Your guide to business entitlement

With the Abbott government's close relations with big business, we're still to see whether its reign will be one of greater or less rent-seeking by particular industries. So far we have evidence going both ways.

We've seen knockbacks for the car makers, fruit canners and Qantas, but wins for farmers opposing the foreign takeover of GrainCorp and seeking more drought assistance, as well as a stay on the big banks' attempt to water down consumer protection on financial advice.

The next test will be the budget. Will the end of the Age of Entitlement apply just to welfare recipients (especially the politically weak, e.g. the unemployed and sole parents, rather than politically powerful age pensioners) or will it extend to "business welfare"?

With Joe Hockey searching for all the budget savings he can find, there's a lot of business welfare or, euphemistically, "industry assistance" to look at. The Productivity Commission measures it every year in its Trade and Assistance Review.

Government assistance to industry is provided in four main ways: through tariffs (restrictions on imports), government spending, tax concessions and regulatory restrictions on competition. Although much rent-seeking takes the form of persuading governments to regulate markets in ways that advantage your industry, the benefit you gain is hard to measure, so it's not included in the commission's figuring.

Assistance through tariffs is far less than in the bad old days before micro-economic reform, but there's still some left. However, its cost is borne directly by consumers in the form of higher prices. So it's not relevant to Hockey's search for budget savings. Even so, I'll give you a quick tour.

The commission estimates that, in 2011-12, tariffs allowed manufacturing industries (plus the odd rural industry) to sell their goods for $7.9 billion a year more than they otherwise would have.

In the process, however, this forced up the cost of goods used by manufacturers and other industries as inputs to their production of goods and services by $6.8 billion a year. About 30 per cent of this cost to inputs was borne by the manufacturers themselves, leaving about 70 per cent borne by other industries, largely the service industries.

(This, by the way, shows why import protection doesn't help employment as non-economists imagine it does. It may prop up manufacturing jobs, but it's at the expense of jobs everywhere else in the economy.)

So now we get to budgetary assistance to industry. On the spending side of the budget it can take the form of direct subsidies, grants, bounties, loans at concessional interest rates, loan guarantees, insurance arrangements or even equity (capital) injections.

On the revenue side of the budget it can take the form of concessional tax deductions, rebates or exemptions, preferential tax rates or the deferral of taxation. In 2011-12, the total value of budgetary assistance was $9.4 billion, with just over half that coming from spending and the rest from tax concessions.

Often people will virtuously assure you their outfit doesn't receive a cent of subsidy from the government, but omit to mention the special tax breaks they're entitled to. Think-tanks that rail against government intervention and the Nanny State, hate admitting they're sucking at the teat because the donations they receive are tax deductible (causing them to be higher than otherwise, but at a cost to other taxpayers).

This is why economists call tax concessions "tax expenditures" - to recognise that, from the perspective of the budget balance and of other taxpayers, it doesn't matter much whether the assistance comes via a cheque from the government or via the right to pay less tax than you otherwise would.

Of the total budgetary assistance in 2011-12 of $9.4 billion, 15 per cent went to agriculture, 7 per cent to mining, 19 per cent to manufacturing and 45 per cent to the services sector (leaving 14 per cent that can't be allocated to particular industries).

To put that in context, remember that agriculture's share of gross domestic product (value-added) is about 3 per cent, mining's is 10 per cent and manufacturing's is 8 per cent, leaving services contributing about 79 per cent.

Within manufacturing, the recipients of the most business welfare are motor vehicles and parts, $620 million, metal and metal fabrication, $270 million, petroleum and chemicals, $220 million, and food and beverage processors, $110 million.

Within services, the big ones are finance and insurance, $910 million, property and professional services, $610 million, and arts and recreation, $350 million.

But if you combine tariff and budgetary assistance, then compare it with the industry's value-added (share of GDP), you get a different perspective on which industries' snouts are deepest in the trough. The "effective rate of combined assistance" is 9.4 per cent for motor vehicles and parts, 7.3 per cent for textiles, clothing and footwear, and 4.7 per cent for metal and metal fabrication.

Get this: outside manufacturing, the most heavily assisted goods industry relative to the size of its contribution to the economy is forestry and logging on 7.2 per cent. We pay a huge price to destroy our native forests.

Within services, the most heavily assisted industry is the one where incomes are so much higher than anywhere else: financial services. Virtually all the assistance picked up in the commission's calculations comes via special tax breaks, such as the tax concession for offshore banking units and the reduced withholding tax on foreigners receiving distributions from managed investment trusts.

But that ain't the half of it. These calculations don't pick up two big free kicks: the benefit to the industry because the government forces almost all workers to hand over 9.25 per cent of their pay to be "managed" by it, and the benefit it gains from having one of its main products, superannuation, so heavily subsidised by other taxpayers.

Cut these fat cats? Naah, screwing people on the dole would be much easier.

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Abbott's red tape play-acting hides rent-seeking

The world of politicians gets deeper and deeper into spin, and so far no production of the Abbott government rates higher on the spin cycle than last week's Repeal Day.

Hands up if you believe in red tape? No, I thought not. So how about we package up a huge pile of window dressing with some worthwhile but minor measures, slip in a few favours for our big business supporters and generous donors, and call it the most vigorous attack on red tape ever? This will give a veneer of credibility to our claim it will do wonders for the economy.

In the process, of course, we'll have changed the meaning of "red tape". It's meant to mean bureaucratic requirements that waste people's time without delivering any public benefit. In the hands of the spin doctors, however, it's being used to encompass everything from removing dead statutes to the supposed deregulation of industries.

Repealing redundant laws and regulations dating back as far as 1900 is mere window dressing. By definition they don't waste anyone's time - if they did they'd have been repealed long ago. Their primary purpose is to allow Tony Abbott to quote huge numbers: today I announce the abolition of more than 1000 acts of Parliament and the repeal of more than 9500 regulations. A trick you can pull only once.

Somewhere in there is some genuine, time-wasting red tape we're better off without, but it doesn't add up to much - hence the need for so much padding. Governments of both colours are always promising to roll back red tape, mainly because it gives people such an emotional charge.

But while it's true there are examples of mindless, unreasonable bureaucratic rules and requirements that could be eliminated or greatly simplified at no loss to anyone, much alleged red tape is in the mind of the beholder: it's red tape if you don't like it and good governance if you do.

There are plenty of small business people who'd try telling you supplying information to the Bureau of Statistics was "pointless red tape", maybe even filling out tax returns. In an era when big business is going overboard on "metrics", it's whingeing about the "reporting burden" the government imposes so it - and the rest of us - can know what's going on in the economy.

When business isn't complaining about "compliance costs" it's demanding greater transparency and accountability from governments. Guess what? They're opposite sides of the same coin. The world is and always will be full of compliance costs. The sensible questions are whether they're higher than they need to be and whether the benefits of compliance outweigh the costs.

The notion that all so-called red tape comes from power-crazed bureaucrats is a delusion. Most excessive regulation comes from politicians. Sometimes they act at the behest of lobbyists for particular industries, sometimes they're merely trying to create the appearance of action (an old favourite is laws to make illegal something that's already against the law) and sometimes they pass an act to impress the punters while carefully leaving loopholes and escape hatches for the industry pros.

But the most objectionable feature of the whole red tape Repeal Day charade is the way it has been used as cover for rent-seeking by the Coalition's industry backers. It's an open secret the protections for investors provided by the Future of Financial Advice legislation are being watered down at the behest of the big banks, which want to be freer to incentivise unqualified sales people to sell inappropriate investment products to mug punters.

Then there's the strange case of the Charity Commission,which was set up only recently to reduce inefficient regulation and red tape. It's to be abolished despite the objections of most charities, presumably because the Catholic Church doesn't like it.

It's being claimed all these dubious doings will "drive productivity, innovation and employment opportunities", not to mention "creating the right environment for businesses of all sizes to thrive and prosper and to drive investment and jobs growth".

Yeah sure. The claimed savings of $700 million a year (don't ask how that figure was arrived at) are equivalent to 0.04 per cent of GDP, and yet they'll work wonders. Must be an incredible multiplier effect.

We're told we'll be getting at least two Repeal Days a year, with the goal of achieving savings worth $1 billion a year. Really, a minimum of six Repeal Days in Abbott's first term? What's the bet that promise will be quietly buried?

But for as long as this pseudo reform lasts it seems it's intended as a substitute for genuine deregulation.

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Compulsory super without protections is a rip off

A few weeks ago, when I offered my list of our top 10 economic reforms of the past 40 years, I was surprised by the number of people arguing I should have included compulsory employee superannuation in the list. Really? I can't agree.

It is, after all, merely a way of compelling people to save for their retirement. That's probably no bad thing in principle, countering our all too human tendency to worry excessively about the here and now and too little about adequate provision for our old age.

But compulsory saving hardly counts as a major reform. I suspect some of my correspondents see it as a boon for workers because it extracts a benefit from employers over and above the wages they're paid.

If so, they've been misled by appearances. Economists are in no doubt it all comes out in the wash: that when the government obliges employers to contribute to workers' retirement savings, the employers eventually make up for it by granting smaller wage rises than they otherwise would have.

It's true that compulsory super contributions - and the subsequent earnings on them - attract tax concessions, being taxed at a flat rate of just 15 cents in the dollar. But while upper income-earners do disgracefully well out of these concessions, people on incomes around the average gain little advantage, and those earning less than $37,000 a year gain nothing. Hardly sounds fair to me.

My other reservation about compulsory super is the way it compels employees to become the victims of the most shamelessly grasping, overpaid industry of them all: financial services. These are the people who made top executives and medical specialists feel they were underpaid.

Compulsory super delivers a huge captive market for the providers of investment services to make an easy living from and for the less scrupulous among them to prey upon. The pot of money the government compels us to give these people to manage on our behalf has now reached $1.6 trillion.

Most of us have little idea how much these people appropriate from our life savings each year to reward themselves for the services we're compelled to let them provide to us - and little desire to find out.

We should be less complacent. For many workers it's more than we pay for electricity each year. Think of it: we put so much energy and passion into carrying on about the rising price of power - and Tony Abbott used our resentment to get himself elected - while the men in flash suits dip into our savings without most of us knowing or caring.

To be fair, industry super funds dip into our savings far more sparingly than the profit-driven "retail" funds backed by the big banks, insurance companies and firms of actuaries. Since most workers do have a choice, you'd need a very good reason not to have your money with an industry fund.

But even this worries me. It means the union movement - the people whose job is to protect workers by being full bottle on the tricks the finance industry gets up to - has divided loyalties. Those who should be holding the industry to account are also part of it.

For years the industry campaigned for an increase in the super levy of 9 per cent of salary, arguing it was insufficient to provide people with an adequate income in retirement. This is a dubious argument, rejected by the Henry taxation review.

But look at it another way: here is a hugely profitable industry arguing the government should increase the proportion of all employees' wages diverted to the industry for it to take annual bites out of before giving us access to our money at age 60 or later.

This is classic rent-seeking. The Howard government was never tempted to yield, but as part of the Labor government's mining-tax reform package, it agreed to boost compulsory super contributions to 12 per cent by 2019. Why? I don't doubt Labor was got at by the union end of the financial services industry.

Contributions increased to 9.25 per cent last July, but the Abbott government came to power promising to defer the phase-up for two years. I'd lay a small bet this deferral will become permanent - though probably not before contributions rise to 9.5 per cent on July 1.

I wouldn't be sorry to see the phase-up abandoned. The Henry report recommended against it, arguing that action to reduce the industry's fees could produce a similar increase in ultimate super payouts. And it's doubtful that low income earners are better off being compelled to save rather than spend their meagre earnings.

The government's policy of compelling workers to hand so much of their wages over to the finance industry surely leaves the government with a greater-than-normal obligation to ensure the industry doesn't exploit this monopoly by misadvising and overcharging its often uninformed customers.

This - along with the millions lost by investors in Storm Financial and other dodgy outfits - prompted Labor's Future of Financial Advice reforms, which focused on prohibiting or highlighting hidden commissions and requiring advisers to put their clients' interests ahead of their own.

But now Senator Arthur Sinodinos is seeking to water down these consumer protections in the name of reducing "red tape". The financial fat cats live to rip us off another day.

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The four business gangs that run America

IF YOU'VE ever suspected politics is increasingly being run in the interests of big business, I have news: Jeffrey Sachs, a highly respected economist from Columbia University, agrees with you - at least in respect of the United States.

In his book, The Price of Civilisation, he says the US economy is caught in a feedback loop. "Corporate wealth translates into political power through campaign financing, corporate lobbying and the revolving door of jobs between government and industry; and political power translates into further wealth through tax cuts, deregulation and sweetheart contracts between government and industry. Wealth begets power, and power begets wealth," he says.

Sachs says four key sectors of US business exemplify this feedback loop and the takeover of political power in America by the "corporatocracy".

First is the well-known military-industrial complex. "As [President] Eisenhower famously warned in his farewell address in January 1961, the linkage of the military and private industry created a political power so pervasive that America has been condemned to militarisation, useless wars and fiscal waste on a scale of many tens of trillions of dollars since then," he says.

Second is the Wall Street-Washington complex, which has steered the financial system towards control by a few politically powerful Wall Street firms, notably Goldman Sachs, JPMorgan Chase, Citigroup, Morgan Stanley and a handful of other financial firms.

These days, almost every US Treasury secretary - Republican or Democrat - comes from Wall Street and goes back there when his term ends. The close ties between Wall Street and Washington "paved the way for the 2008 financial crisis and the mega-bailouts that followed, through reckless deregulation followed by an almost complete lack of oversight by government".

Third is the Big Oil-transport-military complex, which has put the US on the trajectory of heavy oil-imports dependence and a deepening military trap in the Middle East, he says.

"Since the days of John D. Rockefeller and the Standard Oil Trust a century ago, Big Oil has loomed large in American politics and foreign policy. Big Oil teamed up with the automobile industry to steer America away from mass transit and towards gas-guzzling vehicles driving on a nationally financed highway system."

Big Oil has consistently and successfully fought the intrusion of competition from non-oil energy sources, including nuclear, wind and solar power.

It has been at the side of the Pentagon in making sure that America defends the sea-lanes to the Persian Gulf, in effect ensuring a $US100 billion-plus annual subsidy for a fuel that is otherwise dangerous for national security, Sachs says.

"And Big Oil has played a notorious role in the fight to keep climate change off the US agenda. Exxon-Mobil, Koch Industries and others in the sector have underwritten a generation of anti-scientific propaganda to confuse the American people."

Fourth is the healthcare industry, America's largest industry, absorbing no less than 17 per cent of US gross domestic product.

"The key to understanding this sector is to note that the government partners with industry to reimburse costs with little systematic oversight and control," Sachs says. "Pharmaceutical firms set sky-high prices protected by patent rights; Medicare [for the aged] and Medicaid [for the poor] and private insurers reimburse doctors and hospitals on a cost-plus basis; and the American Medical Association restricts the supply of new doctors through the control of placements at medical schools.

"The result of this pseudo-market system is sky-high costs, large profits for the private healthcare sector, and no political will to reform."

Now do you see why the industry put so much effort into persuading America's punters that Obamacare was rank socialism? They didn't succeed in blocking it, but the compromised program doesn't do enough to stop the US being the last rich country in the world without universal healthcare.

It's worth noting that, despite its front-running cost, America's healthcare system doesn't leave Americans with particularly good health - not as good as ours, for instance. This conundrum is easily explained: America has the highest-paid doctors.

Sachs says the main thing to remember about the corporatocracy is that it looks after its own. "There is absolutely no economic crisis in corporate America.

"Consider the pulse of the corporate sector as opposed to the pulse of the employees working in it: corporate profits in 2010 were at an all-time high, chief executive salaries in 2010 rebounded strongly from the financial crisis, Wall Street compensation in 2010 was at an all-time high, several Wall Street firms paid civil penalties for financial abuses, but no senior banker faced any criminal charges, and there were no adverse regulatory measures that would lead to a loss of profits in finance, health care, military supplies and energy," he says.

The 30-year achievement of the corporatocracy has been the creation of America's rich and super-rich classes, he says. And we can now see their tools of trade.

"It began with globalisation, which pushed up capital income while pushing down wages. These changes were magnified by the tax cuts at the top, which left more take-home pay and the ability to accumulate greater wealth through higher net-of-tax returns to saving."

Chief executives then helped themselves to their own slice of the corporate sector ownership through outlandish awards of stock options by friendly and often handpicked compensation committees, while the Securities and Exchange Commission looked the other way. It's not all that hard to do when both political parties are standing in line to do your bidding, Sachs concludes.

Fortunately, things aren't nearly so bad in Australia. But it will require vigilance to stop them sliding further in that direction.

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Industry captures regulation of taxis

Does changing the government make much difference? Both sides of politics always assure us it will. But judging by the infrequency with which we do it, we seem doubtful.

At the state level the national swing from Labor to the Coalition is almost complete, providing a good opportunity to test the question. And a good test is the regulation of industry.

Despite both sides' protestations of undying concern for the welfare of ordinary voters, it gets harder to avoid the suspicion that governments regulate industries for the benefit of the businesses rather than their customers.

Take the case of taxis. We've been dissatisfied with the service provided by taxis for many a moon. They're expensive, but often don't offer good service: they're too hard to find at certain times, they don't turn up or take far too long to arrive; too many drivers don't know where to go, or are unfriendly.

But the outgoing Labor governments did far too little to improve the position. It got so bad in Victoria the Baillieu government promised action and appointed Allan Fels, the former chairman of the Australian Competition and Consumer Commission, to conduct an inquiry.

The taxi industry is highly regulated by state governments. What's the goal of this regulation? It's supposed to be to ensure we're provided with a safe and reliable taxi service at a reasonable price. In practice, the goal has evolved into the protection of a highly lucrative financial investment, the taxi licence plate.

Since about the time of the Depression, governments have sought to control the number of taxis by issuing a limited quantity of licence plates. Initially, and for many years, these licences were issued free to people wanting to drive taxis.

Because the supply of licences was limited relative to the demand for them, licence plates became valuable in their own right. They exist in perpetuity, and people who'd been given one by the government were able to sell it to someone else.

That someone may be a person who wants to drive a taxi, but doesn't have to be. And ownership of taxi plates doesn't imply ownership of the car to which those licence plates are screwed. You can "assign" (rent) the plates to a taxi operator for a fee, who buys the car and puts it on the road. Operators may drive the car themselves, or they may get others to do the driving.

Thus did the taxi licence plate transform into a valuable financial investment, with an active market in their purchase and sale. According to Professor Fels's interim report, the value of plates has been rising for years and Melbourne plates now change hands for up to $490,000 a pop.

Licences are assigned to operators for a fee of about $35,000 a year, thus yielding a direct return to their owners of about 7 per cent. Allow for capital gain and the overall return rises to about 16 per cent a year.

Not a bad investment. Now get this: according to the Fels report, in 1985 only about 4 per cent of Victorian taxi licences had been assigned to others. By 1998, about 45 per cent of metropolitan licences had been assigned. And by December last year it was up to about 70 per cent.

Because assignment fees are so high, not enough income is left for taxi operators and even less for drivers. Taxi fares are controlled by the government and the need to pay drivers more - they get an average of about $13 an hour, according to Fels - is often used to justify fare increases.

But every time fares increase so do the assignment fees charged by the licence owners, justifying a further rise in value of licences.

Fundamentally, however, what causes the rising value of licences is their growing scarcity relative to demand. Who is it that limits the number of licences on issue? The government. Who does this benefit? The owners of licence plates. The industry is being regulated largely for the benefit of absentee landlords, so to speak.

Taxi drivers get a terrible deal. They generally get 50 per cent of their take, but they're not employees and have to bear many costs themselves. They get no workers compensation cover, no holidays or superannuation and have to pay the goods and services tax.

Is it any wonder the quality of drivers is often poor, turnover is high and it's hard to get recruits? And yet most of our complaints about taxis relate to the performance of drivers.

Fels's key proposal in Victoria is for the government to issue new taxi licences to any qualified person for a fee of $20,000 a year. New licences would not be transferable and issued only to owner-drivers.

This would make it easier for drivers to become owners. It would force the existing licence plate owners' assignment fee down to $20,000 a year, still leaving them a reasonable return, but lowering the capital value of their plates to about $250,000.

Taxi operators would benefit from the lower assignment fees and this would allow the drivers' share of their take to be raised to 60 per cent. This, in turn, would justify making greater demands on drivers, including requiring them to pass a more stringent street and location knowledge test.

Now you see why licence-plate owners are opposing these reforms so vigorously. We'll see if Ted Baillieu stands up to them with any more fortitude than his Labor predecessors.

The specifics of taxi regulation in NSW differ somewhat from those in Victoria but the general principles are much the same - as are the complaints from taxi users. Will Barry O'Farrell try harder than Labor to fix things? So far he hasn't even called for a report.

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