Economic dreamers in the clouds on reform
To say that is not to be dismissive. After all, dullness may have its faults but it is blissful at a time when differences are being played out in far more divisive and destructive ways. If economists are to be Australia’s sorcerers disguised as studious bean-counters, witchdoctors quietly wielding spreadsheets and equations, one can say only that mankind has produced much nastier alternatives.
The risk, however, is that the semblance of rigour, the mumbo-jumbo of the economist’s craft, can readily give credibility to arguments that, stripped of the arcane, are nugatory. Even worse, they can paper over omissions, inconsistencies and evasions that, more simply stated, would be glaring.
Nowhere are those risks greater than in the papers prepared for the event by the “official family”; that is, Treasury, the Productivity Commission and the Reserve Bank.
It is, for example, striking that while all of the papers complain about excessive regulation, they contain twice as many recommendations for new or expanded regulations as proposals to pare regulations back.
Nor do the papers pay much attention to the compliance burdens their recommendations entail. To take but one example, the PC’s paper on the energy transition recommends extending to an additional 370 facilities a highly complex scheme – the so-called Safeguard Mechanism – that currently applies to a small number of major emitters.
But instead of carefully examining the resulting compliance burden, and the extension’s impact on those facilities’ viability, the paper blithely assumes the benefits of its recommendation would exceed the costs.
Even more serious, however, is the official family’s reluctance to put dead cats on the table. Thus, the energy transition paper notes that regardless of our future emissions policies, “we are likely to face significant climate-related risks” as global average temperatures seem set to rise by 3C. That may not be intended to mean that our emissions policies are pointless but it clearly implies there is little chance that they will achieve their stated goal of averting climate change.
But shouldn’t that affect the costs we are willing to bear to reduce emissions? Or has the PC convinced itself of the somewhat eccentric proposition that the probability of a policy succeeding is irrelevant to the sacrifices it is rational to make in its pursuit?
No less startling is the complete absence in those papers of any mention of the effects the dramatic increases in power prices provoked by the energy transition have had on productivity growth. Yet there is a mountain of evidence that the energy price shocks of the 1970s helped cause the subsequent collapse in productivity by accelerating the scrapping of energy-intensive plant, reducing capacity utilisation and increasing the user cost of capital.
It would, however, be a mistake to think the polite silence applies only to the energy transition. The papers rightly highlight the shortage of investment. But there is not a word about the appallingly inefficient use of capital that has been made by Australian governments in recent years.
For example, the NBN, which Labor loudly claimed would earn a fully commercial rate of return, will by 2026 have effectively written off as much investment as it was originally estimated to require. It is, of course, in good company, drowning, as we are, in infrastructure projects that would fail any properly implemented cost-benefit test and in off-budget commonwealth ventures that could be called fit for purpose only were that purpose the frittering away of taxpayers’ funds.
The Hilmer report, which recognised that the quality of investment was every bit as important as its level, tried to break our governments’ addiction to squandering capital. Well, it’s back – and no one in the official family seems willing to call it out.
Multiplying those examples would be child’s play. Yet they are, in reality, simply symptoms of the underlying problem. The papers emphasise the importance of reinvigorating productivity growth.
Their remedies, however, just tinker at the edges, proposing some changes that are sensible, others that are much less so. That is not so much a failure of boldness; it is a failure of vision – the lack of a coherent view of what we ought to be trying to achieve.
That vision was at the heart of what was long meant by reform. When Edmund Burke, in advocating his “economical reform” bill of 1780, said “to reform is not to innovate”, he was explicitly distinguishing his proposals from paltry attempts at marginal repairs. What he sought, he said, was “radical”, in the sense that it would address – incrementally but surely and steadily – the root cause of the “great distemper”, which was the use of public spending to induce dependence on the state rather than independence from it, sapping the very energies England needed to encourage.
It was also with that meaning of the term in mind that William Gladstone framed his great budgets and the famous Midlothian speeches. Fiscal prudence was not to be pursued for its own sake; it was to be sought because waste and robbing Peter to bribe Paul both displaced private initiative and “impeached all public character”, undermining the legitimacy of the entire political class.
There is a direct line that runs from there to Robert Menzies and John Howard, with their emphasis on lifters, not leaners, and, for all of their differences, to Margaret Thatcher and the other reformers of the 1980s.
It was an overarching purpose and coherence of vision that gave those leaders’ reforms a social as well as economic character and a moral as well as pragmatic dimension. And it is that unity of purpose and coherence these papers, and the government they reflect, utterly lack.
The bad news, in short, is that we have no idea where we’re going. The good news is that thanks to these deliberations, we will get there more quickly.
For my part, I will spend the days when our witchdoctors are at work re-reading Thomas Love Peacock’s glorious satire Crotchet Castle (1831), which centres on discussions around the table of economic reform.
How can one not admire its delightfully named Scotsman, Mr MacQuedy – whose adoration of economists, “the modern Athenians”, knows no bounds – and his dining companion, the Reverend Doctor Folliott, who ridicules economics as “premises assumed without evidence, or in spite of it; and conclusions drawn from them so logically, that they must necessarily be erroneous”?
And who could resist, when the roundtable’s communique eventually appears, clutching a stiff drink and intoning – as Folliott and MacQuedy do, having debated the burning fiscal issues of the day (which they don’t understand) over several bottles of claret (which they understand all too well) – their splendid economic reformers’ hymn?
So, dear reader, please raise your glass and declaim with me:
After careful meditation,
And profound deliberation,
On the various pretty projects which have just been shown,
Not a scheme in agitation,
For the world’s amelioration,
Has a grain of common sense in it ... except my own.
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