On Wednesday 2 May 2001
By Des Moore
Director, Institute for Private Enterprise

In requesting that I talk to you about the development of economic and industrial relations policy in the 1980s and 1990s Dr Scott rightly pointed out that the connections between research and policy development are "not necessarily straightforward or rational" because we are all influenced by our beliefs about how human beings function and what sort of society is the most desirable. I certainly acknowledge that my starting point is a belief that Australia should aim for a society that encourages improvements in material and cultural living standards and that minimises internal and external conflict.

Indeed, I think that such an objective would be widely accepted. Of course, there are substantial and genuine differences of opinion on how this should best be achieved and these differences can be rather frustrating for those who, like myself, feel we are a good way from having the most appropriate environment. But, with the exception of a small minority who are prepared to use violence, the great majority of participants involved in public debate, or affected by the implementation of government or business policies, accept that differences should be resolved peacefully within a democratic society.

Violence aside, if participants are to have any impact on the best policies to improve, for example, industrial relations, the situation of those on low incomes, of Aborigines, and of the environment, or on what the general role of government should be in society, they need to have researched the main issues. Such research will not ensure results or even influence but it will at least offer the best prospects. In an environment where many proposals for change circulate, some competing and some similar, it is difficult to assess the contribution made by any particular body.

However, having spent a good deal of time, both in Treasury and since 1987, trying to develop and promote policies of various kinds, I do not make any substantive distinction between "research" and other project work. Policies for governments, businesses, even individuals, need systematic investigation to establish what results are likely to flow from pursuing this or that course of action, and the more complex the policy the more investigation is needed.

Although I have been involved only in the social sciences, the situation seems similar in the field of physical sciences. Research in the physical sciences tends to receive more attention because it can produce technology that influences the potential for conflict or for changing living standards. The enormous increase in average living standards since the nineteenth century, for example, is importantly due to improved technology and is reflected in higher material consumption as well as the large reduction in average working hours of those in employment from around 3000 to under 2000 a year.

But changes in social policies also affect the way societies operate and these can have important effects on both living standards and the potential for conflict. One has only to recall the disastrous effects of the fascist and communist policies pursued in many countries last century. Policies developed from the social sciences can therefore play an important role, although there is probably even less certainty about their conclusions because they are based on analyses of the behaviour of humans rather than inanimate objects.

As already noted, this uncertainty leads to substantial differences of opinion about the appropriate policies to pursue. It will be no secret that I advocate policies that are seek a predominantly private enterprise, market oriented system that allows the individual substantial freedom of decision-making. My position is not simply determined by economic criteria but by a belief in individual freedom and that this type of system is most likely to produce the best social outcomes.

Some will see this as simply representing a "right-wing" view based on "ideology", but that would be highly misleading. I think of it as a view that is based on both analysis and experience and that seeks genuinely to maximise the legitimate interests of all individuals and groups in society. While some think tanks undertake consultancy work even where that would support more government intervention or regulation, I am not interested in that.

My view certainly differs markedly from the anti-market approach taken by your Dean in The Age on 14 March. I would argue that there are serious faults in her research and conclusions about what has been happening in Australia over the past twenty years and, in particular, about the regulation of employer-employee relations to which she gave so much attention. I will have something further to say about some of this shortly.

I cannot detail here the various influences, including research, that have brought me to my market oriented view but they include my 28 years of experience in Treasury (ending in 1987) with framing policies for governments and the large number of research cum policy papers I have written both during and since. I started in Treasury with the view that governments could do a lot to improve the operation of markets and the inequality of incomes. But that view has changed over time in a major way, as it has in much of the wider community.

US political scientist Steven Rhoads offered a useful perspective on this development in a 1985 book entitled "The Economist's View of the World". He had this to say:

"Two decades ago many economists optimistically imagined a federal government that would selectively intervene in the economy to correct for market imperfections once the principles of public finance were better developed and disseminated. Few today have such a vision."

The growing recognition that governments are as imperfect as markets, if not more so, probably influenced the quite remarkable development in the US over the past five years. Thus, even though he was a Democrat who started with ideas for bigger government (particularly in health), Clinton departed the US Presidency with the government sector taking a smaller share of the economy than when he started, as well as leaving a forecast of large budget surpluses for the future.

My own reasons for moving away from supporting a large role for government are complex. They included my experience in dealing with government Ministers and international officials, on which I will have more to say, and in analysing a wide range of proposals for more government intervention to overcome perceived problems. The research to analyse such proposals revealed facts and likely effects that suggested to me a strong case for minimising intervention. My analyses covered a wide range of proposals such as:

• For world governments to stop economic and population growth because, according to the Club of Rome, the world is running out of resources;
• To create a new international economic order (NIEO) to protect developing countries against alleged disadvantages suffered under the market-oriented world economic system;
• For a new "growth" tax for the States (which led to the take-over of pay-roll tax by the States) and for reducing the vertical imbalance between the Commonwealth and State Governments;
• To deal with the threat of an Australian external debt crisis and recession because of Keynesian-type Federal economic policies of the 1980s;
• To deal with the excessive debt and expenditure under the Cain-Kirner governments that caused Victoria to have its credit rating downgraded and business to lose confidence. This included a series of papers proposing major changes in Victorian Government policies, many of which were adopted by the Kennett Government;
• To effect a major reduction in Federal Government expenditure;
• To move away from the Accord of the 1980s and towards enterprise bargaining and decentralisation of the industrial relations system;
• To effect a major deregulation of the labour market

Dr Scott also asked about the process of "consultation" in forming or changing a think-tank’s views and policy objectives. That is a huge subject in its own right but consultation is certainly a necessary part of the process of framing policies and one that I would normally undertake before issuing a policy proposal. However, as there is a wide diversity of opinions on how market-oriented the economy should be, both in the community generally and even amongst economists, the usefulness of consultations is limited. Whether one is a politician or an adviser, decisions often have to be made on particular policy changes in the light of disagreements even amongst people who are of apparently similar views. Leadership is important in setting the agenda and taking the initiative, and judgments often have to be made on the useful extent of consultation.

Of course, such judgments have to weigh many considerations, including attitudes of those running existing institutions and political parties, apparent attitudes in the community, views of "experts" and past experience. In the case of think tanks, an additional judgment may be whether, even though a policy change may not be accepted in the short term, the promotion of change now offers a reasonable prospect in the longer term.

The move towards more-market oriented policies in the 1980s and 1990s reflected many developments, among them technological advances in the finance industry as well as increased scepticism about the merits of government intervention. Theories were developed explaining the inbuilt tendency for politicians and bureaucrats to expand government, and to make vote-catching concessions to lobby groups. This increased doubts about the extent to which governments operated in the interests of the community as a whole. With individuals and companies also having greater freedom to decide where to invest, and becoming more selective about the countries in which they invested, all this naturally put more pressure on governments to operate policies providing improved economic results and greater economic stability, as well as greater transparency about the reasons for policies.

It also came to be better understood that, when policy or other major changes that reduce government intervention have unfavourable initial effects on employment and incomes in a particular industry, that is not necessarily all that happens. In reality, there are usually second and third round favourable effects that can more than offset those initial effects. Many people fail to understand these complex reactions produced by the economic system and its participants.

The reductions in protection of some manufacturing industries in the 1980s, for example, was not only proposed in order to reduce the costs to consumers and other industries. It was recognised that the reduction in input costs of other industries would encourage them to expand output and employment. Indeed, with the help of the depreciation of the (real) exchange rate in the less regulated financial system, there was a net improvement in the overall international competitiveness of manufacturing industry and manufactured exports have increased quite strongly.

Of course, those businesses and employees directly in the firing line of such changes experience adverse effects that are often perceived as "unfair". But, if their industries or businesses can no longer make a go of it without subsidies of one kind or another, is it equitable for others to sacrifice their living standards to keep them going?

By the end of the 1980s the potential for high inflation to create a boom-bust situation also came to be recognised and this led to wider agreement that the primary role of monetary policy should be to keep inflation low. But this came after the disastrous Accords of the 1980s between the trade union movement and the Labor Government. Inflation was then essentially determined by the wage increases that were agreed with unions (alone) under the Accords, and effectively rubber-stamped by the Industrial Relations Commission.

The Accords had been designed to prevent the union-driven surges in wages that had previously forced governments to reduce economic activity to hold down inflationary pressures emanating from such surges, as occurred with disastrous employment effects in the mid 1970s and early 1980s. But, while the interventionist- government-driven Accords did succeed in preventing wage surges, they did so in an environment where monetary authorities were "forced" to accept the relatively high inflation that was the product of the relatively high (nominal) wages that were agreed under those Accords. Moreover, as one of the main objectives of the Accords was to achieve higher economic growth once wages surges were prevented, the Government saw fit to pursue Keynesian-type budgetary or monetary policies that were judged conducive to maintaining high growth rates. However, those policies maintained a high rate of inflation and created a boom-bust situation, ending in "the recession we had to have" - but should not have had.

In short, the underlying cause of the early 1990s recession was the interventionist monetary and/or budgetary policies that Labor pursued during the 1980s to try to stimulate growth, with the support of a highly interventionist wages policy. That bad experience did, however, help in making three important changes in policies or policy directions.

First, the current Australian Government's official policy is not to try to adjust the Budget deficit to offset swings in the private sector and that is pretty much accepted bipartisan policy at both the Federal and State Government levels. Such policies are now also widely, though not universally, accepted amongst overseas governments and international economic organisations.

Even academic economists are changing. At the 1999 Conference of Economists held at Latrobe University two prominent overseas economists told their audiences that Keynesian theory itself is outdated and it is acknowledged amongst even today's apparently sophisticated economic modellers that it is difficult to identify major turning points in business cycles. But, if you can't do that with confidence, it is difficult to justify government intervention to correct for the outcomes of such turnings.

This does not mean that all governments and all economists have given up on advocating or pursuing Keynesian policies. But the problems with such polices have given a substantial credibility boost to those who advocate less intervention and who believe that the basic determinant of economic growth is private sector entrepreneurial activity not the manipulation of budget deficits or rates of interests.

Second, we now have bipartisan agreement on the importance of low inflation and on making the central bank independently responsible for achieving that. The temptation for governments to manipulate interest rates for electoral or lobby purposes has disappeared. Moreover, the Industrial Relations Commission has to accept that any of its wages decisions need to be consistent with the inflation objectives. This is an important change that justifiably downgrades the role of the IRC and unions, and holds out the prospect of more sustained and higher average growth rates in economic activity and employment.

Thirdly, developments during the 1980s exposed the need for a reduction in the regulation of employer-employee relations on both efficiency and equity grounds. The Labor Government itself came to realise that the extent of regulation was making it more difficult for employers to introduce productivity improvements and that this was reducing Australia’s capacity to compete internationally and to increase real wages. The "crunch" point was probably Treasurer Keating’s banana republic statement in 1986 and the increasing concern about Australia’s external debt situation.

By the late 1980s, Labor had moved to introduce enterprise bargaining, after initially opposing it strongly. It tried in 1993 to provide further flexibility but the union movement stopped an attempt by Prime Minster Keating to introduce a "new model" that would have allowed employers greater freedom to negotiate agreements with employees and unions and limited the role of the IRC to determining a safety net of minimum standards. That change had to wait until the Coalition secured the passage of amending legislation in 1996.

Unfortunately, Australia is still left with a highly regulated set of arrangements that is undoubtedly acting as a deterrent to employment. The proportion of Australia’s working age population employed has been lower than in countries with broadly similar political and legal institutions, but with less regulated labour markets. If, for example, we had the same proportion employed as in the USA our employment levels would be higher by an amount about equivalent to our unemployed. Yet, as those countries have larger proportions that are more difficult to employ, Australia should have even better rates of employment than them.

It is particularly ironic that the original reason for establishing the IRC – to reduce and settle industrial disputes – has not succeeded. Although until 1930 both strikes and lockouts were proscribed, industrial disputes continued apace after 1904. When Australia experienced another serious recession in the 1930s, dispute rates went even higher. There has been a general downward trend since the mid-1970s, but that cannot be attributed to our regulatory arrangements and Australia’s dispute rates have been higher than in less regulated labour markets. Arguably, the reliance on Section 51 xxxv, which allows the "conciliation and arbitration for the prevention and settlement" of industrial disputes judged as interstate, has actually encouraged disputation.

But the most striking failure has been in regard to the equity side of the workplace arrangements. Since the mid 1970s, the Commission has allowed the inequality of earnings to widen and, at least until recently, the real minimum wage to fall. While this has almost certainly helped employment, it runs counter to the equalising picture painted of the Commission. In any event, it is quite wrong to portray the Commission as a deliverer of social justice by keeping wages up at the bottom end of the income scale. The reality is that the majority of the low paid live in households in the upper half of the income scale and it is Government social security, not Commission decisions, that makes incomes more equal. However, by setting the minimum wage at a relatively high level relative to the average wage, the Commission has almost certainly kept out of employment many with low skills and earning capacity, convicting them to reliance on social security.

Why has Australia still got probably the most highly regulated arrangements amongst developed countries? The answer is to be found in the misconceived perception of a bargaining imbalance between employers and employees. There is a widespread failure to understand that, with over 1,000,000 employers competing for the services of over 9,000,000 employees, there is little or no scope fore employers to impose conditions on workers. The basic problem is much more that the regulatory system seriously inhibits employers from adding to employment, particularly of lower skilled workers.

None of what I have been saying is to suggest that there is no role for government or that we should have a completely laissez-faire system. While I have no clearly defined line between allowing freer play of market forces and having the government intervene, I fully agree, for example, that governments should assist those who are on low incomes and/or are disadvantaged because of some incapacity. Those who earn relatively high incomes should be the basic contributors to the cost of income redistribution, as indeed they are.

This redistribution has helped prevent any increase in income inequality over the past twenty years - incomes of the rich have been increasing but so have those of the poor. Of course, comparisons of income levels at different points of time do not in any event provide a good assessment of poverty levels. Account needs to be taken of the fact most of those who were poor in, say, the early 1980s would by now have either moved up the income scale or had their incomes increased. Moreover, the definition of poverty most commonly used in Australia draws the poverty line at an income level that could not seriously be regarded as leaving the family in difficulty in paying for the basic necessities.

More broadly, it is difficult to justify the 22 per cent of the working age population (including students) now on income support payments compared with "only" 15 per cent at end 1980s. The increase primarily reflects vote buying, not increased needs. Political parties have continually increased the eligibility for benefits, with the result that households from the top 40 per cent of incomes now receive nearly 15 per cent of government benefits and allowances. Moreover, many people who would otherwise be unemployed have been allowed to shift on to some form of social security benefit. Thus, although the published unemployment rate is similar to end 1980s levels, it is really considerably higher – possibly over 9 per cent.

Apart from providing social security benefits, governments also have an important role in regulating the operation of private enterprises to prevent monopolistic exploitation of consumers. However, this should not prevent privatisations of government enterprises, some 15,000 of which have occurred world-wide in recent years and which are continuing even under Labour in the UK.

The essential case for privatisation is that the private sector generally operates enterprises more efficiently and provides a better quality service. This is partly because it faces competition of various kinds and partly because, having had to pay for the assets, private owners naturally want to make them work profitably. Also, when private enterprise fails, shareholders rather than taxpayers lose.

The environment and education areas provide further examples of the need for government intervention. The basic logic here is that, while such intervention imposes costs on individuals or impinges on their individual freedom, it produces more-than-offsetting benefits for the community at large.

For example, government intervention to regulate and control the level of pollution is usually appropriate because individual factory or car owners have no economic incentive to limit the extent to which they emit pollutants and there would otherwise be excessive pollution. Similarly, government intervention is justified to ensure free and compulsory primary and secondary education because there are net "spin-off" benefits both economically and socially from having an educated community.

However, on both economic and equity grounds government assistance for higher education should be limited. The logic here is that qualified individuals have ample incentive to invest in educating themselves as graduates generally earn higher salaries.

In conclusion, I hope I have made it clear why I have been arguing for a reduction in the role of government, though not for a move to laissez-faire, and why this has become more accepted in the past twenty years. Such arguments are not simply about economic efficiency or how best to increase the GDP. Major issues of equity are raised by the provision of government assistance to, or protection of, particular groups or industries in society. In some areas these are justified but we need to be wary because in all too many cases those pushing the interventionist arguments are pushing either their own barrows or some barrow that reflects their own interventionist view of how the world should be organised. History tells us that we should be extremely cautious of jumping on to such barrows.