Good economic decisions the next government should take.

We are in the middle of the electoral cycle, which seems a good time to give advice on which policies make good economics in the sense of being in the interest of the long-run welfare of Australia. My top 5 of do-able economic policies, some big and some small, that a government from either side could implement:

  1. Have an independent Medicine Procurement Authority. We should pay much less for our medicines, both patented and generic medicine, by increasing the distance between politics and medicine pricing. As my colleague Philip Clarke keeps pointing out, Australia pays way too much for its medicine. Whilst we spend about 1% of our GDP on subsidised medicine, we should probably spend no more than half that. And the main reason we spend too much is political, i.e. the minister for health is put under direct pressure to hand out favours to big Pharmaceutical companies (such as via this fairly scandalous Memorandum of Understanding that commits Australia to uncompetitively high prices for generic medicines). An independent medicine procurement authority would have a budget fixed by parliament, revised every so often, with the single task of deciding what to buy for the allocated money. That fixed-budget constraint would force us to constantly review which medicines we still subsidise and what price we pay for them, getting us out of the lazy equilibrium whereby Pharmaceutical companies (invariably foreign) are getting rich because politicians are kept under direct pressure not to put the screws on the pharmaceuticals.
  2. Set up a Long-term Leasing Office charged with auctioning off the right to run public services, coupled with an ex-post regulation regime. I am here for instance thinking of inviting foreign universities to bid for the right to run existing inner-city universities, whereby the foreign bidders would get a long-term lease (say, 30 years) on the community land on which a current university stands, together with a regulatory requirement to deliver certain services (i.e. the land cant be used for other purposes) whilst also guaranteeing regular access to government student subsidy schemes and the like. Long-term leases are also a possibility for things like primary and secondary schools, hospitals, airports, prisons, and residential care. In all cases, we would be talking about outside organisations getting access to existing land and facilities with associated obligations to provide services and access to subsidies and the like. Whilst implementing this wholesale would be fairly revolutionary and difficult, any government could experiment with setting this up for a smaller set of current public service providers. It would not merely be a question of private providers taking over public tasks from public providers: public providers could bid to take over other public providers too. It is primarily a means to reduce overhead and encourage real competition.
  3. (One of Nick Gruen’s favourites) Set up an independent national budget office with the statutory obligation to calculate the long-run effects of major changes in the tax and spending plans of the government, including the vetting of major infrastructure projects like the National Broadband Network. Such institutions already exist in many major economies, witness the Congressional Budget Office in the US or the Rekenkamer in the Netherlands. The great advantage of such an institution is that it gives much greater confidence in projections of major changes and would replace the fairly dodgy current practise of having private consultancy firms give dubious projections on the impact of major changes in taxes. Such a budget office is a fairly low-cost institution and would partially serve as a training ground for fiscally-knowledgeable politicians and civil servants.
  4. A real mining tax. There is little doubt that Ken Henry’s long-run tax reform advice is basically sound: as a country we should reduce taxes on activities with close economic substitutes (such as small business incomes) and increase taxes on things that cannot run away, most notably the minerals we own in the ground. The companies that mine it currently are 85% foreign owned meaning the huge price increases in the international mineral markets are lining the coffers of New York and London stock traders, not Australian households. And yet, minerals cant run away and taxes on their profits have little (if any) deadweight loss, particularly given how few Australians actually work in the mining industry anyway. A 50% or higher profit tax on resources would clearly be in our interest. I would personally also favour putting the proceeds in a future fund that invests the revenue in the world stock markets, which reduces the impact of the mining boom on our exchange rate and thus doesn’t kill off other industries. As an aside, the mining tax we have now is clearly worse than nothing since it indirectly entails the duty of the federal government to prevent the states from increasing their royalties, co-opting our commonwealth government into doing the bidding of foreign-owned companies. One estimate is that this deal cost us 6 billion a year, but complicated tax-offset rules probably mean it is much more. A more realistic figure is that Gillard’s deal cost the country in the order of 50 million a day in lost revenue.
  5. (in the category small) Reduce the budget of the Australian Bureau of Statistics by about 90%, reducing it to merely being in charge of running the Census, and instead commission private providers of statistics to generate surveys of Australian businesses and the population. This would involve a quick reduction of around 300 million a year in expenses and would immediately improve the data available for economic decision making. The rational for cutting off the ABS is that it is completely secretive about the data it gathers: only ABS officials are trusted with using the full data by the ABS, not other government departments or Australian researchers. We are thus in the fairly ridiculous situation that those who devise the Australian budget in the Treasury do not have access to all the data gathered on the finances of individual industries. The ABS hides behind laws promising confidentiality to prevent anyone else from using its data, but similar laws on secrecy exist in other countries that have not been interpreted as ‘only people in our statistics organisation can be trusted’. Quite simply, the ABS has turned into a secretive rent-seeking organisation that draws huge subsidies but does not feel obliged to share its products with its paymasters. Why then should the Australian public pay for data that is not used to improve our knowledge of Australia? It might as well not exist and if it didn’t exist, the community would be free to buy data from other sources that are more consumer-friendly.

There are many other policies that have clear benefits, but the most obvious ones would take a long time to implement: the huge hidden unemployment in the bloated health ministries, defense department, and education administrations, are clear drains on the national purse but getting rid of them is very hard because they are so entrenched. Getting rid of waste in the bureaucracy of education and health is hard since the people you could ask to get rid of it would usually be the ones you would want to get rid of first. On defense, one can talk about major changes like setting up army units based abroad made up of foreigners that would be much cheaper than domestic soldiers (mainly because you bypass the existing bureaucracy), but such things cannot be set up overnight as the institutions one could charge with doing this have every incentive to stuff it up and have no expertise to do it. One would have to build up new institutions that take away part of the competencies of existing ones, which is not easy or quickly done.

Interesting other ideas I would be sympathetic to are the buying of foreign health services in bulk to by-pass local cartels; life-long public monitoring via the Tax Office of the wealth of any politician involved in major public spending decisions (like procuring big contracts or property re-zoning) to improve the incentives of politicians; and setting up Australian PhD institutes to stop the brain drain.

38 thoughts on “Good economic decisions the next government should take.

  1. I like 2, providing it’s experimental, and we experiment with different models and then try to expand the things that work.

    On 1, there’d be bigger fish to fry than just individual pharma companies. They’d send the USTR after us. Not a reason for avoiding it of course but don’t underestimate how hard they’d make it for us.

  2. Librarians would like to kill you if No 5 was accepted. Economists aren’t the only users of ABS stats. In fact, librarians would already like to kill whoever made the decision to stop producing the yearbooks.

  3. Russell, unless I’m seriously mistaken, librarians would benefit from that suggestion. He is suggesting more open data not private or less data!

    I would go along with pretty much chalk of those which us damning indeed.

    I would also cut the company tax rate to about 20%.

  4. I would also cut the company tax rate to about 20%.

    Sure, let’s compete with Ireland for corporate HQs. After all, it was a strategy that worked out really well for them.

  5. Bill,

    Do you know what you’re talking about – or are you suggesting that anything that Ireland did, we should do the opposite of?

  6. 1. Great.

    2. You’d need to set up the incentives and KPIs really, really (really!) carefully, and I think even if it did work the benefits would be modest. There’s this assumption, including among people who should know better, that people on the public payroll are indolent and need a bit of good old-fashioned market discipline to whip ‘em into line (the corollary being that people in the private sector are really clever and productive 24/7, because they have to be. Obviously the people arguing this have never been properly acquainted with what Galbraith describes as the planning system). In any event, the Australian Public Service has an efficiency dividend already which I think simulates the effects of competition upon market agents quite well, for better or worse.

    3. Great.

    4. Great!

    5. This represents a very narrow view of who the ABS’ stakeholders are. The goal is to create high-quality, fit-for-purpose output while keeping the providers onside. (Because if you don’t keep providers onside, you’ve torpedoed your next survey). In my experience there may not be an optimal option available to address a given data need but there is often a fit-for-purpose one; it’s not clear this situation would be improved under the configuration you suggest.

    Your example about Treasury, even if true (and I’m not sure I believe it is; I’ve heard of officials from other agencies being temporarily sworn in as ABS officers, among other arrangements), misses the forest for the trees. Data about industries is available at various levels of industry breakdown, including in some collections by the most detailed industry coding. Individual industry units (ie. businesses) of course don’t have their data published, we all know that. (cf. ‘because if you don’t keep providers onside…’). Again we come back to fitness for purpose.

    Note also the amount of data they provide for free (which imo is an underrated cornerstone of democracy).

    Note finally that there is nothing to prevent you commissioning data collections yourself, if you feel there’s an unmet demand. Good luck with getting anything like the level of data quality that the Census and Statistics Act allows through compelling providers to respond to collections (the other bit of that act being the one about confidentiality, cf. ‘because if you don’t keep providers onside…’).

  7. “Whilst implementing this wholesale would be fairly revolutionary and difficult, any government could experiment with setting this up for a smaller set of current public service providers.”

    I think it’s very hard to predict what the consequences of this would actually be, and it would probably be very industry specific. At least in Victoria with public transport, which basically uses this model for service provision, it’s pretty much a failure. What appears to happen is that rather than adding competition and the service getting better, the main thing it appears useful for is so that the government can pass the buck on providing a decent service, so the government can sign secrecy agreements so no-one knows what is going on and it is therefore hard to hold accountable, and so things like actually improving the system in the long term via the purchase of infrastructure become no-one’s problem except for the people that use it. The other problem is that the various governments constantly sign awful contracts. One only needs to look at things like Sydney Airport and some of the roads to see that the government is basically selling monopolies with a license to print money. Do we really assets (incuding monopolies) locked away for 30 years on bad contracts? Of course one might argue here that if these assets were publically held, it would be even worse, so I imagine this is really an empirical thing.

  8. Bill, we are so far from competing as a corporate headquarters jurisdiction it isn’t funny.

    But we could at least try and compete with Singapore for corporate services offices, the well-paid employees who work in them the highly-paid advisors they employ and all the goods and services they consume!

    I could be a lot more detailed on tax, but I suspect you’d be upset by anything other than tax raises. So take heart from the fact that I do support something much like the original RSPT but without anyone from the ALP involved in implementation.

  9. 2. You should really see how well it has not worked in SA for both water services and public transport. By all means, put it on the table, but unless you know exactly what you are doing, and I mean no ‘high level oversight’, it turns into excrement very quickly.

    Nb, I am not saying the public service does it any better. Merely, for all the trouble it took, outsourcing has not proved to be any better. Google ‘Transfield Adelaide Buses’ to get a feel for it. :)

  10. Regarding #4, how about this idea? The states charge royalties on the minerals (on a simple volume basis that is easy to administer and hard to build complicated tax-offset rules around), and here’s where it get really interesting… the states actually get to keep the money that they earn.

    Then we have this thing called “Democracy” where the voters in that state get to decide how the royalties get spent. I’ve got a real good feeling about this one. We know we can trust the voters at the state level, because that’s exactly what we do at the federal level.

    … as a country we should reduce taxes on activities with close economic substitutes (such as small business incomes) and increase taxes on things that cannot run away, most notably the minerals we own in the ground.

    Exactly! But wait there’s more… a state might consider trade-offs such as lower coal royalties for local production of cheap electricity, which in turn benefits all of the citizens, and attracts business (i.e. jobs) to the state. You know, manufacturing, server farms, electric trains, hadron colliders, that sort of thing. It’s almost like earning the money, and spending the money at the same time.

  11. Regarding #1 and #3 you have a fundamental problem of regulatory capture. It is dead easy to say “independent authority”, there you go I just said it, but it’s another matter entirely to go and do the physical implementation making sure that authority really does remain consistently independent for a long period of time.

    The Libertarians tend towards making such regulators very limited in their scope, and thus a low profile, not worth the effort of capturing. It’s an admission of defeat, but at least it is also an admission that the problem does exist. The ancient Greeks, for example, got so frustrated with this issue that they started doing civil service appointments by random ballot (equivalent to modern jury duty) … that’s also an admission of defeat, but you get bums on seats at least.

    Statists are regularly completely blind-sided by the idea that they can’t create genuine independence simply by decree. Seems mighty strange that when it comes to allowing voters to read the newspaper we supposedly can’t trust human nature; but when it comes to getting a small handful of people and giving them a massively tempting perverse incentive, while being answerable to no one at all, we seemingly can trust human nature. Am I the only one who wonders about this?

    By all means, tell me that you have solved this already, and you were just holding back on those details until someone asked. A simple and workable solution to the regulatory capture problem would be in a good position to stand as the key economic breakthrough of the 21st century.

    In terms of #5, you are essentially complaining that the process that ultimately would envelope #1 and #3 has already happened at the ABS. Again, the deeper problem is not only that a government department always drifts towards enshrining it’s own existence as top priority, but also that statistics such as Gini curves, inflation estimates, unemployment, and so on all strongly link to political motives. All things considered, the ABS do a reasonable job, but with any source of data, you have to consider incentives for bias at the source.

    The only solution I can think of in the case of #5 is that the Prime Minister’s department gets some allocation of money to spend gathering statistics (by whatever means) and the leader of the opposition is also given exactly equal money to re-gather those same statistics (and we have a mechanism to prevent stonewalling). It would be less efficient, but at least you get a chance to see two points of view.

  12. Tel@11:

    This is a worthwhile post. There are no silver bullets here – making regulators toothless (or non-existent) is an option, yes; another option is to make the regulators so well-resourced that no-one can dick with them. Both options incur significant costs. I do however think that most public servants with a regulatory brief take their work seriously though.

    However, even ex-regulatory capture, it’s not exactly clear what’s meant by independence. Say your job is to assess progress against reforms, but you’re unconvinced about the merits of those reforms. So you might fulfil your brief independently, reporting without fear or favour on progress as defined by the higher-ups. But wouldn’t a truly independent body or official say: we’re really not convinced of the merits of these reforms.

    Re: the ABS – during the time I was there I saw nothing but independence and furthermore no attempt to interfere. However there is a higher-order problem, what Robert Nye calls co-optive power, that is, the ability to set the agenda altogether. As much as individual ABS officers (or others) might contend that GDP or variants thereof are inadequate measures of wellbeing, it’s considered sort of flaky or subjective to try using much else.

  13. #1 what I’ve said doesn’t make much sense if we’re talking about 30 year leases. I’d want to give people a lot less security than that. I’d want to see some evidence of things working well within a few years.

    The main problem is that the public sector has been a soft touch for timeservers, and ‘one size fits all’ systems. We need to prudently work our way around that.

  14. I don’t see 1 working out very well. I don’t know whether the problem you describe is true, but if it is, I’ll bet an independent authority won’t solve something of that complexity.

    As for 2, I agree with NG that “The main problem is that the public sector has been a soft touch for timeservers, and ‘one size fits all’ systems. We need to prudently work our way around that.” except I would say that the nature of the PS biases it to one size fits all systems. As a consequence, any leasing arrangement will be biased to one size fits all. Performance is best when consumers regulate through the denial of success.

    As for the minerals, the current royalties are sale prices for the minerals set by the owners of those minerals, who could easily set a mixed pricing regime of a fixed base and a profit component linked to the market price achieved. Each claim in favour of the MRT waves away the constitutional reality, but ignoring that, it does not necessarily follow that a pricing arrangement that encourages the most marginal mines is the best one. As a part owner of a large amount of coal, I’m all in favour of getting the best achievable price. I wonder why Ken Henry thinks he’s better at pricing resources than all of the State govts who’ve been doing it for yonks?

  15. Do you know what you’re talking about – or are you suggesting that anything that Ireland did, we should do the opposite of?

    Are those two options supposed to be mutually exclusive?

    More seriously, tax competition is a game for chump countries that don’t have real industries. The end-point is tax haven status, which would be a very sad place for Australia, which has been one of the leaders in cracking down on avoidance and evasion, to end up.

    The tax base is already under immense pressure due to the resources boom – the commissioner keeps complaining about it, although he would say that wouldn’t he?

    That is of course the real reason for a resources tax.

    I’d prefer to see the burden on business in general reduced by slashing the complexity of the tax law, which is a gargantuan monster that keeps a lot of advisers fat and happy but doesn’t work well for anyone else.

  16. Could you elaborate or suggest links explaining why the current mining rent tax is worse than nothing? Worse than it could be, I understand. Worse than nothing, I don’t follow.

  17. thanks for these comments.
    Regarding 1, I agree with Nick that it would lead to difficulties with overseas interests, though I disagree with those who think this would be such a hard thing to set up. The PBS already has a system of evaluation and the ministy has expertise in price regulation too. The issue is getting it away from the political campaigns, which is exactly what independence is good at.

    Regarding 2 I agree with everyone who says it will be difficult and that there are failed counter-examples. My main response is not to underestimate how bloated many services have become. Managerialism is costing us and outsourcing IMO could make a real difference there. Even if only a small percentage gets outsourced, the mere threat that it could happen would have a disciplining effect.

    Regarding 3 I disagree with Tel and Dan who worry about regulatory capture. These institutions have a long history in other countries and the main problem is incompetence rather than capture. That kind of institution does not address one project or one industry and hence is not a real target for capture, except potentially by political parties. I worry more about capture when it comes to 2. When it comes to 1 the current situation has a high degree of capture to it so that’s what we’d be escaping from.

    4 is of course well-trodden ground. I am sympathetic to Tel’s point at 10 that just having states set royalties would be even better. The situation at the moment is capture by the mining industry of the commonwealth to prevent that from happening (in an indirect way), so I would agree with Tel that what he suggests is better than what we have now, but there are other reasons making that impossible.

    As to the defenders of the ABS, I am sure the Canberra offices will be heartened. Hearing Dan describe people being made temporary ABS officers to get access to publicly funded data makes me even more dismayed than I already was at the ABS. This penchant for overtly telling the rest of Australia they cant be trusted if they are not an ABS employee disqualifies them for public subsidies as far as I am concerned.

  18. Hi Paul@19,

    I’m not quite worried about regulatory capture, I would regard it, in risk matrix terms, as Rare but High Impact. My post at #12 was about something different, even if I expressed a measure of sympathy for Tel’s concerns.

    Re: the ABS, I don’t know whether you intended to address the main thrust of what I was saying – that the ABS publish loads and loads of data fit for many purposes – but again you’re missing the balance that they (have to) seek. Are you asking for unit record file data (ie. the results from individual respondents)?

    a) that’s still possible, you just need to jump through some hoops as defined necessary and sufficient by the ABS to protect the privacy of their respondents. b) Most people don’t need anything like that level of detail.

    (Also I have never worked in Canberra.)

  19. Hi Dan,

    I agreed with your observations at #12 that regulation is tricky since really good regulation is more about following the rights intentions than following prescripts. Its a perennial worry.
    Regarding the ABS, I have nothing against individual officers. Some of them are my friends (no kidding), but the penchant for secrecy and distrust of outsiders is unhealthy. Yes, I mean access to unit records for the stats groups in the other ministries and researchers (subject to confidentiality agreements standard in most developed countries) and I would even go so far as to say it would be a good thing if a lot of data is simply put online to download by anyone. Students in high school and university should as a matter of course be able to use most of the underlying data gathered in our name.

    I know about the hoops you mention. Death comes sooner than the end of those hoops.

  20. “Death comes sooner than the end of those hoops.”

    Conjures quite an image.

    I’m all for the publication of more (and more detailed) data, if this can be done without flipping providers out. I certainly concede that maybe it can.

  21. dan,

    it really is not the statistics law that is a problem. Other countries have very similar laws (check out the links provided here: http://www.privacy.org.au/Resources/PLawsWorld.html). Its the interpretation given in Australia by the ABS that is the problem.

    Take, as an analogy, laws on dog leashes. Dogs have to be on leash in most places in Australia. If you wanted to be absolutely sure no dog would ever be off leash, then the obvious solution is not to allow any dogs at all. If you only trust ABS employees with dog leashes then you only allow dogs in the ABS, which is basically the position the ABS takes on data handling. The way dog leash laws normally work is that many people are allowed dogs and are punished if their dogs are not on a leash. So there is the presumption of trust on the part of all dog owner.

    Its the presumption of distrust of everyone apart from ABS employees that is not in the statistics act that is the problem. Who else does that presumption benefit but the hierarchy of the ABS?

  22. You might be right – I honestly don’t have strong views on the matter. What most ABS people think they are doing is treating their providers’ information with due care.

  23. Paul, You are right about the secrecy culture at ABS. But are they the cause or the effect? There is huge public paranoia about data security, from credit card fraud to paedophile prowlers.

    I think that if the government announced outsourcing of the ABS function, the civil liberties and privacy advocates would make more public clatter than Clive Palmer. Rmember the Australia Card? So the government would have to include severe restrictions on the private provider – possibly even stricter than on the ABS.

    I am not so fussed about unit record data. How about making the REIV and state equivalents make their databases completely open, and also audited for completeness? The largest purchace people make in their lifetimes are made on the basis of coffee-shop anecdotes…”Apparently a three bedder in Smith Street went for k$850 last month…”

  24. Chris,

    I agree data openness would ideally extend to many more statistics.

    Particular departments already gather data that is much more open to use by others than the ABS data. That’s how we got the Hilda, GDP figures, and the LSAC, all originally set up outside of the ABS by other government agencies. That model can be extended in a heartbeat with no major fuss. Simply reduce the budget of the ABS and increase the budget of the statistics part of other departments. This is exactly what has already been happening at a slowish pace.

    The lSAC is a good example of how things could go: its a longitudinal study of Australian children with very personal and detailed unit record data available to researchers and departments. Just look at how user-friendly it is: http://www.aifs.gov.au/growingup/

    It was commissioned and initially set up by Facshia. Now its being run by the ABS but only in the sense of data collection. The responsibility for dissemination is still primarily in the hands of Facshia.
    What does this mean in practice? People wanting to use the data sign a confidentiality agreement and then get it. Still not as easy as some of the American and European datasets, but easy enough for it to be used a lot, even by overseas researchers.
    Compare this to the Time-Use Surveys (TUS) set up and run by the ABS and you see a world of difference in how an outside data user is treated. Guess how often that data is used? By re-streaming the money, we get more LSAC and less TUS. Same laws apply to both.

    General attitudes, I think, are much less secretive than you sketch. There is a whole generation growing up who bare all on facebook for everyone to see.

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  26. The States clearly don’t have a good idea of how to set their mining royalties to achieve the best outcome for themselves. If they did, Victoria would have much higher royalties than it currently does. This would have little impact on mining output in Victoria, but lead to a higher average tax rate being used in the CGC calculations of State fiscal capacity and more redistribution from WA to Victoria.

    What makes you think they would get better at setting their royalties if they were able to keep the money?

    States also haven’t done a great job of designing their stamp duties, payroll and land taxes.

  27. Sam,

    I am presuming your question is mainly for Tel? The main point I keep making is that state royalty rates were going up and up in previous years, effectively allowing Australians to share more in the international price boom for minerals. The Gillard deal now implies that the commonwealth is going to compensate mining companies for any further increases (by reducing the central profit tax on mining), effectively making the commonwealth their guard-dog. This is the main reason why the deal is worse than no deal at all.

    Have a look at the latest political slouch on just this guard-dog issue: http://www.theaustralian.com.au/national-affairs/treasury/treasurers-round-on-swan-over-mining-royalties/story-fn59nsif-1226291181193

  28. Paul

    I was directing it mainly at Tel.

    However, unless the MRRT was completely corrupted Australians will share more in the international price boom if prices continue to rise automatically under the new arrangements. It doesn’t require an ad-hoc changes in the royalty amount. If you don’t think this is enough, surely a better solution would be to fix the problems with the MRRT (the threshold for example, the exclusion of existing mines) rather than stick with state royalties.

    I am not sure that Swan has threatened the States or just merely pointed out how the GST redistribution works. If WA, QLD or the NT (possibly SA as well), which have strong fiscal capacity to raise revenue from mining, increase their royalties, most of the additional revenue raised will be distributed to the other States without any changes to the methodology.

    Queensland would only keep about 18 per cent, Western Australia about 10 per cent, South Australia slightly less and the Northern Territory very little.

    The result of any State increasing their royalties will be to redistribute revenue from the Commonwealth (less MRRT) to all of the States (their royalties which are ultimately shared among all the States). So an alternative explanation of his threat (if it exists), is that Swan feels that payments from the Commonwealth to the States are at the right level. Rather than changing it by adjusting their royalties, the States should ask for more in their Education SPP or one of the other big payments.

  29. Sam,

    you are missing the point. Before the MRRT deal, tax rates on mining was going up via the increases in royalties. There was no automatic reduction in other taxes. The MRRT deal freezes the overall rates such that increases in royalties end up as reductions in what the commonwealth gets. The counterfactual to the MRRT would thus most likely have been continued increases in royalties and thus in total tax rates. The deal has roped the commonwealth into a situation whereby it effectively takes away the exposure of mining companies to royalty increases by the states. In turn, this makes the commonwealth want to stop the states increasing its royalties in order to have more of the money flow via the center.

  30. Presumably the effective tax rate of the MRRT is higher than the current royalty rates.

    Add to this, the weak incentive for Western Australia to increase royalties (they ultimately only keep 10 per cent of the additional revenue due to the GST redistribution).

    Shouldn’t that mean that the effective tax rate will be higher with the MRRT than in the counterfactual?

  31. These are all very interesting.

    I’ve written before abput how I think there are gains to be made in corporate governance, but I couldn’t really think of concrete policy decisions. Can you?

    I’ll mention this because Nicholas hasn’t; I think your conception of an independent budget office is slightly different to his. The way I always read Nicholas is that the office would also play a role in macroeconomic recommendations for the fiscal stance (providing technocratic cover for necessary deficits and pressure for surpluses as required).

  32. Hi Richard,

    let me give you my quick thoughts on this.
    Corporate governance is a real tough one, and the issue of corporate governance amongst private enterprise is even tougher. Because I have little really novel to say on them, I didnt put them in one of my 5 points so you should see the below as my take on best-guess wisdom in this area.

    In the bureaucracy or non-profit sector you have the option of trying to outsource the entity (including privitisation), putting a whole new set of people in charge now and then (the rotation principle), and making appointments subject to public hearing and other forms of oppenness. These are things already in the toolkit of the bureaucratic planner. Invariably, the question is one of political will to decide this or that public institution really isnt working well. The solutions are then usually quite streightforward.

    With private enterprise one is effectively dealing with the question how to handle limited liability people who have elbowed up inside private entreprise (you hardly need to police the self-made millionaires like Bill Gates because they are so few and value the right things already. In the scope of things, your average CEO worked himself up in an existing place, not one he built up and its them you have to worry about). As a government, you cant directly get rid of the CEOs you have, you cant easily nationalise them, and oppenness is much less effective. You have some leeway with how hard you make it for other groups in private organisation to monitor the bosses (via laws on unions) and boards with people from other organisations on it can be fiddled with, but capture has happened to boards in particular and they are now part of the problem. Having major shareholders with incentives to monitor is a usual argued solution, but this is not easy to impose from above.

    Corporate governance hence starts to blend into the problem of entreprise death and shareholder concentration. My general take is that one has to live with rampant corruption at the top of private organisations and welcome bankrupcy as your one and only friend in providing some means of discipline. That is then of course also where the political fight will foremost be: those who have elbowed their way to the top of private companies that were built up by others will lobby government for protection from bankrupcy, often quite successfully as we can see from the many bank guarantees and car-company bailouts throughout the Western world these last few years.

  33. @36 .
    I agree completely with the last 2 paragraphs but have always understood the share market was the force ensuring responsiveness and progress from directors.
    The failure to allow bankruptcy in the circumstances post Oct 2008 have veered off onto a tangent quite out of sync with what may have happened at a prior time.
    For example I don’t really understand what banks are at the moment- they look to have merged into the structure of government.

  34. murph,

    the point about shareholder concentration is a step deeper than the automatic oversight of share-markets. The key thing to note is that small shareholders would face high individual cost of monitoring a board and CEOs, and hence they wont bother. Only institutional investors with a lot riding on a company would have some incentive to put in the effort to actually go and find out what the Board and CEOs have been up to, though even they will find that they are flooded with so much information that they will really need to hire a set of specialists full time to get on top of what’s going on (after all, the real experts on a company are on the Board and are the CEOs). This gets you to the second-round problem for a government of how to achieve high shareholder concentration, which, as I said, is not easy to enforce from above. Private equity firms that specialise in buying up mismanaged firms are in that sense the closest one gets in a normal share market. In systems like Germany and Japan, major banks and pension funds are supposed to play this role, but there too the question arises how internal incentives within those institutions are aligned.

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