Government drives up prices – you heard it here first

This morning The Australian had a wonderful story about government and price increases.

Here’s a startling contrast: the cost of goods and services with prices set by the private sector has increased by just 5 per cent during the past five years.

But where prices are set or substantially influenced by the government, costs have escalated by 27 per cent, more than five times that pace.

In the private sector, competition has never been more intense under the onslaught of cheap Asian-manufactured goods, the entry of new global retailers and the ever-greater ability of technology to put goods and services from around the world at a consumer’s fingertips.

Nice graph too (via the IPA).

But we here at the Cat were onto that nearly ten years ago. Here is a short piece I wrote for the IPA Review in 2008.

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33 Responses to Government drives up prices – you heard it here first

  1. Dr Faustus

    Also the rate of increase in the private sector is turning down – approximately 0.25% pa over the past four years, trending to zero. On the other hand Government-orbit prices are running away at an impressively steady 5.25% pa.

  2. I am the Walras, Equilibrate, and Price-Take

    Baumol’s ‘cost disease’.

  3. Tel

    Did this only start happen since 2008 ?

    The reason I ask is because the basic theory of the Cantillon effect would predict that as government dumps new money into the economy the areas closest to the point of monetary injection would show the highest price increases. 2008 was roughly the year when government in Australia turned from making a surplus (i.e. subtracting money out of the economy) over to massive deficit (i.e. injecting money into the economy).

  4. Pingback: Government drives up prices – you heard it here first | Catallaxy Files | Cranky Old Crow

  5. Entropy

    This little bit of reality is why the Katter party and PHON are so keen for big government to control the price of milk and vegetables. It is always the easiest path to profitability to just get the Government to command commodity prices at a comfortable margin.
    You can even claim rises in the CPI, coincidently goosed by the last round of price setting, to help justify further price rises. A virtuous circle for those with a quota (which also becomes necessary as people flock to supply for the guaranteed income).
    see 1950s to late 1990s.

  6. RobK

    Tel,
    “….the basic theory of the Cantillon effect would predict that as government dumps new money into the economy the areas closest to the point of monetary injection would show the highest price increases. “
    That seems to have a ring of truth to it. Some bank stocks maybe indicative.

  7. stackja

    In the public sector, competition has never been more intense for votes.

  8. Tel

    That seems to have a ring of truth to it.

    Neither of us would be the first people to think along those lines.

    https://mises.org/library/richard-cantillon-founding-father-modern-economics

  9. H B Bear

    LOL alcopops – another government crisis that disappeared into the ether.

    A lot easier to put your prices up when you can just legislate them instead of having to do so in the marketplace.

  10. Rasputin

    You are all missing a most important point which is that the government has for years been encouraging people to vote for their money rather than work for it, and all governments are actively unleashing the ACC and ASIC on all private enterprises to suppress their margins to give mendicant voters the highest possible living standards, and you do not need to go much past the public self-service to find the greatest concentration of mendicants. So their charges are unrestrained while everyone trying to employ workers is milked and raped by statute. This cannot go on in perpetuity!

  11. Snoopy

    Rasputin
    #2464954, posted on August 10, 2017 at 9:51 pm

    +1

  12. overburdened

    IMO all Govs are somewhat still dimly aware that their primary mission is to provide the facilitation of the smooth running of civil society and protection of the citizens. Taxes of the lower and middle class once made a contribution with the intent of mutual obligation without skinning the good folk alive.
    The current orthodoxy of the ‘business model’ and gouging at any opportunity rather than spending generously to churn taxes into amenities and strong institutions makes an ignoramus like me wonder what is the point. People that work are annoyed because they are constantly shafted without lube at every given opportunity, the bludgers and drones have never had it so good and say they feel more deprived and marginalised than ever are told by their enablers to complain and demand more, services have gone to shit and the place is broke. I don’t think I will come to grips with economics gov style.

  13. overburdened

    should be ‘and are told…’ sheesh

  14. John constantine

    Their ABC have the answer, just move everybody to a government run services economy, and everybody can get a pay rise when the cost of living goes up.

    Pay for it by taxing the robots.

    The boom in government services is the first purposely designed profitless boom in history, because the State doesn’t need to run at a profit when it can print money.

    Who else is going to employ all the diverse social services uni graduates except the government and those forced to by government quotas?.

  15. overburdened

    Luckily I have 2 wheelbarrows in case I need to buy a loaf of bread

  16. Baldrick

    We’re from the government, and we’re here to help.

  17. Entropy

    Exactly John Constantine. It isn’t even a deliberate strategy. It’s just if you have a hammer, every problem is a nail. The ABC types live on a [very] comfortable government sinecure, so wouldn’t it be better for everyone if they could be like them? It really is that shallow.
    Mind you, most of the little puppettes displaying their blonde curls and perfect teeth on commercial News TV aren’t any better. They went to the same useless journalism school as the ABC types, taught by academics who are also living well on the toil of future generations of taxpayers.

  18. Bruce of Newcastle

    I got my electricity bill yesterday. Main electricity tariff was up 25% and the off peak rate was up 36%.
    A perfect example of the effect of government.
    Mr Turnbull had the hide to say a couple days ago that he’d put pressure on electricity retail bosses:

    Prime Minister Malcolm Turnbull in ‘please explain’ meet over power prices

    ELECTRICITY retail bosses will be hauled in to Canberra on Wednesday and told to “do better” on power prices crippling Australian households.

    I hope they told him the truth: he and his government are the problem.
    Get rid of RET and let the private sector build some coal fired power stations!

  19. OldOzzie

    Bill Shorten’s uninformed mob out to milk small business


    My dad was a farmer. Wheat, mainly. Nothing “new-fandangled’’, like canola, he used to say.

    Sometimes he and I went to the saleyards and brought back with us the hope that cattle might be good that season. Sometimes it worked and sometimes it didn’t.

    Ours was like every farming family: some years were better than others.

    Whether in the schoolyard, the saleyard or the back yard, in the country you see that ups and downs of weather patterns and commodity prices don’t stop at the farm gate.

    Yet as Labor rushes to the till for another tax grab, it spares no second thought for small business.

    Farmers and small businesses have more in common than a postcode.

    The Liberals and Nationals know when farms do well. So do stock and station agents. So do machinery dealers. So does every single small business in that community.

    That’s why we redefined small business, extended the instant asset write-off and cut tax.

    We know good seasons mean more jobs and new starts and opportunities for country people in small business.

    But Labor’s tax grab forgets that just like those over the farm gate, small businesses often use a trust to manage in times that aren’t as good.

    Just like farmers, small businesspeople aren’t millionaires. They’re not tax cheats and they certainly don’t see their turnover as some ill-gotten gain to fund Labor’s tax-and-spend agenda.

    One year in small business, you may get a good batch of orders. A new market may open up. You may have a good idea which pays off. Others, you may not.

    A drought can mean small trucking companies in a region don’t do as well because there’s not as much stock to move. So markets in the city sell less stock as well and suburban corner stores pay more for product, maybe passing it on to customers.

    Just like for those over the farm gate, it’s tough. The only difference is Bill Shorten’s Labor Party thinks those truckies, those market holders, those corner stores, should pay 30 per cent more in tax.

    So, it says, should shops in town and family enterprises whose ­orders might even help a farmer get back on their feet. While it lectures those who dare call out its tax grab, Labor parrots that Australians in small business are millionaires.

    It cries crocodile tears for those on the farm, a first by anyone’s measure, but not for those who ferry the farmer’s food and fibre, or those whose small business it feeds.

    Opposition Treasury spokesman Chris Bowen told parliament Labor understood “trusts can play a role in asset protection and they can play a role in succession planning”, adding, “we support that”.

    Support, that is, unless you’re in small business.

    Because support through seasonal ups and downs sounds like a hand-out when you’ve always had a salary.

    For so many on Labor’s benches, union-fed salaries were a rite of passage on their path to parliament; a far cry from making your own way in small business. While Labor tries to justify the need for small business to pay 30 per cent more tax on trusts, ­remember this: when it rained too much and the highway was cut, they got paid. When it didn’t rain at all and there was no stock to move, they got paid. And when low commodity prices meant country small businesses suffered, they got paid.

    It’s little wonder it simply does not understand small business.

    It’s little wonder it voted against our productivity-enhancing small business tax cuts and our redefinition that meant tens of thousands more paid less tax and received access to small business concessions.

    It’s little wonder it wants to scrap incentives to cut red tape and end eligibility for the instant asset write-off when it just doesn’t comprehend small business.

    So instead of calling those who dare have a go and create jobs “millionaires”, Labor should go back to the drawing board and join the Liberals and Nationals’ support for small business.

    Michael McCormack is federal Small Business Minister and the Nationals’ MP for Riverina.

    George
    17 years ago, Zimbabwe bumper sticker:

    “No Farmers – no future”

  20. OldOzzie

    Cut the tantrums, Premier

    South Australian Premier Jay Weatherill’s ridiculous outburst in accusing the media of co-operating with banks to achieve a “subversion of our democracy” by accepting paid advertisements cannot camouflage the pitfalls of his proposed $370 million tax grab through a state-based bank tax. The state’s upper house would do South Australians a real service by voting it down. In a curious outburst that raises questions about Mr Weatherill’s belief in free speech, Mr Weatherill has objected to the banks taking out paid advertisements in Adelaide’s daily newspaper, The Advertiser, to argue against the tax.

    Struggling, apparently, to mount a coherent economic argument in favour of the tax, Mr Weatherill resorted to hyperbole in branding the banks money launderers for criminals and terrorists, and accused them of offering dodgy financial advice and false payouts to the sick and dying. However unpopular the banks are with many customers, that does not justify a tax grab likely to be passed on to customers, most of whom have no connection with South Australia. Even more unprofessional rhetoric reportedly boiled over between Treasurer Tom Koutsantonis and a senior Bank SA staff member at the SA Mid Winter Ball at Adelaide Oval on Friday night.

    The bank levy would create uncertainty in South Australia’s already stricken economy by driving investors interstate, a point argued by Opposition Leader Steven Marshall. Even former Labor treasurer Kevin Foley has admitted the tax is not one he would have introduced. And for good reason.

    Before the Howard government introduced the GST 17 years ago, the states agreed to scrap financial institutions taxes “and not reintroduce them or similar taxes” as part of the agreement that allowed them to take all the proceeds of the GST. Mr Weatherill and Mr Koutsantonis should try living within their means as hard-pressed voters are having to do.

  21. RobK

    Tel,
    Thanks for the Cantillon link above. I enjoyed the read.

  22. Roger

    I hope they told him the truth: he and his government are the problem.
    Get rid of RET and let the private sector build some coal fired power stations!

    Er…not exactly; they pressed him for a Clean Energy target.

  23. RobertS

    The ACT is a prime example of government driving up prices. In 1997 my rates bill could be paid with 10 days worth of my fortnightly DFRDB pension. My rates bill this year takes 33 days of my (indexed) fortnightly DFRDB pension to pay the rates. The price of water per kilolitre has tripled in 20 years. And the ACT government continues to boast about the territory running on 100% renewable energy by 2020.
    Can’t wait to get my winter gas and electricity bills!

  24. Bruce of Newcastle

    Er…not exactly; they pressed him for a Clean Energy target.

    Which he should have set to zero point zero.

  25. H B Bear

    Er…not exactly; they pressed him for a Clean Energy target.

    Exactly. Part of the problem. Always have been.

  26. Louis

    It’s a matter of misplaced incentives. For every regulation and other government interference some MP, committee, DG/Secretary or other public servant or politically connected player gets an increase in power, pay or positions.

    I see that as the main driving force behind every new policy I see, with any benefit to the public being pure coincidence.

  27. Robbo

    It’s the old old story. The more government is pro-active the worse off we are. That statement by Ronald Reagan that “government will not fix the problem because government is the problem” has never been truer than at present in Australia. Neither Liberal nor Labor can be trusted to make this country a better place. Both of them are wedded to higher taxes and greater intervention in our day to day lives. We need a government that will ignore SSM and concentrate on making our community safer. We sure aren’t going to get that from Turnbull or Shorten governments. A pox on them both.

  28. OldOzzie

    Venezuela flights: The country airlines hate flying

    Airlines are continuing to pull out of Venezuela, and this time it’s not just about trapped cash but a whole series of grievances including staff held up at gunpoint, luggage theft, poor runway maintenance and low quality jet fuel.

    United Airlines, Avianca and Delta Air Lines have either stopped flying to Venezuela or said they would leave the country, while three others cancelled flights on specific days as the nation descends into chaos.

    Colombia’s pilots’ association says its members who have flown to Venezuela have had to deal with contaminated fuel and hours-long delays as the National Guard pulls suitcases off flights to loot them. This week, videos showed an apparent assassination of a man at the check-in desk of a local airline at the airport.

    “Everything that’s part of the airport’s infrastructure started to get degraded,” Julian Pinzon, the head of security and technical issues at Colombian pilot association Acdac, said. “We started seeing problems in the runway, problems in the aircraft taxiway, problems with the airport’s electricity supply, in the fuel distribution trucks.”

    The current round of carrier defections comes after routes had stabilised from the previous exodus triggered by the government’s halt of dollar payments, and leaves Venezuelans increasingly cut off from the rest of the world. A flight to Miami in coach class can cost about $US1000 ($A1278), in a country where the monthly minimum wage is about $US20 at the black market rate.

    The nation’s social and economic implosion has turned tasks as simple as busing flight crew to hotels into logistical challenges. Staff who once stayed overnight in Caracas, which is about a 45-minute drive away, took to sleeping in hotels near the airport to avoid the bandit-ridden highway. Even then, they’d get attacked, minutes outside the airport perimeter. Some carriers took to flying crew to spend the night in neighbouring countries.

    Avianca hired bodyguards after shots were fired during a robbery of a bus carrying its crew. Although no one was injured, it wasn’t enough to calm nerves, and the overnight route was eventually cancelled, according to Acdac.

    Traffic in and out of Caracas dropped 40 per cent in 2014 after cash piled up from local sales that couldn’t be repatriated — there’s still $US3.8 billion that never made it out, according to international airline association IATA. The airlines that stuck it out were able to pay off local costs and fuel with bolivars – until Venezuela changed that rule, requiring payment in dollars.

    Some carriers are refusing to throw in the towel. American Airlines, which still flies to Caracas and Maracaibo, said in a reply to emailed questions that it would not operate at any airport that didn’t meet the highest standards safety and security. Panama’s Copa Airlines, which flies to Caracas and two other Venezuelan cities, said it’s been able to overcome operational challenges and continues to monitor conditions in the country.

    Venezuela’s aviation authority Inac said it didn’t have an official spokesperson who could talk about the sector. The UN’s International Civil Aviation Organization said that when it last visited Venezuela four years ago, the country delivered “exemplary results.”

    Flights have found Venezuelan jet fuel to be contaminated due to poor conditions in distribution trucks and storage tanks, according to the Acdac. Planes that fill their tanks with the fuel sometimes require lengthy maintenance, the association said.

    “You don’t have the guarantee anymore that the fuel they’re putting on board isn’t contaminated,” Pinzon, the head of safety and technical issues at Acdac, said. “The engines that are getting that gas aren’t going to stop, but the internal system will start to degrade and the filters will start getting blocked up, or damaged.”

    The official reasons for leaving have been varied. United said its Venezuela route wasn’t meeting financial expectations, while Avianca cited operational issues without providing too many details. Aerolineas Argentinas said it wants to continue flying to Caracas, but first needs reassurance that it would be viable and secure. After dropping off passengers from its its weekly Buenos Aires to Caracas flight, the airline takes its crew on to Bogota, rather than have them spend the night in Caracas. They return to Venezuela for the return leg the following morning.

    Complaints about operational issues to Venezuelan authorities have been falling on deaf ears, according to Peter Cerda, IATA’s regional vice president for the Americas.

    “It’s quite unfortunate, the airlines have done everything possible to maintain Venezuela connected to the rest of the world,” he said. “It’s more of a challenge every day.”

  29. Tator

    Doomlord,
    any chance of extrapolating that data out to the most recent CPI review. Would show how governments under the ALP drive CPI upwards via their policies at both state and federal levels. Any analysis of ALP policies will show CPI pressures on issues that are not measured by CPI like total cost of employment for private enterprise, commercial land rents and energy policies as well.

  30. Sinclair Davidson

    any chance of extrapolating that data out to the most recent CPI review.

    Something to do – but under the whip at the minute.

  31. Rob MW

    I see the government regulations funding and governing Grievance(s) has been neglected again. The cost of action is far less than the political cost of inaction. I think Hugo Gillard-Rudd said that, or was it Chavez Turnbull-Nimbleit that said it……… and then moved on ?

  32. mundi

    Add inflation to the graph, then post it to every household in Australia.

  33. The Pugilist

    I hope they told him the truth: he and his government are the problem.
    Get rid of RET and let the private sector build some coal fired power stations!

    Not quite. The rent seeking parasites would have lauded him for his ‘vision’. You see, stroking Maocolm’s ego is the fastest way to ensure the racket goes on and shareholder returns and fat bonuses get boosted with no real effort…why bother with the hard yards of value adding when you can fleece the steeple!

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