Would you like to put your savings in a super scheme presently reserved for public servants? Would you like your bank account or mortgage to be with the Reserve Bank?
Impossible to imagine such a crazy idea? Well, that’s what the Productivity Commission thinks, but it’s neither as impossible nor as crazy as it may sound.
Everyone says they believe in innovation, but when we’re used to thinking and doing things one way and some bright spark argues we should be doing it the opposite way, they’re more likely to be dismissed than grappled with.
And our econocrats are no more receptive to innovative ideas than the rest of us, it seems.
The bright spark in question is Dr Nicholas Gruen, principal of consulting firm Lateral Economics. The Bank of England and Martin Wolf, of the Financial Times, think he’s worth taking seriously, but in the Productivity Commission’s final report on competition in the financial system his ideas are brushed off as though he’s a nut job.
So let’s have a look at them. In his submission to the commission’s inquiry, Gruen argued we needed to give a twist to a widely accepted principle of micro-economic reform, established in 1996, called “competitive neutrality”.
In those days there were a lot of (mainly state) government-owned businesses. Sometimes they had a natural monopoly over some network, sometimes it was an “unnatural” monopoly granted by legislation, sometimes it was a bit of both.
The reformers’ concern was that, being monopolies, these government businesses weren’t terribly efficient. They tended to be overstaffed and do “sweetheart” pay deals with their unions because they knew they could pass the cost straight on to their customers.
Clearly, it would be much better for customers if these outfits could be exposed to competition from private firms, to force their prices down. But this competition would emerge only if the public businesses were robbed of any special advantage arising from their government ownership.
Fine. Almost a quarter-century later, most of those businesses have been privatised – many of them with their anti-competitive advantages intact or restored, so as to boost their sale price.
Today, of course, the big problem is the lack of competition in, say, the oligopolised national electricity market or, as the commission’s inquiry acknowledged, in oligopolised banking. With super, the big problem is workers’ reluctance to engage with all those boring comparisons.
This is where Gruen’s twist on competitive neutrality comes in. If what we needed back then was to increase private competition with government businesses, surely an answer to our present problem of inadequate competition between private players is increased competition from public businesses.
In the case of banking, he asks why, in these days of online banking, the significant benefits of being able to bank with the central bank should be restricted to producers (the commercial banks) and denied to consumers (households and other businesses). What’s competitively neutral about that?
In the case of superannuation, why should savers be prevented from giving their money to funds managing the super savings of public servants? Surveys show public sector funds achieve returns to members even higher than the non-profit industry funds, let alone the for-profit “retail” funds run by banks and insurance companies.
Gruen notes that public sector funds would offer only modern, defined-contribution super and involve no subsidies – that is, they’d be competitively neural. (More radical reformers would say, so what if public providers had a government-related advantage they could pass on to customers? If the government can give the public a better deal, why shouldn’t it?)
Sometimes public providers would have an advantage because they were so big. But that’s not an unfair advantage. It’s exploitation of economies of scale that mean so many private industries are dominated by only a few firms. Only problem is insufficient price competition between them to ensure the cost savings are passed to customers, not owners.
In response to Gruen’s idea of opening up access to central banks, the commission raised practical objections that could be solved if you really wanted to.
In brushing off the idea of public super providers, the commission quoted the case of the Swedes doing something similar. Bad idea, apparently. More than two-thirds of new contributors defaulted into the public fund – perhaps because it earned better returns than the private sector funds.
Of course, you wouldn’t expect privately own banks or super funds to welcome reform that could cost them customers or force down their profit margins. Perhaps this explains the commission’s lack of interest in the idea – it knew the proposal wouldn’t appeal to a Coalition government.
But it's more likely the econocrats are just stuck in an ideological rut. Economic reform was always about reducing public and increasing private. Going the other way is so obviously wrong it doesn’t need thinking about.