SELECTED PUBLICATIONS - P.M.LAWRENCE

You can contact me directly here

This page is best viewed with a computer and a monitor

Support the Any Browser campaign and keep your freedom of choice on the Net.

Arachne WWW browser

CONTENTS

Back to the home page.

These have been reformatted for the internet, and in some cases the printed form was edited further.

Advertisement scheduled to appear in the Australian and the Melbourne Age of 24.8.99

[Further information available in a letter among my Constitutional material]

Conduct of the Constitutional Centenary Foundation

Notice to members of the Victorian Chapter

Have you received the mail-out of 16 April 1999?

The CCF is meant to promote informed discussion on constitutional matters in the run up to 2001. This is especially important with the republic referendum coming up in November.

In 1997, at an extraordinary meeting, the Victorian Chapter Committee attempted to destroy completely and in secret the Summer 1997 newsletter which included articles on the Republic, and articles by Justice Howard Nathan and the former Northern Territory administrator, Austin Asche, amongst others, apparently in order to to suppress material showing that some republicans are not progressive.

That attempt failed. In March 1999, after legal proceedings had been commenced, the CCF agreed to distribute the newsletter to its members to let them judge the material for themselves in context. This mail-out appears to be dated 16 April 1999, but contains a notice referring to events alleged to have occurred at a meeting on 18 April 1999. Are you a member? Did you receive this newsletter? If not, please contact:-

BEST HOOPER
563 Little Lonsdale Street
Melbourne, 3000
Tel: 9670 8951
Fax: 9670 2954
E-Mail: besthoop@planet.net.au

Return to the contents list.

Letter printed in the Australian Financial Review of 11.8.97

Tax rebate to create jobs

In his article of 6.8.97 Alan Mitchell summarises some theoretical options that were used to brief Ministers before the Cabinet meeting on unemployment. One in particular showed some possibility of results, namely lowering the minimum wage while compensating the less well off through social security and/or the tax system.

These options rely on reaching a new equilibrium. The practical difficulties are blindingly obvious - there's many a slip between cup and lip, so what if other factors interfered and we got the worst combination of the intended and current situations? We might have all the unpleasant effects of minimum wages collapsing, without ever quite reaching the jam promised us for tomorrow. We might not be able to get there from here.

Yet there is another approach. Consider the effect of rebating employers' own tax bills, say by $10,000 per full time employee per annum (and pro rata for part-timers). The precise figure should correspond to social security costs, including the on-costs of administration. The general tax rates would need to be higher to offset the rebates on the existing workforce, of course - but short of 100% unemployment the frighteningly high rates are merely dummy intermediate numbers for purposes of calculation, and no employer would ever pay that much. But this does imply broad-based production taxes, such as a GST or a tax on the use of commercial plant and premises.

In the short term such rebates would encourage employment at the same time as protecting a minimum wage corresponding to social security, with no additional cost over and above the existing hidden cost of social security. As tax rates would match present requirements the system would be revenue-neutral in the short term, and while the tax base would narrow to the extent that social security was privatised, it would only do so in exact step with reductions in the social security burden. Over time this approach would be budget-neutral and would not affect governmental planning, resources or budgets in any other respect. Yet apprenticeship schemes would become realistic, retrenchments would be less likely, and to the extent that the unemployed were taken into the workplace they would be exposed to all the opportunities they need. And, over time, structural change would still create new opportunities - only now without people having to risk being sidelined into dead-end, low wage careers.

With this approach you can get there from here.

Return to the contents list.

Letter printed in the Australian Financial Review of 7.11.97

Tax rebate on employees a better option [than negative income tax]

Professor Dawkins' article on unemployment and tax reform states that "the best way to attack these problems is with a negative income tax". Another approach uses broad based taxes on producers. If employers received rebates for all their employees, e.g. classifying them as a GST business input, there would be an incentive to hire at corresponding wage levels.

The only difference is where the tax falls. Yet this has three major consequences:-

Perhaps a drug cocktail attack on unemployment could combine these and other approaches.

Return to the contents list.

Unpublished letter to the Australian Financial Review, written 6.7.98

Time scale problems for economic reform ever reaching actual improvement

[these follow from mathematical considerations involved in, e.g., stability criteria for back propagation in neural networks or the convergence of perturbation methods in solving rigidly coupled systems of simultaneous differential equations]

You recently printed material on economic issues from Mark Latham (2.7.98), Ian MacFarlane (3.7.98) and Peter Costello (3.7.98). It may be misleading in isolation.

Mark Latham asserted that "In an era of permanent change, 'prepare for it' is the message that this Government should give"; he takes it for granted that permanent change should be accepted. But look at the implications.

Ian MacFarlane described how "The benefits of liberalisation take time... and in the intervening period some... will experience economic hardship... Liberalisation can cause a significant, though temporary, dislocation..." This is identifying short-term with temporary, forgetting the possibility of permanent change. It is only a valid engineering approximation that short-term shocks are temporary when they occur on a timescale about three times slower than assimilating them. If the road is always up for improvements, there is never any actual improvement.

Even temporary change may have permanent losers. Will new entry level opportunities go to teenagers or thirty year olds who never broke into work? Will the middle-aged retrenched five years ago reinvent themselves, or will those still in work get the first call? There could be permanent losers if we merely kept pace with change.

Peter Costello argued that "Australia just cannot turn its back on reform now - the financial markets... or... the IMF... would force it upon us". But with permanent change this dilemma of reforming or being reformed is itself dangerous; at best we can buy time and still be riding the same (Asian?) tiger. The reward for painful reform may be dependence on more of the same, forever or until we fail. Surely that is an underlying problem? Should we not aim beyond, either ending the reform process after a finite number of cycles, or if it must be permanent make it sustainable?

Return to the contents list.

Unpublished letter to the Australian Financial Review, written 2.5.99

Differences between Negative Payroll Tax and Wage Subsidies

I was privileged to be able to ask a question at the recent Business Council of Australia "New Directions" conference in Melbourne, about whether there had been any empirical studies directly on business tax credits linked to staffing levels rather than income tax credits. (These would generate a Negative Payroll Tax matching Social Security.)

Chris Richardson's reply was that he didn't think business tax credits would work, which I take it means no direct studies have actually been done and we must extrapolate from related work.

However most of that is in connection with Negative Income Tax or wage subsidies. A Negative Income Tax works differently by affecting demand, and takes time to flow through to the supply side. (So an NPT acts more rapidly and has no material initial costs.)

Wage subsidies generally fail because:-

Business tax credits are sustained and universal, which bypasses two problem areas. This would greatly increase the deadweight problem, except that they are differently financed. Rather than there being an outflow of government funds, there is a revenue shortfall which has to be made up by raising the general level of taxation. This does not increase the tax burden because employers are receiving the deadweight effect. At the end of the day the system is budget neutral to the government because it claws back the initial deadweight losses through the higher rates, and any further loss due to increased employment is offset by the lower burden on Social Security.

As someone pointed out at the conference, attaching business tax credits to a GST would mean a windfall gain to labour-intensive industries at the expense of capital-intensive ones. There are at least three solutions to this: direct subsidies to key industries; grandfathering in the tax credits by targetting them to people born after a cut-off date; and attaching them to a completely different tax. As this approach is against the spirit of a Payroll Tax anyway, I would suggest encouraging the States to replace Payroll Taxes with taxes on the use of commercial plant and premises which could carry the business tax credits. Such taxes could be fine-tuned to vary by industry sector.

Return to the contents list.

Letter printed in the Australian Financial Review of 3.10.00

John Hewson's non sequitur of 29.9.00

You describe John Hewson's article "A republic is the next event" of 29.9.00 as "Our overt nationalism at the Games further demonstrates why we should be a republic". This is pretty much the argument mostly put for a republic before the referendum, and he supports it in much the same way, with a brightly coloured montage of unrelated and emotive items. Only the headline, the opening paragraph, the byline and the punchline have anything to do with a republic at all, and to put this as an argument for a republic is a mere association of images. Indeed, if we can celebrate national pride without first becoming a republic, if we can conduct the Olympics with our present system without an overwhelming sense of shame, it serves to undercut any republican argument as necessary to secure self-respect.

It did not follow that Australia had to become a republic last November, in the face of actual and substantive issues that really were wrapped up in a republic, and nor does it follow now for all John Hewson's undoubted expertise as an economist or his experience of the political trees that obscure the constitutional wood. Non sequitur - it does not follow.

Return to the contents list.

Letter printed in the Australian Financial Review of 5.10.00

Alan Mitchell's article of 4.10.00

In Alan Mitchell's article of 4.10.00, "Freer trade helps the poor", it appears that throughout he is citing analysis of what happens to poor countries as a whole and not what happens to the poor within the countries. Even after comparing "...the potential gains from freer trade with the potential cost of imposing higher labour standards on developing countries", he goes on to bring out the aggregate benefits to those countries as a whole.

Is this in fact what he is answering? Because if so it goes very little way towards addressing what increased trade liberalisation actually does for the poor. It is true that wealth eventually trickles down, but this is a slow process, and without that the effect may be like the old saying about foreign aid: taking from poor people in rich countries to give to rich people in poor countries. It may be said that it only happens when there is something kleptocratic about the developing countries, but this is like saying "guns don't kill people, people kill people" - it begs the question of the reasonably foreseeable consequences of giving the means to those who are likely to use them that way.

Indeed, there are mechanisms that can cause some people to regress during the early stages of adjustment in any country, such as increased rents or increased use of land for the cash economy. Although it does not always happen, when it does it gives the poor a sort of J curve of progress, reculer pour mieux sauter. The trouble is that with several stages of change piling up one after another, the separate J curves combine to produce a downward trend, at any rate over any period that matters. So, regardless of the fact that the country is developing, we still cannot be sure that we really are helping the poor that way. We certainly cannot rule out these possibilities in advance from empirical experience - even our own experience shows people who have remained caught for years in the eddies produced by our own advancement, despite the fact that anyone not caught definitely benefits.

Return to the contents list.

Letter printed in Quadrant of March, 2002

Identity cards

You say various things about identity cards in your November editorial. Not all of them are borne out by experience, not even by the examples you give.

For instance, there is indeed a valid argument from expense against them. What counts is not the fact that a universal card would be cheaper than a multiplicity; the costs we now face are sunk costs, and a new universal card would impose new and additional costs.

As for risks of being on a central registry being "fantasy and paranoia", even the limited system we now have has already presented me personally with a real and continuing burden. As I am one of the unexpectedly frequent victims of faulty data matching, I have a continuing struggle to prevent being linked to other people of the same name and date of birth. To say that errors "can be dealt with easily enough", that is not so even now. That is, they can be dealt with but not easily; after two years I found that I had not received driving licence correspondence as it had been sent to Koo Wee Rup. As, when and if there is a universal system, far from these independent checks being as convenient the errors that creep in will be locked in; any "check" will simply be referred back to the central registry which will accurately if spuriously return the false information it holds. If on immigrating I found it hard enough to get a Tax File Number on the grounds that I already had one and lived in Gippsland, what would happen to people in my predicament in the future? The worst that has happened to me so far was being given a difficult deadline to challenge a Social Security penalty some years ago, with a contact address for an office that was in the process of closing, when one of my alter egos had left the country without my (naturally) telling the government. At least it is unlikely that I will face the fate of the person who was recently deported because of mistaken identity (page 6 of the Australian of 4.12.01), but if that ever happened to anyone just how easily could it be challenged? It was sheer luck that brought that case to light.

And that is just an example of what can happen to individuals when mistakes are made. It cannot be measured by any aggregate, as those tests simply slide over the problem. How much worse could they get if, indeed, there ever were bad faith at any level, whether institutional or from the misbehaviour of some individual? Both possibilities exist, with the latter being realistic if we can judge from recent court cases against a former ATO officer.

No, in this matter, as in matters of constitutional change, I prefer Henry Ford's design philosophy: when asked why his cars did not have a certain common feature, he replied that if he didn't put one in it couldn't break and it couldn't fall off. And, he might have added, the savings in money, space, and weight could be devoted to the other parts. In the days when automotive matters were untried, unproven, and often erratic, this was a sound principle whatever the advantages of the feature. Since - contrary to your position, and as I have found from my own direct experience - we do have serious defects in our existing identification approaches, I submit that this is the line we should take here.

Return to the contents list.

Letter printed in New Scientist of 20.4.02

"Land and Freedom" article

(This was somewhat edited before being printed. This version shows the original draft.)

The article "Land and Freedom" on page 17 of New Scientist of 23.3.02, and the fuller version at your website [or here], present differing views about whether these developments will actually help people they displace. The developers claim that they will find other jobs, and will be better off as there will be more GDP for them to share in.

There are several problems with this, pretty much the same as happened with the Enclosures in England or the Highland Clearances in Scotland but with one further aggravating feature:-

The only way forward is likely to be impractical: it requires compensation to the evictees, not merely to make sure they get a net percentage of the gain considered as a capital lump sum, but in the form of an indefinitely sustained subsidy flow that is enough for them to compete with other unskilled Indian peasants indefinitely even if not enough for them to survive on by itself. Otherwise they will be in the same unemployable boat as unskilled Australians who cannot compete with third world semi-subsistence labour without a similar subsidy or the equivalent, only without our Social Security safety net to keep them alive. (The Australian situation would be bad anyway, even without subsidised foreign competition - there is an externality involved in resourcing Social Security that unnecessarily raises levels of unemployment here.)

Return to the contents list.

Unpublished letter to the Spectator, written 15.9.02

Andrew Kenny's article of 7.9.02

Andrew Kenny's article of 7.9.02 comes to the wrong conclusion on some important economic issues, not so much from getting his material wrong - it's correct, as far as it goes - but from leaving out some important things that he couldn't be expected to know. But he should know to some extent - the very approaches he recommends as having helped the west, did indeed have horrendous side-effects in each of England, Ireland and Scotland in various ways in the 18th and 19th centuries. This, despite the fact that the aggregate gains were real and there are only beneficiaries left now to tell the tale.

Take his advice that developing country "small" farmers should increase their cotton crop with genetically modified seeds. There's no world shortage of cotton, so although these particular farmers would end up better off (at first), very little more cotton would be sold; other cotton growers would end up worse off, and a lot of the gain would go to buyers in developed countries from lower prices. After a while, from competition, all the growers would be forced into using the seed, so everybody would be back almost where they started. But they would all be paying for the GM technology, with no compensating local gain for the investment they would be servicing.

This payment overseas is an analogue of the absentee landlord scenario that Nassau Senior analysed for Ireland, which is disproportionately harmful in underdeveloped countries. But it gets worse. To the extent that land did get diverted from growing food into producing cotton as an export cash crop, other people in those countries would suffer. That includes the genuinely small farmers, subsistence farmers who end up dispossessed, not just the employees of the comparatively wealthy cotton growers and the urban poor, because it's only the growers who decide what's profitable. And no, the marginalised don't end up paying for imported food with their new found wealth; they don't have any.

So far this is just what's typical, for instance for coffee in most countries that grow that, but it gets worse. Cotton is a thirsty crop; whereas owner farmers can decide for themselves what pays best, using water resources has a cost that spills over onto the rest of the farmers. And these countries don't have proper water use systems, and if they ever did get any then running those would cost as well.

This whole area is crawling with market imperfections that prevent the gains reaching the poor, not least the way the dispossessed can't move to the areas where the gains are occurring - those are in the countries where they get their shirts cheaper.

No, as Peter Jones may tell you, the kind of reforms that are likely to help are those that Solon and the Athenian tyrants tried with some success: ban exports of staples, confer security of tenure on land use to encourage improvements, and only permit exports of high value added products and agricultural products of a sort that don't compete with food production for resources. In Athens they exported olive oil; what is today's equivalent? Not cotton.

Return to the contents list.

Unpublished letter to the Melbourne Age, written 1.1.03

Geoffrey Heard's letter of 30.12.02

Mr. Heard claims that English experience of common land shows that English law recognised and worked with "community rights of property".

In fact the latest newsletter from "Prosper Australia" has an article proving it worked precisely the opposite of that, so John Dawson was right after all. On page 15 the newsletter states that "contrary to a widespread belief, all common land is private property", citing sources.

The thing is, common land did not embody any idea of a "community" that would have been an entity owning and controlling land. Rather, for each village there was a restricted group of commoners who each individually had certain restricted rights on common land, say to graze animals or collect fuel wood. The public at large was barred, even commoners from other villages and underprivileged people from the same village.

What this shows is that even when there was a community, English law had to rearrange the problem so it could be handled one on one by individuals. Common land doesn't mean any legal precedent for handling land rights communally after all.

Return to the contents list.

Letter printed in the Spectator of 1.2.03

Bunyan in Oz

Peter Hitchens asserts [in an article of 18.1.03] that Philip Pullman is writing a sort of inversion of C.S.Lewis' Narnia books, tracking them but inverting values and incidents that work their way out in the books and so producing something atheist where Lewis was Christian.

This is hardly the first time something like this has happened. In the nineteenth century a clear pastiche of Bunyan's Pilgrim's Progress appeared, with a journey that ended not in heaven but in finding and taking the way back from the very destination that Bunyan warned was there. It even inverted identifiable incidents, like Christian's ingenious way of avoiding being destroyed by the glory of heaven before he was ready for it. I am amazed that this obvious antiparallel was not seen for what it was and banned by every library in the USA.

I refer, of course, to the Wizard of Oz.

Return to the contents list.

Unpublished letter to the Australian Financial Review, written 8.4.03

The Liberal Party's practical help for the disadvantaged

In his article of 7.4.03 Geoffrey Barker calls on "liberal conservatives" to remember the less well off rather than pushing them down while the rest advance. He also reminds the "ideological" liberals that they still have a selfish interest in this - a point Disraeli made before.

The thing is, right wing parties have a vested selfish interest in this sort of help; promoting people out of poverty increases their constituency. And, of course, left wing parties have no interest whatsoever in that - all the poor can reasonably hope for from them is a drip feed sufficient to maintain a captive constituency in its captivity.

But the Liberal Party of this country has not forgotten, still has those who care without being fuzzy. At the most recent Victorian Liberal Party State Council the Beaumaris branch put up a motion on this theme, and at the one before my own branch (St. Kilda Road branch) got a motion passed to have Professor Kim Swales' work in the area studied - work which suggests a helpful market reform. The fact that in six months nothing has been done about it says more about the party's priorities, resources and capacities than about whether Disraeli's message has been forgotten.

Unpublished letter to the Australian Financial Review, written 22.4.03

Peter Saunders' and Andrew McCallum's article in the Australian Financial Review of 17-21.4.03

In their article of 17-21.4.03 Peter Saunders and Andrew McCallum present two opposite poles of a debate on how to help unemployed people re-enter the work force.

Even if we confine ourselves to the two poles on offer, there is a considerable amount at cross purposes. Neither description allows enough for time scale issues and their transitional costs, which amount to an uncertain investment. Increasing minimum wages does indeed cause the harm Peter Saunders fears; only, not straight away - and in the short term there really would be the improvements Andrew McCallum wants, before their damage exceeds their gain. That makes a vicious spiral of dependency.

Yet, precisely because we are already in that spiral, doing the opposite would first produce the harm Andrew McCallum fears; only later would there be any improvement. Effectively, we have already drawn down and lived off capital that was embedded in a healthy full employment economy. It would cost us to reinvest that capital. And unfortunately, for complex reasons to do with how advanced our economy is, it is unlikely that any simple relaxing of the burdens would be enough. It is more likely that raising tax thresholds would eventually improve the lot of many but still leave others marginalised - yet more inequity. Even the gainers would have to wait for the working environment to change before they got anything.

Peter Saunders accurately states that raising personal tax thresholds is "the most radical solution on the table". That is a large part of the problem - other candidate solutions like Professor Kim Swales' GST tax credits just aren't on the table yet. I know Peter Saunders knows about that one, because I myself described it to him when he was recently in Melbourne. Yet these candidate solutions would bypass all that delay and costly investment in improvement. They are at least valuable as part of a transition.

We shouldn't polarise the debate but look for wider options and areas of synthesis.

Return to the contents list.

Unpublished letter to the Australian, written 9.5.03

Max Boot's article in the Australian of 8.5.03

In his article of 8.5.03 Max Boot makes out that "on the whole US imperialism has been the greatest force for good in the world during the past century."

This is manifest nonsense. Even if we grant that imperialism can ever do net good, that it makes sense to net these things off in that way, there were already European empires trying to do precisely that right up until the middle of the last century. It was US efforts that stopped them, so even if there was good done it was at the expense of good that the USA prevented; so the USA cannot possibly have done any good on the whole. And if there was not good done, if it was wrong then of (say) Britain and France and Israel to try to stop dictators from coming into being in the Middle East because there was also something in it for them at other people's expense - why, it is at least as wrong now of the USA to try to remove those dictators at that price without either the Europeans' hard won advantage of experience or their moral high ground of never encouraging the dictators.

As far as the good of imperialism goes either we owe the USA nothing since it took more with one hand than it gave with the other, or we owe it nothing since it wasn't doing good things at all.

Return to the contents list.

Letter printed in the Sunday Age of 25.5.03

US ponderables

(This was somewhat edited. As some of the cut material was significant, this version shows the original draft with the cuts left in. They are roughly indicated by being coloured red. This site includes the version as printed.)

In his letter of 18.5.03 Ilbert Phillips makes a number of [several] pro-US statements, backing them up with a whole series of misunderstandings. Let's go through them:-

Return to the contents list.

Unpublished letter to the Spectator, written 11.6.03

Johan Norberg's article and Banned Wagon of 7.6.03

In the latest Spectator, Johan Norberg has told us roughly the right thing for the wrong reason - and similar reasoning in Banned Wagon has pointed in quite the wrong direction.

Yes, all the things Johan Norberg states about benefits from globalisation to workers in third world countries are correct. Only, that has very little to do with whether that is helping. The catch is, the workers are not the ones at the bottom of the heap in those countries as the poor there aren't workers yet - and without all sorts of proper markets, matching property rights and good governance, the marginalised don't end up being promoted into being beneficiaries any more than they did with us during the Highland Clearances or the Enclosure of the Commons. And countries without proper markets, property rights and good governance are the kind there are.

What Johan Norberg did not look at was what new Nike factories cost the people who don't work there. As it happens, that's practically nothing - so his conclusions are correct overall despite his reasoning being incomplete, and Nike is indeed a benefactor there. But it's another story with exported cash crops like rice, coffee and cotton, which he touched on and which were the thrust of Banned Wagon.

What happens with those is just what that notorious dry Nassau Senior analysed in the 1830s, when he showed that absentee landlords did not hurt manufacturing England but did hurt agricultural Ireland. A multiplier means that people there needed to export even more and ate into their own subsistence requirements; the cost of living rose disproportionately, even as non-cash subsistence dwindled. So paid workers and cash crop farmers, compradores and cottiers, do indeed get better off - but the peripheral workers start to starve. Yes, their cash incomes rise, but their subsistence resources vanish; it's like the story of Ruth and Boaz, only with Boaz not even knowing that Ruth the gleaner would perish as he ceased to leave gleanings while he grew rich with new ways.

This ought not to happen, but it does: because the marginalised don't have property rights in the resources they used to have, and so aren't compensated for their loss (poor institutions in those countries); because there are kleptocrats there, not all being like Boaz but rather like the rich man in the parable who took the poor man's ewe lamb (poor governance); and because of something from outside, from our new world order. That something is the way we don't really compensate these countries for the change.

What ought to happen, roughly what happened when Britain invested overseas a century ago, is that real funds flow out and make new roles appear. Nassau Senior's nasty scenario never happened then, because absentee ownership of foreign investments was matched by making those investments in the first place - as those funds went overseas they made the very new opportunities that were needed. The Argentine ended up with railways as well as exporting beef, and nobody starved from losing subsistence because they found new jobs arising.

But now is different. Now the US dollar is the world reserve currency, and as it is a fiat currency a large part of the funding corresponds to printing new dollars and isn't really making new investments at all; it's just mobilising local resources and acquiring existing investments. This has the effect of moving food from mouth to mouth and not making new opportunities at all - you can't simply say the poor ought to take the Nike jobs, as not enough appear. If you apply Johan Norberg's reasoning to these countries now, it all looks good as this or that peasant makes good - but it leaves the marginalised out of the accounting, as they get squeezed off the edges with nowhere new to go.

It is a sad final irony that charitable groups are even now agitating for these countries to be thrown open to wider agricultural export opportunities. As things are, without first arranging for those new jobs to arise in step, that can only condemn the poorest of the poor to even worse.

Return to the contents list.

Unpublished letter to the Spectator, written 1.9.03

Anthony Daniels' article of 30.8.03

Anthony Daniels compares Pauline Hanson with Jean-Marie Le Pen; a better comparison might be with the late Pierre Poujade.

Hansonites are a broad church, not a racist one. The National Republican Movement doesn't make all Australian republicans into racists. In fact Hanson's offence consisted in measures to prevent racists and the like taking over. Australians' real objections to greater migration are merely being demonised as racist; but they are only objections to more people than we can digest and provide infrastructure for, leaks that gain on the pumps. Any cultural preference for (say) the British is not prejudice but acknowledgment that some people have a cultural head start in being easy to digest. There is no objection to giving others the same head start as well, just to throwing too many at us too fast and too far off the deep end to cope with. That just drags others down too.

There is no great irony in Hanson deploring light sentences yet not getting one. The main objection is one of principle, to the conviction being "proper" at all, to laws that make such things a crime in the first place. This is how Pauline Hanson compares with Nelson Mandela, not in what they stood for but in the way they really were handled under due process of law - it's that and not Hanson's actions that reduce our confidence in the electoral process. It says more about the system that makes the law, and which the law supports, than about the people caught under it or brushed aside by it. (The long established Democratic Labor Party is being brushed aside right now.) It is worse than a crime, it is a mistake to sit on the safety valve of democracy. Australian democracy enforces a party system as an intermediary priesthood, one that filters out and distances the people, so Hanson needed one too to be in the game. Staying out of the kitchen is a solution to getting too hot, but not to stopping the cooks running things hot throughout the house.

The underlying problem is institutional. Over the decades well meant things like secret ballots and paid representatives were followed by compulsory voting, direct public funding of parties, and compulsions on representatives not to abstain. We even have some of the targeted exemptions to compulsory voting that Aristotle condemned as a fraud on the public. Grass roots support became unimportant with these gentleman's agreements between the parties, and the insider culture changed imperceptibly slowly away from the people. So now we only have isolated insiders, and party structures are barriers. I have experienced this myself: over a year ago I got our (right wing) Liberal Party to resolve to study Professor Kim Swales' approach to unemployment - not implement it, merely study it. The party has not done so, and will not provide me with contact lists, letterheads, or other authority to do it myself. They do not go in themselves but stop others from going in. Hansonites cannot simply work constructively within the system - it's closed to new entrants. Even when the politicians think they are listening, it's only within a groupthink round robin of politics, the media, and academia. I have more chance of contacting the Australian public through the pages of the Spectator than through anything here.

By the bye, this elite of ours is not famous for drinking Champagne but Chardonnay. If they were closer to the real world they might not. I once knew someone who refused to touch it because he had worked on a farm during a mouse plague and had fallen in the grain enough times to know whereof he spoke. He said Chardonnay tasted of mouse piss.

Return to the contents list.

Unpublished letter to the Australian Financial Review, written 14.9.03

Peter Saunders' article in the Australian Financial Review of 12.9.03

In his article of 12.9.03 Peter Saunders is solving a problem we haven't got, how to get the long term unemployed looking for additional jobs - ones that they wouldn't just be taking from someone else. He suggests that cutting payments to the long term unemployed will encourage them to find jobs rather than slumping into despair, but he supposes that this pressure will not be deadening itself and that it won't itself eat into even the job vacancies we have now.

We aren't facing a situation with employers crying out for workers only to find the long term unemployed unwilling to become employable. At the moment the regular supply of new vacancies really is met by the oversupply of unemployed, and employers do fill all jobs.

While the ratio of seven or eight unemployed for every job doesn't mean there aren't jobs along eventually, the preference of employers for fresh and skilled workers means opportunities get mopped up before the long term unemployed get a look in. Peter Saunders' hope is to change this. But at best that could only make the long term unemployed more eager to take work than those not out of work so long - it would be a substitution effect, poaching jobs that would have gone to fresher people. It wouldn't even work if the same pressures faced those fresh people, motivating them too.

And what if new "jobs" people became willing to take under pressure were antisocial ones, from petty crime on down? Social Security was invented to head off problems like that.

To see the absurdity, consider this improvement: what would happen if we forbade employers to hire people until they had been out of work for a long time? It would clearly be unjust, and it would mean less multiplier increase in GDP to draw in workers since the ones on offer would be staler. With less GDP there would be more unemployment all up. But it would have one thing going for it, at least employers would try to offer retraining they themselves valued instead of the present sort which they don't.

No, to be truly constructive we should try the "five economists' plan" or Professor Kim Swales' similar approach using GST that would actually increase employment and not just move it around. Peter Saunders' idea can only move problems from one budget area to another, fooling people that there was an improvement without ever getting anybody a job that wouldn't have gone to someone anyway.

Return to the contents list.

Unpublished letter to the Australian Financial Review, written 6.11.03

John Quiggin's article in the Australian Financial Review of 6.11.03

In his article of 6.11.03 John Quiggin states that "by giving up on the idea of the governor-general as a neutral figurehead, the government has effectively conceded defeat on the main arguments against a republic and direct election."

Even supposing that the idea has indeed been given up on, rather than having a brief shadow cast on it, that has nothing to do with the main arguments anyway - although it does have a lot to do with republicans' own objections to a direct election model. However if Professor Quiggin or anyone else wants to hear the main arguments against a republic in general, rather than the republicans' own arguments against one particular model of republic, they shouldn't look for them from republicans.

I myself know of several general arguments against, ones that don't merely apply to this or that model. Here is one example. We know by simple observation that there are far fewer successful long term republics than monarchies - just the USA and Switzerland, and not Canada and Sweden as a republican once suggested to me. We don't know what the problems are, but we do know that there are problems and that it is for republicans to find a way past rather than require the status quo to justify itself. We don't know what led to those two exceptional successes but we do know that it may well have involved each passing through the fire. Taking all in all, we don't know how to repeat the trick let alone how to avoid that intolerable cost. Yes, monarchies also paid similar costs - but ours are sunk costs that happened far away and long ago.

Or to put it another way, if it ain't broke don't fix it.

Return to the contents list.

Letter printed in the Australian Financial Review of 6.1.04

Hegemony a first step to imperialism

In his article of 31.12.03 Professor Quiggin has no doubt inadvertently gone off on a false trail.

To give just one example, when he writes that a "characteristic feature of empire is that attempt to extend a single model of government and a single concept of citizenship over many different peoples", it just isn't true about empires in general. It's what the French did, but that was just what the French wanted to do with their empire to live up to their own justification to themselves, their "mission civilisatrice".

Most empires were multicultural and cosmopolitan. The Romans, the Turks, the British - all these didn't care about moulding the people they ruled, and they even provided institutional ways of coping with differences. In India the British kept so far hands off that as much as a third of India remained under indirect rule and following local practices right up until independence. In fact it was independent India and Pakistan that started trying to move in deeper. That is what made Hyderabad and Kashmir what they are today, not any heavy handed British monoculture.

So empires did actually use the methods of hegemony. They only tended to move into more direct rule when indirect rule came apart in their hands. There is no contradiction between hegemony and empire at all, and to show that the USA is being hegemonic isn't showing that it is not an empire, just that it might only be on the first steps towards empire. US anti-imperial intentions don't disprove it either, since even Britain didn't develop imperial ambitions until after it acquired an empire "in a fit of absence of mind".

Return to the contents list.

Unpublished letter to the Australian Financial Review, written 14.1.04

Andrew Leigh's article in the Australian Financial Review of 14.1.04

In his article of 14.1.04 Andrew Leigh concludes from Western Australian experience that a 1 per cent rise in the minimum wage is associated with a 0.13 per cent fall in employment, a small and acceptable cost.

There is good news and bad news about these results. The bad news is that they have not looked at the right measures. Since an initial fall in employment in Western Australia leads to a fall in tax revenue there and an increase in Social Security outgoings there funded by revenues raised in all states, there are external costs. Some of the burden is spilled over onto other states; a proper methodology needs to reveal adverse employment effects across all states. Just reporting the local adverse effects only tells us a lower bound on them, and there is some reason to suspect that the true figure is materially larger.

The good news is that what drives all this isn't really the minimum wage but the marginal cost of hiring. Standard methods of dealing with external costs can raise the minimum wage without flowing through to the marginal cost of hiring. Senator John Cherry of the Democrats has in effect just suggested one method, using tax credits on income tax. This would amount to a "Pigovian subsidy" to eliminate the external costs. Unfortunately it has costs of its own, mostly from time lags and from being somewhat targeted, but other methods like Professor Kim Swales' tax credits on GST even avoid those costs.

Return to the contents list.

Unpublished letter to the Australian Financial Review, written 21.1.04

US marijuana taxes not for revenue after all

Contrary to what Graham McCorry supposes in his letter of 21.1.04, the USA did not use 1930s taxes specifically on marijuana for revenue. Rather, using federal taxing powers was a legal trick to circumvent the US constitution which did not let the federal government ban marijuana. The tax law was passed and tax stamps were printed up to comply with legal requirements - but none were ever issued administratively, so making all actual marijuana sales illegal.

Of course this sort of lifting with the back misleads casual observers into learning the wrong lessons about the effectiveness of different measures. But worse still it reduced the moral force that law is supposed to have, as well as violating the spirit of the US constitution. This was a triumph of the tacticians over the strategists, not a victory for either integrity or utility.

Return to the contents list.

Article circulated privately and written on 30.3.01

Nine economic options for Australia

N.B., Some of these measures require others as preliminaries or as long term adjustments.

  1. Short term. Give farmers grants to convert diesel engines to use biodiesel, and loans to establish biodiesel processing cooperatives in the regions. Undertake to buy Australian grown biodiesel for government purposes.

    Advantages: helps the rural sector and the balance of payments in a sustained way.

    Disadvantages: direct cost and opportunity costs of distorted agricultural sector (but the distortion will clear as fossil fuels become uneconomic).

  2. Long term. Promote renewable fuels with tax breaks, including renewable alcohol/vegetable oil two stroke fuels which actually improve net CO2 emission levels by locking up biological carbon in soot.

    Advantages: helps the rural sector and the balance of payments in a sustained way, and helps with environmental obligations.

    Disadvantages: opportunity costs of distorted agricultural sector and foregone tax revenue (which also clear over time).

  3. Short term. GST and BAS complications can be headed off by "composition". Small businesses (defined by low turnover and by not being diversified) should be offered a substituted form of payment, based on a proportion of turnover. This proportion should depend on the category of the business, worked out by the bureaucracy from existing ABS figures to yield the same as the equivalent GST. (Clearly this is only possible when there is only one whole or main category of business activity.) Compliance should be monitored by the government, using modern statistical methods on the quarterly returns and initial statutory declarations about business category. Businesses dealing with these compounded payers would work with deemed embedded GST payments, to get their own business credit entitlements.

    Advantages: reduced compliance costs.

    Disadvantages: none, unless you want to increase bureaucratic monitoring for its own sake.

  4. Short term. Employment can be boosted by allowing GST and compounded GST payers a discount of some $10,000 per full time employee per year (pro rata for part timers, based on a 40 hour week). This boosts employment but causes a yield shortfall for the States who will be getting that revenue - but they don't have a short term problem anyway, and they can means test free services until employment improves, then cut them. Fiscal drag can be allowed to claw back some of the value of the GST offsets, eventually leaving them at some 5% of average wages.

    Advantages: improved employment and GDP.

    Disadvantages: the yield shortfall that needs to be made up, and a risk to the balance of trade from higher levels of demand for imports.

  5. Short term. Apply a temporary revenue tariff (ideally to exports, and best of all to exports of primary products) to bridge the temporary GST shortfall. Hedge the currency changes, but only with respect to forward purchases of fuel. Because of impact/incidence issues, this and the previous measure cancel out in most respects but still promote employment.

    Advantages: makes up the yield shortfall and also chokes off the risk to the balance of trade, minimising harm to servicing foreign debt if primary products are targetted.

    Disadvantages: might be misunderstood as protectionist, particularly if prolonged; may need careful explanation of how the measures do not cancel completely.

  6. Long term. Either raise the GST rates to compensate for the yield shortfall, or (better) the States should provide a specialised Land Tax to make up the difference, falling only on commercial premises and deriving tax rates from average profit levels of businesses in each tax area (so not rising materially with each business's own improvements). This also permits adjustments for the windfall gains of labour intensive sectors without harming the overall boost to employment.

    Advantages: makes up the yield shortfall without harming either the employment gain or the GDP gain (in percentage terms, this may be about half the employment gain).

    Disadvantages: releases demand for imports, which requires a boost in saving to compensate; merely raising general GST rates may lead to excessive marginal costs to businesses.

  7. Short term. Apply selective Income Tax cuts by age, with over 55s to pay a simplified flat rate of 20%. This boosts savings, and will encourage self-funded retirees to migrate. Compensate for the free ride to the superannuation industry by requiring it to transfer existing low-risk revenue yielding assets to an Australia Permanent Fund, according to actuarial projections. The returns from this compensate for the loss of revenue.

    Advantages: improves the balance of payments by allowing these assets to be drawn down, and by bringing in the funds of retirees.

    Disadvantages: the advantage is unsustainable, and such a fund is exposed to sovereign risk if a tax burden is reimposed on those who already compensated for their taxes by releasing these assets.

  8. Long term. Entrench the Australia Permanent Fund constitutionally, to prevent it being run down (compare the Alaska Permanent Fund and Alberta Heritage Fund); also require a prudent proportion of any deficit to go to the fund. Warn the electorate that the ALP cannot resist that sort of accessible resource.

    Advantages: eliminates the sovereign risk.

    Disadvantages: restricts the government's freedom of action, effectively hypothecating revenue.

  9. Long term. Move back pensionable ages by one year for every two calendar years that pass, lowering the cutoff age for the Income Tax break to match actuarially in compensation. It is important to prevent the ATO deeming retained profits in businesses to be notional income of owners, withheld to put the income into a year after the cutoff - such saving is useful. Require the superannuation industry to shift its administration and assets gradually to the Australia Permanent Fund.

    Advantages: builds up long term savings, effectively switching unfunded liabilities to funded liabilities.

    Disadvantages: slow, and further restricts the government's freedom of action (but acceptable as previous measures reduce people's dependence on the provision of services by governments).

I am indebted to the work of Professor Kim Swales of the University of Strathclyde and his colleagues for certain statistical details, and to Dr. Tim Hendtlass of Swinburne University for details of modern statistical monitoring with neural networks.

Return to the contents list.

Determination of the 135th Victorian State Council of the Liberal Party, 12.10.02 (resolution no. 23, submitted by the St. Kilda Road branch)

Resolution

That a small working group be set up to evaluate Professor Kim Swales' approach to helping unemployment and to report back on it in an Australian context.

[Despite the very specific resolution passed by the State Council, as at 1.10.07 action is still bogged down in the Liberal Party bureaucracy, which so far has only mistakenly referred the matter to the Australian Public Service for a ruling on the desirability of one particular one of Professor Kim Swales' suggested policies instead of setting up a working group to look into his whole approach; it is hardly necessary to add that the Public Service has even misunderstood what is involved in that one policy.]

Accompanying statement

Several research groups have offered a number of approaches to helping unemployment. One of these is the "five economists' plan" for a variation of Negative Income Tax. While promising, it has serious continuing funding problems and also has up front costs to be carried until it starts paying back. Professor Kim Swales of the University of Strathclyde in Scotland has designed a variant that makes use of GST rather than Income Tax and which gives employers a tax break rather than assisting workers with a labour subsidy. It is constructed to avoid these particular problems, at least in the UK. We should look into what it does instead and find out any side effects, then see if it can be worked up into practical Australian policy within a wider package.

Executive Summary (given to St. Kilda Road branch)

The "five economist's plan" is a variant of Negative Income Tax, as is the American "Earned Income Tax Credit". This replaces a collection of support systems with a single basic one, working through Income Tax; for people on low incomes there is actually a payment, and for people with no other income they just get the equivalent of Social Security this way.

The thinking is that by reducing the wages that potential employees have to hold out for, and by eliminating poverty traps, it will become practical for employers to offer lower wages that are still realistic enough for everybody to price themselves into work.

The known catches are:-

One particular feature is that this has losers as well as winners, and it gets the losers early while winners don't turn up until much later. The hope is that in the end everyone ends up better off - maybe a few elections down the track.

It's possible to aim at the same general target and achieve even worse results; that's what the Greens' idea of a "Guaranteed Adequate Income" would do, since it needs far more funds for far longer (impossibly huge funds, in fact). EITC compromises on moving the poverty traps around, and also minimises funds outflow during start up (the unemployed don't get any funds - which also means they can't take just any job, since they need to finance [surviving during] their first work from it).

Professor Kim Swales' work eliminates all or most of the problems. This is by using GST rather than Income Tax. Under this, employers get what amounts to a Negative Payroll Tax, with their GST bills being reduced by a standard amount per full time worker they employ; this can be set as high as Social Security, though long run levels can be lower and you can start with the low levels if you do not need quite as rapid results.

Again, in the standard version the tax take is kept up by increasing the nominal rate of the carrying tax, GST. In a model using the British equivalent, VAT, Professor Swales found that an NPT set at 5% of average UK wages would lead to serious improvements in both employment and GDP, under a number of varying assumptions. You can find his material within http://www.faxfn.org at http://www.faxfn.org/feedback/right/issue_03/jobs_tax.htm#23feb98a [now here]. I have also analysed this using Game Theory (see the link in my signature below).

The improvements are in these areas:-

There is still a problem from higher tax rates, but this is mostly illusory since all actual payers - employers - are getting their adjustments before they pass the whole burden on to consumers, and the adjustments can be set lower than with Negative Income Tax. However there is still a real problem, since Australian GST is a defective consumption tax. Without going into too many details, this can be cured in a number of ways. It can be patched by having the States make up the shortfall themselves with an increase in Land Tax on commercial properties (but not by increasing Payroll Tax, which harms employment by undoing all the good work of NPT). This works because they get all the GST revenue, they can apply the patch, the patch also falls on businesses that pass it on to consumers, and the burden of the patch does not vary with the amount of business done (which was the heart of the problem). And it's politically realistic since the States are currently under different management, and Federal promises to remit the States all the GST revenue don't apply to keeping the GST revenue up.

It also seems that there could be a problem "at the edges", where one tax regime meets another - which means, with foreign trade. So we have to be very careful looking into all the ramifications.

[The signature on the original email led here.]

Return to the contents list.

Article printed in News Weekly of 18.4.98

Today's unemployment and some of the cracks rational economics falls through

In an interview the other day Bishop Challen wondered how the world could reward company advisers for downsizing. The big puzzle is how the numbers work out so that we are all somehow better off for putting people out of work. Rational economics jumps through hoops trying to show that this is all really a good thing in the long run.

There are other possible explanations, and one is "externalities". That is what happens when costs aren't properly shared, so the people getting the benefit don't match up properly with those paying for it. For instance, in Britain there is a mismatch between costs with road and rail transport. Trucks use roads which have been partly paid for out of all tax revenue, not just from road taxes, but railways are maintained by funds which are well matched up with the railways. That ends up favouring roads over railways, because ordinary taxpayers are subsidising the road transport industry.

To give them their due rational economists know all about externalities, and they know exactly what to do about the problem. Just make the costs go to where the beneficiary is, so everyone knows what's really rational. That's where the slogan "user pays" came from - it's a cure for all the problems caused by externalities. But it's more subtle than that, and the rational economists sometimes miss a couple of things. First, the trick is spotting just who the user is. When public urinals were introduced last century [now last century but one, i.e. the 19th century] the "user" wasn't obvious. It was the householder whose doorstep was no longer being used for the purpose - the person getting the benefit, not the person doing the deed. Second, there are some kinds of mismatch that aren't really externalities with the standard solution. For instance there's something called the "tragedy of the commons", known for nearly two centuries. It's not an externality because its cost mismatches do not come from one group paying for another - there's only one group involved, but in two different capacities.

Here's what happened. In the old days English peasants - commoners - literally had various resources in common and the village green really was a common they could keep animals on. But there is a limit to any common's carrying capacity. If the yield of the common starts dropping off when there are twenty animals on it, so twenty-one yield as much as nineteen and so on, there is a problem. During the seventeenth and eighteenth centuries village populations started reaching the limit - say, ten extended families with two animals each. Each commoner had to decide individually whether to put on more animals. The numbers say, add one animal and total yield drops - but whether the others put on more animals or not, each commoner's share is better with one more than without. The best interest of all can be very different from that of each.

This pattern happens in other places as well, such as the way all customers pay for the operating costs of credit cards whether they use them or not - the cost goes on the price of everything, whether bought with a credit card or not. If you tell the banks about this they patiently tell you that it is all really being paid for by growing the market. But that's missing the point - there is a tragedy of the commons whether the market grows or not. If the market grows enough to keep prices as before, that compensates, but nothing says it must. [Since writing the above, Australian law has changed to allow retailers to charge credit card users differently.]

That's what's wrong with the idea that productivity gains always help us all by creating enough new jobs even though old ones are destroyed - nothing says they must. And it turns out that along with other things there is a tragedy of the commons helping to drive up unemployment. Social security is a cost of unemployment, but it doesn't show in the numbers that employers face - it's part of all employers' tax, not of each employer's tax. No individual employer feels the yearly $10,000 or so social security cost of each retrenchment. Payroll tax makes things even worse.

But we could offset the bias by rebating $10,000 from employers' yearly tax bills for each employee, raising the general level of tax to compensate. Taxes would only look higher, because after the rebates the tax bills would stay the same - and they would drop as unemployment eased. Less tax wouldn't hurt the government, because the social security bill would narrow in step with the tax base. Employee rebates would encourage apprenticeships, discourage retrenchments and bring the long-term unemployed into the workplace by privatising social security. And a GST with these rebates might be progressive enough to be acceptable.

Return to the contents list.

Article printed in News Weekly of 22.8.98

GST not a consumption tax, and some variant tax options

There have been many discussions of a goods and services tax or GST (or value added tax, VAT). Most of these have looked at what could go wrong or - from its advocates - what it should do, either in itself or as part of a package, in both the short and the long term. But that is only looking at the theoretical possibilities. These are limited by some features that are inherent in any GST. That is, no matter what we aim at or how things might change later, there is always an overall pattern.

In particular a GST has two major features:-

Other countries' experience backs up the first statement. The truth of the second statement is not so obvious. Most people - even some experts - think that, since all the tax is passed on by merchants and the consumers eventually pay, that makes it a consumption tax by definition. But that is an illusion, because while the end payers are obvious some intermediate effects are not.

Think what happens when a wholesaler sells an item for $100 pre-tax, the retailer marks it up by 15%, and there is a 10% GST on top. The retailer's numbers go like this:-

Most discussions don't show that second step. GST advocates frequently claim that improved cash flow from holding onto the $1.50 will pay for the compliance costs, but they leave out the hidden cash flow penalty from the tax prepaid on the working capital. It is true that the cash flow is better than with a WST (wholesale sales tax), particularly if there was a provisional aspect to that, but the improvement is only relative - and a later government might put in a provisional tax element. On the whole the retailer has poor cash flow, and the little benefit there is could easily be too small in relation to the compliance costs. How it works out all depends on the proportions, the timing, and how much use the extra management accounting information is to the retailer - which is why the compliance costs are uneven. Some businesses, especially big ones, need that sort of information anyway and there is no particular additional compliance involved, but for others it is a huge additional burden. In the example above, the retailer would need to hang on to the tax for literally years to get any material benefit.

For an economist most of the difference between consumption and production is investment. This includes working capital with value in trade as we have just seen, but it also includes fixed capital with value in use. For instance, if a newsagent buys a car for deliveries, that is fixed capital - it will get used in the business. Now, in some ways it is easier for a GST to adjust for that, because such purchases are less frequent and they can be classified as business inputs to generate a rebate. But is it so easy? First off, the exercise of classifying is not straightforward. There might be two identical cars in a showroom, and one gets bought by a newsagent for business and the other gets bought by a commuter. Before the sale they are both working capital, and afterwards one is fixed capital but the other is a consumer item. You can't tell just by looking at them. Just to complicate matters, the owner of record might be a bank with a charge over fixed assets, or a manufacturer retaining title over goods with a contract with a Romalpa clause. Who gets the adjustment?

Even worse, the classification as business inputs must be acceptable to the government. A few years ago there would have been trouble classifying computer software - and even today you can't depreciate it fast enough. Classifying fixed capital as business inputs is the same thing as the government picking winners - it requires the bureaucracy to make accurate judgments about what is or is not appropriate in running a business.

Such adjustments are possible, but they raise compliance costs and they are necessarily imperfect. It has been suggested that Australian compliance costs can sometimes be as much as the value of the work being done, in this case the tax itself, and - since Australian regulations change frequently - few transitional costs are truly temporary; before one lot of dust settles another lot gets stirred up.

A consumption tax is supposed to encourage savings by affecting consumer prices, and these are the same with a GST as with a true consumption tax. So why does it matter if a GST is a production tax? Because of that effect on investment. There would be an incentive to save - it's just that investing in Australia gets correspondingly harder, which counteracts it. Other things being equal, the net effect is to encourage people to invest abroad if at all.

There are a number of theoretical ways to turn any production tax into a consumption tax. You could allow interest on the rebates on prepaid tax, but it is next to impossible to allow the right interest on rebates to make the adjustment, and it would raise the compliance costs. A simpler approach is to grant interest free overdrafts corresponding to the prepaid tax. But it's still not very simple - it requires all the investment to be categorised, just as before. Compliance costs are like moving the wrinkles in a carpet around - whatever you do to claw back a problem just gives you another one.

There is another direct way, the "People's Bank" option, granting businesses low interest loans. Remember that interest free overdrafts on a proportion of capital would have been equivalent to making the right adjustment? Well, in their turn low interest loans against the whole business are the equivalent of that. The difference is that the loan decision is uncoupled from the tax issue and compliance is easier, because it is no longer necessary to justify the loans against tax-related information (but there are other difficulties with this approach).

As part of a tax reform package, however, none of this matters - provided we remember that we have not got a consumption tax and some other part of the package needs to help investment. One way is for the package to encourage savings that would flow all the way around to investment and make up the difference - Singapore and Chile offer examples we can look at. On the whole this seems the simplest way with the fewest compliance problems.

That still leaves the overall compliance cost problem for the original GST. There is a standard way to reduce compliance costs in the tax area, called "composition". With this the bureaucracy allows a grossing up and perhaps a shift in the payment point, so absolute detail is not required. For instance, while a strict PAYE (pay as you earn) system makes income tax easier for wage earners, the moment you have interest on savings your tax return gets harder. In the U.K. a special concession made life easier for the ordinary tax payer by allowing building society and post office savings to earn tax-free interest, at a lower rate because a standard withholding proportion was paid directly to the government by the institution. Similarly gifts to charities might be matched by government top-ups rather than making the tax payer get a refund on tax. It's necessary to place limits on who can do these things and how much, to prevent abuses - but the gain in simplicity saves people a lot of unhealthy stress.

We can use the same composition approach to simplify a GST - perhaps even completely out of existence. Bearing in mind that we can correct any production tax towards a consumption tax with the other parts of the package, we can turn our attention to other production tax options. We can either address production directly, with some form of turnover tax, or we can do it indirectly by taxing the factors of production - capital and labour, and classically land as well. From an economist's point of view all land is treated as capital these days, but from the taxing point of view it is easier to do things the other way around and focus on commercial plant and premises. Taken together these lead to four kinds of tax:-

The last two kinds of tax can reflect business situations well, provided the businesses are not too diverse. This is because there is already a statistical measure, the Du Pont formula, that brings out the appropriate profit levels for various sectors of the economy. This could be used to vary the rates. A turnover tax can be safely set higher because it adjusts for lower profit levels, but a tax on the use of commercial plant and premises can be applied to a wider range of businesses, even those with a range of activities, as the amounts owing simply add up in a straightforward way. Conversely, the more we have a fixed tax component the less we penalise profitability - economists have studied this in comparing fixed rents with sharecropping.

This means that a tax on the use of commercial plant and premises could displace a GST, but only until it burdened low-profit businesses. Since it can be applied locally it could be used by the States, replacing payroll tax - indeed, since payroll tax harms employment, a negative payroll tax could help it. If producers got a rebate matching social security for everyone on the payroll this would tend to bring people back into the workforce. The overall tax level would appear higher to compensate, but that would be an illusion. Total tax bills would be the same.

A turnover tax would need to have rates that varied with the Du Pont measure. You could only do this with simple businesses with a single rate, so you couldn't do it across the board. But these are exactly the businesses with serious compliance cost problems. We could use a turnover tax as a composition for GST for those businesses meeting certain criteria, say fewer than a cutoff level of employees and only one whole or main category of business activity. These businesses would be unable to concoct false returns plausible enough to escape modern statistical analysis.

To sum up, a GST could only work properly if other parts of the tax reform package encouraged saving with flow-on investment in Australia, and composition with a turnover tax can often be used to reduce compliance costs where these are excessive. State payroll tax that harms employment can be replaced by a tax on the use of commercial plant and premises, with a negative payroll tax component to encourage employment.

[Afterword: over time, a GST can provide some relief for tax on investment by allowing prepaid tax to be offset against tax due on current profits until the accumulated prepayment is eliminated; this resembles the interest-free overdraft approach, except that it is only made available very slowly and the compliance costs are even higher - it really only provides adequate adjustment in those special cases where capital requirements can be funded properly by retained profits.]

Return to the contents list.

Article printed in News Weekly of 17.10.98

Never make an engineering decision for accounting reasons

[This was written before the 1998 Sydney-Hobart race, and the example used may or may not describe the events of that race adequately.]

First New Zealand electricity, then Sydney water, then Victoria's gas - all have experienced major interruptions in the very recent past. Many people reached for their pet theories looking for the reasons, and ended up blaming privatisation, or failing that the corporatisation which often precedes it.

It cannot be as simple as that. Some of these utilities have been privatised for a long time, or haven't yet been privatised or corporatised much; and their equivalents in other countries haven't experienced similar problems. So we have to look deeper.

As various newspapers correctly observed, all these problems have a similar immediate cause: many systems have been cut back to the bone, eliminating slack in the name of efficiency and cost-effectiveness, so when trouble hit there were no reserves. This sounds like downsizing, only applied to infrastructure instead of people, so to that extent the accusations were fair. The problem derives from the same spirit of the age that shows up in privatising, even if it is not privatising as such. It has even happened with vital agriculture. Gibbon supposed that Europe was safe from the massive disruption that Rome got from the barbarian invasions because agriculture had improved and broadened its base; well, we have now reversed this - less than 5% of the U.S. workforce is directly engaged in agriculture, which is highly vulnerable.

How could we let things get that far? More to the point, what stopped it from happening before? We can look deeper and try to find an ultimate cause. We can look for similar cases in other fields, and then see what they have in common. A good one is ocean yacht racing. Every few years, in races across the world from Fastnet to Sydney-Hobart, yachts have been lost from the same immediate and ultimate causes. These are by now well known, but short of a firm hand by the race organisers the yachtsmen drive themselves into the same situation continually, like moths to a flame. What is the immediate cause? The yachts are built for speed not strength and stability, so they are not seaworthy enough for the bad years. What is the ultimate cause? Winning is the only thing that counts - coming second, even by a fraction, makes all the difference, so there is every incentive to keep shaving the margins.

But the trouble is that it's like the old engineer's joke about the right amount to tighten up a nut - just tighten it until you strip the thread, then wind it back half a turn. Pretty obviously that is the right amount to turn it in the first place, equally obviously the catch is that it is too late finding it out this way, and the point of the story is that there is no other straightforward way to work out the right amount. Since what is a safe yacht in one year is not what is safe in another, some designers end up getting away with things rather than learning the limits of what works - and the same applies to the regulating skills of the organisers, since between failures valuable knowledge fades; only bitter experience teaches it again.

Yachting competitions are non-linear - instead of rewarding twice the effort with twice the result, there is a sharp break and cutoff, which encourages cutting corners. We know this mechanism from physics, where it drives "relaxation oscillators". Most economic theory focusses on easier mechanisms which are linear or nearly so. This is not so far wrong - a relaxation oscillator is part of a violin, for example. What happens is that there are enough other things going on that the near-random oscillator mechanism gets smoothed out, and this averaging out makes mere noise musical.

That is what - mostly - happens in economic competition. If several people tender for a contract there is only one winner; but there is always another day and another contract, so it should smooth out, by and large. Only, it doesn't always. One reliable way to go broke is to gain an increasing share of a declining market sector - there are no tomorrows there. Contrariwise, you can get away with cutting a lot of corners in an expanding market - this year's orders are big enough to bury the costs of last year's mistakes. With high inflation this even happens with a steady or slow growing market. In either case the culture of the market sector can develop some very bad habits that cause trouble later when it goes into decline.

That could cause some of the trouble, but it still does not explain why it never used to happen, nor why the averaging out isn't good enough. There are two answers: it did happen, only we have forgotten it and the precautions against it our forefathers learned; and we now have institutions working to exaggerate the destabilising effects. In nineteenth century Britain there were a great many gas explosions, train crashes and so on, so these days, all over the world, trained gasfitters now install gas appliances and trains have safety systems. For an Australian example, there's the Goyder line. Some early settlers thought that rain followed the plough, so they pushed settlement further and further back; but they were ignoring Goyder's survey, which marked out the limit of reliable rainfall. As with the yachtsmen, the good years encouraged them to go too far.

This shows one possible cure, giving people proper guidance like Goyder's; once people took it seriously, they followed it. But modern institutions make that harder. In particular, even when companies know they should maintain a strategic margin, reserve or slack they are penalised for doing so - the way the Adelaide Steamship Company was, because low debt makes takeover targets. In theory this sort of thing maximises shareholder value; but the valuations don't always make that difficult judgment of how close to the line it is safe to go. That is, while corporate finance knows very well that the bottom line should also allow an offset for risk, the rest of the bottom line - from the gross profit - is easier to assess objectively than the risk factor. Working that out is as hard to judge as knowing how much to tighten a nut. With accounting the hard part isn't knowing how to add but what to add - categorising everything, leaving nothing out and not double counting. But since the entrepreneurs who go closest to the line get in first in today's way of doing things, they scoop the pool and end up in control of those companies that play it safer. They win out in the short term and the others don't even make it to the long term, so this enforces short-termism.

In the old phrase, companies make engineering decisions for accounting reasons, which is just as bad as making marketing decisions for engineering (operational) reasons or accounting ones for marketing reasons - while they should be kept in touch with each other the tail should never be allowed to wag the dog. Add in the idea of the spirit of the age, the way government-run bodies draw on the private sector for their best practice, and there you have it.

Return to the contents list.

Article printed in News Weekly of 9.1.99

Australian savings and investment, why and how

Why do we need to save more? At the moment Australia has a number of economic problems - or issues or opportunities, if you prefer. They work together, so even though you can start addressing them in isolation, as with my suggestions in April [1998] on attacking unemployment with a Negative Payroll Tax, you have to look wider.

For instance, any approach to improving employment has side-effects, some all its own but some just because there are more people employed. A happy and prosperous Japanese tends to save more. A happy and prosperous Australian, on the other hand, tends to go out and spend - and much of it goes on imported goods and services, which tends to blow out the balance of trade. Since we already have a problem with the balance of trade and the balance of payments, any way of improving employment would always aggravate this.

In the short term we can do something about this, but at a cost. We can do things to help the balance of payments with primage tariffs (still barely permitted), but that does not fix the underlying problem - the increased government revenue would still need to be channelled into private savings and investment somehow. With taxes on the primary industry content of exports, e.g. taxing their bulk and weight, and a floating dollar, we can get the same effect and encourage Australian industry to add value - but that gives the illusion of a burden on primary industry, which makes a political cost.

So the only real long term solution must involve an improvement in Australian savings, together with channels for them to flow through to constructive investment in Australia. Improved savings would help the balance of payments and inflationary tendencies directly, and would loosen the policy constraints on government spending. Constructive investment would mean that there would be a real payback later on, because when people drew down their savings there would be more opportunities to spend on Australian goods and services rather than on imports.

How to do all this? Well, that's the trick. One focus is on superannuation, either by individuals or by governments acting on their behalf. This partly works, but it faces two kinds of problems. One is that every increase in superannuation measures reduces personal incentives because it reduces personal involvement, and the other is that by interposing middlemen it restricts the channels that direct savings into constructive investment. We have middlemen for prudence, so as to make wise investments - not just to maximise our chances of getting more but to minimise those of losing the lot, partly by spreading the risk over different generations.

In a perfect world everybody would be far enough removed from personal distress that we could all look out for our own futures and none of us would need a safety net. Well, it's not like that, but we can imagine it and see where it takes us. Engineers study theoretical perpetual motion machines, not because they seriously expect to build one but because they know that the things that make them fail show the limits of real machines. In the same way, we can look at an imaginary perfect world and see what we need to do to make up for not being able to reach it.

Suppose we switched overnight to a regime where everyone funded his or her own superannuation. Straight away there would be an injustice and a failure. The injustice would be that people who had paid all their lives for the age pension would suddenly find it wasn't there. But there would be a failure too - nobody still in the workforce would have the right habits to save enough, and they wouldn't even have the means if they were unemployed or still faced the previous levels of income tax.

This gives us a clue. Still in the spirit of a perfect world, suppose that there were no unemployment or other factors that couldn't be eliminated at the same time as age benefits - that the income tax load could be wound back in step with age benefits and that people had genuine opportunities to make their own arrangements (we are talking about a perfect world, remember). Then we could phase out government pensions and compulsory superannuation by the grandfathering method - that is, everyone already retired at a cut-off date would remain beneficiaries, but no new retirees would be allowed into the system. That would be just to people who had already paid their way in earlier life. Only, what way would there be to give back the cost reductions as income tax cuts that would both be just and would allow people to make their own arrangements? On the face of it, none, because older people would not accumulate enough income tax cuts and younger ones might not develop savings habits early enough.

People who just missed out on pensions would really miss out. There is a way to reduce the injustice though - instead of restricting pensions to those who were already receiving them, just raise the eligibility age gradually, say by one year for every two that passed. That way at least those who suddenly had to provide for themselves would only have to save a little to cover a brief period, which is manageable - but it's still unjust.

Let's try again. Suppose that instead of grandfathering out age pensions completely, we just clawed them back a little, so they started a couple of years later. What then? People coming up to the former retirement age would deserve a greater opportunity to save, but would not face an insuperable hurdle - they would only need to build up a small nest egg.

Since we are talking about different phases of life that we all face, the equitable thing would be to concentrate the income tax cuts on these last few years of people's working lives.

It would be more just because the older taxpayers would not miss out on tax cuts later generations could benefit from throughout their lives. One useful thing about this is that people in this older range today happen to have greater savings habits than younger ones, so income tax cuts would translate into the necessary savings for these.

As younger ones entered the intermediate range between tax cuts and deferred pensions they would have the example of their predecessors to encourage them to save in their turn.

This is promising. We now have a scenario in which things are unchanged for older and younger groups, but both pensions and the taxes funding them have been eliminated for the intermediate age range (not taxes funding other things like defence, of course). Can we go back to grandfathering to increase the scope of the reform?

We can. By combining both sets of modifications - raising pensionable age more gradually than the passage of calendar time and lowering the age at which income tax rates drop in a way that matches the actuarial requirements - we could equitably drive a wedge into the present system, leaving an ever-widening window for people to make their own arrangements.

In a perfect world, that is - which this isn't. What's still wrong with it? For one thing, not everybody would have the opportunity to receive tax cuts - a point being made about tax cuts offsetting the impact of a GST. For another, we don't all have constructive channels into which we could pour our savings - for instance Japanese savings very often drive the inflation of asset values rather than increases of productive capacity and actual production.

There are some answers to these - partial answers, but in my view enough to make it workable.

First, we would always need a real safety net - a government pension as it was in the early days, guaranteeing survival. This aims lower than superannuation schemes that aim to provide comfort levels, but it is as low as we can afford as a community, if we can arrange for people to provide comfort for themselves.

Second, people should be allowed a holiday from the self-funding window for every period where it was no use to them. Someone who was unemployed just before retiring wouldn't be able to use that period to save - that person would deserve to have his or her benefit entitlement age brought forward in proportion with the wasted part of the savings window, i.e. for any period where official unemployment overlapped the window.

Third, there would need to be real investment opportunities - this corresponds to the reality underlying discussions of whether schemes should be funded or unfunded.

People could of course invest in private superannuation schemes in the old way, but this is actually an absurd choice for many of us, because the benefits of their management decisions are marginal and the fees are imposed at the beginning - with any real career mobility nobody gets their money's worth.

Further, we are also considering the public benefit of people exercising their judgments over investment. What we need is a real collection of investment opportunities which is reasonably safe and accessible to all.

Actually, there is at least one useful area already - debentures secured over the working or operating assets of businesses. This market is called securitisation; it is not fully developed, but it does exist and it could be widened.

With the need being phased in by a wedge of age ranges opening a window to people who could save and invest more, it is likely that this and other markets would develop fast enough to be constructive rather than just flooding with cash chasing investment opportunities.

However, we do need a precaution: the government needs to be able to call a temporary halt to the widening of the wedge if there were signs of this. But since the funding needs of the existing superannuation schemes would also be changing and there are some foreign opportunities too, things should balance out over time - and the point is, we would be allowing that gradual adjustment.

Where does this leave us? There are some loose ends, mostly to do with the shifting demographics of an ageing population - but they do not concern this article because they are present no matter what we do. They have nothing to with whether Australia needs more savings and investment, nor with whether this scheme could help those - only with whether people's needs might remain unmet. That is a demographic issue common to all retirement options, so it nearly balances out between the options (except for things like migration policy) - but we should address it at the right time and place.

To sum up, we can help Australian savings and investment by:-

Return to the contents list.

Article not yet published

Australian Population Change

I wrote an article for the News Weekly of the 9th of January, 1999 which had a loose end in it. The article was on Australian savings and investment, and it touched on the shifting population base because of how Australia's needs vary with people's ages.

The loose end was "nothing to with whether Australia needs more savings and investment, nor with whether this scheme could help those - only with whether people's needs might remain unmet. That is a demographic issue common to all retirement options, so it nearly balances out between the options (except for things like migration policy) - but we should address it at the right time and place."

This is the time and the place.

Australian population figures connect to a wide range of social issues, so we need to disentangle those connections as much as possible first. Here are some of the connections:-

The first point was mostly covered in the earlier article. What that article didn't cover was those things that are fixed compared with the economic incentives, or else vary so slowly that it is realistic to treat them as fixed (a mathematical technique called "perturbations"). What happens is that when individuals save for their futures, or else when governments make funded pension arrangements, this makes a difference in some areas but not in others. If I invest to cover my future needs for food, this goes - circuitously - into increasing the world's ability to supply food, by breaking new ground or introducing new machinery, say. But when I invest in my future medical needs this can only be met by arranging to have future medical services. Since doctors can't - or shouldn't - be stockpiled, this can only mean arranging either for more future doctors or for diverting some of those future doctors to me. In economic terms this is a question of "real" rather than "nominal". But the doctors of twenty years' time are alive now - as five year olds, maybe, but alive. So this is where the economics argument falls short - we need to consider the demographics as well.

The economic argument doesn't care much about other issues. All that matters to that is that there should be enough all up numbers to meet the future's specialised needs for labour. As far as that goes, it doesn't matter whether future doctors are diverted from being lawyers, whether they are migrants, or indeed whether enough potential patients die young that there are enough doctors for the remaining old people. Economics can be morally neutral and indifferent - if we let it. What counts for the economics is that saving now to provide for future needs just pushes the price up if it is in an area where demographics - people numbers - are what count. Mostly, saving drives investment which both pushes prices up and increases supply, in a relationship which varies with what economists call "elasticity", the way spending now builds nursing homes which will be around in twenty years' time. But since people are not slaves we have to deal with people numbers in other parts of public policy - economics still matters but it is not on top of the requirement.

Since we are talking about ourselves and not just about statistical abstractions, we know that we need a comfortable age distribution to continue in Australia. We also know that the middle-aged for twenty years' time are alive now, so that means we need immigration or to brace ourselves for a tight squeeze - we are technically allowed to choose the latter.

That's basically where the last article left us. Now, suppose we choose the first option - immigration. The checklist above broke down the issues into two. Traditionally countries met their needs from a sort of "internal immigration", a flow from the country to the town. This worked reasonably well because - with the public health and food supplies of earlier centuries - the fertility of country women and the child mortality in towns meant that the towns needed mature people and the country had young people to spare. Malthusian principles maintained a brutal balance, or else land shortages encouraged later marriages when overpopulation loomed - or, in more recent periods, people emigrated completely.

That brings up two points. The first waves of Australian migrants were from a single cultural background, so the only issues were of this sort - we can look at that simpler age without needing to analyse quite so many cultural issues as we do now. And, internal migration is still going on in Australia, from the country to the town and from one state to another - which means that, looking at the effects that spring from those, we can see how those issues work in isolation even under modern conditions. Once we have dealt with that we can survey the broader effects of today's immigration patterns.

When a surge of Victorians move to Queensland this has two major economic effects. There is a shortage of public and other services, so there is a strain on the revenue base. And the increased local demand for private goods and services boosts the local economy, and some capital is drawn there - perhaps away from Victoria - while some savings were brought there along with the migrants. The local boom is illusory to some extent. The increased demand for groceries is permanent (unless the migrants move on again), but the needs for building are a one-off. Unless the initial boom translates into a permanent increase in the size of the economy it subsides again.

The same experience showed in the 19th century migration patterns. Compared to the U.K., food was both more plentiful and cheaper here (though more monotonous), but lodging was worse and dearer - quite simply the buildings weren't there yet, though the land was. That led to the historical land boom and bust, when the need was more than filled (although there were other causes too).

When this sort of thing happens it means "growth" was spurious. Yet, we see that the boom era did leave more at the end than there was at the beginning. What it comes down to - ignoring the difficulties of transition for the moment - is that in the long run more people do add value, even where there are diminishing returns. If Australia were just a quarry it wouldn't help to have more Australians around - the economic rent, the extra that comes from those natural resources, would just be spread thinner. But if those Australians add to what they receive they really multiply it - and if they not only add to it but retain their efforts, invest them in the future, the multiplier becomes exponential growth.

So it was in the old days. But, it's not happening now. First, because of diminishing returns more Australians are not equally productive compared with earlier ages - the value we add can only work on what is there, both free from nature