When politicians talk of 'security', be on your guard

I doubt if you’re waiting with bated breath for next Tuesday night’s federal budget but, since it’s the big set-piece event of my year, I’ve started limbering up. I’ve set my bulldust detector to ping every time I see or hear the word “security”. May I suggest you do the same?

We’ve been hearing a lot of that word lately, particularly from Anthony Albanese and his treasurer, Jim Chalmers. It comes with many adjectives – energy security, food security and, of course, national security – and with many spooky euphemisms: risk, strategic, sensitive, critical and sovereign, not to mention the spookiest of them all, terrorism.

In Albanese’s landmark speech on A Future Made in Australia, he assured us that “strategic competition is a fact of life”. “Nations are drawing an explicit link between economic security and national security,” he told us.

“We must recognise there is a new and widespread willingness to make economic interventions on the basis of national interest and national sovereignty,” he said. His government would be guided by three principles, the second of which was that “we need to be more assertive in capitalising on our comparative advantages and building on sovereign capability in areas of national interest”.

His government would be “securing greater sovereignty over our resources and critical minerals”.

Indeed so. When Chalmers announced the government’s new foreign investment rules last week, they seemed to be all about security.

“By providing more clarity around sensitive sectors and assets,” Chalmers said, “our reforms will give businesses and investors greater certainty while safeguarding our national security.

“National security threats are increasing due to intensifying geopolitical competition and risks to Australia’s national interests from foreign investment have evolved at the same time as competition for global capital is becoming more intense.”

The reforms to our foreign investment rules would “boost economic prosperity and productivity, while strengthening our ability to protect the national interest in an increasingly complex economic and geostrategic environment.

“We are dedicating more resources to screening foreign investment in critical infrastructure, critical minerals, critical technology, those that involve sensitive data sets, and investment in close proximity to defence sites, to ensure that all risks are identified, understood and can be managed – balancing economic benefits and security risks,” Chalmers said.

And a bolstered foreign investment compliance team will use the minister’s “call-in power” to review investments that come to pose a national security concern.

My goodness. If you were the excitable type (which I’m not), you could wonder whether the economy’s being put on a war footing. Or maybe it’s that Treasury’s been taken over by Defence and Foreign Affairs. Or ASIO.

Of course, it may be that the government and its spooks know something terrible they’re not telling us. Perhaps some foreign enemy is, as we speak, preparing to do us in.

But if you’ve spent years studying the behaviour of politicians (which I have), you wonder if it’s something less life-threatening and more self-serving. Is there an election coming up, for instance? Do voters have complaints about the economy that you’d like to draw attention away from?

The independent economist Saul Eslake says that, as the government seeks to use “national security” and “economic security” as a rationale for a major shift in economic policy, two things concern him deeply.

First, the tendency to use “security” as a justification for a policy initiative opens the door to interventions that are, in the infamous phrase of former Treasury secretary Dr Ken Henry, “frankly, bad”. Decisions that, without the “security” label, wouldn’t pass muster.

Second, grounding a policy decision in “security” gives politicians an excuse to shut down any questioning of the justification for that decision.

“When governments say something is a matter of ‘national security’, they usually refuse to say why it is; that it would be wrong to allow grubby considerations of ‘cost and benefit’ to interfere with their judgments about ‘security’, or even that it is borderline unpatriotic to question a decision made on ‘security’ grounds,” Eslake says.

It’s not the first time Eslake has expressed such concerns. Here’s a quote from an article he wrote in this august organ in late 2011.

“If you want a government to do something that entitles you to some form of protection from competition (especially overseas competition), some kind of subsidy or tax break, or some other privilege not enjoyed by ordinary folk, but you know that your proposal wouldn’t pass any kind of rigorous, independent, arms-length scrutiny ... then your best chance of getting what you want is to succeed in portraying it as being somehow essential in order to enhance some form of ‘security’,” he wrote.

Sometimes I even wonder how AUKUS – the wisdom of which many defence experts quietly doubt – came about. How much of it was the Americans’ idea, and how much was ours?

What we do know is that, without any prior debate, Scott Morrison suddenly unveiled it as a fait accompli and great coup. Had Labor opposed it, we’d have been straight into a khaki election.

But Labor accepted it without demur and the costs or benefits we’ll discover over the next decade or two.

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Sorry, it's not gallantry that wins wars, it's economic might

Welcome to the Anzac long weekend (sort of). This column is brought to you by your friendly economists, who want to get one thing straight: whatever their causes, wars are usually won by the side with the most economic resources.

This is just one of the many fascinating things you learn from a new book, The Shortest History of Economics, written by Dr Andrew Leigh, former economics professor turned minister in the Albanese government. (The book’s name is misleading. It’s really the shortest account of the part the economy has played in the world’s history. Well worth a read.)

Leigh says the first industrial-scale war following the Industrial Revolution was America’s Civil War during the first half of the 1860s.

“With the use of mass-produced weapons, railroads, steamships and telegraphs, the Civil War was industrial in its scale, and in its carnage,” he says. More than 600,000 combatants – one in five soldiers – lost their lives.

A striking thing about that war was the imbalance of resources between the two sides, strong support for the saying that God is usually on the side with the bigger battalions.

At the outset, the North had a population of 21 million – more than twice the South’s. The South was primarily an agricultural economy, with the North producing 90 per cent of the country’s manufactured goods, including 97 per cent of its firearms.

What’s surprising is that the South held out as long as it did. The war was prolonged by the North’s poor military tactics.

From an economic perspective, wars are often financed by printing money, with ultimate inflationary consequences. The South used this to fund 60 per cent of its costs, whereas the North needed only 13 per cent.

To economists, a significant effect of World War I was that it brought a hasty end to the world’s first experience of globalisation, with greatly increased trade and migration between Europe and the “new world”, fostered by the advent of steel-hulled steamships and the telegraph, and the absence of boring things like passports and visas.

Not until after the Great Depression and World War II did the barriers keeping countries apart begin falling back, thanks to advances in air travel, shipping, containerisation and telecommunications, plus reductions in import protection and banking regulations.

Today, many people believe that greater trade, tourism and other economic contact between countries reduce the likelihood of war. I think there’s truth to this, but the strong commercial ties between the combatants in World War I didn’t stop it happening.

Did you know that, at the outbreak of war in 1914, most of Germany’s shipping trade was insured by Lloyd’s of London?

The Allied powers (Britain, France, Russia and their allies) had far more resources than the Central powers (the German Empire, the Austro-Hungarian Empire and their allies). The Allied powers had five times the population, 11 times the territory and three times the income, according to Leigh.

That the conflict took four years and claimed about 20 million lives reflects the ineptitude of the generals and the intransigence of the political leaders, he says. But the side with the larger economic base won.

Moving on to World War II, which started in 1939 and ran for six years, its outcome, too, could have been predicted from the economic fundamentals.

Compared with the Axis powers (Germany, Italy, Japan and their allies), the Allied powers (Britain, France and their allies) had more than twice as many people, more than seven times as much territory, and a combined income that was 40 per cent higher, Leigh tells us.

Germany did well at first, thanks to the skill of its generals, such as Erwin Rommel, but the war proved primarily a contest of industrial production, Leigh says, and the Allied powers had more resources at their disposal.

This was true even midway through the war because, although Germany had annexed much of Europe, the United States and the Soviet Union had joined the conflict on the side of the Allies. In 1942, the Allied powers still retained a decisive advantage in people, territory and income, he says.

Consider aircraft carriers. Although Japan fully understood their great strategic value, the Allies built nine-tenths of the carriers produced during the war.

The combatant nations differed in how much of their economies they devoted to the war effort. Italy never devoted more than a quarter of its gross domestic product to the war, whereas, at its peak, Japan was devoting more than three-quarters. Britain and Russia managed to deliver more than half their national output to the war, while the US devoted two-fifths.

Together, this gave the Allies a substantial advantage. They produced at least twice as many rifles, tanks, aircraft, mortars and warships. According to Leigh, the Axis powers were literally outgunned.

The overall damage to economies done by World War II was more devastating than in World War I, largely because the technology of killing had advanced so much in the intervening years.

In the air, the first war’s biplanes and zeppelins played a relatively minor role, whereas the second war saw squadrons of bombers devastating cities with incendiary – and ultimately atomic – bombs.

All up, World War II claimed three times as many lives as World War I had done.

But let’s finish on a more positive note. Leigh says the peace that followed World War II was more enduring, partly because countries learnt the lessons of the previous conflict. Through the Marshall Plan, the US provided $US13 billion to Western Europe, equivalent to about 3 per cent of the region’s annual economic output.

In Germany and Japan, the occupying powers put great emphasis on restoration, with the result that both became major industrial powers within a generation.

And economists, including Keynes, played a central role in building international economic institutions – including the Bretton Woods system of fixed exchange rates, the International Monetary Fund, the World Bank and the forerunner to the World Trade Organisation – that would sustain peace.

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Morrison's budget report card: could do a hell of a lot better

When it comes to the relative strengths and weaknesses of the two main parties, polling shows voters’ views are highly stereotyped. For instance, the Liberals, being the party of business, are always better than Labor at handling money, including the budget. But this hardly seems to fit the performance of Scott Morrison and his Treasurer, Josh Frydenberg.

Dr Mike Keating, former top econocrat and a former secretary of the Department of Finance, has delivered a two-part report card in John Menadue’s online public policy journal.

His overall assessment is that the Morrison government is guilty of underfunding essential government services on the one hand, and, on the other, wasting billions on politically high-profile projects.

Keating traces these failures to two sources. First, the government’s undying commitment to Smaller Government, but unwillingness to bring this about by making big cuts in major spending programs, such as defence, age pensions or Medicare.

This is a tacit admission that Smaller Government is an impossible dream. Why? Because it’s simply not acceptable to voters. But this hasn’t stopped Morrison and Frydenberg persisting with the other side of the Smaller Government equation: lower taxes.

The consequence is that they underfund major spending programs, while engaging in penny-pinching where they think they can get away with it. Too often, this ends up as false economy, costing more than it saves.

For instance, Keating says, the Coalition has reimposed staff ceilings. By 2018, this had cut the number of permanent public servants by more the 17,000. But departments now make extensive use of contract labour hire and consultants to get around their staff ceilings, even though it costs more.

Second, Morrison’s determination to win elections exceeds his commitment to businesslike management of taxpayers’ money. He’s secretive, reluctant to be held accountable and unwilling to let public servants insist that legislated procedures be followed.

Apparently, being elected to office means you can ignore unelected officials saying “it’s contrary to the Act, minister”.

Let’s start with Keating’s list of underfunded spending programs. The government has increased aged care funding following the embarrassment of the aged care royal commission, but spent significantly less that all the experts insist is needed to fix the problems.

On childcare, this year’s budget increased funding by $1.7 billion over three years, but this is insufficient to ensure that all those parents – mainly mothers – who’d like to work more have the incentive to do so. This is despite the greater boost to gross domestic product it would cause.

The National Disability Insurance Scheme is clearly underfunded – which is why we have a royal commission that’s likely to recommend additional funds. (I’d add, however, that it’s perfectly possible for underfunding to exist beside wasteful spending on private service-providers costing far more than the state public servants they’ve replaced.)

On universities, the government has recognised the need to provide more student places, but failed to provide sufficient funding. On vocational education and training, the extra funds in this year’s budget were too little, too late. They won’t make up for the 75,000 fall in annual completions of government-funded apprenticeships and traineeships over the four years to 2019.

While housing affordability has worsened dramatically, the government’s done nothing to help. Its modest new assistance to first-home buyers will actually add upward pressure to house prices. What it should be doing is increasing the supply of social housing.

Turning to wasteful highly political, high-profile spending, Keating’s list is headed by the JobKeeper wage subsidy scheme. He acknowledges, as he should, that the scheme was hugely successful in maintaining the link between businesses and their workers, so that the fall in unemployment after last year’s lockdowns ended was truly amazing.

Keating also acknowledges that the scheme was, unavoidably, put together in a hurry. At the start of recessions there’s always a trade-off between getting the money out and spent quickly and making sure it’s well-spent. The longer you spend perfecting the scheme, the less effective your spending is in stopping the economy unravelling. The stitch that wasn’t in time.

Remember, too, that since the objective is to get the money spent and protecting employment, it doesn’t matter much if some people get more than their strict entitlement. In these emergency exercises, it’s too easy to be wise after the event. And the more successful the scheme is in averting disaster, the more smarties there’ll be taking this to mean there was never a problem in the first place, so the money was a complete waste.

But it’s now clear many businesses – small as well as big – ended up getting more assistance than the blow to their profits justified, and many haven’t voluntarily refunded it. Keating criticises the failure to include a clawback mechanism in the scheme and rejects Frydenberg’s claim that including one would have inhibited employers from applying for assistance.

Next, he cites the contract with the French to build 12 conventional submarines. The process that led to the selection of the French sub was “completely flawed”. There was no proper tender, with the contract awarded on the basis only of a concept, not a full design.

Five years later we still didn’t have a full design, but the cost had almost doubled. The government was right to cancel the contract, but the cost to taxpayers will be between $2.5 billion and $4 billion.

Finally, spending on road and rail infrastructure projects, which was booming long before the pandemic. Keating quotes Grattan Institute research as finding that overall investment has been “poorly directed”.

More than half of federal spending has gone on projects with no published evaluation by Infrastructure Australia, suggesting many are unlikely to be economically justified.

“In short,” Keating concludes, “there is an enormous management problem with the government’s infrastructure program. The projects are much bigger, but often poorly chosen, and poorly planned with massive cost overruns.

“The key reason is that the government announces projects chosen for political reasons.”

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Terrorism: we must learn to think like economists

I've spent a lot of my life arguing that the hard-headed "rational" analysis so beloved of economists needs to be tempered by human emotion. But it also works the other way: sometimes we need to curb our emotional reactions and force ourselves to think coolly about what we really want and the most sensible ways to go about getting it.

I think this every time we're faced with another terrible act of terrorism. The first emotions are shock and horror, soon followed by a desire to hit back, to find a government to blame and demand action from. Promise us this will never be allowed to happen again.

Such reactions are only human, but when we surrender to them, we leave ourselves open to manipulation by the unscrupulous – and I don't just mean the terrorists.

But that's a good place to start. Terrorism is practised by the weak to get under the guard of strong. Their goal is not so much to terrify us and weaken our resolve as to provoke us into doing something stupid; something that damages us and benefits them.

Vengeance, retaliation, belligerence – these are common emotions at times like this, particularly among men. The great temptation at present is to send all our military might to the Middle East and defeat these forces of evil once and for all.

But how many times have we tried that without it working?

It's not easy to defeat your opponent so completely that no problem remains. It's much easier to make a strike that doesn't fix anything and actually makes things worse.

It never crosses the mind of the bellicose among us that the other side may be hoping to provoke us into hitting back. Why? To make them into martyrs, to show it's Muslims against the world, and to win them support from young potential fighters or terrorists in our midst.

Even the heroes who indulge themselves by shouting at women wearing headscarves are helping the side they hate.

It's arguable that, in its desire to punish someone after the terrorist strikes of September 11, 2001, the US has made things worse for itself and the rest of us. It's doubtful how much lasting benefit will result from all the lives lost and money spent in Afghanistan.

And the decision to invade and occupy Iraq has achieved little, but has destabilised long-standing enmities in the Middle East, greatly increased hatred of the US and, as the rise of Islamic State demonstrates, created a quagmire from which the Americans can't extract themselves.

No one's allowed to say it, but it's obvious: every time Australia muscles its puny way into these problems on the other side of the world – as if the Americans and Europeans need our help – we increase the risk of terrorism Down Under.

It's funny that the people who worry most about the "unsustainable" growth in government spending, tend to worry least about ever-increasing spending on defence, policing, security and surveillance.

Years of contact with economists has made me hyper-conscious of people using the media to push their vested interests. Almost all the alleged terrorism experts broadcast by a wide-eyed media at times like these seem to have a single message: do more, spend more. Oh, the risks we face.

All the understandable attention the media devote to terrorist attacks, anywhere in the world, can't help but leave us with an exaggerated impression of the risk of such an attack happening here.

A few years ago, Mark Stewart, a professor of civil engineering at my own University of Newcastle, estimated that the risk of an Australian being killed in a terrorist attack is one in 7 million each year, which is about the same as the risk of being struck by lightning.

It's not possible for our politicians to guarantee nothing bad will ever happen to us. But it is possible for them to cover their backsides by spending lots of money, progressively diminishing our freedoms in the name of protecting them, and putting on a show at airports.

A timely article in this week's issue of The Economist says that "a lot of what passes for security at airports is more theatrical than real".

Despite the likelihood that the recent Russian plane crash over the Sinai desert was caused by a bomb in the hold, attempts to blow up airliners are quite rare, it says. And the enhanced airport security introduced after 2001 has played no role in thwarting any attacks.

The ban on carrying liquids on board was introduced in 2006 after a plot to bring down several planes crossing the Atlantic was foiled thanks to a tip-off. In the time since then, nobody has been caught trying to get liquids on board to combine into a bomb.

Nor have any would-be bombers been intercepted since the requirement for passengers to remove their shoes was brought in, after a shoe bomber trying to set off an explosion was subdued by passengers.

The US Transportation Security Administration has a budget of more than $US7 billion ($10 billion) a year, but this year government inspectors succeeded in getting fake bombs and weapons through the screening process in 67 out of 70 tests in airports across the US.

So maybe no passengers have been caught doing the wrong thing because the security is such an effective deterrent, or maybe it's largely a showy waste of our time and money.

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Governments should be pro-market, not pro-business

A fundamental question facing the Abbott government is whether it will succumb to the General Motors syndrome: what's good for big business is good for Australia. Does its slogan that Australia's now "open for business" actually mean open slather for business?

Will it run the country to please its business backers or to benefit all of us? Because the notion that what big business wants of government always coincides with what's best for the rest of us is a fairytale only a chief executive could believe.

Another way to put it - to clarify the choice Tony Abbott faces - is whether the government will be pro-business or pro-market.

The economic side of our lives is about producing and consuming; you can't have one without the other. To be pro-business is to favour producers, making life easier for them when they ask for help, whereas to be pro-market is to favour consumers, the people market economies are meant to serve.

As Adam Smith put it: "Consumption is the sole end and purpose of all production and the welfare of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer."
It's easy to tell yourself that by helping an industry you're helping its customers, though it's more usual to tell yourself you're saving workers' jobs. Business people lobbying to protect their profits almost invariably hide behind their workers' jobs, often making greatly exaggerated claims (claims they're rarely asked to substantiate) about how many jobs will be lost if their demands aren't met.

When you think it through, however, you realise that giving business people the easier life they seek isn't the way to maximise the benefit going to consumers, nor to maximise total employment. You may imagine - as does everyone on the left - that capitalist economies are designed to benefit the owners of capital above all others. In fact, in an efficiently functioning market economy the suppliers of capital get little more than a reasonable return on their investment, with most of the benefit going to consumers in the form of an ever-expanding range of reasonably priced goods and services.

The magic ingredient that brings this about - shifting the benefit from producers to consumers - is competition: competition between the producers but, just as important (and often lacking in our busy lives), competition between consumers and producers as consumers seek out the best deals and the best service.
When industries lobby governments for favours, what they're usually seeking is a reduction in the competition they're facing or about to face - all in the name of protecting their workers' jobs, naturally. They're seeking an easier life than the rough and tough life the capitalist system would otherwise serve up to them.

Often they're seeking protection from competition with imports. In the old days protection was achieved by imposing a tariff (import duty) on imported goods; these days a similar effect is achieved by granting the industry a subsidy from the taxpayer. Either way, the protection comes at the expense of the public.

But does it save jobs? It may save them in the particular industry being protected, but only at the expense of employment in the rest of the economy. How so? Consumers are left with less money to spend on the products of other industries. People in the protected industry don't care about that, of course, but the rest of us should.

Longer-term, protection involves keeping your head in the sand and pretending the rest of the world isn't changing. This is unsustainable. When the world we live in changes, we have to adapt to that change or become an industrial museum.

The way to maximise employment for everyone who wants to work is for us to pay the world price for everything and produce those goods and services where we have an advantage, and leave it to others to produce stuff where we don't have an advantage.

So being pro-market means examining requests for help from particular industries from the perspective of the economy as a whole. This avoids another problem: often one industry's request involves being favoured against rival industries.

Give in to one and the others redouble their screams of pain. You can't help 'em all, and if you try to you end up with a mollycoddled, inefficient economy.

Complicating things for the Abbott government is that its Labor predecessor didn't know how to say no to the business lobbies. And the more it said yes to particular industries the more dissatisfied, demanding and contemptuous the rest of business became.

Lobbying has become a way of life for big business, and no doubt the whole of business is expecting a bonanza now their own side is back in power.

If Abbott has any sense, he'll get the business lobbies back in their box from the start, telling them the era of rent-seeking is over. He'll stand up to big business the way Labor never could because, unlike it, he need have no fear of losing business's support.

The first place to stand up is against the unending blackmail game General Motors and the other global car makers are playing so successfully against all national governments.

And when he and Joe Hockey start delving into the budget, they'll find quite a few areas of hidden protection, starting with the plan to continue paying a fortune for faulty submarines to be made in Adelaide when much cheaper, better-working subs could be bought off the shelf in the US or Sweden.

Then there's the protection for local pill-making companies (not to mention retail chemists) hidden in the pharmaceutical benefits scheme.

And coming up is a bid by manufacturers to be exempted from paying the world price for gas when the eastern states become part of the world gas market in the next year or two. We'll hear a lot more about this one.

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The four business gangs that run America

IF YOU'VE ever suspected politics is increasingly being run in the interests of big business, I have news: Jeffrey Sachs, a highly respected economist from Columbia University, agrees with you - at least in respect of the United States.

In his book, The Price of Civilisation, he says the US economy is caught in a feedback loop. "Corporate wealth translates into political power through campaign financing, corporate lobbying and the revolving door of jobs between government and industry; and political power translates into further wealth through tax cuts, deregulation and sweetheart contracts between government and industry. Wealth begets power, and power begets wealth," he says.

Sachs says four key sectors of US business exemplify this feedback loop and the takeover of political power in America by the "corporatocracy".

First is the well-known military-industrial complex. "As [President] Eisenhower famously warned in his farewell address in January 1961, the linkage of the military and private industry created a political power so pervasive that America has been condemned to militarisation, useless wars and fiscal waste on a scale of many tens of trillions of dollars since then," he says.

Second is the Wall Street-Washington complex, which has steered the financial system towards control by a few politically powerful Wall Street firms, notably Goldman Sachs, JPMorgan Chase, Citigroup, Morgan Stanley and a handful of other financial firms.

These days, almost every US Treasury secretary - Republican or Democrat - comes from Wall Street and goes back there when his term ends. The close ties between Wall Street and Washington "paved the way for the 2008 financial crisis and the mega-bailouts that followed, through reckless deregulation followed by an almost complete lack of oversight by government".

Third is the Big Oil-transport-military complex, which has put the US on the trajectory of heavy oil-imports dependence and a deepening military trap in the Middle East, he says.

"Since the days of John D. Rockefeller and the Standard Oil Trust a century ago, Big Oil has loomed large in American politics and foreign policy. Big Oil teamed up with the automobile industry to steer America away from mass transit and towards gas-guzzling vehicles driving on a nationally financed highway system."

Big Oil has consistently and successfully fought the intrusion of competition from non-oil energy sources, including nuclear, wind and solar power.

It has been at the side of the Pentagon in making sure that America defends the sea-lanes to the Persian Gulf, in effect ensuring a $US100 billion-plus annual subsidy for a fuel that is otherwise dangerous for national security, Sachs says.

"And Big Oil has played a notorious role in the fight to keep climate change off the US agenda. Exxon-Mobil, Koch Industries and others in the sector have underwritten a generation of anti-scientific propaganda to confuse the American people."

Fourth is the healthcare industry, America's largest industry, absorbing no less than 17 per cent of US gross domestic product.

"The key to understanding this sector is to note that the government partners with industry to reimburse costs with little systematic oversight and control," Sachs says. "Pharmaceutical firms set sky-high prices protected by patent rights; Medicare [for the aged] and Medicaid [for the poor] and private insurers reimburse doctors and hospitals on a cost-plus basis; and the American Medical Association restricts the supply of new doctors through the control of placements at medical schools.

"The result of this pseudo-market system is sky-high costs, large profits for the private healthcare sector, and no political will to reform."

Now do you see why the industry put so much effort into persuading America's punters that Obamacare was rank socialism? They didn't succeed in blocking it, but the compromised program doesn't do enough to stop the US being the last rich country in the world without universal healthcare.

It's worth noting that, despite its front-running cost, America's healthcare system doesn't leave Americans with particularly good health - not as good as ours, for instance. This conundrum is easily explained: America has the highest-paid doctors.

Sachs says the main thing to remember about the corporatocracy is that it looks after its own. "There is absolutely no economic crisis in corporate America.

"Consider the pulse of the corporate sector as opposed to the pulse of the employees working in it: corporate profits in 2010 were at an all-time high, chief executive salaries in 2010 rebounded strongly from the financial crisis, Wall Street compensation in 2010 was at an all-time high, several Wall Street firms paid civil penalties for financial abuses, but no senior banker faced any criminal charges, and there were no adverse regulatory measures that would lead to a loss of profits in finance, health care, military supplies and energy," he says.

The 30-year achievement of the corporatocracy has been the creation of America's rich and super-rich classes, he says. And we can now see their tools of trade.

"It began with globalisation, which pushed up capital income while pushing down wages. These changes were magnified by the tax cuts at the top, which left more take-home pay and the ability to accumulate greater wealth through higher net-of-tax returns to saving."

Chief executives then helped themselves to their own slice of the corporate sector ownership through outlandish awards of stock options by friendly and often handpicked compensation committees, while the Securities and Exchange Commission looked the other way. It's not all that hard to do when both political parties are standing in line to do your bidding, Sachs concludes.

Fortunately, things aren't nearly so bad in Australia. But it will require vigilance to stop them sliding further in that direction.

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Rudd's grandiose defence plan never flew

I'm no Colonel Blimp, but by far the biggest loser from all the fiscal bulldozing Wayne Swan had to do to budget for a surplus in 2012-13 - and keep it for the following three years - is Defence.

He used his dozer to push billions in planned defence spending off into never never land, beyond the forward estimates. And that's not the first time. Indeed, he's been doing it in every budget since the one in 2009 when, just 10 days after Kevin Rudd had unveiled his grand defence white paper promising hugely increased spending, Swan began postponing its commitments.

For the good oil on what the budget has done on defence spending it's always necessary to wait a few weeks for Dr Mark Thomson, of the Australian Strategic Policy Institute, to produce his annual analysis of the defence budget. Here's a summary - with my comments - of what he found this time.

The budget cut $5.5 billion from planned defence spending over the next four years, with spending in the coming financial year falling by more than 10 per cent in real terms, to $24 billion. In round figures, 40 per cent of this will go on personnel and 40 per cent on operating costs, leaving 20 per cent for investment in new equipment.

That real reduction is the largest annual decline since the end of the Korean War in 1953. Thomson expects spending to be equivalent to just 1.6 per cent of gross domestic product, its lowest proportion since the eve of World War II (though that doesn't necessarily prove much - what reason is there to expect our defence needs to grow at the same rate or faster than our income?)

Most of the cuts announced this month will be to investment spending: $3 billion from purchases of military equipment and $1.2 billion from the construction of facilities.

But that's not all. The budget also involves a redirection of $2.9 billion in spending within the defence budget to meet key cost pressures - areas where spending is expected to exceed previously set limits.

Most of this will be taken from planned investment in equipment. So it's the old story: whenever pollies are under budget pressure, the first thing overboard is capital works. One exception: $360 million will be saved by cutting civilian numbers by 1000 over two years.

When Rudd announced his grand plan to keep defence spending growing by 3 per cent a year in real terms, he also announced a "strategic reform program" to help cover the cost by delivering $20 billion in savings through greater efficiency.

Most of the areas where costs are growing faster than budget are areas where these efficiency savings were to be achieved. The problem seems to be partly that the savings were an accounting fiction and partly that Defence has failed to try hard enough. It would be wrong to imagine all the fault lies with the politicians.

The Defence Department's manifest failings aside, it's clear Rudd wanted a big expansion in defence spending, but neither he nor his ministers wanted it badly enough to find the money to pay for it.

Under unrelenting pressure from the opposition to prove their credentials as good fiscal managers, they gave a higher priority to getting the budget back to surplus. They won't cop any criticism from me on that.

But it's no excuse to say Rudd's grand plan was overtaken by the global financial crisis. As Thomson reminds us, the white paper was unveiled when everyone expected the crisis to hit us harder than it did.

Thomson argues Rudd's plan never added up. It had to make a clear choice about the role it wanted Defence to play in the future, then design a defence force consistent with that role, then commit to providing the necessary resources to make it happen.

It failed on each count. We're left with a Defence Department that's in disarray. It's supposed to be following a plan its political masters have sabotaged at every turn. Little wonder Julia Gillard has brought forward to next year the development of a new plan.

Let's hope this time the government formulates a plan it can afford, one consistent with its iron commitment to "fiscal sustainability" (the great buzz-phrase of this year's budget papers). This suggests it'll be a lot less superlative than Rudd's grandiose effort.

And guess what? Thomson thinks it wouldn't be such a bad thing. "For what it's worth, this author believes that Australia can responsibly adopt a less ambitious defence strategy than that set out in 2009," he says. "It's likely that the defence force we need is also the one we are willing to pay for."

But, you say, surely Tony Abbott will be the one making those decisions after 2013. Quite possibly. But don't assume his approach will be a lot different.

Thomson observes that public opinion has shifted. The strategic fears and misgivings of the post-September 11 decade have been replaced with the uncertainty and caution of the post global financial crisis decade. For the moment, at least, most people are more worried about the next financial crisis than they are about the seemingly remote prospect of a strategic crisis.

And get this: "The opposition's resistance to the latest round of cuts to defence spending has been both muted and laced with caveats. The long-standing bipartisan approach to defence policy has been trumped by bipartisan fixation on achieving a surplus."

Sure. But take a look at the dire straits decades of budget deficits have got the Europeans into and at the Americans' bitter warring over their budget. As vices go, an obsession with keeping the two sides of the budget in balance isn't high on my list of sins.

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God give us better armed forces, but not yet

Kevin Rudd's chronic tendency to over-promise and under-deliver means the Australian Strategic Policy Institute's annual review of the defence budget is always an object lesson in how his long-suffering purse-string ministers manage to square the budget circle each year.

The fact that the Howard government was prepared to neglect many areas of spending that the Rudd government isn't - education and infrastructure, for openers - doesn't leave it hard to believe Rudd will be economising in areas John Howard favoured, with spending on defence the prime example.

Not, of course, that Rudd hasn't promised to spend a lot more on defence. In his defence white paper delivered a week or two before last year's budget, he matched Howard's commitment to 3 per cent real growth a year in defence spending until 2017-18, and 2.2 per cent thereafter until 2030.

To be fair to him, he also announced a "strategic reform program" in which $20.6 billion worth of the real growth would be covered by savings.

These brave plans took their first blow just two weeks later, when last year's budget cut $8.8 billion in funding from the following six years and deferred it to undisclosed years beyond.

Clearly, the goal of returning the budget to surplus (which includes limiting the real growth in overall budget spending to 2 per cent a year) was given priority over plans to strengthen our defence capability.

The author of the institute's review, Dr Mark Thomson, says that, on the face of it, defence was let off lightly in this year's budget. There were no further spending deferrals (not within the period of the forward estimates, anyway).

And defence was given a $1.6 billion "supplementation" to cover the cost of overseas deployments over the next four years, although it was required to absorb almost all of the $1.1 billion cost of enhanced protection for our forces in Afghanistan.

Defence spending is budgeted to increase by 3.6 per cent in real terms in the coming financial year, reaching almost $27 billion. What's wrong with that?

Just that the job done on defence spending in last year's budget was so thorough it didn't need further adjustment this year. For the following two years, spending is planned to fall in real terms, before recovering in 2013-14 (which just happens to be the year after we're now projected to have the budget back in wafer-thin surplus).

Thomson points out that the now-expected budget surplus of $1 billion in 2012-13 would not have been possible had last year's budget not deferred $3.4 billion of defence funding in that year.

The government now has a lot of credibility riding on the achievement of a surplus that year. If this looked in doubt, how reluctant do you reckon the purse-string ministers would be to push a bit more defence spending off into the future?

But Thomson notes that defence is already holding a lot of IOUs. Real spending is projected to recover the following year, 2013-14. After that, the catch-up needed to deliver the promised average 3 per cent real growth in spending should see defence funding increase by 29 per cent over five years.

Perhaps by then the resuming resources boom will be so well entrenched that Treasury's coffers will again be overflowing, so accommodating such huge real growth in defence spending will be no probs. Failing that, however, I don't find it hard to imagine the government welching on some of those IOUs.

The record spending budgeted for in the coming financial year sounds more comfortable than it is. Thomson says money available to initiate new equipment projects will have fallen by 55 per cent on the forward estimates in last year's budget, with further falls of 42 per cent and 36 per cent in the following two years. Only some of that could be explained by a higher Aussie dollar.

When Lindsay Tanner was shadow finance minister before the 2007 election he invited various worthies (including yours truly) to offer suggestions on ways the budget papers could be made more transparent and generally more informative to people on the outside of government.

These suggestions were developed into the Operation Sunlight policy Labor took to the election and has, we're assured, been implemented now it's in government. But Thomson complains of a lot of newly darkened corners in the defence budget.

He says the government ceased disclosing funding deferrals in its first budget. And this year, "in a marked departure from previous years, the budget papers do not list the projects planned for approval in the coming 12 months. Instead we get an omnibus listing of projects under development which will be approved in the next two to three years."

I have my own beef about lack of sunlight. There are two budget languages, "accrual" and "cash". The budget papers are written in accrual (which I think of as French), but Treasury and the government have encouraged us to continue the macro policy debate in cash (English). Trouble is, the government doesn't provide a full English translation. We get the key totals, but not much else, which means that as soon as you start trying to hold the government to account on some specific issue, you run into the language barrier.

When people tried to use the budget papers to establish how much the government saved by abandoning its emissions trading scheme, they were told their figures were quite wrong because they were in French, not English. Then, when people asked for an English translation of budget figures in another part of the debate, the government refused to supply it.

I guess all governments engage in this sort of budgetary obfuscation, but I confess I had hoped for better from that nice Mr Rudd.

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