Bourgeois dignity

The American economic historian and all-round champion of free markets, Deirdre McCloskey, has written a follow-up volume to her 2006 masterpiece The Bourgeois Virtues: Ethics for an Age of Commerce (no less an authority in economics, Peter Boettke, said this about The Bourgeois Virtues: "Deirdre McCloskey has written what must be acclaimed as the most ambitious book in political economy published in over half a century (perhaps a full century). It is not only ambitious, but it is absolutely brilliant.").

The follow-up volume, called Bourgeois Dignity and Liberty: Why Economics Can't Explain the Modern World, is currently under review by University of Chicago Press.

Based on extracts and related working papers (such as this), the central thesis of McCloskey's latest effort is that the observed explosion of economic growth and market productivity in the West over the past two centuries or so are the product of changing social values - viz. a growing dignity and honour accorded to the merchants and inventors who offer their wares to the consumer sovereign.

To be sure, McCloskey's idea is along the lines of observations made by philosophers of times past. In his tenth philosophical letter on commerce, Voltaire said the following: "the younger son of a peer is not disdainful of commerce. Lord Townshend, a minister of state, has a brother who is content to be a London merchant. At the time when Milord Oxford governed England, his younger brother was a business agent in Aleppo, whence he did not wish to return and where he died."

If my reading of McCloskey is correct, such anecdotal examples of rescinding the luxuries of peerage in eighteenth-century England could not have come about if the values of "dignity to take ones place and the liberty to venture" (as McCloskey describes it) did not start to take hold in the economic realm.

The thesis that McCloskey brings to the fore is certainly very interesting, worthy of attention and of critical thought (including juxtaposed with Gregory Clark's ideas about the industrial revolution). For these reasons, I cannot wait to get a hold of Bourgeois Dignity and Liberty when it is published.

Fighting the good fight for competitive federalism

Appreciation of the benefits of federalism in the Australian context seems arguably to be at its lowest ebb. It is against this background of public opinion that the federal-state tax review, chaired by commonwealth treasury secretary Ken Henry, is being prepared.

Reading the "tea leaves" of Henry's public speeches, it looks as if the final review report will recommend en masse additions to revenue-sharing schemes as currently applied to the GST. Specifically, the commonwealth might seek to harmonise payroll and land tax bases and allow states to impose their own tax rates (within limits).

This idea seems to garner wide praise from academic economists, business representative organisations and media commentators, including George Megalogenis who recently said the states "abused the privilege [of owning payroll tax responsibility] by refusing to maintain a consistent tax base between them."

Yet, one person's terrible tax inefficiency is another person's beneficial interstate tax competition, as I outlined in a recent opinion piece (here) in the National Times.

As I argue, one must weigh up the transaction cost reduction benefits of tax base uniformity against the costs of eliminating yet another area in which the inherent benefits of federalism - choice and diversity - may be exercised. I come out in favour of the pro-federalist side of retaining state revenue policy autonomy.

Others have stepped up to fight the good fight for federalism. My IPA colleague Chris Berg pointedly asks (here) if the efficiency and effectiveness of governmental functions would really improve if tasks are assigned up to a commonwealth government with an underwhelming record in service delivery effectiveness. A very fair question to ask, indeed.

While many classical liberals and libertarians may be critical of the current performance of state governments, the same-said groups appreciate the inherent value of a functional, competitive federalism in dividing public sector power while also ensuring a public services-tax mix most consistent with citizen-voter preferences.

These are subtle, yet important, arguments that seem to have been lost from the Australian conscience - and is in desperate need of revival if this country is to ensure a robust system of federal governance striving to deliver best value for taxpayers' money.

Fat pay packets for state public employees unsustainable

Last week the IPA released a research paper (see here) outlining trends in state and territory government employment. The paper received good coverage in The Australian newspaper, including an opinion piece summarising the research (see here).

One of the key issues raised by this research relates to the ability of governments to contain public service wage costs with regard to the economic circumstances. Seemingly all too often over the past few years, governments have been readily prepared to accede to the continuous political pressure exerted by public sector unions for inflationary pay increases.

In response to the recent economic downturn, most governments have announced new or amended policies limiting accepted growth in public servant wages covering new certified agreements. However, as the IPA research indicates, the effect of old certified agreements still flowing through plus generous new pay deals means that governments are unlikely to achieve their formally stated wages policies.

I compare the actual projected growth in state employee (wages and salaries) expenses over the forward estimates with what these expenses would look like if state wages policies were strictly adhered to. Over four years, cumulative actual projected employee expenses for the six states are about $285 billion. By contrast, if states stick to their wages policies the cumulative projected employee expenses would be about $269 billion instead.

This yields a difference of just over $15 billion over four years. With payroll tax revenue estimated at about $16 billion last financial year, in effect state governments will be seeking a new payroll tax worth of funds to pay for public servant wages that grow over and above the wages policies.

Here are the excess projected employee expenses from 2009-10 to 2012-13, compared to payroll tax in 2008-09, for the states:

NSW Expenses $5.9bn PRT $6.4bn

Vic Expenses $3.9bn PRT $4.0bn

Qld Expenses $4.2bn PRT $2.7bn

WA (over three years) Expenses $1.3bn PRT $2.2bn

SA Expenses -$17m PRT $913m (note: SA projects that its wage expenses will be below its wages policies over four years; a heroic projection indeed!)

Tas Expenses $192m PRT $266m

On this basis, most state governments are effectively conceding that they will not meet the wage growth targets outlined in their budgets. This implies that more comprehensive measures and reforms to restrain the largest cost driver of state operating budgets are required.

What do we have to gain?

I have an opinion piece in today's edition of The Courier Mail (see a copy here) on the futility of the Rudd government's "make-work" stimulus programs.

A figure that Keynes, and Rudd, have presumably overlooked is the French classical liberal, Frederic Bastiat, who outlined the "broken windows" theory. A variation of Bastiat's classic story is relevant here: government cannot create economic wealth by taxing or public borrowing, to then spend on projects of dubious economic value.

Dream policy not the right tool for the job

Earlier this week an opinion piece of mine was published in The Age (Business). An electronic copy can be found here.

I look at two options canvassed to increase employment: (a) government expenditure to increase aggregate demand and thereby increase jobs; and (b) a scheme proposed by Australian post-Keynesian economist Bill Mitchell to have government act as a "buffer employer" for workers unable to find work elsewhere.

The problem with the fiscal stimulus solution currently adopted by the Rudd government is that it ignores the supply-side implications of taxes and public sector borrowing (which in turn would increase future tax burdens). As the economics literature clearly shows, increases in these variables can be potentially deadly for the private sector's ability to employ people.

The Mitchell jobs guarantee completely ignores the potential for lobbying within the system, and may displace private sector job creation over time (... perhaps for Mitchell the adverse effects are intended, given his view that privatisation was a national calamity?).

It is understood that private markets are subject to fluctuations as producer conjectures, about consumer demands are continuously confirmed or rejected in the marketplace. There are instances, known as recessions, where a significant amount of prior economic activity are confirmed as malinvestments or improper conjectures of some kind or another. As David Ricardo said, "men err in their productions."

Despite the temporary unease that recessions can undoubtedly deliver, the overall system of market capitalism has proven itself to be the best in terms of achieving rising living standards. It still remains the best way to generate real, sustainable jobs.

The role of government, in this context, is fairly simple: enforce private property rights and contacts; tax and regulate lightly; and spend in a parsimonious manner.

Recovery comes at a cost

This week in The Courier Mail I had an opinion piece on the limitations of fiscal stimulus (see here).

In this piece I use a hypothetical example to explain that (a) government spending must be financed by taxes or borrowing (future taxes), with distortions to the economy that entails; and (b) government spending is more likely to fund unproductive purposes (whoever thought that pink batts were critical to our economic salvation?!!!), hampering the productive potential of the economy:

"Let's think of a hypothetical scenario to illuminate some of the key issues at play.

Suppose I walk up to you and forcibly take from your wallet $3636. That is roughly about the amount of the Federal Government's combined stimulus programs per head of population.

I immediately give you back $900 of this for you to spend on anything you want - cigarettes, clothing, computer games, fridges, handbags, mobile phones, tattoos, anything you care to buy. You could even deposit it straight back into your own bank account.

I then spend $2227 of your money on things that take my fancy.

Some lobbyist told me that throwing some of the money I've taken from you (let's call it what it is, a tax) towards housing insulation batts would somehow save the Earth.

Someone else whispered in my ear that spending a fraction of the $2227 tax take on school gyms, at inflated rates, would help kids read, write, add and subtract.

In fact, so many people are lobbying me to spend your money that I need more cash from elsewhere. I resolve this by borrowing even more currency, on top of your taxes.

I forgot to mention at the outset that 14 cents out of every dollar I spend is on my own administration costs."

This piece has come at the same week that the Senate Economics References Committee has convened an inquiry into the stimulus packages. The transcripts (see Professor Sinclair Davidson's iconic line about the primacy of taxpayers being able to ask politicians questions!) and submissions are well worth reading.

Whichever way one looks at it...

... taxpayers will lose out.

In today's edition of The Australian Financial Review, it is reported that demographic forecasts by federal treasury have been revised to account for a larger population comprised of more young people.

This will lead Treasurer Wayne Swan to warn in a speech today that a larger and younger nation, fuelled by higher birth and immigration rates, will put pressure on the budget, including through greater infrastructure requirements and education investment.

A few short months ago, the Treasurer warned Australia of structural ageing of the population. In a May interview with Laurie Oakes, he said "the ageing of our population is a very serious issue for this country. ... The basic facts are these: there is something like five workers for every person over 65 today. In 2047, it will be two-and-a-half."

Clearly, the updated treasury forecast will have implications for the forecast dependency ratio spanning out over the coming decades. That is not in dispute. The point made here is that, whichever way one looks at it, future cohorts of taxpayers will be squeezed by an ageing baby-boom cohort at one end of the life cycle and a youngsters-boom at the other end - on the basis of a "no change" policy scenario.

The clear way to give taxpayers relief from the prospect of punitive taxes is to ensure that the economy grows. This, in part, rests on the willingness of governments to engage in an unambiguous agenda promoting productivity growth. This means devolving current governmental services delivery to a more efficient private sector, and deregulating the economy to enable the private sector to expand.

Policy approaches such as increasing pension rates, wasteful stimulus spending with insufficient economic returns, accumulating public sector debts at a time when the baby-boom cohort is reaching retirement age, "economic reform" that entails more government expenditure and regulation, and pointless exercises such as health sector nationalisation, simply won't make the grade if Australia is to cope with demographic transition in an economically and fiscally sustainable manner.