Re-imagining economic reform

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Australia is peculiar — the land where left-of-centre governments initiated and most vigorously pursued economic reform. Whitlam kicked things off by slashing subsidies to industry and farmers and cutting tariffs by a quarter.

Having implored us to embrace market forces, Fraser lacked the bottle for further reform, retreating instead into the time-honoured formula of seeking tariff cuts from other countries while avoiding the discomfort of reciprocating at home.

A world weary bureaucracy marvelled at the new Hawke ALP Government’s response to the backlog of reform. A powerful reforming vision grew around wage restraint, deregulation and sharing the resulting gains with those at the bottom of the heap.

Unlike in New Zealand, the UK and the US, big changes to the tax/transfers system offset much of the inequality that markets were increasingly producing. Might this have something to do with the economic and political success of Australian reform?

Roger Kerr, CEO of New Zealand’s Business Roundtable supported that country’s zealous ‘crash through or crash’ reforming. But just as occurred with Whitlam’s crashing through, the legacy was a political crash and backlash. In addition, and in contrast to Australia’s success, the vigour of New Zealand’s economic reform has yielded mysteriously meagre results. Kerr has since endorsed Australia’s approach as “remarkably consistent, coherent and credible”.

Thanks to Sean Leahy.

Even so, by the end of the ALP’s reign, reform had become formulaic. Even less imagination, and certainly less application has been shown by the current government.

Most economists agree on three remaining agendas.

1. Some industries still need some old fashioned deregulation — post, pharmacies, and taxis come to mind. But just naming them demonstrates their relative unimportance. Reform of land release for housing is probably a ‘sleeper’ of larger economic importance.

2. We should address ‘poverty traps’ created as welfare is withdrawn and tax is paid as people move from welfare to work. Since that requires us to spend money, tax cuts or tax credits focused on reducing poverty traps will go to lower income earners. That means we can kill two birds with one stone by making this compensation for freezing minimum wage rises. Monash University modelling shows that the jobs generated could leave the budget better off even after funding targeted tax cuts!

3. Health and education systems need reform. But though greater choice and competition between providers can help, it could do more harm than good if pursued too mindlessly. And it’s just one part of a large policy jig-saw which includes better accountability structures, and management for results.

These are all worthy enterprises but with returns now diminishing, there’s plenty of low hanging fruit on the tree of economic reform. If only we have the imagination to see it and the courage — sometimes we’ll need no more than a little curiosity and goodwill — to pick it.

Here are some ideas to whet your appetite. Note how much promise they offer not just to make us richer but to improve the quality of our lives — something for which the community’s thirst is growing as its monetary income rises over time.

Information

Economic theory and common sense tell us that economic systems depend on good information for their efficiency. Economists have studied the costs of information failure, but have put surprisingly little effort into exploring ways of improving information flows.

· How about improving employees’ knowledge of the quality of Australia’s workplaces as part of the IR agenda? We should measure and publish the job satisfaction and health and safety performance (workers’ compensation premiums) of all Australia’s larger workplaces so their competition for employees becomes competition to provide safe, satisfying jobs.

· We can apply the same principles widely — wouldn’t you like to know what students and parents think of their schools and patients of their hospitals and mightn’t it help them improve? We can require hospitals to provide patients with statistical prognoses of success for specific clinical procedures corrected for the optimism or pessimism of their previous prognoses. Publishing the investment performance of investment advisors and share brokers would do far more good than the thicket of regulation to which they’re currently exposed.

Managing risk

· Rationalising the management responsibilities of government has been sensible — with privatisation and contracting out for instance — but these policies have shifted risk away from governments which can often bear it better than individual firms or individuals. We should begin redressing the balance by embracing the idea that governments should, like firms and families, borrow to build assets for the future.

· As Robert Shiller suggests in his recent book ‘The New Financial Order” Government’s should explore what informational infrastructure they can establish to assist risk markets to develop further. For instance new instruments for financing housing investment could emerge with better statistical information on the movement of house prices.

· The Government’s creation of the Future Fund establishes the worthwhile principle that Governments should invest in equities providing that investment is of a diversified portfolio of securities that is managed at arms length from government. Such investment should also be done counter-cyclically — that is with Governments seeking to increase holdings of asset classes that are depressed and decrease holdings where asset classes are booming. This is what the Reserve Bank has done successfully in the foreign exchange market for some time. It generates the double dividend of stabilising the relevant market while generating higher expected returns for governments.

The legal system

· Economists’ ‘imperialism’ towards other disciplines has manifested itself largely in the application of economic methodology to problems which are not purely economic. Few of the results have been sublime, but some have been ridiculous. A more promising kind of imperialism would be the application of simple economic principles to the way various social systems are managed. HECS and managing child support within the tax system are examples of this kind of reform. We should apply it more widely to our system of civil law which as it stands is a scandal — available to the rich and those poor enough to access legal aid, but only otherwise to those willing to risk a large part of their life savings.

· With absolute respect to the need for judicial independence on interpreting the law, the costs of arbitrating disputes should be commensurate with the magnitude of the damages at risk. This simple micro-economic principle should be reflected in all legal procedure. Further, both justice and efficiency demand that either litigant to a dispute should be able to pre-emptively elect a low-cost tribunal free from any threat of appeal, except upon their opponent bearing all resulting costs.

Simplicity

· In a world of increasing complexity what happens by ‘default’ matters. So we should engineer socially beneficial defaults. To bolster Australians’ inadequate savings we should ensure that employees’ salary sacrifice super contributions slowly rise above the nine percent compulsory rate by default —subject to employees’ right to opt out.

· Likewise the authorities already have enough information about most Australians’ wage, interest and dividend earnings to relieve them of the burden of filling out their tax return — though of course we should let them lodge a return to pick up additional tax deductions to which they are entitled.

· Both of these ‘sensible default’ ideas have been implemented in New Zealand. We’re hardly talking about them.

Regulation

· Despite a bi-partisan commitment to ‘minimum effective regulation’ — two decades old this year — we have a woeful record of making regulation work more effectively except where we’ve been able to simply deregulate.

· Where simple deregulation is neither possible nor desirable — for instance with occupational safety and consumer protection — we desperately need to make regulation more responsive, and more cost-effectively tailored to achieving its specific social purposes. We must think of regulation less as the issuing of sovereign commands and more as the management of complex systems. Firms and individuals should have rights to challenge the way regulation has been designed, and rights to alternative means of delivering social objectives.

Like other reforms none of these ideas are panaceas. But they begin to take economics out of its current comfort zone. As well as helping us run ‘the economy’, these reforms would help us see economic reform as it was by its founder, Adam Smith, as a means of improving quality and security of our lives by improving the fairness and fitness for purpose of our social institutions.

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