Mining tax set to clip wings of Australia's golden goose

The Commonwealth Mineral Resources Rent Tax (MRRT) on new coal and iron ore mines creates doubts over whether it is the State or Federal Government that holds the taxation rights over minerals.

This will spark competitive taxation measures.

But the MRRT has even greater consequences.

The new tax is to raise an additional $3.7-4.0 billion a year from iron ore and coal.  These two sectors would face higher taxes than other industries, and taxation rates well in excess of those of our overseas competitors.  This industry disadvantage is compounded by the carbon tax.

Most governments nurture their countries' stellar performing industries.  Thus, US governments promote patent protection, which is vital to the success of key American industries like pharmaceuticals and information technology.

By contrast, with the MRRT, Canberra is pursuing a tall-poppy lopping exercise that will penalise Australia's most prospective industries.  No economy has ever prospered from such an approach.

Canberra says its additional mining tax will provide a fairer return to the people as the owners of the resources.  But to get a higher return on our resource wealth first requires the mineral wealth to be found and its development funded.

According to the government, its new tax will simply transfer profits from companies to the community and have no adverse consequences, because mining companies earn particularly high profits.

In reality, a tax having no adverse effects on incentives is as unlikely as locating the ''philosopher's stone'' that turns common metals into gold.  Moreover, Australian mining companies taken as a whole earn profits no greater than average.  Those firms making megabucks are counterbalanced by others with less luck or skill.

A new iron ore deposit, like a new piece of technology, must be discovered, researched and proven before it has value.

Exploration is the precursor to new mines, and Australia accounts for around 12 per cent of global exploration spending.  But high taxation levels can seriously reduce exploration activity.  In the past, South Africa and Mongolia have both experienced exploration slumps in the wake of new high taxes.

Placing an extra impost on miners reduces their incentives to explore and dig.  An additional tax dampens the search for hidden mineral wealth and means fewer finds will be made and fewer discoveries will be developed.

The Australian MRRT's dampening effect on new development hits the very industries that have underpinned our prosperity.  In this respect, the Australian Government's actions would be like the US imposing a special high tax on new ventures in its world-leading semiconductor industry.

Mining now comprises almost half of Australia's major new private investment, up from less than a fifth 20 years ago.  And there have been immense spin-offs on sectors servicing this remarkable upsurge.

The MRRT's $4 billion-a-year tax grab on coal and iron ore mining firms amounts to about 1 per cent of Commonwealth tax revenue.  It falls on the two sectors that have been the key to Australia's success within a troubled world economy and introduces a real risk of strangling growth in the industry and the nation as a whole.

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Regulating from a distance: Finkelstein, politics, power

The structure of the News Media Council proposed by Ray Finkelstein is complicated.

The council would consist of a chair and 20 other members.  Half of those members are to be drawn from the public.  The other half would come from the industry, but they cannot be managers or shareholders.  The chair should (of course) be a judge or an ''eminent'' lawyer.

The council would be appointed, not by parliament, but by a separate, independent body comprised of three senior academics, the Commonwealth Ombudsman, and the Commonwealth Solicitor-General.  The three academics would be chosen by a board of university vice-chancellors from across the country.

So that's one independent body, appointed by another independent body, most of whom will be appointed by a third independent body.

This elaborate composition is supposed to demonstrate maximum impartiality and objectivity.

After all, it would not do to have any whiff of politics near something as sensitive media regulation.  The risk of impropriety — or just the impression of impropriety — would be too great.

This allows Finkelstein to write in his report that, beyond its funding and powers, ''government should have no role''.  It's a curious claim.

Do not imagine, as his language implies and some have since suggested, that his proposals are just industry self-regulation with a little bite.  Finkelstein describes his scheme ''enforced self-regulation'' — a term drawn from the regulatory theory literature but one which is virtually meaningless.

An independent regulatory agency is the Government.  Sure, the News Media Council wouldn't directly answer to Julia Gillard.  It wouldn't be democratic.  But it would have coercive powers, would be funded by compulsory taxation, and its journalistic codes of conduct would be mandatory.  This is the very definition of ''government''.  Any limit on free speech it imposed would be a limit on free speech imposed by the state.

The idea behind independent regulatory agencies is simple, and superficially attractive:  to get the politics out of policy and compliance.  Rather than having politicians oversee the decisions made by regulators — with all the risks of corruption and political manipulation that would create — the agencies are separated from the rest of the government.  They are delegated their powers by parliament, but they are not responsible to parliament.

Independent regulatory agencies are relatively new to Australia and Europe.  There were virtually no such bodies in the 1960s.  Governments of the early and mid-20th century were vast public utilities, owning industries and enforcing cartels.

The untold story of the ''neo-liberal'' reforms of the last few decades is how privatisation and trade deregulation was matched by an extraordinary explosion of new regulation.  And to enforce this huge corpus of new law and regulation, state power was spun off into dozens of independent bodies.  The responsibility for regulation was moved out of ministries and into agencies.

Along every measure government has grown.  Government has expanded its reach and ambition and brought more activities into its web.

At the same time government has become less democratic.  That is a feature, not a bug.  Those who call for regulatory independence worry parliamentary representatives could interfere in technocratic decision-making.

It's a reasonable concern.  Politicians are driven by politics.  They have political motives, political aims, and use political tactics.  They are the last people you'd want in charge of regulation.

Yet we seem reluctant to over think the implications of this change.  Certainly, there are other undemocratic parts of government — the courts and the police are the most obvious.  But regulatory agencies are one of the fastest growing areas of government power.

And these agencies make government policy.  Parliament provides the general legislative framework within which those agencies operate, but leaves them to refine their goals.  The regulators are free to pursue their own agendas and set their own direction.  In a very real sense, they shape (within the limits of parliament's legislation) the law of the land.

Outside the democratic spotlight, the independent agencies are highly susceptible to regulatory capture — that phenomenon where special interests manipulate the regulatory process to favour their own interests, rather than the interests of the public.

In Finkelstein's proposal, the News Media Council itself would write the code by which the media is governed.  This would avoid the taint of partisan politics, which is good, but would at the same time have the limits of democratic debate circumscribed by a committee appointed by university vice-chancellors.

It is well to imagine regulations which might, if perfectly and uniformly enforced, change things for the better.

But the choice which modern advocates of greater regulation offer is unappealing:  give power to politicians, and risk the corruption and politicisation of public policy, or give power to independent regulators, and allow unelected and unaccountable bureaucrats to govern economy and society.

The Greeks have been rightly upset that their government has been replaced, virtually wholesale, with European technocrats.

As independent regulatory agencies blossom, we might start thinking about what it means for democratic control to be eroded as government expands.

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Mining tax bungle: the blame game over poor policy

The 2010 mining tax debacle must still really hurt.  Kevin Rudd was talking about it during his leadership challenge.  His version of events is that Wayne Swan promoted the idea and then bungled the implementation, ultimately leaving Rudd out of a job.  Not so says Swan.

Either way it is clear that both Rudd and Swan have different recollections of the mining tax debacle and, as reported in The Australian, there is bad blood between them.

Robust debate between politicians on matters of public policy shouldn't be that newsworthy.  But it seems the mining industry have the same recollection as does Rudd and Swan won't let it go.

In an essay published in The Monthly and a Press Club speech Swan has accused the mining industry — or one per cent of the industry — of rent-seeking.  He has even named some of the ''rent-seekers''.  Now while we might commend the man for not taking a backward step, the Treasurer of Australia should not get into public slanging matches over ''who said what to whom when'' issues.

Labelling someone a rent-seeker is the economists' ultimate insult.  Those who lobby government for special privilege to gain unearned income are the lowest of the low.  Miners simply don't fall into that category.  Quite the opposite.

Swan complains about individuals who oppose government policy.  In particular, those who oppose his policies to introduce new forms of taxation.  He invites us to believe that individuals who don't want to pay even more tax than they currently do are rent-seekers, i.e. trying to get a free ride.

Swan complains about individuals who conflate their own interest and the national interest.  Yet poor economic policy can never be in the national interest.  Sure making the tax system more efficient might be in the national interest, but that isn't what the mining tax was all about.

The mining tax that was proposed in 2010 was a poorly designed, poorly implemented policy.  For all of Wayne Swan's protestations the historical record supports the view the tax was bungled from beginning to end.

The biggest mistake the Government made was not understanding how the tax would work.  A ''small'' detail like that could have been overcome if the Government had consulted with industry before announcing the tax and before including forecast revenue from the tax in the budget.

The tax was particularly complex involving the Government having to take virtual ownership of 40 per cent of mining operations that would be financed by a loan from the miner to the Government.  The Government would pay the long-term bond rate on the loan, but the miners would have had to have financed that loan at their own cost of capital — well in excess of the long-term bond rate.  While Treasury realised this aspect of the tax would be problematic, they didn't understand the full implication of this feature.

If your eyes have glazed over at this point, that is quite alright.  What isn't alright is that Treasury didn't understand the significance of this problem until after the tax had been announced.  The tax was fatally flawed.  To be fair, Swan couldn't have known this — but without consultation how would he ever have found out?  He didn't.  By all accounts he still doesn't understand why his mining tax failed.

Why didn't Swan have a genuine consultation with the mining industry before the tax was announced?  In Freedom of Information documentation released in early 2011, it is clear that Treasury anticipated a consultation process.  One document dated February 10, 2010 indicates a ''Long process envisaged'' with four dot points ''core features on announcement'', ''education and familiarisation'', ''consultation on technical issues'', and ''commencement July 1, 2012''.

Another document dated February 21, 2010 indicates that a ''Final Design Paper'' would be released six months after the policy announcement.  The announcement would contain a principles paper to be followed by ''high-level consultation'', then the release of a ''consultation paper discussing technical and design issues'' including ''stakeholder submissions and ongoing meetings''.  Ten months after the announcement Treasury expected an ''Exposure Draft and Implementation Details'' to be released ''for consultation''.

Yet none of that happened.  If Treasury was expecting a long, involved, and detailed consultation process, why is Swan now telling us that his office never gave such an undertaking?  Clearly sometime between February and May the Government changed tack and decided to forego the long consultation process that had been planned.  As late as May 2, the Government promised to undertake a consultation;  yet on May 11 the tax was included in the Budget Papers as fait accompli.  At this point any ''consultation'' was simply going through the motions.

The miners weren't told about the change in plan and now it seems neither was the Prime Minister.  Unsurprisingly Wayne Swan has had to go on the attack.

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Free press to be sacrificed for political retribution

Freedom of the media is too important to be controlled by government.

The Independent Media Inquiry has proposed just what was expected:  an outrageous attack on freedom of speech and the press.

Its 470-page report, written by inquiry chairman Ray Finkelstein and released on Friday, concludes Australia needs a mandatory ''News Media Council'' that would have coercive powers to regulate what it deems is ''fairness'', ''accuracy'', ''balance'', and ''quality'' in the press.

This new independent regulator would have power to compel newspapers to publish responses from people who feel aggrieved.  And it would have the power to censor:  it could, for instance, force media organisations to delete stories from their websites that regulators feel aren't up to standard.

But it wouldn't just regulate newspapers.  As if to emphasise just how radical his proposals are, Finkelstein says websites that get more than 15,000 hits a year should be brought under the council's jurisdiction.  That's just 41 hits a day — in other words, pretty much every website publishing anything that could be described as ''news, information and opinion of current value''.

The new body would also regulate every magazine with a print-run above just 3000 copies.  That would be the entire magazine industry, from the street press upwards.  With such ambition, one might ask why Finkelstein excluded books, email newsletters, and Twitter from his regulatory web.

The specifics of Finkelstein's proposals are bad enough.  But they represent something more concerning:  a reversal of the principle that it is not the role of governments to stand in judgment of public debate.  The report may insist that this government-funded body will be independent, but in reality, it is a government body.  And, when it comes to freedom of speech, the state should be subordinate to society — not the other way around.

This principle that has taken centuries to develop should not be abandoned just because some politicians don't think they get a fair shake from newspapers.  The media inquiry was obviously political retribution against critical journalism.

The Greens and the government have long believed newspapers report the carbon tax and the national broadband network unfairly (these issues are specifically raised in Finkelstein's report).  More broadly, they claim the press has an anti-government bias.  Labor senator Doug Cameron said in November:  ''The Murdoch press are an absolute disgrace, they are a threat to democracy in this country and we should absolutely be having a look at them.''  Cameron was angry about leadership speculation printed in The Daily Telegraph.  Of course the speculation turned out to be entirely true.

Recall that Bob Brown opportunistically used the News of the World phone hacking scandal in Britain to suggest that the Australian government should license journalists and newspapers.  But to be fair to Brown, perhaps licensing was not as far-out an idea as it seemed at the time, given Finkelstein's conclusions.

If Finkelstein's proposals are adopted, all news websites, newspapers and magazines would have to sign up to and comply with the News Media Council's standards of conduct.  If they refuse, they would be taken to court and punished ''in the usual way''.  This might not be called ''licensing'' but it is virtually the same thing.

What happens if a blogger rejects the standards or refuses to delete something?  Eventually, after contempt of court proceedings, they could be jailed.  Nor are Finkelstein's proposals unprecedented.  The News Media Council would apply to newspapers, websites and magazines the same sort of regulations that at present oversee radio and television broadcasters.  Problem is, those regulations are frequently used by political partisans as a weapon to attack controversial broadcasters.

Late last year Alan Jones was taken to the Australian Communications and Media Authority because he had described New South Wales bureaucrats as ''scumbags that run around preying on productive people''.

The authority, in its wisdom, decided Jones had not made ''reasonable efforts'' to air other ''significant viewpoints''.  And in response to a complaint by GetUp!, it is holding a formal investigation into whether Jones interviews too many climate sceptics.  If we value free expression, these are not judgments any government body should be making for us.

Yes, there is good journalism and bad journalism.  Newspapers should offer rights of reply and letters pages.

We should reject Finkelstein's proposals, not to defend the media but to defend a fundamental liberal principle:  no government should have power to decide what constitutes ''fair'' or ''balanced'' speech.  Freedom of the press is just too important.

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A spending bonanza that lingers in the mind but not in bottom lines

Last week the government started taking credit for Australia's economic performance through the global financial crisis.

Kevin Rudd claimed to be proud that Australia was the only developed economy not to have experienced a recession, and of having protected Australian jobs.  Others complained that the government didn't get enough credit for our economic performance during that time.

When many Australians think of the stimulus packages they remember hastily built school halls, pink batts, house fires and deaths.  They may remember the billions sent out in cash handouts that got spent on the pokies, strippers, overseas holidays and plasma televisions.

In short, the government's recollection of the GFC is very different from what ordinary Australians remember.  Australians may think about the $167 billion of accumulated budget deficits the Rudd-Gillard governments have racked up so far, and the debt that won't be paid off until 2021.

Many people forget that a return to surplus doesn't mean the debt is written off.  We'll be paying for the stimulus packages for another 10 years.  For all the talk of saving jobs, the unemployment rate in November 2007 was 4.5 per cent (at the bottom of Treasury estimates of the non-accelerating inflation rate of unemployment);  that figure had risen to 5.9 per cent by June 2009.

Of course, we're invited to believe it could have been worse.  Treasury forecast without the stimulus spending that unemployment would peak at 10 per cent by mid-2010.  With the stimulus it was expected to exceed 8 per cent.

Without a doubt the federal government panicked in late 2008.  Lenore Taylor and David Uren, in their 2010 book Shitstorm, relate how an inexperienced first-term government and a Treasury still shell-shocked from ''the recession we had to have'' in the early 1990s decided to ''go hard, go early, go household''.

The big question is whether there is credit to be had.  Sure Rudd, Julia Gillard and Wayne Swan were in office, but can they really take credit for Australia's economic performance during 2008-09?

The fact of the matter is Australia will have very little to show for all that spending but did avoid recession.  Taylor and Uren are damning in their assessment.

''Had the economy behaved anything like Treasury's forecasts for it, no one would have begrudged the money spent,'' they wrote.  ''But now $75bn has gone, with a negligible addition to Australia's productive capacity.  The debt must be serviced and in due course paid back.  In the context of a $1 trillion economy, it is not a crippling burden, but there is depressingly little to show for it.''

Despite telling the Senate in early 2009 that Australians might never know if the stimulus packages had worked, Ken Henry later admitted:  ''History may judge that first stimulus package was too early, too large or the configuration of it was wrong, but my view was that we needed to do something big and do it quickly.''

Too early, too large, wrong may not be as snappy as ''go early, go hard, go household'', but that seems to be the assessment.

In the years since the GFC a small but growing academic literature has evaluated the role government played in ''guiding'' Australia through the crisis.  Tony Makin of Griffith University has done a lot of the heavy lifting.  He is sceptical that the stimulus packages prevented a deep recession.

The thing to remember is that the Australian definition of recession is somewhat arbitrary.  Two consecutive quarters of negative GDP growth is considered a recession.  Despite a massive spike in unemployment and huge business losses, Australia did not experience two consecutive quarters of negative GDP growth.

Two of the three components that make up GDP, however, did experience two negative growth quarters.  But the government ended up spending so much money that all that was masked in the national accounts.  Real GDP per capita, however, did experience three consecutive quarters of negative growth.

Some may say that while Australia did not dodge a bullet, the government did.

Makin estimates that net foreign demand saved Australia in late 2008 through early 2009, and not government spending.  He reckons the stimulus money started flowing only long after it was necessary.

Of course, that is the fundamental problem with activist fiscal policy:  it simply takes too long to spend a lot of money.  But the objective in 2008 and 2009 was to spend, spend, spend.  It didn't matter that the money wasn't well spent.

The failure of stimulus spending is more obvious in the US than in Australia.  The US government justified its stimulus spending by arguing that unemployment might rise to 8 per cent, only to find that unemployment rose much higher.  This has led some to argue that the US stimulus was too small.

But the fundamental question is this:  can spending money you haven't earned, on stuff you don't need, ever create economic value?  All those who would argue that the Australian government saved the economy, or that the US should have spent more, need to address that question.

It is true John Maynard Keynes argued that Treasury could cure unemployment by filling old bottles with bank notes and burying them in disused mine shafts and have the private sector dig them up again.  By that standard building school halls must be an improvement.  But this sort of activity simply isn't sustainable.

The lack of sustainability in government spending was on display this week.  Government spending expands industry beyond the size that the market would sustain.  When the spending ends, the industry collapses.  We saw that with pink batts and now with the rebate for solar hot water.

In the meantime people have invested their own capital and lives in business models that rely on unsustainable government spending.  So it's clear that the stimulus packages weren't good investments and probably did little to shield that Australian economy from the GFC.  Why harp on the issue now?

Well, we're still living with the after-shocks of that massive government spend.  In the first instance taxation will have to be higher than it otherwise would have been to pay off the debt incurred by the packages.  Government programs that would have been undertaken that are now shelved are part of the hidden cost of the stimulus.  Shovel-ready but unwanted school halls will stand for many years.

The more important consideration is that the government put in place a fiscal plan to spend up big and then return to surplus by 2012-13.  By May the Treasurer will have to make good on that plan.  If he cannot deliver a surplus next financial year, then the stimulus plans will have failed by his own standard.  They certainly haven't succeeded by any other standard.  But if there is no surplus then even the ALP will have to accept the error of its ways.

The truth is the Australian economy performed during the GFC despite the stimulus packages.  A generation of serious economic reform combined with swift monetary policy to shield the economy from the worst of the crisis.  The best that can be said for the executive is that they didn't get in the way of the policy response.

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Morning radio with Alex Sloan

ALEX SLOAN:  The Treasurer Wayne Swan is making news today, again it's about surplus.  He's written an essay for The Monthly magazine saying that our fair go culture is under threat by a small group of the very rich, including Andrew Forrest, Gina Rinehart and Clive Palmer.

Wayne Swan writes that they are using their riches to undermine good public policy, and ''threaten our democracy''.  What do you think?  1300 681 666, the text number, 0467 922 666.

Richard Wood joins me this morning.  Richard, hello.

RICHARD WOOD:  Hello.

ALEX SLOAN:  Now I've only read the extracts and report in the FinReview, I don't know if you've read the whole essay, have you?

RICHARD WOOD:  No, I haven't had a chance yet, one's waiting in my mail box.

ALEX SLOAN:  Oh, okay.  What are you making of this lash by Wayne Swan?

RICHARD WOOD:  Well from what I've read in The Australian Financial Review, he's an absolute hypocrite, to be quite frank.  One of the most dangerous things that can happen is when big Government and big business get into bed together to negotiate outcomes, and that's precisely what he did, and Julia Gillard did, over the mining tax, with big mining companies, on renewable energy, and the carbon tax, the renewable energy industries, and those are far bigger threats to democracy than miners advocating what they want...

ALEX SLOAN:  So you're saying they did that to win the election?

RICHARD WOOD:  They did, and that's a very serious threat to democracy, because when it's done behind closed doors, and when it's big business and big Government, what every consumer and taxpayer should do is reach for their wallet, because that's what is going to be raided.

ALEX SLOAN:  The biggest amount that was handed back to the mining companies was about $50 billion, is that right?

RICHARD WOOD:  I don't know the exact figures, but it's a very significant amount of money, and the system that was designed favoured big business against new enterprises and smaller mining companies, and that's what ultimately happens when you have different negotiations.

ALEX SLOAN:  Do you think this is pay-back time, from Wayne Swan?

RICHARD WOOD:  Well, I think it is, and I think he's trying to create a narrative that attacks Australia's most successful business people, and unjustifiably, you know, we need to make sure we have a fair go in this country, and that's why having an open, economic system, where the interests of a select few, are legislated for anyone new who wants to enter the business environment, and that's what this Government has done.

ALEX SLOAN:  Do you think this signals a campaign against what Wayne Swan describes as the increasing power of vested interests?

RICHARD WOOD:  I think it's a declaration in that direction, but you know, what Wayne Swan and Julia Gillard and the rest of the Government have consistently done, is try to attack their opposition and those people who stand up against them, and against the policies they want to advance.  Good public policy to Wayne Swan, is what he agrees with, not what other people agree with, and it's just part of a political stunt, which I'm sure will ultimately backfire.

ALEX SLOAN:  Again, I haven't read the whole essay, I'm just going from the extracts in The Australian Financial Review today, it says — and Wayne Swan says, 'Policies in place of choice between, and I quote, exploiting divisions by promoting fear, or appealing to the sense of fairness and decency that is the foundation of our middle class society'...

RICHARD WOOD:  Well that's an — I don't broadly disagree with that, but what he interprets that in terms of turning it into public policy, we probably disagree with, because what Wayne Swan's tried to do in the past in justifying this concept of a fair go, is have private meetings with big business to negotiate deals which suit the Government and big business, and if there's any threat to our fair go culture, it's creating these sorts of taxes and regulations which make it harder for you, me or anybody else, to get into, to create new businesses, and create our own wealth opportunities.

ALEX SLOAN:  Just to quote him, he says, 'The infamous millionaires' protest, Ax the Tax, against the mining tax, would have been laughed out of town in the Australia I grew up in, and yet it received a wide and favourable reception two years ago'.

RICHARD WOOD:  Well it certainly did, because I think what Wayne Swan also didn't understand, and the Government ultimately didn't understand, is that mining royalties are the domain of the state, and what we have is states that have very significant mining deposits, mineral deposits in places like Queensland and in Western Australia, and we're a federation, they're owned by those states, and what those states know is that when the money goes to Canberra, it gets allocated based on political objectives, in places like Victoria and New South Wales and Queensland, and they were being sold short.

ALEX SLOAN:  Yes.  Another quote, 'A handful of...' this is from Wayne Swan, 'A handful of vested interests that have pocketed a disproportionate share of the nation's economic success now feel they have a right to shape Australia's future, to satisfy their own self-interest'.

RICHARD WOOD:  Oh look, I don't dispute that there clearly is a push from people who have become very successful, to advance what they consider to be their view, but what's the alternative?  To shut down free speech?  See, I think it's better that we have them advocating it in the public domain, because there's a higher degree of transparency, and you and I can read what miners are getting, big miners are getting, up to other big businesses.  What's really dangerous to a fair go, what's really dangerous to our democracy, is when it's done behind closed doors, like Wayne Swan did over the mining tax.

ALEX SLOAN:  Clive Palmer has already responded, saying Wayne Swan has a responsibility to everyone, without fear or favour, and he feels that Wayne Swan is favouring his responsibility for workers, at the exclusion of all other Australians.

RICHARD WOOD:  I actually think that's too generous towards Wayne Swan on this occasion, because workers are the same people who are going to be hit by things like the carbon tax, workers are the same ones who are going to be locked out of the potential to set up new businesses every time regulations make it harder, and that's what we're seeing.  The best thing we can have is an open and transparent political system.

ALEX SLOAN:  Richard Wood, will any good come out of this?  Will there be a national conversation?

RICHARD WOOD:  It'll be interesting to see, I've no doubt there'll be lots of people who will back Wayne Swan up, but I hope in doing so they have that discussion with the people, the public, about the consequences of when Government gets together with big business, and has negotiations behind closed doors, because that's the real threat to a fair go.

ALEX SLOAN:  Richard Wood, nice to talk to you.  Thanks for joining me.

RICHARD WOOD:  Thanks for having me.

ALEX SLOAN:  Happy to hear your thoughts this morning, and as I said, I haven't read the whole essay, I've read the extracts today in The Australian Financial Review, and Wayne Swan is saying that our fair go culture is under threat by a small group of the very rich, including Andrew Forrest, Gina Rinehart and Clive Palmer.

* * END * *

Good oil refined out of existence

Caltex has seen its share price value outperform that of similar stocks in recent weeks.  Usually it is a promising new investment that drives a firm's improved stock value but in the Caltex case it is disinvestment that has prompted the share price to rise.  This involves a contemplated closure of the firm's Brisbane and Sydney oil refineries, first foreshadowed in December 2011 and followed by an announcement last month.

The Caltex refineries are old but have been continually modernised.  Their inefficiency in producing petroleum products relative to imports is due to economies of scale.  Compared with the 500,000- 1.5 million barrels per day (bpd) of modern refineries, Australia's seven refineries have 80,000-140,000 bpd capacity.  Mobil closed its Adelaide refinery in 2003 and Shell will do the same for its Sydney site.

The news begs the question, ''Why are we not replacing rather than retiring petroleum refineries?''  Clearly, the answer is that it is cheaper to import than refine in Australia.  It may be said that this is because of lower wages costs overseas.  Federal minister Bill Shorten's story is that, ''we're never going to be as cheap as Burkina Faso for labour''.  But we seem to be more expensive than the US and Singapore, where many of the largest plants are and where, as in Australia, oil refineries need to be export-oriented.

Although Australian earnings may be comparable with those in Singapore and the US, productivity is considerably less.  But even in the absence of labour regulations that provide over-fertile ground for union militancy, Australia has other deficiencies in the way of new petroleum refineries.

The first concrete proposal would incite spates of state and federal inquiries into environmental impacts, which would doubtless find some parrots, worms or ''unique ecological communities'' that would be imperilled.  These would be buttressed by further inquiries using heritage, Aboriginal and other development-arresting regulations.

The extra costs and inflexibilities would not stop there.  Once built, a facility would doubtless be deemed, like most other oil facilities, to have some monopolistic characteristics that would justify the Australian Competition and Consumer Commission setting ''fair'' arm's length prices that the facility might charge other firms for its outputs.

In real terms, mining has shown a tenfold rise in capital spending, manufacturing a mere 10 per cent, and other industries have doubled.

Instead of removing the impediments to productivity-enhancing investment, the political reaction is to add taxes to the sector with proven attractiveness.  This will result in a fall in total investment and therefore living standards.

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The decriminalisation (or even legalisation) of drugs

It doesn't take more than a moment of thought to recognise that the rulings on which drugs are legal or illegal are governed by no particular logic.

No theory from medicine or philosophy or psychology demands alcohol, tobacco and caffeine must be legal while marijuana, cocaine, and heroin must be prohibited.

We cannot rely on distinctions about relative harm.  Many experts have pointed out that marijuana is on balance less dangerous than alcohol.  But this legal discord isn't unusual.  One British police chief controversially stated a few years ago that ecstasy is safer than aspirin.

Nor is the distinction between recreational or medicinal use any help.  There are legal and illegal drugs that fall on both sides of that artificial line.

The generally accepted definition of the word ''drug'' offers no guide to legality either:  ''any substance other than food which by its chemical nature affects the structure or function of the living organism''.

Whether a drug is illegal is nothing more than an accident of history.  Drug laws were not written dispassionately by a panel of the best medical and ethical minds in the world.  The laws bear no relation to the damage those drugs could cause or their danger to society — they were not written to minimise harm or protect health.

Quite the opposite:  the current schedule of drugs in the Western world has been driven by politics, expediency, prejudice, and sometimes outright racism.

Take, for instance, the prohibition that kicked it all off — the prohibition on opium.

In 19th century Britain, opium was so common as to be part of everyday life.  It was an essential ingredient in tonics and pick-me-ups.  One writer claimed in the 1870s that opium use ''may indeed be said to have reached the height of Fashion''.

Few British conceived of a drug ''problem''.  Certainly, there were dramatic, gothic tales of addiction and vice.  Thomas de Quincey's novel Confessions of an English Opium-Eater is the most well-known.  And there were some distressing, but not representative stories of overdose.  But, culturally, moderate drug use was normal.

And the medical establishment largely accepted this.  When reporting on the Royal Commission on Opium in 1893, the iconic journal Lancet described it as a ''crushing blow to the anti-opium faddists''.

There was however, an ''opium problem'' in Australia and the United States.  The difference was race.  In both countries there was a significant Chinese minority who had brought their country's opium smoking habit with them.  The first war on drugs was a proxy for racial politics, not public health.

''Who has not seen the slave of opium?,'' the Victorian minister of health asked parliament at the end of the 19th century:  ''a creature tottering down the street, with sunken yellow eyes, closely contracted pupils, and his skin hanging over his bones like dirty yellow paper.''

The issue here, clearly, was not opium but the Chinese.

Unsurprisingly this attitude towards opium was hard to separate from the belief Chinese migrants were undercutting Australians in the employment market.  The visceral hatred of opium-smoking was the manifestation of resentment about labour competition.

It was the same in the United States.  As the British writer Christopher Snowdon points out in his excellent new book The Art of Suppression, ''if the government could not get rid of opium-smoking, it would get rid of opium-smokers''.

The 1862 Californian law Protect Free White Labor Against Competition with Chinese Coolie Labor and Discourage the Immigration of the Chinese into California Act is self-explanatory.

One of the most prominent American anti-opium campaigners, Dr Harry Hubbell Kane, openly argued that those concerned about job competition should focus their animosity on Chinese drug use.

It is easy to tell a parallel history of marijuana prohibition, which was overwhelmingly used by Hispanics and African-Americans.

And in his book, Snowdon details the tabloid hysteria of recent times which has led to laws against ''designer'' drugs — synthetic concoctions which are better described as second-rate substitutes for safer, purer, and already prohibited drugs.

Do the political origins of drug laws matter?  Absolutely.

The first international treaty on drug control was signed in January 1912.  The war on drugs is 100 years old this year.

This century-long war has definitively and undeniably failed.  There is widespread belief in expert circles that the world needs to move towards decriminalisation (or even legalisation) if we want to minimise the harm of drug abuse.

But the biggest cultural barrier to such reform is the current status illegal drugs have.  In the sort of circular reasoning that only popular discourse can manage, the prohibition of drugs is mostly justified by their pre-existing legal status.  Why are certain drugs prohibited?  Because they are illicit drugs.

But that status has been set by politics and moral panics, not dispassionate evidence-based risk assessments.  Drug prohibition carries the legacy of the ugly politics of the past.  Once we realise that, we may start to rethink the justice of a war that is, in truth, not against drugs, but against drug users.

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No Love Lost Between Labor and Rudd

In yesterday's ballot for the Labor Party's 102-strong legislative caucus, freshly resigned Minister of Foreign Affairs Kevin Rudd lost spectacularly to Prime Minister Julia Gillard — 31 to 71 votes.  Australia's favorite politician and most popular prime minister in history, a man who gets mobbed like a rock star on the street, left dejected for the back bench.  How did Mr.  Rudd become so loathed in his own party?

Even in the rough-and-tumble world of Australian politics, last week had to go down as one of the worst.  It began with a leaked YouTube video of Mr. Rudd swearing profusely and slamming his desk.  Then senior Labor Party ministers complained about Mr. Rudd's relentless stealth campaign to seek revenge on Ms. Gillard, who had knifed him during his first term as prime minister in June 2010.  Next Mr. Rudd appeared to have pre-empted a move against him by resigning as foreign minister while abroad.  That preceded a contest for the ruling party's leadership with enough conniving and betrayal to make Lady Macbeth blush.

Meanwhile, authority is draining away from the prime minister as if from an open wound.  A year of mounting mistrust over her carbon tax back flip is destroying what little credibility she has left.  Ms. Gillard's approval rating is only 26% and her minority government trails the center-right Coalition by double digits in opinion polls.  Even those who rally around Ms. Gillard do so with little hope — theirs is a contemporary charge of the Light Brigade.

Mr. Rudd's fall from grace has little to do with Ms. Gillard and everything to do with Mr. Rudd.  The 54-year-old Mandarin-speaking former diplomat has two weaknesses:  He has never been much liked by anyone who's worked closely with him and he presided over a dysfunctional government and unprincipled policy agenda from December 2007 to June 2010.

Start with the personal.  Mark Latham, the former Labor leader and now a widely read columnist, reflects the views of many of Mr. Rudd's colleagues when he says:  ''Those who know him best like him least.  And those who say they like him have never actually met him.''  Nearly everyone accepts that ''Heavvie Kevvie'' is somewhat boring and a bit nerdy.  (How else to describe someone who refers to himself in the third person as ''K. Rudd'' and who utters cringe-inducing Australianisms like ''Happy Little Vegemite'' and ''fair shake of the sauce bottle''?)

But his colleagues prefer stronger adjectives — abrasive, arrogant, aloof and autocratic.  In the past week, one member of parliament called him a ''psychopath'';  one senior minister derided him as ''a complete and utter fraud'';  several others refused to serve under him;  and even his former senior mental health adviser has warned that ''this man is not fit for prime minister.''

Then there is his record.  During his two-and-a-half years as prime minister, he espoused so many different positions, often repeatedly and stridently, that he left virtually everyone with the impression that his arguments were always suspect.  Ms. Gillard is widely detested across the nation for legislating a carbon tax she pledged not to introduce.  But Mr. Rudd flipped and flopped with the best of them.

This is a man who once defined himself as an ''economic conservative,'' but once in office took a leftist and interventionist approach to almost every economic issue he addressed.  A man who pledged to stem the flow of illegal immigrants, but ended John Howard's tough stance against people-smugglers that boosted public confidence in large-scale and non-discriminatory legal immigration.  A man who claimed climate change was ''the great moral challenge of our time,'' but dropped the evangelical language along with an emissions trading scheme after the Copenhagen debacle changed the political climate at home.

Such have been the twists and turns of his philosophical journey that it is impossible to know what Mr. Rudd thinks.  Add to this that he ran an utterly dysfunctional and chaotic cabinet.  By most accounts, he regularly treated staff and public servants with rudeness and contempt.  He silenced internal critics and punished those against whom he held a grudge.  And he held up vital decisions while he vacillated over policy and procedure.  No wonder his colleagues overwhelmingly rejected him (again).

Much of the brouhaha of last week won't die down anytime soon.  Although Mr. Rudd has been relegated to the back bench, he will dog his nemesis effectively.  For her part, more than a few of Ms. Gillard's own supporters think the prime minister is among the walking dead.  Meanwhile, many Labor figures are fretting and wailing that Australia's oldest party, which has experienced three splits in the past hundred years, is tearing itself up again.

As the government heads for the mother of all hidings in the next election due in 2013, party hard heads will cast about in vain for someone else who can stymie Mr. Rudd's next challenge while blocking the rise of opposition leader Tony Abbott and his conservatives.  If the last week is anything to go by, they'll struggle to find a cure for its deep-seated ills.

 

Old-school ideas not on the money

The Gonski report on school funding follows in the path of every other government report on schooling of the past 40 years.  It identifies the problem of falling education standards.  In reading, Australian students have fallen from having the second-highest standard in the Organisation for Economic Co-operation and Development (OECD) to seventh in the past 10 years.  In mathematics the fall has been from fifth to 13th.  Gonski's solution is more money, $5 billion more, with most of it to go to poor schools.

This latest report will make no more difference than any of the reports that have gone before.  Julia Gillard, who commissioned it when she was still education minister, has already indicated that a budget surplus is a higher priority than spending more on schools.

The Prime Minister could have said, but didn't, that the international research demonstrates reasonably conclusively that the relationship between education funding and student outcomes is tenuous.  This is the point made by an important report from the Grattan Institute released in the lead-up to the Gonski report.

The Grattan Institute identified that average spending per student in the OECD rose 34 per cent between 2000 and 2008.  In Australia it went up 44 per cent.  Yet over the same period the performance of Australian students actually fell.

The Grattan Institute's finding that more money is not the answer is the same conclusion that I and Brian Caldwell, then dean of education at the University of Melbourne, reached in 2002.  In Australia's Education Choices, prepared for the Menzies Research Centre, we said:  ''Numerous studies have shown that beyond a certain level, increases in education spending do not necessarily provide superior education outcomes.''

Unfortunately, evidence does not determine the level of education spending in this country, industrial and political pressure does.

It's impossible to understand what's happening to education in 2012 without appreciating some history.  Since the 1970s, school education policy in Australia has been essentially centred on three deeply ideological conflicts:  the public versus private debate;  the question of whether education should be homogenised or specialised;  and the issue of whether teaching is an industry or a profession.

Just about everything that has happened in schooling in this country is the result of a state or federal Labor or Coalition government coming down on one side of these conflicts.  Let's take them in turn.

In The Republic, Plato wrote that a ruling class could and should use what is taught to children to control society.  The insight that education shapes the political and economic structure of a community was taken up by a teacher in Brazil named Paulo Freire.  In 1968, he published Pedagogy of the Oppressed, probably the most influential book on education ever written.

Inspired by Marx and Gramsci, Freire argued that the rich and powerful, ''the ruling class'', use education to maintain their power against the lower classes.  The tools of the ruling class include teachers who instruct students rather than letting them be liberated to discover things for themselves;  the testing and grading of students (which promotes competition rather than co-operation and which creates ''winners'' and ''losers'');  and academic examinations (in which the wealthy invariably do better and gain access to further and better education).

Freire's call to arms was taken up around the world.  Twenty years later in Australia it helped produce the Victorian Certificate of Education (VCE).  As originally conceived, the VCE abolished external exams, eliminated marking (replaced by ''descriptions of attainment'') and removed distinctions between ''academic'' and ''non-academic'' subjects.  For the purposes of university entry, dance carried the same weight as physics.  Some proponents of the VCE took their thinking to its logical conclusion and advocated selection to university by ballot.

The VCE, albeit heavily modified, still exists and Freire is still taught in university education faculties.  The federal government's new national curriculum, mandatory in every government and non-government school, is quite explicit about what it regards as the purpose of education — it should create ''a more ecologically and socially just world''.

What happened in Victoria in the 1980s was more extreme than occurred elsewhere in Australia but it neatly demonstrates the public versus private debate in practice.  Should education be a vehicle for social change and the public good, however defined, or is its purpose to provide a benefit to the individual?

Then there is the question of whether parents should be allowed to exercise choice in where their children attend school and whether taxpayer dollars should subsidise a choice that entrenches privilege and ''reproduces'' social inequality (to use the term of French postmodernist philosopher Jean-Francois Lyotard).

Homogenised education versus specialised education goes to the issue of the structure and content of teaching.  Until the 1970s many states in Australia had high schools and technical schools.  High schools specialised in academic subjects and technical schools specialised trade and vocational subjects, a division basically inherited from the UK.

It was assumed that students at technical schools would leave school as soon as they had passed the minimum leaving age, while those finishing high school would attend university.  In the same way that the British shut down their grammar schools to create comprehensives — a process Margaret Thatcher as prime minister in the 1980s did not encourage but did nothing to stop — in Australia, high schools and technical schools were merged into secondary colleges.  The idea was to provide ''parity of esteem'' between the different kinds of subjects, and the various secondary school qualifications were merged into a single certificate.  How successful this experiment has been is controversial.  Supporters argue a comprehensive education gives students more choices and doesn't categorise them.  Opponents argue that only specialisation can meet the specific needs of students, regardless of whether they are academically inclined.  It's interesting to note that many state education authorities are reintroducing differentiated secondary qualification and allowing schools to specialise in areas such as sport, music, drama and languages.

Finally, there are the teachers — the second most important part of the education equation (the most important are the child's parents).  Teaching in Australia is an industry, not a profession.

Here, as elsewhere throughout the world, teacher unions wield enormous power.  They have the capacity to strike and inconvenience hundreds of thousands of voters.  The Australian Education Union is a major force in the country's labour movement.

It's not surprising that successive ALP and Coalition governments have been afraid of the teacher unions.  Their power has had three effects on education.

The first is the bulk of additional funding for education has gone into hiring more teachers instead of paying existing teachers more.

The second effect is that promotion and pay conditions have been determined according to the rule of industrial negotiation.  A consequence of this is that in Australia the starting salary for teachers is relatively high by world standards, but salaries for experienced teachers relatively low.

The third effect of a heavily unionised workforce has been that up until the past few years there was minimal accountability and performance measurement of teachers.

The clarion call of ''we must get the best and brightest students into teaching'' is correct, but so far has proved notoriously difficult to implement.

It's no surprise the Gonski report either doesn't deal with these big issues or skirts around them.  Its main purpose was to fulfil an ALP commitment to the teacher unions.

But until we understand and confront some of the conflicts just described, as a nation we will continue to spend more and more money on education and get worse and worse results.

Abbott needs to be ready

Kevin Rudd and big business have a lot in common apparently.  According to Labor ministers they're both willing to put self-interest ahead of the ''national interest''.

On Wednesday Industry and Climate Change Minister Greg Combet was at the National Press Club berating big business for complaining too much about industrial relations.

According to Combet, when big business points out that the Fair Work Act has resulted in more strikes and lower productivity, companies are talking in their ''self-interest'' and not the national interest.

Then a few hours later, after Kevin Rudd had resigned as foreign minister at a 1am press conference and let loose at Julia Gillard, Treasurer Wayne Swan let loose at Rudd.  Swan accused him of putting ''his own self-interest ahead of ... the country as a whole''.  Since Rudd's resignation there are a few other things he's been accused of as well.

Until this week, Labor politicians usually waited until their party was in opposition before they started abusing each other in public.  At the rate they're going, Labor will have the luxury of years in opposition to continue this fight regardless of who wins Monday morning's leadership ballot.  ALP members will have the time to ponder what their party stands for.

The ideological condition of today's Labor Party is revealed in the fact that Kevin Rudd's pitch for the leadership is based entirely on one simple assertion — that he has the best chance of beating Tony Abbott.

The Gillard-Rudd leadership battle has nothing to do with policy;  it is entirely about electability.  It's another demonstration of how federal Labor politics is now virtually indistinguishable from NSW Labor politics.

Everything that's happened this week is, of course, good news for Tony Abbott.  It's likely that this time next week Julia Gillard will still be Prime Minister, and that's more good news for Abbott.  Coalition MPs are not unhappy about facing an ALP led by Gillard.

Rudd as prime minister again is an entirely different dynamic.  He could say he's sorry for swearing, dump the carbon tax (or at least delay it) and break Labor's alliance with the Greens.  At a stroke he'd negate half of the Coalition's election campaign and overnight the race would become competitive.  Tony Abbott knows this, Julia Gillard and Kevin Rudd know this, and so does virtually every Labor backbencher.

It's a testament to the level of hostility Rudd has generated that despite all of the above only a third of the caucus are likely to vote for him.

It's easy to preach from the sidelines about the need for the federal Coalition to have a transition to government plan when there's an election to be won.  But we've seen in Victoria what happens when parties win government and they're not ready.  The Baillieu government is starting to govern effectively but it's taken at least a year for that to happen.

Abbott needs a plan because there won't be any time to lose.  He will need to make massive spending cuts to fund his promises, to finance the raft of taxes he wants to abolish, and to get a budget surplus.  And he'll have to do this while fighting a potential double dissolution election to get the repeal of the carbon tax through the Senate.

The cuts Abbott needs to make provide him with an unprecedented opportunity to reshape the country's tax and welfare policy framework.  Welfare and income transfers are where the savings in government spending will come from.  Instead of Labor's piecemeal cuts to so-called ''middle-class welfare'', Abbott has the chance to go back to fundamentals and ask the questions no one has asked for decades, such as ''what is welfare'', ''who should get it'', and ''how much should they get''.

This is the opportunity the Coalition missed after it commissioned the McClure report on Australia's welfare system in 1999.  Politics and elections got in the way and the report was buried.  Trends identified a decade ago, such as the rapidly growing number of Australians on welfare and the high prevalence of inter-generational joblessness, have continued.

Abbott won't win the next election by promising welfare reform and spending cuts.  But regardless of whether he talks about these things or not, if he gets to be PM they will dominate his first term.

Labor is doing Tony Abbott's work for him.  Which gives Abbott the chance to spend less time worrying about winning the next election, and more time worrying about how to make sure he'll run a good government.

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Not Only Nixon Could Go to China

President Richard Nixon's visit to China 40 years ago this week is rightly remembered as a historic breakthrough.  Decades later, however, few political myths are as persistent as the notion that ''only Nixon could go to China.''

The mythology runs like this:  Only a red-baiting, Commie-hating Republican could do something that would have been out of reach for a soft, left-liberal Democrat.  Only a bellicose and unscrupulous anti-Communist, whose credibility with fellow conservatives would shield him from any domestic attack, could sup with the devil and become a peacemaker.

At the time of the rapprochement in 1971-72, the Democratic Senate leader, Mike Mansfield, declared:  ''Only a Republican, perhaps only a Nixon, could have made this break and gotten away with it''.  The phrase ''only Nixon could go to China'' has since become part of the Anglosphere's political lexicon to describe a moment when a political leader defies expectations by doing something that would anger his supporters if taken by someone without his credentials.

A Nixon-in-China moment is usually when a conservative surprises with a progressive stance.  Think of Ronald Reagan's detente with the Soviets, or George W. Bush's $15 billion initiative to tackle AIDS in Africa that even won kudos from Bob Geldof.  You could even argue that Disraeli made a Nixon-in-China move a century before the phrase was coined when the Tories, not the Liberals, enfranchised the masses.

But as we mark this week's 40th anniversary of Nixon's visit to the People's Republic, it's time to address the myth behind that famous phrase for such political gymnastics.

After all, the post-1949 U.S. political consensus to isolate Communist China had collapsed several years before Nixon's visit in February 1972.  So radically had the political climate changed that even a liberal Democratic president could have met with Mao Zedong and Zhou Enlai without arousing the anger of Middle America.

In 1966, as serious doubts emerged about the Vietnam War and the Sino-Soviet split became increasingly evident, a great debate over China policy began.  Opinion leaders — politicians, columnists, businesses, think tanks — began to criticize the nearly two-decade-old policy of pretending that the world's most populous nation did not exist.  The hitherto hard-line New York Times published no fewer than 20 editorials calling for a new policy of accommodating the Middle Kingdom.  Polls showed dramatically rising public support for negotiating with Peking, easing the travel ban, and supporting mainland China's admission into the United Nations.  Further, in July 1966, President Lyndon Johnson delivered a nationwide address to advocate ''reconciliation'' with the Communist rulers.  Clearly, a new era of U.S. understanding of China had already begun.

Meanwhile, Nixon was uncharacteristically silent.  Since the Communist Revolution of 1949, and even after U.S. allies such as Britain and France had reestablished diplomatic relations with the mainland, the ambitious congressman, senator, vice president, and private citizen had built a reputation as a China hawk.  In 1951, he even endorsed Senator Joe McCarthy's charge that treasonous State Department officials had ''lost China'' by abandoning nationalist forces.  And as late as June 1966, he warned that ''appeasement [of] Red China [in Vietnam] would lead to World War III.''

From the summer of 1966 to the fall of 1967, however, he made no public comments about China policy.  The silence was significant.  In mid-1967, when he returned from his fifth Asian trip in as many years, Nixon revisited the subject in a much-publicized article in Foreign Affairs.  In it, he advanced the idea of bringing Peking in from the cold.  ''Taking the long view,'' he argued, ''we simply cannot afford to leave China forever outside the family of nations''.  Suddenly, we were all appeasers.

To be sure, Nixon's case for accommodating China was nuanced.  After all, the last thing he wanted to do on the eve of the 1968 Republican primaries was to raise doubts about his conservative credentials.  But Nixon, with a wet finger to the wind, had nonetheless recognized as early as 1966-67 that the anti-Communist climate had changed.  No more red-baiting for him.

Why, then, did it take another five years before the door was opened?  The answer has more to do with China's xenophobic stance during the Cultural Revolution than with any hostility on Washington's part.  Indeed, when Nixon announced his decision to visit China, the amazing thing is that America and the world were amazed.  Long gone were the days when mainstream politicians felt compelled to outlaw and blacklist anything Chinese.

Proponents of the Nixon-China myth make another argument:  that only someone with such authority and credibility on the right of the Republican party would meet little resistance from his own side.  Yet Nixon's great flip-flop actually reflected mainstream Republicans' increasing acceptance of China, and alienated the last of the true believers in isolating ''Red China.''

For most conservatives, Nixon's U-turn was the tipping point in a fractious relationship that had included several betrayals, including price-wage controls, ending the gold standard, and declaring that — gasp — ''we are all Keynesians now''.  During ''the week that changed the world''.  William F. Buckley Jr. — National Review editor and patron saint of American conservatives — complained that the U.S. had ''lost, irretrievably, any remaining sense of moral mission in the world''.  Leading conservative and NR publisher William Rusher called the betrayal of Taiwan ''one of the greatest double crosses of all time.''

William Loeb, publisher of New Hampshire's Union Leader, warned that Nixon's ideological odyssey was ''immoral, indecent, insane and fraught with danger for the survival of the United States''.  Reverend Carl McIntire, chairman of the Vietnam ''March for Victory'' committee, charged that Nixon had ''abandoned all moral principles:  it is like God and the devil having a high-level meeting''.  Republican senators and congressmen broke off relations with the White House.  And actor John Wayne deplored the president's week-long China trip as ''a real shocker.''

If Nixon had been a Democrat, say the Nixon mythmakers, the Republican right would have been outraged over his China overtures.  But they were clearly outraged anyway.  By betraying conservatives, Nixon did himself no favors in the lead-up to the Watergate crisis when he desperately needed friends.  So much for the argument that only Nixon could go to China.

O'Farrell's campaign finance reforms are abominable

As a general rule, any government that changes the rules of elections and political campaigns should be looked upon sceptically.

It's too easy to dress up a base attack on your opponents in democratic frills.

But even with those cynical expectations, the changes to campaign finance laws in New South Wales are abominable.

The Election Funding, Expenditure and Disclosures Amendment Bill 2011, which passed the NSW parliament last week, is transparently designed to defang the union movement and defund the Labor Party.  The bill bans donations to political parties from any organisation, allowing only those from individuals, and maintains the cap on donations from any individual at $5,000 a year.

In one fell swoop, there goes the Labor Party's reliance on union affiliations.

The Government might argue that if Labor is hurt by this reform, so is the Coalition.  Corporations are no longer able to donate either.  In Premier Barry O'Farrell's words, the reform will create an ''equal and level playing field for all''.

But the key dynamic threatened is not between Labor and the unions, or between the Coalition and the corporate sector, but that between opposition and government.

Restrictions on donations hurt the party out of power.  It is expensive to compete with the soapbox of incumbency.  Stemming the flow of money favours the government.

Compounding this, donors like to back winners.  And Labor, reeling after a historic loss, is bound to be a loser for the foreseeable future.

Yet that sort of crude political calculation is par for the course when it comes to donations reform.  The truly obnoxious part of the NSW Government's bill is how it restricts third party organisations from conducting political campaigns.

Any third party involved in ''promoting or opposing, directly or indirectly, a party or the election of a candidate or candidates, or for the purpose of influencing, directly or indirectly, the voting at an election'' falls under the restrictions and can now only be funded by individuals.

In a way you can understand why the bill does this.  Donations reform in the United States has demonstrated when you cut off funding to political parties, money will flow into other campaigning bodies to compensate.

But the NSW Government's solution to this problem is to restrict the ability for organisations to participate in public debate (of course, this would really hurt the unions).

The Premier has repeatedly said these laws will not affect ''genuine issues based campaigns'' and ''genuinely independent'' third parties.  That's not very comforting.  People are free to advocate policy as long as they do not hint at support for a political party to implement that policy?

And the distinction between genuine and political is not very clear.  Indeed, as Andrew Norton of the Grattan Institute pointed out in his submission to a parliamentary inquiry into the bill, NSW election law now draws some awfully fine and complicated distinctions between what political expression is free, and what is regulated.

The reforms intend to restrict participation in political activism solely to individuals, rather than corporations, unions, and peak bodies.  Is our right to freedom of speech and participation rescinded when we form groups?  Surely not.  But that is the basic assumption behind the NSW reforms.

Yet there is a deeper philosophical disagreement here, and it concerns how we understand ''democratic'' political debate.  Broadly, there are two models.

The first imagines democratic debate as a free-for-all.  People and organisations should be allowed to say and advocate whatever they want, support whoever they want through words or donations, and argue their case as publically as they can.  The rough and tumble of such a debate is natural — the sign of a healthy liberal democracy sustained by a broad freedom of speech.

The second model argues that governments should ''manage'' the debate.  The parliamentary inquiry said the reforms sought to ''promote fairness and equality''.  As Kristina Keneally said back in 2010, ''those with the most money have the loudest voice and can simply drown out the voices of all others''.  In the name of democracy, loud voices need to be quietened.

But this second model is puzzling.  Free debate informs the decisions made by voters to elect representatives and change governments.  Free debate is at the heart of democracy.  So what right does a government have to manipulate that debate?  How can it legitimately suppress and restrain participants that it has determined are excessively loud, or decide what constitutes a ''genuine'' — rather than political — campaign?

A government's legitimacy requires voters to make a free choice about their vote.  That choice is not free if the government is managing how those decisions are made — preventing some third parties from endorsing and supporting candidates.  Andrew Norton has noted that the losers from these reforms are community non-profits.  Corporations don't rely on donations to run political campaigns.

It's an appealing idea to ''get money out of politics''.  But legislative attempts to do so have invariably punished oppositions, entrenched incumbents, and limited political participation.  The O'Farrell Government's reforms are just an egregiously bad example.

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Private v public health care: no simple policy cure

Last week the ALP government achieved one of its goals — the private health insurance rebate will be means tested from July 1, 2012.

For many this was a simple issue of removing middle-class welfare.  Tanya Plibersek made the point that people earning $50,000 a year shouldn't be subsidising the private health care of individuals on $250,000 a year.

Well said.  Individuals on $50,000 shouldn't be subsidising anyone.  The problem is Plibersek's argument works too well.  Are we to believe that people on $50,000 are subsidising all government services that are not means tested?  On that logic public education and public health could be means tested too.

Private health insurance is something of a bug-bear for social democrats who believe that everyone should have equal access to health care.  That belief implies a fully public health system.  Let's be clear — that is perfectly respectable policy position.  But it does raise some thorny problems.

A public health system must have politicians and bureaucrats making choices as to how much health care everyone gets.  It must ignore the personal preferences of those who would like a little more and even those who would like a little less.  Such a system is a wealth transfer from the young and healthy to the old and unhealthy.  To be fair, however, that is a price social democrats are prepared to pay.

Public health systems are likely to be quite expensive.  Not just in monetary terms.  Money can be saved by having long waiting times for treatment.  Economists can put a monetary value on pain and suffering, but that figure never turns up in a budget.  So public health incurs a cost to the public purse, and imposes pain and suffering on patients who have to wait for treatment.

A private health system can relieve some of the pressure on a public health system.  Those who are willing and able to pay more for their health care can exit the public system and incur less pain and suffering.  Given the fewer patients in the public system waiting times are reduced (for a given level of expenditure) and/or the monetary cost of public health is reduced too.  Everyone is a winner.

It is this kind of logic that underpinned the private health insurance rebate.  The government shared the budget cost saving with the taxpayer who generated the saving by buying private insurance.  Some readers, of course, will view that argument with some suspicion.  Quite rightly so.  Yet in a 2003 analysis, Ian Harper produced an astonishing graph that supports that story.

The other criticism is that the Howard government never told that story — or if it did, didn't tell it well.  The rebate was always sold as being some sort subsidy to the private health care industry.  All industry subsidies should be removed — not just for health care but the motor industry too.

So when evaluating means testing of private health care we need to consider what has actually happened.  If this is eliminating an industry subsidy then it is good policy.  But if there was a cost sharing arrangement in place then it might not be good policy.

For those who retain their private health insurance the cost of living has increased.  There are three mechanisms driving that increase;  the loss of the rebate, the potential for increased insurance premiums, and the increased monetary cost of the public health system.

There has been a lot of schadenfreude — social democrats sniggering that families on incomes more than $166,000 can't really be doing it tough.  Maybe not — but they vote and a minority government has to gain votes, not lose them.  Essential Media reports that while 76 per cent of Labor voters support the policy only 33 per cent of the population intends voting Labor.  Only 38 per cent of Coalition voters support the change.

What about those who drop out of private health insurance?  (If thinking about doing so, you should first evaluate the impact of the Medicare levy surcharge.  The ATO has some tax calculators that should assist in making the decision.  You may find that even though you would like to drop out that financially you would worse off.  If so, then your cost of living has increased.)

For those people who do actually drop out, then the net cost or net benefit depends upon the interaction of the saving from not paying for private insurance against the increased cost of the public health system and the additional pain and suffering incurred by increased wait times in the public health system.  Those who are young and healthy (and on low lifetime incomes) may find a net benefit to dropping out.

Drop-outs, however, will impose a cost on those who remain (increased premiums) and those already in the public system (increased pain and suffering while on waiting lists).  The increased budget cost of public health gets shared across the tax system in proportion to the overall tax burden.

For those who never had private health insurance they now have to share the public system with those who drop out of the private system and, to the extent they pay tax, they will pay more for the public system.

So in summary — what is really happening?  On the assumption the private health insurance rebate was a sharing arrangement, the means test is actually quite regressive.  Everyone experiences an increase in the monetary cost of public health, those who remain experience an increase in the cost of private insurance, everyone else experiences an increase in pain and suffering while waiting for public health care.  The drop-out rate, that the government hopes will be low, will determine how regressive the policy is, not whether it is or is not regressive.

If the objective of a public health system is to minimise the incidence of health related pain and suffering, this policy is unlikely to be good policy.  If on the other hand the objective is to minimise the incidence of private health care and democratise pain and suffering in waiting lists, it is more likely to be good policy.

An Australian bloodbath

It's an intricate two-step, but one false move now spells death.  As Kevin Rudd surprises everyone, including his own supporters, with his adroit middle-of-the-night resignation in Washington DC, seeking the ideal strategic moment to knife his nemesis, the Prime Minister ducks and weaves hoping she won't shoot herself in the foot (again).

''The simple truth is that I cannot continue to serve as Foreign Minister if I do not have the Prime Minister's support,'' said Mr Rudd, hilariously eschewing a ''stealth attack on a sitting Prime Minister'' and twisting events to appear decisive and ''honest'' while fraudulently painting himself as the aggrieved and innocent party (''the Australian people want an end to this soap opera'').  Jumping before he was pushed, he has cannily thrown the spotlight onto Julia Gillard's presumed inability to beat Tony Abbott at the next election.

When a political party tears itself apart in such spectacular fashion, there is often a key policy issue at stake;  Abbott vs Malcolm Turnbull over climate change being an obvious example.  Not this time.  As with his original ''faceless men'' dethroning, Mr Rudd's latest move comes with no philosophical baggage.  It's simply a question of perceived popularity, mind games and who is the wiliest fighter.

In the absence of any clashes of conviction, Mr Rudd had to find another angle of attack.  This was eagerly provided by the Press Gallery over the past few weeks, keen to notch up a hit after being wrong-footed by political events more than once in recent years.

A strong, confident leader would have been impervious to the hysterical but essentially empty provocations of various media outlets.  Ms Gillard wasn't.  Above all, it is Mr Abbott's success in fatally weakening the Prime Minister that is at the heart of her current predicament.  Constantly carping on about his ''negativity'' and the ''No-alition'' has proven to be Ms Gillard's biggest mistake.  At every turn, and on every policy issue, she has empowered the opposition leader in the eyes of the electorate (and, possibly, wavering members of Caucus), while feeding the impression that she doesn't know how to defeat him.  Much like the picadors who soften up the animal for the kill, Mr Abbott has relentlessly driven his spear into the spine of Ms Gillard, making it that much more tempting for Rudd the matador to convince himself (and his supporters) that he can finish her off.

Bleeding, clearly rattled, and unable to shake off the ''untrustworthy'' tag, it is immaterial whether Ms Gillard survives.  Her confidence and authority are shattered, and her Prime Ministership is doomed.  And yet Mr Rudd himself is deeply unpopular within Caucus, as this week's bloodletting from colleagues Wayne Swan and Tony Burke made clear.  Meanwhile, there is always the possibility of a third contender popping up, eventually.  Whoever is left standing, the Labor party has been battered to within an inch of its life.  Still, for pure entertainment value, not much can compete with the bloodsport of Labor politics.

Avowed anti-communist opened China to the world

''Congratulations on a magnificent breakthrough!'' Donald Rumsfeld wrote to Richard Nixon after his announcement that he would visit the People's Republic of China.  Left-liberals praised their archenemy.  Senate Democrat leader Mike Mansfield said he was ''flabbergasted, delighted and happy'' and was ''looking forward to a new day''.

According to most historians, the rapprochement was the 37th president's finest hour.  But Nixon's visit to Peking (now Beijing) also angered American conservatives, the last of the true believers in isolating ''Red China''.

William F. Buckley Jr, editor of National Review, complained that the US had ''lost — irretrievably — any remaining sense of moral mission in the world''.  Publisher William Rusher called Nixon's volte face ''one of the greatest doublecrosses of all time'' while movie actor John Wayne deplored the week-long trip as a ''real shocker''.

Still, there is no denying the merits of the China opening 40 years ago next week.  It was probably the most significant diplomatic initiative since the launching of the Marshall Plan and creation of NATO in the late 1940s.  Nixon and his national security adviser, Henry Kissinger, exploited the Sino-Soviet split in order to create a global balance of power.  By breaking a 23-year-old taboo on negotiating with the leaders of the world's most populous nation, they helped the Chinese people wake up to the modern world and gradually move away from the nightmares of the Cultural Revolution.

Nixon's overtures to the Middle Kingdom have been the subject of a large scholarly literature, not to mention a plethora of operas and plays.  Yet historians have failed to explain satisfactorily how a staunch anti-communist in the 50s and 60s suddenly became a sophisticated exponent of realpolitik in the 70s.  Instead, they promote one of the great myths:  that only a Nixon could go to China without causing a domestic backlash.

''The reason there was no outcry about the reversal,'' distinguished commentator Walter Lippmann remarked, ''was that it was made under the auspices of a certified anti-communist like Nixon.''

The argument goes like this:  just as the Tories, not the Liberals, enfranchised the masses of people in England in the 19th century, and just as a Labor prime minister in Bob Hawke, not a Liberal, deregulated the Australian economy, so too only a US political figure with impeccable anti-communist credentials could sup with the devil.

The conventional wisdom is wrong.  Why?  Because the American consensus to isolate communist China had collapsed by 1966, more than five years before Nixon's visit.  So swiftly had the political climate changed that even a liberal Democrat president could have negotiated with Mao Zedong and Chou En-lai in 1972 without arousing the anger of middle America.  Moreover, it was in 1966 when the pliant Nixon had begun his own ideological odyssey.

To understand this drama, it is worth putting the China opening in its proper context.  From the enunciation of president Harry Truman's doctrine of containment in 1947 until president Lyndon B. Johnson's prosecution of the Vietnam war two decades later, an anti-communist policy agenda dominated US politics.

Washington had isolated Mao's communist regime on the mainland (no trade, no UN seat, no recognition) and instead recognised Chiang Kai-shek's Nationalist regime on the island of Formosa (now Taiwan).

Any proposals to exploit Sino-Soviet tensions and play Peking off against Moscow were shunned.  And the Cold War crusade was waged from Korea to Indochina, ostensibly to counter Chinese aggression.

No political figure better reflected the prevailing wisdom than Nixon.  As congressman (1947-51), senator (1951-53) and vice president (1953-61), he maintained that the Nationalists in ''Free China'' (Formosa) were the true representatives of the Chinese people while ''Red China'' was an ''outlaw nation''.

He even endorsed Joe McCarthy's charge that treasonous US diplomats had ''lost China''.

The role of US foreign policy, he urged, ''must be nothing less than to bring freedom to the communist world''.  Otherwise, ''Mao might welcome a third world war as a means of spreading communism.''

After losing the 1960 presidential election to John F. Kennedy and then the 1962 race for California governor, Nixon remained in the public arena.

During the ''wilderness years'' — the five years between his defeat in 1962 and his second presidential run in 1968 — Nixon made numerous trips around the world, including five to Asia where he met leading figures.

A close study of his private notes of those meetings is revealing.  Written on his trademark yellow pads, the notes highlight Nixon's keen, analytical mind.  He read omnivorously and functioned always as an enquiring scholar.

These notes reveal his command of not only contemporary strategic issues, but also the thoughts of the major players in Asian politics.  They also reveal Nixon's changing views on China.

Take his meetings with Charles de Gaulle in 1963 and Muhammad Ayub Khan in 1964.  The French and Pakistan presidents told Nixon the Sino-Soviet split was ''real'', and ''driven by nationalism'' (not ideological differences, as cold warriors argued), and Washington should ''exploit the split by playing China off against Moscow''.

In public, however, Nixon would continue to denounce such arguments when they were made by Democrats in the US.  ''How can anyone in a responsible policy-making position say that the Cold War is thawing?'' Nixon argued in November 1964.  ''The Cold War is not thawing;  it is burning with a deadly heat.  Communism is not changing;  it is, as always, plotting, scheming, working, fighting.''

On relaxing US opposition to communist China:  no accommodation, no compromise, only total victory.

Yet by early 1967, when Nixon again met de Gaulle and Ayub (as well as other leaders such as Singapore's Lee Kuan Yew and West Germany's Konrad Adenauer), it was the old cold warrior who privately championed engagement with China.  During a March 1967 meeting with Nicolae Ceausescu, Nixon spent most of the two-hour talk broaching the subject.  Needless to say, the communist dictator of Romania appeared perplexed.

In the October 1967 issue of Foreign Affairs, Nixon wrote:  ''Taking the long view, we simply cannot afford to leave China forever outside the family of nations''.  To be sure, the case for ending China's isolation was qualified, lest he upset the Republican Party's conservative base on the eve of the 1968 presidential primaries.  Still, Nixon had changed his tune.

This raises an important question:  if the Sino-Soviet split shaped the new Nixon's China thinking in the late 60s and early 70s, as most scholars suggest, why didn't he advocate rapprochement in 1963-65 when de Gaulle and Ayub told him that the US should exploit the evident cracks in the Peking-Moscow alliance?

The answer lies in understanding the broader US reconsideration of China policy.  In 1966, as serious doubts emerged about the Vietnam war, a great debate began.  Opinion leaders — politicians, journalists, business, think tanks — began to criticise the two-decades-old policy of isolating Peking.  Even the Sinophiles who had been dismissed as academic fringe-dwellers had suddenly gained a new legitimacy in congressional hearings.

It was widely agreed that China, far from being a reckless dragon bent on world revolution, had been more moderate and cautious;  and that Washington should make every effort to integrate Peking into the world community.

In 1966, the hitherto hard-line New York Times published no fewer than 20 editorials calling for a new policy.  Polls showed wide and increasing public support for negotiating with Peking, easing the travel ban and supporting China's admission into the UN.  President Johnson gave a nationwide address in July to advocate ''reconciliation'' with the mainland.

Clearly, a new era in US understanding of China had begun in 1966.  Meanwhile, Nixon was uncharacteristically silent.  From August 1966 until the second half of 1967, there is no evidence to suggest he had said anything publicly about China policy.  Nothing.  The silence was significant.

From the summer of 1949 to the summer of 1966, Nixon had frequently condemned any proposal to accommodate communist China.  But here was Nixon, with a wet finger to the wind, clearly catching the significance of the changing climate.  Not for him any more red baiting.

Why, then, did it take another five years before the door was opened?  The answer has more to do with China's xenophobic stance during the Cultural Revolution than any hostility on Washington's part.

Indeed, when Nixon announced his decision to visit China — done in the absence of any public concessions by the communist leaders — the amazing thing is that America and the world were amazed.  Long gone were the days when mainstream US politicians felt compelled to outlaw and blacklist anything Chinese.

Again, none of this is to dismiss the significance of Nixon's opening to China.  It's just that the circumstances did not need a Nixon to make a rapprochement succeed 40 years ago.

Liberal Labour reform

One of the first acts of an Abbott government should be to repeal the Labor Party's Fair Work Act.  Industrial relations reform has a strong political rationale and serious policy merit.

Following the 2007 federal election it became conventional political wisdom that industrial relations policy was a no-go zone for the Liberal Party.  After all, the much-loathed WorkChoices legislation had contributed in a significant way to the party's loss of office after 11 years in power.

While it is certainly true that WorkChoices hastened the Liberal Party's demise in 2007, it is far from clear that the political response in 2011 should be to abandon the field of workplace relations reform.

In the 2010 federal election, opposition leader Tony Abbott was forced into an awkward promise to do precisely nothing in the field of labour market reform under pressure from Labor Party scare tactics and grilling from journalists.  From this came his now infamous pledge that WorkChoices was ''dead, buried and cremated''.

But surrendering the battle before the industrial relations war even began in the last election had two serious consequences that Abbott must avoid before the next election, due in 2013.  Firstly, by declining to prosecute the obvious failings of the Fair Work regime, the Liberal Party allowed the ALP to escape reasonable criticism of their workplace policies, and gave voters the impression that they were not causing major headaches for business and impacting on economic efficiency.

Secondly, in the minds of many voters, the Liberal Party has a deep-seated commitment to labour market liberalisation, so a promise to do nothing in this area has little credibility.  Voters who doubted the opposition leader's sincerity had only Labor Party talking points about a return to WorkChoices as a guide to what the Liberal Party would do if it won office.  By contrast, had Abbott outlined a sensible and moderate reform package, he would have been able to more credibly deny charges of a resurrection of John Howard's laws.

The economic case for industrial relations reform is strong.  Productivity is the single most reliable measure for predicting increases in living standards.  If productivity is rising, incomes soon follow.  In fact, there's no other sustainable way of increasing national wealth.  But after strong growth in the 1990s, productivity growth has been lagging for the best part of 10 years, and has slowed to a crawl in last few years.  It would be fanciful to attribute all of this slowdown to stagnant industrial relations laws, as productivity is affected by many economic factors.  But it would be equally foolish to argue that substantially re-regulating the labour market has absolutely no impact on productivity.

After all, the Fair Work Act not only overturned the 2005 WorkChoices laws, but also features of much earlier — and less controversial reforms.  For example, Fair Work eliminated statutory individual agreements, a policy introduced by industrial relations minister Peter Reith in 1997, which were obviously not egregious enough to prevent the Liberal Party winning elections in 1998, 2001 and 2004.  In effect, Labor has returned Australia to an industrial relations era of the early 1990s.

The signs of strain from this system are now becoming apparent.  High profile disputes such as the battle between unions and management at Qantas highlight the way in which the union movement has been emboldened by laws which tilt the system substantially in their favour.  Appalling stories of over the top salaries and ridiculously generous conditions at worksites like Victoria's Wonthaggi desalination plant demonstrate that taxpayers are bearing the cost of a system that pays little heed to economic reality.  We know from cases like that of students employed at a hardware store in rural Victoria — who were denied the chance to work two hour shifts under the laws — that the system is costing jobs.

And the business community is becoming more vocal every day of the increased compliance costs, the embedded disincentives to hire and the inflexibility that characterises the Fair Work Act.

Let's not lose sight of the moral component here either.  Why shouldn't employees and their employers be able to negotiate agreements that they believe are mutually beneficial?  Why should a third party like a union, or a tribunal of Fair Work Australia, be able to tell a small business how they should spend their money and who they should employ?

Australians should be grateful that we don't suffer under the perennially high unemployment that besets Europe.  Even in good economic times, countries like France and Germany have belaboured under the strain of unemployment rates of almost 10%.  This isn't just economically inefficient and expensive for taxpayers, but has a very real personal cost.  We know that unemployment is associated with a whole range of social ills and that the dignity of work is an extremely effective tool for combating them.  One of the reasons Australia has traditionally enjoyed lower unemployment and less of its associated costs is because of our relatively liberal labour markets.  But the current rigid system puts that at risk, particularly if we see the second global economic slump that many predict.

Ultimately, you can't shackle a 21st century economy with a 20th century industrial relations system without negative economic consequences.  If Labor won't reform Fair Work, it falls for Tony Abbott to do so.  The only question is, is he up to the task?

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