It helps for politicians to be wonks
Repost from September 2011
My old friend Hugh sent me this old piece from 2011 about my stint in the Australian Treasury. I was much younger and angrier and didn’t know how to finish essays (I still don’t), yet I think it captures something important about the need for political leaders and their staffers to really grok policy. The best salespeople know the product.
September 25, 2011
I recently left Canberra, after a year-and-a-half stint as a graduate in the Treasury. For a few reasons, the central agencies actively discourage blogging or publishing on policy or politically-related issues, and so I've not written for the last 18 months. I hope to reverse this trend, and thought I'd start by reflecting on my short
time in Canberra.
I should disclose that, apart from being involved in the carbon price modeling, I was nowhere near the centre of action at Treasury, and any sweeping claims I make about the department, government, or Treasurer below should be taken accordingly.
The Treasury
I spent the last 18 months in the Macroeconomic Modelling Division of the Treasury, working on (or working with people working on) time-series econometric models and CGE models. Overall, I found it a good place to cut my teeth in statistical programming and getting stuff done---this being one my many weaknesses. The head of the division [nb. she’s now the Secretary of the Department of Industry, Science and Resources] was a little like a female version of Josh Lyman, which provided an equal balance of terror and fun; she is one of the few people I've met capable of having a team of 20 stay back until 3am most nights and maintain their affections. In all, I'd recommend any recent quantitatively-inclined economics graduate to work there.
But it wasn't all perfect. When our graduate intake started, Ken Henry, the former secretary, gave a speech reflecting on the enormous growth in numbers experienced by Treasury. When he started there in the 1980s, there were only a few hundred people employed there (these few hundred people advised Treasurer Keating to deregulate air travel and go to enterprise bargaining); now, there are 1100. And from inside, it's clear that the Australian public could be getting more from these many talented people.
The requirement for more people has come from three sources. The first is that there is a view that providing good advice always required more thought than was given in the past anyway (good policy in the past was made by luck), and so now we have the number of people we should have had. The second is there has been an increase in the ease at which the public can directly increase the workload of government bureaucrats via ministerial questions and the Freedom of Information requests. The third is that the Treasurer's office, and perhaps the Treasurer, doesn't seem to understand the economic intuition behind many of the policies they champion, and so have a difficult time selling them—this was most clear during the mining tax debate. As a result, Treasury spends most of its time briefing a government to help sell policies its ministers should already be able to sell.
The Government
There are two primary problems with our ruling party which make it an ineffective government. The first is that the parliamentary Labor party does not seem to have a very good idea of what government should not do; what the government should not be responsible for. The second is that the same people have not considered what the government is effectively incapable of doing. Because many ministers and their staffers have not thought very deeply about these two problems, they seem incapable of distinguishing ideas which are good from ideas which are bad but politically harmless, from ideas which are bad and will prove later to be political liabilities. My thesis is that the current impotence of the government is directly attributable to their chasing unnecessary reform which they would screw up anyway, and that this means they have difficulty passing legislation that government should pass which they could do, like taxing environmental externalities and resource rents (to mention nothing of immigration or town-planning reform).
Probably the first instance of this thought-deficit was the aborted attempt at price-monitoring groceries and fuels: GroceryWatch and Fuelwatch. Both of these policy ideas, it turned out, were things that the government should not have been doing. The premise of their supposed value was that sellers of groceries and fuel engaged in
strategic pricing—awfully difficult to prove—which could result from some combination of very limited competition, supply-chain monopolies, cartel behaviour, government regulation forbidding entrance into these sectors, urban planning regulations, or consumers not behaving in their best interest. When you're betting on people not already behaving in their best interest as a pretext for a policy idea, it's not grocery prices you should be worrying about.
The government commissioned the ACCC, the competition regulator, to investigate the level of competition in the grocery sector. In July 2008, the Commission reported that "Grocery retailing is workably competitive", though they suggested that the lack of suitable retail sites increased barriers to entry, which may affect prices. A month
later, citing the report, the government announced it would launch the GroceryWatch website, which would allow consumers to compare prices between retailers from home. This was not a recommendation of the ACCC.
If firms able to charge above-competitive prices due to too little retail land, as suggested by the ACCC, then what sort of change in prices would we expect due to GroceryWatch? Our retailers are quite smart. They would choose prices to maximise profit given that some proportion of consumers would check the website first, and then, given they checked the website, some of those would change their choice of
supermarket. Even without GroceryWatch, retailer have chosen their prices to maximise profits given that some people do already compare prices and have already changed supermarkets. So the only people who supermarkets could attract with lower prices due to this policy are those who would check the website regularly, who would change supermarkets, and who have not changed supermarkets already. We are talking an incredibly small proportion of the population. Would supermarkets alter their prices significantly to win their business? The government seemed to think so. It reminds me a bit of this brilliant XKCD cartoon:
Of course, this policy was just one of the first in a sequence of poorly considered ideas which the government pushed and then, on realising the idiocy, dropped. By pursuing such policies, the Labor government have spent valuable political capital on "thought-farts" of inept ministers and staffers, rather than bouncing these (mainly bad) ideas off critical friends and colleagues. I suspect it may be that there are simply not that many people in the Labor party who spend time thinking about policy.
The Treasurer
Last week, the Deputy Prime Minister and Treasurer, Wayne Swan, won Euromoney's Finance Minister of the Year award. This puts him in the company of Manmohan Singh, who in checking the License Raj pulled hundreds of millions from poverty, and Sri Mulyani, whose standing as finance minister was so high that her announcement of resignation resulted in a sell-off of the rupiah. By contrast, Wayne Swan has not shown he knows what rents or Brown taxes are, has not shown he knows what an externality is and what the efficient level of pollution may be, and has not shown he knows why his choice of fiscal/monetary policy mix may be bad for our exporters, who are having a tough time right now. In short, he is the least intelligent Treasurer in a generation, and personally responsible for the greatest failures of this government and the past one.
A good example is resource rents. Loosely defined, these are returns on investment which were never needed ex ante to justify the level of production. So if BHP need an rate of return on a mine of 20 per cent to justify its construction, but end up (due to increases in mineral prices) with a rate of return on 30 per cent, the 10 per cent difference is a rent. Even if they never received this additional cash, they would undertake the same amount of economic activity. Due to physical limitations, these rents are more reliable in natural resources than in other areas of industry.
The most efficient method of taxing natural resource extraction is using a Brown tax. I'll use the example of how this would work with some land. Let's say in 1990 a piece of inner-city land cost $400,000, and in 2010 the same land is sold for $1,000,000, giving an annual return on investment of 4.69 per cent. Under scenario 1, the
purchaser pays the full price, and makes 4.69 per cent per year on their investment. In scenario 2 (under a Brown tax), the government gives the purchaser some proportion of the initial purchase price---let's say, a quarter. So the purchaser need only come up with $300,000 to buy the land. The same land is still sold for $1,000,000 in 2010, but now, the government takes a quarter of the sale price (as they put up a quarter of the purchase price). The beauty of this sort of tax is that the private investor makes exactly the same rate of return---4.68 per cent.
Because the Treasurer and his office did not know what a Brown tax was, they messed up the mining tax debate from the beginning. First, they wanted the tax to apply to investment made in the past. Though more complicated, it would be like in 2010 the government giving you $100,000 (a quarter of the purchase price) for the right to take a quarter of your $1,000,000 sale price. It was theft. Second, they wanted to grant the initial investment subsidy in tax credits, which would increase in value at the rate of 6 per cent per year for each year they were not used. It was thought that investment banks would create markets for these credits, and so firms could sell them for
cash at the point of investment. The big problem was that 6 per cent was quite a low 'uplift' rate if there was any possibility the government would renege on their promise to honour these tax credits. A smart Treasurer would have realised that, and instead said "it costs us the same (if less) to just give these firms government bonds equivalent to X per cent of the total investment; why not just do that?"
Had the Treasurer understood taxing rents, and not been greedy with respect to stealing the profits of past investment, the mining lobby would not have attacked the government, and Kevin Rudd would still be PM. Swan has displayed similar ignorance about climate policy. Rather than framing the question publicly as "how much CO2-e would we emit if those who gain from emitting were the same people who stand to loose from its aftereffects", he robotically repeats pre-prepared lines
about "changing the structure of the economy" and "taxing our big polluters".
The real pity here is that the Australian opposition is worse, with all the rhetoric and no well-considered climate or resource tax policy. It gives new meaning to plumbing new lows.