Make-up solutions wear thin

Blaming mining and the high Australian dollar for manufacturing's recent woes risks missing the point of what is really needed to get the troubled sector back on its feet.

With BlueScope Steel announcing that 1000 jobs will be cut from its NSW and Victorian operations, politicians, industry groups and unionists have proposed strategies to stem job losses.

But much of what has been proposed so far will hinder, rather than promote, the national economic interest.

Leading figures within the Left faction of the Labor Government have called on mining magnates to direct more of their capital towards manufacturing, or, in other words, do less mining.

If miners were to do this, however, Australia's flagging productivity performance would worsen, since the productivity of manufacturers is considerably less than that of miners.

This would mean the longer-term living standards for all Australians would decline.

For that matter, a shift in economic activity from mining to manufacturing would impede manufacturers, such as steel makers and services industries with close links to mining companies.

Others have called for governments to buy more products manufactured locally to offset reductions in demand for Australian manufactures overseas because of the high dollar.

But taxpayers would be worse off if governments were forced to buy more expensive, Australian manufactured goods rather than overseas alternatives.

Another option being considered, but would also be wasteful, is boosting the profile of Buy Australian, taxpayer-funded campaigns promoting local manufacturing sales.

Perhaps the most audacious policy suggestion has come from Prime Minister Julia Gillard, who stated the carbon dioxide tax will assure a ''bright future'' for manufacturing.

The idea behind this claim is manufacturers will build renewable technologies, such as windmills and solar panels, once Australia imposes a tax penalty on coal-fired electricity generation.

But this ignores the fact that manufacturing capital is highly specialised and cannot be shifted from one form of production into another as if by magic.

The replacement of cheap, coal-fired electricity by costly renewable energies will only dilute the competitiveness of manufacturers and other businesses reliant on energy to produce goods and services.

Governments should instead promote deregulation, tax reductions and other reforms, encouraging manufacturers to discover new sources of value at home and abroad.

The creeping growth in regulation in recent years has imposed significant burdens upon manufacturers doing business in domestic and international markets.

In particular, labour market re-regulation has built up input cost pressures for manufacturers as wages growth increasingly outstrips productivity performance at the firm level.

The threat of new federal taxes has not helped manufacturing businesses, either, as consumers hold tight to their wallets in fear of depredations to come.

A reformist policy approach would be more worthwhile than a throwback to pre-1970s protectionism.

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Europe's doomed euro

Few people predicted the global financial crisis.  Everybody predicted the crisis of the eurozone.

Read almost any critique of the euro from just a few years ago and you'll be struck by their foresight.  The euro will encourage government profligacy -- tick.  The euro will be extremely vulnerable to a housing bubble -- tick.  It will rely on the willingness of stronger economies to bail out weak ones -- tick.  And it will do nothing to buffer Europe from an American downturn -- tick.

These objections were raised by everyone from Paul Krugman to Milton Friedman.

So how on Earth did Europe get its doomed euro -- an idea which was viewed with deep scepticism if not outright hostility by some of the finest economic minds of the age?

As Romano Prodi, the European president said in 2002, ''The introduction of the euro is not economic at all.  It is a completely political step''.

Europe switched its currency for geopolitical purposes and got burned.

In his Euro On Trial (written well before the financial crisis) the economic historian Brendan Brown argues that the European monetary union was a power play between French policymakers and German monetary authorities.  Germany is Europe's largest economy and the Deutschmark was its strongest currency.  The influence of the Deutschmark was seen as a threat to both France's strategic interests and its moral leadership of Europe.  French politicians worried that bolstered by monetary strength Germany could act independently of Europe, forging a unique relationship with the United States and even the Soviet Union.

So for the French, a common currency offered glue with which Germany could be stuck in Europe.  German foreign policy interests could be overcome by French ones.

Of course, the Germans knew this.  French politicians actively raised the spectre of German nationalism when campaigning for the common currency.  But these days the only country which fears German power more than France is Germany.  For historical reasons, Berlin wanted a deeper European Union.  If that meant sacrificing the Deutschmark for French support, so be it.

In adopting the euro, both France and Germany were subordinating economic policy to foreign policy, each trying to bind future German politicians.

The economist Philipp Bagus also argues that prudence of the Bundesbank, the German central bank which dominated Europe, restrained other European countries from excessive spending.  This discipline was, needless to say, unwanted.  Get rid of the Bundesbank, and the spigots of government largess could open freely.

No wonder that in 2004 the Czech president Vaclav Klaus argued that the euro creates a perfect environment for fiscal irresponsibility.

Certainly, there was an intellectual case presented for monetary union.  The theory of optimal currency areas suggests that, at the very least, the size of some currency jurisdictions are better than others.

Then there are the intuitive benefits of currency consolidation.  Single currencies reduce the costs of trade, at least a little bit.  One currency makes it easy to compare prices across the continent.

But there was no reason to suggest that Europe was such an optimal currency area.  (Europe's economies are, obviously, different.)  Even if it was, which countries opted in and opted out of the monetary union was, again, dictated by political considerations, not economic theory.

And the mild convenience of being able to compare prices between Barcelona and Berlin without using a currency converter seems to be a very mild benefit considering the costs of monetary union.

One of the more reasonable polemics in support of the European project was by the British author Mark Leonard -- Why Europe Will Run The 21st Century.  Social democratic Europe would retake world leadership from liberal democratic United States.  And in Leonard's view, a common currency would be a core foundation in Europe's revitalisation -- luring the centre of global finance back across the Atlantic.

Leonard's book was published in 2005.  How times have changed.

In 2011, we can read in the Guardian that ''the monetary union, unlike the EU itself, is an unambiguously right-wing project''.

It's hard to see why.  The European ideal is a long way from its classical liberal origins in a free trade and migration alliance.  The 1957 Treaty of Rome set up a simple union of free movement in goods, services, capital, and people.

That early classical liberal vision is very different from the vision of Europe which informed the euro -- one in which not only borders are being eliminated but policy differences as well.  The monetary union sought to eliminate inter-state competition for the most stable currency.  In the Europe of the 21st century, taxes are being harmonised.  Regulations are being increased.

The Spanish prime minister said in 1998 that ''The single currency is a decision of an essentially political character ... We need a united Europe.''

Unfortunately, the only people who have been surprised by the euro's failure have been the politicians who thought monetary policy should be a weapon for international diplomacy.

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Flexibility will keep us afloat in economic storm

Committing to a floating currency was one of the most important reforms of the Hawke-Keating era.  Since that time a flexible currency has largely shielded the economy from various adverse international events.

Now the dollar is high and somewhat volatile.  It is being blamed for various economic ills;  some believe that Australia suffers from Dutch disease.  Yesterday we heard that 1000 jobs had been lost.  Last week it was 400.  There will be more to come.  It appears that manufacturing is being hollowed out while mining is prospering.

Although the emphasis is on manufacturing, job losses could occur across several sectors.  Tourism and tertiary education, for example, are exposed to the dollar.  This should be particularly troubling for the government.  Treasury modelling showing the benign impact of the carbon tax is predicated on those industries expanding even in the face of a high dollar.

The fact of the matter is Australia faces several economic challenges.  Not all of these are related to the dollar.

Western Europe is locked into a sovereign debt crisis exacerbated by the single currency, while the US largely faces a political crisis over the future of fiscal policy.  It certainly looks as if the US will fall back into recession and the fallout will affect Australia to some extent.

All industries and business models that have high overheads are particularly challenged by the internet.  This creative destruction would occur anyway but has come at a particularly bad time.

Australia itself faces a very different set of macro-economic challenges.  Low growth combined with high inflation and rising unemployment means that Australia has a stagflation problem.  This is more or less a direct consequence of the Keynesian fiscal policies that have been pursued since the financial crisis.

With bad news on the international and domestic fronts, there is good reason for business and consumer confidence to be low.  In this environment, the high Aussie dollar makes pre-existing problems worse.  Australian real interest rates are high relative to the rest of the world, which means our dollar is going to be high too.  This is an additional burden on business;  it is not the only burden or even the primary burden.

The government should avoid those policies that are likely to provide short-term relief from exchange rate volatility at the expense of long-term economic prosperity.  Schemes to prop up dying industries will simply postpone the pain associated with economic change.

The notion that mining firms should invest in manufacturing to provide employment would result in long-term economic losses that would undermine the mining industry.  It is really just an additional form of taxation.

Other proposals usually include building up sovereign wealth funds.  The best sovereign wealth fund the nation could have is a budget in surplus.

The best defence against economic turmoil is a flexible and prosperous economy.  A generation of economic reform and a budget surplus worked to shield Australia against the effects of the GFC.  The economy survived despite the massive fiscal stimulus, not because of it.  We are not as well-placed to survive another economic crisis.

It is well-recognised that productivity growth has been disappointing during the past decade.  It turns out those policies to address poor productivity will also assist business dealing with the high dollar.

Those businesses that are flexible, innovative and entrepreneurial will better handle a period of high and volatile exchange rates.  The impediments to entrepreneurship are well known.  Excessive government intervention and too much spending financed by too much taxation act as a drag on the economy.

Kevin Rudd used ''This irresponsible spending must stop'' as a slogan, yet it is now an economic imperative.

Debt and deficits crowd out private economic enterprise.  This is always true, even if an economy is not at full employment.

Excessive labour market regulation makes it difficult to employ workers at a value-adding wage.  Although Work Choices was a massive over-reach, the present government has swung the pendulum too far in the other direction.  Not nearly enough has been done to reduce red tape.  Corporate tax rates remain far too high while payroll tax is a tax on employment.

Schemes to introduce new mining taxes and complex derivative instruments on greenhouse gases driving up energy prices are exactly wrong given our economic circumstances.

The events in Europe and the US are beyond our control.  Excessive government intervention, too much spending and taxes that are too high, however, are within our control.  Maximising the flexibility of our economy and economic institutions will ensure that the economy is able to weather storms beyond our control while dealing with an exchange that is likely to be high and volatile during the next decade or so.

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Government drags retail industry

Last month's Productivity Commission report on the retail industry came when the industry is under increasing pressure.  Sales, especially household goods and clothing, are sharply down over the past six months.

This tailspin in demand stems from economic uncertainties created by perilous global economic conditions.  But these have been exacerbated by the Federal Government introducing wealth-sapping avalanches of costs and regulations that reduce efficiency and undermine the ability of business to operate profitably.

Economy-wide, these include the carbon tax, government debt-financed spending on school halls and green power, a $44 billion white elephant telecommunications network, industrial relations measures that restore workplace control to unions, taking water off irrigators, preventing cattle exports to Indonesia and yet another forest accord to stifle Tasmanian business.

Instead of oiling the engine of commerce, the Government is throwing buckets of sand into it.  Productivity is lagging across the economy and jobs are being shed.

Australian retailing is ill-equipped to deal with consequent lacklustre demand.  The PC report shows this is because regulations have forced up labour costs, increased rents and disadvantaged Australian shops by exempting online sales from the GST and import duties.

Labour accounts for 70 per cent of retail costs and labour productivity in Australian retailing is 20 to 30 per cent lower than in the US and France.  Our productivity improved once shopping hours were largely deregulated.  But regulations covering penalty rates, minimum hours and the use of casuals are reducing gains.

Shops also face excessive rental costs as a result of planning regulations.  These barriers to shopping centre developments thereby suppressing competition, which is crucial to keeping prices low.  At the least, new centres require lengthy planning negotiations.  And, once a shopping centre has been approved, its owners lobby aggressively to prevent rivals.

The release of surplus Commonwealth airport land allowed a valuable injection of new retail competition since the land was not subject to state planning restraints and was well served by roads.  This brought the development of ''factory outlet'' centres but entrants such as Aldi and Woolies' Masters hardware are finding costly barriers to rolling out new stores.

Unquestionably the growth of online sales is a major factor in the retail sector's malaise.  Although online sales account for only 8 per cent of goods, this share is concentrated in clothing and footwear and is rising.

Online purchases are mainly exempt from import duties and GST, an arrangement the Financial Services Minister, Bill Shorten, wants to retain in order to avoid collection costs.  This reason offers cold comfort for local businesses.  It also makes little sense since Amazon has shown the way to providing goods that fully meet the tax laws of the 50 countries it supplies.

Online sales will doubtless increase but local retailers should not face discriminatory taxes on their goods.

In addition, deregulation of labour is essential to allow shops the flexibility to meet customers' needs and costly planning restraints must be eased.

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I stand for freedom

I stand for freedom, even when it might be a bit distressing.  I stand for liberty, even when it might be a tad uncomfortable.  And I firmly, resolutely and unequivocally stand against the censorious, anti-democratic instinct that resides at the core of the Commonwealth Racial Hatred Act 1995.

The Racial Hatred Act seeks to establish a government-enforced regime of political correctness.  It looks to mandate an idyllic Australia where never is heard a racially discouraging word and ethnic sensibilities are never offended.

But like most Utopian visions, the Act has created less dream and more nightmare where freedom of expression is concerned.

I believe the Racial Hatred Act should be repealed.  And my argument to that effect is best expressed through the alliterative device of what I call the Four ''P''s:  PRINCIPLE, POLITICAL, PERSONAL AND PRACTICAL.

Principle

My first ''P'' denotes the Principle that free speech is the essential prerequisite for all other liberties.  Without the unconstrained exchange of ideas there can be neither forthright political debate nor a free press.  In such a circumstance, government of, by and for the people will surely perish from this earth.

By definition, racial hatred legislation invokes the coercive machinery of the state to ban speech because some people deem its content to be offensive.  The long arm of government is employed to stifle opinions considered politically incorrect by the dominant culture of the day.  This is a recipe, not for democracy, but for tyranny.

In any truly open society, it's inevitable that some people will sometimes find something offensive during the rough-and-tumble of political debate.  But that's the price we pay to live in freedom.  A thought police force of any form is fundamentally inimical both to freedom of inquiry and liberty of expression.  The only thing the Racial Hatred Act has accomplished is to invest the petulant and the paranoid with the power of the censor's red pen.

But many of our bien pensants are at peace with Australia's censorship apparatus because they think it is solely directed against Holocaust-deniers and the like.  And Nazis are easy to despise.

But none of us has 20/20 foresight and no-one can predict what shape our political landscape will take in years to come.  Once the censorship of unpopular views becomes legitimated, there is no way of knowing how that power will be used.  And there's nothing to stop those very same measures being deployed to stifle free speech on a topic near and dear to your heart.  After all, the precedent of quashing expression on the basis of its content has already been established.

Note the comments attached to my weekly columns on the ABC's Drum opinion site.  Many readers write to demand my expulsion from the ABC because I dare express conservative views or opinions.  And those are some of my more moderate critics.  In this respect it's useful to recall that the oldest law of politics is that of unintended consequences.  Be careful what you wish for because you might end up getting it.

If there are to be any restrictions on speech, they must be narrowly tailored and intimately linked to unlawful violence.  Only in instances where there is a direct causal link between the spoken word and imminent lawless action can censorship become defensible.

Freedom of expression has real value only if we are willing to guarantee it to those whose opinions we despise.  If Holocaust-deniers wish to make horse's arses out of themselves by peddling paranoid theories to the lunatic fringe, so be it.  The cost of shutting their mouths is simply too high in terms of the anti-democratic precedent it establishes.  Liberty is menaced far more by a coercive regime of state-enforced political censorship than by the mad ravings of a neo-Nazi nutter.

Political

And that brings me to my second ''P'' -- the Political.  Those on the other side of argument often invoke the example of Nazism to exemplify the dangers of unrestrained speech.  But I see that as an insult, both to Australian democracy and to the English common law tradition from which it sprang.

I'm a firm believer in the concept of Anglo-centric exceptionalism.  And I can almost forgive the Poms for taking the Ashes because they bequeathed us a robust set of democratic values that are immune to the natterings of racist fools.

The fact that Weimar Germany had exceedingly harsh anti-hate speech laws on the books did nothing to prevent the rise of the Third Reich.  In his study of the Weimar Republic, historian Paul Bookbinder noted:  ''Anti-Socialist or anti-Semitic violence, or for that matter inflammatory speech or writing, was dealt with harshly by the police and the judiciary.''  And we all know how that turned out in the end.

Besides, 21st Century Australia has almost nothing in common with early 20th Century Weimar Germany.  We enjoy a deeply engrained culture of liberty that draws on an English common law tradition stretching all the way back to Runnymead in 1215.  Anyone who puts their faith in hate crimes legislation is placing a vote of no confidence in Australian democracy.  And that I reject.

Personal

My third ''P'' is the Personal -- as in my personal resentment against these racial hatred laws that implicitly seek to infantilise me.

Are we really such tender flowers that the aegis of the state is required to defend us from the blather of the ignorant and the malign?  Are we really so uncertain about the righteousness of our cause as to not be able to defend ourselves in the arena of public debate?

Throughout my life I've suffered a good many slings and arrows of anti-Semitic abuse.  But no matter.  The protective regime of the government's human rights apparatus remains unwanted and unappreciated by me.  I'll stand on my own feet and defend myself in the arena of public debate, thank you very much.  My rights are far more endangered by censorious judges and bureaucrats than by the historically illiterate gibberish coming from Hitler-groupies or anti-Zionists.

Practical

The fourth and final ''P'' focuses on the realm of the Practical.  I object to political censorship laws because they are self-defeatingly stupid.  For the sake of protecting us from inconsequential irritants, they deliver us into the hands of genuine threats to freedom.

Look at those who have been prosecuted under similar laws in other Anglophone countries.  In Canada, magazine editor Ezra Levant was hauled before a human rights kangaroo court because he dared to publish the (in)famous Danish Mohammad cartoons.  Conservative writer Mark Steyn was also subjected to prosecution by radical Muslims who didn't like what he wrote about Jihadi Islam.

And here at home, Herald Sun columnist Andrew Bolt has been hauled before a federal court on a racial hatred charge.  The plaintiffs in the Bolt case are seeking to constrict freedom of speech in the name of state-mandated racial orthodoxy.  They demand, not only an apology from Bolt, but also a court order that would prevent him from ever expressing similar views.  They want to muzzle him for life.

Consider that for a moment.  The plaintiffs seek to exploit the coercive machinery of the state to impose a permanent ban on words that they find personally upsetting.  How totalitarian is that?

And even if Bolt ultimately wins he loses.  Think of the massive legal fees he's incurred.  Think of the public humiliation of having to defend himself from spurious allegations of bigotry.

And so all of us lose a piece of our democracy, as well.  The Bolt trial represents the soft totalitarianism of political correctness.  How many writers will risk similar trials and tribulations just to take on a contentious topic that might rouse the ire of particular ethnic or racial group?  The dampening effect of this case on free expression is unavoidable and undeniable.

It's time for us to think again.  It's time for our community to reconsider its position on political censorship.  It's time these pernicious laws were repealed.

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Ownership and exclusion: a lesson from the UK riots

Many commentators correctly attribute the UK rioting to decades of misgoverning and miseducating youth.  Contributing to this has been the breakdown of family discipline, the replacement of working fathers as role models and the creation of a culture of entitlement.

Adding poison to the brew is government appointments and procedures that deflect police forces away from law enforcement into institutions, that ''reach out'' rather than prevent wrong-doing, seek to understand miscreants rather than enforce the law, and try to contain disturbances rather than prevent them.  The soft sociological and managerial ethos that has undermined policing in Britain is all too familiar here in Australia.

But there are other factors at work.  This is especially evident given the nature of those arrested.  Many turn out not to be part of some jobless underclass but relatively affluent working people, some in their late 20s and early 30s.

And the rioters are black and white -- though hardly any Indians or other Asians.  One reason for this is Asian family background, bringing values based on self-improvement by work rather than theft, reinforced by religious teachings, especially in the case of Muslims, the only group where a large majority are religious practitioners.

While the complexion of the rioters will be subject to considerable analysis over future months, we can be confident about one hypothesis -- few if any of the rioters own their own homes.  This is because nothing engenders respect for property and others' possessions more than people having a personal stake in property themselves.  Property ownership, and for most of us this means home ownership, is the key to creating a law-abiding society.  Where riots in England take place outside of areas other than those hosting electrical and sporting goods, they take place on council estates, in areas where people rent.  If in owner-occupied housing areas, the rioters are outsiders.

British families owning their own homes rose steadily up to the early 1980s, reaching 75 per cent.  The figure has since fallen back to 70 per cent.  More critically, the ability to get on the house ownership ladder has become increasingly difficult for large numbers of young people.  Demographia reports that the average house in England now costs over five times the average family's income.  That's up from three times the average family's income 25 years ago.  In London and other major cities the cost is much higher than this.

Countless reports in England, Australia and the US demonstrate planning restraints over land use are the cause of houses becoming expensive.  Governments do their level best to impose additional costs on house builders, especially through energy saving requirements, but the building industry is highly competitive and finds ways of largely offsetting these.  However, when government regulations constrain the amount of land that can be built upon this engenders unavoidable costs.

Ironically, after decades of acquiescing in creating shortages for new home building the UK Government last month finally expressed a determination to do something about freeing up more land for building.  That was met by the usual howls of protest from incumbent home owners wanting to avoid having ''riff raff'' moving close to them, barking on about preservation of villages and anxious to see a continued shortage of available properties to boost their own house values.  But these self-centred blockages of new housing stock are contributing to creating an alienation of many people from mainstream values.

Not being a participant in a home-owning democracy provides no excuse for trashing and thieving.  But it is clear that there is a vast number of young people who have decided they are excluded and have become eager participants in hooliganism.  Policies of tolerating misdemeanours and acquiescing in slack educational supervision will clearly be re-thought in the UK.  But so also must be the policies creating barriers that shut people out of home ownership.

There are lessons in the UK developments for Australia.  Not the least concerns home ownership.  Planning restraints in Australia have created home costs that are six times family incomes (nine times family incomes in Sydney).  House prices in Australia are therefore even higher than in England and urgent steps need to be taken to reform the planning policies that have caused this.

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Carbon pricing

THE defence by the Climate Institute's John Connor (''Many ways to calculate China's carbon price'', Commentary, 17/8) of the government-funded ''Putting a Price Tag on Pollution'' report doesn't hold water.  I do not dispute that China is making modest efforts to curb its emissions growth and that there are different ways of calculating the implicit price of cutting emissions.  What matters is whether the calculations of the cost of doing so are comparable.

FOI documents of Department of Climate Change feedback during the editing process of the report question why inconsistent methodologies were used to compare the carbon prices for Australia and China.

The inconsistency justified the authors including in the final report a note in the table for Australia's implicit carbon price that a different methodology was used for the NSW Greenhouse Gas scheme calculations.  They did so for a reason.  It allowed them to justify using a higher Chinese carbon price of $8.08 per tonne of greenhouse gas emissions, than if they had used the same methodology, which would have delivered a price of $1.78 compared to Australia's $2.34.

One calculation says China is ahead of Australia, the other says the reverse and changes whether Climate Change Minister Greg Combet could use the report's conclusions as part of its political narrative to justify the introduction of a carbon tax.  It's now clear that there are questions about the report's conclusions.  They were first raised by the government, not myself.  And with these concerns should come questions about when Combet learned of them, and if not, why not?

A chilling climate on FOI

It's not vexatious, it's exercising our democratic rights

WHEN it comes to the business of government, too much information is barely enough.  So I struggle to see how the Department of Climate Change could consider myself a vexatious Freedom of Information applicant, since in my book there can never be anything vexatious about exercising the public's right to know.  No ifs, no buts.  Dealing with my 750 requests is no doubt time consuming, but guess what?  When bureaucrats complain about being held to account the rest of us start wondering what they have got to hide.  Journalists and researchers would have every reason to drop a few hundred more FOI requests onto their desks.

I have, very reasonably, agreed not to lodge more requests while the bureaucrats tackle the backlog.  I hope this does not give them an excuse to dawdle.  The department estimates it takes 39 hours for an officer to process one request, which begs the question of whether our public servants need a dose of productivity training.  And, anyway, the in-tray in Canberra could be cleared in a moment if the government adopted a transparent approach to its carbon tax and simply released the documents now under wraps.  It is the secrecy of governments, not the ill will of its citizens, that creates a need for FOI requests.  Indeed, our system of FOI is what sets us apart from undemocratic regimes:  it is a precious right that has been hard-won and it must be protected.

Then again, the Gillard government would seem to have a lot to protect if a recent FOI request is anything to go by.  I reported on Monday that documents I obtained under FOI show the department itself warned Climate Change Minister Greg Combet that a draft report over-estimated a crucial figure, which he nonetheless later used several times to push the carbon tax.  It is perhaps not surprising that staffers are battling to process my other requests for the truth behind one of the most radical policies ever seen here.

Transparency is about putting as much information in the public domain as possible, not about limiting the flow.  The WikiLeaks exercise shows that volume alone does not make a free and open society.  But it demonstrated citizens can never have too much information about the operations of governments.  To suggest otherwise abrogates the compact between the state and the people.

In reality China's carbon tax is far lower than ours

Tomorrow the federal parliament may debate the one-year anniversary of Julia Gillard's haunting broken promise that ''there will be no carbon tax under the government I lead'' but they shouldn't ignore the misinformation the government has knowingly promoted since.

Last August the Department of Climate Change partially funded London-based consultancy Vivid Economics to research the implicit carbon tax impact of regulations and government programs on the Australian, US, British, Chinese, Japanese and South Korean electricity sectors.

In particular the report highlighted that China's implicit carbon tax rate was $8.08 per tonne of emissions.  And the major contribution was the $7.58 per tonne from the Large Substitute for Small, or LSS, program that closed small inefficient coal-fired power stations and replaced them with larger, more efficient ones.

By comparison Australia's effective carbon tax was only $2.34.

When the report was released it was promoted by Climate Change Minister Greg Combet as demonstrating ''China [has] effective carbon prices well in excess of Australia's so the myth that Australia is acting ahead of the world is just that -- a myth''.

What the government didn't disclose at the time is that they knew their argument was bunk.

Documents released under Freedom of Information show that departmental feedback on a draft to the report's commissioners, the Climate Institute, queried if the method for calculating China's carbon tax rate was the ''the correct approach''.

In the note the department twice recalculated the LSS policies' carbon tax effect with different methodologies that would be ''consistent with that used to calculated (sic) measures such as the NSW GGAS scheme in the Australian chapter''.

In doing so they concluded the LSS policy imposed a comparable effective tax of $1.28 not the $7.58 in the final report.

If this comparable number was included in the final report Australia's implicit carbon tax rate would still be $2.34, but China's would be $1.78, showing Australia already had a much higher implicit carbon tax rate on the electricity sector.

After that note the available FoI paper trail ends for why the data was not corrected and whether the department briefed the Climate Change Minister about the correction.  And if not, why not?

Vivid Economics didn't include the departmental feedback in its final report and went ahead with the higher Chinese number while acknowledging discreetly the non-comparability of the implicit carbon tax rates in a way that is only obvious with the released FoI documents and hindsight.

Even without the correction it was clear there were other issues.  Former Keating government minister Gary Johns wrote on these pages ''the Chinese must think Gillard a fool, [Vivid] wildly overstate China's and wildly understate Australia's implicit carbon price''.

But it wasn't until the Productivity Commission published its carbon emissions in key economies report showing China lagged Australia's emissions reduction efforts and that ''no country currently imposes an economy-wide tax'' that the government's case was punctured.

But the government knew it all along, stayed mum and perpetuated the idea it was otherwise.

Sadly, it's part of a pattern of questionable honesty the government has indulged to justify its carbon tax.

The Treasury modelling of the economic impact of the carbon tax is based on a rate of $20 per tonne of emissions and not the actual $23 imposed, as is the compensation package.

But the $3 per tonne difference is enough to eliminate the government's overcompensation of $10.40 annually, when a household's emissions profile reaches just 4 tonnes ($3 x 4 tonnes = $12).

To put it into perspective multiplying the size of the average Australian household by the average emissions produced per Australian amounts to approximately 52 tonnes a year, easily wiping out any overcompensation even when half of the largest emitters aren't being directly taxed.

Similarly the modelling is based on the wildly implausible assumption that the rest of the developed world is imposing the equivalent of Australia's carbon tax price by the middle of this decade.  In isolation the assumption is spectacular, combined with the December 2012 expiration of the Kyoto Protocol, it's absurd.

Before voting on this legislation the parliament needs to properly investigate the carbon tax facts and foster an honest public debate.  Not rely on the government's ongoing preparedness to trade on the information advantage it has over the public.

Abbott lines up with left-wing union on protectionism

The Coalition's position on anti-dumping laws is part of a worrying trend.

Rarely does the federal opposition line up with the Australian Workers' Union on economic policy but that's where they are on free trade.  Unfortunately, the nominally market-orientated Coalition is playing fast and loose with one of its core philosophies.

This matters because as the world faces a second round of financial crises, there's been a surge in protectionism, and it's a fair bet Tony Abbott will be the next prime minister.

In his ''forgotten families'' speech in May, the Opposition Leader made tougher anti-dumping laws a centrepiece of his economic policy.

These laws purport to prevent foreign imports being ''dumped'' so cheaply in domestic markets they threaten the existence of Australian companies.  The theory suggests that the foreigners will jack up prices once local companies have gone out of business.

But it's a theory that everybody from the Productivity Commission to Nobel-winning anti-free market economist Joseph Stiglitz thinks is nonsense.  Pursuing that pricing strategy would be expensive and risky.  It's hard to find an example of any company ever having done so successfully.

Anti-dumping laws are pure protectionism.  They benefit a few companies at the expense of consumers.  No surprise that the AWU has been campaigning to beef up anti-dumping laws for months.  But a big surprise that a Liberal leader has been as well.

The government made some changes to the anti-dumping regime in June.  The AWU was satisfied.  The Coalition was not.  Labor, they said, had ''thumbed its nose'' at manufacturers.  That makes the federal opposition less supportive of free trade in this case than the union movement and the government.  It could be dismissed as an anomaly if it wasn't so clearly part of a trend.

And it isn't an argument between free-market Liberals and agrarian socialists in the National Party.  Last month Liberal industry spokeswoman Sophie Mirabella said departments should buy equipment and clothing from local companies.

Doing so she came up against the Victorian government -- a Coalition government.  Victorian Police Minister Peter Ryan was sourcing fabric for police uniforms from a company that uses Chinese labour.  Protect local jobs, or try to get the best deal for taxpayers on the competitive, international market?  The federal opposition went with the former.  Ryan -- who is a National -- went with the latter.  It's the old battle between major benefits for a few or minor benefits for all.

It goes on.  The opposition has concerns about foreign investment in Australia.  The bogey-man here is Chinese and Middle Eastern companies ''buying up'' Australian farms.  That practice is also known as ''investing''.

And investment is something you'd think a growing, capital-hungry country like Australia might embrace.  Nevertheless, the Coalition has a working group to scrutinise whether it is in Australia's national interest.

The Coalition is not alone when it wavers on free trade.  The past few years of downturn has seen a resurgence in anti-trade sentiment and protectionism around the world.  According to the British-based Centre for Economic Policy Research, the 20 countries in the G20 have enacted 155 trade restrictions or tariffs since November 2010.

Austerity has left politicians with a restricted set of tools to please domestic rent seekers and trade unions.  When governments cannot spend, they regulate.

Protectionism is easy to sell.  Who wouldn't want the government to protect domestic jobs and industries?  By contrast, the benefits of trade -- cheaper goods and services for everybody and an expanding economy fuelled by engagement with the rest of the world -- are more diffuse.

Yet every one of the new restrictions on trade damages economic growth and punishes consumers.  Australia has largely avoided joining the wave of protectionism.  That's what makes the Coalition's growing antipathy to free trade so concerning.

Tony Abbott has been right to oppose many proposed tax increases.  But tax is only one side of the economic coin.  You can't have a strong economy without free trade.  If the Coalition cannot confront this principle in opposition, it will definitely have to confront it in government.

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Shouting the odds

There is nothing more irritating in a debate than when a particular point is constantly made on the basis that, to its users, it is so self-evident that no further discussion is required.

A current example is the issue of sports betting, where the perceived clincher in many letters and comments is a reference to children talking about odds.  As one worried writer to The Age concluded her letter, ''When ten-year-olds are talking about football games in terms of belting odds, the AFL should acknowledge that there is a deeper problem.''

And the problem is?

It does not appear that the ten-year-old in question is sneaking off to place an actual bet.  All the kid is doing is what anybody talking about which team will win a forthcoming game is doing, in the same way kids and adults alike have done since Tom Wills played in Yarra Park. ''Who do you think will win?''  ''I disagree.''  All the use of odds does is to quantify the probability, in a way not dissimilar to aggregating the predictions of newspaper tipsters.

Besides, I can top the concerned ten-year-old's parent, as I have a seven-year-old, who similarly discusses the odds.  She loves using the published odds as a guide as to which team is likely to win and even explains when she thinks the odds are wrong.  As yet, she does not associate it directly with ''putting money'' on it, but even when she does, I fail to see how this is some terrible modern evil.

I remember, when I was 10, I lost a fifty cent wager when Hawthorn lost to Richmond.  And fifty cents meant something in 1982!  In fact, all through my schooldays, kids bet on the outcome of football matches.  Being unsophisticated souls, most of this was done on a straight basis, which meant that those following weaker teams were being dudded by taking even money when they should have had odds against or ''goals in''.

I was introduced to the notion of ''goals in'' by my Year 8 teacher, who not only insisted that he and I have a bet on the outcome of the following weekend's game between our respective teams, but also demanded a couple of ''goals in'' to take account of the fact that his team was lower on the ladder.  I assume, in these less tolerant times, he would face serious disciplinary action for corrupting the students in his charge.

Certainly, today's teachers seem much more alert to the potential evils of gambling.  A teacher recently approached some friends of mine about a most concerning discovery she had made about their young son.  She had found a form-guide in his bag.  I gather she was even more shocked to discover that this activity actually had parental approval.

After all, discussing odds with your child seems a worthwhile learning activity.  Just as kids in the southern states of Australia have traditionally been particularly good at their six times table, now their numerical ability is being enhanced by constantly playing around with the numbers in the odds.  Kids who know how odds work must have a head start when mathematics classes turn to the topic of probability.  And odds demonstrate how maths has an important application to something that is interesting and fun.

Gambling's supposed effect on children has always featured heavily in all the rhetoric of Australia's highest-profile anti-gambling crusader, Senator Nick Xenophon.  Earlier this year, when opposing the idea of a casino's name appearing on an NRL team's guernsey, he claimed it ''normalises gambling behaviour for young kids''.

This may come as a shock to the Senator, but gambling is already normal.  Dozens of totalitarian regimes have tried to ban it, and dozens of democratic ones have imposed onerous regulation on it, but people like to gamble and to discuss the odds of whether one outcome, or another, will occur.  Personally, I'm more worried about footballers normalising tattoos;  but unlike Senator Xenophon, I don't want to ban everything in society which offends my sensibilities.

Given its very normality, children should be exposed to gambling as they are growing up.  In recent decades, parents have been bombarded with the notion from experts that the earlier children are given sex education, the better the world will be.  I am inclined to agree, but am thus somewhat bemused to find that many of the same people who want kids to know about sex at an early age object to them knowing about betting.

Sports betting may not always have been legal in Australia, but it has always been part of our culture.  Fifty years ago, the Sporting Globe published weekly odds on various aspects of football, and the earlier history of both football and cricket in Australia contains numerous examples of betting.  Coinciding with the legalisation of sports betting has been the huge decline in the presence of horse racing in the mainstream media, outside carnival time.  A generation ago, the majority of the sports report on the ABC TV news on a Saturday was replays of the closing stages of all races except those where ''vision has been withheld by the stewards'', complete with lots of talk of betting prices.  Perhaps the increased visibility of sports betting has helped fill the void created by the downgrading of the races and trots.  Whether Manikato was 6/4 or Collingwood is $2.50, the principle is the same.

And speaking of Collingwood, the recent transgressions of Collingwood players Heath Shaw and Nick Maxwell demonstrate that sporting authorities need to keep educating players on why participants cannot bet.  The fact that the players and their families were so blasè in their non-comprehension of this fact beggars belief.  Now, one can debate the specifics about whether the AFL handed out the appropriate penalties, but clearly it is an issue that all sporting bodies know they have to address.

There are clear problems if administrators fail to properly regulate gambling on their sport.  However, whether it is betting on cricket or the impact of drugs on the credibility of cycling, the sports themselves will be the big losers if the public feel that outcomes are being manipulated.  The fact that the AFL pursued such small losing bets shows that they are being vigilant.

Of course, there will always be problems and controversies in the future, but these hardly seem to outweigh the enormous interest and enjoyment that the application of odds to sport can provide.  I look forward to sharing that enjoyment with my daughter as she grows up and just hope Senator Xenophon, and others of his ilk, do not deny us that pleasure.

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Time to bell the Labor cat

Having a hopeless government is bad at the best of times.  But having a hopeless government at potentially the worst of times could be very bad indeed.

The markets are not the economy.  The markets represent investors' opinions about the economy.  Right now those opinions are not optimistic.

It's time for Australian business leaders to bell the cat on the Gillard government.

The reason they won't is because they fear retribution.  Retribution is bad, but businesses going to the wall as a result of government policy is worse.

With a recession possibly around the corner, now is the time for business leaders to stop being cheerleaders for the government and show some leadership.

Some business leaders might even need to be a bit brave.

As the fable goes, a mouse suggested a bell be placed around a cat's neck to alert the mice when the cat approached.  In response to the suggestion, another mouse replied:  ''Excellent, but who is to undertake the job?''

The chances are that one way or the other, with or without Julia Gillard as prime minister, Labor will be in power in Canberra for the next two years.

Australia simply can't afford the next two years of Labor's second term to be as bad as its first year.

At the very least, an honest assessment of what's gone wrong might strengthen the hand of those ministers in cabinet and those backbenchers in caucus who don't believe the path to prosperity rests with the Greens.

A government that is increasingly regarded at home and overseas as arbitrary, capricious and lacking any policy direction is not good for business.

It should be inconceivable for the words ''Australia'' and ''sovereign risk'' to appear together in the same sentence.  Yet that's exactly what's happening.

There are some very capable ministers in the Gillard government, but the current ministry as a collective is far less than the sum of its parts.

Every minister has to take some responsibility for a series of decisions that can only be described as diabolically bad.  For example, the ban on live cattle exports to Indonesia will stand as a victory for short-term political opportunism.

The Labor Party made a great fuss about the damage Pauline Hanson caused to the relationships with our Asian neighbours.  But Pauline Hanson didn't cut off food supplies to Indonesia.

Even if the Labor Party could convince itself that the livelihood of hundreds of families and businesses in northern Australia was less important than placating the concerns of urban elites, there's no excuse for such treatment of the Indonesian people.

The decision to halt live cattle exports, taken as it was without any warning or notice, was noted in every Asian capital.

There's no commodity more important in Asia than food.  The question being asked in Asia is if the Australian government stopped the export of meat because of a television program, will the government, next time, stop the export of wheat or milk because of a newspaper article?

Australian companies are banking on selling billions of dollars of mineral and energy resources to Asia in the coming decades.  Those companies have to be able to guarantee security of supply, in the same way cattle exporters had to guarantee supply.

At the moment, the suggestion that energy exports from Australia could be at risk sounds preposterous.  Except for the fact that the leader of the political party on which Labor relies to stay in power has said that Australia should stop exporting coal.

What criticism there has been of the government by company executives has been mild.  The only reason those criticisms have received any prominence over the past few weeks is because since the election of Kevin Rudd in 2007, business has largely backed the government.

A few company executives have been willing to speak up about individual issues.  For example, on Wednesday BHP Billiton chairman Jac Nasser questioned the carbon tax.  But even so, his concern was only about the timetable for the introduction of the carbon tax.  He didn't challenge the question of why Australia should have such a tax in the first place.

Or why, in the midst of a possible global recession, any government would introduce a tax that would, on the government's own calculations, reduce economic growth and lower Australians' standard of living.

If business leaders had the guts to bell the cat on the Gillard government they'd be doing something positive for themselves, for their businesses and for the government.

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Should we still run a surplus in 2012-2013? The case for a balanced budget

In late 2008 the federal government was under some considerable pressure to abandon any plans of delivering a budget surplus in that year.

I wrote an op-ed for the Australian Financial Review arguing that while budget deficits could occur after the fact, the government should never plan for a deficit.

Fast forward nearly three years and again the government is under some pressure to abandon plans to produce a budget surplus.

Stimulus policy's poor record

Lord Keynes famously said that when the facts changed he changed his mind, what did others do?  Well, the bottom line is that the facts have not changed -- government spending has a poor track record of stimulating the economy.

So I'm still of the opinion that if the government were to adopt an active policy towards stimulating the economy, spending should not be that policy.

There are a lot things happening in the world economy.  But I want to concentrate on the domestic scene.  The economy faces the very real risk of stagflation -- the combination of high inflation and stagnant economic growth.

Low levels of economic growth often manifests as rising unemployment.

Inflation is already above the Reserve Bank's 2-3% target band while unemployment is above the 4½-5% estimate for the non-accelerating inflation rate of unemployment.

In early September we'll discover if Australia has experienced two consecutive quarters of negative growth.  I suspect not, but I doubt growth has been very strong.

In short, those economists who believe that government spending can stimulate the economy have cause to advocate yet more debt and deficit.

Spending equals redistribution, not creation

But they overlook the costs of that intervention.  Government cannot create wealth by spending, it can only redistribute wealth.

Even then it is a negative sum game because of the transactions costs of government intervention and deadweight losses of taxation.

What few people appreciate is that government can crowd out private behaviour even when the economy is not at full employment.  Deficits and debt financing cause crowding out.

James M Buchanan, the 1996 economics Laureate, has argued that because public debt is simply postponed taxation, and because opportunity costs are subjective, the burden of public debt is borne by future generations.

This manifests itself in a smaller capital stock in future relative to a larger consumption in the present.  Quite simply we are sponging off future generations.

Making future generations pay

Do future generations really want to pay, again, for us to spend yet more money on one-size-fit-all school halls and pink batts?  Certainly they would have no interest in yet more tattoos, or plasma televisions.

Of course future generations would benefit, as would we, if we could get the economy working well again.  It isn't as if the determinants of good policy are somehow secret.

It is well known that productivity growth is the long-term driver of economic prosperity.  There are some things that government can do to promote productivity growth.  Cut taxes for a start.

Taxes on business are a huge burden on the economy -- even the Henry Review recognised the high deadweight cost of corporate taxation, estimated to be 40¢ in the dollar.  Payroll taxes were 41¢ in the dollar.

Cutting taxes, spending

Cutting taxes, of course, increases the deficit everything else being equal.  So the next thing to do is to cut spending.

Many economists are surprised to discover this strategy has a good track record.  It worked in the 1930s for Australia and the UK, again in the 1980s in the UK and the late 1990s in Australia.

At the time economists were outraged and signed petitions against spending cuts.  Over 100 Australian economists signed a petition against the 1996 Howard-Costello budget cuts.

That episode was so embarrassing that it is now impossible to find a list of signatories.

Red tape

The simple fact of the matter is that there is a lot of waste in government.

The real problem of government isn't just that it is often wasteful, but that it involves a people do stuff -- fill out reports, submit to inspections, comply with regulation, and the like.

Grattan Institute's Saul Eslake has made a convincing argument that a lot national security and corporate governance activity simply results in productivity-stifling regulation.

So reducing the scale and scope of government has massive flow-on effects.

In addition, however, government should actively seek out opportunities to reduce the regulatory burden on business in particular and society in general.

More tax, regulation

Of course, the government plans to do none of those things.  Right now it is proposing more taxation and more government regulation.

The carbon tax will have undesirable consequences.  Poverty traps increase at low levels of income and again at the $68,000—$80,000 income range.

Single earning more than $50,000 are worse off.

The proposed mining tax disadvantages smaller Australian based miners relative to larger multinational corporations.

In addition to purely economic issues, there are political economy issues.  This government is well into its second term of office and has never yet produced a budget surplus.  For all the excuses, the Budget Papers reveal that spending decisions have been the cause of consistent and persistent deficits.

Fiscal responsibility?

To his credit Mr Swan talks a good talk about the need for fiscal responsibility but is yet to actually deliver on that front.  He has long promised that the budget would return to surplus.

Last year he told the Seven Network's Sunrise co-host David Koch that come hell or high water, next year's budget would be in surplus.

This is a self-imposed constraint.  Governments have extraordinary fiscal powers and few constraints on spending the public purse.

This is why the ability to demonstrate self-control is important -- it is the lack of self-control that is troubling both Europe and the US.  In the absence of self-constraint there is little to stop government from pursuing a policy of tax and spend.

Being held to account

One way to convince the public that they can be trusted with the public purse is to commit to self-control and then to deliver.

Being held to account for broken fiscal promises is an important governance mechanism.

The argument for balanced budgets relies on the fact that outside of its core competencies government isn't very good at adding value.

By contrast core competencies in the private sector are diverse and those who fail to add value are quickly replaced by those who can.

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Free speech: Hicks should keep his memoir profits

David Hicks should be able to keep the profits from his memoir.

The law which confiscates literary proceeds of crime is a bad law.

It's a bad law because it tends towards arbitrariness.  It's a bad law on free speech grounds.

And it's a bad law because it is based not on any philosophy of crime and punishment, but merely on a feeling that it would be a bad thing if bad people became rich off their infamy.

Those observations have nothing to do with the rights and wrongs of the David Hicks case.

After all, the law was not originally conceived with convicted terrorists in mind.

Between 1976 and 1977 David Berkowitz killed at least six people in New York, signing off on the murders as ''Son of Sam''.  By the time Berkowitz was arrested, the case had gathered so much public interest the daily sales of the New York Post doubled.

It's not unusual for the public to be fascinated by serial killers, but Berkowitz took advantage and got a $US75,000 book deal.

The revulsion about the book deal led to New York's Son of Sam law, which prevented criminals making a profit off the back of their crime before all victims had been compensated.

Variations of this law were quickly replicated across 40 American states and Australia.  Over the decades, they've largely dropped their link to victim compensation.  Now they just tend to ban profit.  Our federal Proceeds of Crime Act doesn't even require a person be convicted of a crime, only that on the balances of probabilities they have done so.

According to one New York State senator at the time, a ''sense of justice and decency'' compelled the introduction of the original Son of Sam law.

But it's hard to pin down the rationale for confiscating literary proceeds any more concretely than that.

There's absolutely no question if a court convicts a bank robber they shouldn't be able to keep the loot as a nest egg for when they get out of jail.  In that case, the stolen money is a direct result of the crime.

By contrast, literary proceeds of crime aren't really ''proceeds of crime'' at all.  Trading off the notoriety you gain from robbing a bank is not the same as living large on the bank's money once you get out of jail.

In fact it's quite the opposite:  writing a book is an entirely legal endeavour.  In fact, it's an admirable one.  Any profits gained are gained honestly -- writing a book is a lot of work.  And if the book sells, it implies consumers have gained something from it.  A profitable book is a net benefit to society, regardless of the history of the author.

No surprise:  people like reading about the crooked lives of others.

When the Attorney General's Department looked at the proceeds of crime law in the late 1990s, it sensibly pointed out confiscating literary profits provides no deterrent against committing crime in the first place.  It would be a very farsighted criminal who broke the law in order to write a successful book about it decades later.

Instead the department argued a more convincing basis for the measure was unjust enrichment.

Yes, it seems somewhat unfair a criminal might get a heftier book deal than the victim of their crime perhaps would.

But that sense of unfairness is not a stable enough foundation on which to limit free speech.

It's been claimed that in David Hicks's case confiscating his commercial gains has nothing to do with free speech -- while there is a human right to free speech there is no similar right to speak profitably.

That this argument has come from many conservatives is disappointing.  Because the literary proceeds of crime laws are a neat example of the inextricably intertwined relationship between human rights and economic rights.

Speech requires finance.  To pretend the former is unharmed if you ban the latter is nonsensical.

If a government was to ban a newspaper from making a profit but otherwise leave its material uncensored we would not hesitate to condemn it as a violation of freedom of expression.

There is no right to profit from speech -- not all books or newspapers find markets and audiences -- but without a right to try to profit, the liberty to speak is severely crippled.  Writing, publishing and distributing is an entrepreneurial enterprise.  We cannot detach the economic motive from speech.

No matter how you slice it, confiscation of the proceeds of someone's memoirs is a restraint on free expression.

On The Drum in February, one of David Hicks's legal advisors Ben Saul argued literary proceeds of crime restrictions should be extended to crimes against international law -- that way the profits from John Howard's memoirs would be similarly up for confiscation.

Saul's trite idea obviously will never happen.  But such reasoning encapsulates one big problem with laws such as these.  Rather than contesting the usefulness or justice of the law, partisans wield them like a weapon against their opponents.  Indeed, the Howard government amended the Proceeds of Crime Act in 2004 specifically to stop Hicks and Mamdouh Habib profiting from their stories.

Because in Australia this law has been rarely used and is largely untested -- and many, many Australian criminals have written books -- it is hard to avoid the impression the pursuit of Hicks's profits is more about the man than the just application of the law.

That's pretty much the definition of arbitrariness.

Ultimately, the David Hicks case suggests that the pursuit of the literary profits of convicted criminals comes down more to taste than justice.

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Economic policymakers crippled by China-itis

Paul Samuelson, the famous economics textbook writer, is reputed to have said that the stock market has predicted nine of the last five recessions.

Right now the market seems to be predicting a doozy of a recession.

The Australian stock market has followed global stock markets in shedding huge amounts of wealth.

In years gone by many might have observed the events of the last few days with some detachment.  These days, with compulsory and defined contribution superannuation schemes, stock market losses hit close to home.

Those people currently living off their superannuation returns or planning to retire in the near future are in a world of pain.

There are a lot of things going on that explains the economic dislocation we're seeing.  First and foremost the debt and deficit model of public finance is failing.  It is failing both in Europe and the Unites States.

What is making matters worse in Europe is the euro.  A single currency for such a diverse group of economies was always bad economics -- as many, including Paul Krugman, argued at the time.  Yet the political pressure for monetary union was strong and so economic considerations got subsumed.  Some European governments are willing to keep spending but unable to do so.

The United States is in a somewhat different position.  The government is able to keep spending but the Congress is seemingly unwilling to authorise that spending.  Like the Europeans, the US government has spent well beyond prudent or sustainable levels.

The solution in each case is to reduce spending.  Given that much of that spending is social expenditure these spending cuts are very likely to be painful and it isn't surprising that elected politicians are loathe to inflict that level of pain on their constituents.

It is here especially that Australia is in a better position than Europe and the US.  Our public finances are not under the same pressures and strains as other developed economies.  Our economic challenges are different.

It is true that our budget is in deficit and the Federal Government has accumulated large debts over the past four years.  Yet the policy default position is that the budget should be in surplus and debt paid down.  Contrast that with the US where even after last week's agreement between Democrats and Republicans the default position was that the budget would still be in deficit and borrowings continue to increase.

The problem Australia faces is complacency -- I think of it as China-itis.  Many policymakers have the view that as long as China is OK, we're OK.  That it doesn't matter how poor our policymaking is, the Chinese will buy our stuff at any price and any inconvenience.  By contrast, the response to economic turmoil in 2008 was pure panic.

That complacency leads to commentators arguing that our public debt doesn't matter because it is much lower than comparable countries.  It is, but it can explode very quickly.  Right now markets have an aversion to public debt.  Australia should move rapidly to reduce that debt.

More importantly Australia is facing high levels of inflation.  That the Reserve Bank can post a long-term forecast of inflation above its target band is a policy failure.  At the same time, economic growth forecasts are being revised down and productivity growth is poor.

Federal government policies are not aimed at addressing any of those issues.  Next year tax rates for low income earners will rise and effective marginal tax rates will be increasing too.  That policy hardly encourages improved productivity.  The carbon tax is designed to slow economic growth.  The mining tax is a slug on smaller Australian mining organisations.

At a time when the economy is under external pressures, it hardly seems sensible to hobble ourselves with policies that make it harder for the private sector to generate wealth.

To improve our economic conditions the Government needs to be looking to lower taxes, provide greater incentives to work and increased productivity, lower spending, and cut business red tape.  That won't restore stock market values in the short-run but it will make it easier for the Australian economy to weather the financial turmoil that is engulfing Europe and the US.

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Gillard government must chart new course on economic policy

A worsening of the economic conditions here and overseas dictates that the federal government must chart a new course on economic policy.

In a severe shock to the global financial system, the US last week was subject to its first credit rating downgrade in history.

This is more than a symbolic blow, as it will force the fiscally beleaguered US government to pay higher interest rates on its $US14 trillion ($13.4 trillion) debt.

Even before this mark of reduced economic confidence by credit ratings agency Standard & Poor's, the US sharemarket had been in a tailspin.

This is because investors in US shares had already reacted harshly to the insipid political deal on the US debt ceiling, allowing the Obama administration to continue mortgaging the future while cutting projected, but not actual, spending.

As Julia Gillard and Wayne Swan have rightly indicated, Australia is not immune to adverse international economic events.

Just last week, $100 billion was wiped off the value of Australian shares on the back of the developments in the US.

Our sharemarket meltdown has meant an instantaneous reduction in wealth for retail shareholders, not to mention all of us with superannuation funds tied up in shares.

Despite the hoopla from the Prime Minister and the Treasurer that the Australian economy is doing fine, Australia is in a worse position now than before the last global financial crisis.

Gross domestic product per head of population has declined over the past 12 months, compounding the innate sense of growing hardship felt by many Australians.

The Reserve Bank of Australia has cut its growth forecast this year by a full percentage point, while inflation is now expected to exceed its target range of between 2 and 3 per cent.

National labour productivity has been in freefall over the past few years, spelling growth problems ahead if economic reform is not enacted soon.

The economic bad news continued last week, with news that retail spending figures were at their lowest levels in 50 years, another sign that consumers are tightening their belts in expectation of worse to come.

The decision to imitate the economic sick nations of Europe and the US by introducing fiscal stimulus in 2008-09 still haunts the federal government, in the form of a budget deficit and $107bn of net debt this year.

There is no question that the government and its economic top brass are right now contemplating how to respond if the rest of the world, and perhaps Australia, sinks into another recession.

With the national economy in worse shape today than before the GFC, the government should concede that the Keynesian strategy pursued last time was an economic failure.

The frittering away of $900 cheques, knocking down functional school halls to build costlier new ones, and the tragic home insulation program clearly demonstrated that you cannot grow an economy by breaking windows.

Next time around, if it comes to that, the government would need a new economic strategy to support growth and increase national productivity.

It can do this by stepping aside, allowing private entrepreneurship to thrive and enabling Australians to find their own solutions to the economic challenges as they emerge.

I suggest a four-step program for the government, if circumstances require it.

The first step is to revive economic confidence and secure Australia's position as a worthy place to invest, by abandoning the economically destructive carbon and mining tax schemes.

The second step should focus on genuine expenditure reductions, by cutting spending commitments in the short term rather than shaving projected spending growth in the budget out years.  The location of the spending meat axe, reportedly last seen underneath Kevin Rudd's hospital bed, would be ideal to reduce the 165,000-strong commonwealth public service.

Third, the government should use some of the spending cuts to fund tax reductions.  Personal income tax cuts would boost the labour supply by increasing the incentive to work, while lighter company taxes would enliven business investment outside the mining sector.

Finally, the government should act swiftly to deregulate the economy, allowing the private sector to discover new ways of delivering economic value.  Labour market regulation poses a significant barrier to employment.  If the government is serious about getting more people into work, it should scrap the unfair dismissals law as a starting point.

There are many other opportunities to deregulate markets in the national interest, as the recent Productivity Commission report on retailing shows.

This four-pronged strategy would free up resources away from Canberra and put them back into the hands of individuals and businesses to create new economic activity as they see fit.  It would draw on the inherent capabilities and talents of the millions of Australians whose economic pursuits are guided by profits and losses, rather than being nudged towards inefficiency by a government that doesn't know best.

If the government reduces its reach over the economy, putting its faith in individuals and businesses instead of itself, in challenging times it would belatedly show it is willing and able to learn from its previous mistakes on economic policy.

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''Carbon cops'' destined to join mega-regulators club

The powers which the Gillard Government intends to give the Clean Energy Regulator are unquestionably illiberal.

The climate body will be able to enter and search workplaces and compel people to provide self-incriminating evidence -- a clear breach of the basic right to silence.

Those powers are counter to the Western liberal legal tradition, which should provide protection against self-incrimination, and defend the sanctity of private property against state intrusion.

But, that said, the Clean Energy Regulator's powers are not at all surprising.  They're not even unusual.

It's a feature of Australia's regulatory state that government regulators are granted extraordinary powers -- often more substantial powers than the police hold.

The Australian Securities and Investments Commission can compel people to give evidence in private hearings, under oath, entirely separate from the court system.

ASIC uses its suite of coercive information-gathering powers around 26 times every single working day, a Senate committee hearing revealed last year.  The standard rules of evidence and privilege against self-incrimination do not apply at ASIC hearings.

ASIC's powers are still being bolstered.  In 2010 they had their wire-tapping and phone records access powers increased.

Then there's the Australian Building and Construction Commission (ABCC), which can bring anyone in for questioning, in secret, and force them to hand over documents, or report on private conversations.

In the Sydney Morning Herald last year, George Williams reported one person was pulled in front of the ABCC because they simply walked by a dispute between a union representative and a building manager.

Last week the ABCC admitted it had issued 203 summonses defectively:  the same failure which last year led to the acquittal of Ark Tribe, a building worker who refused to give evidence to the commission.

The Australian Taxation Office has the capacity to ban people from leaving the country if they are in a dispute over tax owed.  Paul Hogan learned this first hand.  And the ATO can enter and search premises for documents without having requested those documents first.

The Australian Prudential Regulatory Authority and the Australian Competition and Consumer Commission also have substantial coercive powers.  They round out Australia's mega-regulators, a club the Gillard Government's climate body is destined to join.

Unfortunately the illiberalism of all these powers is obscured by politics.

Conservatives suggest the ABCC's powers are a necessary evil because they restrain union thugs.  Progressives suggest the extraordinary coercive powers of bodies like ASIC are necessary because cartels and corporate fraud and insider trading are endemic.

That's how the basic principles of the liberal rule of law gets chipped away:  through an endless list of exceptions.

Partisans on each side can point to their opponent's hypocrisies.  Hopefully the union movement, which has been rightly vocal defending the rule of law against the ABCC, will be able to recognise the problems inherent in vesting yet another regulator with coercive powers.

After all, does anybody believe the Clean Energy Regulator won't have its powers extended over time?  Every regulator pesters Parliament to have its jurisdiction expanded, its funds increased, and its scope widened.  This is the inexorable logic of the regulatory state.

Yes, the creeping thicket of regulation demands growing regulatory powers.  If you're going to impose a regulation you'll want mechanisms to make sure the regulated comply.

But those powers are being steadily augmented to give independent regulatory agencies an increasing degree of unchecked power.

Typically the powers held by regulatory agencies lack oversight.  Richard Gilbert, of the Rule of Law Institute of Australia, has pointed out these regulators are reluctant to disclose data on the use of their coercive powers.  And without reliable data, Parliament and the public are unable to assess whether those powers are being used judiciously.

That's a particular problem because the entire purpose of making a regulatory agency ''independent'' is to deliberately separate them from the traditional ministerial and parliamentary lines of responsibility.  By definition, they lack accountability.

This causes a very real governance problem.  Each of these agencies are little fiefdoms, with reputations they feel they need to defend, particular interests, ideological preferences, and obsessions.

This is no more evident than ASIC's behaviour in recent years.

In one of the most celebrated recent cases, ASIC pursued the mining company Fortescue with such fervour the judges started questioning the regulator's motives -- because there'd been no suggestion anyone lost money out of Fortescue's actions.

And ASIC's attempt to have the activity of ''rumourtage'' (spreading false rumours for profit) penalised failed, after the only rumours ASIC could identify which had altered market outcomes turned out to have been, in retrospect, true.

ASIC seeks more power and influence.  It's an independent body, so it acts independently.

While it eagerly sought its new wiretapping abilities, in June ASIC admitted it had not even used them since they were granted late last year.

We can infer the need for those extra coercive powers may not have been as pressing as originally made out.  But it must feel nice to have them on the shelf.

ABCC, ASIC, APRA, ATO, ACCC, and now the CER:  it's rarefied company which the Clean Energy Regulator joins.

No doubt the partisan fluffery will die down and the political roadshow will move on from this week's debate about ''carbon cops''.

But we will be left with just another mega-regulator, desperate to expand its domain, and gathering more and more powers.

Peak productivity, living standards set for carbon tax sacrifice

Campaigning by politicians through the power generation regions of the Latrobe Valley and the Hunter have focussed on the effects of a carbon tax on power station jobs.  However, the really significant feature of these vulnerable areas is just how few jobs are involved.

Employees displaced as a result of a tax face the tragedy that loss of livelihood would bring in areas with limited alternative prospects.  But more important for the rest of the community is the productivity of the facilities in which those people work.

Employment in the electricity and downstream natural gas industries in Australia is around 61,000 people but only 10,000 (17 per cent) of these are in generation.  In Victoria, four Latrobe Valley power stations -- Loy Yang A, Loy Yang B, Hazelwood and Yallourn -- generate almost 90 per cent of supplies.  These facilities employ directly and indirectly about 2,900 people.  This includes those both mining the coal, which has virtually no use other than for generating power, and running the power stations.

Julia Gillard, in her pitch to the Latrobe Valley workers, commented adversely on the effects of the 1990s privatisation under Jeff Kennett/Alan Stockdale in reducing employment within the Victorian power industry.  She said her Government, unlike the Kennett government, would not abandon the workers in the valley in the event of job losses.

In fact most of the job-shedding actually took place in power generation was under the pre-privatisation reforms introduced in the early 1990s by Labor premier Joan Kirner.  The Kennett/Stockdale reforms simply built upon that base.  Ms Gillard left unsaid that these reforms transformed an industry that was hopelessly unproductive into one of high efficiency.  The generators' productivity levels have increased over fivefold since the industry was first corporatised and then privatised.

It is productivity which is the key to income levels.  Current Australian productivity levels are the only reason why Australians enjoy higher living standards than people in other resource rich countries like Brazil and South Africa.  The average Australian worker produces more than the overseas counterparts partly because of the amount of capital per worker, partly because of the structure of production between industries and partly because of the average worker's skills.

Scrapping a stock of capital, restructuring away from industries of highest productivity potential and eliminating the market for carefully learned skills will lower income levels.

Just how productive are the coal-based electricity generators targeted for closure and how do they compare with the facilities earmarked to replace them?

Victorian baseload brown coal generators in 2009/10 had a turnover of $1.935 billion.  The main input into these businesses is coal, which is produced in-house, and only about 12 per cent of inputs comprise items other than labour and capital.

This places the power stations' gross value added per employee at some $667,000, which works out at over $350 per hour.

My recent work has estimated gross productivity per hour across major industries.  This ranges between $25 (food and accommodation) and $250 (mining).

In other words, the Victorian coal-based power stations are among the most productive enterprises in Australia, higher even than the mining activities which have been so significant in raising our average living standards over recent years.

It should be noted that levels of productivity by electricity generators in Queensland and New South Wales are unlikely to reach those of Victoria.  This is because those states' generators are mainly government owned and hence are characterised by employment padding, the key reason why the ALP has resisted their privatisation.

Even so, replacing the coal-based electricity facilities with other sources would send the industry's productivity plummeting.  On present technologies the cheapest non-fossil fuelled alternative source of power available is wind, the productivity of which is about one quarter that of the coal-based generators.  Replacing coal with gas entails a productivity sacrifice of about 40 per cent.

Governments in Australia until recently always pursued policies designed to improve living standards, though sometimes, as in the case of introducing tariff protection, the actual measures were misguided.  It is an astonishing policy approach for any government to promote, as a reform, plans that will clearly reduce living standards, and can only conceivably provide pay-offs if the rest of the world also adopts emission reduction policies.  Forcing the closure of coal-based electricity generation plants in Victoria, New South Wales and Queensland means sacrificing assets and skills that are among the nations most productive and means lower average living standards.

Two speeds? Too vague

A few years ago, our economy was stereotyped as ''a quarry and a beach''.  (Thanks to the high Australian dollar we now no longer fear we'll be turned into a nation of tourist boat operators.)

In the 1950s, we supposedly ''rode on the sheep's back''.  The claim these days is that Australia has a ''two-speed'' economy.  The story goes that there's the resources sector experiencing record prices because of demand from Asia, then there's the rest of the economy lagging behind.

Describing the economy as simply two-speed is inaccurate and sloppy.  Worse, it encourages lazy policymaking.  The economy doesn't have just two speeds.  It has thousands of speeds.  Every company faces its own sets of challenges and business conditions.

A two-speed economy implies that something as complex as a national economy such as Australia's can be simplified into a fast part and a slow part, and that the speeds at which those parts travel can be manipulated to get a desired result.  It assumes government should either slow down or speed up the economy, when in fact the job of government is to get out of the way.

It's true the resources sector is booming, but it's altogether too simplistic to label the rest of the country's economy as ''other''.

The services sector accounts for 80 per cent of the economy and 85 per cent of all jobs.  Within the services sector, there's a multitude of different activities.

Tourism and education for international students are down, but healthcare driven by an ageing population and ever-increasing government spending is up.  Parts of the retail sector are in diabolical trouble, but consumer spending in shopping centres in regional Australia is holding up relatively well.

The notion of a two-speed economy also makes no mention of a sector growing nearly as quickly as resources -- government.  Spending by the commonwealth government in 2008-09 increased by 12.8 per cent over the previous year.

The only time in recent Australian history when government has grown as quickly was in 1974-75 and 1975-76 when, under Whitlam, government expenditure grew by 19.9 per cent and 15.7 per cent.

Dividing the economy in two means that inevitably those parts of the economy doing well get all the attention -- and the rest are ignored -- which is exactly what's happened.

When award modernisation pushed up the hourly rates of pay for the retail sector the perception was that it was only a few noisy shopkeepers complaining.  Now that the resources sector is affected by the federal government's re-regulation of the labour market, more people are paying attention.  Business leaders and their associations are slowly being roused into action.

The Treasurer, Wayne Swan, has said, however, that so far there is no ''fullthroated call'' for reforming the Fair Work Act.  This is an interesting statement in itself from the Treasurer.  It implies that if there were a ''full-throated call'' from business, then maybe the government would consider doing something about it.

A desalination plant in Victoria paid for by taxpayers running millions of dollars over budget because of labour disputes is not very interesting.  But when a $10 billion gas project on the North West shelf is threatened with strike action, people start to take notice.  Overseas customers for Australia's resources also take notice.

''It is now just about impossible to avoid the conclusion that productivity growth performance has been quite poor since at least the mid-2000s,'' Reserve Bank of Australia governor Glenn Stevens said on Tuesday.  ''Apparently easy affluence, conferred by favourable international conditions probably lessened the sharpness of our focus on productivity.''

There's no ''probably'' about it.  It's no coincidence the decline in productivity improvement Stevens talks about coincided with the resources boom and the taking hold of the idea that we had a two-speed economy.

We assumed profits from the ''fast'' part of the economy, that is, resources, would underwrite the rest of the economy.  This was precisely the purpose of Kevin Rudd's resource super profits tax.  The only productivity agenda the Rudd government had was to increase taxes on the most profitable parts of the economy.

There's no mystery as to why productivity growth slowed from the middle of the past decade.  We took it for granted that in a two-speed economy, the ''slow'' part of the economy was slow anyway and not much harm would be done if it slowed even further.

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News of World: sideshows and political opportunism

The News of the World phone hacking scandal has spiralled out in a dozen different directions.

No wonder.  It's fun to talk about Rupert Murdoch.  And for the British Labour Party, it's exciting to tie David Cameron to the News of the World.

But from a political economy perspective, it's the role of the London Metropolitan Police in the hacking which should be the most concerning.

That's because we expect politicians to be craven, and to coddle up to media proprietors.  And we expect many journalists to be opportunistic and tasteless.  As long ago as the 1730s, Montesquieu was complaining about the immorality of English newspapers.

But we expect -- well, require -- the police to be lily white.

In a free society, the police are not just any institution.  Only they can use force against citizens.  The purpose of the police is to prevent crime.  There's no clearer breach of the social contract than police being complicit in criminal activity.

Operation Elveden is the investigation of the Metropolitan Police into officers suspected of aiding the phone hacking.  It was sparked by News International documents which mentioned payments to police.

Elveden is being conducted side-by-side with the investigation into the hacking itself, and given similar priority and prominence.  Officers from both operations have conducted the few arrests so far.

Some survivors of the 2005 London bombings believe the only way their contact details would have been accessible to News of the World is if survivor lists -- full of telephone numbers and addresses -- had been leaked by Met officers.

If true, that would suggest some of this scandal's most ethically egregious violations would not have been possible without the complicity of the Metropolitan Police.

And Operation Elveden has not been the only investigation into police corruption in recent years.

As Graeme McLagan, a former BBC home affairs correspondent, pointed out in The Guardian earlier this month, accusations of inappropriate and corrupt relationships between the police and journalists have been a regular feature of the last decade.  In 2002, McLagan was documenting the existence of a private detective agency which funnelled information from corrupt police to News of World and the Sunday Mirror.

Obscuring these serious issues are a number of sideshows.

The police commissioner Sir Paul Stephenson resigned last week because of the ''embarrassing'' fact he hired a former deputy News of World editor as a public relations consultant.  But, justified or unjustified, that seems to be just a matter of impropriety -- the same sort of impropriety which David Cameron must regret for having hired Andy Coulson.

Impropriety may have political significance, but has little policy significance.  Bad judgment is not a crime.

Much more important is the statement made by former Assistant Police Commissioner John Yates to the House of Commons committee that ''I confidently predict that, as a result of News International disclosures, a very small number of police officers will go to prison for corruption.''

Then there are suggestions that the police failed to adequately pursue the hacking story when it first arose in 2005.

Focusing on the police does nothing to diminish the ethical and criminal seriousness of what News of World did.  Journalists, editors, private investigators, political advisors -- anybody who has committed a crime should, and no doubt will, be prosecuted to the maximum extent of the law.  That's what a legal system is for.

But a legal system cannot function if its enforcement arm is anything less than scrupulously clean.

It's not surprising that Australian commentators haven't focused on police corruption.  Scotland Yard doesn't own two-thirds of our newspapers.

But accusations of phone hacking have spread well beyond News International.  Thirty-one separate British newspapers are now under investigation.  They're not all Murdoch's.

And there has been no serious suggestion anything remotely similar has happened in this country.  (If you think The Australian's antipathy to the Greens is at all like hacking the phones of terror victims, or even vaguely connected, your moral compass is way off.)

Yet Australian politicians and partisans have tried to make the scandal fit an existing set of hobbyhorses -- anti-government hostility in News Limited papers, journalistic ethics, and media consolidation.  Australia's political class can be as opportunistic as any tabloid.

Australian commentators can wax lyrical about media ethics and regulation only because we don't have to face the implications of law-breaking journalists working in tandem with law-breaking cops.

For the public and for the press, police corruption isn't as thrilling as allegations of widespread criminality in their favourite newspapers.

And hauling the world's biggest media mogul before a panel of politicians was great theatre.

But it wasn't Rupert Murdoch's evidence in front of the House of Commons committee which was most important.  It was the police commissioner's.