We need to unclog the pipes of the capitalist machine

Of the many worthwhile economic reforms put on Treasurer Jim Chalmers’ to-do list after last week’s roundtable, I suspect the one that could – repeat could – produce the most lasting boost to our productivity is the one that didn’t sound like much: reform of the way we regulate the economy. Abolish more nuisance tariffs, anyone?

Economists are obsessed by taxes. So too are business people. So it wasn’t hard for those sitting round the oval table to convince themselves that reforming our system of taxes was the key to improving our “productivity” – the efficiency with which our capitalist economic machine converts inputs of resources into outputs of myriad goods and services.

But I doubt it. Our tax system does need major reform, but that’s much more about reducing its generational unfairness than increasing economic efficiency. Economists see taxes as just another price, and the “neoclassical” model of the economy they carry in their heads tells them prices are the key to understanding everything. That’s why they believe such absurd propositions as that every worker on the top tax rate – including all the worthies at the roundtable – is only doing it for the money, and is unmotivated by, for instance, the desire for power and status.

No, a more productive way to think of it is that, though many, many aspects of our lives need to be regulated – from outlawing theft and murder, to what and where we’re allowed to build things – there’s a real risk that the politicians and regulators will overdo it.

That, with the best of intentions, they’ll end up misusing their power. That they’ll make their regulation of the particular bit of our activity they’re responsible for too prescriptive, that they’ll try to perfect outcomes in their bit at the expense of all the other bits. That their demands will overlap with, or even contradict, the demands of other regulators.

This risk is greatly multiplied by our federal system of government, with at least two levels of government having the power to regulate most of the aspects of our activity.

As the Productivity Commission has confirmed, our businesses face a thicket of regulations. That thicket grows with each year of governments governing.

And then there’s the risk that multiple regulators will yield to the temptation to do their job in a way that makes things easier or cheaper for them, at the expense of those they’re regulating. Requiring too much form-filling, for instance.

Worse, regulators who take far too long to approve or deny applications to start a new business or build something. The delay probably saves them the cost of having to hire a few extra workers, but the cost to the rest of us, I now realise, is huge.

If ever there was a “negative externality”, as economists call it, this is it. The cost of regulatory delay has two aspects. It greatly reduces the productivity of the construction industry, affecting both housing, and commercial and infrastructure construction.

If ever there was a multifaceted problem it’s housing affordability; problems on both the demand and supply sides. But we’re indebted to Treasury for pointing out just how much of the problem is explained by the growing inefficiency of our home building industry.

It’s a cottage industry that’s done too little to seek economies of scale. But the average time it takes to produce a new home has worsened greatly in recent decades. This must surely be explained mainly by the growing time it takes for building permits to be issued.

So, if we were to greatly reduce the average approval time – which shouldn’t be too hard – we could expect this to significantly increase the number of homes the industry could produce each year, without any increase in its size. Productivity improvement doesn’t come more clearly than this. And this relatively easy policy measure could also put a decent dent in our home affordability problem.

The other respect in which delays in approvals are costly comes from what economists call “the time value of money,” and normal people call interest rates. Construction companies have capital – borrowed or from shareholders – tied up and waiting for the off from approval bodies. So for every day that capital lies idle, the business has funding costs that aren’t matched by income-earning work.

One of the most useful things about the roundtable is the way it has produced evidence of the extent of something we rarely notice: overlapping and conflicting regulations, the surprising number of approvals businesses must get and the growing delays in getting them, as well as all the forms that regulators demand be filled, repeating known information.

They want economic growth and rising living standards, but they also want to transition to renewable energy, protect the natural environment, keep people safe at work, ensure diversity in the workforce, and various other completely legitimate concerns.

Trouble is, we’ve got all these outfits busily regulating this bit and that bit, without any outfit sitting over the top, regulating the regulators. Making sure the various bits fit together without overlap and contradictions, finding the best trade-off between the conflicting objectives, and forcing all the regulators to rationalise their form-filling, using uniform definitions and common databases.

That would be hard enough at the federal level, but it has to be achieved by agreement between the feds and the states, with the states getting their local government into line.

When you think it through, it’s not hard to see how excessive, unco-ordinated and conflicting regulation of businesses, with all its approval processes and form-filling, is clogging up the capitalist machine. Unclog the pipes and the machine would produce more each year without any extra inputs.

But regulatory reform has been tried before and achieved little before being slipped quietly into the too-hard basket. And even if the roundtable decisions were to lead to an almighty clean-out of the Aegean stable and a one-off lift in the level of productivity, the capitalist pipes would start clogging up again as governments continued to govern and regulation expanded.

So what we need is another permanent government agency, whose only job is to regulate the nation’s regulators in the interests of the regulated and the continued success of the capitalist machine.

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I've changed my mind about red tape: it's well worth cutting

This is the week to understand something most people don’t: businesses don’t do productivity. Although the nation’s productivity happens – or doesn’t happen – mainly on the floors of the millions of Australia’s businesses, their dominant goal is to achieve higher profits.

So most of the “reforms” the business lobby groups are calling for in the name of improving productivity are really intended to help them increase profit.

There’s actually no reason businesspeople would want to spend any of their time contributing to the political debate other than to win favours from the politicians that make it easier for them to increase their profits.

Productivity and profit are related, but not the same. Productivity is a measure of the efficiency with which businesses (and other organisations) take raw materials, capital equipment and human labour and turn them into the myriad goods and services they produce to meet our needs.

So wouldn’t making a business more efficient in doing what it does also make it more profitable? It could – although economists are hoping the strength of competition in their industry will end up obliging businesses to pass on the benefit of their greater efficiency to their customers in the form of lower prices. But even if a weakening in competitive pressure – which seems to have occurred in recent years – could allow businesses to retain the benefit of any improvement in their efficiency, it’s still just one way to increase profit.

Business will always be seeking the easiest way to do it, and achieving greater efficiency – improved productivity – isn’t easy. It’s easier for big businesses to reduce competition by buying out their smaller competitors, thus making it easier for the remaining big boys to put up their prices.

And this is just what research by Treasury and the Reserve Bank says has been happening over the past decade or so.

Of course, the easiest way to increase after-tax profits would be to persuade the government to cut the rate of company tax. And – purely by chance, you understand – this is the top proposal to increase productivity that the business side is taking to this week’s economic reform roundtable.

Another favourite supposed productivity booster would be for the Albanese government to reverse the industrial relations changes it made in its first term, which were intended to shift the balance of bargaining power away from employers and towards employees.

Business’s third idea is for governments to cut back all the “red tape” that has tied business up in knots and to improve planning and the approval of major projects. It’s not hard to see how this would make businesspeople’s lives a lot easier and add a bit to their profits.

But here’s the thing: it’s equally easy to see that reducing excessive regulation and speeding up the approval of major investment projects and even ordinary homes could indeed make a probably small but worthwhile improvement to the economy’s productivity.

Certainly, those hard-nosed folk at the Productivity Commission are convinced. In her speech on Monday, the commission’s boss, Danielle Wood, gave some hair-raising examples of excessive regulatory requirements.

One provider told the commission it is required to complete 15 separate accreditation processes across the health and social care services. Another said it is accountable to 350 pieces of legislation and regulations, and has a minimum of 16 program audits every three years – many of which require them to provide the same information over and over.

Yet another service provider said the cost of repetitive audits and accreditation processes runs into the hundreds of thousands of dollars each year.

Elsewhere, businesses complain of delays extending to years for the approval or rejection of major construction projects, and many months for ordinary homes.

Now, I used to be sceptical of demands to get rid of red tape, fearing they were disguised demands by business fat cats to be able to damage the natural environment wherever they saw fit and build housing anywhere and everywhere. But the greater specificity of the latest proposals has convinced me there’s a real problem that is indeed wasting a lot of the private sector’s time and money.

Part of the problem is government agencies responsible for protecting the environment, or occupational health and safety, or public safety who, in their zeal, set the highest standards without regard for all the other things we need to protect – including our standard of living.

They’re like the French teacher who wants their students to spend all their time preparing for their French test, at the expense of all the other subjects they’re being tested on.

But a further complication is overlap between our three levels of government. If businesses in particular fields are being regulated by federal and state and local government, with overlapping and conflicting regulations and separate forms to fill in, this is confusing as well as wasteful.

And then you’ve got the sad truth that government departments and agencies are constantly temped to abuse their power over the rest of us, and often do. We know how private monopolies commonly overcharge and give their customers poor service. They do this for no other reason than that they can.

But the government is also a monopoly, and its departments and agencies are just as commonly able to abuse their power over us. They are the law, we can’t take our business elsewhere, and if it suits them to make us wait many months for their approval to build something, that’s your problem, not theirs. They save a little by employing too few workers to keep the approval process to time, and you bear the cost of the delay.

The more you think about it, however, the more you realise that streamlining regulation, so that a better trade-off between the many conflicting objectives of government is achieved, and the many cases of overlap between the three levels of government, won’t be easily or quickly done.

Maybe it would take a royal commission, with a continuing monitoring authority, rather than a three-day roundtable.

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Red tape begins at home for business

Having worked all my life in the private sector - mainly for big business, including a big accounting firm - I've long known it's not just the public sector that's bureaucratic. Waste time and money on pointless rules and procedures? Sure.

To imagine otherwise - that the profit motive makes business immune from inefficiency - you'd have to have spent all your life working in the public sector. In the old Treasury, say, or a university.

Even so, private sector inefficiency is not a subject to be raised in public. No, nothing must be said that could undermine the contention that governments and their intervention in markets are the sole source of poor economic performance. That if our rate of productivity improvement is flagging, the only conceivable explanation must be the passing of some law big business didn't like.

This is why I've been waiting for the Australian Enforcers of Right Thinking to start beating up Chris Richardson, of Deloitte Access Economics, the way they tore into some poor sap from Treasury who mentioned in a speech research suggesting Australia's manufacturers were less than perfect.

Richardson has had the temerity to publish a report purporting to show that the cost of self-imposed red tape in the private sector far exceeds the cost of government-created red tape.

In a report titled Get Out of Your Own Way, he urges business to lift its productivity by lifting its game.

My guess is it's a problem limited largely to big business, with inefficiency increasing with the size of the firm. It's one of the diseconomies of scale, such as those that commonly cause company takeovers to be less profit-enhancing than imagined (while still justifying a big pay rise for the surviving chief executive).

Multinational corporations are likely to be worse on red tape than national companies. Companies with monopolies - or access to economic rents, such as the financial services sector - would have the most scope for wastefulness. As had our miners before commodity prices fell.

Richardson suggests the problem has built up over the long period of prosperity since our last big recession, and I don't doubt he's right. Nothing like a recession to subsequently improve productivity (but don't tell the Business Council I said so).

The other Richo's report is so full of uncommon common sense it deserves closer attention. "To be clear," he says, "rules and regulations are vitally necessary.

"They cement the key foundations of our society, protecting the rule of law and a wealth of standards in everything from health to safety and the environment. And they can help businesses to reduce risk and plan for the future."

But our rule-makers - both government and business - often try to achieve the unachievable, the report says. They set rules that are too prescriptive, overreact to momentary crises, let new rules overlap with existing rules, don't listen to those most affected and don't go back later to check how well their rules are working or if they are still required.

"So Australian businesses have bulked up, employing many people whose role is to create and then enforce a whole bunch of rules and regulations. That doesn't just mean some lawyers and accountants. It also includes some people in finance and information technology and human relations functions, as well as in fast-growing governance and security roles."

As a result, there are already more "compliance workers" across Australia than there are people working in construction, manufacturing or education. In fact, one in every 11 employed Australians now works in the compliance sector.

New technologies are delivering a huge dividend but we're not seeing the gains, the report says.
There's been a huge decline in "back-office" workers such as switchboard operators [why have them when you can make your customers deal with some fast-talking, incomprehensible and powerless person in Manila?] mail sorters and library assistants. They have been rapidly shrinking as a share of the workforce, yet those productivity savings have been swallowed up amid the rising cost of Australia's compliance culture.

Corporate Australia has let that culture grow partly because firms overestimate the extent to which they can insulate themselves from costs (a rogue employee, a nasty story in a tabloid, a grumpy customer) and partly because humans are bad at estimating risks, we're told.

Among the many examples of business craziness Richardson and colleagues quote, my favourite is the firm that insisted staff complete an ergonomic checklist and declaration when they moved desks, then introduced "hot-desking" so that everyone spent 20 minutes a day filling out forms.

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Abbott's red tape play-acting hides rent-seeking

The world of politicians gets deeper and deeper into spin, and so far no production of the Abbott government rates higher on the spin cycle than last week's Repeal Day.

Hands up if you believe in red tape? No, I thought not. So how about we package up a huge pile of window dressing with some worthwhile but minor measures, slip in a few favours for our big business supporters and generous donors, and call it the most vigorous attack on red tape ever? This will give a veneer of credibility to our claim it will do wonders for the economy.

In the process, of course, we'll have changed the meaning of "red tape". It's meant to mean bureaucratic requirements that waste people's time without delivering any public benefit. In the hands of the spin doctors, however, it's being used to encompass everything from removing dead statutes to the supposed deregulation of industries.

Repealing redundant laws and regulations dating back as far as 1900 is mere window dressing. By definition they don't waste anyone's time - if they did they'd have been repealed long ago. Their primary purpose is to allow Tony Abbott to quote huge numbers: today I announce the abolition of more than 1000 acts of Parliament and the repeal of more than 9500 regulations. A trick you can pull only once.

Somewhere in there is some genuine, time-wasting red tape we're better off without, but it doesn't add up to much - hence the need for so much padding. Governments of both colours are always promising to roll back red tape, mainly because it gives people such an emotional charge.

But while it's true there are examples of mindless, unreasonable bureaucratic rules and requirements that could be eliminated or greatly simplified at no loss to anyone, much alleged red tape is in the mind of the beholder: it's red tape if you don't like it and good governance if you do.

There are plenty of small business people who'd try telling you supplying information to the Bureau of Statistics was "pointless red tape", maybe even filling out tax returns. In an era when big business is going overboard on "metrics", it's whingeing about the "reporting burden" the government imposes so it - and the rest of us - can know what's going on in the economy.

When business isn't complaining about "compliance costs" it's demanding greater transparency and accountability from governments. Guess what? They're opposite sides of the same coin. The world is and always will be full of compliance costs. The sensible questions are whether they're higher than they need to be and whether the benefits of compliance outweigh the costs.

The notion that all so-called red tape comes from power-crazed bureaucrats is a delusion. Most excessive regulation comes from politicians. Sometimes they act at the behest of lobbyists for particular industries, sometimes they're merely trying to create the appearance of action (an old favourite is laws to make illegal something that's already against the law) and sometimes they pass an act to impress the punters while carefully leaving loopholes and escape hatches for the industry pros.

But the most objectionable feature of the whole red tape Repeal Day charade is the way it has been used as cover for rent-seeking by the Coalition's industry backers. It's an open secret the protections for investors provided by the Future of Financial Advice legislation are being watered down at the behest of the big banks, which want to be freer to incentivise unqualified sales people to sell inappropriate investment products to mug punters.

Then there's the strange case of the Charity Commission,which was set up only recently to reduce inefficient regulation and red tape. It's to be abolished despite the objections of most charities, presumably because the Catholic Church doesn't like it.

It's being claimed all these dubious doings will "drive productivity, innovation and employment opportunities", not to mention "creating the right environment for businesses of all sizes to thrive and prosper and to drive investment and jobs growth".

Yeah sure. The claimed savings of $700 million a year (don't ask how that figure was arrived at) are equivalent to 0.04 per cent of GDP, and yet they'll work wonders. Must be an incredible multiplier effect.

We're told we'll be getting at least two Repeal Days a year, with the goal of achieving savings worth $1 billion a year. Really, a minimum of six Repeal Days in Abbott's first term? What's the bet that promise will be quietly buried?

But for as long as this pseudo reform lasts it seems it's intended as a substitute for genuine deregulation.

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