Administration) Act 1992 was given royal assent on August 21, 1992.  Australian Bureau of Statistics data show union membership has declined ever since.  In August 1992, 43 per cent of Australian employees were members of a trade union.  The latest figures on trade union membership show a sharp decline in that figure.  On the latest figures just 17 per cent of workers are members of a union — the lowest in recorded history.  This steady decline in union membership in Australia undermines the case for trade union officials to be appointed to the boards of industry super funds.

CONFLICT OF INTEREST

This quaint governance structure also creates conflict of interest for trade union board appointees.  In simple terms, trade union officials do not share interests with fund holders.

This reality has led to serious cases of maladministration.

The Health Services Union has had a bad run in recent years.  In one of the more recent scandals to befall industry super, in August the HSU super fund, HESTA, placed political activism before the financial interests of its funds members.  On August 18, HESTA announced that it would divest from Transfield Services because the company was in the business of running regional processing centres on Nauru and Manus Island.  The company's lucrative detention centre contracts, worth $1.2 billion, help it to achieve healthy returns to shareholders — which would be a relevant consideration if the fund was being run as a financial services firm rather than a trade union plaything.

IFM Investors (a fund manager wholly owned by industry super funds) was rocked by a secret report earlier in 2015 that blamed $700 million losses in its wholly owned subsidiary, Pacific Hydro, on failings in corporate governance.  The heavy losses reduced returns to members of the fund to a paltry 1.3 per cent for the 12 months to June 2015, which was well below the average 10.1 per cent average growth for infrastructure portfolios over the same period.

DONATION FROM SUPER FUND

And earlier in 2015, the trade union royal commission uncovered evidence that a slush fund had been created for Bill Shorten's campaign to become leader of the ALP.  Among a series of revelations, it was demonstrated that the largest donation to the fund had been received from the Labour Union Co-operative Retirement Fund, an industry super fund.

Institutional links between trade unions and industry super are inappropriate, and have contributed to serious cases of mismanagement.

This relationship must be addressed so that employees can invest in their retirement with confidence.  Parliament should pass the federal government's superannuation governance reforms, which help take the industry in the right direction.

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A nudge in the right direction? How we can harness behavioural economics

The Turnbull Government last week announced the formation of a behavioural economics unit inside the Department of Prime Minister & Cabinet.

The unit has a real title (Behavioural Economics Team of the Australian Government) but everyone is calling it the "nudge" unit, after the book Nudge, by Cass Sunstein and Richard Thaler.

The nudge unit could backfire badly or be incredibly good.  At its worst, it will provide new excuses for petty meddling and over-regulation.  At its best, it will lead to a fundamental rethink of the authority of government-appointed experts and the dangers of political power.

The idea behind behavioural economics is to bring psychology back into economics.  You've probably heard the caricature of economic thinking that it assumes all people are "rational".  At its simplest, behavioural economics tries to identify patterns and circumstances where our choices aren't perfect — when they are irrational or inconsistent.

For instance, we tend to rationalise our opinions, looking for evidence to confirm pre-existing views rather than threaten them.  We imagine we are more competent — better informed and more skilled — than we actually are.  We are loss averse:  we fear losing money or status more than we enjoy gaining them.

These quirks are, strictly speaking, cognitive errors.  They mean we make worse decisions than we would if we were meticulously rational, profit-maximising algorithms.

Behavioural economists overstate the novelty of these findings.  Pre-modern economists knew very well that people were motivated by more than money — what Adam Smith called the "passions".  But that sort of "humanomics" was lost when economics got all mathy.  Economists are groping back to the earlier, richer picture of human motives and flaws.  Behavioural economics is just one of the paths on the return.

All very interesting.  But Sunstein and Thaler argue the lesson from behavioural economics is that policymakers should alter the environment in which we make decisions in order to help us make better choices.  Not eliminate bad choices, as traditional nanny state paternalism suggests — just nudge us into making less bad ones.  Nudging involves such actions like rearranging choice hierarchies and changing defaults so that better choices are more prominent.

In practice, however, these "nudges" are either trivial, or tend to be more like shoves.  Policy inspired by behavioural economics is rarely able to find the sweet spot:  passive, respectful interventions that also offer significant benefits.

Take, for instance, one of the most famous apparent nudges.  In his Fairfax piece on Turnbull's nudge unit, Peter Martin cites the case of officials at Amsterdam's Schiphol airport who embossed images of little flies on the urinals.  Now men have targets of what to hit.  Spillage reportedly declined dramatically.

Yet, it is not clear how this is a manifestation of nudge theory or the application of behavioural economics to policy.  What systemic cognitive error is being fixed here?  As the economist Riccardo Rebonato points out, urinal flies are a "clever ruse", not a "major breakthrough in social engineering".  Yet it is regularly trotted out as the classic nudge.

The Australian Tax Office has its own nudge program.  Late taxpayers now receive a letter stating that, "When you pay this debt you will be joining the millions of Australians who pay their tax to support our country and Australia's way of life."  Because humans are social animals who like to conform, payment rates have apparently increased.

Other ATO nudges are less impressive.  Why, contra Peter Martin's article, is sending text message reminders to late taxpayers a behavioural economics trick?  Debt collection is one of the world's oldest industries.  Harassing debtors is not a new idea.

The reliance of nudge supporters on such trivial examples does not bode well for the usefulness of behavioural economics as a public policy project.  The Schiphol toilets example comes straight from Sunstein and Thaler themselves.  It's the first real-world example of a nudge in their book.

But there is something very important the Turnbull Government could do with its nudge unit.  The findings of behavioural economics should be applied to policymakers too.  Politicians, advisors, policy consultants, bureaucrats, regulators and legislative drafters are all as susceptible to loss aversion, seeking evidence that confirms their prejudice, choosing irrationally, and assuming unwarranted competence as anybody else.

The nudge unit shouldn't spend its time thinking of clever ways of government to regulate irrational citizens.  It should consider the implications of the fact that the people in government are just as irrational as the citizenry.

This is, admittedly, new intellectual ground.  The field of behavioural economics is a young one, and its significance for political behaviour has not yet been deeply considered.  An early attempt from 2011 argues that viewing regulators as irrational as those they regulate would suggest a "humbler approach" to regulation is necessary.

Governments would do fewer things if they were less confident in their own abilities.  But, then, overconfidence is one of the core cognitive errors.

Defending the nudge unit in parliament last week, Arthur Sinodinos said it would "test these concepts in a way that is consistent with our broader deregulationist philosophy".  But the nudge unit could be better than that.  Used creatively, behavioural economics could underpin the entire deregulation program.

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Churches need a sea change on welfare

Over the last 30 years, Australian Churches have regularly raised with the Government and with their parishioners the need to be generous with money.  After all, the argument goes, we are a wealthy country with a responsibility to be a good neighbour both to countries in our region, and locally, especially to those less fortunate than ourselves.

Sometimes, this is such a strongly applied principle that the very nature of the faith itself can be rarely moved beyond "Be generous to others as God has been generous to you."

Recently, there has been an increasing number of Australians who have come to question the entire premise.  Primarily, there is little evidence to suggest that giving local people welfare raises living standards in any significant measure, or that foreign aid does anything to develop poorer nations over the longer period.

A snapshot of our region actually highlights another more vital reality;  it is giving people work, developing local business, encouraging local entrepreneurs and giving the poor the means to create their own wealth that raises people out of poverty.

Australia has recently concluded a Free-Trade Agreement (KAFTA April 2014) with South Korea, a significant player on the world economic scene but one that only sixty years ago was largely devastated by the Korean War (1950-53).

It is not aid that has resulted in the South Korean transformation, it is a philosophy of economic freedom, a striving for excellence and an entrepreneurial class that has pursued wealth-generating enterprise.  Australians have also benefitted hugely from South Korean growth;  our trade is worth around 30 billion Australian Dollars, and our citizens benefit significantly from competitively priced cars, TVs, electronic and other electrical goods.

Yet South Korea, is only half the Korean story, North Korea is stringently opposed to economic freedom and ruthless in suppressing religious and political freedoms.  North Korean restrictions breed massive starvation and poverty, yet in South Korea free enterprise has raised fifty million from poverty to prosperity.  South Korea is but a tiny microcosm of the world, yet its basic principles hold true:  where people are given economic freedom, poor countries are more than capable of producing wealth.  Without this freedom North Korea waits.

It is at this point that Australia's churches have a vital role to play.  Currently, most discussions about poverty focus on the need for government intervention, the desirability of minimum wages and the necessity of increased welfare provisions.  Yet key components are missing from Church statements on poverty and welfare questions.

How can Australia encourage the entrepreneur?  How do we support the essential role of business in providing employment?  How can we develop and support those who wish to start their own business initiatives?  In short, Australia's churches have underplayed the pivotal and indispensible component in moving people out of poverty — business support, which leads to the provision of employment.

Part of the reason for such neglect appears to be a general mistrust of wealth creation in the capitalist system and a feeling that inequality and greed may result.

A focus on the exceptional wealth of a few individuals often attributes to them selfish motives or corrupt practices.  A more truthful analysis suggests that Australia's churches are also perceived as excessively wealthy and with secretive and self-protecting practices.  It is not just millionaires within the capitalist system who may be tempted by greed;  communists, politicians, trade unionists, footballers, sheiks and bishops can also show themselves to be fragile human beings!

Capitalist nations will always need the rule of law to ensure corruption is contained, but Samsung, Daewoo, Kia, Hyundai, LG and a host of others did not get to the point where they can employ thousands of people in both South Korea and Australia by corrupt and untrustworthy practices.  They are successful by providing at affordable prices quality goods that modern Australians are keen to use.

For Christianity, humanity is made in the image of God with a fundamental call to be co-creators in the human future.  Importantly, it is God's direction to be "fruitful and multiply" that drives us to a creativity beyond the confines of reproduction alone, to a full humanity with a vocation to keep safe our environment and to care and provide for each other.

Economics and work are not morally free environments;  the goods, services and employment they provide are essential to dignity, hope and a strong sense of self.  In the fullness of faith and human flourishing, work and enterprise are important components in the Christian life.

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Keep our liberty to defeat terrorism

In the wake of recent terrorism atrocities around the world, we should resist the temptation to dilute our liberties for the sake of all-out security.

The terror attacks in France and other locations, such as Lebanon and Mali, serve as a shockingly brutal reminder that even if the incidence of violence is generally in long-term decline, it is not yet vanquished.

Psychologist Steven Pinker established in his compelling book, The Better Angels of Our Nature, a reduction in interstate conflicts and homicide, accompanied by a more humane treatment of wrongdoers in the form of declining capital punishment and torture.

We are also often reminded that the probability of death as a result of a terrorist act remains small, far outweighed by more common causes of fatalities such as motor vehicle accidents, diseases, and other factors.

It is the observed historical trend towards pacifism itself which partly explains why contraindicating acts of terror, aside from their sheer mindlessness and scale of destruction, create such an affront to the senses of all decent-minded and respectful peoples.

Of course, the point here is not to diminish the idea that terrorism is a problem, and equally we shouldn't ignore the pain and suffering of those mourning for their perished relatives, friends, and acquaintances, wherever they may have been, in recent times.

The critical matter is how to address this issue in ways which embody a sense of proportionality in response, preventing those who seek to maim and kill innocents while not extinguishing fundamental liberties and rights which are conducive to happy, prosperous, and flourishing lives.

After all, during these times that clarion calls for greater security are magnified but which, if fulfilled, could risk liberties and in the process validate the terrorist's warped mindset that the building blocks of modernity are somehow disposable.

In response to the Paris attacks the Hollande government declared a state of emergency within France for the first time since World War II, and swiftly intensified its rounds of air strikes against Islamic State targets in Syria, but this is by no means the limits of what governments have done in response to terrorist threats.

A massive national security state has emerged in Australia, Europe, the United States and elsewhere since the September 11, 2001, attacks, and is characterised by extensive physical and online surveillance of practically everyone's daily movements, and the dilution of time-tested criminal and judicial standards consistent with the rule of law.

Significant amounts of blood and treasure have been lost in war campaigns in Afghanistan and Iraq with poorly defined policy objectives, and there is now some talk of Western troops making similar incursions into Syrian territory to fight a hardened, but nonetheless likely elusive, adversary.

It does remain an open question to what extent this breathtaking government expansion has suppressed potentially additional terrorist acts, but we shouldn't pretend that the measures described here have made us anything but less free.

A central issue in the policy debate about addressing terrorism, as in all other debates for that matter, is that coercive powers exercised by government should be proportionate to the extent of the problem being addressed and the policy objectives attempted to be achieved.

It is arguable if much stricter controls over movement, either internally or with respect to migration, or the mass monitoring of communications by all and sundry are the most efficient regulatory responses guaranteeing liberty for the vast bulk of us who have no interest but to go about our daily, law-abiding business.

Even during periods when perceptions of physical threats appear amplified, it remains essential to carefully scrutinise any policy proposal which empower some group of people, such as intelligence agents and law enforcement officials, to use force or exude controls over all others.

There is, thankfully, a certain civil libertarian strain of scepticism within the Australian community when it comes to the effectiveness of more stringent national security policies to repel terrorist threats, but scepticism could healthily extend towards other policy areas caught in the anti-terror dragnet.

Important aspects of economic freedom have come under threat over the past decade or so, with capital flows being impeded on grounds of countering money laundering and terrorism financing, while other activities such as aviation travel and merchandise trade are getting bogged down by repeated security checks.

We should guard carefully against restrictions upon economic activities in the Western world which impede opportunities for people, including migrants, to improve their own lives, and that of their loved ones, through upward income mobility.

And although it would be depressingly obvious that war-torn countries suffer from relatively small degrees of economic freedom, what is probably less understood in advanced countries is that the various nuances of Arabic socialism in the Middle East greatly depress economic opportunities by entrenching political patronage.

All this risks ever doing, sadly, is inflame tensions in what is already a volatile region.

Terrorist activity that aims to maim and kill innocent people eating at a restaurant, enjoying live music, staying in paid accommodation, or flying on an aircraft is an outrageous affront against the inherent rights of the individual to act, to choose, and to be themselves.

Within this, terrorism tries to stymie the fundamental liberal ethics that everybody should be free to do what they think is right for them, as long as this doesn't interfere with the equal rights of others.

Scholars such as Pinker illustrate that the historical, though uneven, retreat in violence is powerfully attributed to the growing toleration associated with the "emancipation sequence" of extending individual liberties and rights to ever more people.

It is a mistake to think the emancipation sequence is limited to Western societies, since the desire for economic and social liberalisation, in opposition to guises of authority sacred and profane, are demonstrably universal values shared by all people regardless of their background.

A determination to live the ideals of liberty each and every day is, ultimately, the best counter against the malcontents who want their own beliefs and values, by dint of violence, to hierarchically trump those held by other people.

In that spirit we should fearlessly speak our minds, walk and travel wherever we want to, indulge in our entertainments, love who we wish to love, and trade with whomever we wish to make a deal.

To put it in another way, the key to vanquishing terrorism and other forms of violence over the long haul will be through liberty itself, in all its glorious manifestations great and small.

Tony Abbott talks a good game ... when he's not in power

Now that he's a backbencher, Tony Abbott is making some good points about how to defeat Islamist terrorism.  When he delivered the annual Margaret Thatcher Lecture in London last month, he said two things were required to defeat terrorism.

The first was effective military action against its perpetrators.  The second was a renewed cultural self-confidence "to stand up for ourselves and for the universal decencies of mankind".

Unfortunately as prime minister, Abbott only ever acted on the first of those two things.  He enthusiastically deployed Australian military forces overseas while at the same time creating the apparatus of unprecedented government surveillance of the country's citizens.

But when it came to the battle of ideas, he vacated the field.  Freedom of speech is a fundamental tenet of liberal democracy.  It is what Islamists abhor.  Yet Abbott could never bring himself to fight to implement his election promise to repeal the legislation that makes it unlawful to insult or offend someone on the basis of their race.

Abbott's failure is also the Liberal Party's failure.  His approach is not unrepresentative of the vast bulk of Liberal MPs.  In August, when Abbott was still PM, Coalition MPs debated gay marriage for 5½ hours.  That's fine — to many people it is an important issue.

The absence of any similar sort of debate on freedom of speech reveals a great deal about the priorities of the current crop of Coalition parliamentarians.

The British author, former member of Hizb ut-Tahrir, and candidate for the Liberal Democrats at the last British election, Maajid Nawaz, puts it as, "... if liberty means anything at all, it is the right to express oneself without being killed for it.  It follows, therefore, that any liberal naturally concerned with a fair society must be the first to openly defend against the erosion of free speech, especially when deceptively done in the name of minority groups".

Over their party's history, many Liberals have been more comfortable advocating the resort to force in foreign lands in place of using the power of argument at home.

At the press conference to repudiate his election promise Abbott said his attempted reform was a "needless complication" in the government's relationship with the Muslim community.  Sadly, freedom of speech is not a "needless complication" for the Palestinian artist Ashraf Fayadh who last week was sentenced to death in Saudi Arabia for apostasy.

By privileging the views of Muslims the way he did, Abbott acknowledged they deserve to be treated differently from other Australians and thus abandoning the idea that all citizens should be equal under the law.

BATTLE OF IDEAS

Abbott's position was actually out of step with community attitudes.  A recent survey from the Pew Research Centre revealed 56 per cent of Australians believe people should be free to express an opinion, even if it's offensive to minority groups.

The current Prime Minister has "no plans ... at all" to make good on Abbott's broken election promise.

It's not just on freedom of speech that the Coalition is refusing to engage in the battle of ideas.  All federal and state Coalition education ministers support the content of the national curriculum.

Built as it is on the premise that all cultures are equal, the national curriculum is unlikely to convince marginalised youths from particular ethnic and religious communities that liberal democracy is better than the alternatives.

It's no surprise that a 2014 a poll by the Lowy Institute found only 42 per cent of Australians between 18 and 29 years of age believed "democracy is preferable to any other kind of government".

Over recent years, the political left in Australia has successfully intimidated the Liberal Party into not fighting "the culture wars".  Too many Liberal MPs have convinced themselves "the culture wars" are a sideshow of interest only to ideological zealots.

However, that's not what the left thinks.  Which is why the left puts so much effort into winning the culture wars.  In the end, culture is everything, and in any case "the culture wars" is simply another term for "the battle of ideas".

In the light of what is happening around the world, it's relevant to ask who in today's Liberal Party is committed to winning that battle.

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Why politicians ride the wave of anti-bank populism

Australia's banks are launching a new campaign to educate policymakers and regulators about the ins and outs of their business, the Australian Financial Review reported on Monday.

The banks feel defensive since the debate over the Future of Financial Advice (FOFA) reforms, in which they were depicted as semi-corrupt fraudsters preying on the elderly and uninformed, and the recent outrage over mortgage interest rate rises.

Good luck to them.  This seems a more productive use of their public relations dollar than campaigns on climate change.

But if this campaign breaks the deep connection between Australian politics and anti-bank populism, it will be the first to do so in 12 decades.

The banking crisis of 1893 set in train more than a century of populist political demagoguery about banking.

Our modern Labor mythologists sometimes skip over the comically propagandistic "money power" doctrine that formed such a large part of Labor politics in the first half of the 20th century.  According to money power ideologists, a cabal of bankers — British bankers, Jewish bankers — owned every major industry and asset and controlled Australian politics.

The money power doctrine was not an obscure theory held only at the margins of Australian politics.

Jack Lang, the former NSW premier and Paul Keating's mentor, was a money power conspiracy theorist.

John Curtin's mentor, the Scullin government minister Frank Anstey, was the author of an anti-banking, anti-Semitic book called the Kingdom of Shylock (have a look at the digitised version, if you want to be stunned at how overtly racist Australian labour thought it could be).

Driven by this sort of thinking, in 1945 Curtin government introduced burdensome and harmful regulatory controls on Australian banking that slowed economic development and pushed ordinary borrowers into the shadow banking sector for decades.

While it is true that some economists excited by the possibilities of the new Keynesian economic thinking had urged Labor to introduce banking restrictions, it was the crude money power populism that led to the most harmful of those controls:  caps on interest rates and an outright ban on foreign banks in Australia.

Anti-bank hostility even played a role in the deregulation of banking four decades later.  When Keating ended the ban on foreign banks in 1985, he did so because he believed it would undercut the "drones" of the Australian banking industry.  The banks had been made lazy and powerful because of the protection his Labor predecessors had granted to them.

When the Reserve Bank decided to break the back of inflation in the early 1990s, exacerbating on one of the worst economic downturns in Australian history, Keating directed popular anger towards the banks.

A 1991 inquiry into banks — A Pocket Full of Change — encouraged people to send in their complaints with bank services, interest rates, customer relations.  Anything they could think of.  Nearly a 1000 submissions and complaints were sent in.  This distracted attention from the government decisions that caused the crisis in the first place.

A Pocket Full of Change is largely forgotten now.  But in retrospect it was very significant.

Our semi-regular freak-out about whether banks are adequately passing on Reserve Bank interest rate cuts can be traced back to Keating's decision to recast old money power rhetoric in a new guise:  to present banks and bankers as uniquely profit hungry and exploitative, and to do so as cover for government policy.

Hence the recent kerfuffle about the major banks' decision to increase mortgage rates independent of the Reserve Bank.

The Reserve Bank's cash rate has been held steady at 2 per cent since May 2015.  But in October the big four banks decided to increase the interest rates they charged on variable mortgages.  Westpac went first, and the rest followed.  Bill Shorten thinks that this increase was "just corporate greed".

But the rate increases are explicitly in response to a policy decision by the Australian Prudential Regulatory Authority that the banks should hold more capital against mortgages.  Of course the banks were going to pass the cost of that regulatory requirement onto consumers.

Have the banks raised rates more than they need to, as Scott Morrison tried to argue?  Given the likelihood of even more stringent capital requirements in the near future, it's hard to blame the banks for being cautious.

In the debate over the FOFA reforms much was made of the need to protect uninformed investors from predatory financial advisors.  It's true that many people don't understand the world of finance and banking.

But this doesn't just make them vulnerable to unscrupulous financiers.  It also makes them vulnerable to unscrupulous politicians who want to obscure the consequences of their own policy decisions.

If the banks want to change that dynamic, they're going to have to shift the weight of a century of Australian history.

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