Home > Economic policy, Politics (general) > Ergas v Quiggin on risk and social democracy

Ergas v Quiggin on risk and social democracy

January 8th, 2008

A while ago, I wrote a piece for the Centre for Policy Development (PDF) , making the case that risk and its management, in various forms, would be the central policy issue of the 21st century. The central idea of the piece was to show how an improved understanding of risk could contribute to a modernised social democratic model.

The piece got a bit of attention, and has now been paid the compliment of a full length reply in Quadrant by Henry Ergas . Ergas raises some good points, and usefully extends the discussion in important respects. Unfortunately, he misses the point of the article fairly thoroughly, to the point where he often seems to be arguing against an imaginary opponent. His repeated claims that the paper is unclear reflect the problems he is having matching my paper to the one he thinks he is reading. The debate isn’t helped by the fact that, although Quadrant is now at least partly online, the idea of hyperlinks is too new for its editor, with the result that most of Ergas readers will probably not have read the piece he is criticising.

Ergas attributes three main points to me, which I’ll take in reverse order of his presentation, and also in reverse order of distance from what I actually wrote.

FINALLY, WE COME to the third of Quiggin’s claims—that governments should not only fund protection against economic and social risk, but also directly provide the services, such as education, health care and welfare support, through which that protection would be made available.

Quite why Quiggin believes this is never made at all clear.

Indeed, it isn’t, perhaps because, in my, admittedly brief, discussion of this topic, I wrote exactly the opposite. In relation to health care, I wrote

Although there are good grounds for a substantial element of direct public provision, public financing can also support private provision including both private medical services and community run primary health care centres.

By contrast, Ergas repeatedly imputes to me a demand for a public monopoly on provision. (At least, that’s how I read him, reading me. Perhaps he is objecting to any public provision of health and education services. If so, the burden of proof against him is very strong.)

As regards education, where I don’t discuss public provision at all, Ergas gives a pretty good presentation of cream-skimming arguments. I think these arguments provide good reasons for being dubious about voucher schemes and the like. But if I thought the long-standing policy of providing public finance for private schools should be abolished, I would have said so.

For the record, I believe there is a significant role for both public and private non-profit providers of education at every level. By contrast, I think the hopes that neoliberals placed on for-profit education in the 1990s (Edison schools, University of Phoenix) have proved to be misplaced, except in a few marginal areas. More on this point later perhaps.

Moving on we have

the second of Quiggin’s claims: that in taking on all the risks for which he believes governments are the least-cost insurer, governments should make coverage against those risks comprehensive.

Actually, the intro to the paper stated

This does not mean that we should try to protect everyone from every possible risk – overly zealous or misplaced risk management can stifle innovation and creativity. But what we can do is take a long, hard look at what kinds of risk are best managed at an individual, government or business level.

and the word ‘comprehensive’ appears nowhere in the article.
Ergas justifies his imputation of the opposite claim to me on the basis that

[Quiggin] does not set out any form of test that would limit the extent of coverage. So here too, the claim is made as an unbounded truth.

As an argumentative tactic, this is quite unsatisfactory. Ergas doesn’t cover all sorts of points relevant to the argument: can I therefore impute to him whatever extreme position I want?

Ergas’ presentation is unfortunate, because he goes on to make some useful points about the role of copayments and conceptually similar devices in limiting moral hazard. As he says, these areas have hardly been unexplored, and the fact that I did not recapitulate the literature on the topic doesn’t mean that I’m unaware of it.

The first and most useful section of Ergas paper applies the standard economic distinctions between adverse selection and moral hazard to the question of when there is a role for government in risk aversion. Ergas argues that I have overstated the appropriate role of government but complains again, about the fact that I have been ‘unclear’ in making my case.

The reason for Ergas dissatisfaction is that this was my main concern in this paper was not, as he appears to assume, to rehearse the long-running debate between social democrats and neoliberals about these issues. Rather the paper was primarily aimed at convincing those sympathetic to social democracy that the best way to think about a whole range of public policy issues, including income redistribution, was in terms of risk and risk management.

I don’t want to put words in Ergas’ mouth but it seems to me he implicitly accepts my primary claim, and wants to carry on to the next stage of debate about the range of areas in which government action to spread risk is likely to outperform the private market. At least in principle, I don’t have much disagreement with his suggested set of conditions, namely that:

In particular, the benefits of government action are only likely to exceed the costs in three sets of cases: where governments are uniquely well-placed to determine whether an insurable event has occurred because they can combine that task with some other part of their ordinary operation (as in HECS); where the risks involved are otherwise uninsurable because they lack the requisite degree of uncertainty (as in recurring mental illness); or where the risks are of such a scale, and so difficult to predict statistically, that even the widest and deepest capital markets cannot pool them efficiently (as in terrorism insurance).

I suspect that we would disagree about the scope for intervention covered by these cases. My prime example of income redistribution fits under the category of ‘otherwise uninsurable’ since a lot of this risk is determined very early in life. And I don’t think mental health problems are particularly different from health problems in general as regards the difficulties they present for private financing. In the ‘too big for markets alone’ category, climate change is a standout. Taking these examples, along with education, we have a pretty good prima facie case for both the postwar welfare state and the expansion of public concern, from the 1960s onwards, to cover environmental issues of which climate change is the biggest.

Although we are still talking past each other to some extent, I’m encouraged that Ergas shares my concern about risk allocation and is willing to frame the core debates about public policy in this way.

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  1. January 8th, 2008 at 07:34 | #1

    these discussions are perhaps meant to be in-house colloquys on angel-counting. or maybe just academic coup counting. but suppose one hoi polloi wanders in, and asks some uninformed questions, like: who are you working for? how do you know?

    i always feel that economists are hobbled badly by the secrecy that government and commerce defend so fiercely, and further betrayed by outright lies that occasionally replace the hidden data. that is why i suggest that further progress from the current ‘phlogiston’ level of economics development lies not in arcane argument but in simple political evolution, towards democracy.

    “let there be light” is the fundamental law of science, and can only be achieved when knowledge is not the private property of any group.

  2. January 8th, 2008 at 12:00 | #2

    al loomis,
    I feel your comment is more than a little off whack. This is (IMHO) the sort of debate that is critical to influencing the democracy that you seem to be chasing – what is it appropriate for government to be doing? What evidence is there that the scope of government vs. private provision is appropriate?
    Personally, while I tend to be more sceptical of the role of government than many, and probably most, of the commenters on this site (and also our host) this debate, when it is applied to the evidence, is what we should be having to decide how much government we should have.
    The democratic process must be informed by this – not take place in isolation from it.
    .
    On the main post – I would agree with both Ergas and our host on the conditions, but I suspect that I would lean more one way than the other on how to apply them. I would also agree that this is a very good way to frame the debate as it actually allows the debate to continue in a useful manner – i.e. it reduces the sterile left/right nonsense to a debate about what actually works, how much it costs, what the attendant risks are and so whether doing something is actually worth it.

  3. Joseph Clark
    January 8th, 2008 at 17:37 | #3

    I think Ergas overmade his point. JQ’s paper was about framing intervention in terms of risk for a socialist audience. This is very useful and sensible. What puzzles me is that JQ is making this argument when, for reasons outlined by Ergas, it will likely lead to far less government intervention.

  4. January 8th, 2008 at 22:08 | #4

    “one hoi polloi”? Even in modern loose usage, wouldn’t that be “one of the hoi polloi”? (Yes, I know the “the” is redundant, but if I really wanted to quibble I would have insisted on “ton pollon”.)

  5. Henry Ergas
    January 9th, 2008 at 16:43 | #5

    John, it may be that I misunderstood what you were trying to do – having reread your CPD piece, however, I am not at all convinced that is so. As you will see from my article, one of my central concerns about your CPD piece was that it was far from clear (to me at least) precisely what you were contending for. To the extent to which it was that there should be more – perhaps even significantly more – socialisation of risk-bearing than there currently is, then it seemed to me that the argument was seriously inadequate: inadequate because it did not explain the costs that would involve, and hence allow the reader to evaluate those costs relative to the benefits.

    This also goes to the point you make in your reply, when you say that your purpose was to introduce readers sympathetic to social democracy to a way of thinking about redistribution and risk. I wouldn’t claim to know what those readers are like; but if that was your purpose, then you left it unfulfilled in important respects. In particular, it is not enough to tell people that there are benefits to mitigating risk; rather, it is important to also explain what the costs are, so that the resulting trade-offs can be thought through in a sensible way.

    Ultimately, economics does not provide answers but rather a framework for analysing issues. What we need to do is to explain that framework as clearly as we can, highlighting, when public policies are involved, both the way they yield benefits and the mechanisms by which they impose costs. That, it seemed to me, you did not do – with the danger that your readers, who are likely to be well-disposed to arguments that make for a more expansive role for government, would ignore the cost side of the ledger. As a result, what I have sought to do is to explain both aspects of the problem.

    I am sure that you and I would agree on much of the relevant analytical framework; but our agreement counts for little in the great scheme of things. Rather, it is the wider discussion that really matters – the discussion that involves your readers, but also those of Quadrant. Our responsibility is to do what we can to make that discussion as well informed as it can be, recognising that ultimately, views will differ on the weights to be placed on the various elements of cost and benefit. If our exchange of views advances that understanding, then it will have served its purpose.

    Regards, Henry

  6. James Farrell
    January 9th, 2008 at 17:11 | #6

    That’s a courteous response, Henry. But you would have done yourself a little more credit by answering, or at least acknowledging, John’s complaint that you misrepresented him on the matter of state provision of services. This issue is hardly incidental, since you elected to make ‘costs’ the central theme of your critique; and you must have known that it would play well with Quadrant’s readership to portray John as a naive advocate of state monopoly provision of services.

  7. Ikonoclast
    January 9th, 2008 at 20:08 | #7

    No-one is more in favour of particular expenditures of the public purse in their own favour than the capitalist and rentier class. And they organise such wealth tranfers to themselves with great regularity.

    We can’t find money for a proper dental scheme for poor people by golly we can subsidise the share portfolios of wealthy people with negative gearing.

    The “free market – minimal government” exponents grudge every public cent for the poor but are always in favour of a government dollar for their own pocket.

  8. observa
    January 9th, 2008 at 23:32 | #8

    “In the ‘too big for markets alone’ category, climate change is a standout.”
    Whilst climate change may well be the biggie in terms of assessing costs and benefits of more or less govt hanky on a pressing issue of policy urgency, the statement that it’s too big for markets alone is totally unsubstantiated here. John takes it as a given and hence some sort of ‘mandate’ for what might follow, just like night follows day folks. Now here’s a typical example of such a ‘mandate’ being claimed quite erroneously by an ex-Clinton energy secretary, whilst Obama reminds us all of the true economic framework and costs-
    http://gregmankiw.blogspot.com/2008/01/pigou-club-watches-debates.html
    That doesn’t mean to say that is the best economic analysis or concomitant cost, as a level playing field carbon tax, without corporate welfare might well be. That’s still a matter for much debate and also going back one step, what is the best constitutional marketplace govt can devise and let the players run freely within it, rather than direct quantity controls and more administrative complexity.

    Ikonoclast you say-
    “We can’t find money for a proper dental scheme for poor people by golly we can subsidise the share portfolios of wealthy people with negative gearing.”
    which may simply be pointing out a cost you see in the vagaries of measuring and taxing income. You may not see the same cost in negative gearing when it provides rental accommodation for those same poor, which may be a problem when you want to remove negative gearing altogether, in order to stop subsidising wealthy shareowners as you see it. There are always these uncomfortable tradeoffs for policymakers.

  9. January 9th, 2008 at 23:41 | #9

    Ikonoclast, you are wrong when you write ‘The “free market – minimal governmentâ€? exponents grudge every public cent for the poor but are always in favour of a government dollar for their own pocket’. For exceptions, see the work referenced by Kevin Carson.

  10. gerard
    January 10th, 2008 at 00:47 | #10

    Right Ikonoclast, the perfect example of this ‘moral hazard’ of course being the recent response by the US government and federal reserve to the sub-prime meltdown.

    Professor Quiggin once made a notable remark during a lecture at UQ, in relation to Long Term Capital Management, the hedge fund with Nobel-prize winners Scholes and Merton (authors of the Black-Scholes Theorem) on its board of directors. He said (roughly) that the fact that LTCM suddenly lost $4.6 billion over a few short months in 1998 (destabilizing the entire financial industry) was not a reason to doubt the risk-assessment skills of the two Nobel Prize winners; in fact, they knew that losses on such a huge scale were less of a concern than smaller losses, since a multi-billion dollar loss would leave the government with no choice but to bail the company out, as it did.

    This is why Big Business has no problem at all with Big Government – they recognize that a large government can socialize Risk without having to socialize Profit. The Randroid ‘libertarianism’ that opposes government intervention in the economy has a much larger following amongst small business owners (and econ/poli-sci undergraduates) than amongst the big business Technocracy that manages the commanding heights of our State-Capitalist system.

    Brad deLong and others have written on the evolution of risk-sharing that has gone with industrial development. As modern industrial capitalism evolved, the small firms which were the dominant risk-bearers in its early age gave way to larger limited-liability corporations and eventually to an interventionist Government, as technological projects reached a scale and expense too great for the risk to be borne by the private sector. This shift to a government managed economy (a ‘Fascist’ economy as characterized by Veblen) went hand in hand with the emergence of Mass Production, which as Galbraith described is impossible in an environment of uncertain demand. The process was catalyzed by the Great Depression and Second World War – during and after which the world’s largest economies (United States, Soviet Union, Germany, France, Britain and Japan) all shifted permanently toward dirigism, with a vibrant and innovative state-sector underwriting these countries’ economic success.

    In the democratic west this movement was accompanied by social-democratic reforms that liberated the population at large from the anti-human wage-slavery that had characterized capitalism in its early period. And although the rise of a strong middle class had to be paid for with 90% marginal tax rates, the increased Demand base reduced the Risk involved in mass production, creating jobs and allowing for economies of scale to lower the relative cost of innovative goods. This virtuous cycle created the post-War ‘Golden Age’ of high growth and low unemployment. Furthermore, the social-democratic reforms like unemployment benefits and public healthcare/education actually stimulated free enterprise (to say nothing of their other virtues), by reducing the Risk involved in quitting a dead-end job and starting a small business.

    Since the collapse of the Bretton Woods system, many of the social-democratic gains of that time have been rolled back (especially in the United States), however the size of government spending and the scale of its involvement in the economy overall did not diminish. The Mont Pelarin ‘Free Market’ asshattery of Reagan and Thatcher bore no relation to their actual economic policies or beliefs; they were simply an exercise in PR myth-creation for the media and academia to make their reactionary agenda less obviously repulsive. Rather than diminish the size of government, the ‘inverted Marxists’ of the New Right simply seek to redistribute its benefits exclusively toward the Owners of Society. Socialism for the rich, free-market capitalism for everyone else.

    Capital is the direct beneficiary of most public expenditure on infrastructure, law enforcement, R&D. The large sums of public money that governments in the industrialized world spend on Research and Development (in the United States this is often disguised as “Defense” spending) represent the socialization of Risk that is necessary for a high-tech society to grow. Modern industrial capitalism requires very expensive and risky investments in research, development and production of goods which are often only cost-effective if produced en masse. As there is always a risk that a certain line of costly research/development/production will yield no fruit, far-reaching innovation is prohibitively risky and expensive for any individual corporation to undertake on its own.

    As a result, the fundamental innovations of many of the technologies that characterize modern the world – electronics, plastics, communications technology, computation, biotechnology, aircraft, power-generation – were all underwritten by the public sector. Of course, private enterprise still plays a very important role in the particulars of the final product, but it is a TOTAL MYTH that we owe the technological wonders of the modern world to the ‘rugged-individualism’ of the noble self-made entrepreneur, who valiently toils in his workshop while the parasitic Big Government licks its chops at the thought of how much tax it can ‘steal’ from him. The modern Risk-minimizing Corporate structure with its clear seperation of owners, managers and technicians makes this conception even more divorced from reality.

  11. gerard
    January 10th, 2008 at 02:19 | #11

    Unemployment insurance, for example, may reduce my commitment to staying in a job, and lower the diligence with which I attend to its requirements, making it more likely that I will lose my job and take up the insurance—a form of moral hazard “before the event� (often referred to as ex ante moral hazard). Equally, once I am unemployed, the fact of unemployment insurance may reduce the time I invest in seeking another job (as against lying in bed or going to the beach), or make me more choosy than I should be in considering the jobs on offer, prolonging the period for which I receive the insurance payments (a form of moral hazard after the event, or ex post). Both ex ante and ex post moral hazard impose costs on the insurer (in the form of higher payments, which then require higher premiums), on other insureds (whose premiums must rise to cover the greater payments made to me) and on society as a whole (which suffers from the loss of output while I am unemployed, as well as from any distortions associated with raising the revenue to cover the transfers I receive). Those costs are likely to greatly exceed whatever pleasure I gain from spending more time lying in bed or at the beach.

    Curse those dole-bludgers!

    Ergas makes the point quite well as to why unemployment benefits are immoral. Without the safety net of unemployment benefits, a worker is largly at the mercy of his or her employer. The boss has a much wider scope to treat their employees however they wish, with much less regard to working conditions and benefits. Throw in employer-provided private health insurance and it gets even better. Now the uppity worker is much less likely to “lower the diligence”, to complain, to refuse overtime or turn down a sexual advance. If they are fired or quit their job, they had better find a new one quicksmart (unless they have rich parents, in which case they can lie in bed or at the beach for a while first). Without unemployment benefits, it becomes much cheaper and easier for employers to attract workers. The unemployed definately won’t be too “choosy” about their new McJob; they need to eat after all.

    Actually, it is somewhat subjective come to think of it. For those with a vested interest in a powerless, servile and dependent workforce, the costs of unemployment insurance clearly outweigh its benefits. For society as a whole, however, I think it is an open question.

  12. Henry Ergas
    January 10th, 2008 at 04:12 | #12

    Just for completeness, and responding to James Farrell, I don’t accept John’s view that I misrepresent his comments and contentions; but I think very little point would be served by a forensic exercise of textual analysis of what he did and did not say. Rather, it seems to me that the value of discussions such as this one lies in advancing our understanding of the issues, even if at the end, we disagree about the precise implications that should be drawn. I may well be wrong in that respect, but it is, in my view, how knowledge advances. I, at least, was greatly stimulated — and provoked — by John’s views; I hope mine can help build on that.

    Regards, Henry

  13. Fred Argy
    January 10th, 2008 at 08:18 | #13

    John, your response clarifies many issues and shows there is much common ground between you and Henry.

    On the specific issue of redistribution policy, my support for public funding (as opposed to direct provision) of social investment (in health, early education, training etc.) has always been couched in economic terms. In outlining the economic positives, I have relied heavily on arguments about externalities (third party effects) and the importance of a level playing field (equality of opportunity) in the labour market. You raise risk management as a further crucial issue and I find that very helpful.

    That said, we would all agree with Henry that however great the benefits of government intervention, they always need to be weighed against the costs before arriving at an overall economic assessment. And Henry has reminded us of some of these costs.

    If the economic efficiency costs of additional social investment in Australia do outweigh the economic benefits (and I am not convinced that they do), we are left with some difficult equity-efficiency trade-offs when considering new proposals for social investment or other redistribution proposals. How these trade-offs are resolved must depend on one’s values (including how one defines ‘equity’). Economists have nothing special to offer on values, although they can help define the parameters.

  14. Ernestine Gross
    January 10th, 2008 at 12:02 | #14

    Henry Ergas’s article contains nothing that causes me to revise my comment on JQ’s paper at the time when it was made available on this site. My comment was something to the effect that I am ignorant about politics but JQ’s paper makes sense to me from the perspective of post 1950 general equilibrium theory with incomplete markets and it contains a clear policy (as distinct from politics) guideline. I’d like to add that, IMHO, the clarity of JQ’s paper arises from the absence of a policy prescription. This constitutes an explicit acknowledgement that there are no unique analytical solutions in economics for the issues raised in the paper. Surely, to pretend otherwise is the opposite of clarification, namely obfuscation, or dogma. To pretend that the issue is about ‘benefits vs costs’ – as measured in Finance (or left undefined) – is missing the point.

    In response to the invitation for further debate:

    Income distribution. I agree that risk management in a society cannot be discussed independent of income distribution. I have not seen a proof of existence of a solution to a general equilibrium model (complete or incomplete or partially segmented markets) which does not have a very strong assumption about income distribution (minimum wealth constraint). Furthermore, this is not surprising for models of non-dictatorial resource allocation systems where ‘choice’ in consumption (including supply of labour by individuals) is bound up with the philosophical notion of ‘freedom’ in an economic context. If ‘choice’ is desirable on philosophical grounds (and hence is put into the axiomatic base of the models – preferences) then one would have to be very concerned if the solution to the model does not have a condition which ensures that ‘choice’ is (budget) feasible. (Logical consistency is one of the advantages of the methodology used in this literature.) It is an empirical question to examine the budget feasibility of private insurance for all members of society when such insurance is empirically observable. Ergas provides no evidence on the empirical question, not even for the limited number of privately insurable events.

  15. Spiros
    January 10th, 2008 at 13:37 | #15

    Ernestine, would you like to say that again, but in English?

  16. January 10th, 2008 at 15:16 | #16

    Ernestine,
    Just a quick question – in this sentence “…very strong assumption about income distribution (minimum wealth constraint)…” why do you conflate income with wealth? Surely they are different (if related) concepts?
    The reason I ask is that choice remains budget feasible even in the event that income is zero provided this can be funded from another source – for example previous income (i.e. through dis-saving), future income (borrowing) or charity. Income is surely only one of the options.

  17. Ikonoclast
    January 10th, 2008 at 21:41 | #17

    Gerard, your analysis is spot on and 100% backed by the all the empirical evidence of very late stage capitalism from say 1948 to 2008.

    It does illustrate too the reasonably benign accomodation that has existed for most of that time between general social-democratic forces, big (relatively democratic) government and big business. As a member of the Australin middle class I cannot deny that I have been a beneficiary of this accommodation.

    However, the benignity of western government has been mainly to its own upper and middle classes. We cannot forget that western governments (and thus us as our governments are our agents) have always acted abroad in the most vicious militaristic and imperialistic manner possible.

    For me, as I stir my cappucinno in the morning, aboriginal blood and foreign peasant blood (to give two examples) are still implicit congealing agents in the product I drink. This remains just as true as when Voltaire commented that there was slave blood in every spoon of sugar.

    I am not a Christian but the Christian insight of original guilt is a very profound insight. (I’ll call it guilt to avoid the more emotive and religiously toned word.) We are all totally enmeshed in original and collective guilt. Every advantage of even the most gentle and inoffensive privileged person today could be traced back to an earlier act of barbarity by forebears who “won the ground” or “won the privelege” for him or her.

    Perhaps it’s a sign that I am getting old (though only in my early 50s) but the world now sickens me. By this I mean the world of mankind sickens me. Though I am an agnostic humanist I find the world weary elements of the Book of Ecclesiastes closer to my mood than any other writings. “Vanity of vanities! All is vanity!”

    Indeed, all humans do is vain. We are cruel, corrupt, selfish, ignorant and incapable ulimately of any real improvement in our natures. It is a hopeless round. I weary of it.

    My mind and body will keep living for another 20 or 30 years I guess. I’ll keep plodding on. I still see a kind of duty and residual existential defiance in doing so. But that’s about all I’m afraid.

    I can’t get excited by who will win the US presidential race or what will happen in the latest cricket imbroglio. The reason is that I know nothing will ever change. Nothing essential ever changes in the ugly, selfish and purblind behaviours of humans.

  18. Ernestine Gross
    January 10th, 2008 at 22:43 | #18

    Andrew,

    In the theoretical models I am talking about, ‘income’ is defined as the change in ‘wealth’ per period. (I recall JQ made this relationship between a ‘stock concept’ (wealth) and a ‘flow concept’ (income) quite clear in one of the posts during the past 2 years.) Borrowing is another word for selling future income short by means of issuing securities. It seems to me that the word ‘conflate’ is not quite right in this context because the term ‘income’ is nothing more than a label for the first difference in a time series of wealth. But ‘charity’ is a good one. My answer is: Charity is possible in these models exactly when it is not necessary to ensure ‘freedom of choice’. There is nothing in these models I know about which excludes a ‘voluntary wealth transfer’ (implying a voluntary income redistribution, keeping all else constant) between individuals as long as the individuals involved still have ‘freedom of choice’ (ie only the relative quantities of ‘all things’ which they prefer to consume is affected). However, since charity is voluntary, it cannot ensure ‘freedom of choice’. IMO, a society which relies on charity is a society which has given up on the notion of ‘freedom of choice’. It is a different social system to that of a society which values ‘freedom of choice’. Going beyond the technicalities, I am suggesting that societies which take ‘freedom of choice’ seriously do not exclude wealth (income) distribution from public debate.

  19. observa
    January 11th, 2008 at 08:34 | #19

    Let me cut the esoteric crap here and get down to practical tin tacks. We need a new third way consitutional marketplace (CM) that is market oriented (spare us ‘mandates’ and plastic shopping bag economics), equitable(both now and intergenerationally) and environmentally sound. That said I’ll propose the best I can think of for your perusal. Basically it consists of 4 central planks, which are not by and of themselves anything radically new, but together dovetail to produce the best overall outcome I can envisage, given the conventional wisdom we have at hand.

    Firstly the left give up their unhealthy infatuation with income tax. That 10,000 pages of tax act, trying to measure and tax income, that has now degenerated into- give us a ring and we’ll give you a verbal ruling on what we think.

    Secondly we shift all forms of taxation to resource taxing, with a strong reliance on carbon taxing in particular. Now resource taxing must also include the use of land as a resource (Henry George again) We tax land use, importantly zero for holding natural environment(the John Walmsley’s Earth Sanctuaries, etc) to a maximum rate on earth covered by buildings, bitumen and concrete. As part of that, the road and footpath cover is allocated proportionally too, so that clearly urban dwellers (largest ratio of cover to natural ground) are taxed heaviest, much like rates now, but importantly not on value. It’s imperative not to tax market value which only encourages conversion for economic return.

    Thirdly we have an annual net wealth tax with an important exemption which I’ll come to. This is the quid pro quo for abandoning income tax with all its distortions, savings disincentives and administrative costs of compliance. Resource/carbon taxing of itself may well address all the current equity concerns, but it likely does not address intergenerational equity. An ANWT with one exemption would do that. A couple of points on a wealth tax. Holders should be able to allocate their wealth over whoever they like (wife, the kids, grandma, etc) providing that is clearly available for their benefit and certainly for social security purposes. As well we would need to take account of life cycle circumstances with such a tax. Clearly an 65 yr old with say a $mill at their disposal, is not in the same boat as a 65 yr old with the same wealth. These are simply technical matters to be resolved, although I’d have a powerful compliance measure- find any unallocated wealth out there and the finder gets half, while the ATO gets the other half. Finders keepers basically.

    Fourthly to that ANWT exemption. Any wealth held in approved natural environment(that stuff that has a resource tax exemption you’ll all remember), like the Wlamesley’s Earth Sanctauries, is exempt from the ANWT, whilst held in that form. Go for it and all the capital gain you can extract from it over time. Furthermore, if you invest resources(already resource taxed)with the Walmsleys in creating more natural environment, you gain franking credits toward any ANWT due on wealth held in taxable form.

    Now I want you all to think about that third way constitutional marketplace and the outcomes it would produce. It aint rocket science and those that say the free market can’t produce the results we want are talking nonsense. It’s all in the constitution of our marketplace, which is rightly the preserve of our govt. Then get out of the third way and let the marketplace do its job. I’m happy to field your questions on my third way, or take on board any suggestions for improvement here.

  20. observa
    January 11th, 2008 at 08:44 | #20

    Woops!..Clearly an 65 yr old with say a $mill at their disposal, is not in the same boat as a 15 yr old with the same wealth…

  21. observa
    January 11th, 2008 at 08:55 | #21

    A couple of points here. You’ll notice that in this CM, the natural environment(both its preservation and new creation) has the powerful incentive of the invisible hand. So much so that we could easily envisage that as market forces play out, there would ultimately be no need for govt to own or invest in natural environment. As well the invisible hand would be creating new natural environment by financing the plethora of Walmsleys to do so and at the same time demanding visible hands for such works. Now ask yourself which marginalised hands now, would be most desired in such a marketplace.

  22. observa
    January 11th, 2008 at 14:38 | #22

    Essentially this is a blueprint for change, with the details to be filled in and no doubt argued over as we go along. Basically I’m saying, it’s not the free market that’s the problem, it’s the constitution of it stoopids. That’s my critique of those who would have us go off on tangents chasing rainbows with GW. Kyoto and its cap and trade are utopian dreams, doomed to failure. Feelgood stuff like banning plastic shopping bags, whilst ignoring the relentless march of our flawed CM. The finger in the dyke if you like, when we should have engineered the levy properly in the first place.

    Take GW for example. Now theoretically, to achieve 60% reductions by 2050, you need all countries(jurisdictions) to agree to implement any agreed policy. As to the right policy, be it cap and trade or straight carbon tax, it’s only logical that it be applied to the point of extraction of fossil fuels at the mine or well head, rather than when the stuff is trucked all over the place and finally burnt. Even that is not happening with Kyoto signatories now. Who will administer and police even that simplest scenario? It’s got buckleys chance of producing any desired outcome without that, not to mention the pipedream of world kumbaya in the first instance. That’s the rub. Forget the metoo with utopian dreaming and concentrate on what we can achieve in our own back yard, as an exemplar for the rest of the world to follow. This blueprint offers us that and furthermore, if by some stunning breakthrough in nanotech or fusion power, we do produce that nirvana of clean energy, will all our problems be Solvered? Not with our current CM it won’t. Well if that’s the case, let’s get cracking on one that will and can be an exemplar for the rest of the world to follow. And follow they’ll have to, because if they don’t, then with no form of taxation in this safe Asia Pacific haven for capital, other than taxing the resource and carbon footprints of their head offices, the world’s multinationals will soon wake up. Who cares who owns the wealth if it’s held in the right form, or they pay their rightful dues to exploit any new resources. FIRBs, tax havens, transfer pricing, the army of dodgy tax accountants and slick lawyers and the like begone. That brainpower will be needed for more environmentally productive pursuits. We have the wherewithal and the resources to lead the world. The way we swallowed GST reform of the WST tells us that. It’s time to challenge the world to a Green Olympics and history screams at us, it must be market based.

  23. observa
    January 12th, 2008 at 00:54 | #23

    Ah well looks like that went over like a lead balloon, but to use Gareth’s defence it seemed like a good idea at the time. It was a bit of a concept design, a bit like the new parliament house, which is not to deny the army of architects, engineers and tradeys needed to really kick it into shape. Anyway, perhaps the object of the exercise was to throw some light on the notion of various constitutional marketplaces we could choose.

  24. January 12th, 2008 at 11:30 | #24

    Well the new parliament house was a good idea. Pity about the execution.

  25. January 13th, 2008 at 01:47 | #25

    Perhaps we can build the next parliament house on Nauru? :)

  26. observa
    January 13th, 2008 at 05:35 | #26

    As I recall, Capitol Hill was just a bunch of trees before all those architects, engineers and tradeys made a govt bundle out of it. I wonder whether they squandered it all on Earth Sanctuary Ltd shares or the relentless march of Tuscan MvMansions. Still, if it was the latter, at least they won’t be bringing the shopping home in poly shopping bags soon. They’ll probably be free doggy doo bags.

  27. John Greenfield
    January 13th, 2008 at 09:41 | #27

    gerard

    Capital is the direct beneficiary of most public expenditure on infrastructure, law enforcement, R&D.

    And what is the source of that “public expecnditure?” Money doesn’t grow on trees, you know. ;)

  28. Ken
    January 13th, 2008 at 14:25 | #28

    Wouldn’t efficient use of public money be mostly about management? Even if there are so many instances of the public purse being rorted, the application of good systems of management ought to be able to prevent much of it – contractual arrangements that don’t allow for endless cost overuns for example. Aren’t such arrangements already in place or do gov’ts continue to go on allowing and paying for them because the company directors or union affiliated workforce are members in good standing of the current political party or mates of the current power brokers and/or are big contributors to party fundraisers? I’m not convinced it’s intrinsic, just a matter of “how things are done” tradition that allow public money to be squandered.

  29. January 13th, 2008 at 21:15 | #29

    In Johns paper he said:-

    Social democracy is built on the idea that as members of a society, we have an obligation
    to look out for each other. We also have a legitimate expectation of help from society when
    we are in need of it. In an increasingly diverse society, this kind of social solidarity cannot
    be assumed to exist automatically.

    This seems to be saying in the one breath that we ought to be social democrats but increasingly we are not.

    The idea that we are “obligated” to look out for eachother needs serious qualification. And who gets to do all this obligating anyway?

    I suppose that discussion is difficult when the disagreement is about core axioms.

  30. Nick K
    January 13th, 2008 at 23:33 | #30

    I agree that one of the problems with Quiggin’s paper is that it is too full of broad generalisations and assertions, while it is short on specific arguments, logic and evidence. Consequently, one has to read between the lines to work out specificly what he is arguing for. I guess if you avoid making more specific detailed arguments it is easy to avoid being proved wrong on any point.

    The main flaw in the paper is that it focuses solely on the benefits of government insurance, while ignoring the costs. The message of Quiggin’s paper seems to be that we can simply rely on governments to protect and provide for people with no economic or social downside. This is socialist fantasy parading as sound economics. The main job of economists is to identify the costs and benefits of policies, so that people can make an informed choice about policies. Simply identifying benefits and ignoring costs is the exact opposite of sound economics.

  31. Ernestine Gross
  32. gerard
    January 14th, 2008 at 18:35 | #32

    #27

    Money doesn’t grow on trees – tell that to “deficits don’t matter” President Cheney. As far as I know the source of public expenditure is either taxes or debt (foreign or domestic bond-buyers). Taxes come out of income (wages and salaries), consumption (VAT/GST) or profits – and the composition of the various tax sources will determine to what extent government spending can be considered ‘redistributive’. The profits of big business are often taxed at a disproportionately low rate relative to the benefits that they receive from government expenditure – indeed Business welfare often comes in the form of tax breaks that they demand from the bought-and-paid for political class in return for investing in a given place (e.g. marginal seats). This does not necessarily mean that the money is purely being ‘squandered’, as the investment often does generate jobs and wealth, however it does mean that the skewed distribution of wealth in society is not always made better by government spending, but can just as easily be reinforced or worsened. In the decidedly non-social democratic rightwing paradise of the United States of America this takes place on a scale that is pure theft, since the massive and ever-increasing government expenditure is paid for by public debt. It is essentially a redistribution of wealth from the public at large to the overclass. It was a fraud when Reagan did it (Reagan’s budget director David Stockman admitted as much) and now it is an even more transparent fraud.

  33. Nick K
    January 15th, 2008 at 13:38 | #33

    “The profits of big business are often taxed at a disproportionately low rate relative to the benefits that they receive from government expenditure.”
    This is a remarkable assertion. Are you really suggesting that corporations receive more government expenditure than what they pay in tax? Is there any evidence to support this? If you compare how much companies contribute through corporate taxes (and payroll tax) relative to direct expenditure on business, big business would only get a small amount back. This doesn’t even consider that businesses employ most people who in turn pay income tax, while they also collect most GST, excise, etc. If large businesses were to fold the collection of these taxes would become much more difficult and the revenue base would also decline.

    It is true that some businesses engage in rent-seeking activity such as lobbying for tax breaks, restricting competition etc. in return for investment in politically influential areas. But the cost of this is usually borne primarily by other more efficient businesses, not by the poor or average workers. In any event, all this proves is that governments are less capable of managing resources due to political pressures. If taxes and regulations were reduced it would also reduce the economic incentives for this sort of rent-seeking activity.

    As for the United States, the problems with the budget deficit are the result of excessive government spending rather than the wealthy paying less tax. Since the Bush administration started cutting taxes in 2001 government revenues have actually increased substantially (including income tax from high income earners). Yet spending has increased more dramatically. I believe that between 2001 and 2006 federal expenditures increased by 45%. The evidence shows overwhelmingly that it is excessive government spending, rather than tax breaks for the wealthy, that have caused the budget problems.

    It also should be noted that the US federal tax system is more progressive in practice than most other countries. I believe that the top 1% of income earners pay around 37% of federal income taxes, while the bottom 50% of earners pay just 4%. Also, the wealthiest few percent of the population pay the bulk of federal estate taxes. Because there is no national VAT or flat consumption tax, the overall tax system is far more progressive. Due to things like tax breaks for dependent children, many low and middle-income households pay little or no tax. This is not exactly a “decidedly non-social democratic rightwing paradise”.
    Even though the US has less public expenditure than many other developed countries, the cost of funding that expenditure is more strongly targetted towards the more affluent.

  34. gerard
    January 15th, 2008 at 22:27 | #34

    Thanks for your comments Nick K, I’ll be the first to admit that my understanding of economics is rather half-baked and without formal training beyond first year undergrad, so I appreciate any informative input. As regards the remarkable assertion that you quoted, I didn’t mean direct subsidies to corporations in general (although there are some such cases especially in the politically connected high-tech defense industries to which about half of the US federal budget is directed), but simply the fact that most business that takes place depends on the physical, legal, social infrastructure that government provides. without government involvement, long-term investment in technological research would be too risky and costly, and critical industries can usually expect government assistance if they are ever in serious trouble like the Northern Rock bailout for example. I see big business and government as being dependent upon each other, not working at cross purposes as per the Ayn Rand worldview. every country with a record of successful industrial development has had an interventionist government that protected and subsidized critical infant industries, and famously pro-business administrations such as Reagan and now Bush never actually reduced the overall scale of government involvement in the economy, just redirected its benefits. With regard to America, it is not surprising that the rich pay a greater overall share of taxes and the poor a lesser overall share than in other countries that do not have such stark inequalities of wealth. the US poor also ‘pay’ in terms of the lack of medical coverage (which kills thousands every year) and welfare benefits that citizens of other industrialized countries take for granted – this is what I mean by “decidedly non-social democratic”. my point is that this lack of social-democratic programs is not a result of the budgetary discipline that is supposedly so important to the Rightwing; there is no lack of government spending in the US – it is just being spent on other things (most notably an extremely wasteful war), things that don’t benefit the poor but often do benefit big business. Goverment spending far exceeds government revenue, and whether this can be blamed on too much spending or not enough revenue is a rather fine distinction I would think. US government revenue and spending have both been consistently increasing in absolute terms over the past six decades (as with most other industrialized countries), but as a share of GDP they have rather consistently hovered around 20%. The sharpest dip in government revenues during this long period came during the first few years of Bush II’s term when he gifted the top 1% with huge tax cuts while sharply ramping up government spending – leading to a huge expansion of the deficit (although not as big as Reagan’s relative to GDP). I’d believe that government revenue is up on what it was since that time, which was in the middle of a recession, at least if you are talking in absolute terms rather than relative to GDP, but that doesn’t really prove that the top 1%’s tax cuts were good policy, especially considering the enormous extent of the spending increases. The end result is a redistribution of national wealth in favor of the rich. I don’t know what the top 1% are doing with their tax-cut money (buying government bonds is probably one thing) but I would suspect it’s mostly being put into financial speculation and bloated hedge funds (contributing to the current instability) rather than into productive long-term investment. In other words it looks like it’s going toward financial capital rather than physical capital, contributing to a savings glut/investment deficit. This abundance of financial capital has lowered interest rates and created a boom in speculative property investment, however there has been an overall decline in nonresidential private investment which does not bode well for future economic growth and proves somewhat that these tax cuts for the super rich do not benefit society as a whole – and now with the latest financial crises there is talk of more recession and government bailouts to boot! So overall I would say the Bush Administration’s policies have been terrible and the whole conservative ideology that it is supposedly based around is simple a trojan horse for upward wealth redistribution, however as I noted at the outset I am not an expert and there are doubtless many others who can make the point better than I can.

    Here is an interesting graph showing where all of this debt spending is going:
    http://mibi.deviantart.com/art/Death-and-Taxes-9410862

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