No. 72

When reform stops so does Australia; or why Quiggin and Tanner are wrong.

STONE the crows! No wonder the Gillard Government can’t be bothered with economic reform – it does not work and the media has neither inclination nor ability to address anything other than ephemera. According to John Quiggin and Lindsay Tanner, that is.

On Thursday, John Quiggin argued the productivity improvements of the 1990s “turned out to be a blip” and all the infrastructure privatisations conceived in the 1980s did not deliver.[i]

And former finance minister Lindsay Tanner says “the irresistible commercial pressures on the mainstream media to sell newspapers and win ratings” dumbs down policy debates:

Productivity improvements driven by regulatory reform, infrastructure investment and skills formation will eventually deliver higher living standards. But because this is difficult to explain and doesn’t satisfy momentary demands for action, other approaches have to be pursued. These initiatives will usually have only very marginal effects but they generally sound good. To a hard-pressed person who doesn’t follow public affairs very closely, it sounds like the government is doing something.[ii]

To which the Crows just caw.

The argument against privatisation and regulatory reform is generally used by supporters of supplying ever-more power and resources to an accountability exempt public sector, on the grounds that expecting efficient delivery of services is inhumane, that health and education (it is always health and education) matter more than mere money.

Michael Pusey’s famous defence of the mandarin class that he calls “the improvers” – broadsheet reading, ABC consuming, union joining and public sector working – says it all.[iii] According to Pusey, the reforms of the 1980s and 1990s really upset the improvers:

… anger about economic reform was voiced as a new disregard or contempt for knowledge and creativity, much of it hard-won, for our Improvers through years of formal tertiary education. This was especially true of most of our ‘middle-class’ Improvers, who once again frame their understandings of what is happening with fluent arguments that generalise what they commonly construct both as moral injury to themselves and as social damage.[iv]

As for the argument that the media is to blame for their not being enough reform; it is bit rich for a former member of a government that will only respond to the Henry tax review in October, 17 months after its release, and only then at “a forum”, and calls the re-establishment of the old arbitration system “reform” to hold hacks to blame.

Perhaps Lindsay Tanner has not noticed, but rarely a day passes when writers in the AFR and The Australian make the case for regulatory reform.

In the present case, Tanner is doing the complaining, but given the Opposition is not awash with proposals for structural economic reform it is easy to imagine its members making the same case.

But Quiggin and Tanner are arguing nonsense on stilts. There is never much of a constituency for reform, despite the urging of the policy press. As Tanner put it last year, “reform is often challenging. Those who feel they are adversely affected complain vociferously. Those who benefit are often unaware they are doing so. The benefits can be distributed thinly across most of the population.”[v]

As for the case against de-regulation and privatisation, it has more to do with the way their opponents think the world should be than the permanent need to improve economic performance.

There is no doubting Professor Quiggin is a proper economist, as Jessica Irvine made clear in a weekend puff.[vi] And there is no faulting him for consistency – he was explaining why reform was a waste of time, diverting attention away from (what a surprise) health and education 15 years ago: “the truth is that analysis based on mainstream economics suggests that the benefits of the microeconomic reform (sic) are likely to be too small to be noticed.” [vii]

Which rather makes Tanner’s point about the invisibility of incremental improvements. But even if the professor is right, and attempts to make the state smaller and the over-all economy more productive have not accomplished anything obvious, or anything at all, it does not mean we should stop trying.

Because the great reforms of the 1980s and those of National Competition Policy were never only about privatisation, which generally upsets the mandarins most. These reforms were about reducing rent seeking, cutting the unproductive power of the public sector and trying (with very mixed success) to transform Australia into an economy capable of competing in the global economy.

While people who think economics is optional loathed reform when it was underway and still despise it now, even though there is bipartisan disinterest in doing anything to upset the electors, there is no denying it was and is needed. According to the Productivity Commission, “persistent structural weaknesses in the economy,” meant Australia’s productivity ranking among developed economies slipped from three in 1950 to six in 1973 and to tenth place in 1992.[viii]

The AFR’s editorial on the day Quiggin claimed reform of the public service is a waste time explains why. The leader set out options the government is ignoring to reduce the welfare bill:

Mr Swan wants to enforce structural savings in the budget to ensure its long-term sustainability but there has been little discussion about the compounding impact of welfare and family payment changes on the sustainability of the Australian workforce. The old problem of improving work incentives in the tax and transfer system should not be put off for another day. [ix]

Welfare reform is essential if we are to expand the workforce and reduce the drag that unproductive public spending places on the economy. As The Economist puts it, “productivity growth is the closest economics gets to a magic elixir, especially for ageing advanced economies. When workers produce more for every hour they toil, living standards rise and governments have more resources to service their debts and support those who cannot work.” [x]

The brutal truth is that without reform our productivity will not increase as much as our competitors. The GDP of developing economies per person employed grew every year from the early 1990s until the slump, while in the developed world it has fallen annually for 15 years. [xi]

As our population ages, the public sector will spend more and we will end up emulating the Europeans or even, horror of horrors, the Japanese where the domestic economy remains regulated, to the benefit of interest groups from farmers to retailers and the detriment of consumers. In Japan, the rate of growth in GDP per hour worked peaked in 1990 but has fallen each year since. [xii]

Even if Tanner and Professor Quiggin are correct, deregulating the economy and increasing the productive output of public spending are essential, if only to stop the economy regressing.

As Michael Stutchbury puts it: “when you toss overboard the reform rationale that has served us so well, you also pull up the anchor and invite the rent-seeking pirates on board.” [xiii]

We really are in trouble when smart people decide an endless attempt to reduce regulation is either a waste of time or too hard.

[i] John Quiggin, “Reforms are full of flaws,” Australian Financial Review, April 28

[ii] Lindsay Tanner, “Sideshow syndrome ‘eroding democracy’ ” The Australian April 30

[iii] Michael Pusey, “An Australian Story: The Troubling Experience of Economic Reform”, Senate Occasional Lecture Series, 20 June 2003, 21-22, 13  @

[iv] Michael Pusey, The Experience of Middle Australia: The Dark Side of Economic Reform (Port Melbourne, 2003) 64

[v] Lindsay Tanner, “Change for the good,” Sydney Morning Herald, July 15 2010

[vi] Jessica Irvine, “With the zombies in his sights,” Sydney Morning Herald, April 30

[vii] John Quiggin, “Micro gains for micro reform,” Australian Financial Review September 17 1996

[viii] Productivity Commission, Microeconomic reforms and Australian productivity: exploring the links (Commonwealth of Australian, 1999) xix

[ix] “Welfare shake-up can’t be put off” Australian Financial Review, April 28

[x] The Economist, Smart Work, October 7 2010

[xi] The Economist, How to Grow, October 7 2010

[xii] The Economist, Smart Work, op cit

[xiii] Michael Stutchbury, “Price of a policy narrative,” The Australian, November 17 2010