Reducing privilege in Australia, part I

A question for you: how to combat privilege?

As economists well know, we are all rent seekers who try to secure more and more privileges for ourselves and our families, be it monopoly rights (such as currently legally given to medical specialists or local pharmacies), over-pricing for our goods (such as many of the medicines under the Pharmaceutical benefit scheme), preferential access to legal exemptions (such as enjoyed by the bigger property developers when it concerns exemptions to building restrictions), or other advantages that do not accrue from our abilities but from political favours.

The search for more privilege is normal but, in order to have a healthy society, so must there be a perennial fight against it for otherwise the privileged end up lording over the rest who just have to grin and bear their inferior status. And if any profession is tasked with thinking about how to tackle privilege, it is economists. It is one of the good things we do.

The big success in recent decades in the fight against privilege in Australia was the scaling back of import barriers under the Hawke-Keating years. Since then it would be fair to say only the occasional privilege has been brought down, such as the Telstra monopoly that has been challenged by other mobile phones providers.

Truly big scalps have however not tumbled since the 90s, though I regard the proposed mining tax as a valiant attempt to grab some of the rents of Australia’s minerals that were predominantly flowing to overseas share-holders. That attempt at tackling a privilege unfortunately turned into its complete opposite as the Rudd/Gillard government, facing a barrage of attack adds from essentially foreign-owned mining companies, ended up directly negotiating with the three big mining companies at which point it agreed to the cooptation of the commonwealth in protecting the privileges of the mining industry by having the federal government compensate that industry for tax increases by the States. Through that humiliating deal, the commonwealth is now essentially the guard-dog of the mining industry’s share-holders. It is a new privilege costing Australians billions per year. Without this new privilege, I doubt the Commonwealth or the States would have been in deficit.

Apart from this expensive new mining privilege, several other new ones have been granted in recent decades, such as increased compulsory superannuation which created a fixed market for high-cost financial institutions that did not have to contest their clients (though recent reforms are making them more contestable), banana import bans, the take-over of semi-public institutions by overpaid bureaucrats, over-subsidised medicines, differential costs of government deposit guarantees across financial institutions (which was probably instrumental in killing off many of the smaller financial players), and the National Broadbank Network. All have involved major government decisions where the nitty-gritty favours particular groups at the expense of the whole. Slowly, the arteries of Australian economic life are seeing the build-up again of privileged positions.

Part of the current situation is that the privileged have well-organised interest groups with slick media operations that directly target ministers, research outfits, and public opinion. As a reaction to this, ministers and other politicians are now in perennial media-combat mode, by necessity surrounding themselves with media-savvy staffers who vet policies for spin-value and even come up with policy on-the-hoof that fit political storylines. Complaints of the Business Council of Australia (who claims the tendency of having policy decided upon by media-savvy but policy-ignorant staffer costs Australia 20 billion) and others (such as Terry Morgan) against this reality fall on deaf ears as the political need to first and foremost fight a continual media campaign remains undiminished. The role of the civil service to think critically and hold its own against this tide has been eroded by the demise of its own research arms, probably benefiting the privileged at the expense of the unprivileged.

In this first of a series I want to raise the question of how the self-cleansing capacity of Australia can be increased. For certain, Australia already has many dedicated institutions to counteract or expose privilege, including the ACCC, the CMC, Ombudsmen, the Productivity Commission, and an independent press which, despite what the cynical say, does now and then bring forth editors and journos trying to tackle the positions of the privileged.

Still, the good guys don’t seem to be winning big off late and the question is what concretely can be done to increase the self-cleansing capacity of Australia, either in terms of legislation, new statutory bodies, academic research, or indeed the general blogosphere and its associated hordes of philanthropic citizen journalists. In future posts I intend to discuss the pros and cons of the various ideas.

So please let me know in the discussion thread which changes in privileges you have seen in the last few years and how you propose privilege in Australia can be more successfully reduced.

39 thoughts on “Reducing privilege in Australia, part I

  1. The massive amount that government spends in welfare privileges those who get to decide where this welfare goes. We would be helped by more genuine competition for these dollars, and especially by giving the choice of where this money goes back to the taxpayer. I propose as a solution big cuts in government spending on welfare, in exchange for each taxpayer having a compulsory charitable account, with (say) 1% of each person’s income going to these accounts. The key is that each taxpayer decides which welfare cause they want to send their money to. More details at http://www.michaelrussell.co/2013/01/a-way-out-of-the-welfare-state-compulsory-charitable-accounts.html

    • Mike,

      yes, welfare is also a privilege, but the right to it comes with citizenship and so is much less of an equity issue. I would guess that even upon long reflection and open debate, most Australians would be happy with the current set of arrangements, but that is just a guess. You are certainly not the only one to think of welfare as a corrosive set of privileges. There are plenty of economists who would agree with you, though I am personally more concerned with the privileges at the top end.

  2. The big obvious one for me is funding for private schools. It’s almost passe to whinge about it but the size of the outrage never diminishes. Elite institutions that serve the wealthy got a huge funding boost under Howard* and Labor since haven’t had the cojones to do anything about it. For their trouble the private schools get little regulatory oversight and are free to lob troublesome kids into the state system.

    These schools help maintain social networks of privilege as well as giving the children of the wealthy an even bigger head-start against state school students to get into elite university courses (that we all fund the bulk of as well). Entrance into these courses is still one of the biggest legs-up one can get in our society.

    Implementing the Gonski recommendations would be a very good start to help reduce this privilege, as well as

    - more resources for State School’s infrastructure
    - better pay to attract better grads for teaching
    - better funding for the TAFE system to help those who don’t go to Uni end up in successful careers
    - better programs for gifted kids in the state system to give them an opportunity when competing for elite Uni places
    - early intervention programs for at-risk kids so they have more of an opportunity to do well at whatever school they go to.

    None of this is cheap or easily implemented, but absolutely worth doing.

    As to Paul’s bigger question of how we can increase the institutional ‘self cleansing’ capacity of the nation, I don’t really see the problem as being a lack of institutional capacity. There’s plenty of research (academic, ABS data and otherwise) that gives us the information to see the problem.

    There’s more a democratic gap – not enough people care about it to shift their vote and frighten politicians into better policies. This goes for a lot of problems beyond school funding.

    * This is a simplification, I know that not all private schools are enclaves of wealth but it hardly makes the present funding arrangement defensible in any way.

    • Instead of giving everyone else money (which I think is really the opposite question), an alternative would be to cut some percentage of the funding to these schools once they reach the amount that public schools get or some other similar marker (e.g., say 50% of whatever they get above this level). This way it wouldn’t kill off a whole pile of private/religious schools which arn’t rolling in it, hence putting more strain on the public system, and rich private schools could still happily exist which would provide at least some diversity in where teachers might actually get to teach.

      • Even if you withdrew 100% of government funding to the top-tier elite schools they’d still be doing a lot to preserve privilege because the parents are stumping up the funding. You can’t stop parents wanting to do the best for their kids.

        A better resourced state system would help all the kids, and provide an attractive alternative for the middle class parents who can afford private schools.

        • I don’t see anything wrong with the rather average private schools we have, which represent by far the majority of private schools middle class parents are sending their kids to. People seem to conflate these with the rather smaller number of elite private schools which are always going to dominate the top echelons along with the elite public schools. Given this, I don’t see how these average private schools are entrenching privilege — rather they are entrenching diversity in parental attitudes. We should be happy parents are willing to commit extra funding to the school system, not the reverse, often for things that have nothing to do with privilege (e.g., religious attitudes, disciplinary attitudes, schools having better after hours support when they work full time etc.).

  3. A lot of this seems to me the product of a fairly weak parliament and an over-mighty executive that operates largely in secret. The executive is not held to account because the parliament just doesn’t have the powers or mechanisms to make it behave any other way. An executive busy making deals in secret with rent-seekers no doubt believes it always acts in the public interest, but that is not always the case. One solution would be more accountability/transparency mechanisms and another would be more independence for existing mechanisms like the productivity commission, the ombudsman, etc eye. The electoral commission does an admirable job of running elections, but is a joke when ti comes to enforcing the funding rules, which themselves are very slack by international standards. Despite the government’s signature on the deal with the independents the current parliament, as recently noted by Sen Faulkner, has made zero progress towards a federal integrity commissioner.

    • An interesting article you link to. Faulkner certainly seems to be on the side of the angels, but then all politicians’ speeches make their side look the good guys. I like his quote “There is no man so good that if he placed all his actions and thought under the scrutiny of the laws, he would not deserve hanging ten times in his life.”. It is a bit weird that he keeps banging on about individual integrity later on in his piece when he flags with this quote that there really is no such no thing, but that is a minor squabble.

      Accountability of the executive is clearly important as far too many things are now decided upon in secret. How would you do it though?

      The Productivity Commission and the Ombudsman are quite independent so I dont think there is a problem in terms of a lack of independent observers.

      • The Electoral Commission is not very independent in terms of its budget and it has almost zero investigative capacity. It is very good at redistribution, enrolment, balloting and counting. When Australians for Honest Government it was not an associated entity they basically had to take AHG’s word. It is no accident that the AEC is both very good at the machinery side and unable to investigate anything much.

        Despite the signed agreement with the independents this government has made zero progress towards a federal integrity commissioner, although a majority of states now have them.

        It would also be good to repeal the Financial Framework Legislation Amendment Act (No. 3) 2012. Whenever push comes to shove the major parties invariably combine to ensure that it is the parliament that gets shoved.

        Lastly, and most radically, if the major parties were seriously committed to the level playing field they would establish an electoral level playing field by introducing an element of proportional representation into the House of Representatives.

  4. Actually the other privilege of note (though it is hardly recent) I’d like to pick up on is that of political parties themselves. Both of the major parties are pretty dire in terms of a healthy and democratic membership base.

    This is caused in part by compulsory voting meaning they don’t need the organisational capacity to drive voter turnout. Public funding based (in a large part) on the share of the vote means that they don’t need to engage the populace beyond perpetually campaigning at them, rather than trying to engage a large number of people in the work of selecting candidates and building policy platforms.

    Voucherising the public funding model could help this engagement to some degree. It’s not a silver bullet but worth a try. Making political parties subject to corporate governance and privacy laws wouldn’t hurt either.

    • Yeah, I think it’s more caused by the public funding, because compulsory voting is a two-edged sword for major parties. A voter who is annoyed at being dragged out for a walk on Saturday is more likely to pick some protest party as first preference and move the major parties to the bottom of the list. That’s how the Rootin, Tootin, Huntin, Fishin, Shootin party got their little bit of power in New South Wales (which is OK by me).

      We have preferential voting which is a massive boon to minor parties, and that’s also OK by me.

  5. “Slowly, the arteries of Australian economic life are seeing the build-up again of privileged positions.”

    I think part of the privilege problem is cyclical — when everything is churning along nicely, I don’t think people care very much about these sorts of things. Alternatively, if things are going badly, people are willing to accept change (this is why people liked Jeff Kennett, although it looks like a failing strategy of the QLD Libs now — presumably because they appear to be giving interest groups pork at the same time). So perhaps what people really need to do is work out a list of things that would be smart changes and wait for next recession.

    • yes, this is certainly in part what economists do: have ‘on the shelf’ lists of the interest groups that have gotten away with something that is an ongoing cost to the public, and then teach the list to students and keep knowledge of how the privilege was obtained and is protected alive.
      It is not just cyclical though: the willingness to change comes and goes with the bad times but institutions that collect information, keep the lists, and that continuously campaign against privilege are constant. And it would be unfair to say that things are as bad now as they were 100 years ago. Now were they as bad then as 200 years ago, certainly in Europe where the nobility and the royal courts were running whole countries for their own benefit.

  6. There is no international correlation between voluntary voting and lively political parties. The UK parties have the same internal problems as ours do. Ditto Canada. Id the same thing is happening in all three countries and only one of them has voluntary voting, it follows that voluntary voting is not much of a solution. What is unusual about the Westminster countries is the extent to which royal powers have been transferred to the prime minister or the cabinet instead of to the parliament. There is a tendency in Australia for many people to think there is some natural form of government with no second chamber, no states, no compulsory voting, no proportional representation, etc etc. It apparently does not matter to the natural form of government theorists that is actually no government on this planet apart from a couple of microstates that are not usually quoted as desirable objects of emulation, with all those features.

    • I wasn’t arguing for voluntary voting above, Compulsory voting is a good thing that has a negative consequence of insulating political parties from a need for genuine grassroots participation (esp when combined with public funding based on vote totals).

      Compulsory voting, voluntary funding is the model I’d like to see tried out.

      • And yet the country with the most voluntaristic party funding model, the US, also has the most sclerotic parties and the most entrenched and successful rent-seekers.

  7. A voluntarily used voucher that voters could use for political funding would be a very different proposition from the post Citizen’s-United regime we see in place now.

  8. Except that a voucherised, not vote-dependent, system of presidential campaign funinding is what fave rise to both Citizens United and the post-2008 practice of rejecting public funding in order to avoid funding limits. What is needed, at minimum, is an electoral commission that actively investigates issues like the associated entity status of Australians for Honest Government and Faulkner’s prescription of courts enforcing internal democracy within the parties and a much tighter integrity regime.

  9. I think you’re misidentifying the privilege with pharmaceuticals. That lies in intellectual property law rather than the PBS. Pharmaceutical firms do not like the PBS at all since it effectively is the government using its monopsony power to buy drugs for less – since only certain drugs are approved, and cost effectiveness is part of the criteria. If it merely subsisdised what doctor’s prescribed, they’d love it, but as instituted it requires them to bargain. That’s why they spent so much effort trying to undermine the scheme through the US FTA in 2004.

    If they are oversubsidised, it’s due to shoddy patents rather than the scheme, which may well work better than anywhere else – as far as that means anything.

    My main concern with property developers isn’t so much that they circumvent local council gatekeepers, but that there is so much to circumvent. I’m rarely totally laissez faire, but I get close with urban planning, NIMBYism and attempts to keep the plebs away. Local councils have ended up creating a situation where ONLY the spivs and dodgy types get to build anything since they’re the ones prepared to make the donations and curry favours. If the non dodgy types were permitted to build anything, they’d be able to bid the land away from the dodgy types and things might be better. At the very least we’d have less expensive housing and (most likely) higher land values.

    Superannuation is the most tricky (apart from the pure rents like mining). Econocrats never liked it, but it is genuinely popular. It didn’t arise from the special interests that benefit from it (financial institutions) but from unions (who don’t really benefit from industry funds even though they run them – which is why their returns are better I guess) and then the general electorate. It’s not a Buchanan style public choice problem so much as an ignorant public. We could explain tax incidence theory, and thus that it’s not a bonus payment from employers but foregone pay rises you have no control over. [ I entered the workforce in 2007. I would have been better putting every cent of super under the mattress - let alone my home loan - and I've had some of the better performing funds]. But graphs don’t seem effective to most people…

    • Richard,

      The issue of how it works is of course important. Let me only focus on your first point, the PBS.

      It is far less rosy than you seem to think. Not only are there are actually precious few economists really making the decisions as to what gets funded (and thus others who worry much more about clinical effectiveness than the public purse), but you will also find bracket creep is big ( medicines used for much less severe illnesses at the same super-high price as when it is used for far worse conditions), generic medicines are overpriced and underused (Philip Clarke has some good pieces on this, particularly on statins), and the basic design flaw of the PBS is to always agree to the maximum willingness to pay (like a sugar consumer walking into the shop stating what he willing to pay and then asking how it costs for him). The issues of legacy drugs and life-saving drugs are also big ticket privileges (a life saved with certainty is roughly worth ten lives lost statistically, ie prevented), and direct lobbying is also rife. Need I go on? The basic point is that the PBS is far more expensive than it should be, that there is some element of industry capture to its actual operation and that the small print (things you will only know if you delve into it) is nearly all in favour of big Pharma.

      Now, there is even more nitty gritty on property and super. Perhaps I should write a series of posts on each so we can discuss it properly, but let me cut to the chase here by saying that there too, as with the mining tax, it is the small print where the privileged have made their money. And really big money too, not just a few billion.

      • Again on super, for the nitty gritty, I’m guessing you are saying that superannuation could still be done without so much creaming off the top. I agree (and some recent reforms have helped a little bit), but I still think that it’s a policy with very uncertain worth overall, and one that is innately prone to such creaming off.

        Likewise, we could probably ramp up donation principals and create a system where no developer gets privilege, but there’d be no chances for privilege without the regulations to circumvent – many of which I think are virtueless.

        The nitty gritty makes for great rent seeking opportunities, but in these two instances I think a rather large broom could remove the grit without need for too close examination.

        • With super, the basic problem is that both employers and super funds are making decisions about the money of other people. You don’t need to be an economist to guess what then happens, and it is actually damned hard to prevent major cream skimming. How would you actually want to punish high ‘costs’ of a ‘favoured super’? I am hoping the next round of legislation improves things a bit.

          On property, the thing you can’t get around is the need for planning, zoning, and exemptions. And where you have bureaucrats and politicians making decisions on who gains and who does not involving big monetary consequences… No easy way out.

      • Is the best the enemy of the good here?

        The PBS – as an important part of a package alongside the rest of the Australian health care system – does end up with the Australian per capita pharma expense being almost bang on the OECD median, and generally a little bit less than richer nations, and a little bit under if we measure as a percentage of total health expense.

        I’m sure many of the issues you mention are real problems. But it’s not clear they are material. Do you think that eliminating them will save 1% of the Australian pharmaceutical expenditure, or 20%, or 50%? They all sound like 1% issues to me.

        • PSC,

          an important question, for sure. Yes, things are not better in the median OECD country, but that is partially because they face the same rent-seekers as we do. It is a battle everywhere.

          I would think a 20% savings is not too hard with some political will (we could have made this savings on statins alone if we followed the cheapest OECD examples and there is no reason not to be the cheapest). Indeed, 50% is not too hard to conceive of either as many of the medicines on the PBS do hardly anything more than non-patented alternatives (the Pharmaceuticals spend tens of thousands of meetings per year convincing doctors they should prescribe something expensive rather than something else. Think about it: tens of thousands of meetings!).
          Part of the current problem though is that the government has made many secret deals with pharmaceuticals about prices and conditions that almost no-one knows about, so I am sure there are legal barriers in place to actually getting the reductions.

        • I did a bit of googling – it seems Australia spends around $12bn annually on pharmaceuticals (540 per capita expense according to the OECD * 22 million people), and this paper estimates the saving on statins from moving to English prices at around $320m annually, and $930m if we get very tough. So moving to English prices give around 2.5% saving – obviously this estimate has a back-of-the envelope character, they use 10 year numbers and I didn’t read in far enough to work out their discounting assumptions.

          Certainly saving a few pennies around the edges is worthy, and I’m sure the PBS can do better. But implicitly you seem to be suggesting a much more radically utilitarian approach to funding, i.e. funding directly to maximize some metrics of years of life saved or something like that. (Actually I’m not 100% sure what you’re suggesting, beyond that rent seeking is bad and more economists on things like the PBS board are good …)

          https://www.mja.com.au/journal/2010/192/11/expiry-patent-protection-statins-effects-pharmaceutical-expenditure-australia

        • PSC,

          we’d need a separate blog to talk about the optimal form of restructuring. I would favour an indendent institution charged with spending a budget set by the politicians, but it would need careful thought as to how to do it.
          On statins, I believe they have now made a direct deal with the industry on them, making the question moot for the moment.

        • The problem is that you have come dangerously close to describing the European Commission. I’m not sure the EU can be argued as a rent-red zone or that the commission can be argued as a model for openness, transparency and effectiveness.

        • Alan,

          sure the Commission’s budget is set by others, but there are big differences between setting independent institutions charged with something quite specific (such as the Reserve Bank), or institutions with unclear, complex, evolving, and negotiated mandates (like the Commission). Not fair to equate the two!

  10. Also, I’d remind you of this post by Nicholas on the professions that you received well.

    I remember it mainly for the refutation in comments that noted that the law profession now accepts women into its ranks. I guess with time we may even see negroes and homosexuals!

  11. What about land owners? I don’t hear much talk about land taxes these days from economists. The more efficient you make the rest of the economy, the more rents these land owners will accrue. Essentially, the rent-seekers you mention share the rent that would otherwise go to landowners.

  12. To define class and education you only have to look at post codes to see the latest results in eduction. Private schools are in designer post codes and their kids do well. The underclass kids have no chance since they are from post codes with substandard schools with poor infrastructure, also poor educated parents. Social mobility is very difficult in these post codes. Fortunately some get through but not enough to make a difference to the establishment and the stays quo that we are chained to..

    • “Private schools are in designer suburbs”

      True, but they’re also in bad suburbs. Indeed, just like public schools, they’re all over the place.

      “The underclass kids have no chance since they are from post codes with substandard schools with poor infrastructure”

      Doesn’t seem to have stopped any number of minority groups, so it’s clear that schools are just one part of the equation.

  13. “In Perth all the best private schools”

    That’s true of Melbourne (although one or two have expanded). But it’s true of the public schools too (perhaps excluding ones where all the East-Asians go). But there’s a big distinction between the best private schools (who get so much money privately, and basically always will, I don’t see why we give them anymore), and the run of the mill ones that are basically saving the government money.

    As noted above, people seem to confound these two things, and there’s a vast difference between a school operating on 30K per student and one operating on 12K. If you’re interested in saving money via reducing privilege, this is something you need to think about (c.f., just trying to reduce inequality by attacking the privately funded top).

    If you’re interested, you can look at where all the private schools are here: http://www.privateschoolsdirectory.com.au/ . Out of interest, I looked at Sunshine as a random choice in Victoria of a suburb that isn’t exactly rolling in it (it is colloquially known in some groups as “Scumshine”), and there are private schools there.

  14. Out of further interest, I typed “worst suburbs in Perth” into Google and then typed in the first names mentioned, which were: Mirabooka, Balga, and Kwinana beach (these may fine suburbs for all I know, as I know very little about Perth). All of these suburbs have non-government schools also.

    • There is a danger of looking at facts(sic) on Google about schools.
      There are private schools and private schools!Many Catholic schools are in poor areas but their standard is nothing like the top Private schools. When I studied education there was an obvious difference in standard.Many Catholic schools did not do as well. I also found many of these schools had poor libraries and lacked resources.

  15. Pingback: Privilege in Australia, Part II | Club Troppo

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