Club Troppo

Not so long ago ALP politicians controlled the governments of every state. I think they still did at the end of 07, though I may be wrong. In any event, it was an obvious opportunity an amazingly rare opportunity. For that reason I spent a bit of time on this blog and on the phone trying to see what kind of political project one might erect from it. Because political aspirations are not terribly bold today, and because of the structure of things, it might have been necessary to be fairly modest.  But this post contains a record of 12 ideas which resulted from some blog based brainstorming.

What became of it? Nothing much in a policy sense. But the states did band together in a political exercise to resist John Howard’s soft climate change denialism and it was politically successful, and was a good stroke of policy because it meant that, coming into national government they were about six months ahead of the pace with the Garnaut process.

Otherwise, I don’t think anything much happened, though I’d be happy to be corrected below.

Meanwhile the newly Liberal Governments of NSW and Victoria have announced a reform partnership.  The public material is full of fine sounding intentions, though I expect it’s too early to see what comes out of it. But the fact that they occupy 57 percent of the Australia economy is significant.  Whatever they can agree to harmonise between themselves, and this seems a major focus of the activity, would create quite a strong ‘attractor’ for others to copy. And it does seem that they got the idea of doing something together a little quicker than their ALP counterparts.

The disclaimer below the fold is used by Virgin in their lounges when you log onto their wi-fi. Yet, like so many disclaimers, although it takes a good while to read, it contains terms almost all of which would be implied in the absence of such a disclaimer. Indeed, if there are any that are not implied, they should be implied. Sad then, that we are presented with the disclaimer – and extremely inefficient for all concerned, though this is not necessarily a criticism of Virgin or even their lawyers. They’re covering themselves. (Continued)

I didn’t really expect that my recent posts about the somewhat indeterminate aims of the “Occupy …” protest movement would result in a lively discussion thread about what I imagined was the entirely uncontroversial proposition that the limited liability corporation is by and large not only a positive thing but a key element of the modern capitalist economy.  For Socialist Alliance types and at least one ultra-libertarian, it isn’t uncontroversial at all (though for almost diametrically opposing reasons).

I was discussing this with my CDU Law School colleague Geoff James over lunch a couple of days ago when he mentioned a corporate regulatory policy idea that I hadn’t heard before.  Given that the corporation is a “fictitious legal person”, Geoff said, why not take the analogy to its logical conclusion and legislate a mandatory corporate lifespan?  After (say) three score years and ten all corporations would be compulsorily liquidated and their assets and business undertaking sold.

Apparently this was a policy of the old Australia Party founded in the 1970s by eccentric transport tycoon Gordon Barton.  Be that as it may, it’s an interesting if fairly radical idea.  I’d be interested in the reactions of the diverse Troppo readership, especially the economists among us.

In a sense, it would bring the corporate structure more in line with that of trusts, which once had a maximum life span (perpetuity period aka rule against remoteness of vesting) delightfully defined as a “life in being and twenty one years”.  That equitable description gave rise to the equally quaint drafting convention of maximising the duration of any trust instrument by providing for vesting on the death of the “last currently living heir of Her Majesty Queen Elizabeth II”.  Sadly, most states and territories have now legislated for a more prosaic perpetuity period of 80 years or thereabouts.

Legislating for a maximum corporate life span might also be argued to enhance the prospects for business growth and productivity through harnessing Schumpeter’s notion of “creative destruction” as the principal engine of capitalist growth and renewal.  However it may be a bit more complex than that, as Arthur Diamond discusses (extract over the fold).

(Continued)

ASIC, one of our main financial markets regulators, has today declared that short-selling is a “legitimate business in the market”. Good on them. Markets need short-sellers, far more than most people realise.

The reason is that financial markets are markets in ideas – ideas about what will be valued in the future. And so they need people who are able, every so often, to loudly yell “Bullshit!”

It was short-seller James Chanos who called “bullshit” on Enron in 2001. And it was short-sellers who identified the problems with the US mortgage market a few years later, a story well told in Michael Lewis’s book “The Big Short”. In both cases, the short-sellers explained why the rest of the market was wrongly over-valuing those investments.

If only there were more such people, Enron and the US mortgage market might both have failed earlier and done far less damage.

In fact, if financial markets are to operate calmly rather than in the boom-and-bust mode that does so much damage, short-sellers should be encouraged. In the absence of short-sellers, markets will be full of people with an incentive to overstate the merits of particular investments.

Calls to limit short-selling featured prominently in the 2008 crisis, but they go back to at least the 1600s. People making money out of selling over-valued investments don’t like seeing their tall stories exposed. Their objections tend to be effective, because not enough people value the role the short-sellers play.

Bullshit in financial markets is too dangerous to be left alone. People need to call it early and often. We need more short-selling, not less.

Footnote: The only reason I’ve posted this is that it seems to be an extreme minority opinion. Almost everyone I talk to sees short-selling as sinister. Does anyone know why?

You’ll be pleased to hear that the Mortgage Industry Association of Australia is on a campaign to ramp up the qualifications of mortgage brokers.  Just because all they do is sell loans and fill out forms – and otherwise manage the process by which you apply for a loan – is no reason we shouldn’t want them to have higher and higher levels of qualification. There’s already a process of professional development, according to which mortgage brokers must get something like 14 professional development points per year.  Peach’s brokers can get 8 points for learning how to write commercial loans, and since we don’t do commercial loans, it will be totally useless.  But at least it will be a quick way of getting within striking distance of the yearly requirement. A couple more days of workshops where you are told of some lenders’ products (it’s much better to get it live from an instructor, even if you can read) with a nice afternoon’s golf and Bob’s your uncle. Next stop university degrees for all mortgage brokers. And why not?

There’s something of interest in this piece by Cass Sunstein, Obama’s chief of regulation (It has become common to call him ‘Regulatory Czar’ for some reason – not ‘Regulatory Strongman’ or ‘Regulatory Hulk Hogan’, but ‘Regulatory Czar’).  It speaks not just of the costs of regulation but also of benefits. As part of summarising what’s good about the regulatory policy that he is ‘Czar’ of he quotes not only the extent to which they’ve been able to cut the cost of regulation (if you pay close attention to the numbers quoted they’re pitifully small by the way), but also the benefits of regulation.

This insistence on pragmatic, evidence-based, cost-effective rules is what has informed our regulatory approach over the past two and a half years. We have helped to bring highway deaths down to their lowest level in 60 years; promoted airline safety while protecting passengers from tarmac delays, overbooking and hidden charges; sharply reduced the risk of salmonella from eggs; dramatically increased the fuel economy of cars and trucks, promoting energy independence while saving consumers money; and curbed air pollution that kills thousands of people each year. At the same time, we are eliminating unnecessary regulatory burdens and tens of millions of hours in annual red tape.

So there you have it: a social democratic approach to talking about regulation.  The other thing is that Sunstein talks about lowering the costs of overregulation and bad regulation not just for businesses and organisations generally (which is where we focus our energies on regulation review), but also on individuals.

We are taking immediate steps to save individuals, businesses, and state and local governments hundreds of millions of dollars every year in regulatory burdens.

Very sensible too.  It’s hard to see the downside.

“States that require dental hygienists to be supervised by dentists suffer a 1 percent annual reduction in the output of dental services.”

The Effect of Licensing on Dentists and Hygienists by Morris M. Kleiner and Kyoung Won Park, NBER working paper No. 16560.

As states require occupational licenses for everyone from surgeons to interior decorators. Licensing in effect creates a regulatory barrier to entry into licensed occupations, and thus results in higher income for those with licenses.

In Battles among Licensed Occupations: Analyzing Government Regulations on Labor Market Outcomes for Dentists and Hygienists (NBER Working Paper No. 16560), co-authors Morris Kleiner and Kyoung Won Park use state variations in dental hygienists’ licensing, along with data from the 2001-2007 American Community Survey, to estimate the value created by limiting occupational competition through licensing.

Like dentists, dental hygienists clean teeth, apply sealants, take X-rays, and screen for dental problems. Because dentists are in the majority on the state licensing boards that license dental hygienists in most states, they can in theory create rules that limit the extent to which dental hygienists can compete with them. In fact, most states require dental hygienists to practice under the direct supervision of a dentist, but some allow dental hygienists to own their own practices, clean teeth, and apply sealants.

The authors find that in states that allow dental hygienists to have their own practices, hygienist employment is about 6 percent higher than in other states, and hygienist earnings are about 10 percent higher. At the same time, the growth rate of dentists’ employment is lower — 1.5 percent per year versus 2 percent — in these states.

Assuming that less stringent regulation of dental hygienists has no effect on the quality of services they provide to patients, the authors calculate that reducing regulation would reallocate about $1.34 billion from dentists to dental hygienists and would reduce the output losses caused by restricting employment by $80 million. Overall, Kleiner and Park estimate, states that require dental hygienists to be supervised by dentists suffer a 1 percent annual reduction in the output of dental services.

If you look at the picture on the left, you’ll see a ladder on the upper right window looking at the entrance to the Church of the Holy Sepulchre. You may not believe it, but there’s more chance than is usually the case with relics that the church is on the right spot. It’s location was not arrived at in the middle ages, but in the third century by St Helena, Constantine’s Mum who turned up in Jerusalem and looked for relics.

Anyway, the attentive viewer might assume that the ladder will be moved some time soon, it’s job in lifting up some tradesman to work on the window done. But you’d be wrong, something which is well illustrated by the companion photo from the late nineteenth century. There’s that ladder again!

In fact the ladder turned up sometime in the 1850s. So what’s it still doing there? This is the explanation offered by Atlas Obscura which offers itself as a “compendium of the world’s wonders, curiosities, esoterica (I guess this qualifies in the latter two categories).

The church is run by six denominations – Greek Orthodox, Armenian Apostolic and Roman catholic church, with lesser duties shared by Coptic, Ethiopian and Syriac Orthodox churches.

The whole edifice is carefully parcelled into sections, some being commonly shared while others belonging strictly to a particular sect. A set of complicated rules governs the transit rights of the other groups through each particular section on any given day, and especially during the holidays. Some of the sections of the church however still remain hotly disputed to this day. Arguments and violent clashes are not uncommon. In November 2008 the internet was flooded with videos of a fistfight between Armenian and Greek monks in one such dispute. A small section of the roof of the church is disputed between the Copts and Ethiopians. At least one Coptic monk at any given time sits there on a chair placed on a particular spot to express this claim. On a hot summer day he moved his chair some 20cm more into the shade. This was interpreted as a hostile act and violation of status quo. Eleven were hospitalized after a fight resulting from this provocation.

This state of affairs makes any agreement about renovations or repairs on the edifice impossible. The church is in a state of decay as a result.

The famous immovable ladder is a bizarre outcome of this religious stubbornness pushed to extremes. Some time in the first half of the 19th century, someone has placed a ladder up against the wall of the church. No one is sure whom he was, or more importantly, to which sect he belonged. The ladder remains there to this date. No one dares touch it, lest they disturb the status quo, and provoke the wrath of others. The exact date when ladder was placed is not known but the first evidence of it comes from 1852.

The ladder hasn’t moved since.

The immovable ladder is a nice metaphor for decision making with large groups or within complex systems of rules or regulations.  Satisfying them all can be hard. And when the obstacles are not ‘hard’ ones, they can be soft sociological ones.  Within bureaucracies one is ill-advised to offend anyone gravely – often even if they’re not very important.  People don’t like other people getting their noses seriously out of joint and will go to some lengths to preserve harmony and consensus.  So the immovable ladder goes into my slide pack to illustrate the problems of paralysis by serial veto. And below the fold, you’ll find a spooky codicil to the story.  Just spooky. Come in Dan Brown, come in.

(Continued)

A bunch of new rules are being introduced to Parliament today governing what is usually called the “financial planning” industry. Big new regulatory schemes often have large unintended consequences, and this one could too. But if ever an industry needed to change its behaviour, it is “financial planning”.

I put the words “financial planning” in scare quotes because I can’t bring myself to take the title seriously. The industry is simply not designed to offer financial planning. That’s not how it works. A small group of planners charge consumers for their advice by the hour, but most live on the commissions from the product providers. Their customers are mostly not consumers who need financial plans. Their customers are mostly large financial firms who need people to sell products to consumers. When financial products providers – AMP, AXA, MLC, BT, Perpetual and so on- write the checks, they’re the customers.

So at the level of the consumer, the industry is basically a sales force masquerading as a profession.

This is why calling the industry “financial planning’ is like calling the brothel business “personal counselling”. Sure, you might get some counselling as a byproduct, but the people in the industry are, by and large, being paid for something else entirely.

I seem to recall that Alan Kohler – a journalist who actually understands the role of sales in business – once suggested that the industry could most simply be reformed by forcing “financial planners” to call themselves “salespeople”. He was right. Rather than passing new legislation, the government might simply have told the ACCC they had its support to apply existing law to the industry’s marketing patter.

Don’t believe me? Have a read of this piece from the well-informed recruitment news service eFinancialCareers:

The skill shortage in financial planning is nothing new but employers are becoming more innovative in their efforts to solve it, according to the recent eFinancialCareers roundtable in Melbourne, which was attended by HR professionals from several international and Australian firms.

“We’re all in the market for them and there aren’t too many of them around,” said one of the panelists, all of whom asked not to be named in this report.

So what to do? Well, one firm is recruiting business-to-business salespeople from outside the financial sector, putting them through fin planning qualifications and providing training.

“They have the fundamental skills and importantly they are used to working on long-term deals, unlike those from retail sales who have a shorter-term mentality. We need salespeople who we think will stick with the business and fit into our culture,” said the firm’s representative.

Read the full piece at eFinancialCareers.

I’ve posted before on New Zealand’s Regulatory Responsibility Bill which has become the Regulatory Standards Bill on its passage from advisory taskforce into the Parliament (and it’s often referred to in this post as the Regulatory Responsibility Bill or RRB). In the spirit of virtually all the other initiatives around to world to improve regulation, it does so by reference to the Michelangelo theory of regulation. This teaches us that all we have to do to get the best possible regulation is to increase the difficulty of making bad regulation. In furtherance of this approach governments around the world have regulated regulators to require new regulations to receive satisfactory regulatory impact analysis in order to become regulation. It’s a good idea (at least as far as it goes – it might be useful having some specific attention given to enhancing regulatory outcomes, and not just minimising regulatory costs). But it turns out that even the negative part of the agenda doesn’t seem to work very well.

Here are some reasons why:

The need to win elections leads politicians and their parties to develop a very good understanding of the factors that drive public opinion. Media exposure is “political oxygen”, mainstream media analyse the politics and not the policy of an issue, and the media require instant reactions and ready sound bites.

Consequently, Ministers feel the pressure to:
• respond quickly and decisively to the latest risk, accident or misdeed;
• commit to concrete action, even without evidence that the action will address the problem, or that benefits are likely to exceed costs;
• stick to a political commitment once made; and
• deliver on the commitment as soon as possible.

In the case of legislation, the pressure to deliver quickly is exacerbated by two factors – pressure to deliver results within a short three-year Parliamentary term and pressure to minimise the call made on precious House time.

The incentive issues are not just confined to Ministers:
• MPs have limited incentives to carefully scrutinise and improve proposed legislation, as it does not bring them media attention;
• Government MPs who hope to be Ministers won’t readily risk disfavour by providing strong independent scrutiny or insisting on good process;
• Public servants are often reluctant to give advice that Ministers don’t want to hear, because of their duty of loyalty to the government and their desire not be dragged into the political contest if the advice becomes public;
• Agencies tend to work in policy silos – they lack a whole-of-government perspective and are reluctant to put resources into playing a wider role;
• Private interests are often willing to lobby for regulation that will benefit their interests at the expense of others; and
• Anyone that promoted a particular piece of legislation has few incentives to look for and publicly report evidence that it isn’t working as intended.

Those aren’t my words, but the words of a regulatory impact statement.

(Continued)