Institute for Private Enterprise

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November 1999 Newsletter


The Institute for Private Enterprise promotes the cause of private enterprise and a reduction in the role of government. Subscribers receive copies of all publications including a monthly newsletter complete with attachments. Following is the November newsletter excluding attachments. Comments welcome.



Contents
  • BHP - The Phoenix Rises from the Ashes
  • Senate Questions - Some Answers on I/R reform (or How I Lost Egan's Friendship)
  • Long on Errors - The AFR's Resident Union Man Continues to Err
  • Globalisation - No Increase in Inequality
  • BCA - More Soft-Option Proposals
  • Victoria - Was Kennett a Closet Laborite?
  • Interest Rate Increase - But Why?
  • Olympics - To Privatise or Not?


The most important development over the last month was not the people's no vote to the republic proposal or the increase in interest rates but BHP's no vote to the unions after so many years of being accommodative. If, as Australia's then leading company (and as one that set the corporate culture), BHP had decided in 1986-87 to insist on offering individual agreements for its mining employees at the time Charles Copeman took on the unions at Robe River (but not on individual agreements per se), Australia's workplace relations and employment rates would be very much better today. But Project Phoenix (as BHP describes it) certainly offers an opportunity to rise from the ashes!

Senate Questions - BHP and Other Answers on I/R

The BHP announcement highlights how essential it is for that company to improve competitiveness in a context where it has ceased to be acceptable to run below par returns on capital. As such, it provides valuable support for Minister Reith's argument for giving employers more flexibility - and it should influence (but probably won't) the Senate Committee which is finalising its report on Reith's workplace relations amendments.

My own attempts to do so are reflected in the attached answers to the questions "on notice" I received when I appeared before the Committee, and in a forthcoming article in The Australian. The latter will suggest that present regulatory arrangements be replaced with a codified version of relevant common law and that the AIRC be converted into a voluntary mediator/conciliator and advisor. (I am working on a more detailed exposition of the alternative model to the AIRC and am trying to raise some additional funding to help with that - all contributions gratefully received!).

My presentation along these lines to the NSW Economic Society apparently so enraged the NSW Labor Council (the "peak" union body in NSW) that it complained to Treasurer Egan for allowing the presentation within the premises of the NSW Treasury. Egan was thus "forced" to respond that I am no friend of his - how sad!

Attached also is the letter I wrote correcting an error by Democrats' workplace relations spokesman, Andrew Murray. It is to be hoped that the Senator (who has continued to oppose exempting even small businesses from unfair dismissals regulation) also takes note of the survey showing that over 50 per cent of large companies engaged in legal proceedings last year over alleged unfair dismissals. "Large" companies have hitherto argued that they are not too concerned about regulation of dismissals because they have adjusted their internal human resource practices to take account of the increased regulation. This survey suggests that either the internal practices have not been "adjusted" or (more likely) that the regulation is a substantive problem.

Long on Errors - The AFR's Resident Union Man Continues to Err

I also corrected stark errors in the Fin Review's resident promulgator of union propaganda, Stephen Long. Long seems to be given carte blanche by the paper to run the union line that reduced labour market regulation produces bad social outcomes - longer hours, more unpaid overtime and more job insecurity. It will be interesting to see whether he responds to a Job Futures/Saulwick survey showing that 87 per cent of workers feel secure in their work and 70 per cent believe they are paid fairly. So far, only The Age seems to have reported this survey, which compares with an earlier ACTU one, confined to unionised workers, purporting to show that one third of workers feel less secure than a year ago.

Globalisation - No Increase in Inequality

I attended the annual symposium of the Academy of Social Sciences at the ANU on Facts and Fancies of Human Development , partly to hear Angus Maddison who is the world's leading scholar on analysing inter-country differences in longer term economic growth and whose comparisons (unlike most of those misleadingly used here even in official circles to compare Australian growth rates) are based on per capita GDP figures adjusted to eliminate differences in price levels using purchasing power parities. Maddison gives considerable explanatory weight to "institutional" differences ie if a country has institutions which are sympathetic to entrepreneurial activity, then it is likely to be up with the productivity leader or at least catching up to it. His updated figures for 1950 to 1997 confirm that, with our risk-deterring industrial relations arrangements, Australia has done no more than keep up with the US while (even) Western Europe has been catching up. (Of course, the speeding up in Australia's unadjusted per capita growth rate over the past four or five years to around 3 per cent pa implies some catch up in that period).

RATES of GROWTH in GDP PER CAPITA


table1 - 10907 Bytes

 

 

It is typical that, despite Maddison's presence and despite an excellent lecture by Australia's leading demographer, Professor John Caldwell on Pushing Back the Frontiers of Death, the proceedings of the symposium have been almost unreported in the media. This was the more noteworthy given that two of the papers exposed major errors in a United Nations report that had received widespread and uncritical coverage in The Age and The Canberra Times. In typical fashion, these papers simply accepted without question the assertion in the UN report that globalisation has led to inequality between rich and poor nations blowing out to "grotesque proportions". Former Commonwealth Statistician, Ian Castles, showed conclusively that (properly calculated) not only has there been no decline in the share of least developed countries in world GDP but that real per capita GDP in poorer countries has been increasing by 1.4 -2.0 per cent per annum. Castles also exposed as a complete myth the assertion in the UN report that inequality in Australia is amongst the highest in the world.

Part of the agenda of such reports is to promote the idea that we need more international institutions, leading eventually to "global governance", to intervene to fix these perceived "problems". As Professor David Henderson pointed out in his paper, espousal of this global governance cause is not confined to international institutions themselves: the latest edition of BCA Papers (the newly-founded journal of the Business Council of Australia), contains an article by the President of the World Business Council for Sustainable Development advocating that governments, business and civil society should form a tripolar international grouping to "manage" our lives for us. The inclusion of such an article in the BCA journal is yet another indication of the deteriorating capacity of much of Australian business to support, let alone defend, private enterprise.

BCA - More Government Interventionism

The BCA is also continuing down the path of advocating centrally imposed and interventionist policies, rather than market-oriented ones. Following its support for a centrally imposed cut in real wages to reduce unemployment (see Newsletter of 3 May on www.ipe.net.au), the BCA has issued a paper proposing that an independent body of experts be established with discretion to vary tax rates so as "to manage the economic cycle". The idea seems to be that an independent body could act more quickly than government/parliament, that action would not be attuned to the electoral cycle and that it would be in line with the conversion of the Reserve Bank into a quasi-independent body. While acknowledging that "we no longer believe that government can quickly and precisely 'fine tune' growth to its optimum at all times throughout the cycle", the paper quotes an academic who argues that changes in fiscal policy have quicker and broader effects on activity than monetary policy.

In reality, what is being proposed is 'fine tuning' and the real question is whether such Keynesian policies can successfully be deployed. Historically, there is an enormous range in the length and depth of business cycles (not to mention their underlying causes) and at the recent Economists' Conference two highly regarded economists from overseas pronounced Keynesianism as passe. Further, it is simplistic to think that even "experts" can predict the extent and timing of the business cycle, let alone of any policy response to it: anyone with practical experience of economic forecasting knows that.

Surprisingly, the BCA paper contains no substantive discussion of the Government's existing medium term budget strategy. That strategy aims to achieve underlying balance, on average, over the course of the economic cycle. It thus allows the budget to reflect the effects of variations in economic activity, thereby providing some degree of automatic offset.

This latest venture by the BCA is another worrying sign that Australian business leaders are increasingly inclined to dodge the hard options, such as advocating additional cuts in government spending - for which there is ample scope - or tackling the greenhouse gas farce. By proposing the soft option of government intervention to improve economic performance, the BCA appears to be "doing something" -but not anything of substance.

Like the "government failure" phenomenon, we have here a sad case of "business failure". Such failure is also reflected in the "cash for comments" debacle, of course. In that case the media focus has been on the ethics of the action. More serious, however, is the fact that the banks (and others) felt they had to pay a radio jock large sums to get their message across. This is an admission that few business leaders are prepared to summon up the courage to respond to critics, to convey the benefits of reform in private enterprise and generally to promote such enterprise rather than government.

Victoria - Did Jeff Kennett Become a Closet Laborite?

In 1996, I wrote a report for Project Victoria on Tax Reform in Victoria in which I pointed out the tendency for Victorian budgets to under-estimate tax revenue and the potential for further large additions to net revenue from privatisations, and I argued that priority should henceforth be given to reducing taxes rather than debt. On this basis I proposed "a conservative tax reduction program . to cut taxes by about $1000 million by 1999-2000". Following each of the subsequent Kennett Government budgets, I attended the Stockdale de-briefing and argued the same thesis.

All to no avail, with the result that the Coalition left office with Victorian taxes still almost 7 per cent above the States' average! Nobody has yet explained how taxes could be so high and at the same time spending on basic services could (according to The Age et al) have been cut to the bone. The answer is simple - such expenditure was not cut to the bone but was in fact running at around the average level for the States when Kennett left office. He and his Government just forgot to tell the people!

One example is expenditure on police services and the campaign by the Police Association (ie union) to increase police numbers. My article published after the election (attached) points out there is no case for increased spending there.

Now, we find that the 1998-99 Victorian Budget ran an overall surplus that was much higher than estimated. Guess how much - about $1000 million, the amount of tax cuts I suggested back in 1996 should be available for tax cuts in 1999-00! This higher surplus was not due to lower spending but to higher revenue than estimated. In short, the Coalition Government could (responsibly) have announced substantial tax cuts in the lead up to the 1999 election. Instead it has left a gift to the incoming Labor Government, which will undoubtedly spend the proceeds and be able to claim that it has pursued a responsible policy because it will still have a substantial surplus!

Combined with the failure to "sell" the benefits of reform and to counter the perception that it made excessive reductions in spending on basic services, one can only conclude that Kennett deserved to lose!

Meantime, (as predicted) the Bracks Government is already actively pursuing unionist agendas in education (abandoning the self-governing schools which had freedom to hire and fire teachers), local government (abandoning compulsory competitive tendering which reduced employment of inside, unionised labour where that was not competitive), public service employment (abandoning the individual agreements which unions hate) and WorkCover (restoring access to the more expensive common law decisions on compensation for injured workers). These actions are likely only the start of measures which will deter employment and investment in Victoria.

Interest Rates Up - But Why?

The Reserve Bank decided to increase interest rates by 0.25 per cent (to 5.0 per cent) and implied that there would be more to come. This was widely expected and widely regarded as appropriate - but, while I retain strong support for anti-inflation policies, I did not support this increase. The Bank acknowledged that "there is no evidence as yet" of increased wage pressure, admitting that wage costs continue to rise at a low rate of only just over 3 per cent pa. In fact, the Treasury index of real unit labour costs has been falling at about 1.5 per cent pa, which indicates that the most important cost for most firms is exerting downwards price pressures.

Part of the rationale seems to be a judgement that existing interest rates were "expansionary" and that, with the improved economic outlook, it was a desirable precaution to move to a more "neutral" policy stance. On this basis, many are saying that at least one further 0.25 per cent increase will occur. However, we were not told what a neutral stance is and judgements about that by commentators seem to be based on past experience. They thus appear to take no account of the likelihood that, in circumstances of low inflation and improved productivity, a neutral stance is likely to require lower rates than in the past.

The Bank made the move and then issued its Semi-Annual Statement on Monetary Policy which stated, inter alia, that it expected "quite good growth over the next couple of years" - but, if growth is going to be only "quite good", why the need to constrain it? Presumably because the Bank also expects inflation to be running around 2.75 per cent by mid 2000 - but even granted that this happens (the Bank's justifying arguments are "thin"), it would be within the inflation "target" range of 2-3 per cent pa.

Olympic Games -Privatise It!

The shemozzle over the Olympic tickets distribution is a prize example of "government failure" and, taking account of the other "cock-ups", surely suggests a case for privatising the running of the Games, as was done very successfully by Los Angeles. The decision not to offer tickets at differentiated prices, but to secretly allocate the better and higher-priced tickets to special "rich" customers, is a classic example of the Australian fear of being accused of not giving everyone a "fair go". Yet few would have objected to an open sale of all tickets with differentiated prices for the better seats.