Government and the division of labour – any ideas?

Government and the private sector are good at different things, and there are gains from trade. Thus government has certain assets at its disposal. One of those assets is the taxing power.  That asset should be ‘worked’ wherever it gives rise to value.

Bruce Chapman has spend a substantial proportion of the last two decades of his life outlining the various ways in which the basic mechanism of HECS can be expanded to all manner of things.  Like collecting fines, and helping farmers with droughts and funding maternity leave.  As Bruce says, in principle, everything is HECSable.  Indeed it is and it’s a worthy agenda which Andrew Leigh has also supported in a column.  (I suggested income contingent student loans to Senator Susan Ryan in the corridors of Parliament House in 1983 or 1984 when she was Education Minister, but she wasn’t very interested and said it would be a lot of trouble politically).

I’ve also argued in favour of the Aussie Mac proposal on the grounds that extending the idea of the government as a guarantor of certain lending as an extension of its role as the lender of last resort and underwriter of financial liquidity is a worthwhile thing to do.

Be that as it may, I wondered whether Troppodillians might like to propose in comments other such activities where governments can, by building prudently on their own existing institutions and traditions, contribute to the greater good by helping to extend markets or otherwise increase productivity. I’ve not been precise enough about what I’m after and what I’m not after.  I’m not after standard arguments about ways of extending government influence or intervention (not that I’m necessarily either for or against them).  I’m after means of making more of the institutions that government has already built or could conceivably build. (I realise this isn’t a very precise clarification either – which is too bad.  But it’s late, I’m hoping you have a bit of a feeling for what I mean, and that you’ve got some ideas you can offer.)

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31 Responses to Government and the division of labour – any ideas?

  1. stephen bartos says:

    i’d strongly recommend a Demos publication The Risk Management of Everything – about the rise and rise of government as the adopter of risk in all spheres. In relation to risk, yes government could take all risks out of investment decisions by small business through HECSing everything – but would this be desirable? It’s one of the reasons why I think Bruce Chapman is wrong to advocate a HECS scheme for farmers – if we were being consistent, we would extend it to all small business, not just farms. Income contingent loans are useful when applied to activities with a public good element are fine. but depends on whether you think farmers are a public good, I suppose.

  2. Rex says:

    Nicholas, An example (but definitely not a good one) of what you are talking about is HealthConnect. The theory was good. To leverage the Governments dominant role in the provision of health care to introduce new standards and processes for the sharing of Patient Health Record data. This would theoretically have created savings and improved patient health outcomes, and as a handy side-effect would have created an opportunity for (hopefully Australian based) Health-IT companies to develop products and services in the emerging field of Health Informatics. At the time this project was kicked off, only the UK and Canada had similar ambitions to create national patient data records, so by forging ahead with this plan the Australian Government was establishing the environment for the development of a world leading Health Informatics industry.

    The Healthconnect project fizzled out in 2007 under the leadership of Tony Abbott. (Although remnants of the project remain in the States). The reasons for the failure remain unclear. My guess is that it was a result of the complexity caused by the divisions between State and Federal health jurisdictions, the multitude of different systems and processes that were expected to interact with the new system, plus the added complexities that privacy legislation forced on the system design. In short it was just too hard and complex to do. Dr. David More saw problems with the plan in 2005.

    There does appear to be an intention to re-visit the strategy under the current government which is good because the objectives still remain worthy goals and the industry side effects would still offer good opportunities for innovative companies.

    A proper case study of the problems experienced to date would be a valuable undertaking for any government looking to use its influence and buying power in particular areas to support innovation.

  3. I was at a truly terrific little seminar on Friday last week in Melbourne in which Dr Ian Reinecke, outgoing CEO of the National E-Health Transition Authority (NEHTA) gave a talk which was very interesting on this subject. It is, as one would imagine all very difficult. A bit like regulation, it’s all in the micro detail and this makes governance a problem – because supervision from the top finds it so hard to control things, and sort out any problems of incompatibility between IT or even people.

    I wonder why we don’t just try to build up the resources of Google Health and use that as our platform. You’d think if we provided serious buy-in Google would be pretty keen to ensure their platform delivered what we want. And it will, presumably mature into some international standard, which has its own merits. But when I asked him Reinecke said that Google and Microsoft are really in a different space, and seeking to interact with what I assume to be proprietary systems of Health administrators (I presume within American HMOs). I may have this quite wrong, which shows you how little I know just now about the whole thing. Another aspect of the opacity to the outside world of truly complex and complicated systems. :(

  4. derrida derider says:

    As Bruce says, in principle, everything is HECSable
    And as I keep saying, everything that adds to peoples’ income already is – it’s called income taxation.

    Before trying HECsing an activity, you need to show why it should attract extra tax. It is not obvious to me why a good with a large public good component – education – should be taxed more heavily than other things people do to boost their income. Wouldn’t it be a lot more efficient to simply raise the top marginal tax rate to fund education?

  5. Rex says:

    I wonder why we dont just try to build up the resources of Google Health and use that as our platform.

    I doubt that finding a platform is the problem. It’s getting everyone to participate in a consistent way that is the real challenge.

    Another Howard Government IT failure may also be a good illustration. It was called Bizdex. This concept was supposed to reduce the transaction costs of doing business by hooking all businesses together using standard e-commerce transactions.

    It failed, but not I think for the technical reasons forseen by Brian Farquar, but for the much more fundamental critical mass problem. That is, for a business to participate, it would require significant investment in new IT systems – but there would be no payoff until most other businesses had also made the investment. So why be first? (Shades of ETS. Funny how that one comes around again and again)

  6. MikeM says:

    More than 20 years ago there was substantial activity on implementation of electronic data interchange (EDI), which was probably an ancestor of the BIZDEX initiative. It developed some basic business transaction standards (ANSI X12 in the US and ISO EDIFACT in the rest of the world).

    The vehicle manufacturing industry was very keen on promoting EDI links between manufacturers and parts suppliers and back then BHP was an enthusiastic supporter. I don’t know what has happened in these industries since, but the only one that seems to have made a go of it globally is the international SWIFT electronic messaging system for banks.

    The key to implementation success of such a system is to exploit the network effect. Once a firm with significant market power is committed, it can insist that its suppliers and business partners become progressively committed. As usage spreads, firms eventually find that they can’t survive without it.

    Efforts to implement from the top though are doomed to failure.

    The difficulty with the health care field is that it is in a state of anarchy. There are no big players who can engender the network effect. You’d think the government could since it provides the bulk of the funding, but, as with the current Medicare Easyclaim system for doctors’ Medicare reimbursement, which according to doctors is far from easy, if doctors won’t cooperate with it a system won’t work.

  7. Backroom Girl says:

    It is not obvious to me why a good with a large public good component – education – should be taxed more heavily than other things people do to boost their income.

    And if you think that the highest levels of public good come from people who make the most use of their education (including to earn income), then one of the weird things about HECS is that it taxes the people providing the most benefit to the public, and lets off those who decide to do nothing with their education.

    I’m really not sure at all that HECS-type income-contingent loans are a good policy solution to many of the things they have been proposed for over the years. HECS works pretty well for the thing it was originally designed for – university education for people, most of whom fairly naturally go on to earn higher than average incomes as a result of that education. But even with something like university education you end up with a fair amount of bad debt because people choose not to use their education to earn sufficient money to pay back their HECS debt (or choose to earn their money overseas).

    Once you start extending the principle into areas where lots of people don’t have the capacity to earn high incomes or can choose even more easily not to (eg unemployment, farm or small business support, vocational education, maternity leave, even fines for heaven’s sake), the level of bad debt increases significantly and can even become a large disincentive for people to earn above whatever threshold has been set for repayment.

    So, I don’t really have a problem with the Government being a lender of last resort for people who couldn’t otherwise borrow, but a loan should be treated as a loan and people should be expected to pay it back. (And as DD said, there should be a good reason for making it a loan rather than a grant in the first place.) Otherwise it seems to me that the moral hazards are too great, especially for people who are not ‘naturally’ high income-earners.

  8. BG,

    Yes you can say there’s moral hazard with a HECS style loan for drought relief. But if you begin with the idea that at least where people do well after the event these things should at least in principle be repaid, then any repayment rate is an improvement on zero which is the case with a grant.

  9. conrad says:

    “Wouldnt it be a lot more efficient to simply raise the top marginal tax rate to fund education?”

    Or you could just privatize the universities a bit more, which would let them out of the weird limbo they sit in now (especially given the “large” proportion of public money universities are dependent on that you refer to keeps on shrinking — last time I checked some universities were claiming only 30% of their funding was directly from the government, although I am not sure what exactly this includes). In this case HECS makes much more sense.

  10. Jonathan Swift says:

    Dr Gruen,

    I’m so glad you asked. I have a number of suggestions which I am sure will be of considerable benefit to the community.

    1. Replace the age pension with a government operated reverse mortgage scheme.

    2. Replace Medicare for the aged with a government operated reverse mortgage scheme.

    3. Introduce pay-to-stay prisons. Create a two-tier prison system. Tier one will will be a basic service with only a minimum investment in inmate comfort and safety Tier two will be fee for service option with greater attention paid to inmate safety and comfort. Fees can be paid upfront or through a HECS-type arrangement.

    4. Legalise the sale of organs and body parts and include the value of these items in the assets tests for pensions and allowances.

    5. Legalise the sale of babies and children under 6 and include the value of these items in the assets tests for pensions and allowances.

  11. FDB says:

    Mr Swift, I am but a simple man with little to offer one so wise and shrewd as your towering self, but will you marry me?

  12. Thanks Jonathon,

    I’ve certainly got no problem with HECS on prison stays, but I never did like the idea of gentlemen’s prisons – so call me new age, but I’m a bit of a trendy in being against two tier prisons.

    However, with the babies, you neglect to mention that you can more for them when they’re disassembled (which is the wrong way to put it of course, since they were not strictly speaking assembled – but rather grew). The same goes for children of course.

    Thus points 4 and 5 could be integrated.

  13. David Rubie says:

    Legalise the sale of babies and children under 6 and include the value of these items in the assets tests for pensions and allowances.

    Get the hell off my internet!

    Children are not chattels.

  14. FDB says:

    “Children are not chattels.”

    Quite. A consumable non-durable good cannot properly be so described.

  15. Mark Heydon says:

    The comments in this post seem to be derailing what was a sensible post.

    This is not a new suggestion, and not a HECS style scheme, however…

    With respect to funding retirement, longevity risk is a very real risk, and one that the government is much better placed to deal with than the individual.
    It is possible to purchase a lifetime annuity from a life insurance office to offload the longevity risk, but the market is very thin and capital requirements, moral hazard and prudent investment policies mean that they are very expensive.
    The government already has the system in place to pay a fortnightly pension, so why not get into the business of selling pensions? It would be possible, and perhaps desirable, to make the first call on all retirement lump sums the purchase from the government of a pension equivalent to the age pension.
    This could also be dove tailed in with Jonathon’s suggestion on a reverse mortgage on a home – the purchase price could come from a lump sum superannuation benefit or from the transfer of a share of the equity in the retirees home.
    If such a scheme were introduced, the means test for the pension could become a once only test at age 65 – buy the pension if your assets are sufficient or get granted it for life based on assets at that point – rather than an ongoing affair, which would probably result in immense savings in bureaucracy.

  16. swio says:

    HECS on Biotech companies. They are very high risk, very high payoff and capital markets don’t seem to work very well with that combination. I know there are venture capitalists out there, but if anyone has read through the tech boom you realise that they ask for ridiculously demanding terms, are often very shonky and the benefits rarely go back to the original generator of the idea. Its very hard for someone with a good idea to team up with capital that has integrity and the the necessary risk profile.

    Obviously it would not be good to have the government just giving money to anyone with a Biochemistry degree. You would prevent that by making it a scheme that only gives money to enterprises that are first able to attract money from the private sector. So if a biotech startup is able to get $100k in funding from a private investor the government matches that with another $100k. This would turbocharge the existing market. It is open to fraud but simple accounting and auditing would make it pretty easy to detect someone putting money into Porche’s instead of lab equipment. The requirement of attracting real capital rather than just government grants would ensure that someone has made an objective decision about the prospects of the technology and is watching that money is spent effictively.

    The net effect would be to improve the risk profile of biotch investments. If an investor can put in half the money to get the same result then they can put their money into double the number of biotechs, effectively doubling their chances of a win. Then when one of them wins the lottery and signs a hundred million dollar deal with big pharma the government takes a big cut and ploughs the money back into further biotech startups.

  17. Congestion charges are another Good Idea for something government can do that the private sector can’t (because many of the areas where congestion is greatest are public spaces – like city centres).

  18. observa says:

    “Government and the private sector are good at different things, and there are gains from trade. Thus government has certain assets at its disposal. One of those assets is the taxing power. That asset should be worked wherever it gives rise to value.”

    You fail to see the fundamental flaw that the asset of one that should be ‘worked’ as you call it is the liability of ‘work’ for the other so called gainer from trade. This is clearly not a win win trade situation.

  19. observa says:

    I also note that Backroom Girl is complaining about the monopoly asset provider and the price being charged for same. Apparently it’s not win win for her either.

  20. observa says:

    Probably more correctly- Apparently its not win win for her anecdotally.

  21. Observa, the lower cost supplier – the more competent supplier wins the game. That involves contraction of the loser (with HECS crowding out the tiny student loan market for instance) and expansion of the winner.

    That’s gains from trade old chum. I think you’re having fantasies about how trade is ‘win-win’. It’s win-win between countries – mostly. Not between providers.

    Japanese motorbikes wiped out most of the British motorcycle industry. Britain a winner, but Triumph wasn’t.

  22. observa says:

    “Observa, the lower cost supplier – the more competent supplier wins the game.”
    I’m sure Joe Stalin would have agreed wholeheartedly with the sentiment and the ultimate end game.

  23. observa says:

    In that sense it might be said Backroom Girl is bucking fairly early on in Uncle Joe’s end game.

  24. I guess I’ve got to concede Observa that HECS really is the thin end of the wedge. It is how the Russian Revolution started isn’t it? Pretty soon it led to Joe Stalin. I’m with you – stop the rot before it’s too late.

  25. observa says:

    Well the rot that has occurred may already have serious consequences Nicholas. While central bankers plied their trade, our politicians were busy ‘working’ that tax asset as you like to call it
    To take your example of Japanese motorcycles driving out British ones, I concur but note it was a reasonably level playing field. Two democracies with workers and capital competing internationally and the hard working, innovative Japanese won out, not just over motorcycles. Now take China, while those central bankers and politicians ‘worked’ our assets. A Maoist dictatorship that could command its workers, their savings and their exchange rate. Sure, we enjoyed the fruits of their masters’ slave driving for some years now under a false umbrella at home, whilst our real productive capacity was being hollowed out and the debt mounted. Now they’re knocking on the door like the debt collector always does when the payments are faltering. All those trillions now in their forced SWFs, albeit with the complicity of the failed ethos you continue to espouse here. That ideology is soon to be as bankrupt as ‘we’ are financially now (albeit Australia is a more lucky bastard in that respect) Now that’s a wee bit more nuanced than the Uncle Joe extreme, but it’s very relevant nevertheless. We won’t be living in your fool’s paradise for much longer I’ll warrant, judging by the storm clouds on the horizon.

    As the man said and it applies equally to us-

    Americans misunderstood the nature of capitalism itself. It is not an economic system that makes people automatically richer. It is a moral system a system that rewards virtue and punishes error. You dont get richer because of Free Enterprise. Indeed, as the economic history of the last quarter-century shows, you can get poorer. The market system merely provides the setting in which you get what you deserve. You could get rich- if you were to do the right thing: work hard, save your money, innovate, take chances, forgo consumption. But do the wrong thing and you will pay for it.

    When you spend more than you can afford, you get poorer. Thats the rule. So it should come as no surprise that Americans are getting poorerthough they are just beginning to realize it.

    That’s the underlying problem I have with so called ‘working’ your asset Nicholas.

  26. Richard Green says:

    If we scrapped patents in favour of a prize system, I wonder what different ways the prizes would be administered.

    I wonder because I don’t think that saying “We will award a prize for X breakthrough in Y technology” would be entirely wise, since that presupposes the direction that technology should take. Our record of picking winners is a bit poor in the arena of innovation.

    Were we offering prizes in the mid 20th century, we may have had hundreds for various details of space travel, but none for microprocessing, less for software and none for networking, but the latter categories have been more fruitful.

    So how on earth do you offer a prize when the fruitful innovation often only become apparent (to individuals) ex post facto?

    Maybe you could have a online registry of ideas run by the government (filled with income contingent loan funded research why not?) free for exploitation by anyone, but should an innovation become exploited, the government could reward it after the fact.

    This is replete with problems of course. There will still be litigation over whom “originally” came up with an idea, there is still a huge amount of uncertainty on the part of the innovators, since they also can’t pick winners (although they may have a better idea than others), but it might make the government’s choice of what innovation to reward less distortionary, whilst also removing the impediments patents place of utilisation.

  27. FDB says:

    “The net effect would be to improve the risk profile of biotch investments.”

    Maybe, but then you’ve got to factor in the rising cost of crack cocaine, fishnets, hourly hotel rates…

  28. David Rubie says:

    observa wrote:

    Im sure Joe Stalin would have agreed wholeheartedly with the sentiment and the ultimate end game.

    What with all the baby selling, organ harvesting and general placing of a pricetag on everything, I’ve been inspired by a new idea:

    The government should set up “PriceHeadWatch”.

    Basically, it’s a central repository for the appropriate price for a citizens head. Base it on some formula the tax office dreams up (say income times three years, with welfare payments being negative).

    That way, you could scan “PriceHeadWatch”, purchase them on the open market (kind of like Ebay for contract killing), then by initiating an auction over seven days, either pay the market their price, or receive money from the government for the killing of a welfare mother, with the bonus of harvesting the children.

    So, it would cost a million to buy (say) Morris Iemma so you could legally wander into his office, contract in hand and mercifully (for the rest of us) terminate his premiership.

    But for Sally Slutmother, who’s an unmarried mother of three children, you would receive $90,000 for sending her to an early reward, with the children ending up in your custody to sell on or harvest their kidneys for resale or whatever.

    I think it’s a winner.

  29. observa says:

    Oh dear David, I can see you’re not a true price devotee. The price you seek is of course eternal vigilance and true values, which is why we should remove the temptation of the printing press forever from those who believe in theories of surplus value among other blunt instruments.

  30. The market system merely provides the setting in which you get what you deserve

    ah sweet mystery of life – at last I’ve found you.

  31. gordon says:

    Looks as though you’re on the verge of inventing a kind of Government Bank – maybe we could call it the Commonwealth Bank of Australia?

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