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What I’m reading

January 30th, 2005

I’ve just finished Who Rules? How government retains control in a privatised economy by Michael Keating. Keating’s basic analysis, with which I agree, is that governments are facing a problem of rising demands and bounded state capacity. Hence, wherever possible, they are economising on capacity, for example by using regulation rather than direct public provision of goods and services. Thus, the reforms of the 1980s and 1990s are seen, not as cutting back government but as making it more effective. An obvious inference is that, if the size of the public sector, relative to the economy as a whole, has remained roughly constant for the past 25 years, and the effectiveness of the state has been enhanced, then government is playing a larger role than before, contrary to the hopes of neoliberals and the fears of social democrats. I think this is broadly correct.

Not surprisingly, Keating has a more favourable view of the reforms, many of which he helped to implement, than I do. On almost every point, I felt he was a little too supportive of the reform agenda and a little too dismissive of the critics[1]. Still, it’s an important contribution to the debate, and well worth reading.

fn1. Interestingly, I get quoted a few times, but mainly for criticisms of the pre-reform status quo, such as the observation that industry policy in the era of tariff protection was ad hoc and incoherent.

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  1. Uncle Milton
    January 30th, 2005 at 18:34 | #1

    “Not surprisingly, Keating has a more favourable view of the reforms, many of which he helped to implement”

    That is putting is mildly. Michael Keating was the bureaucratic father of national competition policy.

    It is strange that Keating’s contribution to policy has received so little public attention. Starting with the implementation of Tom Uren’s regional policy in the early to mid 70s, through to the election of John Howard in 1996, Keating was very influential. And he is still influential, having just been appointed chairman of the Independent Pricing and Regulatory Tribunal in NSW.

  2. January 30th, 2005 at 19:15 | #2

    Hey , I’m a queensland girl as well. :) I don’t believe we have met.
    I live in brisbane :)

  3. January 30th, 2005 at 22:51 | #3

    It’s an important point John.

  4. January 30th, 2005 at 22:53 | #4

    Which is to say I agree enthusiastically, not to presume. Starkly paradoxical implications follow.

  5. stephen
    January 31st, 2005 at 15:32 | #5

    Keating’s book is a very useful addition to thinking in this area, which tends to be dominated by shallow and unsupported assertions. While its clear (not surprisingly) that he supports the 80s and 90s reforms, he does not go over the top – for example, he notes that the evidence for the view that the improved performance of the economy is due to reform is “circumstantial rather than conclusive”, and he points out differing opinions frequently. I’ve been recommending the book to others, and have put it on the reading list for a course in government finance later this year.

    An area where I disagree (or at least I think I do – have to talk this through with Mike sometime and also with JQ) is in relation to demands exceeding capacity. I’m coming to think that the usual way of looking at this, citizen’s demands for more services exceeding the fiscal capacity of the state to pay, is not correct. In fact, in recent years the trouble for governments has been in finding worthwhile ways to spend money. The Prime Minister has a penchant for spending large sums of money (he recently went on record as saying that when you think of a big package it has to be a billion dollars – that was in the context of tsunami relief, which is why the mix of donations and loans was packaged up to look like it amounted to a billion, but we only have to look back to his industry, welfare and defence packages to see the same thinking at work). These have been easy to fund, without having to embark on a swingeing program of cuts elsewhere – the constraint seems a mild one. After 14 years of economic growth, the fiscal capacity of the state is much larger now than it was in the 1980s. In my recent experience of budget advising – in huge contrast to the 1980s – the problem seemed to be a shortage of ideas from agencies that were worth pursuing!

    This is not to say there is no constraint – I just think it is a different one. The constraint is the ability of governments to find solutions that are workable to the sorts of problems that people are concerned about these days. Traditional spending programs are not having much effect, or perverse effects. The sorts of observations on indigenous health and welfare programs – that there seems no linear relationship between more dollars spent and more results achieved – are now starting to affect more and more areas of public sector activity. To take a recent example, the “war on terrorism” – does spending more money help or hinder? are we more or less safe from terrorism? (arguably the relationship between spending and safety is an inverse one). The same applies to addressing the question of what makes people happy (post a basic level of provision of services – without roads, schools and hospitals people can be pretty miserable). I’m not sure yet how to express this constraint in any form that economists can fit in to the traditional models, but I do think it is worth thinking about.

  6. stephen
    February 1st, 2005 at 18:00 | #6

    just to add that my above comment applies to the federal level of government; there is still a backlog of unmet need in the sorts of service provision that state governments are constitutionally responsible for (roads, ports, hospitals, schools etc.) and there the traditional fiscal constraint is still a real one. Which also suggests that the federal government needs to transfer more money to the States than it does currently…but that’s a whole new argument.

  7. derrida derider
    February 1st, 2005 at 22:03 | #7

    “Which also suggests that the federal government needs to transfer more money to the States than it does currently…but that’s a whole new argument.”

    And what the hell is wrong with the states raising their own extra revenue if they need it? I’m sure the feds would easily accomodate any desire to add a state income tax to current tax returns.

    For too long state governments have had a habit of taking credit for spending without incurring the odium of taxing.

  8. February 1st, 2005 at 22:44 | #8

    “And what the hell is wrong with the states raising their own extra revenue if they need it? I’m sure the feds would easily accomodate any desire to add a state income tax to current tax returns.”

    I assume that’s a joke?

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