Chasing the Norm

Australian academic and blogger on politics, international relations, and culture

Category: Economics

The Liberal Party’s Economic Confusion

In my last post I remarked on the Oppositions claim to support big budget cuts, but unwillingness to back a relatively easy example of it. It goes to a much larger problem for the Liberal Party: They don’t know where to stand on economics nor how to describe their position.

The essentials arn’t in doubt, they are for the free market, with a reasonable support for government welfare services chucked in to moderate the harsher aspects of capitalism. But over the last 3 years they have seen massive shifts within this range, and varying and contradictory explanations for these positions.

When the Howard Government left office in 2007, it was championed as a great Pro-Free Market government. It had restored economic liberalism after the savage blow of losing the 1993 Fightback election, and implemented a GST, deregulated many industries, privatised and outsourced significant elements (the famous yellow pages test), and spent 11 years advocating strongly and consistently for free markets. This was seen as one of the great strengths and records of the government. Where articulate critics pointed out they had substituted a lot of populism into this mix (such as Andrew Norton’s essay The Rise of Big Government Conservatism) it was generally ignored. If they hadn’t gone as far down the path as they had liked, this weakness was only a minor issue, one that had helped keep them in power and probably Labors fault in blocking reform in the senate or scaring the people. This wasn’t an extreme or libertarian government in any sense. But it was rhetorically and philosophically clear about the direction it wanted to go, and every step further down that path was seen as a good thing.

Then in the Spring of 2008 the Financial Crisis hit and suddenly economic liberalism was seen to take a body blow. This wasn’t entirely fair, as a particular form of US capitalism, bad oversight and regulations and some distorted government policy caused the crisis which then hit around the world. Now, the former members and defenders of the Howard Government couldn’t get away from the term Neo-Liberalism fast enough. Where they had mocked Rudds 2007 accusations of their free marketer ideals, wondering if he proposed poverty and socialism instead, they now sought to claim he was completely over-exaggerating their support for the ideals. They hadn’t been a free market government, just a pragmatic, cautious one that had only been continuing what Labor had started. What was a small weakness in the Governments economic policy in 2007 was now being held up as its greatest strength in 2009. But loyalty to the old ideas isn’t going away (which is a good thing), but it does mean some serious re-writing of history and rhetorical confusion is going on right now as they attempt to find a new place from which to detail their economic position.

I wrote a while back that the big flaw of Tony Abbott’s book Battlelines (which seems to have sunk without trace) was that this confusion was visible on every page and yet never directly addressed. But theres just as clear an example in Paul Kelly’s new book ‘The March of Patriots’ (2009). Kelly is a conservative if sympathetic writer for both sides, but also one clearly in support of economic liberalisation (As I am too). But this leaves his narrative into contrary directions because of the Liberals recent re-writing (which began to occur whilst interviewing for the book)

‘The 1993 election extinguished more than John Hewson’s dreams – it terminated the neo-liberal political experiment…Hewson’s Fightback! program was the only package resembling neo-liberalism ever presented to the Australian people. Its defeat was a turning point. No Future leader – not Keating, not Howard, not Treasurer Costello – would contemplate the model or its specifics as a package. This was the conclusions from the 1993 election despite occasional polemical claims that Howard as a Prime Minister was actually a neo-liberal – Page 75

Yet just 11 pages later as he details the fall of Hewson he recognises that whilst the man was gone, very little had changed in the party:

It was a view shared across much of the coalition frontbench and it took more shape as the 1993-1996 term evolved. It was the position of Howard, Costello and Dower. Their sentiment was to avoid any over reaction filled with recrimination, to recognise the policy integrity and energy within Fightback, to review policies applying a sharper test of what the people would accept, to return to the political centre but stand by the pro-market economic reform agenda and to avoid any early detailed policy release’ – Page 86-87

Where the Coalition seethed during office that they couldn’t implement all their reforms, out of office they have come to claim this was a deliberate design. Apparently they wanted some of their bills to fail, wanted to lose on workchoices, wanted to be rebuffed by the public on selling Aus Post and others, wanted to have the democrats force them to take food out of a GST, etc etc. In office they would nod and acknowledge yes it was bad economic policy to hand tens of billions over to families on comfortable wages, but that was the price to keep Labor out of office. Now they seem willing to make welfare for the wealthy a core principle of the party.

Labor has responded to the Economic crisis by indulging their desires for government spending. In many ways it seems this has worked very well (we have stayed out of recession, unemployments stayed in reasonable shape), but a reckoning will come and only some seem (Lindsay Tanner) seem interested in talking about it, and then more as an electoral weapon than a shift in policy.

The Liberals on the other hand have got themselves completely tied up in knots. Their baser instinct and education is to return to the proud support for free markets that they enjoyed under the Howard years. To promise to cut spending and demagogue debt. But like a dog beaten too often, when anyone gets close they flinch. When media questions get too hot they jump back. No specifics, no details, and NO NO NO to means tests for government handouts. The only time the Liberal Party has looked at all comfortable in opposition was a few weeks in July 2009 when they had the issue of debt to rally them, and remind them of the good old days. (In fact it reminded them too much of them, repeating old ideas such as a debt truck) , but soon Godwin Grench reared up, Rudd & Swan managed to hold us up out of recession and the Liberals lost their nerve again.

As for Kelly, his book is thus far enjoyable (I’ll do a review when finished early next week) but it feels rather over-written, and with a deliberate eye for the future. He’s trying to make this the essential history of the period (as his End of Certainty became for Hawkies govt). But if he’s willing to uncritically accept this clear re-writing of Liberal views, then it is unlikely to gain as much traction. Nor does it have a cleaver summing up in the way the previous book had with its formulation of an ‘Australian Settlement’

Update: Michelle Grattan is clearly a reader of this blog :p

Trust Me – Tomorrow I’ll start the diet

A nice juxtoposition in this mornings paper:

What they Say:

Hockey Vows to slash $14b in spending

MALCOLM Turnbull will base his push for the prime ministership in next year’s federal election on a promise to axe government spending by billions of dollars a year.

And the Opposition Leader will blame Kevin Rudd’s economic mismanagement for the need to take a razor to spending, proposing cuts that on current levels would be worth at least $14billion a year – the equivalent of 70 per cent of the nation’s annual defence budget.

Mr Hockey refused to nominate which services would face the axe, but said there was a strong argument that government spending as a proportion of GDP should be no more than 24 per cent.

This financial year, spending is worth 28.6 per cent of GDP, with the government’s budget forecasts reducing the level to 28 per cent in 2010-11, 27.1 per cent in 2011-12 and 26.4 per cent in 2012-13.

What they do:

Coalition Votes down Health Means Testing

THE Senate has dealt a $1.9billion blow to Kevin Rudd’s health budget by rejecting plans to means-test taxpayer rebates for private health cover and increase levies on the non-insured.

The Coalition, the Greens, independent Senator Nick Xenophon and Family First senator Steve Fielding combined to defeat the three budget bills, which would have raised health fund premiums for more than two million middle- to higher-income Australians.

Manager of Government Business in the Senate Joe Ludwig appealed to balance-of-power crossbenchers ahead of the vote to pass the savings measure, which the Coalition had long vowed to oppose.

“This is a hard decision and one that was not taken lightly, but it is the right decision for Australia’s long-term economic future,” Senator Ludwig said. But the government offered no compromises, which sealed the package’s fate.

It’s easy to say you will cut immense amounts, but significantly harder to actually do so. In this case the Coalition had a case of spending that could be reduced with the cover of the Labor Government championing the bill, and in line with their major principles of individual responsibility (Private health insurance is a benefit above and beyond the norm, so those who want it should pay for it) and reducing government dependence and spending.

But they have chickened out for short term and almost pointless political benefit. No MP will keep his seat next year because of this vote, but Labor will be able to cut holes in their claims to financial competence by putting up similar bills and watching the Coalition act to keep high spending levels in place.

There’s also an intriguing claim by Hockey that Government spending as a GDP ration should be at 24% (which seems both his comfortable norm and his “emergency maximum level”). Theres no real reason why 24% should be the magic figure. There is the obvious argument that lower is better, but why 24%. It was the most common figure during the last 32 years, but hardly tracks to economic well being. (1)

Personally I think big cuts do need to be made to our welfare levels, but that should be a question of total spending vs need, rather than based around trying to hit supposed magic numbers. As the chart shows, some very successful economy’s have significantly greater Govt spending as a % of GDP, and some have quite a bit less. What’s more important is where and how that is spent, and the capacity of the country to pay for that spending.

When the coalition starts supporting the simple introduction of means-testing welfare and benefits for the middle class we will know they are beginning to be serious about cutting spending (I’m not sure the ALP is either, so we shouldn’t yet take their support for the bill as evidence of it). Until then Hockey is just using bluster and bullshit. But lets leave the final word to his predecessor as Treasurer in the Liberal Party: Peter Costello

don’t think that reducing expenditure to GDP ratios is easy. Every pressure in a democratic system is to increase spending. Resisting calls for increased spending on worthy causes (and all causes are worthy in the eyes of those who want it) is a daily struggle – week in week out, month in month out, year in year out.

(1) Whilst trying to find a good graph illustrating the difference I ran across this 2006 speech by Peter Costello claiming that “In the OECD Australia has the second lowest level of government spending as a share of GDP at 35.7%, lower even than the United States.”. Whilst the 2009-10 budget records a level of Government Payments as % of GDP at 24.2 for that year (Which also matches the figures Hockey cites for current spending at 28%.)

Update: The wise and civil Sinclair Davidson from Catallaxyfiles suggests this may include state spending, or counting the GST as Federal rather than State spending.

Why is Libertarianism so unpopular ?

If you take a regular gander at libertarian voices in this country, you often find they arn’t a very happy bunch. Despite thirty years of economic reform running almost entirely in their direction, they always have a nervous skittishness about any sign of backtracking, with frequent prophetic warnings about imminent economic doom. A large part of this is based on the widespread recognition that libertarian and indeed free market ideas arn’t actually that popular in most countries in the world. What better demonstration could there be than the 2007 dumping of the Howard Government for its support for WorkChoices, or the public embrace of Rudd and his heavy spending on health and education (the two area’s which always lead public opinion polls in terms of focus area’s over tax, security or immigration). The Liberal Democratic Party, the closest to a Libertarian party in this country, receives well under 1% of the vote

Yet Libertarian views have four significant advantages:

1) They advocate more freedom: Whatever minor philosophical differences there are, Libertarians can generally be identified as favouring social and economic freedom. Of course in individual circumstances there are debates about the consequences and the like (ie drugs, abortion, fireworks), but in general being identified as being in favour of such a key western value is of tremendous value. Conservatives have spent 30 years grasping for that mantle, and only sometimes succeed in getting anywhere near it.

2) They play to people’s self interest. Despite the obvious flaw in this reasoning, most people think they are above average, and would like a little more of their own tax dollars. Now while this can certainly be over-sold, (and the strongest vote against workchoices came from those not affected by it) this is a pretty good platform from which to appeal to people. Instead of having to make a moral or ethical case about caring for the ‘other’ as social democrats do (witness Obama’s struggle for health care in the US), Libertarians can appeal to your personal sense of competence, capability and resilience. You should choose who your doctor is, where your kids go to school, how to spend your money, etc etc. Most people seem to recognise that the common wealth benefits us all, but still see themselves as seperate from and more capable than most they run into. Libertarians get to play to this, with a clear set of policy proposals that have a logic of their own (you make it, you keep it) rather than the re-distributionism of the big government advocates (we’ll give you more in handouts).

3) It seems to work: After thirty years of general movement towards free market policies we have western societies that sit on the right side of ‘History’, have seen significant growth in GDP, disposable income, attainable products and services, quality of life, brought over a billion people out of poverty, and had few of the claimed major consequences of opponents rhetoric. Sure, the welfare state and very slow changes have been there to buffet the winds of change, and markets clearly don’t work in some areas (defence, health, education) in the way they work in others (ie need some public input to achieve outcomes), but we have reduced taxes, sold off assets, and deregulated our markets for great public benefit. Yet the favoritism for free trade and libertarianism doesn’t seem to have significantly budged despite these successes.

4) And most importantly: They are the natural party of wealth in our society. Money has always had and always will have a significant influence in democratic societies. Indeed most of the big fights that lead to democracy in the west have been centered around the wealthy trying to exert their influence (the original kings councils that ushered in the parliamentary system in Britain) and to protect that wealth from undue government control (the US ‘no taxation without representation revolution). Elections are very expensive businesses and while money usually follows power (meaning the major parties abilities to enact current changes will drive corporate interest), most businesses, entrepreneurs or wealthy agents in society would also be very sympathetic to those proposing less regulation, less taxation and an outsourced, reduced government.
The Australian Labor party is one of the most successful left wing parties in the west precisely because their union beginning and links gave them a financial base to compete with the big money interests who supported the conservatives. But given the Conservatives in Australia have only a half-hearted endorsement of free market and libertarian ideals (at the same time as introducing WorkChoices, Howard was presiding over the highest level of Government welfare spending in this country’s history), it is a wonder that business elements, especially those trying to challenge the status quo of a particular market, or those so sure of their capability in a particular arena dont try and pull the Conservatives towards the Libertarian side of the dial with strategic donations.

Despite these three great advantages, appealing to individual desire for freedom, individual self-interest and the natural alliance with the moneyed interests in a country, it is a wonder why Libertarian voices havn’t done that well. Perhaps the main reason I can see is that Libertarians have usually been unable to even agree to enter the political debate, and as such have little to no public face. Without a professional effort at public advocacy, what arguments are made for Libertarian views are usually either pitched as high economics or simplistic scare stories. Indeed whilst I am often very sympathetic with their overall ideals, and spend a fair bit of time reading libertarian literature and chatting with them, I so often feel somewhat talked down to. The answer is usually so obvious to them that your greed or ignorance seems the only reason you don’t fall to your knees and accept their wisdom.
Likewise, when presented to much of the general public, Libertarian views are seen to be representative of greed and avarice, while they see the economics and logic of their positions both more just and more likely to benefit the disadvantaged. (On that there is some scope for debate, but it’s defendable, and certainly shouldn’t be as dismissed as it currently is). Finally, both for reasons of ideology, and because of the reception that the ideology has recieved, there is a quite clear distrust if not contempt for democracy amongst a clear minority of Libertarians that then slows or even damages efforts to promote their ideas to the public.

So why then is Libertarianism such a disregarded and discredited ideology in Australia, indeed in the world?

Australias strongest Lobby

Perhaps one of the most fundamental differences on the left side of politics is between those who favour equality of outcome and those who favour equality of opportunity. The first ex-socialists, the latter shy liberals. But it is also a divide that comes out in most analysis of social outcomes too. One of the most common though often mistaken approaches I see my students taking is to look at an unequal outcome, and assume that it has occurred through an unequal or discriminatory process. Sometimes however it also seems to afflict those who should know better:

I am suggesting that there is almost a regionalisation of wealth, income and culture based on urban geography.
Battlers, migrants and assorted low-income earners who formerly lived in the inner city are now being flung out, as if by some centrifugal force, to the city’s edge. What is left in the inner city is an odd coalescence of tribes — namely students, singles, couples, dinks, gays, expats, corporates, divorcees and, most important of all, the professional and entrepreneurial classes.

One of the key drivers of social division within the city is income. Between 1996 and 2006 the average income per person in Melbourne’s Melton and Wyndham and Sydney’s Blacktown and Penrith hovered a few percentage points above or below the Australian average… However, it was a different story in the city centre. In Sydney’s inner-western municipality of Leichhardt, income levels on a per-person basis jumped from 43 per cent to 73 per cent above the Australian average over the decade to 2006…The same upshift applied to Melbourne’s City of Port Phillip, where income levels moved from 27 per cent to 50 per cent above the Australian average in a decade…At the heart of the differences is education. In the inner suburbs it’s not uncommon for two-thirds of adults to hold a bachelor degree or higher. In the outer suburbs this proportion is less than a third.

And yet this is a voice that is rarely heard in the Australian media. Name a newspaper columnist, let alone a radio broadcaster or a television presenter, who projects their perspective on life from within the middle suburbs, never mind outer suburbia.Why are there ample caricatures of unsophisticated suburbanites (Kath and Kim, Edna Everage, Kenny) but none of the inner-city elite? Is the educated well-to-do, inner-city-living class beyond parody or satire? The problem I have is that city planning, and more often Australian culture, appears to be determined by those whose lives are based in the inner city, and not by the silent majority of average Australians who live in the suburban heartland.

If you are of the first kind of lefty then these figures will shock you. Surely if one groups income is rising far faster then some sort of discrimination is occuring? Salt even suggests a reason: an absence of a definate ‘voice’ within the national discourse as the cause, resulting in an unheard ‘silent majority’ who are being excluded and deprived. Tony Abbott expresses similar sentiments in his book with a sub-heading ‘how families have been forgotten’. If the outcome is different surely the process is flawed? Perhaps not

For the latter kind of lefty and most centrists, however there is another factor at work: A self-selection bias that is going to always cause such changes, and need not expressly worry us. As Salt acknowledges the heart of the difference is education. Those who have gone to universities, perhaps even for higher research have prospered, those who have not added such skills, have in this analysis seemingly missed out. But this ignores that both groups have seen rising incomes of all income brackets during this period, so the difference is only one of relative gain. More importantly is how this advantage came to be accrued, with the HECS system Australia has a system which does not deter the poor from attending higher education:

in 1989 the government introduced a charge for university attendance – the Higher Education Contribution Scheme. This had a unique characteristic: students could choose to pay their university fees after they graduated, and only if and when their incomes reached a specified threshold – about A$34,000 a year at the time, although it has since been lowered.
The effects of Hecs have been studied extensively, particularly its consequences for access for the poor to university. The bottom line is that there have been no implications: higher education enrolments by all socioeconomic groups have increased by an average of 40 per cent. The university system is thus much larger than it was 13 years ago, and this has happened because of the creation of a healthy Hecs revenue base.

(You can find a more detailed paper on the subject here)

So the opportunity to access Higher Education in this country has been equal and non-discriminatory for the last 20 years, including this studied decade. So on the basis of the opportunity one group has taken the opportunity and been rewarded, another has not and thus not obtained it. An outcome most children would recognise as fair when taught through stories such as Aseops fable about the Ant & the Grasshopper.

Secondly and more importantly however, Salt both decries the “centrifugal force” flinging families into suburbia, yet presents the figures as if the groups were static the whole time. Rather than assume all in the city have had their incomes rise, we should expect to see that those who’se incomes were rising tended to migrate towards the city. This would be both for job opportunities and in parallel for social organisation reasons to. People with similar outlooks or culture tend to want to live nearby each other and so employers follow. If everyone was static in residence then such changing figures might seem discriminatory, but instead they are exacerbated by change, rather than mitigated by it. Secondly, if the opportunities for this benefit was equal then the different outcome is not so much discrimination as the natural variation we find amongst people in the world. Each of us have different talents, skills, work ethic and personalities that lend themselves to or detract from our ability to demand a higher income. And of course having families necessarily means some trade off between time available for involvement in culture and spent chasing career advancement.

Yet Salt plays with numbers, or mentions a single TV show in order to demonstrate that socially families are excluded or mocked. But as his concern is with economic and demographic issues, what we are really discussing is not a social but a political process. And within the sphere of politics the accusation that families or suburbia are being ignored is not only laughable but offensive.

As I was remarking to a fellow blogger the other day, families are the very first in this country to play the victim card. Whatever the overall national economic circumstances there is a omnipresent view in this country that families are doing it tough and need help. In 2007, at the end of our longest ever economic boom, Labor managed to tell families they were doing it tough as ‘working families’ and ride this resentment into government. Howard’s truthful though arrogant claim that families ‘had never had it better’ helped cut the lingering ties between the government and its former supporters.

Indeed despite Abbott’s odd chapter heading, we have never seen a government as obsessed with helping families than the Howard Government (which ruled from 1996-2007, exactly covering the period in question in Salt’s figures), as Andrew Norton made clear in his essay ‘Big Government Conservatism’

In 2004–05 Commonwealth assistance to families with children, primarily via Family Tax Benefits, cost almost $25.5 billion. After adjustment for inflation, it increased by 18% in the three years ending 30 June 2005 (included in figure 2), with the Budget papers forecasting another $3 billion a year on top of this in 2007–08.

Though the Prime Minister correctly observes that children are costly, people caring for them typically earn more than households generally. In 1996–97, two-thirds of couples with children had incomes placing them in the top 40% of households when ranked by income. By contrast, only one-third of lone adults aged 25–64 earned enough to be in this upper income group.[12] In 2003–04, market income (excluding government benefits) for the median couple with children was more than $76,000, compared to $45,000 for households generally.[13] For most couples, children coincide with the financial capacity to raise them.

The net effect of this is that 42.2% of families pay no net tax, receiving more in benefits from the government than they pay in income tax:

Take a step back and recall what happened to the politically ubiquitous working family during the past decade. The proportion with both parents employed increased from 54.5 per cent in 1997 to 59.9 per cent last year. The proportion of jobless families – where both parents were out of work – fell from 8.6 per cent to 4.8 per cent during the same period.

Oh, and the home ownership rate also rose, despite talk of an affordability crisis, from 78.3 per cent in 1996 to 79.6 per cent in 2006. Against these undoubted boosts to living standards, governments, both Coalition and Labor, decided it wasn’t nearly enough. The proportion of couples with dependent children who are tax free jumped from one in five (20.1 per cent) in 2004 to one in four (26.3per cent) in the present financial year.

Ours is a nation obsessed by suburbia, with all politicians having to pass the ‘family’ test to be elected and certainly to become Prime Minister. No single men have made it to the top, and those without kids (such as Bob Carr from NSW) are the exception that prove the rule. Over the last 20 years practically every election except 2001 was decided on the issue of who would better support families. 2007 was working families, 2004 aspirationals and interest rates, 1998 & 1993 on tax breaks and 1996 on putting ‘suburbia not special interests’ front and center.

Raising a family is certainly a tough decision, and as a country we need more kids and should encourage and congratulate those who do. But to pretend families are not being heard or looked after is a gross distortion unworthy of a federal newspaper columnist. A populist fiddle with figures that ignores the overwhelming political context where families dominate and exclude all other groups day after day. And thats fine, its a good thing our countries focus is on those seeking to raise kids, but so long as the opportunities that created this outcome are fair, then small deviations are not reflections of inequality but personal choice and natural circumstance.

Governing behind closed doors

secretRudd was already cruising prior to Utegate, but I am sure he can not believe his luck that not only did it blow up so badly, Turnbull show his weaknesses so clearly (and is still doing so), but now the Auditor-General’s report has come out to body slam the Opposition just as the new session begins. Add in the happenstance of Australian Stories’s camera’s being in Turnbull’s office when it broke (and showing them stunned and confused, raising viewer doubts on competence), and Grench’s admission he faked and scripted the whole affair, and Rudd could take the next year off and still cruise to victory next year.

But just as everyone moved on from utegate pretty soon after parliament lifted, we can be sure the media and public will largely forget it too within a few days. But what about the Public service and its relations with the Opposition? Likely this is where utegate really matters, and probably negatively for all interested in open accountable government. Leaking is a complex affair, all partisans love it when it helps them, and hate it when it goes against. More impartial observers recognise the benefit it has in keeping governments honest (particularly when the opposition is so weak as we have now) but equally government should be allowed to make its decisions largely in private. Afterall how many times have we seen good new initiatives destroyed because only part of the story got out. How often have we seen ministers ask for a range of options to fix a problem, and wake up to find the most extreme and never-to-be-chosen option splashed across the front pages as if that was the real policy of the government (such as this mistaken outcry on the govt tracking hospital staff). With a government as dominant as Rudd’s right at the moment I’d prefer to see more leaking, to keep them honest and from getting arrogant. However in a year or two when the reckoning comes to cut funding and pay back the debt, then the less media outcry over individual initiatives and more considered focus on the overall proposal the better for the nation at large.

I raise this because whilst Turnbull can still recover, the oppositions relationship with the Public Service will not. Once bitten, twice shy, the Opposition is going to stay a long way away from any leaks and suggestions from public servants, however sincerely offered. They will still filter through some claims, but by and large we can expect the flow to dry up. Whilst Howard used the AFP to intimidate public servants not to leak, Rudd has had the same service performed for him by Turnbull & Grench. Public servants watching this affair will realise the immense dangers to their careers and even well being should they get tied up with such a bumbling opposition and likely decide the risks are not worth the return (and as Turnbull’s odds on winning lengthen the incentive will further disappear).

Meanwhile, with the downfall of Joel Fitzgibbon (in part due to leaking public servants in the DOD) we have seen the move away from Special Minister of State John Faulkner into the reticent department. Where Falkner was an uncorruptable idealist, respected across the chamber on transparency and fairness issues, his replacement Joe Ludwig is for all intensive purposes a partisan hack. Ludwig is capable and smart and on historical grounds it’s likely that this government will see more openness and transparency than we saw under the conservatives. However he will not have the influence with the PM, nor the personal incentive to push for real reforms in the way government operates and its openness to the people as Faulkner would have. This is a loss to all Australians, especially those in the media and academia who make their careers based on knowing as much as possible about the actions of the government. It’s already a tough gig, with Australia way back in position 35 for overall freedom of the press. Faulkner would have had a hell of a fight to have changed that whilst the control-conscious Rudd was Prime Minister, however with his departure and the Grench implosion the potential for open government in Australia has really been set back. This is the real legacy of Goodwin Grench and the Utegate affair. A sad result for a man who seems a decent and committed public servant, who just too his partisan biases too far and ended up harming his own side most of all.

I meant to post this the other day, but circumstances took me away (well ok I was lazy) but when you are doing your taxes this year take a moment to chuck your overall income/tax paid into this website It lays out just where your money is going to be spent over the next financial year. Pretty cool, and a very good way of showing just how large the health and welfare side of our budget really is. Fixing those costs without abandoning our principles of universal healthcare and emergency income protection is the primary task for fiscal conservatives over the next decade or two. As of yet however I havn’t even seen the hint of a new policy. Likewise many on the left who feverently support these policies are refusing to even admit there is a problem. The neo-liberal revolution has run it’s course, and the public has decided: Medicare and welfare are hear to stay. The real question is how to target and pay for them.

Photo by stevendepolo used under a Creative Commons Licence.

The Free Trade Left

I’ve already raised the issue of ending the ban on parallel imports of books. The Productivity Commission has now released it’s final report and its findings are clear:

the Commission has
• concluded that the PIRs place upward pressure on book prices and that, at times,
the price effect is likely to be substantial. The magnitude of the effect will vary over
time and across book genres.
• Most of the benefits of PIR protection accrue to publishers and authors, with demand
for local printing also increased.
• Most of the costs are met by consumers, who fund these benefits in a nontransparent
manner through higher book prices.
• PIRs are a poor means of promoting culturally significant Australian works.
– They do not differentiate between books of high and low cultural value.
– The bulk of the assistance leaks offshore, and some flows to the printing industry.

Alan Fells, former head of ACCC and now at the Australian New Zealand School of Government has suggested that means a cost of up to $200m for consumers.

But what is most interesting (though if you know your history not surprising) is that most of the push for this end to protectionism has come from the left. It was Chris Bowen, in the Rudd government who initiated the Productivity Commission’s survey. It has been most publicly championed by Bob Carr, former ALP premier of NSW. And has received support from a variety of quite left wing types such as the ACT’s own rising star Andrew Barr (as I noticed this morning via his facebook – who says blogs don’t break news:P). Whilst the libertarians at Catallaxy have of course been forthright in wanting a change, I could only find this lukewarm press release from the Liberals Competition policy shadow minister Luke Hartsuyker, with not a single mention by Malcolm Turnbull.

This may seem counter-intuitive if you think the right is pro-free trade and the left against it. Yet whilst the two party structure of Labor and anti-labor sometimes creates that mould, the history is quite different. The single largest reduction in tariff’s in this country occurred in 1973 under the Whitlam Government. After some drift under the conservative Fraser, Hawke and Keating picked up the mantle and effectively ended the way Australians had run their economy by reducing almost all tariff’s. This was encouraged by Howard (having supped from the classical liberal economics of Reagan and Thatcher), but his own government whilst rhetorically adamant, ended up doing very little on the free trade front. It liberalised small areas such as CD’s (in the way now proposed for books) and seeing the flaws of multilateral deals pushed into bilateral deals with mild success. The two big areas still under the umbrella in agriculture and cars remained protected, or got effective protection through constant handouts. In fact if you examine Australian political history, it has been the moderates and liberals within both the ALP and Liberal Party who have lead the move towards free trade in this country (Howard being the obvious exception). The more conservative forces, much like the union-left have largely been against such moves. Take for instance this piece by Tony Abbott writing in 1995:

‘His [Keating’s] Asian crusade is simply the second phase of a long battle – hitherto fought around Australia’s economic structures – to extripate the legacy of Menzies. The first phase meant changing Australia’s economic structures and breaking down the old business establishment. The second centres on smashing the Crown which he thinks is the ultimate icon of conservative Australia. Asia played little part in his drive to ‘reform’ economic institutions – after all, most Asian governments pursue pragmatic interventionist economic policies similar to those of pre-Keating Australia’ (p220)
Abbott, Tony in Sheridan, Greg (1995) Living with Dragons: Australia confronts its Asian destiny Sydney: Allen & Unwin

Abbott went along with, even championed Howard’s economic ideals, but never was at the forefront of the debate, and with his mentor out of the game, it will be interesting to see which way he turns in his forthcoming book. Whilst the forces of free trade have largely won out (both due to argument and circumstance), don’t be surprised if there is a slight shifting back amongst the right should the conservative forces lead by Abbott take charge. As i’ve predicted many times before, I see the two party system shifting to a more liberals vs conservative basis instead of the weird cross-overs we saw under the Reagan/Howard coalitions, but either party could take either role, depending on their internal struggles. Long story short the “common sense” idea in the media and the general public that the right is pro-free trade and the left against it is not sustainable in current policy nor historically accurate. As the new left begins to develop it’s form, I have little doubt that a strong stand for free trade will be at the heart and soul of its economic system. Only such a system can encourage universal rather than national sentiments, international organisation, healthy free competition and the free flow of ideas and people.

Fukuyama was right

Normally I post a link to someone being serious/foolish and then spend several pages saying why they’re wrong and there’s better ways of looking at the world. This time however, someone being funny, in order to buffer a larger and under-represented point I’ve been wanting the make:

Capitalism is often seen by the public purely as it’s visible (or at least countable) outcomes. Money, Interest, Stocks are what come to mind when you ask people. Yet, much much more than that, Capitalism is a system of trade, lending, and interaction based upon the assessed value of capital assets possessed by the parties. Where barter trade systems consider just the equivalence of one good for another, capitalism adds in considerations of the assets already (or in future owned) and allows those to become part of the exchange (ie a bank lending to you based on the value of your house, or companies selling stocks which offer part of their future profits to those who purchase now).

That is, it is a system that is highly dependent on TRUST between the various participants within the market. It is a significant historical fact that Francis Fukuyama, fresh from his controversial classic ‘the End of History’ charting the ideological victory of democratic capitalism as a way of organizing human societies, would write his second book on the question of ‘Trust’. Fukuyama would argue and through numerous case study seek to demonstrate that ‘in all successful economic societies these communities are united by trust’ (1995:9).

While we are far from the end of the economic recession, we have the US president saying he is beginning to see ‘green shoots’ and much closer to home, even positive retail growth and reductions in unemployment. Whilst these numbers are sure to dip again, and some of the shoots to be bitten by the winter chill, it is likely that at the very least the Western world can now be said to have avoided a 1930’s style depression. This recession will be severe, and take a long time to get out of (not to mention the debt to pay back), but the system has held. And despite Adams pessimism that is because fundamentally people have retained their trust in the system. In the banks to hold their money, in the stock market to chart the worth of companies, and in our political leaders to respond to the challenges and do what they can to marshal resources towards solving the crisis.
Whilst Obama’s economic moves have taken hits from the Left (most notably Paul Krugman and those supporting bank nationalisation) and from the Right (sensible conservative concerns about debt through to the nutty tea baggers), he has largely been seen to chart a pragmatic and responsive policy approach to the current economic challenges. Whilst the media have again tried to use the left-right frame to accuse Obama of becoming a socialist or alternately being captured by the big end of town, the public have responded positively to his efforts. American conceptions of if the country is on the Right Track/Wrong Track have gone up a remarkable 31% since October 2008 when Obama’s victory began to look apparent. In the last 2 months it has gone up 8% and finally moved to positive territory with a 48/44 split. Even better and clearer in its indication is news that 64% of Americans approve of Obama’s handling of the Presidency. Obama and his team may have stumbled at times, and people are still nervous about how the bank stress tests will play out, but for now there is confidence returning.

Closer to home in Australia, and the Prime Minister also enjoys significant public support. While there was a statistically significant drop since April, Labor is in comfortable election winning territory, and the PM is like his American counterpart enjoying 64% satisfaction support. Indeed this comes even as voters express significant disagreement* with the way in which the government has stimulated the economy. Rudd’s job was a little easier given his inheritance of the strong economic management of the Howard government, yet such is the trust that the government is doing what it thinks is right, the public can disagree and still show almost record support for the prime minister.

It goes back to an argument that social democrats have been making since the Industrial Revolution. Whilst their measures distort the market, affect prices and cost individuals, the resulting benefits whether delivered in welfare, working conditions or universal access to services help guarantee public support for the continuation of the capitalist system as the engine of prosperity in the community. As Franklin Delano Roosevelt would repeatedly claim, his New Deal made him the best friend capitalism ever had. He saved it from itself, a mantle Kevin Rudd would claim for himself in his 2009 essay on the Global Financial Crisis. This has often been unfairly compared to a ‘destroying the village in order to save it’ mentality, but whilst there is no guarantee that moving significantly further in the opposite direction is even better at social cohesion and stability (or is worth the cost and distortion of the market), social-democratic policies can be claimed as a useful ballast, maintaining the stability of society.

This indeed is one of the interesting contradictions of politics, in that the reinvigorated capitalist revolution of the 1980’s and 90’s, was largely championed by social conservatives who saw their policies unleash significant social change and damage to the ‘social fabric’ of Burke’s immortal metaphor.

Thankfully Adams social commentary is just a little bit too pessimistic this time. Even though great problems remain, Capitalism retains the trust of the public, and for that our national leaders deserve our support. Now to tell our kids they have to begin helping pay for those same measures …

* I put this down more to voter ignorance, both of economics and the governments approach. Of the $42 billion 2nd stimulus package only 4 billion was cash handouts, with the rest on infrastructure. Yet the media framing has largely been such that the payments are the focus.

Liberals and Markets

I’ve blogged before on my disagreements with Classical Liberal/Libertarian types. Whilst we seem to have read the same great texts, and decided such ideals and principles were for us, most modern ideologues who claim the labels Classical Liberal or Libertarian seem to have but one solution to every single policy option: Create another Market. Yet much as markets are rightly praised as a necessary basis for a free people, I don’t see why what is essentially a means, should have become the default ends for every single policy debate. Take a recent debate on Andrew Norton’s site as he works through the implications of his political survey:

Commenter Robert suggests, regarding my post suggesting Milton Friedman influenced views in favour of competitive curricula on government not delivering school education, that

It could just be that better read classical liberals tend to favour freedom in education (and perhaps freedom in other areas) and it’s not Friedman specific. Is it worth testing whether the effect from Friedman is greater than having read other liberal thinkers?

I’m sorry to report it, as I like and admire Friedman rather than just admire Hayek, but a test comparing Friedman readers and Hayek readers (Hayek being the second most popular classical liberal writer among classical liberals, after Friedman) suggests that Robert is right. Hayek readers are slightly more likely to give the ‘correct’ classical liberal responses to questions on school curriculum setting and funding.

Note the terminology shared between Norton and his commentator. Private education and having states compete in delivering curriculum is a position that “favour’s freedom” and is the “correct” response. (To get the full context you might need to read these two blog posts 1, 2)

Yet whilst robert, andrew and myself all hold individual freedom as the primary goal, I don’t see how that is best achieved through encouraging a market in education. To wit:

1.The options for parental choice are limited: People are limited geographically and to a certain extent socio-economically. And whilst ideally parents may move to good schooling area’s when their children begin school, the ability and likelyhood of moving again to facilitate a better educaiton is almost non-existent. Parents simply make do out of limited choices. Markets can work with only a few choices available, but the selection between then at relatively low cost is critical, and in education non-existent (a factor no government intervention can really overcome – at least not in a private system, more on this later)
2. For children, there simply is no choice. Not only do their parents dictate their education, upon turning 18, people cant and simply wont go and repeat parts of their education should they decide that other vendors are better equipped, cheaper, whatever. They will instead go into another industry, such as choosing between tertiary education providers, or simply leave behind the education market altogether.
3. Together these two points dramatically work to limit the cost or benefits to schools for adapting to the market in issues such as ‘best practice curriculum’. Schools have significantly lower need to be efficient or cutting edge than any business in a real market.
4. Norton presents this debate in the context of choosing between having a nationally delivered curriculum, a state delivered curriculum and ‘competitive curriculum’. Here, the ‘freedom’ of having schools compete in what curriculum is seen as the highest principle and therefore the ‘correct’ approach. Yet the group who benefits from this freedom is a very limited selection of the general public. That is, school teachers and administrators who can implement a variety of curriculum’s that they feel best benefit the students (or suit their own skills/interests) and a limited selection of students who do indeed receive the ‘best practice’ available at the time. As with points 1-3, the actual flow of information and therefore new curriculum will be limited, not to mention the difficulty and cost of implementing new curriculum’s each year; hence even students whose parents have sent them to the ‘best’ school may still miss out on the highest standards due to implementation issues/unlucky timing.

What this presents is an idea of a market which ticks some of the basic liberal box’s (markets, freedom) the market would be inefficient and the freedom limited and largely superficial. Meanwhile the social effect (again a Liberal concern) would be that some students within the system would largely miss out on even an acceptable level of education due to either flawed curriculum (ie an experiment gone wrong), or more likely stay stuck with a consistent, but lagging curriculum chosen by only a handful of local professionals years before and kept in place by tradition and the static effect of the costs of transition.

All this becomes even more apparent when you look back and read the classical liberal thinkers, and not the modern economists who have championed their ideals. Education has always been at the heart of the Liberal ideal because it is perhaps the primary means in which individuals can better themselves and in which they can be prepared whilst children to become independent, responsible, self-fulfilling members of society. Freedom within the liberal context is based upon the individual being aware of their choices, of having knowledge of the flow of information in order to make educated choices between competing options. None of this is available to the illiterate or the educationally deprived. As such, this Liberal would argue that the greatest freedom is delivered not in schools choosing between curriculum, but in individuals being the best possibly prepared to engage the modern world as adults. That is, the short term cost to schools in losing that competition (and to some extent to parents), is offset by having the end product individuals significantly better prepared to independently engage society and exercise their individual freedom in a range of industries.
Given this, the argument for a national curriculum to ensure individuals are well prepared, with such a service delivered by both public or private schools (who have the option to add additional subjects such as religious education), seems a pragmatic but ultimately more profitable approach.

Yet none of this seems to even register in the debate that occurs within ‘Classical Liberal’ and Libertarian circles. That the market is the primary way in which Liberal principles are to be achieved is held without question to be the ‘correct’ answer. Dissenting views from this ideal are almost not engaged with. Now there are several reasons that could be attributed to this. First is the traditional benefits of markets in other areas to provide liberal ideals, along with the general ‘siege’ mentality that seems to lead some liberal/libertarian thinkers to think they are still facing great statist forces as occurred in the 20’s, 50’s and 80’s, and not within a very market orientated culture. Likewise is the effect of the economist’s who became the primary public advocates for liberal/libertarian ideals during the late 20th century (Hayek, Friedman etc).

But either way, it makes for a strange experience to engage people who share very similar principles and ideals, and yet be able to predict without reference to circumstance the policy prescription they favor. Its not that I disagree with them in all cases, and Norton deserves credit for being an intelligent voice advocating an alternate solution within the Australian education context. It’s just that it’s ‘correctness’ and correlation with liberal principles like ‘freedom’ is simply expected due to the means advocated, rather than a more hard headed analysis of the actual ends to which such a system would deliver. Like the statists within social democrat ranks, marketeers within the classical liberal/libertarian ranks have managed to convince their fellow ideologue that the means are actually the ends. Odd.

Letting the Market be the Market

One of the fundamental principles handed down to us from the modern birth of democracy was the imperative to separate church and state. Having had well over a thousand years of church dominated political life, thinkers in the west came to recognize that such cross-over harmed both. Government failed the people physically and the Church spiritually as both were corrupted from their primary purpose. It is also no co-incidence that America is one of the most religious places on earth due to giving the churches wide space to act outside and away from the grasp of state-doctrine & man-anointed leaders.

This principle is well ingrained, and now as we end the first decade of the 21st century I’d like to advocate another similar principle: The separation of Corporation and State

Lindsay Tanner writing in the Age this morning makes the point well in relation to health-care:

Australia has been fortunate to avoid the most extreme form of this phenomenon, where individual companies became vehicles for social welfare policy.

American car manufacturers are threatened with bankruptcy partly because they are burdened with enormous health and pension obligations. China is struggling to build a social safety net as it can no longer afford to force companies to provide services such as health care and housing.

This is something that has always intrigued me, in watching apparently pro-market forces condemn government paid health-care services. Even some of the most thoughtful tie themselves in knots trying to justify the massive costs forced onto business, all the while charting those for whom the recession has meant not just the loss of their job, but their health care too. But in spite of this burden on business, and great risk on the individual, the idea of universal coverage paid for by taxation (and lets face it US rates arn’t that much lower than anywhere else in the developed world, and such costs pale next to the defence budget) is anathema and must be rejected out of hand.

Yet why should business’s already struggling to compete as efficiently as they can, be forced to provide for the healthcare needs of their employers. They only pay for their education when it comes to specific business related learning, so why cover their general maintenance and well being too? If business’s want to add an extra incentive to attract workers thats great, but most business’s offer it only because they know they have to (in some cases are forced to) And so issues related to hiring and firing and workplace flexibility become infinitely more complex and emotionally tied up due to the link to the health of both the employee and their family. Given business’s already pay taxes, why are they forced to become a secondary social welfare vehicle ?

Yet the point is obvious in other areas too. In politics our politicians are ever more having to account for who they met and interact with, less they be revealed to have dined from the table of Lobbyists (and to which President Obama has, -at some cost to the progressive movement- banished from the white house staff)

Even more transparently, corporations and states rarely mix for a beneficial outcome to the public, from dodgy deals in no-bid contracts, to the vast extent of corporate welfare which burdens out budget and distorts our policy, particularly in primary industries such as Agriculture and Manufacturing. And whist the prophets of the free market warn darkly about the return of tariffs, the single greatest force encouraging such protectionism is the very corporations who are idolised by these same figures. Individuals and towns are often ignored by governments, but put a big corporation before a government to plead it’s case and more often than not tax payer money seems to flow their way. All for the good of the people we are told.

This was also one of the great faults of the Howard Government, which claimed to be pro-market, yet was more accurately pro-business. What major companies began at the start of its time in office, it put in all viable resources to see them continue. As I outlined a while back, the Howard government was relentless in its efforts to protect the major corporations in Australia from competition and the forces of the market, even when it hurt it’s own electoral base. That is those who advocated the most about preventing government distortion of the market to benefit the social welfare (such as in opposing regulation or taxation) were often the first to embrace their own distortions when it helped corporate welfare.

Of course no complete seperation is possible, nor should it be advocated. Just as we would lose out if we tried to ban religious arguments from our public sphere, we should not try to stop corporations advocating their case or playing their role before the public. But where possible, government should see that their mission is quite different to that of corporations, and too close a link (however much it might help in promoting wealth and prosperity) is likely to corrupt both away from their actual skills and constituency.

After the experience of the middle ages, new political thinkers realised that seperating the church and state benefited both. After the experience of the depression, fascism and the new market crashes, we should realise that separating Corporation and State will also benefit both. Unleash the market to compete as vigorously as possible, and restrain the state to keep as focused on individual freedom & well being, not business bottom lines as possible. In short, let the market, be the market. It’s a lesson those who profess to love it most, will find the hardest to accept.

Sometimes you dont need a sick day

This doesn’t sound a wise idea.

TREASURY is preparing the ground for a massive new burst of fiscal stimulus in next month’s budget, declaring that the measures to date have averted a plunge in consumer spending.

Retail sales figures released yesterday show that although there was a 2 per cent fall in sales in February, turnover still remains 4.5per cent ahead of its level last June.

Speaking in London overnight, the Treasurer Wayne Swan and Kevin Rudd said the figures vindicated their decision to spend $52 billion to kick-start economic activity since last November.

But they would not comment on The Australian’s report that Treasury is preparing a third economic stimulus package.

Surely we should be doing all we can to keep the economy flowing along ? And our ability to pay it back will depend on the strength we maintain throughout right ? Not always. Let me use a homely metaphor of the type Rudd is so fond.

Flu season is well upon us, along with a variety of sniffles, colds and coughs in this grey damp season. So all of us, esp the Casual and part time workers amongst you dear readers will be familiar with the times when you face that hard choice of going back to work, even though every impulse in your aching body calls out for more rest. So you make your way to the PC & check your online banking, no work means no money on monday. But if you are fully rested by then you could surely do more hours right ? Earn a bit of overtime and make up for the shortfall right ?
But usually such choices are a mirage. However long you spend in bed, you’ll still feel slightly sluggish the following day, and by 3:40 be pinning to race out the door. You’re certainly a little healthier than you were had you not stayed home, but also sure to enjoy poverty for another week, unable to bring yourself to torment yourself with that many more hours of overtime. Increasingly one thing becomes clear: you should have gone to work, and just been done with it the previous day. And so you feel worse.

Even at a reduced rate you’ll end up better off, than the indulged but broken promise to double down pathway. It will suck, but sometimes it’s better to just go back to work. Sicknesses do pass, you just have to accept being at the whim of nature and forces beyond yourself and get on with life. It may still blindside us that we, unrivalled amongst the species of the planet if not the universe can still be struck low by such a small thing, but that is sometimes a useful lesson to learn. Rudd should be very careful about wanting to make the economy downturn even softer, at the cost of long term debt & financing headaches in the future. Plans that will eliminate any chance for him to engage in critical health or education reform.

And now, I’m off to eat an Orange. Prevention is always better tastier than the cure.

The Economics of Peace

There’s some interesting new research out on an idea which is as old as the idea of free trade economics: More Trade = Less chance of War

In a recent paper (Lee and Pyun 2008), we assess the impact of trade integration on military conflict based on a large panel data set of 290,040 country-pair observations from 1950 to 2000. Results show that an increase in bilateral trade interdependence reduces the probability of inter-state military conflict between the two partners. If bilateral trade volume increases 10% from the world mean value, the probability of military conflict between the two trading partners decreases by about 0.1% from its predicted mean probability, other variables remaining constant. The peace-promotion effect of bilateral trade integration is significantly higher for contiguous countries that are likely to experience more conflicts. For example, an increase of 10% in bilateral trade volume lowers the probability of military conflict between two contiguous states by about 1.9%.

More importantly, our study finds that global trade openness also significantly promotes peace. An increase in global trade openness would reduce the probability of military conflict as it leads to an increase in bilateral trade interdependence. However, when the level of bilateral trade interdependence is held constant, the effect of increased multilateral trade openness on the probability of bilateral conflict is not clear. Countries more open to global trade may have a higher probability of dyadic conflict if multilateral trade openness reduces bilateral dependence on any given country, thus lowering the opportunity-cost of military conflict. In a recent paper, Martin, Mayer, and Thoenig (2008) find that an increase in multilateral trade raises the chance of conflict between states (see their Vox column). In contrast to their findings, however, our study finds that multilateral trade openness in fact lowers the probability of dyadic conflict with the bilateral trade partner, and by a larger magnitude than bilateral trade does alone. An increase in global trade openness by 10% from the world mean value decreases the probability of the dyad’s military conflict by about 2.6% from its predicted mean.

The most interesting point here is that multilateral trade reduces the chance of war far more than bilateral trade. Which seems slightly-counter initiative if we look at this as a pure economic consideration, as going to war with a bilateral only partner risks the entire trade relationship, whilst if they are just one within many in a multilateral deal, their importance to you is significantly reduced.

Yet here Constructivism offers an important insight. Relations between countries are not governed by the market value of the wealth/materials traded, but by the value placed on that trade and relationship by both participants. Take the case of China and Australia. Our export of Iron Ore is worth 2.4 billion, a sizable amount, and critical for China’s development. Yet, whilst worth much less, Australia also exports 300 tonnes of Uranium to China, and has 23% of the worlds supply under our soil. Australia could harm China’s nuclear power supply, and perhaps its nuclear weapon capability one day in the future (we only export for power purposes currently). As such, China has a great interest in increasing its relationship with Australia, and maintaining peaceful conditions with us. (Of course the ANZUS alliance & EU condemnation are the main determinants against China invading Australia). So it is less the dollars or numbers, than the value placed on that trade

But this goes much further when several countries are brought in to interact: Not only is there the material value of the multilateral trade, but countries are careful to be seen by their fellow nations as acting in an appropriate spirit and character. Just as you may observe your friends offering to buy the next round at the pub, or being nice to someones new girlfriend -who no one can stand- countries interact in a social fashion and shape rules or “norms” about those interactions. Gradually those ties can bind countries together, such that the mere realist thought of pure power domination for material advantage is never even considered (Australia could for instance invade New Zealand, but i doubt it has ever seriously come up in a Cabinet discussion in this country, despite the potential advantages and the ease of such a victory).

Thus, even if countries were confident that other nations would continue to trade with them despite going to war with one of the mutilateral trade partners, they would still be dissuaded due to the socialisation that had built up between all of the countries, and brought them to think of themselves as part of a common group, with common ways of interacting. (Of help here is also the fact that most multilateral trade deals are regionally based)

As I’ve said, this is one of the oldest ideas in classical economics and seemingly a common sense one, whether we take an economic or a constructivist view. Yet surprisingly, this was also an idea that met with significant student resistance when I was lecturing a unit on International Relations last year. Whilst the classes were largely young and left wing, there was a fair amount of diversity in their midst, and realist and conservative arguments could be regularly expected to be raised and debated. Yet, in spite of even my own publicly professed support for the idea, it met with strong disagreement, through both tutorials and written assignments.

It was only when I came to look again at who the public faces for this claim were that, I began to see perhaps why such a seemingly common sense idea is rejected out of hand; and just how trashed the free trade brand has become. Whilst the student body hasn’t suddenly gone socialist let alone communist (there literally are no alternatives!), the marketing of these ideas is in an incredibly bad state. The idea’s are strong, the evidence around, but people have become very skeptical that this is anything more than the big end of town favouring its own. Despite the billion plus brought out of poverty by Globalisation (though now at risk thanks to the GFC) and the general prosperity of the last 30 years) the public tend to see such ideas purely within an individual gain/loss prism. They see it as an incentive to increase their income, participate in the stock market, or begin a business, but almost never connect these to the wider social idea. The workchoices reforms suffered a similar issue. Both the advertising for the policy, and the union response against concentrated on what these changes meant for YOU. You’ll have more flexibility/You’ll get less rights or higher/lower pay. Almost no where was there a discussion about the benefits to the economy, the increased employment, flexibility in tougher times. I’m a skeptic of the workchoices reforms, so I don’t think the wholescale benefits overcame the individual negatives, but to see the government accept such a framing amazed me. This is also something that I think many Libertarians simply do not get in their support for such ideas and bewilderment that the wider public look on them so negatively.

The evidence may be there that increased trade reduces poverty and reduces the chance of war. Yet the Baby Boomer generation has abjectly failed to sell the idea, and I dont see the Gen X’ers doing any better (if anything they are more arrogant and less capable). Instead I think it will come through members of Gen-Y who have grown up within the free trade bubble (ie Born after 1982 when such ideas were in the ascendency) and who have experienced the benefits (prosperity and peace being the mainstays). We have in short been socialised to these ideas, and thus more able to see them for the potential they are, rather than the fictions of a ‘perfect market’ vs a ‘bastardy & Greed’ meme’s that dominated past generations of ideologues thought.

The future of the Australian Economy

There was much promise when the Rudd government came to power, especially with its slogans such as a ‘Education Revolution’ and efforts to attack the Howard governments lack of spending on education was crimping our economic prowess. With this in mind a fellow aussie blogger Colin Docherty makes a good point about its recent disappointing turn to populism

its interesting that Labor were elected fronting the idea that Australia’s greatest asset was its knowledge, and our potential to put that to use, economically. After criticising the Liberal government over many years about the lack of technical development, its interesting that Labor seemed to have abandoned their plan for a ‘Knowledge Nation‘ (which former leader Kim Beasley ran a failed campaign on), beyond meaningless rhetoric. And now Labor leader Kevin Rudd has taken the cliche political path of sniping at companies partaking in this intellectual revolution. He’s hardly been partisan about this either, with Malcom Turnbull and just about every politician with a microphone near their mouth doing exactly the same.

If a knowledge nation and intellectual revolution was coined as the country’s future path many years ago, why are we selling ourselves short by reverting back to political populism? Instead of wasting time bickering about whether what Pacific Brands did was right, why not instead spend time working on re-training programs,

This reminds me of a quote which I tend to attribute to Paul Keating though can’t re-find my reference: That Australia must become the “brain to Asia’s brawn”. Whilst Australia rode in on the sheep’s back, or manufactured its way to prosperity in the post-war period, it is through the service economy, and designing, marketing and selling products that we are going to be successful in the future. This in many ways was the great failing of the Howard-Costello government. Whilst it could manage the day to day economy, it didn’t have an idea for how Australia would earn a dollar in the future. I had put it down to the general luddite nature of the older members of the government, Howard/Alston and the like which held it back from embracing a digital economy, but reading Peter Costello’s memoirs reveals the malaise was much more wide spread:

‘A particular line of attack on my economic management was that we had failed to encourage dot-com companies, had missed the technology boom and had therefore presided over the collapse in currency. Many critics recommended that Australia quickly establish microchip manufacturing…. The Labor party at this point lacerated the government for the weak exchange rate and its so called reliance on mining. When, some years later, mining became immensely profitable and the high-tech bubble burst, it said we were riding the boom. If Labor had its way we would have got out of mining just when it was about to take off and invested in technology just when it was about to collapse’
– The Costello Memoirs 2008: p 155

In short, Costello seems to argue that it is impossible for the Australian economy to both walk and chew gum. Either mining or IT, not both, and whilst the giddying heights of the IT boom have proven illusionary, to publish an account in 2008 suggesting Australia didn’t need to get on the IT bandwagon (or more accurately get back the bandwagon, as we used to have a world-class industry). Such a tunnel vision government could never summon the interest to push potential new industries, and consequently left Australia out of the great innovative turn of the 21st century*. These captains of capitalism in short managed to prove their own rhetoric about the inability of government to keep up. Shame the opposition had no trouble making the link

Rudd came to power promising a new approach, but thus far it has translated to a few nice rhetorical lines and otherwise cheap economic populism. Rudd would do well to spend less time worrying about the decisions he cant change (like Pacific Brands) and instead helping build for those modernisation steps he can bring about.

* This however is far from the worst luddite sin of the Howard Government. A highlight for me was witnessing Browyn Bishop during a House of Representatives Committee tell a group of public servants that those who had created the MP3 standard were acting as a cartel. I doubt Steve Jobs or anyone who has ever bought an Mp3 player(such as an Ipod) or ripped a CD would agree….

Trusting the Market

Capitalism as an economic system is quite dependent upon one factor more than any other: Trust

What separates the buying and selling of goods ancient farmers practiced and capitalism as a system is that we have come to trust that money can be lent, that businesses can obtain capital beyond their actual assets and turn it into something worthwhile, and that there is a flow of accurate information between participants in the market that allows price signals to work and resources to be efficiently distributed. Indeed much of the current crisis is built upon less the inability of banks to lend again, but their lack of trust that they should do so. It is no surprise therefore that having written of the end of history success of democratic capitalism that Francis Fukuyama’s very next book was on the importance of trust for this whole enterprise to work.

Yet somewhere in around early 2001 that trust was broken (building on a pattern of amazing growth from 1950 onwards), that invisible ratio between the economic wealth of the economy (assets, resources, labour etc) and the credit flows that were accumulating. The money traded began to bear less and less relation to anything that existed beyond the mere numbers on the screen. And yet, because these numbers kept going up, and at least some sectors got wealthier everyone went along assuming that bond still held.

But there was no actual wealth behind these numbers as Paul Krugman notes:

Last week [Early February] the Federal Reserve released the results of the latest Survey of Consumer Finances, a triennial report on the assets and liabilities of American households. The bottom line is that there has been basically no wealth creation at all since the turn of the millennium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001.

As we are seeing the reckoning now, then whilst all of us are partly to blame, special attention must be paid to those boosters who claimed not only to be able to read the entrails of the market, but came to see the numbers of the market as the only thing we needed to think about. Take Gabriel Winant’s piece on watching being subjected to 12 straight hours of the Market News Cable Channel CNBC:

On Monday, at 8:30 a.m., I turned on CNBC and started watching the business channel for the first time in my life. Twelve hours later, a long stare through the peacock-colored looking glass had shaken me. I was huddled in the corner of my living room couch, arms hugging my knees, wondering why the angry faces on-screen were yelling at me.
What I found was a paradox at the channel’s core — one that seemed, late on the afternoon of Monday, March 9, to make Jim Cramer want to claw his own skin off. The station’s business model rests on its claim to insider wisdom and market smarts….

At the same time, however, the network depends on a particular industry, and thrives on good economic news, which is in short supply. Nobody wants to tune in to cable day after day to hear yet another dirge for yet another one of their stocks. There is a financial imperative for the pundits to keep their core audience of investors coming back, and therefore an obligation for the pundits to distort empirical reality to make a grim future seem manageable
CNBC’s audience is not a demographic cross section of America. If it was a cross section, the network wouldn’t make any money; CNBC attracts advertisers not with the size of its audience but with its maleness and its affluence. The network gets about a quarter million viewers a day, a tiny fraction of the U.S. population, but those viewers have a median household net worth of more than $1.2 million. Still, the financial pundits flatter viewers into thinking, as Rick Santelli put it during his famous trading floor rant, that they are “a pretty good statistical cross-section of America.” For these guys, investors are America. Jim Cramer asked at one point, of the Obama administration, “Who do they think owns stocks?” As if the obvious answer is, “Everybody!” Obama, Cramer complained, “seemed proud that he ignored the [market] averages, as if they’re some sort of distraction, and not a precursor of the economy.”

In some ways, this is what makes the economic down turn even scarier. For whilst many are still shocked at the drops, we are yet to do anything to really address this issue of ensuring the trust returns to the system. We seem to still act and treat those who got it so badly wrong, (and here CNBC is an easy target, but hardly unique). People still have a largely pre-recession mindset, that this is a drop that can be fixed, that a few bits of plaster here and there & governmental pats on the back and we will be ok. But the longer the return takes, the more people will be unwilling to invest funds back into the market, and there the real break in trust will occur. For the moment people still respect there is a link between market wealth and actual wealth. But they wont always, and those who make their money claiming to read the markets, but also as boosters for it, are doing it’s credibility real damage.

Of Corporations Political Clout

As the sheer size of Obama’s budget has dropped jaws (along with its noticeable lack of actual spending restraint), we should expect to see more pieces like this coming out (H/t Andrew Sullivan):

During the campaign, presumably thinking of his Silicon Valley supporters, Obama proposed eliminating capital-gains taxes on start-ups in order to offset some of the tax effects that I’ve highlighted. This idea was always make-believe. As I predicted last July, the president’s just-released budget has “delayed” the proposal until 2014. Translation: it isn’t going to happen. Like the college students who stayed up late to hear Obama’s campaign speeches only to find his first significant action to be a stimulus program that will transfer about $1 trillion from them to the Baby Boomers, Silicon Valley Obama supporters may find themselves in an uncomfortable environment. A government-dominated economic era may not be an auspicious one in which to start companies that threaten big, incumbent corporations with lots of political clout.

There’s certainly an argument to be made here if indeed Obama’s policies result in higher taxes, and more regulation, but I think that last line is not just wrong, but 180 degrees wrong. Big incumbent Corporations with lots of political clout, are at their most powerful precisely when the high priests of the market are in government, not when the big government spenders are.

Whilst it may seem initiative that those on the Center-left who are cautious about the market’s power may act to dampen a dynamic market, the record of the last two decades shows the reverse is true. Center-Right governments, such as those of George W. Bush or here in Australia John Howard, are because of their beliefs, politically invested in the success of the market, and in the success of the big companies. Not only may they draw their friends, political supporters (and even vice-presidents) from Big Corporates ranks, they know that their economic credentials are being measured by the press on how well these organisations do. As such, their every incentive is to maintain as much of the status quo of the market as possible.

Here in Australia, we saw the pro-free Market government of John Howard repeatedly act to protect favoured big corporations. It privatised, the maintained the monopoly of the nations telecom Telstra (affecting both the telephone and Internet Service Provider markets) It ignored consistent outrage over the state of the supermarket industry to maintain Coles and Woolworths duopoly, it protected the airline industry and Qantas in particular from overseas competition, in healthcare policy, the new government private insurance rebate funneled millions into the big established providers. Established big business did very well under these governments. The idea of competition: not so much.

Howard’s government was in favor of a market that was prosperous amongst corporations, rather than one that was competitive between corporations. Competition is actually a rather risky thing for governments who feel their popularity is tied to the well being of the market. Competition if working well should regularly send businesses under, and with them all the jobs of their employers. It should see prices shifting about, punishing some areas of the country, rewarding others regardless of who is in a marginal electorate seat. Howard & Bush may have talked endlessly about increasing competition, and tried to reduce regulations to help reward entrepreneurial behavior, but they were also closely tied to the fortunes of the Big Corporate end of town, and hence gave these corporations significant political clout. The prosperous status quo was rewarded, not the young up and comers who made waves.

In the US a similar story repeated itself, with big business being brought into the room to make policy under the Bush Administration. No clearer sign of the rejection of such cronyism could be seen than the Obama’s ban on Lobbyists taking positions in the new administration. Corporate America’s political clout has been seriously undercut with the new government, in part due to its Big Government tendencies, not the reverse as Manzi mistakenly claims.

For the Center-Left, who are less concerned about the well being of each individual business, competition is perhaps the redeeming light of the market. Big Corporations are instead of being favoured sons welcomed in under their opponents are seen as self-interested challenges for such governments (if not being outright politically hostile in the money they send to right wing parties campaigns or via business association lobbies) Whilst Center-left too are willing to act to protect certain brands and industries (such as cars or manafacturing) these are typically industry wide and tied more to sheer numbers of jobs, than protecting the identity of particular brands. As such the Keating Government was happy to push Optus to enable competition with Telstra (then telecom) and the Rudd government is looking to small ISP’s to roll out its broadband network).

Center-Right governments may be able to claim they create better environments for new start ups and entrepreneurs, but that market concern comes at a cost of a greater political tie to the well being of the Big Corporate sector, whose interest is in anything but new corporations. What passed for pro-market rhetoric from the Howard and Bush governments was largely advocacy for the status quo. None of this is a hard and fast rule, but if as a start up your big problem is too high regulation/tax then a center-right government might be better, but if your big problem is too big competitors with political leverage, then a center-left government would be a better bet.

Many hands make light work

Whilst everyone has been quick to lay the blame for the financial slippery-dip we are currently on, few have actual solutions. Or rather, their solutions are almost entirely ideological, and held well before the crisis started. On the right it’s old meme’s such as the Community Protection Act, and Government always and everywhere being the problem. On the left its the nature of greed and free market fundamentalism. Both have some point, but it doesn’t exactly help much, and neither have been able to turn their principles into clear policy prescriptions. This idea however strikes me as one of the best to thus far come along:

we need to rethink our entire philosophy of regulation. Instead of assigning oversight responsibility to a finite group of bureaucrats, we should enable every investor to act as a citizen-regulator. We should tap into the massive parallel processing power of people around the world by giving everyone the tools to track, analyze, and publicize financial machinations. The result would be a wave of decentralized innovation that can keep pace with Wall Street and allow the market to regulate itself—naturally punishing companies and investments that don’t measure up—more efficiently than the regulators ever could.

Typically I’m sceptical about the proclaimed power of the online world to revolutionize data organisation. Wikipedia is held up as the great example, but it’s founder Jimmy Wales did some tests and found that: “over 50% of all the edits are done by just .7% of the users … 524 people. … And in fact the most active 2%, which is 1400 people, have done 73.4% of all the edits”

The blogosphere is very good at disseminating information, or getting 100 people to investigate something, each bringing in a new fact, but this is often done in an ideological manner without much social benefit (ie the Pajama Media’s efforts against Dan Rather in 2004) or is outclassed by the efforts of a few professionals (see the uncovering of the Windschuttle Hoax). Likewise the SETI and Folding @ Home programs havn’t really taken off as their founders would like; most computers idle downtime is still wasted.
But, as Clay Shirky argues, this is just the beginning, and the norm of such group uses of technology is still being socialized amongst the wider community (Shirky argues we will reach that point once it shifts from being new to ‘boring’ in how we view such roles). Equally the theory seems to make sense, and if there is an incentive (and every single stock market investor would have one) then the potential is immense. Even helping reduce some of the delays and costs of some of the current system could be a boon:

A Senate study in 2002 found that the SEC had managed to fully review just 16 percent of the nearly 15,000 annual reports that companies submitted in the previous fiscal year; the recently disgraced Enron hadn’t been reviewed in a decade..A few years ago, when banking regulators started requiring filings in XBRL [a set of tags that standardizes financial information] from its member banks, it found that the time it took auditors to review a bank’s quarterly financial information dropped from about 70 days to two. More regulators are catching on: Last December, the SEC announced that by June, every company with a market capitalization over $5 billion will be required to submit all filings using the format. And all publicly traded companies and mutual funds must follow suit by 2011.

It wont replace the need for the government regulatory bodies, but it could help us reduce their role to one of looking after the major & difficult players (those too big to fail/with a bad history) and leave the rest to be poked into by the public at large. In each and every theory of markets, the flow of accurate information is considered the essential requirement for efficiency to occur. This seems one great way to help move towards that goal.

And theory aside, this also seems to me to highlight one group who’ve thus far escaped blame in the financial crisis : Shareholders. Government has had to step in to help protect such people, and yet they were engaged in the market on the basis of self-interest, yet their willingness to ignore executive compensations, and the short-term focus and risky actions of many of these companies represents a failure of a role society needs such people to undertake, and is the least that could be expected of them, in return for the financial return they receive (indeed any who fail to, ought fail to make money under a real efficient market theory).