Ian McAuley

  • Ian McAuley. The speech that Tony Abbott almost delivered to the National Press Club.

    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 ……..

     

  • Ian McAuley. Pyne on education funding.

    A good friend is someone who, when you’ve had too much to drink at a Christmas party, ignores your protests and takes your car keys to prevent you driving home sozzled. You’re surely grateful the next morning.

    When he gets back to the Adelaide’s leafy eastern suburbs and has regained his composure, Christopher Pyne might realize that Senators Lambie, Lazurus, Wang and Xenophon, in rejecting his university ‘reforms’, have saved him and his government from something almost as bad as a DUI conviction. In a country where almost everyone aspires to a tertiary education for themselves or their children, deregulating fees after cutting public support for universities by 20 per cent is a sure election loser.

    He might even show his gratitude by sending Christmas cards to the four Senators.

    Because the landscape of tertiary education is changing there are genuine reforms to be pursued. Information and communications technology is having a huge effect on tertiary education, but those who believe a university course can be delivered over the Internet in the same way as one downloads a novel from Amazon seem to have missed some important learning in their own education. Employers are increasingly interested in demonstrable skills rather than certificates, and graduates are increasingly finding themselves moving away from their initial disciplines, but a swag of technical skills is not the same as a capacity for critical thinking and an ability to live as a responsible and engaged citizen. And there is a need to bring TAFE and universities closer together, but this should involve the inclusion of more liberal content in technical education, as is the case in northern European countries, rather than pushing universities even further along the path of commercialization.

    If the government wants these issues addressed, it must restore funding to the tertiary education sector, already badly savaged by the Rudd-Gillard Government before this Government cut funding even further.

    Some Senators are arguing for a return to free university education, a proposal that’s unthinkable to either of the two main parties. It’s not unthinkable in Germany however, where Niedersachsen has just become the last state to abolish university tuition fees (joining with the Nordic countries), and it shouldn’t be unthinkable in Australia.

    The political rejoinder is that to do so would involve billions of extra government debt. But the Government’s proposal also involves funding through debt – individual debt rather than government debt, and Australians already have high private debt. Whether Australians pay for tertiary education through HECS-type repayments or future taxes, that debt still has to be repaid. In a macroeconomic sense the form of debt makes no difference.

    Where the difference comes, however, is in who chooses to go to university and what courses they choose. It’s easier to risk a $100 000 or $50 000 debt if, in time, you are likely to inherit a share in a million dollar house, and if you choose a course in corporate law rather than teaching. That’s the unfairness and gross misdirection of resources of Pyne’s proposals.  They disingenuously combine both inequity and economic waste – the waste of leaving many people’s capabilities underdeveloped.

    Even better than either HECS or public debt, however, would be restoration of university funding through collecting more taxes from those who have enjoyed free or heavily-subsidised university education. Reforming ‘negative gearing’, restoring the pre-2001 capital gains rules, prohibiting use of family trusts for tax avoidance and removing superannuation concessions favouring high-income earners all come to mind.

    It’s time for the baby-boomers to repay their debts to society and to contribute to educating those who come after them.

     

  • Is capitalism redeemable? Part 9: Restoring a moral voice

    It is easy to allocate blame for our apparent entrapment in bad public policy. Tony Abbott’s truculence, disregard for reason, inflexibility and broken promises all come to mind. As does the blatant partisan stance of the Murdoch media.

    Those who look for more general causes draw attention to dysfunctional party structures, an adversarial parliamentary system and sloppy journalism.

    It is useful to go a little deeper than these specific manifestations, and ask why so many of us are indifferent to such problems. Why have we turned our back on Enlightenment values – those values which a century ago saw Australia take a world lead in female suffrage, decent wages, pensions and good government generally? In a country that has made such strides in mass education, how come tabloid newspapers still command any readership and how come spiteful shock-jock radio hosts hold their audiences?

    Australians have always been a sceptical lot, but scepticism seems to have morphed into cynicism, and more generally a creeping atmosphere of nihilism is stripping all consideration of morality from our public debates.

    One starting point is to look back to the unrest of the 1960s. To shift Wordsworth’s context, “Bliss was it in that dawn to be alive, but to be young was very heaven!”. It was a revolution against the hypocrisy exhibited by society’s moral guardians, against race and sex discrimination, against colonialism, and against a pointless war. All ideas were up for grabs, all nostrums were up for question.

    Into that space came the philosophy of postmodernism, a philosophy holding that there is no reality, just subjective viewpoints. Your viewpoint, my viewpoint, her viewpoint – all are equally valid. It was an easy philosophy to embrace because it required no moral references, and it dispensed with the need for reason or logic. While the hard thinkers were making the case for tolerance, respect and humility in issues of race and sex discrimination, those who embraced postmodernism took the easy path of adopting the amoral view of cultural relativism – even, in extreme cases, not objecting to practices such as selective abortion of female foetuses and genital mutilation, and considering the Holocaust to be no more than a subjective interpretation of history.

    Although emanating from the “left”, postmodernism has spread its influence across the political spectrum. If there are no moral standards as reference points, then we don’t have to worry too much about what Louise Newman says about children in detention or what Tim Costello says about poker machines: Newman and Costello are entitled to their “opinions”. ABC staff interpret their charter to give balance to contrasting “views” on climate change, and leave unchallenged politicians’ most egregious lies: if government ministers say that Labor left a record deficit, or that no other country has emissions trading (both easily dismissed by reference to authoritative sources) they’re just “opinions”, not to be questioned any more than the minister’s choice of a blue tie over a red one.

    And, as we all know, the quickest way to put down a political argument is to say “there are two sides to every story”, before moving on to less unsettling dinner table discussions, such as comparisons between New Zealand and South Australian Hills Sauvignon Blanc, or the noise levels of BMW and Mercedes Benz cars.

    Also developing from the 1960s has been a general downplaying of the more rigorous academic disciplines, most clearly manifest in the relative fall in enrolments in science and mathematics, and also in an erosion of logical rigour in many other disciplines. Students can get through a whole high school education and university degree without exposure to the basic tools of critical thinking, such as understanding deductive logic or the rules of scientific inquiry.

    When people don’t have recourse to tools of critical thinking, logically empty statements such as “I cannot guarantee there were no terrorists on that refugee boat”, or “Not all Muslims embrace the views of ISIS” come to carry meaning for the casual listener. The use of statements which are correct in logic but misleading in content is known as “sophistry” to philosophers and as “dog whistle” politics in more general parlance. John Howard was a master in sophistry and Abbott, though more gauche, follows his footsteps. Similarly, if people don’t understand the conditionality of hypotheses and the role of attempted refutation in scientific method, they are likely to believe that the question of climate change is one of great uncertainty and disagreement between experts.

    Ironically, the nihilism which arose as a by-product of student radicalism in the 1960s may have made it easier for universities to drift into the world of commerce, where faculties are treated as business units, where students become customers, and where the starting salaries of graduates become the prime measure of success. The enthusiasm with which so many vice chancellors have embraced the Government’s tertiary education “reform” proposals would render C P Snow and John Henry Newman speechless.

    Although the churches condemned some of the movements of the 1960s, in various ways they too have dealt themselves out of the moral debate, paving the way for nihilism.

    A few religious movements, particularly in some of the fundamentalist Protestant churches, have espoused bitterly anti-Enlightenment values in relation to evolution, in literal interpretation of scripture and in reduction of morality to the ten categorical rules that guided Moses to keep his restive tribe in order.

    Throw out the love of learning and reasoning that sit at the core of the Enlightenment, however, and you throw out the tools which allow us to handle complex moral problems – and most moral problems that count are complex. Good public policy is often about finding practical reconciliations of conflicting moral principles.  (By contrast Australian-style politics is more about a supposed Manichean conflict between good and evil.)

    The other moral distortion has come from parts of the Catholic Church and from some other religious groups, and that’s an obsession with sex, allowing concerns with sexual behaviour to crowd out almost all other moral issues. Also, as we uncover the history of political events in Spain, Portugal and Chile, we learn that people with positions of authority in the Catholic Church have been involved in terrible transgressions of human rights. More recently, revelations of sexual abuse have exposed widespread gross hypocrisy. Logically, one should distinguish between the corruption of an institutional church from its moral teachings, but that separation is a big ask for those who feel betrayed by those they have trusted.

    To his credit the present Pope is trying to address wider moral issues, and there are similar movements in other faiths, but they are up against institutional inertia. In spite of separation of church and state in our constitution, the Anglican and Catholic Churches have become intertwined with government, the former through de-facto establishment in colonial times, and the latter through dependence on government support for its schools and hospitals. If we are looking for moral leadership from the church it is worth remembering that Martin Luther King’s effectiveness owed a great deal to his separation from the political establishment.

    The task of confronting lies with truth, and of restoring some moral stance to public life, is a great one. There are voices – in the political sphere Bob Oakeshott, Tony Windsor, John Faulkner, Lindsay Tanner, and John Hewson come easily to mind, and undoubtedly there are many politicians working quietly behind the scenes. These people all need strong support, because their stances have been met with some of the most vile abuse imaginable.

    But we cannot wait around for some messianic “leader” to take us to the promised land of a decent society, like sheep waiting for a drover and his border collie. The task of leadership does not reside solely with the people in positions of authority – indeed, those people often face constraints that limit their capacity to raise hard issues. To take one prominent illustration, it may appear to many people that Malcolm Fraser has gone through some Pauline conversion, but the more likely explanation for what looks like a change of behaviour is that he has been free of the shackles of political office for the last thirty years.

    That’s why the task of moral leadership is one that falls on all of us, in our various modest but collectively effective roles.

     

     

  • Ian McAuley. Is capitalism redeemable? Part 8: Inequality’s downward economic spiral

    Let’s start with what looks like a self-evident proposition. “Countries with right-wing or neoliberal governments spend less on social security than countries with more left-inclined governments.”

    It’s a proposition university lecturers put to students of public economics, and the smarter students usually recognize that there’s a trick in it.

    Harvard economists Dani Rodrik and Alberto Alesina studied the impact of neoliberal policies such as those pursued by Britain’s Thatcher Government, and found that those policies, because they resulted in widening inequality, actually increased the demand for social security payments.

    Whatever images they may project, it’s worth remembering that governments on the right are not entirely heartless, and may even be well-intentioned. Even if it’s only because their supporters find street beggars and shanty towns indecorous, they feel constrained to spend on alleviating extreme poverty. (Lest anyone think that last suggestion is too cynical, we should contemplate our likely political reaction if the squalid conditions of Aboriginal settlements in the remote outback were more visible from the roads and railways used daily by our urban commuters.)

    Economists often argue for neoliberal policies, such as those which dilute workers’ rights, on the basis that while they will make some people worse off, they are worth pursuing because they will increase economic growth and therefore improve governments’ taxing power and capacity to make compensatory payments. Anyone with a little mathematical ability can work through the econometric equations and check the validity of this proposition.

    The main flaw in the argument is not mathematical. Rather it lies in the assumption that social security payments can compensate for some of the non-monetary costs of disruption associated with economic change. The tradeoff is rarely as stark as a choice between job and a welfare payment, but it is often in the form of compensation for a job with less pay, or with less security. It is easy, for example, for an economist in Canberra looking at a proposal which may wipe out regional economy to suggest generous re-location payments, but those calculations rarely take into account the hard-to-quantify costs of loss of a community’s social capital.

    Also, most people prefer some level of self-reliance to dependence on government benefits.

    By almost any consideration, “left” or “right”, an economy is healthier if it can provide well-paid employment for all, either in the form of jobs or self-employment in small business, without making too much call on social security benefits. There will always be enough call on the social security budget as a result of ageing, and to those with severe disabilities, without also asking it to pick up the costs of an under-performing economy.

    The general way in which governments can avoid this demand for re-distribution is to ensure the economy can support well-paid employment, through investment in human capital (education in particular), research, transport and telecommunications infrastructure, primary health care – in fact the whole set of public services that the market either cannot provide or cannot provide efficiently. Research into the determinants of economic growth show that even public investments which we may consider to be remote from the productive end of the economy, such as street lighting, have a positive effect on growth.

    But when there is an increasing demand for social security payments to compensate for poor economic performance, a nation’s public finances become caught in a destructive spiral, as demands for such payments crowd out other areas of government expenditure, particularly if a government has constrained itself with some arbitrary cap on public expenditure. As social security payments crowd out other areas of expenditure, particularly (but not only) education and infrastructure, a country’s long-term economic performance suffers, creating in turn more pressure on the social security system.  It’s a downward spiral to poverty.

    This downward spiral is far from hypothetical. It almost certainly accounts for much of Argentina’s economic decline over last century. And closer to home, the Howard Government used social security payments, such as family allowances, to compensate for our economy’s increasing inability to provide well-paid jobs. “Middle-class” welfare was, and still is, an unsustainable way to prop up material living standards.

    Hockey, Cormann and their advisors understand that social security payments and some other open-ended benefits are making a big call on the public budget, and that in material terms we are living beyond our means. Some short-term sacrifice is needed in order to put our economy and public finances back on track.

    The trouble is that they are going about rectifying this situation in completely the wrong way. Our escape from this spiral should be in the form of increased investment in public services, financed by higher taxes, rather than by cuts in expenditure, while sustaining social security provisions. In time, when those payments are no longer being called upon to compensate for our economic weaknesses, they can even be made more generous for those with enduring needs. Also, expenditure on universally-available services, particularly health and education, besides having high value in themselves, help support the living standards of those who are not so well-off, without being dependent on social security. There is a world of difference between the dignity of participating in shared services and the humiliation of applying for social security.

    Higher income taxes, and withdrawal of excessively generous superannuation benefits for the well-off, would carry a message of shared sacrifice.  One doesn’t need a PhD in economics or ethics to understand that it’s almost impossible to ask people to make sacrifices when the burden isn’t shared.

    The latest example of the Government’s stupidity in this regard has been in its support for a cut in soldiers’ pay. Any soldier, private through to colonel, knows the military tradition of shared sacrifice. The military is not a democracy – far from it – but when, in difficult conditions, sacrifice is needed, it is across the board, or is even disproportionately applied to senior NCOs and officers. Had the Government cracked down on corporate tax avoidance, made wealthy superannuants pay taxes, withdrawn privileges for family trusts, and scrapped privileges for financial commission agents, it may not be in such political strife over issues to do with military and public service pay.

    In this series of articles I have touched on some of many areas of public policy. Many of these will be covered in a book which Miriam Lyons (former Executive Director of the Centre for Policy Development) and I are writing, and which should be published around May next year.

    In the final piece I will look at some of the reasons why unjust and economically destructive public policy remains largely unchallenged. The roots of this problem lie much deeper than media bias or political apathy.

     

  • Ian McAuley. Is capitalism redeemable? Part 7: Inequality – a shameful waste

    “Australia’s program to increase world growth seems to be to cut social security benefits from the poor.”

    When Geraldine Doogue asked Malcolm Fraser to comment on Abbott’s G20 agenda, that was his summary of the present Government’s economic policy

    Unfortunately, ministers such as Hockey and Cormann may not understand the sarcasm in his comment, because there is an economic philosophy supporting their very line: redistribute income towards the rich while disciplining the poor with hardship.

    Of course that doesn’t get stated so bluntly; it’s padded in spin about a “budget emergency”, “Labor’s waste” and so on. But it shows through in the Government’s budget proposals, not only those directed at the poorest, but also in its rejection of Labor’s measures aimed at reigning in some of the undeserved privileges enjoyed by the already well-off. These reforms included changes in the tax treatment of employer-provided cars, ending the racket of hidden commissions on financial products, and modest taxes on multi-million dollar pension accounts.

    Giving breaks to the already privileged is based in part on a belief that if people are rich they must be clever, and therefore their entrepreneurial virtues should be further rewarded. It’s a belief that conveniently overlooks the role of inheritance, luck, political deals and outright corruption in contributing to many people’s financial prosperity.

    It’s also based on the slightly more respectable economic theory that those with higher incomes tend to save and invest, therefore creating jobs for others.

    As Thomas Piketty points out, the saving and investment theory holds only up to a point. Once a financially wealthy class develops it goes on accumulating more financial wealth, and there is no certainty that its financial wealth will be invested wisely. Even if that financial wealth came about in the first instance through entrepreneurship, there is no guarantee that those entrepreneurial energies will be sustained into subsequent generations, who are likely to lead an indolent lifestyle, spending their fortunes on luxuries rather than on productive investment. And that lavish consumption does little for the local economy – it is more likely to make its way to car manufacturers in Germany, watchmakers in Switzerland and vignerons in France than the more modest consumption patterns of those of more modest means.

    Also, perpetuation of privilege is often based on the well-off having first call on what economists call “positional goods”, where supply is limited – the best surgeons, the best teachers and so on. There is a strong economic case, for example, for allocating the best teachers to where they can do the most good, in endeavours such as helping kids who haven’t had the early childhood breaks enjoyed by rich kids.

    The other end of that philosophy – making it hard for the poor – is so economically dumb that it is hardly worth taking the effort to refute it. When there is no demand for labour herding people into the labour force through punitive social security conditions just doesn’t work. The business cycle is an inescapable economic reality, and in an interconnected world one’s chances of finding a job are as likely to depend on decisions of the US monetary authorities or the sentiment of Chinese investors as on local business conditions or one’s own skills and motivation.

    For those who, through a tough upbringing or educational disadvantage, lack skills, there just aren’t jobs available. Minimum wages would have to be brought down to absurdly low levels to make it worthwhile for business to employ unskilled labour, and if they did, there would be a huge waste of resources, because low wages provide no incentive for employers to use labour productively. The waste would be in that most valuable of all resources, people’s capabilities.

    Good public policy is about investing in people’s capabilities which, through circumstances beyond people’s control, have lain dormant and undeveloped, or have been devalued by life’s experiences. Far better than denying unemployment benefits to out-of-work young people would be programs to support them in gaining new skills, and, of course, programs devoting resources to children at risk – children who are otherwise going to spend their adult lives in and out or poorly paid work, in and out of the criminal justice system, and without any stake in society.

    Instead we have a suite of policies designed to sap the self-confidence and dignity from those who become unemployed, as if subjecting people to the humiliation of job rejections and having to beg from friends and charities has no negative consequences. There are consequences, however, not just for the individual but also for the community as a whole.

    Another waste resulting from punitive conditions on the unemployed is that bad management is rewarded and perpetuated. Besides collective action through unions (which is becoming more difficult), one of the few ways people can knock some sense into bad employers is having the capacity to walk out of a lousy job. A workforce of people held to employment only because the alternative is unbearable is not a productive workforce. Sullen compliance with directions, like an ongoing work-to-rule campaign, is a poor substitute for enthusiasm.

    Those are some of the reasons why high levels of inequality hobble a country’s economic performance: they inevitably involve a waste of resources. When Tim Costello spoke of the need for the G20 to bring up the standards of the poorest through “inclusive growth” he reminded us that good social morality and good economics have a great deal of common ground. That common ground seems to be unknown territory to Abbott and his ministers, hell-bent on replicating George Bush’s so-called “supply side” economics, an experiment that failed in the USA and would be even more likely to fail here because it is so alien to our tradition of the “fair go”.

    This article has focussed on the waste of unchecked inequality and the pointlessness of economic growth that benefits only those who are already well-off. The next will outline how policies which promote inequality (intentionally or otherwise), not only waste resources. They also sap governments of the capacity to prevent widening inequality from dragging down the whole economy.

     

  • Ian McAuley. Is capitalism redeemable? Part 5: When finance goes its own way

    One of the world’s most useful social institutions is money, but it’s hard to think of it in its social context.

    To understand the social value of money, think of a world without money, or a country where, through recklessness the currency has been debased, as happened in the hyperinflation in the Weimar Republic in the 1920s.

    Barter served us well when few articles were traded – grinding stones, pituri and ochre in the Australian outback – but not in Germany in the 1920s and certainly not now. Complex trades require some agreed currency, not necessarily having any utility in itself, but with an agreed value in exchange. It’s that need for agreement, and for trust in those who control the currency, be it obsidian, rare shells, gold, or US Treasury Notes, that gives money that social context.

    Besides facilitating exchange, money also allows those with a temporary surplus to lend to those with temporary deficits – the wealthy individual funding someone else’s startup business, the older generation lending to the younger generation to buy houses. Such deals involve a huge range of instruments – loans, mortgages, equity and so on – but what they have in common is the need for some level of trust. Trust that the debtor intends to repay, trust that the terms of the deal are protected by some external authority, trust by the creditor that the debt will not be whittled away by inflation.

    Apart from times when we are caught short of cash – when the taxi fare is blown on the last race at Randwick – individuals don’t go around lending and borrowing. We do so through financial intermediaries, such as banks and stockbrokers. When we make deposits in these institutions we must be able to trust that they will act responsibly (in line with normal risk/return tradeoffs). That is, they will assess the quality of the way they invest that money on the depositor’s behalf and act as responsible trustees.

    That’s the way money serves the economy – by facilitating trade and investment. Thanks to what is known as “fractional reserve banking”, money isn’t some fixed entity: if there is trust and confidence money expands. When I borrow to buy a house or to set up a business I use that money to pay a builder or to hire workers, who, in turn use some of that money to lend to others through their bank deposits.

    These arrangements serve us well, until we lose sight of this practical, mundane function of money. They start to fall apart when we start to think that money itself is something real, as wealth, rather than as a means of denoting wealth.

    It’s hard to put a date on this confusion of money with wealth. The Biblical warning about “love of money” suggests it goes back a long way. On the other hand, older Australians can remember when bankers were respectably dull people who drove Holdens, wore Fletcher Jones suits, and ate roast lamb with three veg on Sundays.

    Something was changing when we started to hear life insurance salesmen (they were men) and bankers re-brand themselves as financial planners, and when they later re-branded themselves as “wealth managers”, when the Holden was replaced by a BMW and the Fletcher Jones suit by a Hugo Boss.

    The situation worsened as traders bought and sold financial instruments, sometimes not even knowing what acronyms such as “CDOs” stood for, let alone knowing about any connection these instruments may have had to any physical reality. Hence the GFC.

    The GFC is most easily understood as a loss of trust, as a loss of the social capital that allows borrowers and lenders to deal with one another.

    It meant that money literally disappeared. That doesn’t mean people’s or businesses’  bank accounts suddenly shrank, but it meant that many debts were never repaid, that some investments went belly-up, that investments in pension funds went backwards, and that people and businesses became reluctant to lend and invest. Governments tried to stimulate their economies with low interest rates and “quantitative easing” (i.e. printing money), but as fast as they injected money into the economy people took it out again, often re-investing in the safety of government bonds – the equivalent of putting banknotes under the bed. They no longer trusted the financial system, and trust, once lost, is very hard to restore.

    That has been the main consequence of the GFC – a crisis that could have been avoided had governments not been so gung-ho about deregulating the financial sector in the 1980s.  As is so often the case, rather than replacing obsolete regulations with more appropriate ones, they went down the path of deregulation.

    The other cost to the economy has been manifest since well before the GFC, and that has been the distortion of incentives in the economy. The message in the financial boom was that doing anything useful in the real economy was a mug’s game: playing with money was where the big returns were to be found. The finance sector took in some of the world’s most mathematically talented graduates, who could have been contributing to the real economy in engineering or science.

    In so doing it worsened economic inequality, damaging the already tenuous links between contribution and reward. Inequality, its causes and consequences, is the subject of the next two contributions.

     

  • Ian McAuley. Is capitalism redeemable?  Part 4: Moral conflicts

    Luxembourg (more properly the Grand Duchy of Luxembourg) is one of Europe’s smallest sovereign nations, both in population (about the same as Tasmania’s) and area (about one thirtieth of Tasmania’s).  Many Australians might have driven right through it, not realizing that in a half hour or so they had crossed a whole nation.

    If corporate accounts are to be believed, however, it is a major centre of economic activity. Ikea, Fedex and Amazon – all firms with global distribution functions – realize a large proportion of their profits in Luxembourg, even though it is landlocked.

    But if you linger in Luxembourg you won’t find any Amazon depot, and not even an Ikea retail outlet. Nor will you find an Australian bar for employees of AMP, the Macquarie Group, Lend Lease and the Goodman Group, companies which also report a significant presence in that country.

    Luxembourg is in the Australian news because those firms and many others, using various techniques of transfer pricing, declare part of their profits there, taking advantage of its low corporate tax rate.  In other words, they are engaged in tax minimisation, at the expense of our own public revenue.

    Whether such schemes are legal is a question for the courts. But by any reasonable criteria we are entitled to feel that there is something morally wrong about such corporate behaviour.

    The common corporate rationalization for such behaviour is that everyone else does it. It’s an excuse we probably tried as children, and learned that it didn’t have much traction. But before we jump in and condemn the corporations, let’s look at that rationalization in two situations we may encounter when we’re in a stadium watching a football game or the races.

    The first situation is where we may be tempted to shove our trash under the seat, observing that many others do likewise.

    The second is when we stand up during an exciting part of the event, presenting the person behind us with the choice of looking at our backside or standing up herself. Our rationalization is that the person in front of us stood up.

    Both decisions – discarding trash under the seat and standing up – incur costs on others. But in the case of the trash the personal cost of finding a bin is trivial. In the case of standing up, the personal cost of staying seated is significant. (Those who have studied game theory will recognize the latter as a “prisoners’ dilemma” situation.)

    To generalise the issue, there are many situations where we do the wrong thing because we are penalised for doing the right thing. These are morally difficult situations where reasonable people feel they have no choice but to act unreasonably.

    Those situations are often faced by corporations in competitive markets. The firm that doesn’t minimize tax, that doesn’t misrepresent the quality of its products, that doesn’t ruthlessly exploit its workforce, that doesn’t pollute the environment when its competitors are doing all these things may be sending itself out of business, or paving the way for an even more ruthless raider to take it over.

    In competitive situations it is not feasible or fair to leave sole responsibility for good behaviour with the corporations. The moral responsibility is a collective one, involving a recognized higher authority. Returning to the stadium situation, if there were an enforceable rule requiring us to stay seated in the stadium, we would all be better-off.

    In relation to corporate behaviour that authority is the government, which is where the prime responsibility lies. We elect governments to protect the weak against the strong, to protect the public interest against the sectional interest.

    Politicians, in defence of weak regulatory effort, may claim that in an interconnected world individual nation states are powerless, but there are vehicles of multilateral cooperative action, such as the World Trade Organization attending to the rules of trade. The hurdles to cooperation on taxation, labour standards, product safety and environmental protection (particularly the urgent issue of global warming) are not insurmountable.

    That doesn’t get corporations off the hook: they have political influence.  In that regard it was disappointing to hear a spokesperson for the Business Council of Australia suggesting that governments should not pursue international tax reform too vigorously.

    While the Australian travelling through Luxembourg may not see much sign of corporate activity, he will see excellent publicly-funded public transport, roads, schools and a health care system.

    The traveller, having been driving on French or German roads, may notice that Luxembourg has low gasoline taxes. Will he yield to the temptation and top up his rented car, or will he wait till he is over border and chip in to pay for the roads he has been using?

  • Ian McAuley. Is capitalism redeemable? Part 3: Why tax avoidance is bad for business

    One article of faith in the corporate sector is that low taxes are good for the economy – not only low corporate taxes but also low taxes in general.

    Echoing this sentiment, Treasurer Hockey and other spokespeople for the Government repeatedly promise to cut taxes. Even suggestions that the GST should be increased are set in the context of a tradeoff against income taxes, rather than any net increase in tax.

    For a start, let’s get one myth out of the way. Although repeated surveys reveal that most people believe Australia is a high-tax country, the reality is that among high-income OECD countries, Australia’s taxes (as a percentage of GDP) are very low: only the USA has lower taxes, and they have achieved this by running much higher budget deficits than in Australia.

    Another myth is that high taxes are bad for the economy.  Again, looking at high-income OECD countries, there is no evidence to support this proposition. There is no relationship between the level of taxes and economic growth or competitiveness. What does seem to be the important factor is not the size of government (as measured by taxes or spending), but the purposes to which public revenue those taxes are put. A competent “big government” contributes to economic performance in ways that an incompetent or corrupt “small government” does not.

    Also, research on competitiveness suggests that some countries try to entice investment with the offer of low taxes to compensate for deficiencies in other conditions, such as poor infrastructure, corruption, or an inadequately educated workforce.

    Businesses need publicly-funded services. They obviously need the networks of transport and telecommunications infrastructure. They need an educated and healthy workforce. They need a publicly-funded but independent legal system.

    Less obvious, but no less valid, is the way business benefits from safety nets, such as social security payments. If people are to take risks, such as investing in start-ups, or developing specialist skills, they need a safety net to fall back on when these investments fail.

    The economist Joseph Stiglitz points out that well-crafted taxes can actually improve a country’s economic performance. Tax regimes which give a leg-up to new ventures, which encourage re-training, or which shape depreciation provisions to encourage the uptake of new technologies, can all help improve a country’s economic adaptability. A carbon tax is an example not only of a payment for harm done to others (“negative externalities” in the language of economists), but also of an incentive for industries to adjust and modernise their production methods.

    Of course, established businesses have a voice in various industry associations, such as the Business Council of Australia and the Australian Chamber of Commerce and Industry, as well as numerous industry-specific lobbies. These organizations, quite understandably, represent the interests of established firms (just as trade unions tend to represent the interests of already-employed workers). These are the firms that have established their place in the market, have benefited from past investments in public goods, and which don’t necessarily welcome the entry of new firms into their industries. They certainly don’t welcome disruptions such as carbon pricing – disruptions which may force them to lift their game or to go out of business as new and more nimble competitors grab opportunities.

    Also when these lobby groups speak on tax matters, particularly personal income taxes, it is questionable whether they have in mind the interests of corporations (inanimate constructs with no interests other than those of their stakeholders) or the interests of generously-paid corporate managers.

    In recent times we have heard pathetic rationalisations as to why Australian companies should be able to use Luxembourg as a tax haven, and why any right-minded business executive should feel affronted by the suggestion his or firm should pay their share of taxes. Perhaps the “small government” line is just a conditioned, rather than a considered, response.

    In the next article we’ll look at the ethics of tax avoidance – it’s not as straightforward as it looks at first sight.

  • Ian  McAuley. Is capitalism redeemable? Part 2: Karl Marx’s and Henry Ford’s shared understanding

    Karl Marx was the intellectual father of communism, grandson of a rabbi. Henry Ford was the quintessential American industrialist, anti-union and anti-Semitic.

    They shared one insight, however. They both knew that capitalism could destroy its own markets. A plentiful supply of workers would keep wages low, to the benefit of industrialists. But those same industrialists needed markets for their products, and an underpaid workforce wasn’t going to be able to afford the products coming off the industrialists’ assembly lines.

    Marx saw this as the root of capitalism’s undoing. Ford saw it as a challenge.

    In 1914 Ford doubled workers’ pay, an act based not on generosity, but on well-calculated self-interest. He wanted a loyal and productive workforce, with a stake in the success of the enterprise.

    His move was a rejection of the nineteenth century idea that capitalism needed a pool of workers with nothing to offer but their brawn, facing starvation if they did not accept the industrialists’ meagre offerings. He realised that his assembly-line model of mass-production required a mass market of well-paid workers, and that it was in his interests if other industrialists did likewise. Unemployed workers, or workers working for miserable wages, weren’t going to be able buy T-Model Fords.

    That notion of production and consumption, where wages come back to the industrialists as demand for their products, became a central tenet of economics. A well-paid workforce is a basis for capitalism’s success.

    That understanding was built into the Australian understanding of capitalism from early on, codified in the 1907 Harvester Judgement, establishing the idea of a basic wage. Tariff protection was the mechanism which would allow for a recognition of the shared interests of industrialists and workers. The journalist Paul Kelly was to call it the “Australian Settlement”.

    So strong was the idea of the Australian economy depending on a well-paid workforce that in the 1950s and 1960s the Country Party, which one would expect to favour free trade, supported tariff protection. Jack McEwen, the Party’s leader, realised that farmers’ most reliable markets were prosperous Australian households.

    Tariff protection is well past its use-by date, but the idea that a fully-employed and well-paid workforce underpins a successful economy is no less valid now than it was in 1907 or 1914. Also, as Ford understood, when labour is cheap workers are not properly valued. A reasonably high minimum wage helps see that workers are employed productively. (Australians visiting the United States, where in some states minimum wages are as low as $5 an hour, are often surprised to find people in low-productivity jobs, pumping gasoline or walking the streets wearing sandwich-boards advertising local businesses.) Former US Labor Secretary Robert Reich, in his work Outrage, clearly attributes America’s recession and sluggish recovery, in large part, to its low-wage economic structure.

    In 2008, when the Global Financial Crisis hit Australia, the Rudd Government, acting on sound advice from Treasury, understood the urgency of maintaining domestic demand and stopping unemployment from rising too high. The cost was a rise in government debt to a modest level – modest both by Australian historical and by contemporary world standards. Those who misrepresent this cautious intervention as causing a “budget emergency” never mention the cost of inaction which would have seen much higher unemployment – people doing nothing instead of building school classrooms and halls, insulating houses and constructing highways, and maintaining their connection to the workforce. Nor do they mention the IMF’s praise for Australia’s policy response, and its more recent criticism of those countries that pursued austerity in response to the GFC. It’s a callous attitude, oblivious not only to the economic cost of unemployment, but also to the misery suffered by people excluded from participating in productive activity.

    Perhaps those same people who criticize the Rudd Government’s GFC response are locked into a nineteenth-century model of capitalism. Rather than striving for an economic structure  that can support a well-paid workforce, they envisage a future based on low wages. The present Government has taken a lead by reducing real wages for those on the public payroll, and its proposals on pensions, Newstart allowances and foreign workers are all designed to keep downward pressure on wages.

    It’s an agenda that meets with the approval of business lobbies, who, like Marx, still see the world through the lens of class conflict. They don’t seem to realize that they are undermining the capitalist system they claim to support.

    And they still see “low taxes” and “small government” as the path to private sector prosperity – the subject of the next contribution.

     

  • Ian McAuley. Is capitalism redeemable? Part 1: From markets to market societies

    Republican victories in the US midterm elections have given conservatives a psychological boost, just days before the twenty-fifth anniversary of the fall of the Berlin Wall. (For the record, the 1989 collapse of European communism was a victory for those Germans, Hungarians and others who risked all to stand up against tyranny, but it has been appropriated by American conservatives as a triumph of unfettered markets over government.)

    Those celebrating the midterm results may be overlooking other recent developments, such as the resounding defeat of the Swedish centre-right coalition which had tried to privatize health and education. Even the midterms were less than a decisive endorsement of the Republicans’ free market agenda: several states voted to lift minimum wages, and by a quirk in the US electoral system there was a concentration of central and southern states going to the polls. These are the poorer states where the agenda is far more complex than traditional “left/right” conflicts.

    Perhaps people have forgotten the Global Financial Crisis, or as it has come to be known, the Great Recession, when cowboy behaviour in financial markets would have crippled the world economy had governments not bailed them out.

    And in celebrating the fall of the Berlin Wall it is easy to overlook communism’s contribution to capitalism. In its role as a rival ideological suitor it kept capitalism on its best behaviour. As the Marxist historian Eric Hobsbawm wrote in his reflection on the twentieth century:

    It is one of the ironies of this strange century that the most lasting results of the October revolution, whose object was the global overthrow of capitalism, was to save its antagonist, both in war and peace – that is to say, by providing it with the incentive, fear, to reform itself after the Second World War, and, by establishing the popularity of economic planning, furnishing it with some of the procedures for its reform.

    With their supposed rival discredited, capitalism’s champions have been pushing boundaries aside. In some countries – the English-speaking countries in particular – it is becoming beyond question that the best government is small government, and that markets should be left to their own devices.

    The Bank of England Governor Mark Carney at a conference on “inclusive capitalism” earlier this year warned about such thoughtless exuberance:

    All ideologies are prone to extremes. Capitalism loses its sense of moderation when the belief in the power of the market enters the realm of faith.

    Seventy years ago, when economists and politicians were considering the postwar order, the Hungarian economist and philosopher Karl Polanyi warned about a coming “great transformation”, when the market would be unleashed from its previous constraints.

    Since markets had first emerged, Polanyi pointed out, they had been subject to society’s norms and moral codes, and generally limited in space (the market place) and time (market days and fairs). They had been constrained by notions of a “fair price” and rules against usury. He foresaw the postwar order, however, as one in which people would live in a “market society”, and the organising principles of society would be the those of the market.

    As it happened, the immediate postwar order saw a tamed version of capitalism. The Great Depression was fresh in people’s memories, and communism still had followers. (Menzies won the 1961 election on Communist Party preferences directed away from Labor.)

    But from the early 1980s, with the election of Thatcher and Reagan in in the USA, capitalism became more triumphant and more aggressive, and by now Polanyi’s prophecy has largely come to pass. We have let the market take over more of our physical and metaphorical space. With commercial television and the internet even our homes are subsumed into market space. Our roads are turned over to private companies to operate as tollways, and to make sure we can’t escape the market, public space is becoming cluttered with billboards. And, most seriously, we are increasingly allowing the profit motive to intrude into health and education – areas we once considered to be subject to the rules of social obligation.

    The Harvard philosopher Michael Sandel in his book What Money Can’t Buy: The Moral Limits of Markets points out some of the extensions of the idea that everything is on the market: some Californian prisoners can buy a cell upgrade; $500 000 will buy you a visa to migrate to the United States; you can sell space on your exposed skin for tattoos carrying advertising; a lobbyist can hire you to stand in a queue to meet a congressman. He goes on with a list that makes prostitution look positively respectable by comparison.

    Possibly because this transformation has been gradual, we have tended to underestimate its extent. And possibly because some of the earlier restrictions on markets were dysfunctional (such as the closure of all shops, even garages, for 45 hours from noon on Saturday), we have assumed that the alternative to poor regulation is no regulation.

    We have let the profit-driven private health insurance industry into health financing, using clumsy, expensive and ineffective mechanisms, such as “community rating” to try to restore some equity. We have let for-profit corporations enter what we now call the “market” for education. We talk about the “labour market”, as if people are tradeable commodities like iron ore or soy beans.

    The pushback, where it has occurred, has been insipid. Politicians, even those supposedly on the “left”, talk about policies “balancing” economic and social objectives, and businesspeople talk about “triple bottom line” reporting, as if there is some tradeoff between economic and social outcomes.

    But, Polanyi would ask, what is the point of economic activity if it does not contribute to social outcomes? We laugh at the apocryphal story of the officer who said during the Vietnam War “we had to destroy the village in order to save it”, but we let pass the equally silly idea that we must somehow compromise social objectives to achieve economic objectives.

    The market must be restored to its place, not above or beside society, but contained within society, subject to its norms.  The mixed economy, where markets, civil society and governments all do what they do best, has served us well in the past, but the fashionable “small government” ideology is leading us down a destructive path.

    Markets are capable of bringing great prosperity, but when left to their own devices can be destructive. Like an obese patient eating himself to death, capitalism needs to be protected from its own excesses.

    In following articles I will touch on capitalism’s self-destructive forces, and on what we must do, through the governments we elect, to protect it from those forces, because there is a danger that in response to its failures we will reject it altogether. The alternatives to properly-regulated capitalism are rather unattractive.

     

  • Ian McAuley. A Year Of Tony Abbott.

     The Abbott Government was elected one year and one day ago. Ian McAuley celebrates the countless successes that have slipped under the radar.

     A year into the Abbott Government’s term we can reflect on its impressive economic achievements.

    The highlight is the repeal of the carbon tax. It’s easy to stand up against tree huggers and left‑wing romantics who prat on about global warming, but it takes political courage to stand up against scientists and economists.

    A close second has to be repeal of the mining tax. Some people refuse to understand how Australia works. For 200 years, ever since Macarthur opened up the wool trade, we have been selling raw materials for cleverer people to make into useful products.

    For a few years after 1945 we thought we could be clever ourselves and make things like cars and airplanes – even Menzies got carried away by that delusion – but thankfully that era of unreality has passed.

    The world needs a quarry and we’re in the business of providing it.  Australia can be the Saudi Arabia of the twenty‑first century.

    The Government hasn’t scrapped the Renewable Energy Target, but, with a bit of help from Dick Warburton, it has created enough uncertainty to kill this crazy scheme. Joe Hockey is right when he says windmills are ugly – they distract one’s attention from advertising billboards on the roadside.

    More seriously, all this renewable energy eats into power companies’ profits.

    Some say that Australia shouldn’t break a long‑standing bipartisan commitment on the RET because to do so increases our sovereign risk, but don’t they realize that there has never been a sovereign risk as bad as six years of a Labor Government?

    Six years when foreign investment fell to the lowest on record! (The ABS statistics on investment erroneously show high foreign mining investment mining during Labor’s term – proof if ever you needed it that you can’t trust public servants).

    Australia is open for business, but not all businesses – certainly not businesses that undermine our world‑standard coal industry.

    The cuts to science are well‑directed: $75 million from the Australian Research Council; $120 million from the Defence Science and Technology Organisation; $8 million from the Institute of Marine Science; and $111 million from the CSIRO.

    We don’t need all these boffins. The CSIRO served us well in the past when it focussed on crop yields and sheep fertility; it could serve us well in the future if it concentrates on mining research.

    One of the Government’s least‑understood achievements is reversal of most of the Future of Financial Advice changes – Labor’s meddle in the financial market, which made it hard for financial advisers to reward themselves with ongoing commissions.

    These are proper, respectable, upstanding people, not like the unionised riff‑raff who work in car plants or in companies like SPC‑Ardmona. Their jobs need support. In fact, with re‑training, unemployed scientists could find useful work in the finance sector, or in the tax avoidance salary packaging industry.

    Then there is repeal of small business tax concessions. These concessions – instant asset write‑offs and offsetting future losses against past losses – were highly favourable to new companies and to companies expanding into new ventures.

    The trouble with encouraging such businesses is that they put competitive pressure on existing businesses to improve their performance or lower their prices. That’s just not fair.

    In any case the concessions were introduced by the Labor Government – a clear indication that they were not good for the country.

    An achievement which has passed almost unnoticed is the abolition of the Australian National Preventative Health Agency. ANPHA was one of those wacky Labor nanny‑state bureaucracies, all about getting people to lead healthier lifestyles in order to take pressure off health care resources.

    Had it survived it could have moved through the health sector like a wrecking ball, putting specialists out of work, and hitting the profits of pharmaceutical firms and private health insurers.

    Worse, their first campaign was on obesity – an obvious threat not only to the bariatric surgery industry (literally one of our promising growth industries) – but also to our successful fast food chains.

    Don’t they realize that corpulence is the new chic? Public money should not be in the hands of scrawny vegetarian do‑gooders.

    Getting rid of that fibre‑to‑the‑premises National Broadband Network idea was timely – nipped in the bud before it got its own momentum. It could have spelled the end of telegram boys and could have put the telex network out of business.

    Unfortunately some of the Coalition’s most far‑reaching reforms are having a hard time in the Senate.

    One of these, the proposed changes to higher education, are truly far‑reaching. Let’s face it, there are just too many over‑educated people in this country.

    We need a few mining engineers and technicians, but we can get them on 457 visas. Our economy needs more taxi drivers, nannies, cleaners and others to attend to the worthy classes.

    The Coalition is having a hard time putting to rest Labor’s highfalutin idea that Australia could become an internationally competitive industrialised country. It’s hard to put down a stupid idea like that.

    People just don’t understand the Coalition’s education and labour market policies. We need people who can read and write if they’re going to operate a mining truck or work in the market gardens of our northern food bowl. But take education too far and people become sceptical and start thinking critically.

    It’s dangerous in a democracy if people think too much for themselves. Our state education system should take people to the level that they can read Sydney’s Telegraph or Adelaide’s Advertiser, but no further.

    Our private schools can teach higher‑order skills, such as negotiating with a BMW dealer or getting a coal loader proposal past legislative roadblocks.

    Another set of blocked initiatives are the cuts to the Newstart allowance, the extension of retirement age to 70, and the reductions in the Age Pension.

    These are all designed to get people into the workforce. Some armchair economists say there aren’t enough jobs, particularly not enough unskilled jobs, but they don’t see the vision in the policy.

    It’s intended to put supply‑side pressure on the minimum wage. If Australia can get rid of the minimum wage we can have a labour market more like America’s – a tremendously successful economy to emulate.

    If only people would stop whingeing about unfairness in the Government’s Budget measures. There’s nothing wrong with giving a leg‑up to those who have done well.

    The rich wouldn’t be rich unless they were competent and deserving. The poor blow their money on things like rent, food and fuel: it’s the rich who invest and create jobs for the less deserving.

    That was the essence of President Reagan’s successful “supply side” economics, a policy which has generally been followed by both Democratic and Republican administrations. OK – there has been a little collateral damage, like the GFC, but give America’s business‑friendly policies time and it will all come good.

    About the only economic idea the Coalition has wrong is the plan to re‑introduce fuel tax indexation, sensibly dropped by the Howard Government in 2001.

    There’s plenty of oil in the world, and one of life’s few remaining pleasures in a country where the nanny state has encroached on almost all our freedoms is to hoon around in a hotted‑up V8 ute, topping it off with a drag race and a burnout.

    That’s the freedom our diggers fought for when they thrashed the Turks at Gallipoli. Thankfully the Greens have the good sense to block this proposal.

    And lest readers believe this contribution to be partisan, I should give credit to the Rudd‑Gillard Government for their demonstrated commitment to cutting taxes.

    Out of the most prosperous 18 OECD countries, only the USA has lower taxes than Australia. That’s some achievement.

    While high‑tax countries like Germany have wasted money on schools, universities, public transport, fast trains, and autobahns, we have wisely made sure the government hasn’t crowded out productive private sector investments, such as casinos and dinosaur parks.

    Perhaps the Coalition’s greatest economic achievement, however, has been to convince the electorate of its economic competence.

    The Essential opinion poll shows they are well ahead of Labor on the question “which party – Labor or Liberal – do you think is best when it comes to handling the economy well?”

    Labor scores only 23 per cent, while the Liberal Party scores 37 per cent.

    Not all credit for this score goes to the Government, however, for Labor still seems to be reluctant to engage with the community on economic policy.

    This article by Ian McAuley was published in New Matilda on Sunday, 7 September 2014.

  • Ian McAuley. Ignored Budget issues.

    ​Lobby groups and community organizations have provided their take on the Budget – some with a “what’s in it for me” approach, others with a more analytical line.  My contribution from the stands is to draw attention to a few aspects which aren’t getting a great deal of attention.

    1.  Pension indexation.

    I’m surprised that this hasn’t been the subject to outrage. Perhaps people don’t appreciate the difference between indexation to average earnings and indexation to consumer prices.

    As a rule of thumb, earnings rise about one percent faster than inflation. That’s why, over the last 50 years, our material living standards have more than doubled.

    Currently the two person age pension is held to around 42 per cent of average male earnings. If real earnings continue to grow as they have in the past, while pensions are held to CPI, in 30 years time the age pension will be only around 30 per cent of earnings. Someone now 40, contemplating retiring at age 67, and who holds only a small superannuation balance, has suddenly been told his or her retirement living standards will fall by almost a third from what was expected.

    The notion that relative standards don’t matter is bunkum. Social inclusion is about not being left behind.  If you’re old enough, or if you know someone who can recall the 1950s, ask yourself how you would enjoy what in the 1950s was a reasonable standard of living.

    2. Inequality.

    As so many are pointing out, this budget entrenches and extends inequality. Besides the moral aspect of inequality there is a problem well-understood by hard-nosed economists.

    In a few words, if people do not see that the rewards from economic activity are being shared fairly, they will reject the economic system. That rejection won’t be a 1917 revolution – we live in a democracy and people have to be driven to starvation levels before they storm the Winter Palace or the mansions of Mosman.  But the reaction won’t be a move to sensible public policy either, particularly when we have a Labor Party lacking an economic vision and  a Green Party which just cannot understand the needs of anyone living more than a train stop away from the CBD. The reaction will be a move to populist policies – protectionist, anti-enterprise, anti structural change (ironically leading to economic stagnation and therefore worsening inequality).

    3.  Wages.

    The government is determined to get more people into the labour force. Hockey says it’s about getting people into work, but it’s really about getting people into the labour force.  There’s a difference between being in the labour force and having a job – just ask someone who’s unemployed. This policy is on three fronts – making it much harder for young people and people with disabilities to get government benefits, restricting  family tax benefit  B (thereby encouraging women to re-enter the labour force), and incentives (carrots and sticks) for older people to stay in the labour force.

    Unless there is a corresponding demand for labour, the inevitable consequence of an increase in labour supply is a compression of wages.

    If that support for participation were accompanied by investment in skills and education, it would provide a sound path to future prosperity, because while there are few jobs for the unskilled, there is an economy-wide shortage of skilled labour, and as our receipts from coal and iron ore fall away, we will need to rely more on our human capital as a source of competitive strength. But the budget measures, in increasing the burden on young people seeking either trades or university qualifications, and its foreshadowed cuts to school funding, go in the opposite direction. The only compelling explanation for this policy combination is that it is a response to those businesses which see their interests in terms of suppressing wages rather than in innovating and improving productivity.

    4. Foreign aid

    By cutting foreign aid we’re reducing flows to poor foreigners, but in abolishing the mining tax we’re being generous to rich foreigners.

    5. Bulk billing

    The $7 medical co-payment isn’t just about $7. It’s also about removing any incentive for medical practitioners to use direct billing (disparagingly called “bulk billing”).  The attraction of direct billing is that it removes the cost of handling and accounting for cash transactions.  Even a dollar co-payment removes that attraction.

     

  • Ian McAuley. Pay for a GP visit.

    The Commission of Audit’s proposal to charge a $5 or $6 fee for “bulk-billed” GP services has little to commend it. But that doesn’t justify knee-jerk outrage from medical and consumer groups, or from the Labor Opposition, for there is no reason why Medicare should not incorporate fixed and limited co-payments.

    As it stands the proposal is poor public policy. It bears resemblance to the ideas in a discussion paper prepared by the Australian Centre for Health Research in October, proposing a $6 charge in order to bring price discipline into service use, but which contradicted itself by suggesting those co-payments could be funded through private health insurance (PHI).

    There is no explanation of principles, no system-wide view, and no consideration of the costs of handling 140 million small transactions each year.

    It’s simply a proposal to save $750 million in Commonwealth outlays over four years. Why four years? Because that’s the “forward estimates” period. Why Medicare services and not all health expenditure? Because that’s the budgetary line item. Why only fiscal outlays and not total health care costs? Because fiscal considerations have taken over from economic considerations, and if the cost falls on state governments through a move to outpatient services, that’s none of the Commonwealth’s responsibility. We have a fiscal system, not a health care system, and a political imperative around the budget bottom line.

    If we had a completely free health care system, the indignation of lobby groups and the Opposition would be understandable, because it would indeed be a wedge into our system.  But we already pay 19 percent of our health care outlays from our own pockets (about the OECD average of 20 percent).  We may have the luck to find a “bulk billing” GP, but if we have to fill a pharmaceutical prescription scrip we have to pay up to $36.10, or $5.90 if we hold a concession card, and if the suggested medication is not on the Pharmaceutical Benefits Scheme, it’s whatever the pharmacist charges. If we cannot find a bulk-billing GP (only 81 percent of GP services are bulk-billed, and they would be disproportionately for card holders), then we are paying on average $29 from our own pockets.

    We don’t know the rationale behind the proposal – this Government is not given to policy openness – but it’s probably driven by the tremendous growth in use of medical services over the years. In 1984-85 we used about 7 Medicare services per head, in 2002-03 we used 11, and in 2012-13 we used 15. Ageing explains some of this, but there has been growth in utilization across all age groups. While half the population uses 7 or fewer services a year, 10 percent of the population uses 31 or more services – more than one a fortnight – accounting for 44 percent of services.  (These figures relate to 2007-08, so they would understate the skew to heavy users. The Department no longer publishes this data.)

    Penny Wong portrayed the proposal as a disaster of Thatcheresque proportions, claiming that a $6 fee would be a barrier to access, ignoring the barriers imposed by long waits at bulk-bill clinics (many people would be spending more than $6 in parking fees), and the closed books at GP surgeries whose capacity has been absorbed by heavy users.

    Oppositions criticize – that’s their job. But they shouldn’t close off avenues for possible reform.  An opposition with a little nous could complain about the process issues mentioned above.  “Yes, we have a problem, and we need some rationalization of co-payments, but this is an inept and counterproductive way to go about it ……”.

    The political reaction is similar to what happened in 1991, when the Hawke Government proposed fixed co-payments.  The squeals from groups supposedly on the “left” forced the Government to a hasty retreat.  “Medicare” became implanted in the political and public mind as a “free” primary care service.  (Earlier, in 1987, the Coalition had abandoned their plans for people to spend $250 before receiving Medicare support, because of similar protests.)  In 1991 the most common protest was that Medicare would become a “safety net” rather than a universal free service.

    The gaping flaw in that protest is that we have never had a universal free health care service.

    In those campaigns of last century the “left” exhausted its political energy defending free Medicare services.  But what has developed, a resurgence of private health insurance (PHI), is far worse by any reasonable criteria of equity or allocative efficiency.  As for the protests about a safety net, a safety net would be far better than our inconsistent arrangements which leave people, particularly those with chronic illnesses, bearing open-ended liability for uncapped expenses.

    There are three ways to fund health care – direct consumer payments, a single national insurer, and competing private insurers. Two of these mechanisms, one a market mechanism, one a countervailing power mechanism, can keep health care costs in check and assure there is universal access to affordable services. The third mechanism, private health insurance, fails to achieve these outcomes and leads to price inflation and inequity. Its elimination should be the focus of consumer and Opposition energies.

    Why should any consumer group or a party aspiring to government rule out one of the two mechanisms that actually have a chance of working?

    Ian McAuley is a researcher and teacher in the fields of public sector management and public policy.

    For other posts on this subject, see ‘health’ category on right side of home page.

     

  • Ian McAuley- Picketty and the gap between rich and poor. Inequality of wealth is the problem rather than the inequality of income.

    The Observer/Guardian carried a recent story/review about Thomas Picketty’s address to the Institute of New Economic Thinking in Toronto. The story was headed “Capitalism simply isn’t working and here are the reasons why” The story draws also  on a recently published book by the French economist Picketty  “Capital in the 21st Century” The newspaper story  asserted “You have to go back to the 1970’s and Milton Friedman for a single economist to have such an impact (as Picketty)”

    The Financial Times labelled Picketty a “rock star economist”. Paul Krugman in the New York Review of Books described Picketty’s book as “awesome” and that it was transforming economic discourse. “We will never talk about wealth and inequality the same way we used to” he said.

    In this blog Ian McAuley outlines Picketty’s thesis that an apparent small gap between the return on capital and the rate of growth can in the long run have powerful and destabilising effects on the structure and dynamics of social inequality.   John Menadue

    Like Marx, Picketty recognizes the consequences of an excessive concentration of wealth – loss of markets, eventual diminution of profit, and social conflict leading to revolution.  His prescriptions, however, for a progressive tax on wealth, are within the field of orthodox capitalist economics.

    He presents convincing evidence that the compression in incomes in the mid-20th century was a unique event. The natural tendency of market capitalism is for concentration of wealth, particularly when there is low economic growth and a high return on capital.  (High growth reduces the relative power of established wealth.)  A tax on wealth has immediate and minor redistributive benefits, but that’s not its purpose, which is to dampen the positive feedback loop of concentration of capital, because a tax on capital reduces its effective return and therefore weakens the positive (self-reinforcing) feedback of an exponential concentration of wealth.

    Picketty puts the unique compression in the mid-20th century down to the events of 1914 to 1950 – an intermittent but destructive war, a depression, and post-war inflation, which combined to wipe out a lot of physical and financial wealth in both the victorious and defeated countries.  The expanding inequalities we are now seeing is simply a return to the natural dynamics of market capitalism.

    His fundamental thesis, I think, does a lot to explain Australia’s history.  We hardly get a mention, but he does point out how the rapid economic growth of the New World (mainly the USA in his examples) made for egalitarianism.  I would like to see his thought on why the same high growth did not make for egalitarianism in Argentina in 100 years ago, or in the Middle East 40 years ago.

    While I find his analysis convincing, I think he attributes too much to war, depression and inflation wiping out wealth as the sole causes of the compression of incomes.  I had the good fortune to be at Harvard when the last of Roosevelt’s liberals were still around – Ray Vernon, Tom Schelling, and JK Galbraith – and they saw the post-war liberalism as a result of deliberate policy, played out domestically in the New Deal and internationally in the Bretton Woods arrangements.  Another strong view, certainly influential to the Hawke and Keating Governments, was that the post-war rise of Germany and Japan, while helped by US anti-Soviet policy, was also helped by the war’s destruction of “distributive coalitions” – groups of rent-seekers blocking economic modernization.

    Picketty is dismissive of human capital theory.  He doesn’t deny its existence (as Marx and Ricardo did), but he thinks its role is overstated.  While he celebrates mass education, he does point out that it has not done much to help distribution – we have simply all moved up a notch or two, and there is something of an arms race at the top.  But he does present strong evidence that high university fees (particularly in the USA) work against intergenerational mobility.

    I find his single prescription somewhat limiting. War, depression and inflation do wipe out wealth, but so too do other disruptions re-allocate wealth.  Galbraith, for example, saw the Australian gold rush as a great social re-distributor (not a leveller, however). New technologies do the same.  In this regard I find the policies of the current Australian Government, in opposing the disruptive technologies of the NBN and renewable energy, as an attempt to freeze an industrial structure to preserve and strengthen the privileges of existing wealth-holders.  Also their policies on superannuation and tax are highly regressive at the top end, and we have a migration program which gives almost free entry to anyone with enough money, regardless of the means by which it was accumulated.  Whether this policy is crony capitalism or a misguided application of Reagan’s “supply-side” economics, the consequences are the same – there is a concentration of wealth and an erosion of meritocracy.

    Picketty’s greatest contribution is in looking beyond income distribution as an indicator of inequality.  (I, for one, have been very critical of the Australian “left” for its narrow focus on income while overlooking wealth.) He looks at the sources of income, and distinguishes between income from labour (which can go up to very high levels of course) and income from wealth.  On the way through he looks at the salaries of “supermanagers”, and points out (as many other researchers do) that their salaries have nothing to do with contribution and that they essentially set their own salaries in a self-referential process.

    But his greatest concern is with the top one percent with incomes greater than $350,000 and whose income comes from wealth.  It is at this level, particularly in the USA, where the bulk of inequality arises – they are taking a huge proportion of the proceeds of economic growth, and damaging any sense of legitimacy in the economic system.  In fact, he points out, the very rich enjoy a certain economy of scale – their return on investment is much higher than is available to lesser mortals with only five or six figure amounts to invest.  Hence their positive feedback cycle is strengthened.  He also points out that the moderately well-off, “petite rentiers”, do very well, while a large proportion of the population has no wealth or negligible wealth.  We, the petite rentiers, should pay more tax – in fact redistribution from the top 20 percentile will be more effective in terms of immediate redistribution than simply taxing the very rich – but it’s hard to convince us when we see the very rich getting off so lightly.

    His main concern is with the very rich, who are on the way to establish an economic and social order, an oligarchy with inherited privilege, similar to that which existed in Europe in the early nineteenth century – an order which Marx correctly saw as unsustainable.  He does not speculate much on our political reaction – perhaps, rather than a revolution, it will be a retreat to protectionism and dirigiste politics.

    Reading his book I have come to ask, in relation to the 2008 crisis, “what would Keating have done?”  Keating, the fellow who talked about the recession “we had to have”.  Perhaps we have been too generous with counter-cyclical levers, thereby accumulating moral hazard in economic systems, while spending a lot of our fiscal ammunition.  To reconstruct a right wing metaphor, a hurricane damages all boats, but the damage to a 4 meter tinnie is easier to rectify than the damage to a 30 meter cabin cruiser.  Can we achieve a destructive re-distribution without the sort of damage that occurred in the 1930s?  My view, taken in part from my time working for the Hawke-Keating Government, and in part from the teaching of Ron Heifetz, is that a task of government is to manage disruption – to steer a policy path between complacency where rent-seekers throttle economic progress as seems likely under Abbott and distress, where the pace of change leads to backlash as occurred under Whitlam..

    It’s a rich work of 700 pages.  If you do buy or borrow it, I suggest you read the first two chapters and the four chapters in part 4.   But be patient. The book is sold out almost everywhere.

     

     

     

  • Ian McAuley. Inequality in Australia.

    A Financial Review article on March 24 claimed “Inequality in Australia has not deteriorated over the last 25 years, according to Reserve Bank of Australia research that undermines claims the gap between rich and poor has worsened”

    The essence of the argument is that while, between 1993-94 and 2009-10, the distribution of income has become more unequal, we have all increased our consumption – what we spend on food, transport, housing health care, recreation etc – by the same amount. Therefore we aren’t becoming more unequal.

    The argument is superficially credible, but it’s a sloppy piece of journalism.

    For a start, the relevant Reserve Bank article, “The Distribution of Household Spending in Australia” in the latest Bulletin, is a carefully qualified study, and in relation to the change in consumption over the 16 years (not 25 years) to 2009-10 it concludes:

    “The top 10 per cent of spenders have experienced slightly faster growth in real consumption than other households over recent decades, though the difference in growth is less pronounced than in the case of income.”

    That is, even when consumption is used as a measure of wellbeing, there has been a rise in inequality. That is easily confirmed by comparing the 1993-94 and 2009-10 ABS Household Expenditure Surveys, which shows, in real (CPI-adjusted) terms, that the highest income fifth of households increased their consumption by 41 per cent, the middle fifth increased theirs by 32 percent, and the lowest fifth by only 19 per cent.

    Second, as the RBA article points out, “consumption is not a complete measure of wellbeing”. One reason is that household expenditure statistics cover only what we spend from our own pockets, and do not include our enjoyment of publicly-provided services such as health care and education. If we spend more on these services because we believe, rightly or wrongly, that the quality or scope of publicly-provided services has deteriorated, then we can hardly be said to be better-off.

    For example, between 1994 and 2010, the proportion of Australians with private health insurance rose from  36 per cent to 45 per cent, and between 1996 and 2010 the proportion of students in non-government schools increased from 29 per cent to 34 per cent. Household expenditure data shows that for the households in the middle income band 14 percent of their increase in expenditure was for education and health care, but for the highest income households health and education took only 11 per cent of their increased expenditure. The well-off already had private health insurance and children in private schools.

    Third, while most economists agree that over the long term consumption is a reasonably good measure of material wellbeing, the compelling reality is that it has to be financed. Therefore if consumption and spending diverge for a period, it must be financed by borrowing or running down saving.

    Robert Reich and other American economists point out that in the USA, while real incomes for all but the rich have stagnated or fallen for many years, people have maintained or improved their living standards by going further into debt. Australia’s situation is  similar but a little more complex. Around 2002 we stopped running down our savings and started saving again.  Our officially-measured savings rates in 1994 and 2010 were much the same, at around 10 percent of income. But those figures do not show the increasing tendency over that period to draw on increasing equity in our houses through financial innovations such as mortgage re-draw facilities. Our house price boom allowed us to use our houses as ATMs, a phenomenon eloquently described by a young man caught by a roving microphone on the evening of Howard’s 2004 election victory, who said.  “Of course I voted for Johnny Howard. When he was elected my house was worth only $200 000; it’s now worth $500 000.  Why wouldn’t I vote for someone who’s made me $300 000 richer?”

    That debt, financed by illusory wealth, eventually catches up with us. Indeed, in recent years (since 2009-10) it has been manifest in widespread complaints about the cost-of-living.  Work by Tim Soutphommasane of Per-Capita and research I have done for The Centre for Policy Development shows that although incomes have been rising faster than prices, Australians generally believe it is getting harder to make ends meet.  The most compelling explanation for this apparently contradictory finding is that we are at last finding that we have been living beyond our means.

     

  • Ian McAuley, Jennifer Doggett and John Menadue. The case for government funding of healthcare.

    In our joint submission to the Senate Inquiry into the Abbott Government’s Commission of Audit, we drew attention to the fact that by international comparison, Australia is a low-taxed country. Furthermore, the trend in Commonwealth expenditures has been downwards since the mid-1980s. Our full submission can be found on my website (click above).

    In that submission we made the case for government funding of healthcare as a superior option. Extracts from this submission on healthcare follow.

    The flaw in the “unaffordable” argument (made by the Abbott Government in respect of health care) is that even if the government withdraws from funding, we still have to pay for health care, and all the evidence from other countries’ experience shows that if the government abandons responsibility for funding health care, we will end up spending a greater amount for the same or a lower quality of care.

    In all probability Australians want to share the bulk of our health costs with one another. Across all OECD countries people pay only about 20 percent of health costs from their own pockets – that is through payments at time of service delivery and in amounts not covered by insurance. In Australia, at 19 percent, we are just below that average. In developed countries most health care costs are paid through insurance – either a government insurer or competing private insurers.

    Even if, as is likely, we accept a need to pay more from our own pockets, we will continue to seek insurance cover for large outlays. We may be willing to take our chances in many aspects of life, but when it comes to health care we have little to guide us about our future needs.

    Policies which shift funding responsibility from government programs, such as Australia’s Medicare, on to private health insurance (PHI) have a short-term attraction to a government concerned with containing fiscal outlays. But even the best designed policies to entice or force people into PHI are costly and inequitable.

    For a start PHI involves high administrative costs. In Australia only 84 cents in every dollar paid to PHI is returned in terms of payment for services. The rest goes to administrative costs and corporate profits. By contrast, Medicare has administrative costs of about 5 percent, and another 1 percent in Tax Office collection costs. That means that Medicare returns 94 cents in the dollar as health services – a ten cent difference in comparison with PHI.35 The USA, highly dependent on PHI, provides the standout example of administrative overheads. Only 69 cents in every dollar Americans spend on health care comes back in terms of services.36

    Second, and more important, when there are competing private health insurers they have little ability to control the prices demanded by service providers. If one insurer tries to bargain hard with hospitals to keep prices down, the hospitals will simply choose to do business with another insurer. The insurers have about the same power in the market as consumers do when they are dealing with powerful oligopolies such as banks. By contrast a single national insurer, usually a government agency, has the market power to put some discipline into prices and utilization.

    Evidence from international experience bears out these points. When countries rely on PHI to fund health care they pay more for it, without necessarily getting any better health outcomes. To quote at length from the OECD:

    Private health insurance markets have resulted in increased overall health costs in several OECD countries. First, by bringing more financial resources into the health care system, it raises total health expenditure. Second, cost-control measures – such as global budgets, price regulation and capacity controls – have been applied to the public sector in virtually all OECD countries. Conversely, the private financing sector in virtually all OECD countries, except the Netherlands, has not been subject to such centralised, governmental cost controls. This has resulted in less tight control over activities and prices in the private sector. Third, private insurers in most OECD countries do not have the same bargaining powers over the price and quantity of care provided to insurees as public systems do, although within concentrated PHI markets insurers can exert stronger pressure, as in the case of Ireland. Payment options such as global budgets that have helped public systems to contain costs in several countries are hard for private insurers to negotiate – or may not be options at all. PHI carriers have generally exerted little leverage over costs – as they might if they engaged in more selective contracting.

    In the United States, private insurance has been less effective than the public Medicare programme in controlling costs. Growth in per enrolee payments for a comparable set of services in private health insurance outweighed Medicare over the period 1970-2000, reflecting the higher payment rates to providers paid by private insurers. While “managed care” delivered some cost control in the 1990s, PHI premiums have resumed double-digit growth since 2001.

    Cost control is also more problematic to achieve in systems with multiple competing payers, including most PHI markets. Not only their purchasing position relative to providers is weaker, but also shifting cost onto other purchasers, whether public systems or other private insurers, is a more attractive strategy for insurers than restraining cost.

    PHI also risks increasing public expenditure on health. This is because, while PHI may serve as an independent source of health funding, its effects are rarely entirely disconnected from the publicly funded system.

    Subsidies to private health cover, as in Ireland, Australia and the United States, increase public sector expenditure and have an opportunity cost, sometimes increasing overall utilisation levels as well. Even in the absence of direct or indirect subsidies, PHI has given rise to higher public cost in several countries with a significant PHI market because of the way it interacts with the public system.37

    This is borne out empirically by data from the OECD….. The message is clear: the more governments rely on PHI to fund health care the more is the total cost of health care….

    As with administrative costs, the stand-out case is the USA, where health care costs are now almost 18 percent of GDP. (Even when the USA is excluded there is a positive relationship, and it is too big to be considered a statistical aberration.) As a consequence of America’s longstanding dependence on PHI – a dependence which could intensify with Obamacare – its government programs, Medicare and Medicaid, now cost around 8.5 percent of GDP. This is more than the governments of Sweden, Norway and Iceland pay for their comprehensive public insurance programs, and more than the governments of UK and Canada pay for their near-universal public programs.

    In an attempt to avoid universal public funding, the USA has developed a system which now incurs higher fiscal costs than they would have incurred had they pursued a single insurer option. That is because the government Medicare and Medicaid programs have become passive price-takers in a market where prices are set by powerful service providers. Even here in Australia, because of the generous way we subsidize PHI, those subsidies are costing more than they are saving government outlays. Reducing subsidies for PHI would result in some reduction in membership and therefore more government expenditure on health care, but there would be significant net public savings.38 The Grattan Institute, for example, estimates that even with offsetting compensation to public hospitals removing the PHI rebate could save public budgets $3.5 billion a year.39 …

    Simply ending subsidies for PHI is only part of necessary funding reform. The whole way health care is funded needs to be reviewed – a task well beyond a body such as the Commission of Audit. As a case in point, there needs to be rationalization of co-payments, so that they can serve to bring the benefits of market discipline into health care, rather than encouraging patients to seek “free” services to avoid co-payments. Our present division between “free” services, covered by Medicare or PHI, and paid service, is haphazard.40 Examples abound: public hospitals are “free” while pharmaceuticals incur co-payments; it can be cheaper for a consumer to leave tooth decay until it needs treatment in hospital than to seek paid preventative dental care early on; PHI and Medicare often cap the number of paid services in areas such as physiotherapy, leaving the patient with open-ended risk. Besides savings from scrapping the PHI rebate, the Grattan Institute estimates there are additional savings of around $6 billion a year to be found without comprising the quality of care.41

    The national insurer, of course, needs to use its purchasing power to contain costs. In this regard the Commonwealth, once highly effective in negotiating low pharmaceutical prices, as a result of a series of concessions to pharmaceutical firms is now paying more than many other countries for pharmaceuticals. Government purchasing and price negotiation are areas with potential savings.

    Replacing PHI with a strong, single national insurer removes incentives for over-servicing and over-pricing, but there are savings in private and public costs if there is less need for health care in the first place, through investing in preventive services.42 Preventive health measures, such as anti-smoking initiatives, deliver high returns, in terms of long-term health outcomes. However, Australia currently allocates less than two percent of the total health budget to preventive health.43 Investing in early childhood health and education is also a proven and cost-effective strategy to prevent the development of a range of lifelong social and health problems, but Australia also falls short in this area:  almost one-quarter of children are developmentally vulnerable at school entry with Aboriginal and Torres Strait Islander children and children in socioeconomic disadvantaged areas most likely to fare worse across a broad range of health and social indicators.44 Failure to fund preventive, public health and early childhood programs adequately represents a wasted opportunity to direct resources to achieve maximum benefit. These are functions which, if abandoned by government, will not be performed by the private sector.

    (Our basic case is that by shifting health expenditures from the public to the private sector will cost more. It will increase total costs)

     


    35.          Figures taken from John Menadue and Ian McAuley Private Health Insurance: High in cost and low in equity. Centre for Policy Development 2012.

    36.          Henry Minzberg “Managing the myths of health care” World Hospitals and Health Services Vol 48 # 3, 2012.

    37.          Francesca Colombo and Nicole Tapay “Private health insurance in OECD countries: the benefits and costs for Individuals and health systems” OECD Health Working Papers No. 15, 2006.

    38.          Terence Cheng Does reducing rebates for private health insurance generate cost savings  Institute of Applied Economic and Social Research, The University of Melbourne, July 2013.

    39.          John Daley Balancing Budgets: Tough choices we need Grattan Institute 2013.

    40.          See, for example Jennifer Doggett “Out of Pocket: rethinking health copayments” Centre for Policy Development Occasional Paper 2009.

    41.          John Daley, Grattan Institute op. cit.

    42.          World Health Organisation. Key components of a well-functioning health system. May 2010.

    43.          Australian Institute of Health and Welfare Health Expenditure Australia 2011-2012.

    44.          Australian Institute of Health and Welfare A picture of Australia’s Children 2012.

  • Ian McAuley. Cutting waste and costs in health.

    There are three areas of saving to be made in health care – real savings rather than movement of costs from public budgets to consumers.

    There can be savings in technical efficiency — savings any engineer or cost-conscious manager seeks in a workplace. A strong example is making better use of information technology.

    There can be savings in purchasing.  Australia used to negotiate some of the world’s lowest pharmaceutical prices.  We now pay high prices.

    My concern is the third area – improvements in allocative efficiency.  That is, ensuring scarce resources are allocated where they will result in greatest benefit.

    The priority should be to remove private health insurance as a source of funding.  Administratively, it does at high cost what the Australian Tax Office and Medicare do much better.

    Its big costs are in terms of allocative inefficiency, for it simply re-shuffles queues, allocating resources to those with subsidized insurance, pushing others to the back of the line.

    Getting rid of private health insurance would save around $1.5 billion a year in administrative costs alone. The Grattan Institute estimates net savings of $3.5 billion a year.

    Other savings in allocative efficiency can be found in making better use of nurses, more careful prescribing of pharmaceuticals, and rationalization of co-payments so that people are not directed to “free” services in preference to more effective and lower-cost services involving upfront fees.  And, of course, there are big savings in all-of-government initiatives to encourage good health.

    Ian McAuley is a teacher and researcher in the fields of  public sector management and public policy.

  • Repost: Health care and the budget deficit in the US. Joint blog John Menadue and Ian McAuley

    Repost for holiday reading.

    The political obstacles to these two major problems for President Obama are real and confusing. But the arithmetic is quite clear.

    If the US had a health service like those in countries without heavy reliance on private insurance, such as Australia, it could solve its budget deficit problem.

    Let us explain the arithmetic. US health care expenditure is already 18% of GDP – and on present trends will reach over 20% of GDP by 2020.  It is by far the highest in the world: most developed countries contain their health care expenditure at around 10% of GDP.  (Australia’s health care expenditure is 9% of GDP, of which about 6% is spent by our governments.)

    Of that 18% of GDP in the US, half is spent by government, while almost all of the other half is through private insurance. In rough figures, the USA is now committing as much public expenditure on health care as those countries – UK and the Nordic countries – which for the same public expenditure have comprehensive government-funded single payer systems and with only a marginal role for private insurance.

    The contrast between the experience of America and those countries with single government payers demonstrates clearly how private health insurance causes health care costs to run out of control, and eventually forces up public expenditure as the government is forced to pay prices set in a distorted market where private insurers pass through costs set by powerful providers, called by some the “health care complex” – a reference to the similarly insatiable “military-industrial complex”.

    Imagine if Obama, who has often referred to the “public option”, could convince Congress to put good fiscal management and the provision of affordable health care ahead of the interests of private health insurers and health care corporations.

    The government could simply take over all health insurance and use its strong purchasing power to control prices and usage, as in those countries with single payer systems. That would bring the total cost of health care down 9% of GDP, in line with those countries, and would cost no more in public expenditure.

    The other 9%, presently passing through private health insurance, would be collected as public revenue – in other words a tax increase. Americans would be trading health insurance outlays for a tax increase. They would be substituting an official tax for what is essentially a privatized tax, for most Americans, who are fortunate enough to have good jobs, have little personal choice about health insurance, that choice being made by their employers who essentially deduct it from their pay just as they deduct official tax payments to the Internal Revenue Service.

    With another 9% of GDP in taxation revenue there would be a turnaround in the federal budget, which is presently running a deficit of 7% of GDP. The 2% surplus could be directed to paying down debt or investing in much-needed public investment.

    Are there flaws in our argument?  We have ignored the political hurdles, the difficulty of rolling back entrenched corporate privilege, and the irrational way in which people have become blind to the cost of private health insurance, which trades on the notion that because it is “private” it has some intrinsic virtue.

    It’s a lesson for those in Australia who naively believe that shifting health care expenditure off-budget will save public expenditure.  Beware any in Australia who suggest we go down the route of expanded private health insurance. In the short term there may be some budgetary savings and possibly some tax reductions, but those tax reductions would be more than cancelled by health insurance premiums – we would be paying “taxes” to Bupa, Medibank Private and the other private insurers. In the long term, as is happening in the USA, even public expenditures would rise – we would be paying more taxes to the ATO and to the private insurers. The US disaster in health care is a warning of what not to do.

    John Menadue and guest blogger, Ian McAuley.