Voters reject economics as usual

Assuming the government scrapes back in, this surprisingly poor election result for the Coalition carries hard lessons for politicians and those who seek to influence the policies they pursue: business people, economists and econocrats.

In this election economic issues dominated, and those hard lessons are about economic management and economic reform: what voters will let you do and what they won't.

It was a fight between a "national plan for jobs and growth", and health and education. Guess what? Spending cuts lost more votes than tax increases did, or than tax cuts won.

The temptation to explain the Coalition's disappointing result in terms of personalities ("I've never liked Malcolm and now I have proof") and poor political tactics, shouldn't be allowed to obscure the lessons for economic policy.

There are two. First, the strategy of trying to fix the budget deficit solely on the spending side has been a dismal failure. Only a more balanced approach is likely to be politically acceptable.

The Coalition will do itself a disservice if it believes its own bulldust that it did so poorly purely because of the success of Labor's big lie about privatising Medicare. More on that another day.

The strategy of the Abbott government's first budget was to return the budget to surplus by cutting government spending while avoiding tax increases or cuts in tax concessions almost completely.

The public's reaction was so hostile Tony Abbott was rendered unre-electable. But, though few of those measures went through, Scott Morrison has persisted with the strategy by repeatedly claiming the budget has a spending problem, not a revenue problem.

Such a strategy involves fixing the budget at the expense of low and middle income-earners, while largely shielding high income-earners and business.

The political arithmetic of this was always what Sir Humphrey would call "courageous" and so it proved on Saturday.

Remember, the Turnbull government's plans still included huge cuts in grants to the states for public hospitals and schools, plus measures doctors claimed would force them to stop bulk-billing. Plus an unspecified future increase in university fees.

Many voters would also remember the enormous stuff-up of the attempt to privatise technical and further education.

On the other side of the budget, the Coalition has acted as though fixing the deficit by increasing taxes or cutting tax concessions was economic and political anathema.

This is nonsense - as the election shows. The government actually went to the election with plans to increase taxes, on tobacco and on multinational companies, which drew no criticism.

Its plan to cut superannuation tax concessions drew noisy criticism from a few people who would never have not voted Liberal.

Its heavy past – and future – reliance on bracket creep drew no criticism. Nor did Labor's plan to continue the temporary "budget repair" levy on high income-earners.

Point is, the Coalition's willingness to propose tax increases came only to help pay for its planned phase-down in the rate of company tax, not as part of its efforts to return the budget to surplus.

It lost votes for wanting to cut company tax, thus reducing any political benefit from its plan for jobs and growth. In any case, the cuts are now unlikely to get far in the Senate.

Message: we won't achieve much in fixing the budget until we're prepared to increase tax as well as cut spending and, in the process, share the burden more fairly between the top, middle and bottom.

The election result's second lesson is that, in our efforts to make "reforms" that increase economic efficiency and improve our productivity, we should stop gratifying rent-seeking by big business and start listening to other advice, including the majority of recently polled economists saying the long-run growth dividend from spending on education is greater than an equivalent amount spent on business tax cuts.

We should abandon the voter-rejected experiment with reform via tax changes and shift to productivity-enhancing reform of education, infrastructure and, would you believe, health (because health is one of our biggest and fastest growing industries, but quite inefficient).

If you think this conflicts with all I've just said about repairing the budget in ways voters will accept, it's clear we – and, more particularly, our pollies and their econocrat advisers – have a lot more thinking to do.

Lifting our productivity via education, infrastructure and health doesn't have to involve spending a lot more on them, and may well involve achieving slower rates of spending growth.

That's because it mainly involves making spending in these areas more efficient and effective. That is, genuine reform, not just the mere cost-shifting we tried – and voters have rejected.

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ECONOMIC JUSTICE

Talk to Salvation Army Moral and Social Issues Council National Conference, Melbourne, July 2, 2016

I spent the first 25 years of my life imbibing the Christian beliefs and social values of Salvationists, and the rest of my life learning - and later critiquing - the principles of conventional, “neo-classical” economics, particularly as it is practiced in the Australian political debate. So I see my role this morning as acting as a sort of interpreter standing between Salvationists and economists, but also business people and politicians who are so heavily influenced by the “the economist’s way of thinking”. I’m certainly not here to try to convert you to the economic religion. I want to help you understand where they’re coming from and why they take the attitudes they do. In the little time available I want to make six points.

First, it’s appropriate to focus on “equality” in the case of social justice - the idea that everyone should be treated equally - but in the case of economic justice I think it’s more appropriate to use the less-precise concept of “equity” - fairness. Economics invariably ends up being about money or, to be more precise, income (how much we have to live on) and wealth (the value of what we own - home and investments, less our debts). And the trouble with income and wealth is that how much we each have can be measured and compared reasonable easily and precisely. We may believe that people should be treated equally regardless of their race, but few of us believe that everyone’s income or wealth should be identical. Rather, we believe the gap between the richest and poorest shouldn’t be too wide; that too big a gap isn’t “fair”; that more should be done to improve equality of opportunity. Everyone gets a decent education, then we see what use they make of it.

Second, mainstream economics isn’t about “economic justice”. Most economists don’t have much professional interest in economic justice and don’t see much place for it in their discipline. Conventional economics is the study of how we use markets to aid the production and consumption of goods and services and, in particular, how we can make our markets work more efficiently in producing the goods and services we most want and thereby increase the combined “utility” - satisfaction - we derive from that consumption. Economics, therefore, focuses almost exclusively on the material aspect of our lives, largely ignoring the other dimensions: the social aspect, the relational aspect, the cultural aspect, the spiritual aspect. I believe the much greater influence economists have come to enjoy over the past 30 years is both an effect and a cause of the community’s greater materialism in that time.

Christians - and certainly not those as practical as Salvationists are - don’t for a moment deny the importance of the material aspect of our lives. This, after all, explains their concern about economic justice; it explains much of the Army’s social work. But the Christian’s witness to the world must always be that there’s more to life than the material: that social aspects matter, the treatment of the poor matters, the spiritual matters.

Third, since economists specialise in promoting productivity and “efficiency” - efficiency in the allocation of material resources such as land, labour and capital - they tend to ignore and undervalue what you call economic justice and they call “equity”. They advocate “reforms” they believe would maximise the community’s overall satisfaction of mainly material wants but, for the most part, they have little interest in how the fruits of the economic growth they seek are distributed - shared - between individuals and families within the community. Is the increase shared reasonably fairly between the bottom, the middle and the top, or has a disproportionate share gone to the top, thus widening the gap between the bottom and the top? This is a question that’s rarely at the top of their minds. Many economists believe efficiency is an objective, scientific issue, whereas equity - fairness - is quite a subjective matter - one where opinions differ - which they leave to others, such as politicians.

Fourth, even so, some economists do specialise in measuring how income and wealth are distributed between rich and poor, and studying how and why that distribution changes over time. They are familiar with the institutions or instruments of economic justice that the community uses to re-distribute income from the richer to the poorer. The main instruments in Australia are the progressive income-tax scale and means-tested access to social welfare benefits.

Fifth, the conventional wisdom among economists is that the objectives of efficiency and equity are in conflict. That the things governments do to increase equity reduce efficiency and the things they do to increase efficiency reduce equity. For instance, the high tax rates at the top of the income-tax scale discourage people from working, saving and investing. But if they’re cut, the well-off will work harder and earn more and the gap between them and the less well-off will widen. A part of this is their belief that the bigger government is - the more it raises in taxes and redistributes to the less well-off - the more it reduces incentives to work and save, and so the less efficient the economy is.

My last point is the good news: very recent years have seen an increasing volume of empirical research - much of it produced by such prestigious authorities as the International Monetary Fund and the OECD - casting doubt on this conventional wisdom that equity and efficiency are always in conflict. It looks across the countries of the world and finds little correlation between how fast they grow and the size of their government. It finds evidence that the growing inequality in many developed countries over the past 30 or 40 years partly explains their slower economic growth. Best of all, the research points to various cases where particular policy measures can increase fairness and productivity and growth at the same time. Two obvious examples in the Australian context are the Gonski school reforms and the national disability insurance scheme. For instance, doing more to improve the education of disadvantaged students is not only fairer and better for them, it also increases the value of their labour and their rate of participation in the workforce, to the benefit of the rest of us.

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