IAN McAULEY. Mates, lobbyists and rent-seekers

Two books, one recent the other written 35 years ago, explain how special interests are strangling the Australian economy.

“It was 22nd February 1790 when James Ruse was granted Australia’s first parcel of private land by Governor Arthur Phillip. His thirty acres was recorded as No. 1 on the Land Grants register, and sits in the heart of Parramatta”.

Cameron Murray and Paul Fritjers in their work Game of Mates: How favours bleed the nation, introduce James Ruse not only as the emancipist who kicked off agriculture in the colony, but also as Australia’s first property developer to have made a fortune out of government largesse.

Their chapter “The Great Property Development Game” takes us from 1790 to contemporary Australia, with cameo appearances by other property developers, including Eddie Obeid and former Queensland Premier Cameron Newman. According to their study of 1137 Queensland landowners, “around 70 per cent of the value gain from re-zoning went to politically connected property developers.”

Their work is a rich study of cronyism in Australia, and they don’t stop at property developers. Among others they expose are bankers, private health insurers, pharmacists, and toll-road owners.

Those reading Game of Mates seeking accounts of spivs meeting in car parks to give politicians brown paper bags stuffed with $100 notes will be disappointed: for such lurid stories they should troll through the work of the NSW Independent Commission Against Corruption. Rather, Murray and Fritjers describe a more subtle set of relationships – relationships based on old school ties, revolving doors between government and business, and political affiliations – relationships of “mates” as they properly point out.

Their work is well-researched, with what may be a disproportionate loading of Queensland case studies. Perhaps that is because both Murray and Fritjers are economists at the University of Queensland. Or perhaps there is still a little of the culture that supported 19 years of Joh Bjelke-Petersen’s government.

They conclude with estimates of the cost of these cosy relationships, and although they have plenty of data, as cautious economists they wisely don’t go beyond making rough estimates. If just one or two groups were benefiting at the cost of the rest, they could add up those costs, but when so many groups have some privilege, aggregation is more difficult. For example, farmers have their own lurks – under-priced water and subsidies for ethanol come to mind – but farmers also pay for some of the costs of privileges enjoyed by the finance sector and for less than perfect competition in commodity markets. Murray and Fritjers mention taxis, but the benefits of restricting the number of taxi plates didn’t go to the taxi-drivers.

Every year the Productivity Commission grapples with this problem in its regular Trade and Assistance Review, but unless you want to delve into detail, I recommend Murray and Fritjers. In terms that Gilbert and Sullivan may have used, when everybody’s subsidising someone else, then no one is subsidising anybody.

But it’s worse than a simple circular flow that all comes around, because this game of mates clams up an economy. The game is not only about gaining privilege for your group; it’s also about retaining it by blocking anything that comes along to upset it.

Economists refer to effort of gaining and retaining privilege as “rent seeking”.  It’s a confusing term, because it bears only a weak relationship to our everyday use of the term “rent”. Investopedia definites it as:

… the use of the resources of a company, an organization or an individual to obtain economic gain from others without reciprocating any benefits to society through wealth creation. An example of rent-seeking is when a company lobbies the government for loan subsidies, grants or tariff protection.

I would add to that example corporate lobbying for favourable regulations. The standout example at present is the effort of the coal industry lobby not only to continue to avoid paying for the cost of greenhouse gas and other pollution (in itself a costly subsidy to the industry), but also to gain concessions to keep coal-fired generators operating.

Rent-seeking itself is costly – think of the burden of the lobbying industry itself, and of the costs it imposes on others who try to counter its influence. Most citizens would far prefer to live in a world where they didn’t have to organise action groups to oppose land grabs or make donations to environmental groups to counter the huge influence of mining lobbies, for example.

But the more substantial costs occur when the rent-seekers succeed, and these costs are hard to measure, because they are what economists know as opportunity costs. These are the costs of benefits that don’t come about because successful lobbying has blocked reforms and other beneficial changes. At a local level it may be a toll road owner blocking the construction of a railroad to the airport; at the national level it may be a professional group restricting accreditation of new members. The mining industry in 2013 brought huge and effective political pressure to thwart the government’s attempt to introduce a tax that would have helped stabilise the economy and allow the nation as a whole to share the fruits of periodic mining booms.

Murray and Fritjers’ work covers Australian cases of rent-seeking. For a more general and international context I recommend the work of Mancur Olson, particularly his 1982 book The rise and decline of nations: economic growth, stagflation and social rigidities. Olson was curious to learn why, after their wartime defeat in 1945, the Japanese and German economies had done so well. He acknowledged the usual explanations – their need to replace aged equipment, the influence of the Marshall Plan in Europe and MacArthur’s reforms in Japan. But the overwhelming factor he found in these countries was the loss of the influence of the lobby groups who, in the postwar era, had either disappeared or couldn’t find traction with the new regimes. In the victorious countries, by contrast, lobby groups were still able to exert their retarding influence. (John Menadue’s insights into a comparison of postwar Japan and Germany explains why Germany has retained its edge, while Japan has slipped back.)

In a theme that rang true with Australian policy makers concerned with tariff reform Olson wrote about the influence of arrangements between trade unions and industry groups – he called them “distributive coalitions”. The rise and decline of nations was virtually compulsory reading for anyone involved with the Hawke-Keating economic reforms.

Olson wasn’t anti-union or anti-mechanisms of distribution. When he died in 1998 The Economist in its obituary described him as the “scourge of special interests”, and summarised his work with his conclusion that  “Narrow, self-serving groups had an inherent, though not insuperable, advantage over broad ones that worry about the well-being of society as a whole.”

We saw the influence of Olson’s thinking in the Hawke Government’s emphasis on bringing  unions together to take a collective view – for example the understanding that while some workers benefited from import restrictions on shoes and clothes for others those restrictions meant high prices. Similarly Hawke encouraged peak industry associations to understand their collective interest in a well-paid workforce in secure employment.

Unfortunately we seem to have lost those mechanisms to consider the collective view. Australia is once again a comfortable place for rent-seekers doing deals with mates. Ironically the Hawke Government itself, with its public service reforms, may have contributed to this situation, because those reforms tended to make each agency and department stand alone and look after its own interests, often with the support of lobby groups with deep tentacles into those departments.

Murray and Fritjers’ work is important, not only as an expose of the cronyism that’s strangling our country, but also as a warning that we need once again to channel those efforts that have gone into rent-seeking into institutions that can work for the collective interest.

 

Ian McAuley is an Adjunct Lecturer in Public Sector Finance at the University of Canberra and a Fellow at the Centre for Policy Development. In their work Governomics – can we afford small government? Miriam Lyons and Ian McAuley explain the relevance of Olson’s work to public policy.

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2 Responses to IAN McAULEY. Mates, lobbyists and rent-seekers

  1. In an earlier post Ian McAuley described Australia’s quadrilateral energy market, an artistic creation of deep beauty that may well have won a citation at the University of Chicago but never passed the pub test at home. The general public from the outset recognised the Thatcherian privatisations for what they were — the crime of the century.

    I suppose I should read the book reviewed because Paul Fritjers asked me to when challenging me to a debate after I had blamed our woes on neoliberalism generally and the teaching of F.A. Hayek in particular. Paul maintained that corruption was the major problem and his generation of economists could save the world with some new theories such as behavioural economics.

    If I understood him correctly today’s kids at the universities are not even studying Hayek. This would have shocked me were it not for the outraged cry from Richard Posner at the time of the global financial crisis when he realised that, having studied economics in Chicago, he knew nothing about Keynes. We are in trouble if Paul is correct and our problems are shonky politicians and greedy businessmen because politicians will always be shonky and businessmen will always be greedy. Crooks are drawn to the worlds of business and commerce like fleas to a dog.

    When I worked in government it was the job of the permanent public service to keep the fleas off the dog’s back, or at least slow them down. Now the fleas are the heroic captains of industry, to be encouraged to create one, big flea market, happily bartering, trucking and exchanging, all the fleas’ boats rising on the incoming tide, guided by an invisible hand with the most agile and flexible opening up new territory. I could think of some more clichés from the neoliberal cheer squad but I might spew all over my keyboard.

    Governments used to provide services to taxpayers and ratepayers. Now they provide markets, giving companies, often foreign-owned, a licence to make money for doing nothing. When the companies fail to do their jobs they blame government for not providing certainty. If you want certainty in life, get religion.

    How do you know when an airport has been privatised? When you can’t find enough cash in your pockets to pay the parking machine and you have to use a credit card to bail your car out of the car park. Perth airport used to have a spacious arrival and departure lounge. Now there are so many shops in the fairway that there’s no room for passengers trying to get out of the place. A shop owner in a Port Hedland shopping centre told me he knew when the owner’s representative had been in town because he received a letter criticising his shop decorations. No personal visit. handshake, how are you going? thanks for all the rent. In Western Australia we call these parasites “West Perth types.” You can spot them by their stylish spectacles.

    Obviously I can’t pretend to be impressed by the technocrats who have given us these markets nor by the politicians who took their advice and not by Fred Hilmer and his competition policy. Dee Margets was doing some good work on Hilmer and publishing in the Journal of Australian Political Economy. I hope she finished the project. I wrote a paper on this stuff for Ernie Bridge to deliver to a federal parliamentary committee, so it should be in the Hansard s0mewhere. In it I likened the commissars of the new economic republic to the Grand Inquisitor of Castile. Ernie told me Graeme Samuel was quite upset about that but Bob Katter loved it.

    I do agree with Michael Keating on one point and that was made in his response to Eva Cox (Pearls and Irritations 30 June and 17 July). There are more forces at work than neoliberalism in the individualisation of community. There is an overlay covering every aspect of our society and that is the reduction of all relationships and activities to a dollar value. Hayek and Milton Friedman had a lot to do with this but so did Isiah Berlin with his concepts of positive and negative freedom. Positive freedom is liberty, equality and fraternity. We might call it social justice. This is dangerous because the freedom fighters wind up with Robespierre and Napoleon, Stalin and Hitler. Negative freedom is safer. That is the freedom to go shopping, build a new barbecue in the back yard.

    I’m not convinced. I think justice is a human drive, like hunger and thirst. It shows up in young school children and I have discussed this with teachers. Jeremy Corbyn and Bernie Sanders are tapping into this desire. This is a long response to a book review but I hope it gets past the umpires because I am trying to make a point in all these comments. We over-simplify our political and economic analysis because we overlook the theorists who construct the framework that limits our policy debate and, ultimately, our view of the world.

    And surely there is a Biblical element here. An Anglican Minister in suburban Perth corrected me when I said money was the root of all evil. Saint Paul said “love” of money. It is a fine point although one must respect Saint Paul’s precise use of language. His identification of caritas as the most important factor, even above faith and hope, is a lesson for all time. The neatest comment on the ethics of our time came in a cute Hollywood comedy called Pretty Woman. “You and I are in the same line of business,” said Richard Gere, the Wall Street, West Perth type, to Julia Roberts, playing a call-girl in a seriously short skirt. “We screw people for money.”

    It is a matter of logic. A society that worships money will be governed by crooks, ipso facto, as night follows day.

  2. Scott MacWilliam says:

    Mancur Olson’s Rise and Decline should be compared with Chalmers Johnson’s MITI and the Japanese Miracle for a contrary and somewhat more sophisticated account regarding post-war reconstruction in that country. Johnson showed that it was far from a small government which oversaw the so-called `Miracle’. He also emphasised that instead of being a socialist state, as so many of his abundant and deeply ideologically determined critics claimed, Japan’s was a capitalist developmental state of the variety almost absent today, including in Japan.

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