Category: Economy

What a difference a day makes to so many things including innovation. Immediately prior to the replacement of Tony Abbott by Malcolm Turnbull the Commonwealth Government barely had innovation, to say nothing of digital disruption and start ups, on its radar. Its major achievements in the area of funding for innovation were mostly notable for cutting and rebranding existing programs.

To be sure they had responded to worthy ideas from the Business Council of Australia to identify and support five industry growth centres but the level of support – $188.5 million over 4 years – is modest and expectations about their impact, outside government, is limited.

The Labor Party had gradually been building up a series of initiatives aimed at strengthening Australia’s innovation capacity but these were gaining very limited traction in the broader economic debate.

In one giant bound the new Prime Minister has put innovation, start ups and the great opportunities for both growth and jobs offered by technology disruption and the digital revolution in particular centre stage.

He has matched his rhetoric by placing Christopher Pyne in the Ministry of Industry, Innovation and Science and making Wyatt Roy, who was not even born when the internet was let loose, Associate Minister for Innovation.

The amazing thing about the change in the priority of innovation is not that it has happened at all but that it has happened so relatively late compared to other developed and emerging economies. We had better hope that there are advantages in being a fast-ish follower.

There is rather a lot to digest in the brave new world that has been opened up. My purpose is to attempt to throw some light on the now fashionable term of disruption, whether digital, technological or innovative and the most important disruptive technologies. To briefly review what earlier adopters, including China, have been doing and to point to areas where Australia might focus in a bipartisan way.

Disruptive Technology/Innovation

The literature on innovation tends to identify three different kinds of innovation, all of which have somewhat different implications for competition, creative destruction and supporting policy instruments.

The first two kinds which have until relatively recent times dominated discussion of innovation tend to be those which do not radically alter existing markets and value networks. The simplest kind might be considered to be evolutionary/continuous innovation which improves existing products and markets in broadly expected ways. They add value to customers and companies but don’t alter the nature of things.

The next step up the innovation food chain is radical/discontinuous innovation which tends to come in unexpected ways and have a large impact on the value proposition for customers and companies. The introduction of the first automobiles can be seen as an example of such innovation, but initially the impact of the new technology was not large and far reaching.

The third step in innovation is disruptive innovation, popularized by the management writer Clayton M Christensen, which creates a new market and value networks by replacing an existing market and value networks. The mass production system associated with Henry Ford is a powerful example. While new technology was involved in mass production as opposed to craft production, the radical change was the new business model introduced by Ford and the thoroughgoing change it made to transportation.

An example of disruptive innovation which is in the news at the moment is that associated with the name of Uber. If the Uber model is allowed by regulators to proceed, it will radically alter the on demand transport market and force wide ranging and painful change in the traditional taxi business.

Disruptive innovation will change both markets and value networks. For a country which is only a marginal player in some important manufacturing and services markets, it offers the opportunity to carve out serious positions in newly emerging value networks and create the jobs of the future. Perhaps it is this characteristic which has captured the imagination of policy makers.

Where is technology disruption taking place?

Three directors of the McKinsey Global Institute have recently published an important book on this subject with the title “No Ordinary Disruption: The Four Global Forces Breaking All The Trends “ by Richard Dobbs, James Manyika and Jonathon Woetzel. The four disruptive forces are:

The age of urbanization.

Accelerating technological change.

Responding to the challenges of an ageing world.

Greater global connections.

The 12 disruptive technologies they identify which will drive acceleration technological change are:

Changing the building blocks of everything (Next generation genomics and Advanced materials;

Rethinking of energy comes of age (Energy storage, Advanced oil and gas exploration and recovery and Renewable energy);

Machines working for us (Advanced robotics, Autonomous and near-autonomous vehicles and 3-D printing); and

IT and how we use it (Mobile internet, Internet of things, Cloud technology and Automation of knowledge work).

All these areas are likely to be important and offer opportunities for agile and capable Australian companies. At various times these technology disrupters have all received some attention in the media.

But the reality is that in the field of start-ups a lot of the attention has been given to IT and how we use it. Seek is an often quoted example of Australian success and Uber is pointed to as a harbinger of the sharing economy. There is no doubt that IT in its various forms is important but it is not the only game in town and in developing policy responses to build Australia’s innovation system it is important a broad view is taken rather than putting all our eggs in one basket.

Britain in its 8 great technologies program announced a couple of years ago has committed 600 million pounds to big data, space, robotics and autonomous systems, synthetic biology, regenerative medicine, agri-science , advanced materials and energy.

The China Challenge

China has already been a major source of disruption in global markets with its command of manufacturing production in a range of industries. Optimists in the west see the Chinese challenge stopping at the stage of labour intensive products and me-too products. However, the emergence of companies such as Haier in white goods, Geely Motors in automotive, Huawei in telecommunications and Hengan International in consumer products strongly suggest a different and more challenging reality. These companies are disrupting global markets and building new value networks.

The Chinese government realizes that the future for China lies in innovation and in 2006 launched a 15 year plan to raise the share of R&D in GDP to 2.5 per cent.

Reflecting the importance of STEM skills Edward Tse in his recent book China’s Disruptors makes the point that of 200,000 doctorates awarded around the world in science and engineering in 2010 China was second in the world with 31,000 compared to 33,000 in the USA.

In IT and e-commerce a number of Chinese companies have already come on to the global radar and have the potential to rival the big name US companies. Companies like Baidu, Alibaba, Tencent and Xiaomi are ultra entrepreneurial, large and growing quickly. They all have global aspirations and in time will look like and act like US and European multinationals with their own global value networks. Some of these companies are already significant investors in start-ups offshore in places like Israel and have R&D centres offshore.

The next Chinese challenge is well and truly on the radar of governments and industry in the US, Asia and Europe. Innovation policies are being developed partly with an eye to the challenge.

What are other countries doing to support innovation?

Most developed countries have innovation policies of one kind or another but two small countries which have received a good deal of attention are Israel and Singapore.

Israel which spends 4.5 per cent of its GDP on R&D has through its Office of the Chief Scientist pursued a range of policies aimed at boosting innovation. Special emphasis has been placed on creating a very positive environment for start ups. Notable in this regard is the Israeli Incubator Program which supports 20 incubators throughout Israel. Special early stage funding has been provided to support the development and growth of start ups. This can involve the provision of $7 for every $1 invested by private sector entities.

In 2014 start up exists are estimated to have been valued at $15 billion. While a lot of venture capital has come from US sources, in recent years Chinese investors have become important.

Singapore through its National Framework for Research, Innovation and Enterprise has learnt from the Israeli approach and amongst other things has put in place a Technology Incubation Scheme. Under this scheme the government co-invests up to 85 per cent of the costs of a start up.

Special attention is being given to the digital economy. The Infocomm Development Authority which has a mission to support the development of the IT and telecommunications sector provides Sing$ 200 million to support start ups. They plan to support 500 start ups over the next five years.

Apart from funding start ups, both Israel and Singapore are also focusing on building up their talent pools to support the digital economy.

The Conservative Government in the UK and its immediate coalition predecessor have placed a high priority on policies to support innovation. A key agency is the Technology Strategy Board, now renamed Innovate UK, which has a portfolio of programs including Smart Grants, Catapult Centres and the Small Business Research Institute. The Catapult Centres launched in 2013 are designed to convert good ideas into commercial results. So far 9 have been established.

The UK Treasurer in his 2015 Budget Speech argued that one of the aims of the British Government was to improve economic growth by making Britain:

“The best place in the world to start, invest in and grow a business, including through a package of measures t help unlock the potential of the sharing economy.”

As noted earlier, the UK government has identified 8 great technologies. These go well beyond the digital economy.

Some pointers for Australia

We now have a great opportunity to develop an effective and hopefully bipartisan innovation policy worthy of the name in comparison to what other developed countries are doing and Australia’s special needs and potential.

We are not starting from ground zero. Some of the key elements of such a policy are in place:

The importance of STEM skills has been recognized notably by the Chief Scientist and action aimed at building the talent pool has started. The Opposition has promised a series of STEM initiatives.

Five industry innovation growth centres are being established and some funding has been provided albeit modest in comparison with the UK Catapult program which seems to have been the model for the centres.

The CRC Program following the Miles Review is being continued.

But a strong case can be made that given the challenge and the size of the opportunities available that a much more strategic and rather better funded set of integrated instruments are urgently needed.

As we have seen, Israel, Singapore and the UK innovation policies are seen as playing a very significant role in future growth, business development and jobs. These policies all place a heavy emphasis on building the STEM talent pool. As well, they devote very substantial resources to the incubation of start ups and the financing of early stage businesses. Australia by comparison has hardly begun to move the needle. The Opposition’s promised $500 million Smart Investment Fund to co-invest in early stage companies is one way forward.

Innovation and the incentives to create and build businesses ought to be essential elements of tax reform. Perhaps using the UK aim of being the best place in the world to start, invest in and grow a business as a starting point for Australia.

In terms of scope, while the opportunities associated with digital disruption are no doubt large and perceived to be so in other jurisdictions putting great weight on innovation, innovation policy should not ignore the also large opportunities that will come from the technological disruptions identified by the McKinsey study noted earlier.

A global perspective is needed to fit Australian companies into emerging global value networks. Given our location in Asia Pacific the opportunities offered by building connections to the leading Chinese IT and manufacturing companies are likely to be considerable. The Australia China Free Trade Agreement ought to be part of creating the right environment for these connections to be built.

Finally, a community effort is required involving not just the Commonwealth and State Governments but also business, universities and the research entities such as the CSIRO and the medical research institutes. The conversation about innovation has just received a major injection of energy, the will is now needed to take advantage of this in a comprehensive, bipartisan and durable way.

David Charles was the Chair of the Advanced Manufacturing CRC and will be a Director of the recently-announced Innovative Manufacturing CRC. He is a Director of Insight Economics Pty Ltd. From 1985-1990 he was Secretary of the Department of Industry, Technology and Commerce. He was a Founding Director of the Allen Consulting Group.

See link below to an article by David Charles in the Policy Series which was published on 25 June 2015.

https://publish.pearlsandirritations.com/blog/?p=4143

 

 

 

 

 

 

 

 

 

With Federal Budget deficits projected to continue indefinitely, the one thing that is generally agreed is that fiscal repair and consolidation is absolutely necessary. Where there is debate, however, is about how much of the repair job must be achieved by expenditure savings and how much by increasing revenue.

In this regard, the new Treasurer Scott Morrison has declared that Australia has a spending problem not a revenue problem. Others including the Shadow Treasurer, Chris Bowen, and the esteemed former head of the Treasury, Ken Henry, have disagreed. Instead they consider that restoring the Budget to a modest surplus will require action on the revenue side as well as on the expenditure side of the budget.

As will be shown below the extent of action to improve total government revenue is also very important for the nature of tax reform, which the government has declared to be a critical part of its policy agenda.

Treasurer Morrison’s starting point seems to be that:

1. Australian government expenditure at 26 per cent of GDP is high relative to past “norms”, and
2. future revenue is presently projected to recover to previous levels without any additional action from the government.

In fact on both these points Mr. Morrison is broadly correct[1]. However, that begs the question of how relevant are such “past standards” when judging future expenditure and revenue needs?

Furthermore, it is important to note that as much as 85 per cent of this projected recovery in revenue is due to the impact of bracket creep as people move into higher tax brackets as their earnings rise over time, including in response to inflation. Frankly this projection is simply not credible. It represents increasing taxation by stealth. For example, someone on full-time average earnings is already expected to enter the second highest 37 per cent tax bracket this current financial year, and this increase in taxation impacting on typical workers will only further increase over time if the present income tax rate scale is maintained as projected in the Budget.

In short there is a huge credibility gap regarding the government’s rhetoric about incentivising people so long as it continues to count on the present revenue projections. Tax reform will therefore have to adjust the present income tax rate scales, and additional revenue will have to be found from other sources just to realise the present Budget projections.

In addition, even if budget balance were restored by say 2020, the latest Intergenerational Report projects increasing budget deficits over the subsequent thirty years. Consequently much more far reaching reforms will be necessary to ensure fiscal stability over the long run.

Indeed the task of budget repair should not start from some essentially arbitrary standard based on the past. Instead what should be the starting point is a proper assessment of the level of expenditure required:

1. to maintain and enhance the sort of society that we collectively aspire to, and
2. to develop the capacity of the economy, and especially the capabilities of our people, so we can afford to pay for those aspirations.

Significantly in respect of both these considerations, there are indications that technological change and globalisation are leading to increasing inequality in Australia, as is the case elsewhere among the developed economies. Responding adequately to this challenge may well require further expenditures over and above the present projections. Furthermore, Australia faces a particular challenge as we have much the same aspirations as most other developed nations regarding the nature of our society and the role of government in supporting those aspirations, but we already have a lower level of government expenditure relative to GDP than any other developed western nation.

Of course the need to respond to these new pressures for additional expenditure further emphasises the continuing need for restraint of other expenditures. So all government expenditures should be tightly controlled and waste avoided by ensuring that programs are effective.

My own estimate is that over the next few years expenditure savings of a bit over 1 per cent of GDP could be realised by improving program effectiveness, further rising to 1.5 per cent of GDP in the 2020s. These savings would come principally from improvements to health and infrastructure spending, with further savings in expenditure on school education also being possible, but then redeployed elsewhere in the education and innovation budgets (see posting 18 May as part of the series on Fairness, Opportunity and Security).

But what is equally apparent from the Government’s own projections in its Intergenerational Report is that expenditure savings of as much as 1.5 per cent of GDP will not be sufficient to ensure sustained fiscal stability. And as I have just noted, there may be a need for new expenditure initiatives to develop peoples’ adaptive capacities if we are to avoid increasing inequality from the structural changes occurring in our economy.

In short, there is no alternative. The total amount of revenue will have to increase compared to the amount that can be expected from the continuation of present taxes.

Sure the Government will have to revamp the income tax rate scales so that they avoid the present problem of ordinary workers moving up into the second highest tax bracket, and this new tax scale will no doubt be portrayed as lower taxes – as similar action has been portrayed in the past. But on a net basis total tax revenue will have to rise, and as I discussed at greater length in a previous posting (19 May as part of the series on Fairness, Opportunity and Security) this additional revenue will have to come from some combination of:

• broadening tax bases – a euphemism for reducing present tax concessions
• Adjusting the mix of taxes – for example raising the GST to pay for additional income tax cuts
• Strong and effective action to minimise the present tax avoidance by large companies
• Changing the tax rates

In principle, there is no reason why a conservative government should not be prepared to consider at least the first three of these approaches to tax reform, especially if as they say all options are on the table for further consideration. Indeed it may be that Treasurer Morrison will reach this conclusion, but that he wants to screw down expenditure as tightly as he can first before considering additional revenue possibilities.

In that case, however, the Treasurer would be well advised to remember that in the same way as genuine tax reform requires considerable consultation and takes time, so does genuine expenditure savings achieved by improvements to program effectiveness.

Dr Michael Keating AC is former Secretary of the Department of Finance and Secretary, Department of Prime Minister and Cabinet.

[1] Compared to the present ratio of 26 per cent, the ratio of government expenditure to GDP over the two decades prior to the Global Financial Crisis (GFC) averaged 24.5 per cent of GDP, and in the previous Labor Government’s last full year in office 2012-13, this ratio was only 24.1 per cent. On the revenue side in this year’s Budget total receipts were projected to amount to 24 per cent of GDP, with taxation receipts accounting for 22.3 per cent of GDP. Over the following three years taxation receipts were projected in the Budget to increase by around a percentage point to 23.4 per cent of GDP, and this compares with a long-run average of 22.6 per cent over the two decades from 1987-88 to 2007-08 inclusive.

The new Turnbull Coalition has the opportunity to rewrite the economic policy, or lack of it, of the previous Abbott-Hockey Government. This greatly exacerbated Australia’s housing problem and was pushing Australia into recession. The Reserve Bank’s Governor Stevens recently explained that repeated interest rate reductions were attempting to stimulate the depressed economy. He suggested the Government could take advantage of record low interest rates to borrow for infrastructure spending to provide the much needed economic stimulus without further interest rate cuts. (Statistics show infrastructure spending had dramatically fallen since the Abbott Government came to Office.) There was no response.

These low interest rates concerned the new Head of Treasury who feared they were setting the stage for a housing bubble. Presumably he had memories of the 2008 US housing collapse following an immense “bubble” funded by irresponsible lending—albeit much worse than Australia’s possible situation. Surprisingly his concern over interest rates dismayed Abbott who expressed his support for rising house prices. Ironically it was Abbott, against all precedents, who appointed the new Treasury Head from outside the public service.

The low interest rates attracted a multitude of housing investors, from both within Australia and overseas, seeking capital gain from purchasing housing primarily in Sydney and Melbourne. The inevitable escalation in housing prices made housing increasingly unaffordable for first home buyers in those cities.

Incongruously, despite the almost continuous increases in productivity and per capita income over the past 70 years, housing in these cities is now less affordable than in the 1950’s! Since 1985 the ratio of median housing price to median income has increased from 3.4 to 11.4; and with virtually static wages and rising house prices this ratio will worsen. Since housing is the largest and most important material component in the living standards of the vast majority of Australians its affordability for first-home buyers should surely be a high priority for Government.

There are three obvious steps to solving the housing problem. Firstly, to reduce housing demand from local and foreign investors seeking capital gain (resulting from the demand-supply discrepancy) and from local investors also seeking to reduce their taxable income. Secondly, to reduce the rate of population increase which at 330,000 last year–of which net migration was 184,000—this was close to adding the population of another Canberra. The third step is to increase the annual addition to housing supply.

Examining these steps

The Government could readily block the sale of housing to overseas residents, now accounting for over 20% of purchases in Sydney and Melbourne, to protect the interests of Australia’s first-home buyers over non-residents seeking capital gain. Hockey’s recent concern with overseas housing investors was confined to their limited purchase of established housing rather than with their much greater investment in new housing.

The Government could also phase-out tax advantages given to local investors through both negative gearing (permitting interest on housing investment as a tax deduction from total taxable income), and discounted tax on capital gains. These tax perks, going primarily to higher income earners, not only increase housing demand and therefore housing prices but substantially cut Commonwealth revenue. The Australia Institute estimates this year’s negative gearing will cost revenue $4.2 billion. This could fund around 17,000 homes for low income earners—enough to house the current estimated 100,000 homeless in six years. Despite Hockey’s past claims that negative gearing increases housing supply, statistics show the great majority of such investment is in established housing.

The previous Government therefore not only permitted, but played a crucial role in the manipulation of a market which made housing increasingly less affordable for first-home buyers and at their time of greatest need.

On the supply side the Australian Government could, at no expense to the budget, establish a National Housing Corporation (NHC) to construct additional housing for sale and rent to overcome the market’s shortage of affordable housing. The National Housing Supply Council, within the Department of Treasury until abolished by the Abbott Government shortly after coming to Office, estimated the shortage of affordable housing was 599,000 in 2010-11. Considering the steep rise in housing prices and the very small increase in average earnings over recent years this figure would now be much larger.

The proposed NHC could borrow at current record low interest rates. Since Government can borrow significantly below the rate to the private sector and because the Corporation could be established as a community service, rather than as a profit-making enterprise, it could sell or rent housing well below current market prices. Moreover, the increased supply would significantly reduce market prices. Because interest and administrative costs could be built into both sale prices and rental charges the NHC could operate without cost to the budget. Of course the Government could use the budget to subsidise a proportion of these houses to assist low income earners and those dependent on social services.

These policies would lead to a considerable reduction in current housing stress– defined as mortgage repayment or rental cost exceeding 30% of gross household income–which has been steadily increasing over recent decades. With unchanged policies this will further increase.

As a major social bonus the NHC could be subject to statutory requirements for quality architecture and town planning. Furthermore, it could be required to take account of location concerning both public transport and employment opportunities usually ignored by private developers. Such policy, perhaps complemented with the establishment of an Urban Development Authority, could eventually help save State Governments many billions of dollars in transport costs for both new roads and expanded public transport designed primarily to move workers from their housing to place of work!

The NHC could make the single largest contribution to reducing poverty since mortgage repayments and rent represent by far the largest item in the vast majority of low to middle income family budgets.

Harold Levien is a freelance writer on political and economic issues. After graduating in economics he founded and edited a monthly review of current affairs, Voice, The Australian Independent Monthly. It lasted five years. After its demise he lectured in economics. He has written many articles on current political and economic issues for a variety of journals. He is now retired.

 

 

 

Most readers of this piece will not need lessons about the power of economic incentives. They know that efficient price signals can channel investment into productive assets and these same signals will drain funds from unconstructive pursuits. The same process more or less works at individual levels. Both good and bad performance is demonstrated by similar calculations. In turn these calculations draw on a variety of other metrics – prices, volumes, demand, supply, growth estimates and so forth.

Readers also know these numbers are reasonably reliable because they come from credible institutions. Thus markets are reasonably ‘free’ and undistorted. The Bureau and Census and Statistics is honest. The Stock Exchange is not manipulated. The judicial system acts according to the rule of law.

At a tertiary level, a variety of other institutions – the Productivity Commission, APRA, the Reserve Bank – police these secondary systems and reframe them when necessary to ensure that they continue to support wider public interests. This in essence is the familiar economic system.

Why do so many people then approach the political system with naïve or simplistic assumptions? Why do they not recognise that the political world is also a complex interdependent system where immediate incentives depend on the effective working of more embedded institutions?

If they did, the reasons for the current impasse in public policy in Australia might be more apparent – perhaps along with the profound nature of the present political challenge.

But let’s start with a fact. Since 1983, only one major piece of economic reform requiring legislative endorsement has passed in this country without bipartisan support. That was the GST which John Howard successfully navigated into law after winning the 1998 election. But he won that election and lost the popular vote. Hardly an auspicious signal to his successors.

Every other major measure in Australia since 1983 has required bipartisan support.

Why, short of a palpable crisis, is bipartisanship so elusive? Look first at immediate incentives. Politicians live in a two party, winner-takes-all world. Conceding common ground can spell disaster for a leader. Look no further than Malcolm Turnbull.

This adversarial system was conceived to highlight the choice between major parties that differed in their basic policy orientation. In the process, common ground, which was essential to sustain continuity in governance, was deliberately disguised or concealed. The parliamentary theatre was deliberately designed to highlight programmatic differences. The forms and procedures of parliament – question time, the allocation of time, executive prerogatives etc. – work to sustain this divide. The late Bernard Crick captured this perfectly in his depiction of parliamentary routines as ‘tantamount to a continuing election campaign.’

This political architecture was indeed appropriate and relevant for much of the period from the birth of this system in 1909 until the adoption of a softened neo-liberal programme by the Hawke-Keating government after 1983. Now party differences do not turn on the basic longer term agenda. The market system has more or less won.

But political leaders still live in a world in which immediate incentives dictate sharp product differentiation. How to respond? Is it surprising that from Tampa on we have seen a turn to populism and worse?

But you might say – OK, the major parties have converged in their fundamental approach. So why not share this agreement with the public and fight over the detail of measures. Why not make clear we agree that the states need more tax revenue – but we disagree about where this should come from. The blue side says a GST of 15% and the red side says the Medicare levy. Why not play the game that way.

The old problem of incentives recurs. Earlier we noted the political incentives that, on controversial issues, discourage disclosure of even partial common ground. These are reinforced by executive arrangements. Our present political system makes it impossible to separate debate into longer term and more immediate streams. The political system as it operates in parliament is governed by three basic conventions – ministerial responsibility, collective cabinet responsibility and confidence. Note these are conventions. They are not enshrined in the constitution. They have no wider legal base. They can be changed by votes on the floor of parliament. But they do determine the structure of executive power. They are long established. They distribute many privileges. And these rules of the game are sustained by the power and force of inertia. These conventions make it impossible to separate debate into longer term and more immediate components.

Then there are the distorting incentives that are associated with the media cycle. This reinforces populism and a short term orientation. Why does this incentive structure now exercise so much power?

The media cycle exercises its power because it now provides the primary link between political leaders and their publics. Earlier more complex tissue has largely dissolved. Once around 50% of the community had strong or very strong affiliation to one or other of the major parties. Party organisations enrolled activists. Party brands cued public opinion. Party programmes signalled longer term values and ambitions. Each party stood for a clear and distinctive position in the eyes of its supporters.

Political loyalty then turned primarily on class identification. This was the dominant social fault line. Class remains an important marker. But it no longer predominates. The women’s, gay, environment, consumer, animal rights, Indigenous, ethnic and other movements of the 1970s have busted that simple binary divide. And they have stimulated conservative reactions which have further compounded differentiation. Australian society is now pluralised in a way that would be unrecognisable to Alfred Deakin or Billy Hughes much less to John Curtin and Robert Menzies.

The major parties try to contain these internal pressures, not surprisingly often not very effectively.

So if you want to understand why the Australia political system is in trouble look no farther than this catalogue of distorting incentives and hollowed out systems. My personal view is that the two party system has past its use-by date. But this is a large judgment that is likely to be hotly contested – not least by those who in one form or another are advantaged by the present structure of power. Or by those whose political imaginations cannot extend beyond the existing architecture.

Were we to move beyond it, what should count as the central challenge? Surely the primary concern must be to renew the tissue that links the system to the people? In our more fluid and more pluralised society we need capacities for a more informed public conversation. We need to be able to debate single issues and we need capacities to do this initially at the level of strategy – is this an important issue for our country? What are some options in responding?

In other words we need an institutional design that can separate the longer term strategic conversation from a more immediate one about responses. Ideally the main parties would campaign fiercely over the latter issue – but bipartisanship would reinforce public support for the former. By such means, majority coalitions that can underwrite (or prevent) policy action could be constructed.

How to do this? We do not need wild schemes. This is how the Senate worked from 1901 to 1909. Ministers were drawn largely from the House. The Senate and its committees were custodians of longer term issues.

But this is a bigger story. We may need new political architecture for a more pluralised twenty-first century. But before there is even a remote possibility of that happening, the distorting incentives and dysfunctional institutions that are causing our present political discontents need to be frankly acknowledged.

Ian Marsh is a Visiting Professor at the UTS Management School. His study, Democratic Decline and Democratic Renewal:  Political Change in Britain, Australia and New Zealand (with Raymond Miller) was published in 2012 by Cambridge University Press.

The Abbott Coalition government came to power two years ago this week with a promise to change Labor’s fibre to the premises (FTTP) National Broadband Network (NBN) to one using less-expensive fibre-to-the-node (FTTN) technologies, spruiking its network with the three-word slogan: “Fast. Affordable. Sooner.”

But with the release in August of the 2016 NBN corporate plan and in the light of overseas developments, it is clear that the Coalition’s broadband network will not provide adequate bandwidth, will be no more affordable than Labor’s FTTP network and will take almost as long to roll out.

With the benefits of two years’ hindsight since 2013, let’s look at the Coalition’s performance against each of the three assertions in their 2013 slogan.

Affordable

The graph (below) shows funding estimates for the NBN from December 2010 to August 2015. Labor’s funding estimates for its FTTP NBN rose from A$40.9 billion in December 2010 to A$44.9 billion in September 2013, an increase of 10%. By comparison, the Coalition’s funding estimates, both for FTTP and the so-called multi-technology mix (MTM), have fluctuated wildly.

The estimated funding required for the Coalition’s NBN has almost doubled from A$28.5 billion before the 2013 election to between A$46 billion and A$56 billion in August. Before the 2013 election, the Coalition claimed that its proposed multi-technology-mix network would cost less than one-third (30%) of Labor’s FTTP-based NBN.

But in new estimates released in the 2016 corporate plan, the cost of the multi-technology mix favoured by the Coalition blew out and rose to two-thirds (66%) of the cost of a FTTP-based network.

Also, the cost of repairing and maintaining Telstra’s ageing copper network was likely underestimated, as was the cost of retraining and maintaining a workforce with the wider range of skills needed to install and maintain the multi-technology-mix network – costs that are unique to the MTM.

In the space of two years, the lower-cost deal the Coalition spruiked to Australian voters has turned out to be not so affordable after all.

Sooner

The Coalition probably underestimated the predictably lengthy delays in re-negotiating the agreement with Telstra as well as delays in re-designing the network the new IT systems needed to manage a more complicated network with multiple technologies.

The graph (below) shows the actual and planned number of premises passed (or in today’s parlance – ready for service) for the original FTTP network and the Coalition’s network.

The Coalition’s original target was to bring at least 25 Mbps to all 13 million Australian premises by 2016. That target has now been quietly dropped and replaced with a target of more than 50 Mbps to 90% of premises by 2020.

At the end of July 2015, almost two years after the 2013 election, only 67 premises had been served by multi-technology-mix technologies. In the meantime, as shown (in the graph above), the roll-out of FTTP has continued, albeit at a lower rate than Labor originally intended.

This lower roll-out rate has led to fewer connected customers and lower revenue. It will be interesting to see if the newly released targets for premises ready for service will be achieved (blue broken line in the graph above).

Labor certainly had its problems when it was in charge. For example, slow negotiations with Telstra and asbestos in Telstra’s infrastructure caused delays of around one year. The funding requirements for Labor’s FTTP network crept up by about 10% from 2010 to 2013.

But the delays and cost blowouts have been very much worse under the Coalition than under Labor.

Fast

Australia’s broadband capabilities are falling behind its international peers. According to internet companies Ookla and Akami, Australia’s broadband speed lags well behind other advanced and even emerging economies.

In 2009, Ookla ranked Australia’s average broadband download speed as 39th in the world. Since then, our international ranking has steadily declined and slipped to 59th place earlier this year.

What’s worse, my studies of trends in internet speed in Australia and in a range of developed and developing countries show that FTTN technology – a key part of the Coalition’s MTM – will not be enough to meet the needs of Australian broadband customers.

In short, FTTN technology will cement Australia’s place as an internet backwater. Our world ranking could fall as low as 100th by 2020.

In many forward-looking nations, fibre-to-the-node technology has never been entertained as an option. In some countries where it has been installed, network operators are planning to move away from FTTN in favour of more advanced broadband technologies like FTTP. In doing the opposite, Australia is moving backwards.

If FTTN magically appeared on our doorsteps by 2016, as originally promised by the Coalition, there would certainly be a short-term advantage. But the 2016 target has been missed and the FTTN component of the network will be obsolete by the time the roll-out is completed.

Of course, there is no point in speed just for speed’s sake. Studies in Europe and the United States have shown a strong correlation between GDP growth and internet speed.

In the US and elsewhere, increasing numbers of homes and businesses are receiving services at 1 Gbps and higher. A recent study presents evidence that communities served by 1 Gbps and more are faring better economically than communities with slow-speed broadband.

If in 2013 the Coalition had simply allowed NBN Co to get on with the job of rolling out its fibre-to-the-premises NBN, rather than changing it to an inferior multi-technology mix, it may well have ended up spending less money and delivered Australia a much better network.

The Coalition sold the Australian public a product that was supposed to be fast, one-third the cost and arrive sooner than what Labor was offering us. Instead the Coalition’s NBN will be so slow that it is obsolete by the time it’s in place, it will cost about the same as Labor’s fibre-to-the-premises NBN, and it won’t arrive on our doorsteps much sooner.

By my reckoning, we didn’t get a good deal.

Rod Tucker is Laureate Emeritus Professor at University of Melbourne. This article was first published in The Conversation on September 8, 2015.

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I am sure that I am just as frustrated as most Australians – especially as month after month, year after year, it becomes clearer that what I, along with others, have been saying since 2011 – that a cheaper and faster NBN such as the Coalition Government is trying to install by retrofitting ageing copper networks is not delivering.

In the 18^th C Britain struggled to accommodate a growing prison population incarcerated for social reasons, mainly poverty. After the America revolution in 1776, Britain became unable to keep sending its excess prisoners to America. The solution was to establish a prison colony in Australia in 1788. Britain never learnt that incarceration is not a solution for serious social problems. Neither did the USA. Nor for that matter did Australia.

With 130 prisoners per 100,000 residents in 20012/13, Australia had the 15^th highest incarceration rate of the OECD countries, far behind the OECD and world leader, the USA (701) and well behind New Zealand (7^th, 192) and just behind the United Kingdom (13^th, 147).

Incarceration rates have been increasing in many countries in recent decades, including Australia. Rent seekers have had a wonderful time. With 4.4 % of the world’s population the USA has almost 25% of the world’s prison inmates. After Nixon declared a War on Drugs in the early 1970s, the US incarceration rate increased five fold peaking in 2007. As with many other fads, California was an early market leader in the US with conservative Republicans, private prison operators and corrections unions working together, each benefitting enormously. Increasing the number of prisoners, building more prisons, improving the wages and conditions of prison guards and expanding the private prison sector worked well at the ballot box as long as voters could continue to be convinced that crime was a serious and ever growing threat. In an era when taxation revenues have been steadily falling, funding extra police, courts and prison costs never seemed a problem. California discovered that cutting higher education could pay for its law and order policies. No one seemed to mind or even notice. The taxpayer even picked up the tab for this electoral Magic Pudding.

All good things come to an end. Eventually. US incarceration rates started declining 7-8 years ago. Now President Obama, supported by politicians from across the political spectrum, has made it clear that he wants to end America’s jails and prisons binge. In an important 45 minute speech¹ on criminal justice policy in Philadelphia on 14 July to the National Association for the Advancement of Coloured People (NAACP), Obama reminded his audience of the huge gap between the vision of Amertica’s ‘founding [fathers] that we are all created equal, endowed by our Creator with certain unalienable rights’ with ‘the realities that we live each and every day’. Obama noted that the aims of the NAACP had moved from ending lynching to ending the now more subtle forms of bigotry and gross disparities in opportunity. He reminded his audience that ‘since my first campaign, I’ve talked about how, in too many cases, our criminal justice system ends up being a pipeline from underfunded, inadequate schools to overcrowded jails.’ Obama noted that ‘We keep more people behind bars than the top 35 European countries combined’. Increasing from 500,000 in 1980 to 2.2 million today.  [The number of correctional inmates] ‘has quadrupled since 1980.  Our prison population has doubled in the last two decades alone’. He went on to argue that the main factor driving up the US prison population has been the steadily increasing number of nonviolent drug offenders locked up for longer and longer periods. As Obama observed, the shocking disproportionality of US prison sentences also ended up costing taxpayers $80 billion/year – a sum that he said ‘could pay for universal preschool for every 3-year-old and 4-year-old in America, or a doubling of the salary of every high school teacher in America or investment in new roads, bridges and airports, job training programs, and research and development’. For the cost of keeping ‘everyone locked up for one year’, Obama said ‘we could eliminate tuition at every single one of our public colleges and universities’.

Minorities in the USA have paid a tragically high price for this binge on incarceration. As Obama noted ‘African Americans and Latinos make up 30 percent of our population; they make up 60 percent of our inmates.  About one in every 35 African American men, one in every 88 Latino men is serving time right now.  Among white men, that number is one in 214’.

But nothing lasts forever. Obama observed that ‘for the first time in 40 years, America’s crime rate and incarceration rate both went down at the same time’ last year. He supporting increased investment in communities to reduce crime, increased judicial discretion, greater use of non-custodial sentencing options and prison reform.

Many fads start in California and then spread to the rest of the USA and then to the rest of the world. America has now woken up to the huge social and financial cost of its addiction to incarceration. But like many other addictions, getting this addiction under control takes time and a lot of energy and motivation.

NSW recently broke though the 12,000 inmate barrier. More than 30,000 Australians will go to sleep in a prison cell tonight, no doubt some for very good reason. It’s high time Australian political parties agreed to abandon the Laura Norder debate and work together to reduce our prison population. Prisons should only be used as a last resort. And offenders should be sent to prison as punishment and not for punishment.

Dr Alex Wodak AM is President, Australian Drug Law Reform Foundation

 

 

1 https://www.whitehouse.gov/the-press-office/2015/07/14/remarks-president-naacp-conference

RAIL: FEWER SPENDING CHEERLEADERS, MORE JIMMY CARTER.

In June the Australian Financial Review hosted an Infrastructure Summit of the great and good in Sydney. It heard about the need for much more infrastructure: Australia was ‘well behind’ other countries in such matters. Nobody dwelt on the possibility that in transport at least, Australia might suffer from a tired and patchy regulatory inheritance and an extremely lazy generation of regulatory policy makers.

Thankfully, at least one new project is complete: an Inland Rail. New freight ‘inland ports’ are in place along its 4,000 kilometre length. It out-competes trucks for speed and cost of delivery. In its first decade of operation, it’s expected to drag down freight prices, save almost $6 billion in congestion costs, remove 13 million long-haul trucks from the road, save over 8 billion litres of diesel fuel and reduce carbon emissions by 71 million tonnes. It’s a simple public-private partnership: the operator finances commercial aspects; government chips in based on estimated economic benefits.

The only problem for our infrastructure cheerleaders is this project happened in the United States, not Australia: it’s the $AUD 3.4 billion dollar ‘Crescent Corridor’ – linking Louisiana with New Jersey[i].

It could happen there because US rail is on a market footing. It wasn’t always so. Until 1980, perverse regulations hampered US rail. Here is what President Jimmy Carter said then, when signing into law the Staggers Act of rail reform:

‘By stripping away needless and costly regulation in favor of marketplace forces wherever possible, this act will help assure a strong and healthy future for our Nation’s railroads and the men and women who work for them.

Carter’s efforts didn’t deregulate rail – it remains thoroughly regulated to this day. His administration’s genius lay in recognising and rewarding commercial rail motivations in a cleaner regulatory framework. Amongst other things, Staggers saw loss-making passenger train obligations removed from US freight rail companies. Freight railways were free to decide where to build new productive rail and where to abandon costly ‘basket cases’. Owners were allowed to sell failing rural rail branches to niche operators who could do a better job. After considerable turbulence, all of these measures succeeded. US rail’s share of long-distance interstate transport now stands at around 40 per cent – on Australia’s east coast it is just over 10. Many smaller regional branch lines work efficiently to support the big ‘Class-1’ railways – in Australia these branch lines languish, museum pieces propped up by taxpayers. Since 1980 US rail has made a stunning $AUD 800 billion of new investment into itself. This underlines what happens when regulations encourage the animal economy:

US Freight Railroad Performance Pre and Post-Staggers Act Reforms

https://www.aar.org/Pages/US-Freight-Rail-Performance-Since-Staggers-Act.aspx

Source: Association of American Railroads

Back in Oz, a government-owned entity – Australian Rail Track Corporation (ARTC) still owns the interstate rail system and mostly decides what will be spent, when and where. It preserves an historic network, whether it makes money or not. ARTC in turn relies on meagre taxpayer funding from the transport department: excepting the Keating years, this agency has eschewed serious rail investment in favour of roads: 2014’s 5-year budget saw over $46 billion dollars going to more national highways, city motorways and tollways, while less than a billion flowed to interstate rail.[ii] One of the constants of US rail regulation has been that all railways must be interoperable – a common gauge of track and trains. This promotes scale, competition, flexibility and cheaper prices; 114 years after Federation, Queensland is not yet even on the national standard gauge of rail.

This year the Commonwealth flagged the sale of ARTC. Tellingly, it didn’t prefigure an effort to review the sector’s regulations or provide a stable, market-led road and rail investment environment. What is in prospect is undoubtedly just a rude carve-up: hire a bunch of merchant bank advisors to auction-off government rail assets, then bank the sale price. This is both primitive and highly irresponsible: it will lead variously to rent-seeking and stranded assets if no thought is given to how the newly-privatised market should be structured for maximum long-run national efficiency. In reform terms, it’s the very shallowest part of the pool. Some call it ‘asset recycling’.

Meanwhile, Australia’s own Inland Rail project – a line between Brisbane and Melbourne, west of the Dividing Range – is more Eeyore than Tigger: it languishes unbuilt, a feeding frenzy for consultants and a superannuation plan for administering public servants, who at last count have been voted around $400 million dollars by the Commonwealth. Funds are not earmarked for actually building an operational railway, but mostly just for producing designs, route analysis and ‘preparatory works’ – in the belief that if something is begun, a white knight will surely arrive to finish and operate it. But this project is never likely to become efficient: the regulatory settings are non-commercial, so global commercial rail leaders rightly don’t take it seriously.

For now, such criticisms and alternatives remain academic. Instead of embracing productive reform lessons from elsewhere, our transport bureaucracy’s boilerplate response is to acknowledge any challenge, establish a grand new committee and ask for more money. But what if the agency itself was the problem? Removing the dead hand of agencies on freight solutions and forcing indolent transport regulators to make improvements in the spirit of Carter[iii] should be imperatives for Australia.

The next summit would benefit from locking out the infrastructure cheerleaders – those unfazed by seeing taxpayers blow yet more billions on dumb projects (to be fair, it’s easier to remain unfazed when your company might be landing the contracts).   An alternative would be an adult discussion about how we improve on the specific regulatory settings which are retarding a brighter future for Australian transport consumers and patient capital investors alike.

A future post will address desired Australian land freight reform in more detail: it will attempt to sketch out more productive regulatory settings, funding arrangements, matters of financial and economic viability and their implications for pricing as well as the important matter of a better approach to road pricing for the trucks which (mostly) outcompete Australian rail freight.

Luke Fraser and former Secretary of the Department of Prime Minister and Cabinet Michael Keating AC recently co-authored the transport and infrastructure paper in John Menadue’s Fairness, Opportunity and Security series.

Luke Fraser is founder and principal of Juturna, a public policy consultancy specialised in roads, freight and market investment reforms. He is a former national trucking industry CEO and has authored several reform studies for Infrastructure Australia. He was a member of the 2008 review of NSW grain railways and in 2012 he was appointed to the COAG Road Reform Board.

[i] See http://www.nscorp.com/content/nscorp/en/shipping-options/corridors/crescent-corridor.html or a promotional video at https://www.youtube.com/watch?v=M1m_8jRlIwY

[ii] The National Land Transport Funding Agreement 2014-2019 refers.

[iii] Carter’s 1980 rail reforms were complemented by sweeping market reform of the aviation and trucking sectors (1978 and 1980 respectively).

Hugh Stretton, one of the greatest social scientists and public intellectuals that Australia has produced, passed away in late July after a long illness. His legacy as a thinker, writer, activist, advisor, teacher, mentor and friend is vast. Those of us who have had the honour of his advice and support can only marvel at the way in which Hugh balanced his great mind and deep knowledge and engagement across a very wide intellectual terrain with human capacities to connect with others at all levels with an inner calm, wisdom, kindness, humility and self-deprecation.

Hugh’s life was one of high achievement from the outset. After, as he put it, ‘a happy childhood down the bay from Melbourne’ and success at Melbourne University interrupted by war service, he won a Rhodes scholarship to study history at Oxford. His achievements there saw his appointment in his early 20s as a tutor in modern history at Balliol College before the award of his Oxford degree. He was then appointed Professor of History at the University of Adelaide in 1954 at the age of 30, the youngest professor in an Australian university at the time. Over the next 15 years, he presided over the establishment of a history department whose members would go onto play central roles in reshaping historical scholarship in Australia and beyond.

In 1968, he stepped down from his professorship to a readership at the University of Adelaide to concentrate on research and writing. The high achievement continued. From the late 1960s to the mid 2000s, he published seminal books and essays, and delivered public lectures in what is perhaps the most impressive output of any Australian social scientist of his generation.

The Political Sciences (1969) challenged the growth of positivism and abstraction in political, social and economic understanding. The book promoted a view of the social sciences as inherently valued-based, moral and practical in nature. It was widely influential both locally and internationally.

His work on cities and housing is perhaps best known. His self-published Ideas for Australian Cities (1970) offered powerful histories of city planning in Australia while developing the idea that the good city is of human scale needing urban planning much more concerned with its social, distributional and equity impacts. His 1974 Boyer Lectures Housing and Government put the case for better recognising the productive economic and social activity enabled by good housing (the ‘domestic economy’ as Stretton put it) and the virtues of a mixed private and public housing system. He defended the need for national housing policy to address new market and public failures then on the horizon. Urban Planning in Rich and Poor Countries (1978) distilled insights from rival theories about cities and trends in urban planning across the world in what was described by one reviewer as ‘like one of those rare miniatures that reveal more sheer skill than many a famed old master’.

The future of social democracy and the attack it has faced from economic rationalism and neoliberalism were other foci of Stretton’s work. Capitalism, Socialism and the Environment (1976) deployed many of the ideas about values, choices and the ‘imagination of alternatives’ of his earlier work. The book offered a powerful analysis of the options and possibilities for democratic socialist reform in capitalist democracies taking heed of new problems of inflation, economic inequality, and environmental limits. Neal Blewett described the book as ‘a classic both of, and for, our times’. Political Essays (1987) brought together many of Stretton’s shorter writings on business and government, housing, public service and the nature of the social sciences assembled against the rising tide of economic rationalist change in Australian politics and public policy. Public Goods, Public Enterprise, Public Choice (1994 co-authored with Lionel Orchard) developed a critique of public choice theory, by then a very influential stream of neo-liberal, anti-government thinking. It reminded readers about the virtues of the mixed economy balancing private markets with public enterprise, and provided insight about the nature of politics and governing gleaned from other traditions of non-reductive political thought.

What some saw as the product of a lifetime of reflection, Stretton’s magnum opus Economics: A New Introduction (1999) offered a comprehensive new curriculum for teaching economics based on his views about value-based social science, this time expressed through a comprehensive defence of an ‘institutional’ view of the modern mixed economy. His last book Australia Fair (2005) presented a social democratic manifesto taking heed of many new economic, social and environmental problems facing Australian society, and proposing ideas about how to manage them equitably and fairly. For him, better, more active government was and is central to that task.

Alongside his academic work, Hugh Stretton was widely admired as an activist and advocate. He was also much sought after as an advisor across the political spectrum. Much of his engagement was focussed on where he lived much of his life – Adelaide and South Australia – but his voice was strong on the national stage. He served as Deputy Chairperson of the SA Housing Trust from 1973 to 1989 and on various planning bodies particularly in the City of Adelaide. Some of his most engaging writing on public issues appeared in a diverse range of media outlets, Christopher Pearson’s Adelaide Review perhaps most prominently. Reflecting his open and practical disposition, Stretton was involved in and often lead policy experiments and initiatives particularly in urban and housing policy. The Ramsay Trust, a venture to marshal savings into a new kind of capital-indexed structure for housing finance engaged him in the 1980s while he was proud of documents he wrote or contributed to in the 1970s leading to the establishment of the Noarlunga Centre in Adelaide’s southern suburbs and the preservation of old housing fabric in Hackney, an inner Adelaide suburb threatened with redevelopment.

As an engaged public intellectual, Stretton took his role as critic seriously and responsibly when the need arose on many issues both local and national. Mainstream economists, and politicians in their thrall, took exception to Stretton’s thinking throughout his career – from those critical of his Boyer Lectures, to those critical of his views about positivism and the winding back of social democratic governing in Australia in the 1980s, to Paul Keating’s attack on his Political Essays in 1987. Stretton always engaged critics with respectful, reasoned responses.

Through all of this high level intellectual and policy work, Hugh was also widely admired as a gifted teacher and mentor. I speak with first hand experience of his skill and generosity on these fronts. As with many others, Hugh went out of his way as supervisor of my PhD research to guide and support me both intellectually and personally in his unobtrusive but firm way. In these respects, I was very fortunate.

No man is an island and this is true for Hugh Stretton too. The wide group of intellectuals he had as friends and advisors is testament to that. In the Australian context, he was an original but he belongs in the company of other giants on the international stage. Some suggested after the publication of his early books that he was the ‘nearest thing to an Australian JK Galbraith’. Indeed, like Galbraith, his work echoes and connects with the work of social scientists and philosophers – Albert Hirschman, Martha Nussbaum and Charles Taylor among others – struggling to maintain and hold to a liberal, social democratic, pluralist centre in the face of the limits of the positivist mainstream, relentless economic and social change, and post-modern pressure to abandon any such ambition. The task we face is to draw on Hugh Stretton’s legacy in this spirit.

Lionel Orchard taught public policy in Flinders University’s Graduate Program in Public Administration from 1989-2015. In the 1980s, he wrote a PhD on urban and regional policy with Hugh Stretton’s supervision and, in the early 1990s, jointly researched and wrote the book Public Goods, Public Enterprise, Public Choice (Macmillan, 1994) with him.

Michael West, in the SMH continues his many articles on tax avoidance by major international companies who operate in Australia. He mentions many of them, including Big Pharma, Google, Paypal, Newscorp. He comments ‘How long can [these companies] continue to treat Australians as fools. While multinational tax avoidance remains so rife, how can governments possibly claim a democratic licence to his ordinary Australians with a hike in the GST.’  See link to article below:

 

http://www.smh.com.au/business/comment-and-analysis/focus-on-tax-avoidance-not-gst-hikes-20150802-gipm9k.html