Guest Post: Sanjeev Sabhlok – The elephant in the room in the Australian productivity debate: vast stores of fat in government

I attended an event yesterday which looked at options to increase productivity and innovation in Australia.

The good things first:
1) Both sides of politics in Australia seem to agree that governments should not pick winners.
2) Everyone agreed that that competition needs to be beefed up and a reform zeal of the sort experienced in Australia in the 1980s and 1990s is needed again.

However, the big elephant in the room – the level of fat in the government – was only tangentially alluded to by some of the speakers.

At drinks, one of the attendees with whom I was having a chat suggested that this is not really the big elephant that I’m making of it. He noted that the size of government has remained relatively constant in Australia as a share of GDP. But there are problems with this way of thinking.

The first problem is that government expenditure is equated as output for purposes of GDP calculations. While the rest of the economy’s output is market-tested (hence represents genuine, i.e. optimal, value), government output today is well in excess of the optimal level in practically every area of government activity. When people spend their own money it is used for things that provide the greatest value. When governments spend money it goes into things that bureaucrats like. The preferences of bureaucrats are often inefficient and biased towards their self-interest. I think I’m qualified to make such a comment based on my 33 years of experience in governments.

But there’s another issue. No business can survive if it doesn’t keep on improving its productivity. A good business tends to produce more with increasingly fewer staff. That’s the essence of productivity. But in the government, the number of staff either increases every year or at least remains constant as a proportion of the total jobs in society.

When every other industry is doing more with less, why should the government do the same with more? There needs to be a steady attrition in the total number of government employees by 1 or 2 per cent per year. There should be economies of scale (we need fewer government employees per citizen as the population of the country increases) as well as a productivity dividend from the application of technology. The size of government must reduce over time. The fact that the size of government tends to grow with a growing economy tells us that fat is being accumulated.

Finally, if a business doesn’t keep on cutting its costs and improving its output, it won’t survive in a competitive world. The government does not experience such pressure. A government usually doesn’t go bankrupt even if it reaches the peak of inefficiency compared with the private sector.

In sum, I suggest that the biggest problem Australia faces today in terms of the low productivity it has experienced in recent years is the sheer size of governments.

Cutting the number of government employees by 2 per cent per year for ten years will cut unproductive expenditure and put money back into the pockets of the people – who best know how to spend it in the most productive way. That will also create opportunities for businesses and increase incentives for innovation.

And yes, swathes of government-owned or managed industries probably need to be privatised, as well (I won’t go into details since there might be some conflict with my current policy advisory role, but I’d say that one doesn’t have to look far to find such sectors).

Of course, none of the other reforms suggested at the event (e.g. competition and regulation reforms) are redundant. These do need to be implemented. But these reforms, in isolation, will hardly make a dent into the problem of low productivity. Taking a scalpel to the vast stores of fat in the bowels of various Australian governments, when implemented along with these other reforms, will make a real difference. All governments should come to an agreement on a ten year plan to incrementally reduce the size of government.

Posted in Guest Post | 33 Comments

A textbook answer to Japan’s economic problems

Look, Malcolm might not be the worst economic manager in the world: Japanese Prime Minister Shinzo Abe to unzip $33bn on welfare. The Japanese economy has never recovered from its stimulus program of the 1990s, and despite its twenty years of failure, the addiction to public spending just keeps getting worse.

Japanese Prime Minister Shinzo Abe will increase spending on ­social programs and raise the minimum wage as he tries to jump-start the flagging economy ahead of an election next year.

Mr Abe said on Thursday the government would give cash handouts to the elderly poor, and build childcare and aged-care ­facilities to help people enter and stay in the workforce, as part of a stimulus package expected to cost at least ¥3 trillion ($33 billion).

He hopes to revive an economy that has slipped into recession for the second time in two years, heightening scepticism about whether Abenomics will succeed in generating sustainable growth.

Why should anyone be sceptical? They’re just stimulating demand, just like the textbooks say they need to do.

[My thanks to MH for sending the link.]

Posted in Classical Economics, Economics and economy | 12 Comments

Are their statistics any better than their spelling?

Simon Chapman is all atwitter:

Following the link provides us with this paper (pdf).

Conclusions: A significant decline in smoking prevalence in Australia followed the introduction of plain packaging, after adjusting for the impact of other tobacco control measures. This conclusion is in marked contrast to that off the industry-funded analysis.

Oh dear. “… off the industry-funded analysis”. That’s from the abstract on the front page.

The interesting point about this paper is that it focuses on Kaul and Wolf – but does not at all address the Davidson and De Silva paper. To the best of my knowledge Kaul and Wolf is an unpublished working paper while Davidson and De Silva is both peer-reviewed and published. I wonder why the anti-tobacco lobby is spending so much time on Kaul and Wolf and not so much time on the ABS data?

Posted in Hypocrisy of progressives, Take Nanny down | 22 Comments

The Climate Caper. Crony science leads to crony capitalism.

In New Orleans at the annual conference of the Society for the Development of Austrian Economics I enjoyed some excellent conversations including a session with Richard Ebeling (an admirer of Steve Kates) swapping Bill Hutt stories and an encounter with Bill Butos and Thomas Mcquade who have been working on climate science. This paper contains a mass of information on the number of dollars devoted to climate science and the innumerable channels that contribute to it, a great many of them driven directly out of the office of the President of the United States.

Our overall conclusion is that a confluence of scientific uncertainty, political opportunism, and ideological predisposition in an area of scientific study of phenomena of great practical interest has fomented an artificial boom in that scientific discipline. The boom is driven and sustained by the actions of Big Players—the IPCC and various government entities—in funding the boom and singularly in promoting only one among a number of plausible hypotheses describing the relevant phenomena.

A key feature of the US scene is the Global Change Research Act of 1990 which established institutional structures operating out of the White House to develop and oversee the implementation of the National Global Change Research Plan and created the U.S. Global Change Research Program (USGCRP) to coordinate executive departments’ and agencies’ climate-change research activities. The USGCRP drives the research components of thirteen participating government agencies, each of which independently designates funds in accordance with the program’s objectives.

The departments and agencies whose activities compose the bulk of such funding include independent agencies such as the National Aeronautics and Space Administration (NASA), the National Science Foundation (NSF), the Environmental Protection Agency (EPA),
the U.S. Agency for International Development, and the quasi-official Smithsonian Institute as well as executive departments such as Agriculture, Commerce (National Oceanic and Atmospheric Administration [NOAA], National Institute of Standards
and Technology), Energy (DOE), Interior (DOI, the U.S. Geological Survey and conservation initiatives), State, and Treasury.

As of 2014, the coordination of climate-change-related activities resides largely in the president’s Office of Science and Technology Policy, which houses several separate offices, including Environment and Energy, Polar Sciences, Ocean Sciences, Clean Energy and Materials R&D, Climate Adaptation and Ecosystems, National Climate Assessment, and others. The Office of the President also maintains the National Science and Technology Council, which oversees the Committee on Environment, Natural Resources, and Sustainability and its Subcommittee on Climate Change
Research. The subcommittee is charged with the responsibility of planning and coordinating with the interagency USGCRP. Also, the Office of Energy and Climate Change Policy is housed within the president’s Domestic Policy Council. Although Congress authorizes executive-branch budgets, the priorities these departments and agencies follow are set by the White House.
As expressed in various agency and executive-branch strategic plans, these efforts have been recently organized around four components: (1) climate-change research and education, (2) emissions reduction through “clean” energy technologies and investments, (3) adaptation to climate change, and (4) international climate-change leadership.

The impact of government funding on scientific research is a matter not only of the amounts but also of the concentration of research monies arising from a single source and brought to bear on particular kinds of scientific research. Government is that
single source and has Big Player effects because it has access to a deep pool of taxpayer (and, indeed, borrowed and created) funds as well as regulatory and enforcement powers that necessarily place it on a different footing from other players and institutions.

Crony Capitalism

Section 1705 of the American Recovery and Reinvestment Act of 2009 authorized the DOE to provide taxpayer loan guarantees and direct-investment subsidies for the development of green technologies.56 As the program wound down in 2014, $16 billion had been allocated to twenty-seven firms. As Christine Lakatos (2014) has reported in detail, the majority of the firms had officers or investors with close ties to political insiders at the federal and state levels, campaign bundlers, donors, and DOE agency officials. Of these firms, several have declared bankruptcy, accounting for $3 billion in taxpayer losses,57 and several others that Victor Nava and Julian Morris (2013) list as “troubled recipients” account for another $3.5 billion.58 Of the eighteen firms that were not listed as “troubled,” fourteen, representing $11.3 billion in loan guarantees, had not completed their projects as of the end of 2013, and only four firms with loan guarantees of $352.6 million had completed projects. In summary, of the $16 billion in DOE loan guarantees, about $15.6 billion represent bankrupt, troubled, or incomplete taxpayer investments as of 2013.

Even if we assume that most of the loan guarantees in the “incomplete” category pan out, the taxpayer losses of perhaps $6.5 billion on a $16 billion “investment” are arguably unacceptable. What accounts for this flouting of conservative stewardship?

Posted in Global warming and climate change policy, Rafe, Shut it down. Fire them all. | 27 Comments

Open Forum: November 28, 2014

Posted in Open Forum | 663 Comments

Malcolm and the economy

The way to achieve growth is to encourage the private sector: lower taxes, less regulation and a cut to spending. Three stories, each highlighting how bizarre economic policy now is. First this: Budget cash to back innovation push.

Malcolm Turnbull’s sweeping innov­ation strategy will hit the budget bottom line as the package of more than 30 reforms, including new spending measures, will not be matched with savings.

The Prime Minister, who has told Industry Minister Christopher Pyne to “release his inner revolutionary” in setting the new innovation agenda, is understood to have ordered Treasury officials to prepare “second-round effects” modelling to demonstrate the long-term benefits of the reform package, despite the anticipated short-term hit to the budget.

And then on the matter of savings, we have this: Cutbacks eyed for superannuation tax breaks.

Tax breaks on superannuation could be scaled back to help fund income tax cuts for workers, under ideas Scott Morrison will air today in a bid to ignite a debate over the best way to use concessions worth billions of dollars.

The Treasurer will also raise the prospect of easing some of the rules that prevent people from building up their nest eggs, acknowledging that caps on their contributions can make it impossible to save all they need for a comfortable old age.

But Mr Morrison will use a major speech today to warn that super must not be turned into ­“estate-planning vehicles” for the wealthy to exploit the tax-free ­nature of the funds in retirement.

The suggestions widen the tax reform debate, as the government examines options that range from an increase in the GST to a “progressive” scale of super tax rates that could recoup as much as $6 billion a year in revenue.

And we should not neglect this either: Turnbull’s NBN deficiencies exposed by $800 million Optus debacle.

Leaked documents, which show that the company building the government’s national broadband network could be up for $375 million in repairs and upgrades of a key part of its multi-technology-mix (MTM) pose serious questions about the wisdom of the government in tearing up Labor’s fibre to the premise plans.

The stories are each part of Malcolm’s visionless approach to policy. He thinks government spending is good, private investment irrelevant, and national saving not central to his plans. We are dealing with a Labor government that is only being constrained by the conservatives in its ranks, the ones Malcolm is trying to rid the party of.

Everyone is perfectly aware that Albanese will lead the ALP at the next election. If Malcolm loses the unloseable, he will have to emigrate with the other millions heading to Europe.

Posted in Economics and economy, Federal Politics | 125 Comments

The Emperor’s Recycled Clothes

As reported today in the media, including in the SMH by Chris Kenny, the Labor Party has proposed to cut Australia’s 2005 measured emissions by 45% by 2030 and to lead Australia towards a goal of a totally emissions neutral Australian economy by 2050.  This presumably on top of the Labor Party’s prior announced policy of a 50% renewable energy target.  This later target presumably to be achieved through wind and solar because dams can’t be built for hydro, trees can’t be cut down to be burned and god forbid nuclear.

No numbers or costings or cost benefit analyses were provided.  No dependencies or contingencies were noted, such as action by China, India, US, Canada, Russia – you know the major emitters.

Henry Kissinger once said that “the test of policy is how it ends, not how it begins“.

This is how it begins and we all know how it ends.


Talk about shallow and cynical politics.  Can someone out there please advise what the impact on global temperatures will be of this policy.  Please be specific.  None of this leadership clap trap or Australia can afford it.  There is a cost to such a policy, what is the benefit please.

Another demonstration of economic and foreign policy developed in the social and gender studies faculties of inner city universities.

Posted in Uncategorized | 35 Comments

Guest Post: BorisG – On the Russia-Turkey incident

The shooting down by Turkey of a Russian bomber is the most serious military incident between Russia and a NATO country for decades. But whose fault is it? If the plane indeed violated Turkish airspace then Russia has done everything to provoke Turkey:

  • From September onwards, the Russians started bombing all rebel groups opposed to the Asad regime. This pitched Russia directly against Turkey, which is sharply opposed to that regime.
  • Moreover they are not just bombing all rebel groups, they specifically bomb turkmen people of North Western Syria, who are strongly supported by Turkey due to their strong ethnic and historical ties.
  • And against this background, the bomber flies either through a strip of Turkish airspace, or very close to the border.

All this suggests that Turkey was provoked. However Turkey is also at fault:

  • By the Turkey’s own admission, the plane was only in Turkish airspace for 17 seconds.
  • As Putin stated correctly, it posed zero threat to Turkey.
  • Putin called Turkish leaders ‘accomplices of terrorists’. While Putin’s branding of Turkmen terrorists and his refusal to distinguish them from ISIS is a blatant lie, everyone knows that Turkey indeed has been until recently reluctant to take on ISIS, and by many accounts gave them support, if only by way of not sealing the border. This was the first time that someone officially called them supporters of terrorists. Good call.
  • Putin says the downing of the plane was a stab in the back for Russia. Since Russia and Turkey are pitched directly against one another, this is hardly a stab in the back. It is however indeed a stab in the back of the renewed attempt to build a coordinated coalition against ISIS. I don’t like conspiracy theories but I wonder if it wasn’t indeed Erdogan’s goal to disrupt this process.

No one looks good here. And from now on it is shaping as a contest of will between two autocratic leaders.

However on second thoughts, two comments in defence of Turkey’s position:

  1. Throughout the Syrian civil war, Turkey made it very clear who is to blame for it, but had enough patience and wisdom not send their troops even a millimetre across the border. Even in defence of Turkmen. This is remarkable patience, which is rare in this part of the world, and has to be commended.
  2. Everyone is blaming Turkey for not taking on ISIS. But Turkey is concerned that if and when ISIS in Syria is defeated, Kurds will come to take its place, and will pose a direct threat to Turkey (in light of their close ties with PKK). This is a serious and legitimate concern, isn’t it? Has the West given a thought on how to address this concern?

I don’t think any solution in Syria has any hope of eventuating without the support of Turkey. And that is a fact regardless whether we like Turkey’s Islamist and Hamas supporting leadership or not. I certainly don’t.

Posted in Guest Post | 94 Comments

Freudian displacement and the non-war on ISIS

Maurice Newman has an article in The Oz today on Waffling West empowers Islamic terror. And there he wrote, in the kind of article that has already virtually disappeared, about how there is something else that is the Number One issue to allow you to show you are being tough-minded even while studiously ignoring ISIS.

Left leaning, Nobel prize-winning economist Paul Krugman sympathises. “When President Obama describes climate change as the greatest threat we face, he’s exactly right. Terrorism can’t and won’t destroy our civilisation but global warming could and might.”

French Foreign Minister Laurent Fabius agrees “climate change is a threat to peace” and a significant cause of terrorism, sentiments echoed by Prince Charles.

All this reminded me of an article some time back by Ed Driscoll on Freudian displacement. He began with this:

Tough language is borrowed from the war on terror and applied to the war on weather. “I really consider this a national security issue,” says celebrity activist and “An Inconvenient Truth” producer Laurie David. “Truth” star Al Gore calls global warming a “planetary emergency.” Bill Clinton’s first worry is climate change: “It’s the only thing that I believe has the power to fundamentally end the march of civilization as we know it.”

Freud called it displacement. People fixate on the environment when they can’t deal with real threats. Combating the climate gives nonhawks a chance to look tough. They can flex their muscle for Mother Nature, take a preemptive strike at an SUV. Forget the Patriot Act, it’s Kyoto that’ll save you.

But then a quarter of an hour later, having thought about his original post, Driscoll went on with a much fuller discussion on how fighting climate change gives some people the pretence of being tough. Link to it all since it is short but subtle, and explains quite a lot. A sample:

While the hawks among us worry about preventing the Armageddon that’s coming, our modern-day hippies just want to make sure the planet is pristine when it does. In fact, the more menacing terrorism becomes, the more some people seem to worry about the weather. Scared and unsure how to fight terrorists, they confront “climate change,” which only requires spending trillions of other people’s dollars on something that may not need fixing or may not be fixable. No wonder some of these people chain themselves to trees – they think money grows on them.

It’s funny when you put it that way, but it’s actually not funny at all. That the US could twice elect Obama at such a moment – and in Australia replace Tony with Malcolm – is the surest sign that we would happily sign the surrender documents if only it wasn’t all too obvious to the other side that this is what we have in effect already done.

Posted in Cultural Issues, International | 43 Comments

Guest Post: Riccardo Bosi – Knowledge Dispels Fear

It was a hot day just before Christmas in 1990. I was travelling through Sydney in a taxi and the cabbie was listening intently to ABC news radio which was covering the build-up of tension between Iraq and the rest of the world.

Saddam Hussein’s armed forces had invaded Kuwait some months earlier, and was now threatening the mother of all wars should the US led coalition of 30 countries, which now numbered 40,000 and was building up in Saudi Arabia, attempt to remove his army by force.

When the news item ended, the cabbie volunteered that he was confused because there were so many contradictory versions of events in the Middle East. He just wanted to know, with some degree of certainty what was going to happen if the coalition went to war and that he wished there was just one news service that would ‘tell us like it really is’.

I sat there, resisting the very strong temptation to discuss his desire for a single source of news, and instead knowing that knowledge dispels fear, decided to oblige him.

“The war will be short, it will be brutal and we will win”.

He asked how I knew and how could I be so certain, so I gave him the short answer. I was an Army officer and that it was ‘what we do for a living’. I said that he was no different in that he could reasonably assess the time needed to travel between the airport and the city, taking into consideration variables such as traffic and motor vehicle accidents, because it was what he did for a living. Having had his need for knowledge met, he did appear less fearful but no happier, as is often the case.

Knowledge Dispels Fear is the motto of the Australian Defence Force’s Parachute Training School located at Naval Air Station – Nowra, on the NSW coast south of Sydney. That’s where I learnt it.

Knowledge dispels fear but it does not bring happiness. I also learned that at the Parachute Training School and you’d be surprised at the number of Special Forces soldiers who are not happy about jumping out of a plane.

I have been reminded of this motto many times since the Paris attacks, specifically whenever I have heard the leaders of western nations telling their populations not to be fearful and to go about their everyday lives, otherwise the terrorists win.

Sounds nice but the exhortations from politicians, a group not noted for their honesty nor trustworthiness, are falling on deaf ears and for good reason. The paucity of knowledge on the part of the people is prodigious. Our largely incompetent leaders are allowing the enemy, in this case ISIL, unfettered access to inform the media narrative. We are warned not to overreact lest we fuel ISIL yet it is exactly this absence of an effective counter message from western governments that is providing aid and comfort to the enemy and those who would support them.

So, given that our own Prime Minister is also Absent Without Leave on this issue, I will now outline a possible plan to the military problem of ISIL. Please note it is a possible ground war plan only, much simplified and built on many assumptions, but it is a workable solution to the removal of ISIL from the Levant. This is a necessary precursor to the rebuilding of Syria and Iraq, and the halting of the humanitarian crisis. My purpose is to dispel fear by providing the knowledge that ISIL is not an invincible behemoth which our leaders seem to believe it is, but rather just another adversary that will be defeated on the battlefield.

The plan follows the ancient approach of setting the anvil and swinging the hammers, and is as follows:


Mission Secure boundaries


Mission – Secure Syria


Mission – Secure Northern Iraq


Mission – Secure Western Iraq

See the maps below for further information. Continue reading

Posted in Guest Post | 85 Comments