I have little doubt that when people look back on the Howard era they will see – apart from other things a similar set of wasted economic opportunities to those we saw under Fraser. The main difference is that Fraser inherited a difficult hand – and played it in a mediocre but not disastrous fashion – and Howard inherited a great hand – and played it in a mediocre . . .
This week’s column argues that there’s a patten in a lot of economic reforms of the Howard Government. They’re often driven from the top, and they’re tend to be driven by the symbolism of mass politics rather than some compromise between this and good policy making – which typically bubbles up through the community and the bureaucracy.
I think I’m right in saying that Hawke is the only PM in our history who had an economic degree. Now there are plenty of people with such degrees (Jim Cairns had a PhD in economic history) who are thoroughly capable of economic vandalism. And we weren’t expecting Hawkie to be as good as he was (and he wore his economics training lightly).
But the fact is that under his chairmanship, a whole new approach emerged to reform. It was initially oriented around a strategic assessment of the central weaknesses of our economy (the ‘real wage overhang’ being central, but also inflation and micro-economic flexibility). The bureaucracy got going with a backlog of reform from the Fraser era and so it, and the nation was energised. It’s a bit different now.
Howard understands the lessons of the 1970s – that a government that makes too spectacular mess of the economy doesn’t last long. Short of that, he’s not particularly interested in economic policy, but rather in cultural warfare. That’d be OK with me if only I sympathised more with him on the culture wars front :(
Anyway, the column is over the fold. The obvious contrast with Howard is Kennett who acted as figurehead and protector of a reform effort that paid considerable attention to the quality of reform. That’s not to say that mistakes weren’t made. But basic things like attending to industry structure before privatisation takes place were attended to – for instance in energy.
Sadly as the column makes clear, there don’t seem to be very bright signs of light on the other side of politics.
Telstra pays policy price
When I think about John Howard’s latest triumph on Telstra I think of Oscar Wilde’s comment “When the gods wish to punish us they answer our prayers”. But Howard probably won’t wear the punishment. We will.
The completion of the Telstra privatisation follows an all too familiar pattern. First Howard commits to an iconic reform. Then, as the political shenanigans escalate the media focus turns inevitably away from the quality of the reform and towards race-calling its political success or failure. It’s sad, but altogether fitting, because usually the policy has been adopted as a political symbol, without much care about its quality.
Remember the GST. The commitment came, mysteriously enough, shortly after Howard assailed on all sides for lacking ‘vision’ had emerged from a short hospital stay.
Howard got his vision of the shelf with the GST (though some shocked advisors mistook it for an hallucination). But though the reform had the support of most of the economics profession, and attractive as it seemed in principle, it displaced lots more important tax reforms.
For the amount of political capital Howard spent on GST we could have got far more economic and social benefit from more imaginative reforms, like taxes on inheritance, pollution and traffic congestion on our roads (raising revenue which could be returned to us as lower taxes elsewhere). And when it comes to cutting income tax, the highest effective marginal rates aren’t for high income earners, but for those in ‘poverty traps’ who lose welfare benefits just as they start paying tax on any wages if they get work.
But as its degree of difficulty escalated, the tax package got worse. As exemptions were negotiated the GST grew in complexity compromising one of its two big selling points. And the lavish personal tax cuts necessary to make the package electorally palatable removed the prospect that alleviating poverty traps would be a major part of the package. It was time to walk away. But that didn’t fit the political script.
Other details of the package were cobbled together at the end of the process like the halving of capital gains tax which drove the property boom from which we’ve so far been extracting ourselves with our Reserve Bank’s now usual mix of skill and luck.
The so called “free trade agreement” with the US followed a similar pattern. Negotiations were initiated for essentially political reasons. Many independent experts advised against the deal on principle fearing it would compromise more important trade objectives elsewhere. I’m not sure they were right.
But things got much worse. The Americans made their usual outrageous demands of free trading partners on intellectual property. But with the Bush Administration facing election, they remained sublimely intransigent on the trade concessions they’d offer us. Once committed, Howard was not only unable to walk away instead insisting on a result in time for his own next election.
The result? A dud agreement we’ll be saddled with for years, all justified with specially commissioned modelling which, as economics Professor Ross Garnaut commented, didn’t even pass the “laugh test”.
And here we are again – for the third and last time selling the rest of Telstra. Each time the Government’s handed out yet more compensation to get its iconic privatisation through the Senate not just cash but additional regulatory lead in Telstra’s saddle bags and so its share price.
Yet reform is being done in the wrong order. The first step much easier before the first lot of Telstra shares were sold should always have been breaking Telstra up as they did with AT&T in the United States. The local loop (the copper wire to your house) is a ‘natural monopoly’ being uneconomic for competitors to reproduce. So a separate infrastructure company should own it.
Then the Telstra businesses that compete with Optus, AAPT and others to sell services like mobile and long distance telephony could be easily sold. The Government could even privatise the profitable parts of the local loop monopoly infrastructure business. Its prices should be regulated, but so long as it didn’t own a downstream telco it wouldn’t play favourites between downstream providers.
Not only would this produce a healthier industry structure, it would raise billions more revenue as investors avoided the uncertain losses of the commercially unviable parts of Telstra and the regulatory uncertainty going with them.
As industry economist Professor Joshua Gans put it “Get structure right and the rest will follow. Talk about a ‘no brainer’ in public policy.”
Still, the groundwork for Howard’s approach was laid way back in 1991. The then Treasurer Paul Keating wanted to privatise the Overseas Telecommunications Corporation (OTC) to become the core of a new competitor with Telstra with immediate deregulation of the industry.
But the new Minister for Transport and Communications persuaded cabinet to let Telstra swallow OTC. And while it digested its meal it was cocooned in a cozy duopoly with Optus for five more years.
Kim Christian Beazley.