ROSS GITTINS. Confessions of a pet shop galah: a lot of reform backfired (SMH 11.11.2019)

As someone who, back in the day, did his share of being one of Paul Keating’s pet shop galahs – screeching “more micro reform!” every time they saw a pollie – I don’t cease to be embarrassed by the many supposed reforms that turned into stuff-ups.

My defence is that at least I’ve learnt from those mistakes. One thing I’ve learnt is that too many economists are heavily into confirmation bias – they memorise all the happenings that affirm the wisdom of their theory, but quickly cast from their minds the events that cast doubt on that wisdom.

Well, let me remind them of a few things they’d prefer to forget.

Of course, it’s not the case that everything done in the name of “micro-economic reform” was wrong-headed. The floating of the dollar was an unavoidable recognition that the era of fixed exchange rates was over and the dollar’s ups and downs have almost always helped to stabilise the economy.

The old regulated banking system wasn’t working well and had to be junked. With the rise of China in a globalising world, persisting with a highly protected manufacturing sector would have been a recipe for getting poorer. Nor could we have persisted with a centralised wage-fixing system or a tax system that failed to tax capital gains, fringe benefits and services – to name just a few worthwhile reforms.

Many privatisations were justified – the government-owned banks, insurance companies and airlines – but the sale of geographic monopolies (ports and airports) and natural monopolies (electricity and telephone networks) was a step backwards, mainly because governments couldn’t resist the temptation to maximise the sale price by preserving the businesses’ pricing power at the expense of consumers.

The conversion of five state monopolies into the national electricity market proved a monumental stuff-up at all three levels: generation, transmission and retail. It quickly devolved into an oligopoly with three big vertically integrated firms happily overcharging consumers at every level, with collateral damage to the use of carbon pricing in reducing greenhouse gas emissions.

We’ve learnt that “markets” artificially created by governments and managed by bureaucrats are – you wouldn’t guess – hugely bureaucratic, with the managers susceptible to “capture” by market players. The gas market has also been an enormous stuff-up, threatening the survival of what remains of Australian manufacturing.

The ill-considered attempt to treat schools and TAFEs and universities as being in some kind of market, where fostering competition between them and paying teachers performance bonuses would spur them to lift their performance, proved an utter dud.

Had the harebrained plan to deregulate uni fees not been stopped, it would have made even worse the chronic disorientation of the nation’s vice chancellors on what universities are meant to do and why they’re doing it. Lesson: trying to turn non-market parts of society into markets, while blithely ignoring all the obvious reason such “markets” would fail, is a fool’s errand.

Which brings us to the half-baked idea of trying improve the provision of taxpayer-funded services by making their delivery “contestable” by for-profit providers. It’s been an expensive failure pretty much everywhere it’s been tried: childcare, employment services, vocational education and training, and aged care (see present royal commission), not to mention privately run prisons and offshore detention centres. How long will it be before we’re having a royal commission in the abuses of the largely outsourced national disability insurance scheme?

Why have so many reform programs ended so badly? Partly because of the naivety of econocrats and other proponents of “economic rationalism”. They had no notion of how far the grossly oversimplified neo-classical model of markets they carry in their heads misrepresented the big bad real world.

And many of them, having spent their working lives solely in the public sector, had no idea of how wasteful or bureaucratic the supposedly rational private sector could be. Actually break the law if they thought they wouldn’t get caught because corporate law-breaking wasn’t being policed? Sure. Rip off the government because the bureaucrats wouldn’t notice? Love to.

But there’s another reason so many reforms blew up. Because naive econocrats failed to foresee the way reforms intended to leave consumers or taxpayers better off could be hijacked by Finance Department accountants looking to cut government spending and produce “smaller government” by whatever expediency possible (see uni fee deregulation) and politicians looking to win the approval of big business or to move money and influence from the public sector column (them) to the private sector column (us).

Lesson: if a venal politician can find a way to sabotage micro-economic reform to their own advantage, they will.

Ross Gittins is the Herald’s economics editor.

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9 Responses to ROSS GITTINS. Confessions of a pet shop galah: a lot of reform backfired (SMH 11.11.2019)

  1. Hi Michael. The determination of Treasurer and think tank economist Mike Nahan to privatise Western Power was a significant contributor to the Coalition Government’s loss in Western Australian in 2017. I had the pleasure of working with Bruce Kirkwood, Don Saunders and Bob Booth in WA’s State Energy Commission when Andrew Mensaros was Minister in the late 1970s.

    The structure pre “reform” when the State provided infrastructure and private enterprise chimed in with superstructure worked well. Professor Michael Hudson of Kansas City is interesting on this point. Hard and fast rules on privatisation may not be a good idea. There is room for a pragmatic view of public and private ownership but today’s scepticism towards privatisation and de-regulation is surely warranted.

    • michael hitchens says:

      I agree Jenny much of it has been done badly, including in the electricity sector. Perhaps back in the 70’s our politicians were more interested in what was good for the State rather than plotting to get re-elected via pots of cash generated by poorly regulated privatisations. But the point remains at least in the electricity sector, it was the rapacious State Treasurers controlling both the publicly owned electricity assets and the regulators of those assets that have been responsible for botching the electricity market reform. The concept of the reform remains a worthy public policy.

  2. michael hitchens says:

    I will stick to my knitting, which is the national electricity market (NEM). And yes I am an economist.
    Ross is wrong in lamenting his support for the NEM in the mid-1990s. He is right in pointing out that, while the economists got it right conceptually, it was the State politicians that hijacked the reform (yes reform).
    Contrary to most commentary (including here) that blamed privatisation, it was in fact the lack of privatisation in NSW, Queensland and Tasmania, and then the inept adoption of climate change policies by all governments, that has lead to the electricity price debacle.
    The facts are that under the NEM wholesale electricity prices fell in real terms up until 2007. They increased from then on due to uncertainty about climate change policy, renewable energy policy and wholesale market manipulation principally by publicly owned generators in Queensland and NSW.
    Real retail electricity prices under the NEM however began to rise significantly from around the turn of the century when the the Qld and NSW State Treasuries demanded of the publicly owned transmission and distribution companies exhorbitant dividends. It remains the case that the costs of transmission and distribution in Victoria, privatised in the late 1990s, are the lowest in the NEM. The publicly owned operations in Qld, NSW and Tasmania continue to rip consumers off.
    On the whole, the reform was well founded but not well executed because some States did not fully privatise their assets, preferring instead to keep them in public hands to gouge consumers. It is worth considering where we would be had there been no NEM, with then no market pressure to hold back any of the States from exploiting us.

  3. One of your sins, Ross, is the use of the word “reform.” I wrote to newspaper editors when this abuse of language kicked off. Reform has positive connotations in politics thanks to the work of Wilberforce, Grey and Shaftsbury. It was a dirty trick by the economic rationalists to use the “reform’ word for policies that stole the public’s property and gave it to financial parasites.

  4. Mark Freeman says:

    Reminds me of the saying about “when the facts change, I change my mind…” Thanks for your candour Ross. I’ve read you for decades and this summary of your views matches my memories. What you didn’t mention was that there were many who tried to warn you lot about crooks, capture, corruption, cronyism and deregulation for its own sake. Just like all those warnings about dodgy debt markets before the GFC.

    The basics of the so called neoliberal changes were pretty good. We really have benefitted from the end of protectionism. There are however readily available fixes for many of today’s problems. A federal ICAC, gas reservation, overhaul of the PRRT, replacement of the AEMC, curtailment of lobbyists just to name a few. Where is our economist’s commitment to these reforms ?

  5. Philip Laird says:

    A helpful article. Australia has provided a number of text book examples of poor privatisation outcomes. One such is the combining of Port Botany and Port Kembla leases by the NSW Government and if this was not bad enough, put restrictions on the movement of containers at the Port of Newcastle. This is now subject to proceedings in the Federal court brought by the ACCC.
    Rail privatisation could have been handled better in Australia (and New Zealand). If rail subsidies are to be paid due to low traffic volumes, the question arises as to whether they should be paid to a private sector provider or a government agency. The experiences, at least in the Tasmanian and New Zealand cases, suggests that the subsidies may better be directed to a government agency, charged with the responsibility of providing efficient rail freight (and passenger) services.
    Re Banks, I would welcome a government bank if only to provide more competition with the private sector as is the case in New Zealand with KiwiBank (using Post Offices). Pre privatisation of the CBA, fees by the other three major banks were not a major issue. With all four major banks in the private sector…

  6. DON OWERS says:

    The old regulated banking system wasn’t working well …New one isn’t too hot either.. persisting with a highly protected manufacturing sector would have been a recipe for getting poorer. Well what country does not subsidise manufacturing?

    The gas market has also been an enormous stuff-up, threatening the survival of what remains of Australian manufacturing. Manufacturing was stuffed because of cheap imports from nations that subsidised their industries

    The ill-considered attempt to treat schools and TAFEs and universities as being in some kind of market, where fostering competition between them and paying teachers performance bonuses would spur them to lift their performance, proved an utter dud. As was making Uni rely on O/S students who only attended because they could get permanent residence .

  7. Bruce George says:

    How privatisation of the the Commonwealth bank was “justified” is an assertion totally lacking in justification, since the regulator of this privatised bank has bee totally ineffective in reigning in it’s illegal activities. Monetary policy is an essential function of Government and banking is such a profitable legalised swindle operation it should never be entrusted to private individuals or corporation, The Commonwealth bank is now “Australia’s” most profitable corporation and is 60% owned by USA investors. There is simply no justification for selling off an irreplaceable asset for short term gain that also acted as a very effective standard setter of the Australian banking industry, especially given that the gain was little more than the profits that would have been generated and the beneficiaries are USA investors.

  8. Barry Reynolds says:

    So you’re one of the barstewards that kicked all of this off?

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