Institute for Private Enterprise

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SEMINAR - 21 MAY 1999


I agree with Prof Kasper that existing methodology tends to understate the benefits of economic reform. In the "old days" in Treasury we used to talk about the potential for "dynamic" benefits, by which was meant that, if the right policies were put in place and maintained over the medium term, entrepreneurs would likely respond by increasing investment and employment beyond any possible measurable Keynesian effects. It is surprising that academic economists have taken so long to recognise that whether or not "institutional" arrangements are conducive to innovation and risk-taking is an important determinant of economic growth. To borrow from Hayek, the measurable has all too often been allowed to drive out the important. The Commission has allowed itself to be influenced far too much by modelling.

It is being suggested that "the community" has reform fatigue because the reforms of the 1980s have created insecurity, caused a deterioration in social cohesion, and because their benefits have been unevenly distributed. Accordingly, it is argued, either reform must proceed more slowly or "compensation" must be provided to "losers" - or both.

However, many of the structural changes over recent years are not the result of reforms per se but of the inexorable march of progress and technological innovation that is reflected in consumers' decisions, that is, decisions by "the community". It is illogical to argue that reform should stop or be slowed while "natural" changes are allowed to proceed. Should we, for instance, compensate those who have lost jobs or experienced lower wages in manufacturing because consumer demand has switched to computers?

In any event, many claims of adverse social effects from change are not proven and some reflect the self-interest of the claimants and the fact that the continued existence of many non-government organisations depends on them being able to promote the cause of social problems. That is not to deny that there is some reform fatigue or that there are some social problems But the factors causing these have not been properly analysed and there has been a very inadequate response to the purveyors of gloom that suggest worsening social problems.

I mention just three points.

First, the popular perception of increased uncertainty and insecurity is largely a reflection of the surge in unemployment from "the recession we had to have". But this was due primarily to poor macro-policies not to micro reforms. And the slowness of the subsequent fall in unemployment cannot be attributed to reforms or, at least at a macro-level, even to improved productivity. It is due, rather, to the lack of reforms.

Second, assertions of adverse social effects often lack solid evidence and have been exaggerated. In reality, the great majority of the community has "never had it so good". Higher unemployment rates notwithstanding, on most measures life is more secure and certain, and living standards much higher, than in the 1970s let alone in the 1920s or 1930s. Contrary to the line promulgated by a story-hungry media and by mischief-makers in academia and social welfare agencies, job security has not deteriorated in the last twenty years and there is no evidence even of heightened perceptions of job insecurity. Nor have average working hours increased: they have in fact declined, as has the average period that people are working during their lives to attain higher living standards than their parents.

Third, it is doubtful that perceived community concerns about the lack of "fairness" about reform outcomes relate to income inequalities to any significant extent. For one thing, despite claims to the contrary there has been no increase even in measured income inequality (which takes no account of the extensive "black" economy that leads to understatement of incomes at the bottom end). However, there is much community concern that incomes are not being earned or received fairly. What upsets people most is if they perceive substantial tax avoidance, extensive welfare cheating, or unwarranted favouritism to some groups in the provision of government assistance. An indication of these concerns is the considerable dobbing-in of welfare cheats - 25,000 in the last six months, for example. High salaries paid to executives in poorly performing companies are also perceived as "unfair", sometimes with justice.

This leads to the point that much greater effort needs to be made to explain the benefits of reforms and of economic change and to put them in broader perspective. Specific reform proposals need to be accompanied by more comprehensive explanations of the benefits. Such explanations should include analyses of the potential dynamic economic spin-offs and of the potential improvements in equity. Productivity Commission reports need to include a separate section or chapter addressing equity issues.

The potential improvements in equity as a result of reforms are all too frequently misunderstood and therefore overlooked. Most reforms involve the breaking down of protectionist or restrictive practices which are inherently inequitable and whose inequity needs to be highlighted. Take deregulation of the labour market, for example:

First, the elimination of the "overpayments" that are made in industries such as coal mining, stevedoring and meat processing as a result of union monopolies in those industries would clearly be an improvement in equity;

Second, equity would be improved through increased employment of those who are at present kept outside the labour market because wages are set at too high a level and/or because the present institutional arrangements act to deter risk-taking and hence employment;

Third, equity would also improve because of the reduction in the cost of goods and services whose prices are being kept up because of wage and other regulation, with benefits to all income groups. However, low income groups would benefit more than proportionately.

Of course, it is also likely that labour market deregulation would cause some existing employees who are low paid and living in low income families to suffer a fall in wage earnings. With other possible wage reductions this would increase the measured dispersion of earnings. But, after allowance for the enhanced equity of those previously unemployed who could now attain jobs at these lower wage rates and whose incomes would improve, would the overall outcome be more or less equitable? Judgements may vary but mine is that there would be a significant net improvement in equity.

That judgement is framed against the background that the Australian social security system provides substantial assistance to low income people and that assistance is mostly means tested. Thus any falls in earnings would be at least partly offset by increases in social security assistance. To the extent that such offsets were judged inadequate, appropriate adjustments could be made to social security assistance to protect living standards of low income individuals.

In short, Australia's generous social security system (it is manifestly incorrect to describe it as "tightly targeted") should be the basic mechanism used to protect low income earners living in low income families from any adverse effects of reform or change. This should be taken into specific account in framing and explaining reform proposals. As a general rule, "compensation" should not be payable to the "losers" from reform other than through means tested social security benefits. However, benefits should be adjusted where reforms would clearly reduce living standards of low income groups. There may also be some other cases where adjustment assistance is justified e.g, those who have clearly established businesses and employment based on protection of one kind or another that is removed.

The social security system, however, badly needs reforming not only by reducing EMTRs but by getting rid of "middle class welfare." One possible additional change would be to modify existing benefits, particularly the unemployment benefit and the family payments, so as to make more overt the fact that society is already ensuring a minimum guaranteed income. The "proceeds" of reduced middle class welfare could be used to finance any addition to benefits that might be required. Care would need to be taken that there was no additional disincentive to work.


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