We need to unclog the pipes of the capitalist machine

Of the many worthwhile economic reforms put on Treasurer Jim Chalmers’ to-do list after last week’s roundtable, I suspect the one that could – repeat could – produce the most lasting boost to our productivity is the one that didn’t sound like much: reform of the way we regulate the economy. Abolish more nuisance tariffs, anyone?

Economists are obsessed by taxes. So too are business people. So it wasn’t hard for those sitting round the oval table to convince themselves that reforming our system of taxes was the key to improving our “productivity” – the efficiency with which our capitalist economic machine converts inputs of resources into outputs of myriad goods and services.

But I doubt it. Our tax system does need major reform, but that’s much more about reducing its generational unfairness than increasing economic efficiency. Economists see taxes as just another price, and the “neoclassical” model of the economy they carry in their heads tells them prices are the key to understanding everything. That’s why they believe such absurd propositions as that every worker on the top tax rate – including all the worthies at the roundtable – is only doing it for the money, and is unmotivated by, for instance, the desire for power and status.

No, a more productive way to think of it is that, though many, many aspects of our lives need to be regulated – from outlawing theft and murder, to what and where we’re allowed to build things – there’s a real risk that the politicians and regulators will overdo it.

That, with the best of intentions, they’ll end up misusing their power. That they’ll make their regulation of the particular bit of our activity they’re responsible for too prescriptive, that they’ll try to perfect outcomes in their bit at the expense of all the other bits. That their demands will overlap with, or even contradict, the demands of other regulators.

This risk is greatly multiplied by our federal system of government, with at least two levels of government having the power to regulate most of the aspects of our activity.

As the Productivity Commission has confirmed, our businesses face a thicket of regulations. That thicket grows with each year of governments governing.

And then there’s the risk that multiple regulators will yield to the temptation to do their job in a way that makes things easier or cheaper for them, at the expense of those they’re regulating. Requiring too much form-filling, for instance.

Worse, regulators who take far too long to approve or deny applications to start a new business or build something. The delay probably saves them the cost of having to hire a few extra workers, but the cost to the rest of us, I now realise, is huge.

If ever there was a “negative externality”, as economists call it, this is it. The cost of regulatory delay has two aspects. It greatly reduces the productivity of the construction industry, affecting both housing, and commercial and infrastructure construction.

If ever there was a multifaceted problem it’s housing affordability; problems on both the demand and supply sides. But we’re indebted to Treasury for pointing out just how much of the problem is explained by the growing inefficiency of our home building industry.

It’s a cottage industry that’s done too little to seek economies of scale. But the average time it takes to produce a new home has worsened greatly in recent decades. This must surely be explained mainly by the growing time it takes for building permits to be issued.

So, if we were to greatly reduce the average approval time – which shouldn’t be too hard – we could expect this to significantly increase the number of homes the industry could produce each year, without any increase in its size. Productivity improvement doesn’t come more clearly than this. And this relatively easy policy measure could also put a decent dent in our home affordability problem.

The other respect in which delays in approvals are costly comes from what economists call “the time value of money,” and normal people call interest rates. Construction companies have capital – borrowed or from shareholders – tied up and waiting for the off from approval bodies. So for every day that capital lies idle, the business has funding costs that aren’t matched by income-earning work.

One of the most useful things about the roundtable is the way it has produced evidence of the extent of something we rarely notice: overlapping and conflicting regulations, the surprising number of approvals businesses must get and the growing delays in getting them, as well as all the forms that regulators demand be filled, repeating known information.

They want economic growth and rising living standards, but they also want to transition to renewable energy, protect the natural environment, keep people safe at work, ensure diversity in the workforce, and various other completely legitimate concerns.

Trouble is, we’ve got all these outfits busily regulating this bit and that bit, without any outfit sitting over the top, regulating the regulators. Making sure the various bits fit together without overlap and contradictions, finding the best trade-off between the conflicting objectives, and forcing all the regulators to rationalise their form-filling, using uniform definitions and common databases.

That would be hard enough at the federal level, but it has to be achieved by agreement between the feds and the states, with the states getting their local government into line.

When you think it through, it’s not hard to see how excessive, unco-ordinated and conflicting regulation of businesses, with all its approval processes and form-filling, is clogging up the capitalist machine. Unclog the pipes and the machine would produce more each year without any extra inputs.

But regulatory reform has been tried before and achieved little before being slipped quietly into the too-hard basket. And even if the roundtable decisions were to lead to an almighty clean-out of the Aegean stable and a one-off lift in the level of productivity, the capitalist pipes would start clogging up again as governments continued to govern and regulation expanded.

So what we need is another permanent government agency, whose only job is to regulate the nation’s regulators in the interests of the regulated and the continued success of the capitalist machine.

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We pay for miners' impatience

Is patience a virtue? Our mothers taught us that it was, but much economic thinking treats it as a vice. And business people treat their impatience as though it's a virtue. But I'm with mum.

What isn't in doubt is that impatience is a pretty much universal human characteristic; we're all impatient, to a greater or lesser extent. I hardly think that makes impatience "rational" but, even so, conventional economics is careful to take full account of it.

The most fundamental reflection of our impatience is found in interest rates. No one is likely to lend money to a non-family member without charging a fee. Lenders want to be rewarded for doing you a favour and also for running the risk they won't be repaid.

But why not charge borrowers a flat fee? Why charge them at an annual rate for however long it is they have your money? Because you're impatient to get it back. So interest rates are a reflection of our impatience.

It's because lenders are always paid, and borrowers always charged, an amount of interest that varies with the length of the loan, that interest rates reflect "the time value of money". Allow for that value and you see why a dollar today is worth more than a dollar tomorrow (or in a year's time).

If you had a dollar today, you could lend it to someone and charge interest; if you needed a dollar today you'd have to pay interest. This being universally true, it becomes "rational" for economic calculations to take account of our impatience, as reflected in our charging of interest on the basis of time.

This is why, if someone promises to pay you $1 million a year for 10 years, it's not sensible to value that promise at $10 million. It's worth less than that because you have to wait so long for the money. How much less? That depends on how long you have to wait and your degree of impatience.

This, of course, explains the common business practice of "discounting" future flows of cash (both incoming and outgoing) to determine the "net present value" of a project. (A "discount rate" is compound interest in reverse, working from the future to the present rather than the present to the future.)

But this practice of discounting at a constant rate over time is far from foolproof. For one thing, behavioural economists have shown that, in real life, we're a lot more impatient in the near term than the longer term ("hyperbolic discounting").

For another, conventional discounting implies we care little about the distant future, which flies in the face of our concerns about the wellbeing of our children and grandchildren ("intergenerational equity") and sustainability - ecological or otherwise.

Business people treat delay as a vice - they're always on their high horse about government delays in approving their projects - but impatience may be motivated by selfishness, shortsightedness and even greed. We want to be richer - and we want to be richer now.

So we demand quarterly performance reports and structure chief executives' remuneration packages to reward them for getting quick results. Then we discover they're neglecting to invest in the longer term, not worrying about what will happen to the business in future years, and complain about "short-termism".

John Maynard Keynes said many wise things, but his most foolish (or misapplied) was that "in the long run we are all dead". It's not true - I'm still alive after first hearing it almost 50 years ago - and it's a maxim most of us will live to regret following.

People have understood the shortsightedness of short-termism for decades, but little or nothing has been done to correct it. The truth is, the business world is shackled by its uncontrollable impatience, to our long-term detriment.

It doesn't seem to have occurred to those people complaining about being in the slow lane of the resources boom that their problems are being compounded by the miners' impatience to get in for their cut while the going is good.

That's because, in business circles, impatience is seen as something to be admired. Among economists, the speed at which market participants wish to proceed is seen as a matter for them in their response to market incentives, not something the government should interfere with.

The more the dollar stays high, despite the fall back in coal and iron ore prices, the more likely it's being held up by the huge mining investment boom, as miners rush to get extra production capacity on line before prices have fallen too far.

Miners are elbowing their competitors aside, trying the grab the labour and other resources they need to get their mine built before other people's mines.

In their mad scramble they're attracting resources away from other industries - including major public infrastructure projects - creating shortages of skilled labour and bidding up wages. This explains why miners are demanding that environmental and other approval processes be speeded up. Worry about the environmental consequences later; let's just do it!

But their mad dash to get their mines built as soon as possible is causing indigestion problems for the rest of the economy.

They're bidding up wages to attract the workers they need, and for a long time the Reserve Bank was afraid they would cause an inflation surge.

It kept interest rates higher in consequence - thus probably adding a little to the dollar's strength - and, either way, making life tougher for the manufacturers and tourism operators.

And all because no one was prepared to tell the miners our minerals would come to no harm staying in the ground, so they should stop making trouble for others by being so impatient.

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