Want a better economy? Design better policies, don't just pick sides

A wise person has said that our brains love to make either-or choices. Which is why it’s wise not to waste much energy on the concocted furore over Treasurer Jim Chalmers’ 6000-word essay musing on future economic policy.

The world is a complicated place, and so are the choices we make about what we need to do get an economy that improves the lives of the humans who constitute it, including those at the bottom, not just the top.

But our brains look for ways to simplify the many choices we face. The simplest choice is binary: between A and B, black or white, good or bad. This fits with our tribal instincts. My tribe versus the rest, us and them, the good guys versus the bad guys.

Our two-party political system has been built to keep things simple. And thus, to minimise the need for hard thinking. Many people don’t have time to decide what they think about this policy or that, so they pick a political party and outsource their thinking to it.

“Am I for it or against it? Tell me what my party’s saying, and I’ll know what I think.” There’s plenty of survey evidence that people who voted for the government – any government – are more inclined to think the economy’s going well, whereas those who voted for the other side think it’s going badly.

Too much of the outrage over Chalmers and his essay has come from media outlets whose business plan is to pander to the prejudices of a particular “market segment”.

Economists like to think of themselves as rational and objective, but economics and economy policy are highly susceptible to binary choices, and fads and fashions.

All I’ve seen over the years has made me a believer in the pendulum theory of history: we tend to swing from one extreme to the other. After World War II, people – particularly in Britain and Europe - were very aware of the failings of the private sector, so they decided to nationalise many industries.

By the time Maggie Thatcher and Ronald Reagan arrived, people had become very aware of the failings of government-owned businesses. So they decided to privatise many industries.

The big binary issue in economic policy is broader than privatisation, it’s government intervention in markets. Should governments intervene as little as possible, or as much as is necessary? To put it in the comic book terms beloved by Chalmers’ partisan critics: we face a choice between the free market or socialism.

Except that we don’t. My point is that the truth – and the ideal place to be – is unlikely to be found at one extreme or the other. It’s much more likely be somewhere in the middle.

To me, this is what economics teaches. It’s why economists say we should make decisions “at the margin” and are obsessed by finding the best “trade-off” between our conflicting objectives.

We want to be free to do as we choose, but we also want to be protected from instability (high inflation and high unemployment) and unfair treatment in its many forms.

The period of deregulation and privatisation instigated by the Hawke-Keating government in the mid-1980s, known locally as “micro-economic reform” motivated by “economic rationalism”, eventually degenerated into a belief in public bad/private good under subsequent governments, and was dubbed “neoliberalism” by leftie academics.

While the inclination to favour business and sell off government businesses remained under the former Coalition federal government, it had no commitment to minimising government intervention. Its willingness to impose its wishes on electricity and gas producers, for instance, was often on display.

And while the big reforms undertaken in the name of economic rationalism – floating the dollar, deregulating the banks, ending import protection, and introducing national competition policy – have served us well, many of the privatisations and efforts to outsource provision of government services have not.

In 2023, we’re left somewhere between the two extremes, with an economy that’s not working nearly as well as we need it to. Chalmers and Labor’s other ministers will have to intervene – but do so in ways they’re reasonably sure will make matters better rather than worse.

That’s the hard part, and their econocrat advisers aren’t nearly as well-equipped as they should be to tell them “what works and what doesn’t”.

Why not? Because we’ve done far too little hard thinking about the problems, preferring to take refuge in the happy delusion that the answer lies at one extreme or the other.

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Virus reminder: governments need to be better, not smaller

One good thing the coronavirus has done is slow the pace of our lives, leaving us more time to think about them. And since the main device being used to stop the spread of the virus has been to reduce physical contact between people, it hasn’t been hard to see that what matters most to us is face-to-face contact with family and friends.

People of middle age fret about not being able to visit elderly parents. The great Dr Brendan Murphy, flat out advising the Prime Minister, really misses being able to hug his granddaughters. (Grandsons and granddaughter, in my case.) Teenagers take their family for granted, but miss their friends. Younger kids realise they actually like going to school and mixing with others.

The virus has also thrown into relief our rights as individuals versus our obligations to the group. The prevailing political and economic ideology highlights the individual and plays down the group, but in emergencies like this even our squabbling federal and state politicians see that the only way of coping is to co-operate rather than compete.

Looking at the Americans and the terrible disaster they’re making of it – including people refusing to wear masks because it’s a violation of their personal freedom – it’s not hard to see that individualism can go too far, and playing your part as a loyal member of the group has its virtues.

The virus reminds us that many of the problems we face can’t be solved by individuals acting alone, but by all of us acting together. For this we need leadership; we need the government to govern. To tell us what needs to happen, to issue instructions, provide support for those who need it, and then have all of us falling into line and pulling our weight.

That’s easy to see – and accept – in a crisis, but harder when we’re muddling along as normal. Fact is, however, our world abounds with problems that can’t be solved by individuals and businesses acting on their own initiative.

For these we do need somebody – or some body – with the authority to act on our behalf, calling the shots, fixing things, spending money and requiring us to cough up that money according to our ability to pay.

And yet the rise of individualism has been accompanied by the denigration of the role of government. It was the now-canonised Ronald Reagan who famously said that the nine most terrifying words in the English language are "I’m from the government and I’m here to help".

Obviously, governments can be far from perfect. Government agencies can be unhelpful, they can push us around for no good reason, be inefficient and waste our money. And yet the prevailing ideology’s response – influencing the behaviour of both sides of politics – hasn’t been to improve the functioning of government, but to chop it back as much as possible.

Any government business that can be sold, should be. Industries should be deregulated so private enterprise is given maximum freedom to be enterprising. There are services that governments need to pay for from the public purse, but their provision should be contracted out to private firms.

The trouble is, the advocates of Smaller Government have never persuaded the public of the wisdom of this approach, nor received a mandate. When governments try to cut back government spending in big licks – as Tony Abbott, despite promises to the contrary, tried to do in his first budget – they get repudiated.

So they end up forever trying to keep the lid on government spending – quietly cutting money going to politically unpopular causes (the unemployed, public servants), and ignoring all the people warning them to start preparing for possible problems in this field or that (a bad bushfire season, for instance).

They justify all this short-sighted penny pinching by saying no one wants to pay more taxes. Which is the message we so often send them, partly because we’ve grown distrustful that our money will be spent wisely.

See where this is leading? All the denigration and distrust of government does much to explain why we haven’t responded to the pandemic as well as we should have. National planning for a pandemic was discontinued after 2008 and it’s likely that the recommended national stockpile of personal protective equipment was a victim of successive "efficiency dividend" cut backs.

The ironically named efficiency-dividend cuts to the public service may help explain the inadequacy of Victoria’s contact tracing arrangements. There’s an inquiry into the failures of Victoria’s quarantine of returning travellers, contracted out to private firms.

Deregulation of wage-fixing has encouraged the growth in casual workers, whose lack of paid sick leave tempts them to go to work while at risk of having contracted the virus. Governments are scrambling to fill this dangerous gap.

Finally, the decades of wilful neglect and misregulation of aged care facilities, “left out of sight and out of mind” and “fragmented, unsupported and underfunded” – to quote the latest of many inquiries. All to keep taxes low.

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Thatcherism: our conservatives prefer punishment to 'reform'

If your citizen-strength bulldust detector isn’t pinging like blazes, you need a new one. And if Scott Morrison and Josh Frydenberg have a fraction of the courage of Margaret Thatcher and Ronald Reagan, I’ll eat the hat I’m not yet bald enough to need.

Speaking from experience, Frydenberg is like the fat man whose eyes are bigger than his belly and orders more than he can eat. He wanted to give his hardline Liberal backbenchers a thrill by invoking the holy names, but he and his boss don’t have the appetite for tough “reforms”.

The truth is that only conservatives of a certain age (and failing memories) hanker after the glory days of Thatcher and Reagan. No one else wants to return to the halcyon era of privatisation and deregulation because by now most people realise how lacking in halcyonicity those things are.

In any case, all the obvious reforms have already been made. When you’ve privatised Telstra, Qantas, the Commonwealth Bank, the Commonwealth Serum Laboratories and much else, what’s left? Selling off Australia Post?

The further you go down that road, the more dubious and distasteful your sell-offs become. The more recent privatisation of Medibank has effectively opened private health insurance provision to profit-seeking companies, adding a further problem to all that sector’s other life-threatening ailments.

The states’ privatisation of the electricity industry has turned five state monopolies into three big money-hungry oligopolists and raised electricity prices far higher than a carbon tax ever could.

The admission of for-profit businesses to childcare and aged care has hardly been a roaring success (on the latter, just ask Victorians). Bringing private companies into vocational training has turned technical education into a disaster area that’s still to be cleaned up.

The public is strongly opposed to privatisation. When the Coalition was considering privatising Medicare’s back-office processing, Labor portrayed this as a plan to privatise Medicare proper which, apparently, cost Malcolm Turnbull a lot of votes in the 2016 election.

Speaking of which, remember that Thatcher’s initial reforms were so unpopular she needed a war with Argentina to get re-elected. John Howard’s goods and services tax was so unpopular he went perilously close to losing the 1998 election.

I was puzzled to see Frydenberg associating Thatcher and Reagan with removing red tape. They aren’t remembered for anything so minor. Then I realised removing red tape was his euphemism for “deregulation”. The word now has such negative connotations he didn’t even want to say it – much less do it.

No, I don’t think we have anything to fear from Morrison’s inner Maggie.

For another thing, she wanted to close Britain’s inefficient coal mines, not defy economic reality and keep them going at all cost. And she, being a scientist, never had any doubt about the reality of climate change and the need to stop it.

The historian Manning Clark argued that, thanks to the circumstances of white settlement, Australia’s leaders could be divided into two groups: the “enlargers” and the “punishers and straighteners”. The enlargers wanted to get on with exploiting this land’s huge opportunities, whereas the punishers and straighteners, successors to the governors and prison guards, just wanted to go on running the place and keeping the lower orders in line.

If today’s Liberals were enlargers, they’d be resisting the temptation to help our coal and gas industries postpone their inevitable demise, and embracing this great opportunity to transform Australia into a global superpower in the production and export of renewable energy.

The Libs’ continuing role as punishers and straighteners is seen in their penchant for playing friends and enemies. Honourable friends and disreputable enemies. Honourable friends get rewarded with big tax cuts, which probably need to be brought forward – in the national interest, of course.

Although the Libs have lacked the mandate to cut government spending generally, they’ve selected various enemies whose lack of public sympathy means their money can be cut with impunity. Amid the massive government spending to counteract the lockdown, they’ve still singled out the universities for exclusion from the JobKeeper wage subsidy scheme or any other help of consequence.

But the people the Libs have most wanted to punish are the unemployed. When the lockdown caused unemployment to more than double, they had no choice but to increase the dole. But they kept their measures temporary, and introduced a two-class system.

Those travelling second class – who’ve lost any link to an employer – were given the JobSeeker unemployment benefit of $558 a week, about a quarter less than those in first class on JobKeeper.

We learnt last week that, after September, this will drop to $408, about a third less than the reduced JobKeeper payment. Means-testing will be resumed, as will penalties for failing to search for jobs. JobKeeper has been extended for six months, but the JobSeeker supplement only for three, with no guarantee it then won’t revert to $40 a day.

Why so tough? Because the unemployed aren’t like you and me. They’re shirkers. If you want them to work, you have to threaten punishment.

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