A question for you: how to combat privilege?

As economists well know, we are all rent seekers who try to secure more and more privileges for ourselves and our families, be it monopoly rights (such as currently legally given to medical specialists or local pharmacies), over-pricing for our goods (such as many of the medicines under the Pharmaceutical benefit scheme), preferential access to legal exemptions (such as enjoyed by the bigger property developers when it concerns exemptions to building restrictions), or other advantages that do not accrue from our abilities but from political favours.

The search for more privilege is normal but, in order to have a healthy society, so must there be a perennial fight against it for otherwise the privileged end up lording over the rest who just have to grin and bear their inferior status. And if any profession is tasked with thinking about how to tackle privilege, it is economists. It is one of the good things we do.

The big success in recent decades in the fight against privilege in Australia was the scaling back of import barriers under the Hawke-Keating years. Since then it would be fair to say only the occasional privilege has been brought down, such as the Telstra monopoly that has been challenged by other mobile phones providers.

Truly big scalps have however not tumbled since the 90s, though I regard the proposed mining tax as a valiant attempt to grab some of the rents of Australia’s minerals that were predominantly flowing to overseas share-holders. That attempt at tackling a privilege unfortunately turned into its complete opposite as the Rudd/Gillard government, facing a barrage of attack adds from essentially foreign-owned mining companies, ended up directly negotiating with the three big mining companies at which point it agreed to the cooptation of the commonwealth in protecting the privileges of the mining industry by having the federal government compensate that industry for tax increases by the states. Through that humiliating deal, the commonwealth is now essentially the guard-dog of the mining industry’s share-holders. It is a new privilege costing Australians billions per year. Without this new privilege, I doubt the Commonwealth or the States would have been in deficit.

Apart from this expensive new mining privilege, several other new ones have been granted in recent decades, such as increased compulsory superannuation which created a fixed market for high-cost financial institutions that did not have to contest their clients (though recent reforms are making them more contestable), banana import bans, the take-over of semi-public institutions by overpaid bureaucrats, over-subsidised medicines, differential costs of government deposit guarantees across financial institutions (which was probably instrumental in killing off many of the smaller financial players), and the National Broadbank Network. All have involved major government decisions where the nitty-gritty favours particular groups at the expense of the whole. Slowly, the arteries of Australian economic life are seeing the build-up again of privileged positions.

Part of the current situation is that the privileged have well-organised interest groups with slick media operations that directly target ministers, research outfits, and public opinion. As a reaction to this, ministers and other politicians are now in perennial media-combat mode, by necessity surrounding themselves with media-savvy staffers who vet policies for spin-value and even come up with policy on-the-hoof that fit political storylines. Complaints of the Business Council of Australia (who claims the tendency of having policy decided upon by media-savvy but policy-ignorant staffer costs Australia 20 billion) and others (such as Terry Morgan) against this reality fall on deaf ears as the political need to first and foremost fight a continual media campaign remains undiminished. The role of the civil service to think critically and hold its own against this tide has been eroded by the demise of its own research arms, probably benefiting the privileged at the expense of the unprivileged.

In this first of a series I want to raise the question of how the self-cleansing capacity of Australia can be increased. For certain, Australia already has many dedicated institutions to counteract or expose privilege, including the ACCC, the CMC, Ombudsmen, the Productivity Commission, and an independent press which, despite what the cynical say, does now and then bring forth editors and journos trying to tackle the positions of the privileged.

Still, the good guys don’t seem to be winning big off late and the question is what concretely can be done to increase the self-cleansing capacity of Australia, either in terms of legislation, new statutory bodies, academic research, or indeed the general blogosphere and its associated hordes of philanthropic citizen journalists. In future posts I intend to discuss the pros and cons of the various ideas.

So please let me know in the discussion thread which changes in privileges you have seen in the last few years and how you propose privilege in Australia can be more successfully reduced.

18 Responses to Reducing privilege in Australia, part I

  1. sam wylie says:

    Paul
    It would help if the most elemental concepts of welfare economics were taught to high school kids. Most people, even intelligent and well educated people, don’t have any intuition about deadweight losses. The thinking of the public, and therefore the actions of politicians, is strongly influenced by perceptions of unfairness. But without basic notions of economic welfare, the public can’t see how unfair rent seeking behaviour is, or even that it exists. I bet if you asked 10 people in the street about taxi licences, 9 out of 10 could not explain or even see that a huge amount of value is destroyed by the high price of those licences. if most university educated people in Australia knew what the term ‘deadweight loss’ means and could cite two examples, then public discourse on rent seeking would be quite different, and different policy outcomes would follow. We need to get just the most basic welfare ideas into the year 7-10 high school curriculum.
    Also, I think the treatment of water rights is a first order example of rent seeking in the last decade.

  2. selzick says:

    I’ll flag GPs as a well entrenched privileged group particularly in respect to the multitude of inducements which “enable” them to practice. For example the use of enhanced practice incentive payments (PIP) to set up basic computing infrastructure (computers, webcams, etc.. which one would have thought is paid by a business like every other business), the availability to claim a PIP if they then use such infrastructure (telehealth PIP) and a whole bureaucratic layer which helps them set up such infrastructure to maximise the claiming of benefits (Divisions of General Practice staff which are now Medicare Local staff). Being involved in this sector i’m flabbergasted to see such waste that does not end up creating better patient outcomes (cf. the totality of Divisions of General Practice networks). Would it not be better to train more GPs, practice nurses, etc., than supporting a very privileged group in Australia protected by the AMA?

  3. Baz says:

    I’m not necessarily of the opinion that infrastructure spending like the NBN is a privilege, any more than roads are. The market had its chance to build the infrastructure and didn’t because there was no market incentive over keeping the virtual monopoly it had on copper. Seems like a market failure to me.

    • Paul Frijters says:

      The issue with the NBN is one of political patronage: a hugely expensive infrastructure project without proper cost-benefit analyses. The public pays, particular companies win. Joshua Gans wrote some nice pieces on it at the time of its introduction.

      • kme says:

        The same is true of the road system though, isn’t it? Who are the biggest winners from, say, the dupliation of the Hume Highway if not trucking companies?

        • Paul Frijters says:

          Depends on the circumstances, which I know too little about in the case of the Hume highway. If the duplication really only benefits one truck company and one road builder, then it is equivalent to just writing a cheque to that truck company with public money. If one is benefiting a hundred truck companies that are competitive and where hence the reduced transport costs would go to all the users of these trucking facilities, then the building of the road could overcome the coordination problems between these trucking companies and be a highly efficient and proper use of public money.
          With the NBN what is important is whether we pay too much for it (over-pricing), whether it goes to places that it is highly inefficient to go to (over-production), and whom it ultimately gets used by. Its a murky issue precisely because there has been no proper cost-benefit analysis, but I think on the first two of those counts one can argue privileges have been had.

          • kme says:

            The intention for the NBN is that many competing ISPs will offer services over it, so in the same way the reduced connectivity costs (for high bandwidth, low-latency connections) will go to the customers of those ISPs.

      • Ben says:

        My argument would be that there are significant positive externalities to the NBN, number one of which would be productivity.

        Just by way of an example, consider an eftpos system, say an eftpos transaction in general takes 5 seconds, and the NBN could shave a couple of seconds off that, for millions of transactions every day. The beneficiaries of this extra time and money wouldn’t be the telco or (directly) the government, it would be society in general.

        The costs of the NBN are easy to measure, the benefits less so – when do you stop? it’s so easy to imagine new technology that will be enabled by having universal high bandwidth. Say an ultrasound where a rural doctor could real time communicate with a specialist a thousand miles away, or increased ability to do remote office work, improved remote education. Companies with the ability to hire Australia wide or worldwide rather than be limited to the people who live within 20 kilometers of their offices. All of these would be improvements to the lives of the users of the system, not to the telcos. How many examples do you need before the societal benefits dwarf the costs? I can come up with this stuff all day.

        As for how expensive it is, well my understanding is that it is meant to pay for itself via line usage, which is essentially a tax on the highest users (not that the highest users’ line will cost any more to install). A price that those users will happily pay.

        Honestly I don’t really care if it could be built for slight fraction cheaper with a different governance structure. I think there’s too much ideology in here. Just build the bloody thing. I don’t care how.

        • You don’t care about the cost to the public purse or that, at huge additional costs, extremely remote places are hooked up which involves very little expected use?

          Call me a fanatical economist, but I do care whether public money is spent wisely. Complacency is so easily abused.

          • Ben says:

            Ok. Time for numbers, otherwise we’re just playing stupid word games. You tell me exactly what percentage of the total ‘huge additional costs’ entails (3%?, 7%?) and I’ll tell you whether I care (especially given that I’m reasonably likely to be a high bandwidth user, thus paying more line-rental/tax than the average punter, thus subsidising those extremely remote places, and making their lives better. You’re welcome, extremely remote places).

            Interesting situation though isn’t it – those who are going to be taxed the most are the ones most gung ho about it.

            If you insist. You’re a fanatical economist. Happy? ;-). I of course care whether public money is spent wisely. It just so happens that given the potential public good created here I am reasonably happy that this is wise, compared to a baseline case of dithering around for 20 more years and doing nothing.

            (I’m still enjoying these conversations by the way – what is the good of blogs you agree with all of the time?)

          • Ben says:

            There’s an equality element to this too – it’s those very remote areas, where employment prospects are low, there’s no bank, it’s a thousand miles to the nearest obstetrician or oncologist, there’s no chance of a decent education. Those areas are the ones that will have the highest marginal benefit in utility from better connectivity, simply because they are remote.

            Like I said. You’re welcome, remote areas. I will gladly pay my extra 50c in line rental that I wouldn’t have paid if that nasty Paul guy got his way so your lives are better.

  4. Ben says:

    Anyway, back on topic: cut price electricity for aluminium smelters. Feed in tarriffs for solar PV.

    • I don’t agree re: solar PV. The feed-in subsidies haven’t just happened in Australia but also in a variety of other markets internationally. Each are, in essence, fueling (pun intended) a speedier transition to solar competitiveness (i.e. when the subsidies WON’T be needed) in that all parts of the value chain (both in terms of R&D and production economies) have been encouraged to continue investing.

      If the tarriffs are retained after parity is reached, THEN this would be a worthy example.

      • Ben says:

        Parity to what? Coal? Why focus on a single technology then? Why not CSP? Don’t get me wrong, I love PV, I’d have it for my house if I didn’t rent, but the brutal truth is that those who have their PV installed are subsidised by the vast majority of people who don’t. They are getting an individual benefit at a cost to everyone else. It fits the pattern. (Same is true for smelters times 100 though)

        While we’re enumerating, lets throw a few more sacred cows onto the BBQ. Negative gearing, the baby bonus, car deductions, commonwealth payments to ‘private’ schools, probably half of our defence contracts.

        Parallel imports is an example of a recent improvement.

  5. […] In part I the question was posed to the readers which privileges bothered them most about Australia and what they thought could be done to reduce them. In this part I want to start to consider the barriers by talking about the ‘face’ of any privilege and how this creates particular difficulties in tackling them. […]

  6. paul says:

    Change of privilege is move of education away from selected groups/classes, towards a process available to anyone prepared to apply time with internet access.

    NBN ensures most Australians access to this, where previously economic returns limited access to groups/classes often were not economical.

    Video-conference lectures and tutorials, downloading recorded lectures and tutorials opening opportunities for participation.

    As a rural and remote oriented person, perhaps am prejudiced to the “economic rationalist” blinkers applied by many who live within metropolitan and suburban environments.

    Notice the changes to meaning of education as tertiary educational institutions open access to their educating courses so all able to access them can follow them, can learn.

    Access to learning does not require certification to benefit society, directly or indirectly.

    Access to learning provides individuals opportunity to educate themselves at their own pace.

    Certification changes enable individuals following their own educational interest courses, with available accreditation for experience, testing for competence.

    Tertiary institutions retain these testing and accreditation roles, some deciding their ensuring quality testing to certify achievement will boost their institutional incomes.

    Certification long achieved by surviving examination processes, or through achieving professional peer recognition of competence.

    IF we change the focus in society so everyone sees life as a never ending process to educate themselves, improvements likely continue flowing.

  7. […] In the first two parts, the readers and I looked at the long list of sectors in Australia where there is a privileged minority who, with the help of the government, is in a position to extract more than their fair share of income out of the economy. Medical specialists, GPs, banana growers, pharmaceuticals, etc., have all managed to get political protection and favouritism to push their cause at the expense of the rest. […]

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