Time for the ‘reform’ mantra to be modernised: My AFR column of yesterday

The Hawke LegacyBy the time economic reform matured as a political project – let’s date it from Paul Keating’s announcement about its popularity with the resident galah in every pet shop – it was already on the slide into the kind of ideological formula of mercantilism that Ken Henry so powerfully critiqued earlier this week.

Australia was a standard-bearer in areas like trade and agricultural protection, the two airline policy and shopping hours. There, with the stroke of a pen, we swept away the detritus of a century’s ad hoc political favouritism. And unlike our peers in the Anglosphere, we also expanded funding for the safety net – bolstering equity.

But beyond that, as we’ve learned (or have we?), considering policy alternatives against a criterion as crude as how ‘free market’ they are doesn’t work so well. In infrastructure, utility and financial reform, where monopoly and asymmetric information problems abound, regulation remains inevitable and new rent seeking political pathologies lie in wait for those unpicking the old ones. Here our reform efforts brought forth excessively priced mortgages, toll-ways, desalination plants and airports with the political and official insiders championing the changes parachuting into lucrative careers with the corporate beneficiaries of their reforms to lobby their successors. We’ve seen massive over-investment in electricity transmission and under-investment in other infrastructure.

And yet our policy elite speak as if ‘reform’ is well articulated and will take us back to the glory days of the 1990s Australian ‘reform boom’ that preceded the subsequent resources boom. “Gary Banks’ List” assembled by the former Productivity Commission (PC) chairman – is a canonical PC endorsed reform ‘to do’ list. It was – tellingly enough – cobbled together some months after Glenn Stevens assured a Parliamentary Committee of its existence. John Edwards recently suggested, only slightly exaggerating, that its adoption wouldn’t make a measurable difference to growth.

Here are some contemporary challenges and opportunities absent from the list – all of which escape prevailing reform formulas:

  • Policy discussion typically conceives of markets as comprising competitive firms subject to state regulation. In areas like education, health, aged care, city planning, research and legal services, output is better thought of as the joint product of competitive and collective (collaborative and regulatory) activity. Each sector requires the evolution of quite different institutions in which public and private, competitive and collaborative considerations concatenate at every level from high policy down to the life-world of workplaces.
  • While wealth management fits well into the previous paragraph, the public private partnership that is banking and through which the public good of monetary policy is transmitted is a special case. It remains not just profoundly pro-cyclical but unstable – a ticking time bomb – and will remain so under all likely post crisis reforms.
  • How do we deliver useful professional knowledge while ensuring that that knowledge serves the interests of consumers? How to we minimise the typical abuses of professional power including restricting entry? What institutions could help consumers identify the best professional services?
  • How do we optimise the free-rider opportunities to which modern ICT gives rise? Lateral Economics recently published a report suggesting large economic gains (around $16 billion annually) with few losers from more thoroughgoing and insightful open data policies.
  • Personal information management services (PIMS) will generate similar gains. The UK leads the world with legislation vouchsafing citizen rights to the data firms collect on them and with numerous corporates like Google, Mastercard and Lloyds Bank partnering with government agencies like the Office of Fair Trading to pioneer the necessary infrastructure in which data flows are authorised from the consumer up. First mover advantages will enable UK businesses’ to roll out PIMS to the world. What are we doing? No so much.
  • More generally, how might the internet and its epiphenomena (peer production, social media, big data, mobile computing, the internet of things, wearables, ‘nearables’ and so on) reshape the public policy of infrastructure and public goods?
  • How can we incubate the skills and relationships necessary (perhaps outside government) to rebuild damaged social capital in communities with mores and perspectives different to those within dominant institutions?
  • With our polity increasingly distracted and immobilised by the populist alarums and excursions delivering eyeballs to screens and clicks on links, how can we evolve democratic institutions within which real civic deliberation might be encouraged as it is in juries?

Economists have identified a “middle income trap” into which many countries have fallen like most in South America. Industrialisation gives them the institutional ‘arteries’ of a functioning modern political economy, but not the ‘capillaries’ if you will – traditions of social trust, peaceable dispute resolution, property rights, competent, non-partisan officials and strong anti-corruption institutions. Perhaps we’re in our own trap in which we can’t escape the mental world of the glory days of 1980s reform.

There’s some good thinking for us to build on in plenty of these areas, despite the deep incuriosity shown by many of the gatekeepers of public discussion – those to whom Paul Krugman refers to as the “Very Serious People”. In others, we have only glimmerings of the answers to the questions posed above. But that’s what finding one’s way to the future is always like. And building on those glimmerings is our only way to build on our proud legacy as a standard bearer for neoliberal reform – by moving beyond it.

Article in AFR (behind paywall) here. The Radio interview of the column.

Postscript: This interview was intended to be on this post, but spent at least as much of its time on the ‘high income trap’ mentioned above.

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7 Responses to Time for the ‘reform’ mantra to be modernised: My AFR column of yesterday

  1. Nicholas Gruen says:

    It’s official – we all know how to achieve productivity. The problem is having the guts. Remember, no guts: no glory. No pain: no gain.

    Or in the words of George Osborne

    The UK has a long-term productivity problem, which has been made worse by the financial crisis. Like many western democracies the challenge has not been to understand what to do; the challenge has been to be bold enough as a country to take the difficult decisions required to deliver this whole-heartedly. That must now end.

  2. Nicholas Gruen says:

    Here’s the best formulation not exactly of how to do it, but of what moving out of our own ‘high income trap’ might look like.

    The highest form which civilization can reach is a seamless web of deserved trust. Not much procedure, just totally reliable people correctly trusting one another. That’s the way an operating room works at the Mayo Clinic.

    If a bunch of lawyers were to introduce a lot of process, the patients would all die. So never forget when you’re a lawyer that you may be rewarded for selling this stuff but you don’t have to buy it. In your own life what you want is a seamless web of deserved trust. And if your proposed marriage contract has 47 pages, my suggestion is do not enter.

    Charlie Munger

  3. Nicholas Gruen says:

    Peter Varghese retiring as DFAT Secretary

    “Deep policy thinking is an area where our system at both the political and public service levels has struggled over the past decade,” he said. Governments often came into power with headline policy ideas but little deep expert analysis and looked to their policy departments to “fill in the gaps”.

    “The public service, meanwhile, has lost depth when it comes to policy thinking,” said Varghese.

    “And so we have had the two systems, political and bureaucratic, talking past each other and each nursing a quiet disappointment with the other.

  4. Nicholas Gruen says:

    Note, I changed the wording of the column the conclusion of which I thought was too modest about our knowledge. I added “There’s some good thinking for us to build on in plenty of these areas, despite the deep incuriosity shown by many of the gatekeepers of public discussion – those to whom Paul Krugman refers to as the “Very Serious People”. In others …” with the rest being the same as originally published mutatis mutandis.

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