Federal government must learn from chaplains case

The unanimous High Court decision in the Williams (No 2) school chaplains case offers the Abbott government a historic opportunity to restore federalism.

The court found that federal legislation passed in 2012 authorising funding agreements for the national school chaplaincy program was invalid and that the provision of a chaplain or welfare worker at a school was outside the legislative and executive powers of the commonwealth.

Federalism is enshrined in the Constitution.  There's no doubt that the framers of the Constitution intended for Australia to remain a strong federation.

The commonwealth was given only a limited number of enunciated legislative powers.  The intention behind the demarcation of power was to limit the size and reach of the commonwealth, retaining strong states.

Yet despite this, the trend in Australia has been towards an ever stronger federal government.

Over the past 100 years, High Court decisions such as the Engineers case, the Tasmanian Dams case and the Work Choices case have provided an expansive reading of the commonwealth powers enabling federal governments to trample into areas traditionally of state concern.

Blurring the lines of responsibility and accountability has led to the blame game of modern politics.

Duplication of commonwealth and state activities has added to the overall burden of government.  For example, the federal Health Department has 4500 public servants without running a single hospital.

Likewise, the federal Education Department has 3500 public servants without running a single school.

The Abbott government is acutely aware of the problem, having committed to undertaking a white paper on the federation.

The government's first budget showed promise in handing back responsibility to the states, with Treasurer Joe Hockey stating:  "Over the next 18 months, we will work with state and territory governments to strengthen the federation and ensure that the overlap between the layers of government is reduced or removed."

The government may not have a choice.  The High Court's decision in Williams (No 2) is significant, not because it invalidates the national school chaplaincy program (Ron Williams' primary motivation for bringing the challenge) but because it is the third in a series of recent High Court decisions that counters the long-term trend;  limiting commonwealth power and reasserting the role of the states.

First is the 2009 decision of Pape.  Lawyer Bryan Pape challenged the Rudd government's global financial crisis "stimulus package" of cash handouts between $250 and $900.

While the majority of the High Court upheld the validity of the payments, the court unanimously found that the executive did not have a substantive spending power — contrary to the conventional wisdom.

Any power to spend taxpayers' money must be found expressly in the Constitution, or in statutes made under it by the parliament.  Pape put many areas of commonwealth expenditure into doubt, and this was the basis for the two Williams decisions that followed.

The chaplaincy program, introduced in 2007, was funded in accordance with government guidelines rather than legislation.

In December 2010 Williams brought his first challenge, opposing the payment of money from the commonwealth to Scripture Union Queensland on various grounds.

In 2012, the High Court in Williams (No 1) found that the payments were unconstitutional because they were not supported by the executive power of the commonwealth.

In response, the Gillard government rushed through unprecedented and undemocratic legislation that stripped the power of the parliament to oversee government spending in 415 different, often vaguely described, areas.

The key question for the High Court in Williams (No 2) was whether the commonwealth parliament had the power to pass this legislation.  The High Court found that the program was outside the legislative and executive purview of the commonwealth.

More challenges to other federal government programs could succeed for the same reasons.  Because the ruling casts doubt on many areas of commonwealth expenditure, fixing federalism is an urgent constitutional necessity.

However, the policy case is also strong.  The case rests on two main principles:  subsidiarity and competition.

Under subsidiarity principle, policy and service delivery should be decentralised to the level of government closest to the affected people.  State governments are in a much better position to formulate policy and deliver services specifically tailored to local needs and preferences, rather than the one-size-fits-all approach of Canberra.

Under the competition principle, multiple sovereign governments setting different policies will breed innovation and choice.

The bar lifts over time, resulting in better outcomes for all jurisdictions, rather than centralised mediocrity.

The Abbott government must seize this rare opportunity to restore the principles of federalism in Australia.  Already, the government has made some welcome steps in this direction, with the establishment of a one-stop shop for environmental approvals, avoiding the costly situation in the past where major projects required permission from both state and federal governments to proceed.

But there is scope to go much further.  The commonwealth should cease meddling in policy areas that were clearly intended to be the responsibility of the states, like health and education.  The wasteful duplication of government departments and agencies should end.  States should be given the capacity to raise enough revenue on their own to cover the cost of the services they deliver.

If the Abbott government doesn't act quickly to revive federalism, the High Court might force it to do so.

Whole-of-school approach needed to lift levels

The Direct Instruction teaching method has merit but it is not the role of the federal government to dictate how teachers teach in classrooms.

In a return to exactly the approach that is holding back improvement for all Australian students, this week the federal government announced $22 million school spending allocated to a specific program.

The funds have been assigned to roll out the Direct Instruction method of teaching in remote indigenous primary schools in an effort to improve literacy levels.

There is a compelling case for directing efforts to where the greatest difference can be made and the achievement gap for indigenous students is clear.  The 2013 NAPLAN results show that 94.6 per cent of non-indigenous Year 5 students are at or above ­national minimum standard, compared with 73 per cent of indigenous students at the same age.

Equally, there is nothing wrong with the Direct Instruction model.  In fact, many people would recognise this approach as the way they learned.  Simply put, the teacher explicitly presents the material to be learned, breaking it down into its component parts.  Children work in ability groups, they are frequently assessed and corrected, and material is repeated until it is learned.  The advantage of Direct Instruction is that it works and is good at boosting test scores.

The problem is that it reduces learning to a very narrow set of objectives and doesn't reflect all of our aspirations for our children.

That doesn't mean, however, that Direct Instruction doesn't have a place.  Skilled teachers routinely adapt their teaching approach to match the situation, the children in their class and the material being presented.  Direct Instruction is just one of the many techniques that may be used.  And it should be used in every school, not just in schools that cater to indigenous students.

The most successful teachers routinely combine a balance of approaches, recognising that there is no one magic bullet that will work in every situation.

So it is not a question of whether Direct Instruction is a worthwhile approach.  Nor is it a question of whether we should be providing extra support to children struggling with literacy.  The problem is that if we want to do a better job of ensuring educational success for all students we need to stop thinking of improvement in terms of isolated and unconnected policies and approaches that do little other than make for a good press release.

The problems facing schools and students are more complex than can be fixed with the introduction of a single federal government program.  Improvement comes from a whole-of-school approach, conceived and driven from within and supported by the school community.

It is not simple, and requires a very clear and sustained focus on specific goals that are supported by everyone within a school.  It is not the sort of change that comes from some extra money that carries with it myriad conditions and is imposed from above.

Parents and school communities are best placed to decide which programs and approaches will work best for them.  These decisions, taken at school level, have a much greater chance of long-term success and impact.  The education minister's "students first" policy actively recognises that giving schools and school leaders greater autonomy can help improve student results.  That is why this latest move is so puzzling.

The allocation of funds into separate programs and initiatives without broader integration and strategic direction misdirects resources away from schools and into costly bureaucratic requirements for accountabilities and program reporting.

There is overwhelming evidence, here and overseas, that shows funding allocated in this way does not lead to long-term improvements in student achievement beyond the schools that directly participate.

Rarely are the advantages gained sustained after the completion of the funding term because the new practices have not been incorporated into existing school practice.

One of the changes in school funding that arose from the renegotiation between state and federal governments was the rolling in of multiple separate funding allocations into block grants, allowing a welcome move for more resourcing decisions to be made closer to where the services are ­delivered.  Seeing the end of separately identified program allocations at the national level provided hope for a new direction in education.  It allows schools to decide where resources could best be allocated to do the most good.

Under the guise of a targeted investment in schools this new announcement signals a worrying sign that we may again slide back into thinking the federal government is best placed to know what should happen in classrooms.

Ricky Muir — the Senate's everyman

The great American conservative William F. Buckley Jr. said:  "I would rather be governed by the first two thousand people in the Boston telephone directory than by the two thousand people on the faculty of Harvard University."

The Australian version of that quote would be "A cabinet full of Ricky Muirs couldn't be any worse than a cabinet full of Gillard government ministers."

Ricky Muir, the 32-year-old former timber worker from Gippsland in Victoria, took his place in the Senate on Tuesday for the Australian Motoring Enthusiast Party.  His spot in Parliament is as legitimate as that of any other MP.

The suggestion that somehow he shouldn't be in the Senate because he only received a total of 17,122 votes and was elected as a result of other parties' preferences can't be sustained.

The Coalition, the ALP, and the Greens all had senators elected via preferences flows from other parties.  Likewise, numerous MPs in the House of Representatives are elected via preferences.

It's difficult to argue an MP elected via preferences from four or five other parties has a better right to be in Parliament than someone elected via preferences from 10 or even more other parties.  For as long as Australia has preferential voting, people are going to get into Parliament on the votes from parties other than their own.

The reason why so many political commentators are upset by Ricky Muir's election is not because of the way he was elected.

What's upset the Canberra press gallery is that Ricky Muir is different from them.  And he's different from the politicians, the staffers, and the public servants that the Canberra press gallery spends its time reporting on and socialising with.

Muir doesn't have a university degree.  He's done manual labour.  He's been unemployed.  He hasn't done media training (as was obvious from his infamous interview with Mike Willesee).  And we don't know for sure, but he probably doesn't think the Three Rs — the republic, "reconciliation" and refugees — are the three biggest issues immediately facing the country.

In other words Ricky Muir is like the vast majority of the population.

The disdain and the sneering with which so many political commentators have greeted Muir is palpable.

Perhaps the least bad thing that's been said about Muir was on the ABC's The Drum last month when all the panellists agreed he "wasn't up to it".  None of the panellists explained exactly why they thought this, but the imputation was obvious — Muir wasn't smart enough to be a senator.

EDUCATION V EXPERIENCE

Unfortunately the panellists didn't reveal exactly how smart they thought someone needed to be before they could be in Parliament.  No one on the panel pointed out that if there was a piece of legislation before the Parliament that Muir (or any other MP for that matter) couldn't understand, than perhaps the problem might lie with the legislation not with legislators.

The panel all assumed that government is now so large and so complicated that inevitably laws will be passed which only someone with a university degree would able to understand.

Julia Gillard's last cabinet had plenty of smart people in it.  The 20 ministers had between them no fewer than three dozen university degrees (a third of them in law).  Every single member of the cabinet held a university qualification.

All those smart people in Gillard's cabinet thought it was a good idea, for example, to abolish freedom of the press in this country.

It wasn't education or eloquence that was missing from Gillard's cabinet — what it lacked was any experience of the real world.

In the scheme of things whether or not Muir mangled a media interview is irrelevant.  (Remember Gillard delivered her "no carbon tax" promise impeccably and pitch-perfect.) Muir should be judged on his merits and he should be judged on his policies (or lack of them).

Whether Ricky Muir has the character, the judgment and the sensibleness to be a good parliamentary representative it is too early to tell.

But the fact that he's upset so many people simply because someone like him is in the Senate means he's already made an excellent start to his parliamentary career.

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Shining a light on the dangers of royal commissions

Royal commissions are said to have coercive powers to uncover "hidden truths", but their lower standards of procedural fairness mean they are just as likely to uncover untruths.

Last week, the Senate Standing Committee on Economics called for a royal commission into the Australian Securities and Investment Commission and the Commonwealth Bank over the financial fraud scandal.

In other words, the key recommendation of one parliamentary inquiry is that the government should establish an even bigger inquiry.

Royal commissions have an almost magical, mythical status in Australian politics.  They have become less a means to an end, and more an end in themselves.

There are already three royal commissions ongoing at the Commonwealth level:  one into institutional responses to the sexual abuse of children, another into the Rudd government's home insulation scheme, and the third into trade union governance and corruption.

It's been 20 years since there have been this many commissions going at the same time.

Yet there's only one real public policy reason to choose a royal commission over any other form of inquiry — their coercive powers.

Royal commissions awkwardly span the gap between executive government and the judiciary.  They're formed by the government of the day according to its whim.  See, for instance, the royal commission into pink batts — an incredible precedent for new governments to punish the policy decisions of previous governments.

But while royal commissions are creatures of the executive — that is, driven by politics — they're also empowered with the sort of coercive powers only granted to apolitical courts.

They can summon witnesses.  They can compel those witnesses to produce documents.  They can force testimony — even self-incriminating testimony, eliminating the right to silence in the process.  They can apply for search warrants.  (In the Northern Territory, no warrant is even needed.  Any member of a commission can enter any building they want and take what they please.)

As the Law Council of Australia told a 2009 inquiry into royal commissions, the Commonwealth Royal Commission Act "removes or significantly dilutes the traditional common law protections usually afforded to witnesses".

This makes them exceptionally powerful.  Even for undoubtedly worthy subjects of investigation (and who could question the virtue of an inquiry into institutional responses to child sexual abuse?) it should be of serious concern that royal commissions throw basic legal rights out the door.  Even the worst people have rights.

Do these coercive powers uncover "hidden truths", as many advocates of royal commissions suggest?  Maybe.  But royal commissions have lower standards of procedural fairness than courts.  They can admit hearsay, for instance.  They are as likely to uncover untruths as traditional courts are to miss hidden truths.

In his book Royal Commissions and Public Inquiries in Australia, Scott Prasser distinguishes between royal commissions whose purpose is to advise on policy questions and those that are inquisitorial;  that is, those which investigate and expose wrongdoing.  All three current commissions take the latter form.

But we already have elaborate and expensive law enforcement and judicial systems to investigate, expose, and finally prosecute wrongdoing.

Every inquisitorial royal commission is a tacit admission that the existing legal system isn't working.  More prosaically, every inquisitorial royal commission should be focused on law-enforcement failure.

One survivor told the child abuse royal commission that "the police don't listen to children".  Another was told by police "we can't do anything" and that the issue of sexual abuse was too much of a "hot potato".  Whatever comes out of that royal commission, changes in the way the police handle abuse allegations are likely to have the most long-term importance.

While the ability to coerce testimony may be the only real policy reason to form a royal commission, there are a whole lot of political ones.

Nobody ever made headlines by calling for an interdepartmental review.  When a government appoints a royal commission, it is trying to tell the public that there is no limit to how seriously it takes a given issue.  The government looked at its menu and chose the crown jewels — a royal inquiry.

When the royal commission into union corruption was announced earlier this year, the unions were quick to denounce it as a witch-hunt.

The metaphor was more correct than was perhaps intended.  Once formed, royal commissions are impossible to control.

Usually governments have a good idea about the result they'll get from an independent inquiry.  They write the terms of reference.  They choose who heads the inquiry.  Did anybody doubt that the Gillard government's inquiry into media regulation would propose new media regulation?

By contrast, the Fraser government wouldn't have expected its royal commission into the Federated Ship Painters and Dockers Union to delve into corporate "bottom of the harbour" tax evasion schemes.  Royal commissions are fishing expeditions, and heavily armed ones at that.

So why a royal commission into ASIC and the Commonwealth Bank?

ASIC is one of our most heavily empowered regulators.  If any regulator deserved to have its feet held against the fire, it would be ASIC.

Yet, as the Coalition Senator David Bushby pointed out in a dissenting appendix (page 457 onwards), we already have an inquiry looking at the structure of financial regulation.

The Financial System Inquiry isn't draped in the Queen's regalia, sure.  It can't coerce testimony.

But isn't that a good thing?  The cultural status of the royal commission has obscured its very real dangers to the rule of law and civil liberties.

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Australia Post: Let's free it up

Substantial reform of Australia Post is urgently required for it to most effectively manage the radical transformations unfolding within the postal communications sector.  As evidenced in many other parts of the Australian economy, technological developments and changing consumer tastes are blowing the winds of Schumpeterian "creative destruction" right through the processes of delivering letters and parcels.

The most obvious innovation has been the widespread adoption of email, enabling people to contact others on a personal or professional basis instantaneously.  There has also been a boom in parcel deliveries due to the emergence of national and international shopping online.

The growth in parcel traffic catalysed by online shopping has been aided by moves among couriers to streamline global supply chains and, through it, improve delivery times and reduce prices, and even Amazon is testing out the use of drones for same-day parcel deliveries.

The volume of physical mail delivered by Australia Post has been in decline over recent years, due to the near-saturated uptake in electronic communications.  Australia Post handled less than five billion items of mail in the last financial year, equivalent to one billion fewer letters being delivered each year compared with 2008.  At the same time, Australia Post services 11.2 million addresses, with this number increasing by about 130,000 each year due mainly to population growth.

Primarily as a consequence of online shopping growth, the numbers of domestically delivered parcels by Australia Post has grown by a little over 9 per cent in 2012-13.  Overall, Australia Post attained an after-tax profit last financial year.

Last week the government released the findings of a consultancy study suggesting that the overall financial position of Australia Post is approaching the crossroads.  Against the backdrop of declining letter traffic, as a result of the government's commitment to go online with all public correspondence from 2017, and more vigorous competition from private parcel couriers, it is projected that overall profitability will soon end.

Australia Post has responded to its financial predicament in several ways, including job cuts, a two-tiered pricing system for business mail, and a structural separation of the letter and retail business from parcels.

It is true that the modern Australia Post has a greater degree of discretion to amend its operating practices, thanks to the "corporatisation" model ushered in by the Hawke government in 1989 that obliges the organisation to conduct itself in a "business-like" fashion.  But it is unclear that there is compelling merit to keep restraining the postal service within the straitjackets of the "community service obligation" and state ownership.

The prevailing CSO allows Australia Post to maintain a legal monopoly over domestic and international letters weighing less than 250 grams, but with several service delivery obligations to be maintained.  These include postage to be charged anywhere within Australia at a standard rate, deliveries made to 98 per cent of addresses five time per week, and the maintaining of at least 4000 retail outlets (including 2500 in rural and remote areas).

The CSO conditions not only impose a continuing cost burden upon the postal monopoly, but the regulations prevent potential alternative suppliers in the market from discovering which elements of the letters and small parcels business are profitable, if at all, and thus worth maintaining.

Good steps forward for a reforming government would be to break the Australia Post letter monopoly, relax the CSO provisions, and, if services delivery to regional Australia remains a concern, then directly subsidise the cost of letter deliveries, through the budget, in the form of transparent spending measures.

Postal sector liberalisation has become commonplace throughout the Western world over the last three decades, with European Union countries and New Zealand among the most notable abolishing the postal monopoly, opening up letter and parcel carriage to new entrants, and relaxing service regulatory standards.  The Commonwealth should also consider transferring Australia Post out of public sector ownership in an act of privatisation, as suggested by the Shepherd National Commission of Audit released earlier this year.

Late last year the British government sold 60 per cent of its stake in the nearly 500-year-old Royal Mail, at 330 pence per share, raising almost £2 billion ($3.615 billion) in sales proceeds.  The Royal Mail sale proceeded smoothly, and the initial public share offering was massively oversubscribed, but critics have lambasted the sale claiming the Cameron government sold Royal Mail "on the cheap", given that shares closed 38 per cent higher than the sale price on the first day of trading alone.

Such criticisms appear disingenuous to the extent they are primarily waged by anti-privatisation proponents, who condemn privatisation on account of its ability to reap government revenues from asset sales, in any case.  In any case, absent a pre-existing domestic market for postal services, it is nigh on impossible to establish the "correct" or "ideal" share price that should be set for an initial public float of a longstanding state-owned entity.

Rather than setting the share price too high, and risking the potential for insufficient share market interest, the Cameron government wisely proceeded more cautiously and, so, can take any lessons from the initial sale in any future partial, or completed, sale of Royal Mail.

But the ultimate end of privatisation is not to fill the public treasury with more cash, but allow consumers to enjoy cheaper and better quality services that can only come from a competitive postal sector with the greatest incentive to become more cost-efficient and market-responsive.

In the end, the best way to set sail to the winds of structural change is to free up Australia Post, and allow the market to discover what postal products and services customers would most prefer.

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Renewable energy as a means of reducing emissions fails two key tests

Regulatory change will always disadvantage some while advantaging others.  But the benefits of deregulation far outpace the costs and Australia carries a weighty regulatory burden, one that has deprived us of enjoying the world's highest living standards.

The most costly regulations are the ever-mounting environmental red tape and Australia's unique union-dominated controls over employment conditions.  The deleterious effects of these have been somewhat offset by deregulatory progress in import tariffs, for example, and in opening up areas such as ports, travel and telecommunications to greater competition.  Privatisation has also helped in this regard.

Unfortunately we have gone backwards in energy supply policy with the carbon tax and forced substitution of cheap coal-generated electricity for expensive renewables.  These government measures have resulted in Australian electricity prices being transformed from among the world's lowest into one of the highest.

This has contributed to placing intense competitive pressure on industry and commerce over the past few years;  households have as a result incurred higher prices for the goods and services they buy, as well as taking a direct hit from skyrocketing electricity bills.

While the Palmer United policy remains unclear it seems that the carbon tax is likely to be removed with the new Senate.  The future of the other strings to these regulatory bows is less certain.  Chief among these is the Renewable Energy Target (RET) under review by a panel chaired by leading businessman Dick Warburton.

The RET forces all electricity consumers to incorporate a proportion of wind and solar energy into their electricity supply.  This renewable energy is three times as costly as the energy it displaces and will soon comprise 20 per cent or more of total supply.  At that stage it will add 30-50 per cent to total wholesale electricity costs.  The RET alone will mean household electricity bills go up by 7 per cent and those of industrial users by 10 per cent.  Other state-based measures add to this cost.

The RET review has attracted some 24,000 submissions, mostly from green zealots regurgitating slogans offered up by their leaders.  This group is unaware or uncaring that the renewable energy scheme means a considerable increase in electricity costs for industry and households.

Some claim the subsidies help consumers since they drive down electricity prices.  But any such price reduction is similar to that which would follow from government supplying cheap bread.  The price might fall but not enough to pay for the costs involved and the price falls would result in commercial suppliers ceasing to operate, creating future shortages.

Also supporting green subsidies are a number of publicly-financed bodies.  Many of these, such as the cities of Melbourne and Sydney, have no expertise on the matter but their councils' irresponsible approach to spending involves employing green personnel for vanity purposes.

Others like Climateworks and the Grattan Institute were given taxpayer funding by Labor-Greens government to promote renewable energy.

A second group of submissions is businesses and their representatives who have made investments in subsidised renewables and are keen to protect those investments and even to create additional subsidies.

The third is specific business interests, largely in aluminium, which recognise the deadly costs of the RET scheme and seek to quarantine themselves from its effects.

The mining representatives and the Australian Chamber of Commerce and Industry form a fourth group, which notes that the renewable scheme is a horrendous waste of resources, needlessly drives up electricity costs, and finances lobbying activity that pollutes the political process.  These bodies argue that the scheme should be axed immediately and all subsidy payments terminated.

Twenty years ago, the two green technologies favoured by subsidies — wind and solar — were touted as being on the verge of becoming competitive with coal, gas and oil.  Almost no serious analyst nowadays believes this.

That bold but discredited technological optimism was joined with a rationale that subsidies to green energy would reduce carbon emissions.  As a policy, renewable energy as a means of reducing emissions fails two key tests.  It founders on the shoals of adamant refusals by other countries to embark on serious carbon emission reductions and on clear evidence that renewable policies only reduce emissions at a very high cost.

To date, Australia has wasted $20 billion in worthless renewable energy investments, mainly on windfarms but also on solar, including the rooftop panels.  Just to put that in perspective, $20 billion would build 100,000 new houses.  According to modelling undertaken by Acil Tasman for the RET review, unless the program is stopped immediately a further cost of $13 billion will be incurred.  Of course, if we also provide subsidies to new renewable facilities, many more billions will be wasted.

Beneficiaries of the subsidies argue that unless they are maintained, Australia will suffer adversely by being regarded as a nation imposing "sovereign risk" on investors.  This, so it is said, will discourage future investments.  Sovereign risk is where governments seize property without proper compensation.

But changing a tax or subsidy can hardly be considered an imposition of sovereign risk.  Such changes happen all the time and invariably mean losses to somebody.

Moreover we have seen policy changes in recent years that have very severe repercussions on investments.

Take the automotive industry, where reductions in industry protection, changes to industrial relations laws and the energy price hikes have caused investment write-offs amounting to billions of dollars.  Or the "alcopops" industry, severely impaired by a sudden and unexpected 70 per cent tax increase.  Or cigarette manufacturing, hounded from Australia by tax hikes and restraints to marketing.

We also saw the former Commonwealth government, in response to claims by the ABC about animal cruelty, dramatically close the live beef trade to Indonesia.  Many graziers had to shoot their stock and average prices fell by a third.

The victims of these government activities got no compensation.  Importantly, nor did the measures bring a rise in investment risk.

While the less government meddling there is in the economy the better, the fact is taxes, subsidies and tax rates do change.  No government can reasonably expect to bind its successors to paying a worthless subsidy for 15 years as is nominally the case with the RET.  And no investor would sensibly expect this.

The renewable energy scam, alongside the carbon tax, was one of the many targets of the late Ray Evans, whose funeral is today.  He was a co-founder of the Lavoisier Group established to combat misinformation about climate change.  The current Shadow Resources Minister, Gary Gray, was a former member.  Ray did not live to see the costly green edifices of economic self-harm dismantled.  But the new Senate, in spite of resistance from the Greens and Labor's leadership, will begin the necessary economic repairs next week.

Tides to turn for Shorten on debt, boats and tax

Bill Shorten is romping ahead in the polls right now, but being in opposition is a long-term goal and the tables will turn on three big policy areas before the next election.

Bill Shorten has one of the worst jobs in Australian politics — first opposition leader after a loss of government.

Just ask Brendan Nelson, Kim Beazley, Andrew Peacock, and Billy Snedden.

Yet, thanks to the Government's disastrously bad selling of the budget, Shorten has an impressively winning poll position.  If the election were held tomorrow, Labor would romp it back in.

Unfortunately for Shorten there are no federal elections scheduled for tomorrow.

Opposition is a long-term game — almost certain to be longer term for Shorten than most, as Labor's new party rules make it virtually impossible to spill him before the next election.

In the Sydney Morning Herald on Sunday Mark Latham claimed the "right-wing hunting pack" is targeting Shorten because he is too successful.  (This is the sort of canny judgment that made Latham such a success himself.)

But polls go up, polls go down.  If we look out two years from now to the next election, Labor's political profile is very different.  Where Shorten looks strong now, he is vulnerable in 2016.  Where he looks vulnerable, he is actually quite strong.

Let's take the big issues of last year's election:  debt, boats, and the carbon tax.

The debt is Shorten's biggest weakness.

This seems paradoxical, perhaps, because the Coalition's budget — that is, its solution to the debt problem — is deeply unpopular.  According to an Essential Poll earlier this month, just 23 per cent of voters think that Labor should support university deregulation.  Just 27 per cent think Labor should support the pension changes.  Just 32 per cent think Labor should back the Medicare co-payment.

These are gimmes for Shorten.  Yet opposing the specific proposals will do little to rebuild Labor's economic reputation.

Wayne Swan destroyed Labor's standing on the economy when he was unable to wrestle the budget back into the black.  Year after year Swan claimed that the budget was returning to surplus.  Year after year we got deficits.

It's easy to free ride on public dissatisfaction with government policy.  Voters might be hostile to the Coalition's individual budget measures but voters are not stupid.  Shorten has to suggest — perhaps just hint, allude, imply, give us a knowing wink — that there could be a better way to fix the deficit.

That's the difference between being a time-serving opposition leader and a viable potential prime minister.

If Shorten is strangely weak on the budget, he is strangely strong on boats.

Labor has careened from one side to another on the asylum seeker issue.  Last week a few in caucus tried to engineer a shift back to the left again.  Quite apart from the morality and practicality of the policy, Labor looks hopelessly divided and confused.

But will it in two years?

Right now, Labor will be secretly crossing its thumbs that the boats have, in fact, stopped, and stay stopped.  It is in Labor's interest to get boats off the front page;  to remove asylum seekers from the centre of Australian politics.  A weakness isn't a weakness if nobody is talking about it.

For Labor, the carbon tax is neither vulnerability nor strength.

This is strange, perhaps, because the carbon tax has been one of the defining policies of the last decade.  Elections have been won and lost on it.  Prime ministers and opposition leaders have fallen at its altar.

Yet much of the heat dissipated from the carbon tax debate after it was introduced.  Kevin Rudd smothered what remained when he announced he would transition from the tax to an emissions scheme.  This is a rare example of trying to confuse voters as a deliberate political strategy.  (I outlined the farcical nature of this announcement on The Drum when it was made last July.)

Climate activists have tried to respark climate change as a political issue — every once in a while the Climate Institute puts out a poll to try to get momentum going again, as they did yesterday — but realistically the issue is on hiatus.  All sides have dug in.  It isn't a positive.  It isn't a negative.  It just is.

It is often said that the Coalition didn't win the 2013 election, Labor lost it.

In other words, it was the Rudd and Gillard government's faults that were highest on the minds of voters as they faced the September ballot, rather than Tony Abbott's virtues.

This is true as far as it goes, but those faults were made powerful because of the Coalition's dogged prosecution of them.

Abbott made the carbon tax into a political liability.  It wasn't before.  Same with the boats.  And Abbott and his predecessor Malcolm Turnbull made Labor wear its deficit spending.

By contrast, Shorten is just along for the ride.  He's been gifted the budget backlash.  He'll likely be spared the need to take a stand on asylum seekers.  And he's been excused from boldness on the carbon tax debate.

Shorten might be polling well now, but if he wants to be competitive in 2016 he'll have to be more proactive than that.

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Anti-coal activism has unsound basis

The fossil fuel industry, in general, and the coal industry, in particular, has come under attack from environmental activists seeking to end Australian coal production and exports.

If the goal of the campaign is to end coal production, the means to that end is to persuade investors that coal has no economic future and to persuade them to "divest" out of fossil fuel-based industries.

The campaign rests, however, on false premises and unsubstantiated claims and may breach Australian law.  Taken at face value the logic of the claims is appealing, and is scientifically and economically sophisticated.  Upon close evaluation, however, the divestment logic is fragile and driven by the desired conclusions.

Despite lip-service being paid to a 2 degrees temperature target increase, most governments are making little or no progress to achieving that target.  Whether or not that target will be breached is a function both of CO2 emissions and technology.

The divestment campaign logic ignores technological improvements that could vary the maximum amount of CO2 emissions.  The divestment campaign suggests that investors are capable of understanding that the "solution" to the carbon risk problem is to divest portfolios of fossil fuel stocks.  Yet the World Wildlife Fund has not divested its fossil fuel exposure, but rather hedged that risk.  In this respect, the WWF is following the practice of ordinary investors, who are indeed pricing the risk of climate change, but just not as highly as the environmental movement would like.

Ultimately, the divest campaign is making a forecast on future fossil fuel demand and is just one of many such forecasting exercises, and should be seen and treated as such.  Investors, and policy-makers, should rely on energy projections from a variety of independent-minded forecasters, not those written by activists with an ideological axe to grind.

CENTRAL ROLE IN FUTURE

The principal international energy forecasters — private and public — all suggest that coal will have a central role in energy generation for decades to come.  Finally, the campaign may contravene the letter or the spirit of the Corporations Act.  While activists argue that wealth portfolios without fossil fuel stocks perform just as well as those with fossil fuel stocks, the reality is that failing to hold a well-diversified portfolio has substantial economic costs in the form of higher risk and lower returns.

So if investors make valuation errors based on the divestment campaign and relinquish high-performing stocks, a breach of the Corporations Act may have occurred.

There is a potential role for the Australian Securities and Investment Commission to examine whether the stigmatisation of the fossil fuel sector via the divestment campaign is a breach of the Act.  The divestment campaign would amount to an unlawful secondary boycott if environmental activists were covered by those laws.

They are seeking to restrict coal mining in Australia by targeting a critical supplier to the sector.  The bottom line is that the divestment campaign is environmental activism dressed up as investment advice.

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Entrepreneurs should not get government support

The 2014 Federal Budget cuts back family payments, places tough new rules around welfare for young people, taxes doctor visits to fund medical research, and reindexes the pension.

But it's not all bad news!

If you own a business that's more than three years old, has good turnover, and operates in any one of 14 favoured sectors, you'll be eligible for $20,000 of taxpayers' money to hire management consultants.

Better, you could receive a $50,000 grant to employ a researcher for a few months.

Or, the jackpot:  if you own a company that's about to launch a new product or service, you might get $250,000 of matched government funding to help.

The base immorality of corporate welfare is never clearer than in times of austerity.

These obscenities are part of what's called the Entrepreneurs' Infrastructure Programme.  The program was announced in the May budget, but it's only now the subject of a public discussion process.  (An incredibly short discussion process.  The program starts on July 1.)

The program partly rationalises and partly replaces a bunch of other grants and subsidies from the previous government.

It's worth $484.2 million over five years — the better part of half a billion dollars.  This is huge.  The change in Work for the Dole payments will only save $1.2 billion over four years, and that will affect many more people.

The entrepreneurs program is funded from a larger cut of industry programs, so the government can say it is reducing expenses somewhat.

But it is still incredible that even in a horror budget the federal government plans to give money away to successful companies.

After all, we're not talking about bailing out firms in trouble here.  We're talking about handouts to firms the government believes have "growth potential".  Of course, the real winners will be the management consultants paid to pore over business plans on the taxpayer penny.

The Australian government is awash with small grants, minor programs, petty subsidies.  State governments are too.  Yet these sorts of policies are rarely discussed, let alone justified.

The Australian government has always been in the business of giving privileges to private firms.

The great tariff barriers of the 20th century acted as an indirect transfer of wealth from consumers to manufacturing interests.  By preventing cheaper goods from entering the country, consumers were forced to spend more in order to protect certain politically connected industries.  Think the car industry.

Tariffs were not presented to the electorate as a gift to private enterprise.  The justifications were more complex — Australia needed temporary barriers to build industries until they were adult enough to compete globally, or that the government knew which industries were "industries of the future" and needed a little kick along.

In retrospect these claims were absurd.  The "infant industry" argument never went away, even after decades of tariff protection.  Somehow our industries were always young.

And with 20-20 hindsight those "industries of the future" just look like wrong turns.  Again, think the car industry.

But for all the intellectual debate, the practical, real-world effect of protectionism was to subsidise private companies;  a privilege those companies lobbied hard to defend.

The Whitlam government took the first axe to the Australian tariff.  Much of the growth in living standards over the last few decades is thanks to tariff liberalisation.

So what's going on with the Entrepreneurs' Infrastructure Programme?

It's tempting to see programs like this as the last gasp of corporate welfare — simply the trinkets that remain after three decades of liberalisation, waiting to be swept up.

But such programs really demonstrate that the political dynamic that supported protectionism is still with us.  Rent-seekers and their political supporters have just gotten smarter.

Instead of the implicit taxation of the tariff, governments just hand firms money directly.  The grants are given fashionable titles.  Labor had a "Green Car Innovation Fund" and "Innovation Precincts".  The Coalition talks about entrepreneurship.

This is a bit strange.  Every minute entrepreneurs spend filling out a grant applications is a minute stolen from doing what makes entrepreneurism so valuable:  developing new products, finding new markets, and adding value to the economy.

One of the successes of the economics profession has been to persuade politicians that entrepreneurs are important.  Entrepreneurs take risks, and those risks are tested in the marketplace.  That's great.  But politicians took that lesson to mean they should give money to entrepreneurs.  Never say politics doesn't have a sense of irony.

To the individual taxpayer, the Entrepreneurs' program will cost a fraction of a cent a year.  Who could be bothered complaining about a few cents of tax?  To the recipients, though, these subsidies are huge.  Politicians will like the subsidies, too.  What better publicity than being photographed with innovative entrepreneurs — to have job creators thank politicians for their support in front of TV cameras?

Tony Abbott is fond of an Abraham Lincoln quote:  "Government should do for people what they can't do for themselves and no more."

How on earth does taxpayer-funded management consultants for private businesses fit that criteria?

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Ray Evans: A quiet shaper of the right's ideas

Ray Evans, who died in Melbourne on Tuesday at the age of 74, had more influence on politics and policy in Australia than 95 per cent of MPs who have been in the federal Parliament, and 99 per cent of MPs who have ever been in a state Parliament.

In some way or another, Evans was involved in, and helped shape, the course of every major policy debate in Australia of the last 30 years.  And he did it all as a private citizen who volunteered his own time for the public good.  He was the epitome of a concerned and engaged member of the community.  And because the causes Evans pursued were not of the left, his efforts were without the assistance of government funding.  It's easy being a public intellectual when you're employed at the ABC or have a tenured professorship.

As ever more attention is devoted to the daily and often trivial goings-on of the Australian Parliaments, Ray Evan's legacy is a testament to the fact the public and intellectual life of a nation is not, in fact, determined by what happens in the parliamentary chamber.  Making the laws under which people are forced to live is certainly important, but the ideas which give birth to the laws on which politicians vote don't originate on the ministerial benches.

In 1986, Evans together with John Stone, Peter Costello and Barry Purvis, founded the HR Nicholls Society.  Evans was president for 21 years.  At the first meeting of the society, Hugh Morgan spoke of how industrial relations system of the time penalised efficient industries that competed in world markets.  While farmers and miners suffered, the rest of the economy was insulated from "the discipline and vagaries of the marketplace".  This statement of an obvious truth was so controversial that prime minister Bob Hawke labelled the society "political troglodytes and economic lunatics".

Evans also founded, or was a central figure in, The Samuel Griffith Society committed to upholding the rule of law, the Lavoisier Group which questions the prevailing wisdom on climate change, the Bennelong Society which focuses on indigenous affairs, and the Galatians Group which examined the role of religion, and especially Christianity, in modern society.  All of these organisations were non-government, voluntary groups sustained by the individual efforts of their members.  The influence of these organisations rested on nothing more and nothing less than the power of the ideas they espouse.

Evans was an electrical engineer by profession and taught at Melbourne's Deakin University before going to work at Western Mining Corporation.  He had been a member of the Australian Labor Party and, in the 1960s, was a union delegate to the Victorian State ALP Conference.

It was morality that motivated the passion of Ray Evans.  For example, he wanted a worker to have the freedom to work for a wage that was chosen by the worker themselves — not the government.

In 1997 Evans delivered the funeral eulogy for the great tariff reformer, Bert Kelly.  Kelly was only briefly a minister in the Holt and Gorton governments.  After his ministerial career, Kelly had a weekly column as the "Modest Member" in this newspaper.

"Those Friday columns came to exert great influence throughout Australia, and each successive Friday came to be dreaded by the Canberra lobbyists whose job was defending and expanding the tariffs which their industries enjoyed," Evans recalled.

What motivated Ray Evans was what motivated Bert Kelly.  In the case of protectionism, Evans pointed out that Kelly was opposed to protectionism not just because it was economically inefficient — but because it was morally wrong.

"[Protectionism] created a situation in which governments, in the person of ministers or officials, granted arbitrary and capricious favours to some, who were thus greatly enriched, at the expense of others."

Evans said of Bert Kelly that he "was the great embodiment of Edmund Burke's dictum that 'politics is morality writ large' and if the application of the moral principles which has been inculcated into him from childhood led to economically sensible conclusions, that was an additional benefit".  Ray Evans was also a great embodiment of Burke's dictum.

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The Regulators White-Anting New Homes

New South Wales Premier Mike Baird claims there is "a massive housing boom" underway in Western Sydney, explaining that he has "released" land sufficient for 6,600 new houses.  Talk of a boom is decidedly relative.  On the edge of the city the market is hardly being driven by demand, since the Premier is looking to extend the first-home-buyer grant of $15,000 to new properties worth less than $750,000 — a near-impossible sum for the vast majority of aspiring home owners.

The subsidy is trivial compared to the excessive costs stemming from regulatory action.  At a minimum of $500,000, and usually much more, new house prices are massively inflated by a land shortage caused by government regulation.

Land on the periphery of Sydney — indeed, all Australian cities — would sell at considerably less than $100,000 per developed block if government planners got out of the way of buyers and sellers.  Instead, a new housing block goes for at least $350,000.  The Premier's self-congratulatory statement offers the palliative of a $15,000 subsidy to selected new buyers, rather than deregulatory policies that would reduce house prices by at least $150,000 and, more likely, as much as $250,000.

Over the past 40 years we have seen a gradual revolution transfer to governments the rights landowners formerly exercised over the use of their properties.  Each milestone along the way, like NSW's 1979 Environmental Planning and Assessment Act and Victoria's 1980 Metropolitan Strategy Plan, represented incremental steps.  But the outcome has morphed a process whereby only exceptional circumstances prevented landowners selling their properties for housing development into one where it takes exceptional circumstances for the government to allow this to happen.

This severe attenuation of private property rights has starved the housing market of land.  Now Baird can, without batting an eye, claim the credit for "land releases" that allow people to buy and sell private property so that new housing can be built.  Moreover, even current land releases leave new home building at only two-thirds the levels of the 1980s.  The population has grown considerably since then and demand for housing even more so, given the constrained supply forced upon potential buyers by successive governments.

A knock-on effect of the regulatory-induced housing shortage is seen at the periphery of all Australia's major conurbations.  In the inner city this is amplified by NIMBY opposition to redevelopment (2014 prices in Sydney and Melbourne are up 16% and 9% respectively).

Perhaps, anxious to protect capital gains accruing to existing house owners from inflated prices, governments hide behind notions that there is a genuine shortage of land, that new infrastructure would be too costly, even that "urban sprawl" is a problem.  None of these claims is supported by the facts.

Meanwhile, Australia's is among the world's most expensive housing markets, despite the ample land on the periphery of all our major cities.  Even the IMF has recognised our housing costs are out of whack.  IMF data shows house prices in Australia are the second-highest among the world's 25 most affluent economies.  By rights, with massive supplies of low-productivity agricultural land and a very efficient home-building industry, we should be among the lowest.

Forty years ago, Alan Bond made his first fortune by selling quarter-acre, ready-to-build blocks on what was then Perth's periphery for the equivalent, in today's money, of $40,000 apiece.  That number is a fifth and tenth of current prices.  The incursions of regulatory planning overlays have made broadly affordable blocks an impossibility, obliging politicians to claim as victories any modest increase in new permits to build.  Sometimes those same politicians quote estimates that many years' supply remains available for development.  What they fail to add is that those estimates are based on the reduced demand due to the massively inflated prices their policies have created.

Incumbent house owners may be pleased with the value of their properties.  But much of that value is derived from regulatory constraints on supply.  The losers are those priced out of ownership, as well as tenants forced to pay excessive rents.  What is needed is a radical roll back of the regulatory layers enacted over 30 years or more.  This would allow the supply of land for housing to increase, thereby driving down prices to affordable levels.

It is a simple concept.  The wonder is that the truth of it appears not yet to have dawned on Baird and his counterparts in the other states.

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Cherry-picking stats an uncertain science

There has been a kerfuffle over Christian Kerr's article last week.  On Monday night, Media Watch got into the act.  So let's remind ourselves of the basic argument.

The Australian wrote on June 6:

"Plain-packaging laws which came into force in December 2012 have instead boosted demand for cheaper cigarettes, with reports of a more than 50 per cent rise in the market for lower-cost cigarettes.  The research by industry monitor InfoView, which shows a rise in the market share of cheaper cigarettes from 32 per cent to 37 per cent last year, is backed up by retailers, consumer marketers and the industry, with cigarette-maker Philip Morris saying its ­information showed no drop in demand."

On Monday, the ABC confirmed this:  "Well, perhaps part of the answer is that (the) tobacco industry's profits have been hit by plain packaging as people switch to cheaper brands."

People are switching to cheaper brands of cigarettes?  Just like Christian Kerr argued?  And this effective decrease in price will have no impact on quantity demanded or consumed?  (Hold that thought).  I just want to confirm for our international readers that the ABC is not some spear carrier for Big Tobacco or part of the great right-wing conspiracy, but is an Australian government agency.

I should also point out some very interesting cherry-picking by Media Watch.  "But ... let's ask a couple of questions.  Do the figures mean more people are smoking?  Well, no ... the industry admits the number of smokers fell in 2013 by 1.4 per cent.  OK.  So are the people who do smoke smoking more?  No again ... the average number of cigarettes smoked per person also fell in 2013 by 1.4 per cent".  Hmmm.  Media Watch showed a very small copy of the letter and quickly whipped it off the screen.

Let's look at what the source material actually said.  "Over the five years in the lead-up to the introduction of plain packaging, total tobacco industry volumes were declining at an average rate of -4.1 per cent.  Subsequently, since plain packs were introduced on 1 December, 2012, industry volumes have actually grown for the first time in a long time to +0.3 per cent.

"Further, the number of cigarettes smoked on a daily basis declined at a rate of -1.9 per cent in the five years leading up to plain packaging, while it slowed to -1.4 per cent after green packs hit shelves.  The long-term decline of people giving up smoking at a fairly consistent rate and also smoking less has changed for the worse."

Oh, dear.  Media Watch quoted the same number — out of context — twice to make different points.  I wonder why it didn't quote this (from the industry letter):  "With growth in industry volumes, fewer people quitting and a jump in the amount of cheap illegal cigarettes ... you could draw the conclusion that people are actually smoking more now than before plain packaging came into effect."

The thing that really intrigues me about all of this is the naive reliance on ABS statistics.  In particular, The Kouk (economist Stephen Koukoulas) has been tweeting and retweeting the ABS address of the seasonally adjusted volume measure of tobacco consumption — right down to the excel spreadsheet column.  To be sure, the ABS does a magnificent job, but as the great philosopher Obi-Wan Kenobi said:  "These are not the numbers you are looking for."

These numbers are subject to revision.  Then we need to understand expenditure is a measure of price times quantity.  Now, with some sophisticated mathematics, I'm going to change the subject of the formula and we also know that quantity is expenditure divided by price.  So now if expenditure is down and price is a constant, then quantity is down too.  That is Koukoulas's argument and is what the ABC wanted us to believe.  Small problem, as even the ABC now admits:  "... people switch to cheaper brands."

Price, in effect, is falling.  Suddenly for a given level of expenditure we cannot be certain what the impact on quantity is — it all depends on the magnitude of the fall in price.  But it is possible to imagine that over 2013 when expenditure was rising and price falling that quantity would rise.

The secret to understanding this is that we're dividing a bigger number by a smaller number.  Another problem with the ABS data is that its technique for calculating "chain" measures doesn't entirely eliminate substitution bias.  That's the fancy term for consumers switching from more expensive products to less expensive products — as another government agency, the ABC, acknowledges is happening.

The objective in these calculations is to eliminate price movements and get an understanding of the quantities involved.  The ABS says it "derives its annual and quarterly chain volume estimates using the Laspeyres formula with annual base years.  With the exception of the latest quarters, quarterly chain-volume estimates are derived by linking estimates derived in the average prices of the previous year.  However, the latest five to eight quarters are derived in the average prices of the latest base year, which is the year before the previous year."

So how old are the prices being used in the calculation?  At the least, not especially up to date.  This isn't a criticism of the ABS per se, as for most things it probably doesn't matter much.  But sometimes it does.  "For aggregates such as gross value added of mining and agriculture, and maybe exports and imports, where volatility in price and volume relativities are common, the advantages of frequent linking may be doubtful, particularly using the Laspeyres (or Paasche) formula," it says.  "For reasons of practicality and consistency, the same approach to volume aggregation has to be followed throughout."

Fair enough, but note the caveat — when "volatility in price and volume relativities are common" the benefit of the ABS approach may be doubtful.  The ABS actually provides an example where declines in price distort their data:  computers.  This is an example we understand.  But the ABS also tells us it doesn't matter that the data are distorted because Australia doesn't produce computers and so the overall GDP figures are not distorted much.

Again, that is a fair judgment — but it does tell us that we should not simply accept any and every data point as being definitive or decisive in a debate.  A lot of very careful work needs to be done into the efficacy of the plain-packaging policy.  The early evidence isn't very supportive of the policy.  All this is over and above the illegitimacy of state-sponsored persecution of that minority who consume tobacco.  That is an argument I think is powerful, but it has been lost.

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True economic liberty means more open borders

There are two versions of David Brat, the upstart who defeated House Majority Leader Eric Cantor in the Virginia Republican primary last week.

The first is a professor of economics at Randolph-Macon College in Virginia — a principled libertarian, dedicated to the cause of economic freedom.

Brat describes himself "a free-market guy", who believes the economy has been badly distorted by regulation.  He runs something called the BB&T Program on Capitalism, Markets and Morality.  He's passionately opposed to the mass surveillance program exposed by Edward Snowden.  His academic research focuses on the intersection between Christian theology and the market economy.

That's the first version of Brat.

The second version is different — an anti-immigration warrior for the conservative right.  He ran hard against Cantor on the latter's support for amnesty for the children of illegal migrants.

In this campaign, Brat argued immigration "lowers wages, adds to unemployment, and the taxpayer pays the tab for any benefits to folks coming in".  (Just as the asylum seeker debate is in Australia, the question of amnesty for illegals is a proxy for the broader question about how open the United States should be to migration.)

For these sentiments he received endorsements from conservative firebrands like Ann Coulter — Brat was a candidate "true patriots should support with everything they have" — and Laura Ingraham.

It's not easy to bridge the divide between the two Brats.  There's nothing "libertarian" or "free market" about an immigration crackdown.  Quite the opposite.

The great free market victories over the last few decades have meant goods and capital can move around the world freely.  This has raised living standards for everyone, rich and poor.

The last remaining barrier to economic liberty is the free movement of people.

It's as much a barrier of political philosophy as it is a barrier of legislation.  As Brat demonstrates, even some of the most hardcore free market advocates have a blind spot when it comes to immigration.

Yet what could be more respectful of the tenets of individual liberty than allowing individuals and families to travel across national borders to make a better life for themselves?

And what could be more inconsistent than claiming to believe in the morality of liberty but then placing the strictest of possible limits on that liberty?

On The Drum in 2011 I argued that to prevent migration is to prevent the most powerful way to lift people out of poverty.  Migration is a big deal economically too.  Opening the world's borders could double the size of the world's economy, according to one famous estimate.

Yet one of the doyens of free market thought, the Nobel-winning economist James Buchanan, said the hardest essay he ever had to write was on whether governments could justifiably restrict immigration.

There are two objections to larger scale immigration that you commonly hear from the intellectual right.  Neither are strong.

The first is that increased immigration is incompatible with the welfare state.  In this view, allowing large scale migration is great in theory, but we have generous welfare programs.  There's a risk some immigrants might migrate with the goal of hopping on social security.  This argument was made by no less an authority than Milton Friedman.

But it's almost comically easy to resolve the apparent incompatibility:  cordon off welfare programs to new migrants for a certain amount of time.  In fact, that's exactly what we do in Australia (with the exception of refugees, who constitute a small fraction of the total migration intake).

The second objection is migrants may not assimilate to the national culture.  This is not helped by the fact that many of the loudest pro-immigration voices are on the left and espouse a woolly sort of multicultural utopianism.  But the point of a liberal framework of laws is that people of different values, preferences and beliefs can go about their business while everybody's rights are equally protected.

And let's not overestimate the cultural consensus among those born in the developed world.  In Australia the Lowy Institute poll has been recording remarkably low support for basic things like democracy for many years.

Yet somehow the Commonwealth endures.  As it would with a larger — even vastly larger — immigration intake.

(If your concern is that immigrants might vote for illiberal policies — that is, undermine the liberal legal framework — note that immigration and citizenship are different things.)

Let's be clear — Brat is more philosophically coherent than 99 per cent of the politicians out there.  Any defeat of an established Washington politician is a win.  In response to Brat's attack on immigration, Cantor surged hard to the right on amnesty.  Self-interest beats principle.

And even taking Brat's views on amnesty into account, American politics will be better off with him in Congress rather than a beltway native like Cantor.

Brat ought to be praised for his scholarship on the connection between morality and free markets.

But it's also time for politicians who proclaim the virtues of liberty to discover its connection with the free movement of people.

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The fiscal illusion of inexpensive government

The largely hostile reactions against the federal government's big-spending budget partly reflect existing fiscal arrangements concealing the true costs of public sector activities from most voters.  The inconvenient truth is that the modern Australian fiscal system is inherently geared toward excessive, and ultimately unsustainable, levels of government expenditure.

Most voters retain a strong preference for government spending, in areas such as education, health, welfare, transport and so on, and especially for programs perceived to benefit them, their relatives, or other people they intimately know.  By the same token, and despite occasional public protestations by some that they are willing to pay more of "the price of civilisation", people demanding such spending from their governments are typically loathe to fund the full costs of the programs themselves.

In an attempt to financially oblige voter demands for an ambitiously expansive portfolio of spending functions, governments forcibly impose great taxation burdens upon various components of private sector activity, such as market incomes and product sales.  But financing public spending through taxation by no means resembles anything like the direct "user pays" connection between payment for, and the acquisition and use of, outputs produced by market suppliers.

The traditional revenue-raising rationale for taxation has become increasingly confounded with, amongst other things, "equity" ideals dictating that people with a greater capacity to contribute to consolidated revenue, rather than those who more intensively use government services, should do so.

This is most clearly illustrated by income taxation data showing that individuals earning more than $80,000 a year, who rely less upon public sector services and transfers, contribute about 64 per cent of the total net income tax take, whereas those earning up to $37,000, much more heavily reliant on government spending, contribute about 4 per cent.

The income tax withholding regime, which requires employers to withhold tax from an employee's pay check and transfer it to the government, further dulls the pain that most workers would feel if they were otherwise required to pay income tax instalments directly from their own accounts.

Politicians with short-term re-election objectives have the incentive to keep offering up new and more kinds of spending programs regardless of affordability, and rather than living within the hard constraint of available taxation collections they often borrow heavily, which is tantamount to shifting tax burdens into the future.

The political class has tended to make a rod for their own backs by obscuring the costs of taxation, and exalting the benefits of spending, through the use of deceptive, error-laden language in an attempt to acquire broadly-based political support for an overly large public sector.

In this Orwellian world of fiscal "doublespeak", spending on consumption items and transfers are reclassified as "investments", taxes are relabelled as "levies" or "co-payments", increasing taxation is represented as a budget "saving", tax cuts are rebadged as "spending" and electing not to raise taxation is conceived as a generous "subsidy" handout to the general public.

And as the federal government has felt all too painfully, false political impressions can readily be conveyed when forward program announcements, such as the Gonski school funding regime or the National Disability Insurance Scheme, are construed as the reality and, as such, cannot easily be amended or abandoned, even though they are not yet established.

What this all means is that recipients of government expenditure programs come to perceive transfer payments and services as effectively being "free", or close to it, and that they feel entitled to demand more of this spending as a basic right.  Further, policy proposals which attempt to encourage recipients to at least appreciate that spending is costly, and even encourage them to recalibrate their demands accordingly, is intensely resisted within the political environment.

This explains why major political opinion polls have turned rather savagely against the Abbott government in the wake of its first budget, and why various groups have organised sporadic protests in capital cities against "austerian" proposals such as the $7 Medicare "co-payment" and higher education reforms.

The misperceptions caused by the separation of government benefit receipt from the taxation imposed to fund it, labelled by economists as "fiscal illusion", also explains paradoxical polling results whereby concern about the overall size of Australian government is juxtaposed with an equally great concern to retain favoured spending activities.

The fiscal illusion exacerbated by the great disconnect in modern public financing systems, between spending programs benefiting favoured political constituencies and the imposition of taxation burdens upon unfavoured constituencies, calls for carefully applied and consistent policy reform resolutions right across the board.

A range of fairly simple administrative changes could be pursued to help inform the general public about the costs of running government programs and functions, including the levels of debt incurred as aggregate spending outruns available revenue.

Before the budget, the government announced it would provide a "tax receipt" for personal income taxpayers informing them how much of their tax liability was spent on each budget area, as well as gross debt levels.  This is a welcome step forward in the field of fiscal transparency, but much more can be done to counter the endemic fiscal illusion problem in our democratic system.

In addition to the budget itself, all other government statements presenting information with fiscal implications, such as press releases of policy announcements, should more clearly include details of the costs of initiatives.  Another step would be for the government to establish detailed fiscal transparency online portals outlining spending activities in real time, similar to those readily available in the US states.

To ensure a more holistic assessment of the relative costs and benefits of government expenditures, the budget and all other major fiscal statements must include estimates of the marginal excess burden associated with raising taxes.

Most current services and transfers do not conform, at least very neatly, to the economic definition of a public good, and so this opens up the possibility of a greater reliance on user charges and fees, rather than on highly distortionary and discriminatory taxes, to fund programs.

The challenge of budget repair is not only to set Australia onto a fiscally sustainable path now, but to help ensure we don't veer off track again by lifting the fog of fiscal misinformation that leads voters to believe they can all receive spending benefits on the cheap.

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Canadians lead the way on free speech

In commemorating the 70th anniv­ersary of the D-day landings, Tony Abbott observed that Canada is a longstanding friend of Australia and has always shared our commitment to democracy and people's right to be free.

Canada's successful effort to repeal laws similar to Australia's section 18C of the Racial Discrimination Act shows its commitment to greater personal freedom.

Visiting Canada this week, the Prime Minister would have seen that hatred had not been unleashed.

He should follow the lead of his Canadian counterpart, Stephen Harper, whose government considered that existing criminal laws were the appropriate legal mechanism against racial hatred — not subjective and vague so-called human-rights legislation that curtailed freedom of expression.

Section 13 of Canada's Human Rights Act was repealed in June last year.  This section made it unlawful to communicate, by phone or internet, "any material that is likely to expose a person or persons to hatred or contempt" based on grounds of discrimination — including race, nationality and ethnic origin.

Like section 18C, section 13 gave Canadians the ability to seek legal redress against those who offend­ed them.  Defendants could be subject to lifetime speech bans, as well as monetary penalties.

At its core, section 13 favoured identity group rights over the classical human right of free speech.  The 1990 Canadian Sup­reme Court decision of Taylor v Canadian Human Rights Commission made this clear.

Then chief justice Brian Dickson explained that "messages of hate propaganda undermine the dignity and self-worth of target group members and, more generally, contribute to disharmonious relations among various racial and cultural and religious groups, as a result eroding the tolerance and open-mindedness that must flourish in a multicultural society".

Dickson went on to state that the promotion of rights for certain groups was of such "pressing and substantial importance" that it warranted the limitation of the freedom of expression of all Canad­ians.

Dormant for decades, a policy debate about this limitation emerged in the late 2000s.  The battlelines were drawn between those who sought to promote group rights and endorsed state censorship, and those who sought to defend the classical liberal trad­ition.

Several high-profile legal disputes were the catalyst for this debate.  In 2006, Ezra Levant published the infamous Danish cartoons of the prophet Mohammed in his magazine, the Western Standard.

He published these in an apparent effort to cover the news story, where major news publishers around the globe lacked the courage.

Following a complaint by a Calgary imam, Levant was interrogated by the Alberta Human Rights Commission.  He posted the exchange on YouTube, where it went viral.

At one point, the commission's investigator asks Levant what was his "intent and purpose" in publishing the cartoons.

The question goes to the heart of the problem with the law:  the judic­ial system becomes the arbit­er of what and how opinions can be expressed.

Recall that Andrew Bolt breached section 18C not because he got his facts wrong, as many claim, but because Federal Court judge Mordecai Bromberg did not like the tone of Bolt's articles.

Another prominent Canadian case was against Mark Steyn.  Between 2005 and 2007, Steyn wrote 22 separate articles about Islam in Maclean's magazine.

The series included an extract of his book, which argued that the spread of radical ideology in Muslim countries was a threat to Western values.

Three laws students approached Maclean's to print a counter article.  When its editor refused, they filed suit in the Human Rights Commission.

Complaints were also filed by British Columbian Muslims and the Canadian Islamic Congress.

Although the complaints did not proceed, the head of the commission took the liberty of writing an open letter to Maclean's that implied Steyn had to put up with the continued threat of restrained speech, simply because it was the "law of the land".

Following an extensive media campaign, the law of the land changed for the better.

A private member's bill repealing section 13 passed through the Canadian parliament, with support from Harper's Conservative government.

The repeal was met with the same type of criticism as we are hearing for repealing section 18C.  For example, Canadian senator Nancy Ruth said that the repeal would "remove protection from disadvantaged groups", and would be a "victory for hate speech".

However, the Canadian sky remains intact.  Hatred has not been unleashed in Canada — nor will it be in Australia.

Freedom of speech is a core ele­ment of political freedom in any true liberal democracy.  Abbott had the courage to promise to repeal section 18C.  Hopefully, he will draw inspiration from the Canad­ians to finish the job.

A hefty efficiency dividend to come from selling poles and wires

Thirty years ago, at the dawn of the Australian reform era, there was a lively debate about the merits of public versus private ownership.  At that stage, conscious of its support from featherbedded unions, Labor argued it was competition, not ownership, that drove efficiency.

Since then, those carrying the flag for public ownership have seen their ranks thinning.  Now they are confined to the hard left and elements of the populist right.  Hardly anybody sees a case for retaining public ownership of businesses that compete with the private sector to supply goods and services.

It was 20 years ago when even Gough Whitlam supported Bob Hawke's privatisation of Commonwealth Bank of Australia and Qantas.  This week's decision by the Baird government to sell NSW's electricity poles and wires renews the efforts Bob Carr's treasurer, Michael Egan, made 20 years ago.

Locking up public funds in firms that have business rivals makes no sense, especially since the private sector will always prove superior in keeping down costs and seeking better ways to profitably supply market needs.

Even so, state-owned companies such as electricity generators, which are in competition with private businesses, are forced to follow their private sector competitors' cost savings and innovations.  If they don't, they lose money.

These disciplines are absent with monopoly businesses, the most important of which are the electricity networks.  Hence privatisation can bring far greater benefits with such businesses.

Performances by government-owned electricity networks are compared with those that are privately owned, even though no two networks pose identical challenges.

This year, costs of the state-owned distribution businesses in NSW and Queensland mean network prices are around twice those of Victoria's private distribution businesses.  And the situation is deteriorating.  Over the past three years, NSW and Queensland costs increased three times as fast as Victoria's (the private South Australian network also has high costs as it serves a very peaky load and had been run-down).

HAT TRICK OF HIGH COST

In the case of NSW and Queensland, costs are inflated for three main reasons.  First, government ownership has led to more gold-plating of the systems as risk-averse ministers who have little incentive to save costs over-react to mishaps.  Even so, the reliability of the states' networks is, if anything, rather less than that of Victoria.

Secondly, because government ownership equates to a relative indifference to costs, workforces become bloated and over-generous conditions prevail.  Private sector workers in networks earn far less than the $138,000 a year average earned by Sydney/Newcastle distribution business Ausgrid or the $127,000 average at country supplier Essential Energy, most of whose workers also have use of a company car.  Private sector management also requires greater workplace flexibility.  And private companies would not tolerate the use of their equipment for purposes like the erection of anti-privatisation signs on Ausgrid poles — forcing consumers to finance propaganda to maintain the high costs that government ownership imposes on them.

Finally, the lack of controls in government businesses means little discipline on spending.  All electricity network businesses, as monopolies, have to obtain agreement from the regulator for a total spending cap.  This dictates the prices that can be set.  Having better information about their businesses, the firms will normally persuade the regulator to approve over-generous levels of the spending (and therefore higher prices than are necessary).

In the case of private sector companies, the owners will seek savings in the regulator-approved capital and operational spending for the benefit of shareholders.  In subsequent regulatory rounds this provides guidance to the regulator who will demand a lower spending cap and lower prices.  There is no such operational management discipline on government businesses.  Executives in those organisations will spend all that they are allocated and often even more, confident they will recoup the additional costs in subsequent regulatory rounds.

The case for privatisation of networks is compelling.  However, the NSW proposals are timid in exempting the inefficient Essential Energy and seeking only a 49 per cent private holding for the rest of the network.  Baird is hoping that placing 51 per cent with an apolitical future fund will offer buyers sufficient assurances that they can pursue the necessary management reforms.

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Coalition in murky waters in hunt for online pirates

One of the quickest ways for a company to cut costs is outsourcing.  Even better when you can have the Government do your outsourcing for you.

This is the basic political logic behind the upcoming crackdown on online copyright infringement.

For the last year George Brandis has been hinting at a legislative crackdown on copyright infringement.  It wasn't quite an election promise in 2013, but it was definitely on the cards.

Now nine months into Government the Coalition is reportedly on the brink of announcing its approach.  (Momentum for the policy was temporarily slowed by the unfortunate political storm around the budget — it was due to go to cabinet in early May.)

Here's what we know.  There are two proposals being considered, "graduated response" and a website blocking scheme.

In a graduated response scheme — sometimes called "three strikes" — internet service providers are required to penalise their users for pirating material on a scale of increasing severity.

Graduated response has been introduced in a number of countries around the world, including France, New Zealand, the United Kingdom, and South Korea.

Typically the scheme works like this.

Copyright owners notify an ISP that they believe a user has pirated copyright material.  The infringing user is initially issued with warning notices by their ISP.

If those warning notices are ignored and the user continues to infringe, more serious consequences follow.

The final punishment is the disconnection of internet service altogether.

Why disconnection?  Simply because disconnection is the most severe penalty ISPs can mete out.  Their only "coercive" power over their customers is to stop doing business with them.

Under Australian law downloading copyrighted material is not illegal — it is not a crime, in any formal sense.  (There are some copyright offenses which are criminal:  things like importing, selling, or exhibited pirated material.  Basically copyright infringement on a commercial scale.  But simply downloading a movie for personal use is not.)

Rather, piracy is a civil matter.  Enforcing copyright requires a copyright holder to sue the pirate themselves.  But litigation is complicated and expensive.  Determining exactly who has pirated a particular film or music track is not easy.  Lawyers are pricey.

Litigation has an even bigger cost — to reputation.

American copyright holders did themselves enormous reputational harm earlier this century when they tried to sue the piracy problem into submission.

There were some appalling cases.  Take the legal action against this single mother in Minnesota, who was threatened in 2004 with a $540,000 lawsuit after her daughter downloaded some music — a damages bill orders of magnitude larger than her $21,000 annual salary.

Stories like these didn't just make the industry look greedy — it made them look cruel and vindictive.

Outsourcing the problem to ISPs with a graduated response scheme avoids the costly and controversial need to sue otherwise law abiding citizens.

Better to have the ISPs look like they're the cruel and vindictive ones.

So unsurprisingly, as Nicolas Suzor and Brian Fitzgerald pointed out in an important 2011 paper, graduated response is counter to basic principles of the rule of law.

Disconnecting someone from the internet is a big deal.  It's easy to forget how integrated internet access is to the modern world.  There is hardly a public or private service that does not rely on digital interaction with customers.

Graduated response schemes impose such a punishment on internet users without also granting them the legal protections they would receive if they were taken to court.

For instance, graduated response schemes offer little in the way of due process.  Copyright infringement is not always clearly proven.  The schemes place the burden of proof on the accused, rather than the accuser.  Graduated response can easily become draconian.

And for what?  There is no reliable evidence to suggest that graduated response schemes reduce copyright infringement, as one detailed study published in the Columbia Journal of Law and the Arts found this year.

The second proposal the Abbott Government is considering to tackle piracy is certain to be even less effective:  requiring ISPs to block websites that facilitate the downloading of pirated material.  Websites like the Pirate Bay host torrent files through which people share content.

Never mind that some of that content is "legitimate".  The last decade has conclusively demonstrated that when one avenue for piracy is closed off, another quickly appears.  Exhibit A:  Napster.

But more importantly, any such policy would come head to head with the Government's professed support of freedom of speech.

In 2010 Malcolm Turnbull claimed that the previous Labor government's internet filter was "dead, buried and cremated, and if it shows any signs of revival it will then be exorcised".

But a policy that blocks torrent websites will be, in a very real way, the internet filter by other means.

A crackdown on copyright infringement was not one of the Coalition's 2013 election promises.  Defending free speech was.

If the copyright lobby convinces the Government to take responsibility for protecting its business model, that promise will be completely broken.

Expelling MP Geoff Shaw should not be the only way out for the Napthine government

Resolving the Geoff Shaw crisis ought to be relatively simple.  Ought to be, if a) the previous Labor government hadn't fundamentally broken the flexibility of the Westminster system, and b) Daniel Andrews wasn't trying to score disgracefully undemocratic political points by seeking to expel a fellow member of parliament.

Last time someone was expelled from Victoria's Legislative Assembly was in 1901 and he had insulted the king.  Shaw's offence is even less serious than that.

Denis Napthine struggles to control the lower house.  Now that Geoff Shaw has "gone rogue", the Coalition's previously razor-thin parliamentary majority is an unworkable one.  Some days the government loses control of proceedings.  This is not sustainable.

But nor is it particularly unusual.  Sometimes governments lose control of the lower house.  It happens.

Under a bog-standard Westminster system, Napthine would be able to call an election to resolve the problem once and for all.  (Last week the Premier said he would have liked to go to an election six to 12 months ago.  It might have been a tough election for the Coalition.  But better than this damaging farce.)

Alternatively, the Governor of Victoria Alex Chernov could require that the Premier demonstrate he has control of the lower house.  If Napthine was unable to do so, Chernov could appoint a new government or issue writs for a new election.

But we no longer have a bog-standard Westminster system.  If you're looking for someone to blame for the crisis, blame Labor's decision to move to fixed terms a decade ago.

In 2003 the Bracks government introduced a four-year fixed parliamentary term, taking the decision to call an election out of the hands of the premier, and stripping the governor of their reserve powers.

It's now obvious there is a fundamental contradiction between a Westminster system and fixed terms.

In the Westminster system, government is formed on the floor of the house.  The ability of the premier to call an election provides the fail-safe mechanism if they lose control of Parliament.  A secondary fail-safe mechanism is vested in the governor.

In 2003 those fail safes were eliminated.  Instead, the electoral reforms jerry-rigged a complex workaround if the government lost control of the house outside predetermined election times.  But — here's the problem — that workaround relies on the opposition introducing a vote of no confidence in the government.

If the opposition refuses ... well, then the whole process gets stuck.

Right now the only political actor with room to move is Andrews.  Yet Andrews won't pursue a no-confidence motion in the government because he says Shaw's vote — necessary for a successful motion — is "tainted".

Instead, he wants to simply to kick Shaw out of Parliament.  What an undemocratic, unjust and entirely political ploy.

Vote taint is not a thing.  Votes don't go off.  They don't get spoiled.  Vote taint wasn't a thing when the federal Coalition claimed Craig Thomson's vote was tainted.  It isn't a thing in Victoria now.

Yes, Shaw is dislikeable.  He is anti-abortion.  He is also a duly elected member of Parliament.  The voters of Frankston chose him as their representative.  He has a political constituency and his views are shared by a sizeable minority of the population.

Nor has it been shown that he has committed any crime that would make him ineligible to hold public office.

In an opinion piece last week former Labor speaker Ken Coghill suggested the basic problem is that Victoria lacks a corruption watchdog with sufficient heft to turf Shaw out of Parliament.

The argument that a corruption watchdog could sort out an essentially political problem is as strong an argument against such bodies as ever devised.

Shaw misused his parliamentary car for personal business.  He shouldn't have done so.  But it's clear that Shaw's biggest misdeed is simply that he is in the way — that he holds the balance of power, has strong policy preferences, and is disinclined to compromise.

Obstinate?  Absolutely.  But Shaw isn't being much more obstinate than Andrews is.

Shaw has one thing going for him.  He isn't so morally bankrupt as to try to banish a legitimately elected fellow member of Parliament for political convenience.

Labor's legal advice suggests parliament can expel a member as long as the stated reasons for doing so are sufficiently "general".  Apparently detailing too many particulars — that is, particulars of what mortal sin Shaw is actually guilty of — would expose the expulsion to legal challenge.

One anonymous Liberal told The Age this weekend "We can't just get rid of someone because they're a tool."

But, ultimately, a well-designed parliamentary system should be able to function or dissolve itself even if some of its members are tools.

Victoria's Parliament is no longer well-designed.

There's no reason to believe that fixed parliamentary terms has given us better government.  Has there been any discernable increase in "long-term thinking"?  Are we better off for letting the Shaw saga stagger along?

It's easy to be seduced by grand plans for social reform.  Fixed terms was one such plan — a parliamentary rule change that was supposed to reduce political uncertainty.  We're now living with the disastrous consequences of that seduction.

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