Reform Howard Style

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.

The Minister?

Kim Christian Beazley.

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Styx
Styx
2022 years ago

I’m wondering if other people have noticed just how few cards the PM is able to play. My guess is that rising fuel prices are far more insidious than unfair dismissal laws, yet energy issues seem to be outside the PM’s comfort zone. To maintain the impression of being at the helm we get old favourites like tough-on-terror laws and privatisation. Now even his economic stewardship is disputed; was it Sitglitz who said Australia had a lucky break with exports? Sooner or later the Howard aura has to slip.

meika
2022 years ago

Its not an aura, its a cardigan.

And they never wear out, slip or rot.

They are handed on to wrap newborns in.

Mark U
Mark U
2022 years ago

Nicholas,

You say “the first step……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’

John Humphreys
John Humphreys
2022 years ago

I worked on the Aus-US FTA report, and if you have a problem with it you might want to debate the issue instead of repeating the pathetic comments from Garnaut. The whole theory of comparative advantage doesn`t pass the laugh test either for most people — do you suggest we drop that too?

Of course the modelling was `specially commissioned` — how else could it be commissioned? Though a alternative non-special process? Or would you prefer no modelling was done? Or perhaps the ACIL modelling was more to your liking — despite their modelling errors. Note that no modelling errors were found in our report. That`s because we do world-class modelling.

Garnaut showed quite clearly on the public record that he didn`t actually understand the report and he made several errors of very simple logic. But hey… at least he had a witty one-liner.

Two caveats. I no longer work for CIE. And the results of our model came with a high margin of error — which was stated at the time by us as often as people would listen. But the only way to get a negative result was to add `bad vibes` as a cost or make modelling mistakes.

Homer Paxton
Homer Paxton
2022 years ago

Nicholas,
I believe Billy McMahon had degrees in law and economics.

now there is a benchmark!

Rafe
2022 years ago

Some “all over the place” comments on a typically stimulating piece.
The GST might have been just worth the effort if there were no exemptions.
The Coalition was immunized against serious reform by the failure in 1993 when the a real reform package was put down by Keating and the commentariat.
The Hawke/Keating cabinet was a dream team in many ways, with a core of economic rationalists. Sadly they did not manage to sell economic rationalism adequately to the public and later the ALP could not make capital out of it.
Beazley was also responsible for a massive white elephant “over the horizon warning system” that cost us mega billions.
I don’t think Hawke’s economics degree was much good – there is a funny story about the thesis that he started in Oxford,(I forget the details) I think his supervisor gave up on the project because Hawke just knew about our IR system, not real economics.
On poverty traps – yes in spades.

Homer Paxton
Homer Paxton
2022 years ago

Hawke was forced to reform and was lucky concerning the quality of his frontbench.

Kennett only won by promising reform.

By contrast Howard didn’t actually promise any reform in 96 merely not to be Keating.

He has been content , like menzies, to run on the coat-tails on the previous government.

let’s face it even on some of his ‘reform’ program such as GST, IR or telstra they haven’t actualy understood why they were actually proposing the programs.

I remember Warren Smith of the Babk Credit analyst saying he had never visited a country so economically literate. this was late 80’s.

Homer Paxton
Homer Paxton
2022 years ago

forgot to add Rafe has confused Hawke’s economic degree gotten from Wa and his Batchelor of Letters which was from Oxford.

rossco
rossco
2022 years ago

And we still have the IR “reforms” to come. The supposed economic benefits seem to based on idealogy and hope rather than any real hard analysis. I believe it is more about neutering the unions and thus hurting the ALP.

Interesting to know why the IR legislation is taking so long to appear. Could it be the Constitution is proving an obstacle?

Rafe
2022 years ago

The academic career of Bob Hawke.
Hawke was president of the University’s Student Representative Council and graduated with a Law degree and an Arts degree in 1953. Bob Hawke went to Oxford University in 1953, as Western Australia’s Rhodes scholar. Abandoning his planned degree, he submitted a thesis on the history of wage-fixing in Australia. He graduated with a Bachelor of Letters in 1955 and returned to Australia in 1956. [His thesis was on the history of Aust wage fixing and the basic wage].
On 3 March 1956, he and Hazel Masterson married in Perth. They had first met eight years earlier. Hawke then enrolled in a doctoral program at the Australian National University and the couple moved to Canberra. Two years later, with the degree unfinished, Hawke took a job with the Australian Council of Trade Unions (ACTU).

Homer Paxton
Homer Paxton
2022 years ago

Rafe, what was Bob’s major in Arts?

Remember the ‘economics’ degree was awarded by only a very few Unis’

I was one of the first lot to get it from Macquarie!

Nicholas Gruen
2022 years ago

John,

Regarding the issue of the theory of comparative advantage and the ‘laugh test’ I think you’re not really addressing yourself to what (I think you could have inferred) I was trying to get at.

Likewise I don’t think your criticism of Garnaut satisfactorily refutes his one-liner. I suggest that if he made technical errors, they were not about the arbitrary modelling of a fall in the cost of capital that dominated the result (and produced the laughs).