There is a German saying “The less the people know about how laws and sausages are made, the better they sleep at night”.

In his book Credlin & Co (Black Inc 2016), an exposé of the political relationship between Tony Abbott and his loyal Chief of Staff, Peta Credlin, Aaron Patrick of the Financial Review takes us inside Abbott’s sausage factory.

At one level it’s a story that’s been around for 500 years, which is when Machiavelli warned about the folly of the prince who surrounds himself with a protective guard to flatter him and protect him from his critics. When at Oxford Abbott must have skipped over that part of The Prince.

But at another level it’s about the dysfunctional nature of the Liberal Party. Patrick describes the party’s factions and alliances, and the values some of its power-brokers hold strongly – social conservatism, a dogmatic faith in the intrinsic virtue of “small government”, loyalty to the Queen of England, a belief that’s what’s good for “business” is good for Australia, and denial of climate change, to name a few.

Reading Patrick’s work it’s apparent that the only unifying thread in the Party is a compulsion to keep Labor out of office. To the Party’s members it’s an imperative akin to protecting Australia from smallpox – so self-evident that it needs no explanation or justification.

And that’s where Abbott excelled, from the day in late 2009 when he knocked off Malcolm Turnbull as Opposition Leader. Abbott and Credlin were faithful to the Party’s mission – and understandably they would be resentful at being turfed out after having been so true to the Party’s mission.

Patrick exposes a party that’s so arrogant and sure of itself that it attributes any setbacks or defeats to a failure to get its message across. If only Abbott and Hockey had explained the 2014 Budget it would been far better accepted. If only they had handled the Senate cross-benchers better they could have succeeded in cutting age pensions and raising university fees. If only Campbell Newman had been a better political strategist the LNP would not have suffered its humiliating defeat in Queensland.

Patrick acknowledges that Abbott went overboard on terrorism, and that awarding a knighthood to an already honour-overladen prince from one of Europe’s offshore islands was rather stupid, but by and large he does not suggest that there was anything wrong with Abbott’s t policies.

Apart from criticising Abbott’s ineptitude, Patrick’s account is largely non-judgmental. His book flows easily (journalists can write well when sub-editors don’t mangle their work .) I doubt whether he set out to expose the Liberal Party’s weaknesses. He tends to take the Party’s policy justifications at face value.

What he exposes, inadvertently perhaps, is a party that cannot learn from its policy mistakes. Abbott and Credlin cut themselves from the rest of the Parliamentary Party, but that is similar to the way the Liberal Party has cut itself from the Australian people. Abbott and Credlin are scapegoats for a malaise that affects the whole party – a paternalistic “born to rule mentality”.

No politician, however canny, could have “sold” the 2014 budget to the Australian people. Those who are skilled in political leadership can convince people that when economic times are tough some short-term shared sacrifice is necessary for the common good, but almost anyone can see through a policy that imposes costs on the most vulnerable while protecting the privileges of rent-seekers. The problem for the Abbott Liberal Government was that people did understand its policies.

The Liberal Party’s strongest manifestation of paternalism is in its “small government” obsession. Although we have the smallest public sector and are the most lightly-taxed of all prosperous developed countries, the Party is unwavering in its idea that “small government” is good for us. Indeed, its articulation of beliefs says “businesses and individuals – not government – are the true creators of wealth and employment”. That statement is grossly offensive to every doctor in a public hospital, every teacher in a government school, and every cop on the beat, as well as being just plain stupid economics.

So, when people demand more funding for health, education, urban transport, and environmental protection, the Party’s response is to disrespect people’s preferences, and to assert, paternalistically, that the Party knows better.

Nowhere is this paternalism more evident than in privatisation. It’s reasonable that people should object to paying high prices for their electricity or public transport when those businesses become featherbeds for overpaid and underworked trade unionists. But that doesn’t mean they want these same utilities sold to the private sector so that high prices are subsidising overpaid executives and shareholders. They want their utilities – the utilities in which they have invested their taxes – to be run well, not sold off to opportunists. Privatisation is a lazy substitute for reform.

Even if people haven’t studied the economics of market failure, they understand that certain matters – health insurance, school education, energy and water utilities, roads – are far better handled by governments than by the private sector.

And people know what is meant by “business interests”. Patrick points out that the Abbott Government had lost the support of the “business community”, as if that was unquestionably a bad development. But there is a fuzzy line between “business friendly” economic policy and cronyism. If we were to find the ACCI and the BCA – lobby groups that speak mainly for corporate executives and (largely foreign) shareholders – were 100 percent behind any government’s policy, we should be truly worried that the government has lost sight of the public interest.

For anyone interested in seeing inside the sausage factory – at least the Liberal Party section of the factory – Patrick’s book is an excellent exposé. Readers may find it hard to swallow his uncritical approach to the Liberal Party’s paternalism, and statements such as his claim that the ABC and the Fairfax media are on the “left”, but that is the world view of one who has been close to the Liberal Party powerbrokers, and it’s the world view into which Australians are slowly drifting.

More important, in exposing the Liberal Party’s weaknesses, it should be a guide for a confident Opposition, ready to engage in a mature and honest way with the electorate.

Policy Series

Australia has a reputation for egalitarianism, as a country where, in comparison with Old World countries, wages were good and, to quote Lawson, where people “call no reason to call no biped lord or sir”.

Up to around 1980, Australia’s distribution of income was becoming more equal, but since then inequality has been on the rise: our income distribution is now back to where it was 80 years ago, in the years before the Pacific War. We still do better than the UK and the USA – our usual points of comparison – but in comparison with other prosperous countries, particularly those of northern Europe, we have slipped a long way behind.

And as income inequality persists so wealth inequality also grows, and wealth inequality tends to be enduring as the advantages of high wealth, and the disadvantages of poverty are passed from generation to generation. We are on the way to having an entrenched “upper class” and a class, not even accurately described as a “working class”, for whom opportunities for economic mobility are blocked.

It is tempting for governments to dismiss rising inequality with the aphorism “a rising tide lifts all boats”. The idea is that just so long as no one goes backwards in material living standards, all is well.

This economic philosophy, which has become the basis of undergraduate economics teaching – and therefore the ideas that dominate government treasury departments – is attributed to the Italian economist Wilfredo Pareto, an adviser to Mussolini’s fascist government. It’s not that academics and bureaucrats are attracted to fascism, but they are attracted to the simplicity of Pareto’s economics, absolving them from having to think about moral questions about inequality. It’s a neat cop-out rationalisation for allowing privilege to become more entrenched.

Pareto’s stamp is on many government policies. The projections of the 2015 Intergenerational Report suggested that over the next 40 years gross income per person will rise by 75 percent, but not for those dependent on the age whose income was to be frozen at 2017 levels.

It’s extraordinary that any government could have the gall to produce such a projection based on its preferred policy settings, and it’s even more extraordinary that they received such a tame reception in the media (including the ABC). Perhaps this shows the extent to which Pareto’s dismal brand of economics has been absorbed into our thinking.

Maybe, in the land of the “fair go”, we have come to accept Pareto’s amoral indifference. We get upset when public policy actually takes from the poor (as was the case with the 2014 Abbott-Hockey budget), but not when policies allow for widening inequality.

Inequality does count, however. It is costly to all – not only to the most disadvantaged. Even those on the right, who pay lip service to the benefits of capitalism and market forces, and who assert that good public policy is about economic progress, should be able to understand that inequality is a problem, because a high level of inequality is symptomatic of deep problems in the economic system.If a society cannot achieve a fair distribution of income, wealth, participation and opportunity there is something wrong with the country’s economic structure. Politicians may see inequality as an unavoidable collateral outcome of a successful economy, but an economic structure that sees most of the benefits accrue to a few while others are left behind can hardly be called a success. It is flawed thinking to assume there must be some tradeoff between “economic” and “social” outcomes.

Of course many on the right will argue that inequality simply arises from different individuals’ contributions, which in turn arise from different people’s talents and effort.

But when inequality gets to a high level we must seriously question that assumption. Is a bank CEO paid $10 million really 300 times as talented and hard-working as someone earning a basic wage?

It’s hard to imagine differences on that scale being innate: it’s more likely that the connection between contribution and reward, which has always been a fairly fragile connection, has become further weakened, and that many people have been unable to develop their full capabilities.

Market capitalism, as a theoretical system, is based on a linkage between contribution and reward. Even the most right wing economist would agree with that proposition. But when inequality results from inheritance, privilege bestowed by government policy, “old boy” (and “old girl”) networks, corruption and theft, the basic incentives that are supposed to operate in a market economy don’t function.

There’s no point in working hard or creatively if others will enjoy the benefits. There’s no point in studying difficult courses at university if there is no return for putting in the effort: better to spend one’s student days finding a well-connected spouse, or cultivating friendships with those who have already made it into the ruling class. And if one has mathematical talents, there’s no point in becoming a teacher, engineer or scientist when there are such lucrative rewards in the finance sector, shuffling other people’s money around and taking a commission on the way.

And when people lack the opportunity to develop their full capabilities there is an additional cost to society. Equality of opportunity is another essential plank of market capitalism and if it is blocked by misallocation of education resources and inadequate attention to children at risk, there is a big opportunity cost of unrealized talent.

These are the hard-nosed economic costs of inequality, without even venturing into the moral issues of economic unfairness. When those few politicians who have the courage to speak out on unfairness they are often met with the rebuke that they are raising the “politics of envy”, but fair-minded people don’t envy those who have succeeded through their own effort and who enjoy the rewards of having made a contribution to society. Use of the word “envy” does injustice to those who are disgusted by the perversion of economic incentives in our society and by the tawdry rationalizations those who have accumulated unearned wealth use to justify their privileges.

When people think the cards are stacked unfairly the resulting resentment can have far-reaching consequences. Politics becomes a tussle about preserving or gaining privilege, rather than a contest of ideas about how to improve prosperity for all.

One manifestation of this tussle is our labour relations system, where both sides fight to retain what they hold rather cooperating in ways to increase wealth. (The notion of a class-based dividing line between “employers” and “employees” is an anachronism but it survives in Australia.) Elections and budgets have come to be about “what’s in it for me”, rather than evaluation of economic policy.

A “what’s in it for me” approach to inequality doesn’t work. At best it may divide a shrinking pie a little more fairly. 

Inequality has to be tackled at its root – the nation’s economic structure.

Policy approaches – eliminate or compensate – distribution or redistribution

There are two broad policy approaches to reducing inequality. One is to attend to a nation’s economic structure so that inequality is less likely to arise in the first place; the other is to let inequality to arise and to compensate with progressive income tax and social security payments.

Both approaches have their place, but the emphasis is a matter of policy choice. As a general finding, left-leaning governments tend to favor solutions at source, through attention to labour market, industry, education, regional and other policies, while more right-leaning governments tend to favor compensation through welfare payments. (And, of course, some governments on the right take the view that any form of distributive welfare that goes beyond mere survival destroys the work incentive.)

To illustrate different countries’ approaches, it is revealing to look at a common indicator of income inequality known as the Gini coefficient. When income is exactly equally distributed, as in some hypothetical socialist paradise, the Gini coefficient is 0.00. In a situation of extreme feudalism, with hordes of starving peasants and one rich warlord, the Gini coefficient is 1.00.

The table below shows the Gini coefficients for the world’s 17 most prosperous developed countries. The first column shows the coefficients arranged by what is known as “private income”. That is people’s income before governments intervene with taxes, pensions and other cash distributions (“transfers” in economic terms). The next column shows what happens once taxes and transfers are taken into account, and the third shows the extent of the reduction.

Note that the range generally aligns with what we already know: the Nordic countries are at one end, while the US and UK are at the other end. Australia is around the middle in private income: this is possibly a reflection of our comparatively young age structure and a reasonably high minimum wage. But after taxes and transfers we don’t do as well as most other countries.

Note also two patterns, which I call “distributive” and “re-distributive”. The Nordic countries and Switzerland tend to go for distributive policies – that is to pursue policies making sure that private incomes are reasonably well-distributed before the government kicks in with welfare transfers.  By contrast, France, Germany, Finland, Austria and Belgium all have relatively unequal distributions of private income, and rely heavily on taxes and transfers to achieve a degree of equality, thus bringing their ranking up.  (If we had data for Saudi Arabia, Oman and Kuwait they would no doubt show a very high use of transfers to redress a highly imbalanced distribution of private income.)

Historically, Australia has strived for distributive policies, backed by targeted (often means-tested) re-distribution. The main policy instruments were tariff protection, centralized wage determination, partial or full nationalization of key industries, and tolerance of restrictive trade practices. (“The Australian settlement”). The economic aspiration in the early post-federation years was that every job should be a well-paid job by the standards of the time.  Universal free public education and good public housing, and later universal health care were important components of the “social wage”. 

The means to realize this aspiration necessarily change. Tariff protection and tolerance of restrictive trade practices are definitely past their use-by dates. So too are many industry-specific subsidies, such as those which have been granted to automobile manufacturers.

But that doesn’t mean other means cannot meet the same purpose. 

Public policy – an economic structure to prioritize distribution over redistribution

As with the past, the starting point should be with structural policies. The vision should be that everyone’s capabilities are developed to the fullest, and that no one so equipped should have to rely on redistributive measures.

Of course that will never be fully achievable, but it should be standard against which policies are assessed. And it is a more egalitarian policy than simply seeking full employment.

Full employment, or near-full employment, can be achieved by forcing people into poorly-paid and demeaning jobs through punitive measures, and cutting support to those who need it most. If minimum wages are pushed low enough, and if the alternative to employment is made miserable enough, of course employment will rise, but it won’t be a very productive or motivated workforce.

Incentives for economic participation should apply across the board. Terms such as “passive welfare”, “lifters and leaners”, “mutual obligation” and the old perennial “dole bludgers”, have some validity if applied to all – the financial planner taking a commission for doing nothing, the “self-funded” retiree enjoying a six digit tax-free income, the executive in a mining firm enjoying government subsidies, the share speculator  making a fortune on lightly-taxed capital gains, and the healthy work-shy twenty-four year old living on an invalidity pension.

But these terms are applied selectively, generally as part of a right wing agenda of preserving privilege for the well-off. and cutting government services – the “small government” agenda.

A “small government” however, won’t provide the public goods – the framework of support – necessary for people to realize their capabilities, and will not adequately defend the public interest against rent-seekers and others who seek to prosper from the efforts of others.

Practical public policy – distribution through investment

The list below, in a rough hierarchical order, covers ten policy principles which can come together to address inequality. All the first eight are “distributive” policies aimed at strengthening the economy’s productive capacity. Only the last two involving transfers through progressive taxation and cash transfers are primarily “redistributive”.

1. Invest in human capital. This is primarily about a well-funded public education system as a basis for developing people’s capabilities and achieving equality of opportunity. The most important immediate measure is to implement the Gonski reforms.While school education is important, it is crucial that governments support children at risk. Early childhood is where the foundations for future development are laid down.Also economic disadvantage should not provide a barrier to access to post-school education. Just as in the past we have shifted our norms upwards to what constitutes a basic “free” education, trade certificates and undergraduate degrees should now be fully tax-funded. This is in recognition of the general principle, observed in most human societies for most of history, that the elders have an obligation to support the upbringing of the young.If the community is to enjoy the benefits of a dynamic economy it should make sure that people whose livelihood is threatened by structural change are supported with opportunities for re-training and re-skilling. Public investments in these activities are much lower cost than the alternative – long-term unemployment of displaced workers and political resistance to structural change.

2. Invest in public goods. A society needs a suite of public goods covering what the market cannot supply or what the market cannot supply efficiently. These include health care, education, security, public health and physical infrastructure. Utilities (water and energy), roads, railroads and public transport remain essential infrastructure for economic participation; to these should be added a national broadband network as originally envisaged.

3. Use sound counter-cyclical management. Government’s macroeconomic role is to practice counter-cyclical management, compensating for swings in the business cycle, and more actively to use its power to prevent speculative booms and crashes. It has become fashionable to criticize the Rudd-Gillard Government for running a deficit in response to the events of 2008, but that is normal and responsible economic practice. While it is easy to see the cost of a fiscal deficit, it is far harder to bring to measure the cost of the alternative – a loss of employment and output. When, in a downturn, people lose their jobs or close their businesses, some will never get going again.

4. Develop an economically responsible tax system and regulatory structure. These policies should rewardeconomic contribution and that discourage financial speculation and rent-seeking. In this regard tax reform is crucial – restoring a neutral capital gains tax system (the present arrangements reward short-term speculation while discouraging long-term investment), removing incentives for payment in fringe benefits, closing avoidance provisions such as use of family trusts, re-introducing inheritance and gift taxes, removing the most regressive superannuation tax provisions, removing subsidies for “negative geared” property investments, re-establishing a carbon tax, requiring multinational firms to pay a fair share of tax, and establishing a proper resource rent tax.

5. Mandate a decent minimum wage. Australia has traditionally had a high minimum wage – it has been a defining feature of our economy. There is an argument that a high minimum wage discourages firms from taking on staff, and this has some validity. But a high minimum wage also ensures that firms have an incentive to employ people productively. When people are employed in low productivity jobs such as parking station attendants, domestic servants and supermarket packers there is a waste of human capital.

6. Provide social insurance –covering high-cost contingencies. Unemployment benefits, Medicare, drought assistance, age and invalid pensions and the National Disability Insurance Scheme can all be classified as social insurance.Social insurance is necessary because of various failures of private markets to cover risk. Social insurance can be set with high or low safety nets. Publicly-provided social insurance can allow individuals to take more risks in private markets, for example by establishing startup businesses and investing in specialised skills.While social insurance has many similarities with redistributive welfare, and indeed may use some of the same policy instruments (e.g. unemployment benefits), it is redistributive only in the same sense that normal commercial insurance could be described as “redistributive”.   

7. Support social inclusion.Beyond platitudes about “team Australia” social inclusion does not seem to be a priority of Coalition governments. And there has been a tendency by Labor governments to conflate ideas of social inclusion with redistributive welfare. This conflation has allowed governments to ignore the problem of self-exclusion by the well-off, into literal or metaphorical gated communities, most notably private schools and private hospitals.As a result, services such as public education and publicly-funded health care become re-defined as services for the poor (or “indigent” to use the demeaning American term). Those who are well off, who expect high standards and who have the political clout to demand them cease to have any stake in such services.There should be no taxation or other financial incentives (such as subsidies for private health insurance) that encourage people to opt out of using shared services. Where means-testing is applied to health and education services it should be applied in such a way that supports sharing the services.

8. Attend to the social wage. The importance of the social wage was asserted in the 1945 White Paper on Full Employmentand re-affirmed by the Hawke Government. It refers to a set of government services and interventions as a complement the minimum wage to support a basic living standard, through provision of publicly-funded health care and education, and attention to important household costs, particularly housing and provision of utilities such as electricity and water. These are areas where markets, left to their own mechanisms, can produce very inequitable effects.Housing affordability has become a major issue in Australia, and needs to be tackled by supply-side interventions, including provision of high quality public housing to exert price competition, public funding of infrastructure for new housing, and spatial policies to quell the arms race pushing up housing prices in desirable locations.

9. Use progressive taxation. The way taxation is collected can and does have redistributive benefits, but in recent years there has been a concerted campaign towards flattening tax scales because of claimed disincentive effects of high levels of taxation on those earning high incomes.Contrary to mythology justifying the notion of cutting top tax rates, Australia does not have high rates of personal income taxes once compulsory tax-like contributions, such as social security contributions, are taken into account.  Out of those 17 prosperous OECD countries mentioned earlier, only four (Switzerland, Iceland, Luxembourg and Austria) have lower top marginal tax rates than Australia when these compulsory levies are included. Whether high marginal tax rates discourage work is a matter of dispute among economists. Whatever disincentive effects exist may be fully or partially offset by people’s desire to work harder to sustain a desired standard of living. And, of course, there are many motivations other than material living standards driving people to work hard – motivations which tend to be lost in the simplistic and amoral economic models upon which much public policy is based.
   
   In any event, if high marginal tax rates do discourage some from paid work, that may be a desirable outcome. Those who voluntarily move out of the paid workforce or reduce their hours are not necessarily ceasing to make economic contributions – many are moving to unpaid work, including care for others and volunteer work. And few would dispute the need to distribute work and leisure more evenly.

10. Use social security payments to support those in need. There will always be a need for cash transfers to those in need, but this form of assistance should not be seen as the first response to rising inequality. The priority should be to measures that allow people to develop their capabilities and to contribute in whatever way they choose.

Ian McAuley is Adjunct Lecturer, University of Canberra. He has worked on consultancies for Australian and foreign governments, and for international agencies, the UN and the OECD. 

Fairness, Opportunity and Security
Policy series edited by Michael Keating and John Menadue.

Australia to the 1980s – Government at the commanding heights

For almost 200 years, from 1788 to the early 1980s, governments held the commanding heights of the Australian landscape.

The Australia in which I came of age, the Australia of the 1950s and 1960s, would now be described as a “command economy”, notwithstanding the anti-communist rhetoric of the postwar era, championing the liberties of the “free world”.

The journalist Paul Kelly commented that while we didn’t live under totalitarian rule, we did live under a condition of state paternalism. Governments, state or federal, Labor or Coalition, determined what we could read (remember the fuss over Lady Chatterly’s Lover), whom we could have sex with, and what time the shops should close.

In the economic sphere government was even more dominant. With all the authority of Soviet central planning, governments determined the shape of the Australian economy, through tariff and quota protection, partial or full ownership in key industries (banking, airlines, railroads, aircraft manufacture, pharmaceuticals, telecommunications), and sanctioning internal restraints on trade. In disregard of Section 92 of the Constitution (the free internal trade bit), for example, local brewing monopolies were protected by prohibitions on trading beer across state borders.

This economic system must be seen in its historical context, namely the decision, at the time of federation, that Australia would not go down the path of “plantation economies”, such as Argentina, characterised by wide disparities in income and opportunity. Rather, Australia would go down a path of industrialisation as a means of spreading income and opportunity – a process well-described in Ian McLean’s 2012 work Why Australia Prospered. Even the White Australia Policy, although strongly based on racism, had its liberal supporters who saw it as a means of stopping Australia from becoming a society of white masters and colored coolies.

Also there were the demands of industrial mobilisation during the Pacific War and of national development after the war. There were no private investors waiting to invest in rail gage standardisation, in an international airline, or in a hydro-electric/irrigation/conservation scheme in the Snowy Mountains. (To put the Snowy Mountains Scheme into perspective, its total project cost was about 6 percent of one year’s GDP, which would come to about $100 billion in today’s terms – enough to fund an east coast high speed rail and a proper national broadband system, with change left over to fix up the Pacific Highway.)

The withdrawal of state paternalism

The Dunstan Government in Adelaide – “the city of churches” – was the first to push socially progressive legislation on censorship, anti-discrimination, consumer protection and decriminalization of homosexuality, while encouraging multiculturalism and engagement with Asia. Nationally the Whitlam Government was to follow a similar reforming zeal. In social policy state paternalism was on the way out, and Labor was leading the change.

In the economic sphere it was the Hawke-Keating Government that made the greatest progress in withdrawing state paternalism and giving freer rein to market forces – implementing tariff reform, significant deregulation of the finance sector, a float of the exchange rate, and effective competition policy.

An enduring myth of Australian politics is that Labor has been the party of “big government”, but in reality Labor has been the party of liberal reform. The myth, which has so well-suited conservative politicians, lies in selective interpretation of what is meant by “big government”, and, more basically, the assumed role government is to take in our lives.

We often look for quantification of terms such as “big” and “small”, and one that stands out is the size of government spending in relation to GDP – a metric with huge variation even among the 34 member countries of the OECD (from 23 percent in Mexico up to 58 percent in Denmark, with Australian near the lower end at 35 percent).

But in itself such a metric carries little meaning. A government can be “small” by this measure, while imposing a heavy burden of oppression on its citizens, as was the case with many South American countries in the 1980s. It doesn’t take much expenditure to run a surveillance and police apparatus. Government can be so small as to be absent, leaving citizens to the ravages of gangs and warlords, as in failed or failing states. At the other end of the spectrum are countries with “big” government expenditures, such as Sweden and other Nordic countries, which guarantee civil liberties and offer an attractive environment for business investment.

In most democracies, including Australia, government expenditure has grown because the legitimate demands citizens have placed on government have grown.

But what are those demands and what makes them legitimate?

The wisdom of a US Republican

Abraham Lincoln stated the role of government:

“The legitimate object of government is to do for a community of people whatever they need to have done, but can not do at all, or can not so well do, for themselves–in their separate, and individual capacities.” 

That statement was made 160 years ago in a different political context but it encapsulates what most independent economists and political scientists still see as the legitimate role of government.

It has two important parts.

The first is about what people cannot do at all (in their separate and individual capacities). That’s uncontentious: even those on the hard right accept that governments must guarantee the integrity of the currency, provide national defence, and maintain internal security – in fact on these last two functions they tend to go to extremes.

The other is about what people cannot do so well, and this has become contested territory, particularly in the last 35 years since the rise of the Thatcher Government in the UK and the Reagan Government in the USA. If one believes that the private sector always does better than government, then logically the government should not be involved in anything the private sector can conceivably do. It should vacate education, health care, research, environmental protection and so on – all areas where there is some possibility of private sector provision.

The Howard Government, for example, adopted what Minister for Administrative Services David Jull called a “Yellow Pages” test for what should be in and out of government: if an activity appeared in the Yellow Pages directory it should be left to the private sector.

It’s an idea of government, when taken to an extreme, would see a very diminished state. Of course any government pursuing such an agenda confronts electoral opposition, which means that governments of the right concerned with political survival aren’t don’t go the whole hog of privatisation, but the vision remains as an aspiration.

Opposition to the “small government” aspiration is construed as a reaction of a people who have become too accepting of the “nanny state” and too recalcitrant to accept the need for change. Christopher Pyne’s reaction to the Senate’s blocking of his higher-education “reforms” is a textbook illustration of this attitude – we just don’t know what’s good for us.

Those on the right fail to notice the irony of this form of paternalism. And the idea that there is validity in the idea that governments can do some things better than the market doesn’t enter their ideologically-primed minds.

There is a mountain of evidence, however, of the economic benefits of publicly-funded education, health insurance, transport infrastructure and other services where governments do a much better job than the private sector. There is similar evidence that only governments can efficiently mobilise resources for projects with long-term benefits, such as transport systems and broadband networks. There is a whole established economic literature on the limits of markets – the textbook and real-world theory of “market failure” – but politicians who are confident in the intrinsic competence of the private sector can safely ignore evidence and argument, particularly when they have an unshakeable belief in their own economic competence.

The most extreme version of this belief is not just that the private sector is better, but that the public sector is entirely worthless, as captured in the explicit “beliefs” of the Liberal Party, where it is stated that: “businesses and individuals – not government –  are the true creators of wealth and employment”, implying that the efforts of police, teachers, nurses and others on the public payroll are worthless, as are public assets such as highways and art collections.

Even those few on the right who do accept that markets fail tend to respond with the claim that government failure is always worse: it’s better to put up with the lesser evil of monopolisation, injustices of asymmetric market power, administrative duplication in the private sector, the short-term focus of corporations and so on, than the greater evil of government incompetence and waste.

Public choice theory

The idea that incompetence and waste are inevitable in government undertakings is given a fig leaf of academic respectability in a theory known as “public choice”, which has been popular in some Australian universities (the nurseries for treasury officials and most politicians).

The nub of the theory is that governments face inexorable pressure to grow. Public servants and ministers, whatever their left/right labels, always enjoy the benefits of bureaucratic expansion, just as (it is supposed) business executives enjoy managing a big company rather than a small one, and voters’ demand for more services is insatiable. President Reagan summarized public choice theory even more succinctly when he said “Government is like a baby. An alimentary canal with a big appetite at one end and no sense of responsibility at the other”.

While the expansionary aspirations of business executives are kept in check by shareholders (a naive assumption), governments have the power to tax – or, better still, to incur debt and to push the pain of repayment on to future voters (an argument that ignores the power of oversold IPOs and share issues to lure mug shareholders in the private sector).

A related aspect of the theory is that governments offer too many openings for rent-seekers – those who can use political clout to secure privilege such as a protected monopoly or a favourable re-zoning of land. It’s best not to have the agencies which have the discretion to offer such privilege.  (There is no acknowledgement that good government is about upholding community interests, and that in an unregulated laissez faire situation monopoly and collusion will prevail.)

The net conclusion from public choice theory is that good government is about applying countervailing pressure to these drivers of growth.

The ultimate model of government to emerge from public choice theory is that government is just another “interest group”, like the trade union movement or the mining lobby – admittedly with some differences, but still with the motivation of self-interest – rather than any notion of the public interest or public service. It may hold certain assets, but only as a reluctant owner, rather than as a custodian of the common wealth. (Listen to the language – it’s not about “our” government or “your” government, but rather “the” government.)

The weakness of public choice theory is that it rests on weak or false assumptions: an infantilized view of the electorate (as if people are too stupid to see the connection between taxes and services); an expansionist assumption about the motivations of public servants; and  a complete dismissal of any motivational idea other than self-interest.

It also misinterprets the relationship between people and the governments they elect, a misunderstanding illustrated in the heated debates over privatisation.  Governments pushing privatisation behave in the same way as investment bankers may – “sell BHP, buy RIO”, “sell the electricity grid, buy tollways”. That detached role is not the way the public see it.  It’s their government, with a custodial responsibility for their assets.

The outcome of these ideas – weakened and distanced government

This faith in the intrinsic virtue of “small government” may arise from genuine belief or it may be a rationalization to give respectability to ideas serving the interests of those who can profit (in the short run at least) from a weakened state – crony capitalism in other words.

The vision of the public purpose is that it is best served by the government retreating as far as possible.  (An extreme manifestation is to dismiss the very idea of public purpose. If, as British Prime Minister Margaret Thatcher said there is “no such thing as society”, logically there can be no “public purpose”.)

Governments infused with these ideas grudgingly go on providing public services, only because it would be costly to their survival if they did not, and a less fiscally responsible government may take their place. That probably explains the Federal Liberal Party’s “beliefs” and electoral strategies, which are focussed almost exclusively on keeping Labor out of office, rather than articulating any agenda – it’s not “negative politics”, just a frank description of the political scene through the eyes of a Party member. It’s a paternalistic guardian, rather than a party of competing ideas. That’s why it’s so devoid of inspiration: it’s hard to inspire political enthusiasm when your political aspiration is to close the show down.

A related idea is that if it’s hard to wean an electorate off public spending, then its best to do so by diverting the composition of government outlays away from spending on services and on to spending on cash transfers. Rather than providing schools, clinics, roads and so on, public spending is best directed at cash handouts (such as family benefits) or tax concessions (such as those applying to superannuants). That way some of the evil of public spending can be ameliorated, because the final spending decisions are in the hands of individuals rather than public servants. Choice is left to the individual. (In reality choice is left to those who , through advertising and other market manipulations to shape people’s consumption.) 

The Howard Government’s generosity with the proceeds of the mining boom, which went to cash transfers for “middle class welfare” while spending on education and infrastructure was squeezed, is illustrative of this philosophy. When we look at the growth of government expenditure over the last 50 years, we see that spending on government services has risen modestly, from 15 percent to 18 percent of GDP, while the growth in personal transfers has doubled from 4 percent to 8 percent of GDP. At the Commonwealth level the trend is even more marked.

It would be wrong to attribute these attitudes entirely to any one party. They may be most clearly manifest in the Liberal Party, but they have infected Australia’s public discourse to the extent that it is now accepted almost without question that the only way to achieve a fiscal balance (in itself an over-simplified goal) is through cutting expenditure rather than raising revenue.  (When did you last hear an ABC journalist, quizzing a minister about a budget cut, ask “Yes Minister, but have you looked at the possibility of raising revenue – after all Australia is getting by with very low taxes?”)

It was a Labor Government in the 1980s that instituted a set of “reforms” which ultimately saw fiscal management take over from economic management – to the extent that documents such as those comprising the Charter of Budget Honesty and the Intergenerational Report effectively posit fiscal management (in reality fiscal stringency) as the sole aim of economic policy. Economic policy should be about the whole community’s interests, while fiscal policy is simply about public expenditure and revenue.

“Reforms” under the rubric “new public management” transformed the public servant from a servant of the public to a servant of the minister, with responsibility not for the public interest, but for controlling expenditure within his or her own agency’s appropriation. If budgetary savings can be made by denying services or by shifting costs “off budget” (for example from education departments to parents, from health departments to private insurers), that’s good management, even if there is a net economic cost to the community.

Gone are the ideas of benefit-cost-analysis, which consider the community’s costs (e.g. travel time in location of schools and libraries).  At best benefit-cost-analysis is used only as a tool for dealing with limited funds for capital spending, to get the best out of miserly allocations.

And gone is the idea of the common wealth.  Even the name of our nation – The Commonwealth of Australia – looks like an anachronism in this brave new world of “small government”.

Restoring the common wealth

There’s no need to go looking for some new role of government – Lincoln laid it out.

Of course there are changes in how this role is realised. Demographics change, which means there is more need for spending on age pensions. Technologies change, which means that more options for health care become available, while some functions once reasonably reserved for government, such as telecommunications, can have more private sector involvement. And relative prices change, which means that while many items of private consumption (cars, travel, entertainment) have become cheaper, some services provided by government, including education, health care and policing, necessarily remain labour-intensive and therefore expensive: it is quite reasonable that relative expenditure on these public services should go on growing for some time (a consideration entirely overlooked in banal fiscal documents such as the Intergenerational Report.)

A restoration of Lincoln’s common-sense understanding of the role of government or the value of the common wealth isn’t going to arise from a simple change in political actors. There is no messianic political “leader” who will take us out of this neoliberal darkness. Public ideas develop over time, through the contributions of many. The task is up to all of us, and let me conclude with some advice to those who have voice in the community.

Politicians (established and wannabe) – question the assumptions of your platforms and of the strategists in your party. Take it on yourselves to learn about the workings of the “mixed economy”, that has contributed so much to Australia’s prosperity in the past. Learn a little basic economics about how and why markets sometimes work well and sometimes fail. 

Journalists – put at least as much effort into reporting on public policy as you do on politics, and remember that fiscal management is only one small aspect of economic management. Remind Australians of some hard facts, such as our low tax base.  And don’t let a concern for “balance” displace your concern for seeking the truth. Don’t be afraid to expose lies and hypocrisy.

Public sector unionists – don’t campaign about your jobs. Every time you complain that some privatisation or cutback will cost your members’ jobs, the public interpretation is that the activity in question is overstaffed, playing straight into the hands of your detractors. Campaign about public services – and then your jobs will be secure.

Business lobbies – it may be clever in the short term to campaign for lower taxes or cuts in public spending. Such measures will naturally help your immediate profitability to the pleasure of your shareholders and managers. But remember that the success of capitalist economies rests on a wise mix of public and private goods, and on public policies that link contribution to reward and protect the vulnerable. It has taken strong governments to protect capitalism from its own self-destructive tendencies.

“Social progressives”, “greens”, “the left” – engage with economics.  It’s not difficult. If you don’t, others will, perpetrating the absurd but glibly appealing ideas that there are conflicts between economic and social objectives and between economics and environmental objectives. If you don’t state your case, these false ideas will dominate.

Australia and similar democracies have done well because economic progress  has been a shared venture between the public and private sectors. Our prosperity is built on that shared venture, including the accumulated contribution of governments in education, health care, physical infrastructure and a host of other services that we’re too inclined to take for granted.

As Aristotle warned “That which is common to the greatest number has the least care bestowed upon it”. We need care for our common wealth.

Ian McAuley is Adjunct Lecturer, Canberra University.

The ideas in this paper are expanded in a book ‘Governomics: Can we afford small government?’ written by Ian McAuley and Miriam Lyons, which was published on 1 May 2015 by Melbourne University Press.

Was this a spoof?

There are ‘claims’ that the following speech appeared on the websites of the Liberal Party and the Department of Prime Minister and Cabinet on the day that Tony Abbott gave his speech to the National Press Club, but it was taken down as soon as it was found that the Prime Minister was delivering a different speech – presumably one prepared entirely in his own office.

For delivery National Press Club – 2 February 2015

Let me start with a “thank you” to the people of Queensland.

My gratitude may surprise some. As leader of the Federal Coalition I am naturally disappointed to see one of our own lose office. But last weekend the people of Queensland sent us a loud wake-up call.

It wasn’t our first wake-up call. We have had many since we were elected 16 months ago, but each time we have lazily reached for the “snooze” button.

We have been too cocksure, too ready to believe our own propaganda, too ready to read the columns of sycophantic journalists, too ready to take plaudits from people of our own tribe.

Each political setback – failures of Coalition parties in elections in South Australia, Victoria and Queensland, the Senate’s rejection of our education and health bills, a string of poor opinion polls – we have put down to an inability to get our message across.

It didn’t occur to us that the electors may have heard and understood our message all too clearly, and that they have rejected it.

It didn’t occur to us that they could see through the accounting tricks of “asset recycling” and “leasing”.

It didn’t occur to us that they rejected the idea that everything that’s good for the private sector is necessarily good for Australia.

In short, we have been saying, paternalistically, “we know what’s good for you”.  Our side of politics has often accused parties of the “left” of paternalism, but we have been blind to our own transgressions.

Paternalism, I need to remind myself, and my Parliamentary colleagues, has no place in the Liberal Party.

I take the brunt of responsibility for these failures. I have made too many “captain’s calls”.  When I have consulted it has been with my hand-picked colleagues, particularly a cabinet which, I now realise, is not even representative of the views of the members of the Coalition parties.

I have ignored those who spend time in their electorates listening to the views, ideas and aspirations of the Australian people.

I have been too ready to listen to those who agree with me, and to disregard my critics – to assume that those who disagree with us are our enemies rather than people of good will offering sound advice.

My appointment of a Commission of Audit, bypassing the established policy processes of government, I now acknowledge was a grave mistake.

When people criticised our budget we accused them of short-sightedness, of a failure to understand the need for fiscal responsibility. We didn’t realise that people may be ready to make sacrifices for the public good, provided the pain and effort are shared fairly.

I have been too ready to blame the previous Government for the nation’s problems. They did a reasonable job in reacting to the financial crisis and its aftermath. I do criticise them, however, for failing to attend to our weakened public revenue base. The last years of the Labor Government saw many promises – including excellent initiatives in education and disability services – but there was no plan to raise the revenue to fund them.

We made the mistake of dealing with this fiscal gap through cutting expenditure rather than raising revenue.

We listened only to those who stood to benefit from privatisation, forgetting that people legitimately expect their governments to do what the private sector cannot do, or cannot do so well, and are willing to pay for public goods and services.

We made the fiscal task harder for ourselves by repealing and reversing plans to raise taxes, most significantly the tax on carbon emissions. We failed to appreciate that these taxes, besides contributing fiscally, were designed to help Australian industry adjust.

I now realise that we have let down many of Australia’s most energetic and creative entrepreneurs, who, in times past, would have been strong supporters of the Liberal Party.

Those who had plans for renewable energy investments.

Those who had intended to build businesses around high speed broadband.

Those who had drawn on publicly funded research in universities and the CSIRO to develop new products and processes.

We didn’t listen to them.  Rather, we were too ready to give an ear to established businesses, the big donors to our party.

It would be tempting to use an occasion like this to announce a few populist sweeteners – tax breaks for small business or handouts for families.  But that’s the very policy on the run that has characterised Australian politics for far too long.

Rather, I want to announce the general policy directions we will be taking.

First, we are taking proposals for health and education back to the drawing boards to be subjected to full community consultation, with more considered proposals ready for next year’s election. In the meantime we will restore funding to ensure these sectors, particularly the universities, are not disadvantaged.

Second, we will review all funding cuts made since we came to office and in Labor’s last year in office. Most of these were made with too little consideration or appreciation of the economic benefits of public services.

Third, we will do this in a fiscally and economically responsible way.

That means repairing our revenue base.

To this end I call on those Australians who have benefited so much from public spending – defence, infrastructure, education, health care – to contribute more. Our budget to be handed down in May will have measures to close holes left by successive governments’ tax concessions for superannuation, short-term capital gains, investor housing, family trusts and corporate perks.

That means the task of fiscal repair will not fall on those who have most rather than least capacity to pay. We are also mindful of the risk to consumer confidence and demand when the purchasing power of the least well-off is diminished.

Once we have completed our Cabinet re-shuffle, our to-be-appointed Treasurer will announce more details.

One certainty is that we will restore a carbon pricing mechanism. It will be more comprehensive that Labor’s half-hearted scheme, covering transport fuels and exported coal. And, in keeping with the principles of our Party, it will be market-based.

Also in keeping with the principles of the Liberal Party to provide business with stable policy, I announce that there will be no change to the Renewable Energy Target.

Our infrastructure plan remains intact; in fact we will expand it, but I am pleased to announce that “asset recycling” is now dead, cremated and buried. We will consider privatisation only when there is no longer a benefit in public ownership.

It would be economically irresponsible not to take advantage of our credit rating to borrow at the low rates available to us to invest in rail, road, public transport, research, environmental repair and other public goods, so badly neglected by past governments. Handing these to the private sector, whose cost of capital is so much higher than the government’s, is simply wasteful, and can result in higher national debt than if the government is to fund these projects.

That means there will be an increase in our already low public debt, but we will raise the taxes to service that debt.

Our focus from here on will be on the public balance sheet, compensating for years of neglect of our public assets. I bear some personal responsibility for allowing fiscal policy to crowd out all other aspects of economic policy, but I also ask journalists here today to lift the quality of economic debate beyond “gotcha” attacks on failures in budget projections.

That is our economic agenda, but I have several other announcements relating to political donations, Australian honours, refugees and ……..