Home > Economics - General > The Australian case for nationalisation

The Australian case for nationalisation

January 25th, 2009

The speed with which bank nationalisation has risen to the top of the policy agenda has found the economics profession largely unprepared. The literature on property rights that developed in the 1970s produced a range of arguments in favour of private as opposed to public ownership which had at least some influence on the widespread adoption of privatisation policies in the 1980s and 1990s. Although subsequent theoretical and empirical developments, such as the discovery of the equity premium puzzle and developments in agency theory cast doubt on the claims of the original literature, the profession had moved on, and showed little interest in revisiting the issues. As Joshua Gans observes,

the main contributions have come from Australian economists who did this research a decade ago only to be told by international journals that as privatisation had occurred everywhere by then, no one was interested in the conditions under which government ownership would be preferable.

and notes “I guess that view is wrong.” Unsurprisingly, I was among those who tried, with limited success, to interest the international profession in this question.

Looking at the history of the issue, it’s also not all that surprising that such debate as there was took place mainly in Australia. Until very recently, the economics profession has been dominated by the US, where public ownership is rarely part of policy debate, and by the UK, where the advocates of privatisation were dominant from the start. Australia is typically among the primary export markets for UK policy ideas, and this was certainly the case with privatisation. In Australia proposals for privatisation ran into serious political difficulties which created room for a critical analysis of central elements of the case for privatisation.

It rapidly became evident that the idea that privatisation was a method by which governments could raise money was not, in general, true – the earnings foregone through privatisation were often worth more than the sale price. And simplistic claims about improved efficiency only worked well for firms operating in competitive markets with little needed for regulation. Unsurprisingly, perhaps, public ownership was concentrated in industries with a high degree of natural monopoly and other problems that necessitated continuing government involvement.

Australia has made some notable contributions to economic thought, particularly the work of Trevor Swan (arguably the most significant economist never to win a Nobel prize), Colin Clark on national accounting, and before that the “Australian case for protection” developed by the Brigden Commission and later formalised as the Stolper-Samuelson theorem. In the 1970s, the “Gregory thesis” was an independent analysis of what became known internationally as “Dutch disease”. As these examples suggest, we tend to suffer a bit from being on the far side of the planet from the main centres of activity in the profession. It will be interesting to see if the Australian case for nationalisation gets any recognition now that the idea is in vogue in the Northern hemisphere.

I’ll try to post a list of useful references on this topic before too long.

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  1. El Mono
    January 25th, 2009 at 23:28 | #1

    Australian Economics sounds to much like Austrian economics, perhaps?

  2. Fozzy
    January 26th, 2009 at 00:17 | #2

    Interesting analysis, as a non-economist, I find your blog provides a great insight into current thinking in the field.

    This piece however, you had the jargon setting a little too high. I’d be interested to hear what the two ideas: “equity premium puzzle and developments in agency theory” mean – particularly in the context of the nationalisation debate. Similarly the theorems and thesis of the last paragraph.

    Despite finding myself over my head on this occasion, I found the observations interesting.

  3. jquiggin
    January 26th, 2009 at 05:25 | #3

    El Mono, this thought occurred to me too, and I was going to write about some similar confusions (there was a notorious one involving glycerol in wine) but I couldn’t find a good link.

  4. Don Miller Robinson
    January 26th, 2009 at 06:30 | #4

    As always, your blog tweaks the neurons most agreeably. Any chance of a tad more on “the discovery of the equity premium puzzle and developments in agency theory”
    In a past life while touring in a rock band, I actually caught a Dutch disease. While curable it was definitely most irritating.
    Thanks JQ!
    Una mente, uno consilio ;)

  5. Tony G
    January 26th, 2009 at 07:12 | #5

    A regulated private monopoly is all ways a better model than a self regulated nationalised one.

    Governments should primarily regulate. If government concentrated on regulating well as opposed to becoming an excessive government, where they try to do everything, yet do none of it well, which is what has been happening, then we would’nt have this unregulated mess in the financial markets.

  6. Hermit
    January 26th, 2009 at 07:55 | #6

    The case for nationalisation has been extended to energy companies as well as banks. In the US attempts have been made to ‘decouple’ private profits from amounts of electricity and gas sold to customers. Essentially the firm has to be compensated for giving up higher sales. It has been suggested if there is no longer a requirement for an equity return then the task would be easier. That task would then become to manage rationing rather than make a profit.

    Instead the department of energy supply will provide you with just the amount of electricity and gas it thinks you should have. This could be a bureaucratic nightmare but then the private profit maximisation model doesn’t work so well either.

  7. Chris Warren
    January 26th, 2009 at 08:34 | #7

    Nationalisation/public ownership (in itself) is not useful.

    I am not sure where this concept comes from, but utopian socialism come to mind – however they were calling for cooperative ownership.

    Karl Marx indicated that “expropriators need to be expropriated”. He also indicated that capitalism was based on an original privatisation of common means of production (eg enclosures).

    But the great problem was not this – this was just the environment.

    Consequently, undoing privatisation and using taxfunded welfare to counter expropriation never solves the real issue.

    Unfortunately a State run, and public owned, or a nationalised enterprise can still operate on a capitalist basis, issue debt, cut costs, trick workers, suborn politicians, hire thugs, run roughshod over rights, in a lust for maximum profits.

    It is the debt/profits nexus that is the problem. A small business person who owns all their own property but only makes a wage, creates no economic crisis, but a nationalised enterprise seeking to maximise profits destroys society.

    Forget nationalisation – look deeper.

  8. observa
    January 26th, 2009 at 08:56 | #8

    We live in interesting times as Obama is somewhat critical of
    “reports that we’ve seen over the last couple of days about companies that have received taxpayer assistance, then going out and renovating bathrooms or offices, or in other ways not managing those dollars appropriately.”
    As Greg Mankiw asks somewhat rhetorically, what’s the difference in macroeconomic fiscal stimulus between a local bank branch of a head office in receipt of TARP funds spending $20k on remodelling the branch bathroom, or lending it out to a homeowner to do likewise? Presumably Rudd is about to do likewise with his ‘Property Fund’ and the latest report in The Oz that the Govt is considering topping up manufacturing workers wages for those being forced to use up any annual and LS leave and RDO entitlements and ultimately going part time with manufacturing shutdown periods. That $4bill to save 50,000 construction jobs is $80,000 per job which raises the obvious that shouldn’t the Govt pay all firms to retain workers laid off due to the recession? After all it’s only a fiscal deficit measure to tide things over until the good times return and it saves trying to pick winners. Just scoop the losers up under the Govt’s protective wing temporarily.

  9. Salient Green
    January 26th, 2009 at 09:29 | #9

    Nationalisation makes sense on the ‘sell high, buy low’ rule alone.

    Government can run an enterprise well if it wants to through well set up trusts, as our irrigation trust is a good example.

    What future is there for capitalism anyway?

  10. January 26th, 2009 at 12:31 | #10

    When the profit motive, which is supposed to be the driver for the efficiency of private ownership, collides with accepted social objectives, then in the words of the song “something’s got to give”.
    Electricity is one example. Even in the days of semi-privatised electricity, these utilities were providing incentives for all-electric homes and spruiking the advantages of air-conditioning, which meant more electricity used. And governments were offering ridiculously cheap power to attract aluminium plants and the like to their regions.
    More than three decades ago there were those warning about the potential dangers of not recognising the finite nature of energy resources or the thermodynamic principles in the best uses of different forms of energy.
    For example, Barry Commoner’s “The poverty of power. Energy and the Economic Crisis” was first published in 1976 by Jonathan Cape. It said, among many other things, that electricity was an inefficient power source for heating (hot water or stoves). Even back then Commoner suggested electricity was fine for cooling air-conditioners that were driven mechanically by a compressor but was wrong for heat-operated air-conditioners (and presumably reverse cycle air-conditioners).
    I don’t remember any electricity or gas utilities heeding these warnings.
    Now, we have the concept that using air-conditioning on hot days is bad, unless you are rich enough to afford it (Perhaps, though, it would be preferable to eliminate the heating capacity of air-conditioners and rely on gas for heating, making the old-fashioned air-conditioners cheaper to use for cooling.). As I understand it, those railing against air-conditioning do so on the basis of the power surges that occur on hot days.
    Today all utilities – gas, electricity and water – are promoting the benefits of lower use of their products. The catch in this is that they seek higher prices for the sales forgone, even when they are in full or semi-government ownership. The regulatory bodies, such as IPART in NSW, then try to reconcile the irreconcilable in the free market system – that the object is to set a price for a product without having the benefits of scale of extra sales.
    Before people get too carried away with the notion that prices have to be set to reflect the scarce resource, perhaps we should examine past practices when water, gas and electricity were provided at excessively cheap prices to encourage industries that needed to use them extensively. The time has surely come to end these concessions before asking the average household consumer to continue to subsidise them.

  11. Jill Rush
    January 26th, 2009 at 14:41 | #11

    Sir Thomas Playford (not a socialist) nationalised the electricity market in SA to deal with the inefficiencies of a privatised market. He wanted to develop an industrial capacity in the state and recognised that the privatised delivery impeded these plans. Of course as JohnL points out the inbuilt cheap prices are still there in the form of differential tariffs for industry and the consumer.

    Sometimes however having a great deal of distance between ourselves and the centres of economic thought can be a good thing as we don’t just go along with the crowd and certainly even in our privatised industries there are more expectations about service delivery than overseas.

    There were the economic arguments for privatisation but there is also the political will to get rid of a responsibility and be able to blame a private provider for failure. The public has not accepted this, which has caused problems for the political class, as once an activity is privatised politicians often have little ability to control outcomes whilst still being held responsible by the public because of their failure in the regulatory role.

    This leaves the question how can a government regulate itself as a provider? This has been one of the biggest reasons given for privatisation; that the regulator needs to be independent of the delivery arm. This conveniently ignores the other issues such as market manipulation, lack of competition and other far greater negatives.

  12. nanks
    January 26th, 2009 at 14:58 | #12

    Unless the enterprise is run in an open and transparent manner, with full disclosure of meetings, policy decisions and so forth, then eventually the management will find ways to attract greater and greater power and privilege to themselves. Nationalised or not.

  13. Alanna
    January 26th, 2009 at 15:14 | #13

    What I would like to know with nationalisation. Whats the government going to do when the government officials appointed to the bank board tell the government they cant let them know whats going on because it would be contrary to the corporations legislation or commercial in comfidence or some other smokescreen? What will the government do when the government officials on the board go along with huge pay rises for the executives? Not enough control and the government will set themselves up to be “had.”

    I dont trust the partial privatisation or the partial nationalisation idea. Mixing private and public sector interests organisationally unravels more often than not. Too different purposes – and they are irreconcilable. Nationalise the bank in entirety or let the bank fail. The financial sector needs rationalising and its going to happen whether we like it or not. Financial institutions multiplied when the boom was running (but now there are simply too many of them). Or make it a requirement they can only lend if they have a pool of deposits and let firms lending on creative debt instruments go to the wall.

  14. Chris Warren
    January 26th, 2009 at 17:51 | #14

    I agree with nanks.

    I would want such open enterprises encouraged through land rate, and payroll tax concessions but with heavy taxation of any surplus beyond a moderate rate we could expect to be sustainable.

    They would have a competitive advantage in the wider economy for customers seeking a service, but not for capitalists seeking maximum profits.

    You can mix capitalist shops and open democratic shops and let customers decide where to go and for which to work for.

    So it is not nationalisation so much as a form of democratisation and transparency.

    If there is no real reason (or gain after tax) to maximise profits, then there is not much cause for increasing per capita debt – so greater economic stability for customers, producers and workers results.

  15. plaasmatron
    January 27th, 2009 at 06:36 | #15

    Thank Buddha that NSW didn’t sell off the electricity sector. No matter how inefficient it currently is there is nothing worse than a private monopoly trying to maximise profits by promoting electricity usage.

    All the talk of electricity used in aluminium refining, its cement production that is the killer. I just spent a weekend in Rome looking at 200 year old cement structures. There is a recent theory (http://www.pyramidofman.com/blog/how-were-the-ancient-egyptian-pyramids-built-part-4/)that the Egyptians used it in the pyramids. The nice thing about the egyptian stuff is that it uses hardly any energy, just sun-baked, and you can’t tell me that the big tombs in Giza don’t look a lot better than the concrete jungles we build for ourselves today.

    Portland cement production is one of the most energy intensive process around. The cement industry produces 5% of global man-made CO2 emissions. The amount of CO2 emitted by the cement industry is nearly 900 kg of CO2 for every 1000 kg of cement produced. You have to cook the stuff at 1450C. Little wonder that China’s electricity production has slumped at the same time as a slump in property construction (http://www.economist.com/world/asia/displaystory.cfm?story_id=12987564)

  16. BilB
    January 27th, 2009 at 06:38 | #16

    Tony G @5,

    I think that you would have to add to your premise “where such a privatised monopoly is in harmony with the public interest for service, price, distribution, contractural flexibility, resource consumption, and environmental best interest”. Take water for instance. We now face a situation where privately held contracts are standing in the way of resource realocation. For power (in following comments) where the drive for consumption expansion is at odds with revised environmental requirements. In telecommunications where fringe interests are unprofitable.

    I think that is far better to see the private sector as performing a modular functionality within a framework of national interests, where the degree of involvement varies with the sensitivity and stability of the sector.

  17. Chris Warren
    January 27th, 2009 at 09:26 | #17

    I suppose many will have seen todays Fin. Review’s article by David Bassanese about bank Nationalisation.

    What sort of economic nonsense is this capitalist system?

    Why use the worker-taxpayer and future generations, as a feather bed for capitalists?

    The government should let these banks wilt on the vine, and set-up a new stable public funded bank on a not-for-profit basis.

    Maybe then Westpac, National, Commbank, executives can get jobs cleaning the cars of those who they foreclosed out of their homes.

  18. Socrates
    January 27th, 2009 at 09:31 | #18

    I think there are two separate points here: the current circumstances which might warrant nationalisation of (some or most?) banks now and the general question of whether all chargeable services should be public or private. In both cases I think the answer is “it depends”. Of course, this is a big change from the previously fashionable view that “private is always best”. Like many fashions that was stupid view.

    Having worked in government when privatisations occurred I don’t think economics was ever the reason though. It was pure expediency – sell them to pay off debts. Economics was the excuse.

  19. Socrates
    January 27th, 2009 at 09:34 | #19

    When you think back to the stated reasons for the banking deregulation of the 1980s, was “success” ever achieved? Banking profitability rose, but did net costs to consumers ever really fall? Bank charges are a cost to the rest of the system. Did more “banking services” just mean more costs being born by the real economy? I fear so. They certainly haven’t reduced risks.

  20. observa
    January 27th, 2009 at 10:04 | #20

    What we’re talking around here is the never ending subtlety and tension between doing ‘well’ and doing ‘good’. Nowhere was that more obvious than the history of Freddie and Fannie and as one clever observer put it- Some institutions want to do well and some want to do good. When I hear of institutions that want to do both I reach for my wallet and so should you. Sage words and worth remembering given the current GFC and its roots.

    That’s the rub with the banking sector now in that they were expected to serve two masters and inevitably failed. OTOH they are specifically Govt licensed to deliver the coin of the realm through fractional reserve banking and via that mechanism deliver monetary policy but OTO to provide competitive financial services and loans against allcommers. Do good and well and now we’re all reaching for our wallets via future tax liability or serious inflation if central bankers are successful going down that rescue path. The gold price suggests the latter will be futile or even more ominous.

    Crisis management aside, in the longer term if private banks are to be licensed to competitively manage money supply and institute monetary policy they will need to be restricted to doing more good than too well. The money they issue will need to be founded in real value which means only loans with liens/mortgages over real property and goods. That would rule out any involvement with consumer revolving credit unless it was backed by mortgage over eminently saleable goods, RE or registered motor vehicles and perhaps certain high value machinery and equipment. Notice this would mean the banks restricting themselves to only lending on RE up to a fixed percentage of Valuar Generals’ valuations, bearing in mind historical slumps in RE prices. ie perhaps only 65-70% of current valuation, although given that longer term ethos, that slump margin may well whither away somewhat. With the fundamental money supply safe the authorities would be able to call on that safety margin to tighten money supply,(or else the bank requires more private equity of its own) rather than pushing or pulling on interest rates. There’s no reason why the private sector shouldn’t run such strictly licensed and prescribed banks so long as they’re not expected to do Govt ‘good’ with that loan money like Freddie and Fannie. That’s the preserve of specific Govt institutions for the purpose.

  21. observa
    January 27th, 2009 at 10:16 | #21

    I should have added the logical outcome of this is that Govt could guarantee such bank deposits and safely provide liquidity for any run on such banks, without threat to the taxpayer. All other financial investments and deposit taking institutions outside this sector would be strictly buyer beware.

  22. TN
    January 27th, 2009 at 10:28 | #22

    Socrates, who apart from the straw economic man who inhabits your imagination, ever held the view that “private is always best”?

  23. Socrates
    January 27th, 2009 at 10:46 | #23


    Several people I dealt with in government had that view on almost everything except defence and control of the money suppply – the classic Milton Friedman line. In one policy paper I read that went to Federal Cabinet, in my view it was fairly clear that the writer didn’t properly understand the economic definition of a “public good”. He/ she thought it meant publically owned. Hence my comment that many of the (political) decision makers didn’t care about the economics.

  24. O6
    January 27th, 2009 at 12:39 | #24

    Those who think that nationalisation is the only answer should go back and read ‘State of Denial’ by Chris Kenny, about the collapse of the State Bank of SA during the premiership of John Bannon. Bad management, secrecy, bail-outs, all the problems are there, just as they are now, globally. Good, independent, transparent regulation is part of the solution, but it won’t stop bubbles forming because there’s always a balance between fear and greed, and when greed is in the ascendant, judgement goes out the window.
    People don’t learn.

  25. Michael of Summer Hill
    January 27th, 2009 at 12:58 | #25

    John, if ever there was a case for nationalising a bank for fear of an economy imploding then ‘Hypo Real Estate Bank’ in Germany fits the bill. In Australia’s case time will tell whether or not our banks need to be nationalised.

  26. Socrates
    January 27th, 2009 at 14:07 | #26

    On Stephen Keen’s website there is a lengthy discussion under comments where Keen feels that inflation (of wages and prices) may be part of the solution to avoiding depression and deflation. Does anyone else have a view on that?

  27. Chris Warren
    January 27th, 2009 at 14:23 | #27

    As I recall, Keynes believed that inflation was necessary to reduce real wages.

    An as i also recall, Prime Minister Pitt, also unleashed inflation to reduce real wages.

    So it is an old trick. The Accord(s) was a modern variation.

    Inflation reduces real wages more than real prices because wages are set by agreements (often tri-annual).

  28. Alanna
    January 27th, 2009 at 15:44 | #28

    JH and GB and MT and RR and MF and a whole lot of their followers.

  29. Alanna
    January 27th, 2009 at 15:54 | #29

    15#plaasmatron says
    “Thank Buddha that NSW didn’t sell off the electricity sector. No matter how inefficient it currently is there is nothing worse than a private monopoly trying to maximise profits by promoting electricity usage.”

    Do you honestly think Barry Ofarrell isnt going to do this. Thast how much we dont understand plitics. Its a liberal party agenda. The only reason Barry didnt vote for it was to take down Moris Iemma. I was happy about that but dont for one minuted think it wont be high on the mibs agenda when they get in. We have about three years. Id like to think otherwise but it aint going to happen.

  30. Alanna
    January 27th, 2009 at 15:59 | #30

    oops – many spelling errors in previous post (sons laptop).

    Electicity privatisation in NSW will be high on the liberal party agenda if they get in, which they will in NSW. Thats the problem – both the libs and labor want privtaise electricity because they both follow the VERY SAME right wing ideology and that ideology is complete rubbish. Vote to mke your seat marginal is the best advice I can give – vote green or independant until they start listening to us and not their”out of touch” party platforms.

  31. Socrates
    January 27th, 2009 at 18:37 | #31

    Alanna 28

    I agree the politicians follow that thinking (private is best) but I was trying to imply that even some (not all) economists and many “policy makers” in government held the view too. I can think of one very senior (PhD) economist in my field who was quite explicit about it. He was not alone in that view. Some dissented but that was often a way of ensuring you would never rise very far up the ladder in the line departments I had experience of. I think some of the better economists in Treasury did dissent, but they often had to bite their tongue.

  32. TN
    January 28th, 2009 at 02:09 | #32

    Socrates and Alana,
    Working from within government, I think you are defintely having yourselves on. Even at #23, Socrates, you step back from your original claim.
    I doubt that any serious policy practitioner within government thinks now, or has ever thought, that “private is always best”, or anything like it. Certainly, all the economists I know within government, and that is many, have an approach of weighing up the pros and cons of government and private provision in any particular set of circumstances. You are simply continuing to attack straw economic men of your imagination’s own creation.

  33. Chris Warren
    January 28th, 2009 at 08:28 | #33

    have an approach of weighing up the pros and cons of government and private provision in any particular set of circumstances.

    Sorry TN, but this is driven by the policy objectives of government as relayed by Ministers to Secretaries to Departmental Group/Division managers.

    In any case the economic theory taught at universities, including modelling, is in itself contestable by those who want a debt free economy and fair trade.

    Government economists undertake their supposed balancing of pros and cons in an environment biassed by the dogma of wage-inflation spiral, tariff fallacies, and their modelling is incompetant which they explain away as ‘externalities’.

    Economists cannot predict next years growth rate, or CPI, within half a per cent when the magnitude is around 4.

    Economists only expect things will trend along the same lines as past performance and never predict a turning point (except by accident).

    Economists spend most of their time explaining why they were wrong in the past.

    The only solution they have for their so called balancing of pros and cons over the last 100 years is – ‘bugger, get more debt to TARP over the mess’.

    I have lost count of how many trillions of dollars are now being invented to help a world full of economists supposedly balance their pros and cons.

  34. Socrates
    January 28th, 2009 at 09:28 | #34


    Perhaps the problem is timing and arguments from anecdotal experience. In my original post 18 I said that view (private is always best) was “fashionable”. I knew then that not all economists believed it. That was my experience of ten years in State and federal government departments and I stand by it. Others may have experienced different people and formed a different view. Nevertheless I can still recall the privatisation push in the early years of the Howard government and I consider that my statement is an accurate reflection of thinking I encountered that was widespread at that time.

    It is now a few years since I last worked in Federal government so perhaps things have changed since. (Hopefully so.) Also I accept that I can only judge from economists I dealt with (mainly in line agencies, not Treasury or DOFA). Hopefully professional economists in Treasury and RBA know better. Even so, I think economists often get selective memories at these sort of times. When I first studied undergraduate economics (late 80s/early 90s) the subject in economic philosophy wasn’t even taught. The view that “private is always best” SHOULD be a straw man, but it was a widely believed one in my experience of government. Perhaps I was just unlucky.

  35. Alanna
    January 28th, 2009 at 14:30 | #35

    It goes further than that – for the past twenty years some economists have sought to keep it under wraps that they were Keynesian in our universities because Keynes has been a dirty or unfashionable word. Well thank goodness thats now coming to an end with Obama fighting for Keynesian initiatives (and yes we now hear the same tired arguments – that the private sector is the fount of all wealth – that when government spends on infrastructure “they cant see how a bridge or road will help because what matters is lending ipso facto give to the banks instead” – the same damn banks that have been gambling to the max – we are also hearing how “oh dear when government spends its just inefficient because its a patchwork approach of throwing here and there and thus its inconsistent” etc bla bla. Im in the US now and all the repblicans are out for more money “for lending” – they just dont get it – they also need spending because people do not want to borrow in this mess. Last thing they want to do.

  36. Alanna
    January 28th, 2009 at 14:34 | #36

    Then TN #32
    Can you explain how we moved so far down the privatisation road in the past ten years – or did that happen despite the advice of the public sector? In that case where are the checks and balances on governments like Howards – or did he do away with them ? me thinks the latter? He overrode a lot of public sector independent advice as far as I can see? So how did he get away with it? Have the departments all cowed into a corner?

  37. Ben
    January 28th, 2009 at 14:50 | #37

    um… it’s not april 1st John.

    There’s another Ben already commenting, so you may want to change your handle. As regards the date, read today’s (or any recent day’s) NYT and WSJ . I imagine by 1 April, the spoof headlines will be something like “Restoration of free market capitalism announced” JQ

  38. Tony G
    January 28th, 2009 at 15:14 | #38

    Alanna said

    “where are the checks and balances on governments”

    The only check or balance you can have on government is to have less of it. Governments are self regulating monopolies that grant themselves a pay rise every year, perpetually bloating their way into excessiveness.

  39. nanks
    January 28th, 2009 at 15:43 | #39

    @Tony G I don’t fully agree Tony – I think if we limited the length of time a politician can serve that would go some way to restricting the accretion of power to individuals. If we similarly limited the holding of power in public service positions that would help as well.

  40. Alanna
    January 28th, 2009 at 16:16 | #40


    Ahhhh not so Tony. Let me see how you can do away with the checks and balances of government? You can sack six of the nations 18 public service department sectretaries when you come to power. You can sack the head of the prime ministers department 6 months later. You can replace them with political appointees. You can centralise power to the prime ministers office – you can give ministers power to override the advice or decisions of public sector departments. If I recall rightly Brendan Nelson, despite having no qualifications to do as much, was given the power to override decisions of the ARC re funding for university research. He did in fact override ARC decisions prompting a strong objection from the VCs committee. Why? he didnt like the sound of the research outline.

    Yep – you can Tony and when you do it leads to an autocracy and undermines a democracy. We have public sector checks and balances to stop politicians assuming autocracies Tony but JH thought he would take it any way by changing legislation designed to protect the independence of the public sector and the role and function of ministers and their limited powers over senior bureaucrats (legislation which of course is designed to protect democracy).

    Your criticism of government is all wrong Tony. You should be critical of those who criticise the role of the public sector.

  41. Tony G
    January 28th, 2009 at 20:44 | #41

    Alanna. said

    “Let me see how you can do away with the checks and balances of government? ”

    Since Federation the total public sector has risen steadily from 6% of GDP to 33% today.

    Although, today to get the same services that the public sector was providing and charging us only 30% of GDP 15 years ago, the equivalent of 50% of GDP is being spent today.

    This due to the large scale privatisations that have occurred since the early 1990s eg. roads, transport, healthcare,education, utilities, pensions, utilities etc. etc. A large proportion of these services are now provided by the private sector, yet the public sector proportion of GDP did not reduce when these items were taken off the public sector ‘balance sheet’.

    What is the public sector doing with that 15% of GDP it is still taxing us for, sweet FA. There is a strong case to bring the public sector back down to 20% of GDP.

    Now where should the mass sacking start? Should we sever a tier or just sack 12% across the 3 tiers to keep those that like federalism happy?

  42. Tony G
    January 28th, 2009 at 20:50 | #42

    Nanks @ 38

    I agree limit the terms maybe to 8 years like the US president.

    With regards to the “holding of power in public service positions’, just have less of them so they can inflict less damage on the community.

  43. TN
    January 28th, 2009 at 22:26 | #43


    Alana, your latest defence of your position (in #36) relies inter alia on “a move down the road towards privatisation” being evidence of a view that “privatisation is always better”. This simply does not hold up. Given that you have previously mispresented the views and analytical of policy economics in the context of a discussion of competition policy on this blog, I see little value in continuing to engage with you on these matters.

    Likewise, Socrates at #34, you cannot get around your earlier over-reach by saying that you only called the view that “private is always better” “fahionable” and that “I knew that not all economists believed it”. You need to show that a significant number did. I doubt that you could find any who did. In this context, I am not confident, given your understanding of the nuances of economics evident from your other comments on this blog, that your interpretation of the utterances of the odd economist you came accross 10 years ago in a line agency can be relied upon.

    Finally, regarding Chris Warren’s anti-economics spray at #33, in which he mentions “fair trade”, “debt free economies” and other indicators of a rigorous mind at work, my response is that, apart from these words, I really can’t be bothered to respond.

    In any case, on past evidence, I doubt that continued exposure of the various logical fallacies and factual innacuracies underlying your attacks on policy economists in this blog’s comments threads will cause any of you to desist.

  44. Alanna
    January 29th, 2009 at 04:16 | #44


    It seems TN, that you resent certain arguments (such as my own) that suggest we may have gone too far down the privatisation road to the extent that public service provision and that the role of the government as an employer (and the fiscal stimulatory effect this can have on the economy along with the benefits to short and long term infrastructure) has been undermined eithin economic policy direction, over the past twenty five or so years in Australia. In short, I suggest, and its fairly well accepted, that there has been a paradigm shift to private provision, the use of competition policy (which I consider at odds with public purpose), and market provision as a dominant paradigm within economic policy direction. IF you dont want to engage on that – that is your decision. However if you disagree – where is your point?

  45. Alanna
    January 29th, 2009 at 04:29 | #45


    You quoted me thus in 43

    “Alana, your latest defence of your position (in #36) relies inter alia on “a move down the road towards privatisation” being evidence of a view that “privatisation is always better”.

    That is a misquote (of me at 36). I did suggest that the move towards privatisation implies a view that “privatisation is always better”.

    I, at no stage, suggested that. You inferred it and incorrectly.

    To be clear, what I am suggesting is that the move towards privatisation of public services and outsourcing of public sector operations, and applying competition policy iniatives (such as user pays charges between government departments) in Australia over the past 25 years or so, in general has been taken way too far, despite any views individual public servant economic policy makers may hold.

    I hope that clarifies your misinterpretation of what I suggested.

  46. Alanna
    January 29th, 2009 at 04:56 | #46

    Re Tony Gs #41 Tony G continues to quote percentages with no reliable sources given and calls for mass sackings of public servants

    (How about using the ABS Tony? Thats what they do.)

    Tony forgets the role of government is crucial to a well run democracy and apart from the stimulatory effects of public sector jobs, it also acts as a check and balance on politicians who seek too much power. There are processes that politicians need to follow (such as seeking independent advice from the buraecracy) that prevent them turning our democracy into an autocracy.

    The AWB scandal was a classic example. As a result of the appointment by Howard of “politically sympathetic” advisers, it enabled Ministers like Downer to claim they “were not informed” that bribes were being paid, despite senior public servants informing the ministerial advisers.

    As a result of these political appointments as they affected the AWB case, the law has now been effectively altered, to permit Ministers to absolve themselves of any responsibility by claiming “I was not informed.”

    Wrong. Wrong. Wrong. Another check and balance torn down by the politicisation of the public service.

    Our politicians should be accountable for what occurs under their watch in the departments under their control. That is what protects our democracy. To do away with the proper processes and procedures of the public service invites the rise of a situation where too much power concentrated in too few hands.

    As I see it there are three major benefits of a well run public service

    a) public sector employment
    b) the provision of vital public infrastructure
    c) to act as a check and balance to our political leadership; to protect democracy and to ensure political leaders act for the benefit of the majority and not for the interests of the few

  47. Tony G
    January 29th, 2009 at 09:13 | #47

    “percentages with no reliable source” table 27.19 TAXATION REVENUE AND GDP PER HEAD here The public sector giving themselves a pay rise every year since federation.

    “it also acts as a check and balance on politicians who seek too much power”

    Sounds like the fox watching the hen house, but I suppose burdening everyone with too much bureaucracy will stop anything happening at all, even “politicians who seek too much power”
    . .

    “a) public sector employment” = communism, we know how efficient that is.

    “b) the provision of vital public infrastructure”; In NSW it doesn’t even happen and in any case the private sector does it better. You would’nt want to go to a public hospital in NSW, thank goodness there is private ones.

    “c) to act as a check and balance to our political leadership; to protect democracy and to ensure political leaders act for the benefit of the majority and not for the interests of the few”;
    self regulating monopolies do not work and that is what the government/public sector is. Unfortunately they act for the benefit of themselves and not the majority

    THe best “check and balance to our political leadership” is to kick them out at the ballot box and every few years. The rest of the public sector should be culled just as often, unfortunately in the case of Australia’s public sector this has not occurred for a long time.

  48. Donald Oats
    January 29th, 2009 at 09:17 | #48

    Minimising government without an adequate criterion for an objective function, well that’s hardly a sensible approach to life.

    I’m in no way convinced that the market economy is “efficient” in the sense of optimising allocation of resources. The whole question of efficiency revolves around the choice of time horizon and of measures. Given the Dante’sqe descent into Hell we are witnessing today, I think this is rather damning evidence to the inefficiencies of the market economy. Governments too often get a bad rap.

    The Bannon era in South Australia merely demonstrates two things: i) Being both premier and treasurer is a courageous venture, and foolhardy in the extreme; ii) Public organisations, such as the State Bank of South Australia, can fail too. Especially when rebadged and run by Marcus Clark (where is he now…).

    A failure of a single government owned bank is treated as justification to privatise it (and other state government utilities such as power). A failure of several financial companies is treated as part of capitalism, so business as usual, boys. The contrast is poignant.

  49. Nettle
    January 29th, 2009 at 13:49 | #49

    Tony G at 38.
    “Governments are self regulating monopolies that grant themselves a pay rise every year, perpetually bloating their way into excessiveness.”

    And bankers haven’t indulged in excessiveness? Not to mention the CEOs of all the major corporations?

  50. Alanna
    January 29th, 2009 at 15:42 | #50

    I have here an example of bankers attitudes to the US bailout designed to unfreeze credit markets. In the first wave of US federal bailout money designed to loosen credi, some bankers had other ideas. John C Hope III, chairman of Whitney Bank, New Orleans, in an address to other Wall St royalty gathered at the Palm Beach Ritz Carlton said;

    “Make more loans? We’re not going to change our business model or our credit policies to accommodate the needs of the public sector as they see it to have us make more loans.”

    The author of this article asks “how’s that for arrogance? Mr Hope’s bank received $300 million in taxpayer funded bailout money.”

    The article quotes Mr Walter M.Pressey (president of Boston Private Wealth Management (a healthy bank with an affluent clientele) which received $154 million of US taxpayers bailout monies.

    “With that capital in hand, not only do we feel comfortable that we can ride out the recession, but we also feel that we’ll be in a position to take advantages of opportunities that present themselves once this recession is sorted”

    Author notes, “take advantage indeed. That, in a nutshell is what the plutocracy is all aboout: taking unfair advantage”

    At least a fiscal injection, even if it is patchwork in application, doesnt go into bank coffers to be sat on in the private sector in the wishful thinking that recipient banks can use the funds to buy some other bank cheaply later in the depths of the recession when the buying is cheap.

    Bailout funds need to be on the street now (as lending or spending) and working as fast as possible – and there is some part of that philosophy financial institutions are just not getting, even while they put their hands out eagerly for bailout money.

    No wonder they call it a liquidity trap.

    From: Wall St Times “the same old song” p.29 Jan 27th.

  51. Alanna
    January 29th, 2009 at 15:49 | #51

    Donald#49 – Tony G #47 has never stated what size he would like the government to be – apart from extremely small to preferably non existent (and perhaps that is ultimately too big for Tony).

    Tony? Any ideas on size of government relative to rest of the economy? Perhaps you would prefer the self regulating market based financial sector elites to run the economy?

  52. Michael of Summer Hill
    January 29th, 2009 at 15:58 | #52

    John, if I may reply to Tony G by saying you just might be wright for a change for the Richard Craniums in NSW Labor Right have done an excellent job of bucking up the State. Maybe its time the left are given the chance to wright the past wrongs. Thumbs up for John Robertson.

  53. Donald Oats
    January 29th, 2009 at 22:47 | #53

    As mentioned in #12 by Alanna, SA used to enjoy a public electricity function; unfortunately the privatise-it-if-it-isn’t-nailed-down mob told us how cheap power would be yada yada yada if we privatised it.

    Power isn’t cheaper; it went up in hefty jumps. Furthermore, supply is limited now (manipulated?) which means on hot days we can expect a number of suburbs to suffer load shedding, the euphemism for turning the power off.

    If you choose to live in Adelaide then pick a suburb with essential services. Steer clear of any suburb with no industry, hospitals or really big shopping malls, as they are likely to be on the list for load-shedding.

    Please, please bring back public power utilities.

  54. Alanna
    January 30th, 2009 at 03:12 | #54

    Just correcting source of my quote at 50# – its New York Times not Wall Street Times (what was I thinking?)

  55. Alanna
    January 30th, 2009 at 04:17 | #55

    I think they will go down the road of electricity privatisation in New South Wales, because its part of liberal platform to seek as much privatisation of public services as possible (ignoring the public good arguments because basically they dont think market failure exists). It will come undone, as the max profit motive wont see a need to maintain service to non profitable areas, and inflicts price rises on those with the least ability to pay, and in the end the government will have to renationalise it. We cant say “I told you so” just yet…but we will be able to later when the mess arrives. Unfortunately they wont even examine the South Australia experience. Its faith we deal with not rigorous analysis of the case.

  56. Socrates
    January 30th, 2009 at 07:24 | #56

    Donald 53

    Living in Adelaide I agree that power is neither cheap nor reliable. However the main reason for power loss is not supply – it is the condition of the grid, which was poorly or not maintained for most of the 90s. I am not in that field but engineering colleagues who are tell me that the current government does have a program to improve that but, as with old buckled train lines, it will take some years to catch up the backlog.

  57. Ben S
    January 30th, 2009 at 12:11 | #57

    So the plan is to overburden industry with tax and regulation and then when said industry can no longer function we call it capitalism gone mad and claim we need more regulation?

  58. Tony G
    January 30th, 2009 at 13:41 | #58

    Michael of Summer Hill @52 said

    “Thumbs up for John Robertson.”
    Add Roozendaal to that list.

    It is great see how people can be parachuted into a ministry without ever having to face the ballot box, it seems being appointed a union official will suffice, democracy Inc. NSW style.

    Alanna @ 51

    “Tony? Any ideas on size of government relative to rest of the economy?”

    As I said here @ 41

    “There is a strong case to bring the public sector back down to 20% of GDP.”

    To reiterate the point I was making @ 41.

    Since the early 1990′s the government has part privatised itself to the equivalent of about 10% of GDP and we we are now paying this to the private sector. The government is also still charging us for these services which it is no longer providing us. Considering it has not reduced the proportion of GDP it is slugging us, what is the government doing with the money? Hence, the strong case to bring the public sector back down to 20% of GDP.

    Alanna also said ;

    “Tony G continues to quote percentages with no reliable sources given and calls for mass sackings of public servants

    (How about using the ABS Tony? Thats what they do.)” see Table 27.19

    10% of GDP equates to about 30% of the public sector revenues. Alanna what 30% can we get rid of?

  59. jquiggin
    January 30th, 2009 at 13:42 | #59

    Ben S, as I said last time, I think you need to start reading the papers again. A lot has happened since 2006, or whenever you last looked at the news. The lightly taxed, deregulated financial sector that everyone was going on about back then has collapsed in a messy and expensive heap. Sadly (or maybe not) social democrats had nothing to do with bringing this about.

    And, please, no comments on how, by the standards of the planet Libertaria, Bear Stearns, Lehman and so on were groaning under the burden of an oppressive state. By any relevant historical standards, these institutions were effectively unregulated.

  60. Tony G
    January 30th, 2009 at 13:57 | #60

    JQ Said;

    “these institutions were effectively unregulated.”

    exactly, government asleep at the wheel (again).

  61. Alanna
    January 30th, 2009 at 14:04 | #61

    Tony G also omits that the tax percentage of GDP also reflects a disproportionate burden on paye earners but neglects to mention the likely tax minimisation schemes including the use of offshore tax havens that welathy firms and individuals are so fond of. If the scandals erupting over these are not an indicator of a need for greater regulation of the corporate form I dont know what is. Plus Tony G, its the corporate institutions themselves lining up with their hands out for government bailouts – that is more of the ordinary taxpayers money. Tony wants a smaller government in numbers, but a smaller government doesnt necessarily mean less Tax. It might mean more tax burdens on “those who DO actually pay tax in this country” if the government becomes politically disposed to the unregulated corporate form like Howards did.

  62. Alanna
    January 30th, 2009 at 14:08 | #62

    Profits MADE here can remain undeclared here and often do and I object to this. Transfer pricing to parent companies or transfers made to offshore tax havens happens worldwide and many corporate entities pay next to no tax on enormous profits. That is unethical greed and I welcome initiatives by governments to close them down. Tax should never be one rule for the rich and a more expensive burden for the poor by mutual agreement between industry power brokers and sycophantic politicians.

  63. Ben S
    January 30th, 2009 at 14:27 | #63

    And, please, no comments on how, by the standards of the planet Libertaria, Bear Stearns, Lehman and so on were groaning under the burden of an oppressive state.

    Um… why not? Seems fairly appropriate to me!

  64. Alanna
    January 30th, 2009 at 16:12 | #64

    Ben S # 63 Planet Libertaria got us into this mess. So Lehman was groaning under the weight of bureaucracy (and Bear Sterns and all else who failed?) Right Ben – so the dreaded government caused these financial firms to fail and not before they managed to live like kings on the company’s money for a decade and extract huge surpluses for remuneration of executives – Ben you are dreaming. Such rampant excess is not the sign of firms struggling under the weight of bureaucracy.

    You must be joking. There isnt a point you make that has any sense at all.

  65. Donald Oats
    January 30th, 2009 at 17:13 | #65

    Socrates #56, you are correct in that part of the electricity problem in SA is a matter of distribution. Bottlenecks constrain delivery of supply on the highest load days. However, lack of supply can occur due to a large discrepancy between demand forecast and actual attempted consumption. Record breaking heatwaves are a case in point.

    This is one of the many parts of Aussie infrastructure that CSIRO track under the auspices of quantitative risk management, I seem to recall.

  66. Ben S
    January 30th, 2009 at 21:37 | #66


    I don’t think I’ve actually said anything that could be described in any way as a point here so it’s no wonder my points aren’t making sense.

    By “Bear Stearns and all else who failed” could you possibly be talking about say… Fannie Mae and Freddie Mac? Those bastions of laissez faire capitalism. Uh huh.

  67. January 31st, 2009 at 01:59 | #67

    Is it always going to be a tug of war between privatisation and nationalisation? What about the mutual sector – building societies, co-operative banks, credit unions and emerging online financial institutions? I spent the 80s and 90s being opposed to rampant demutualisation. It struck me as obvious that building societies would be useful one day, when there was no clear commercial reason for a bank to hand out a mortgage. My dad used to reminisce about the days(early 60s) when you more or less had to beg the bank manager for a mortgage, and the building society had a huge waiting list. I fear we may be heading that way very soon. I’m not sure we need more economic arguments. We need people to set up again the financial institutions we have mostly lost. But I’m not particularly proselytising – I think it will happen anyway as people find it’s a realistic option.

  68. Alanna
    January 31st, 2009 at 03:29 | #68

    Do you alternate between Tony G and Ben S? Or are you two different perosnalities with remarkably similar views?
    I note you also quoted tax as a percentage of GDP risisng from 6% around the turn of the century to 30% now. In fact that is very misleading because around the turn of the century we had no curbing and guttering, no paved roads, no electric lighting in the streets and suburbs, no water or sewerage to the suburbs and some inner city areas were a cesspit of disease.
    Is that what you want low taxes for Ben? I dont know which private company you think is going to roll this infrastructure out. Optus wont even take cable up private roads in central locations let alone in outer suburbs or regional areas.
    No you would want it all and low taxes Id guess.

  69. Alanna
    January 31st, 2009 at 03:56 | #69

    Oh and no railways to many areas around the turn of the century did not yet exist. Railways that provided a huge surge in all sorts of support businesses. All this publicly provided infrastructure that the private sector benefitted from for most of the century (and continue to benefit from in the form of lower costs) but given their short term profit agendas these days now businesses still call for lower taxes (despite the benefit of lower costs from public infrastructure) because all they care about is short term share price movements.
    No tax reduction would ever be enough such is the greed out there.
    Example. One of Australia’s early entrepreneurs – a Mr Mort (of Goldsborough Mort) – estabalished Bodalla cheese making as one of his buisiness intersts last century when entrepreneurs still actually beleived in running businesses not scam and sham structures. He purchased the land on which he established tenant farmers who had shares in the company. It worked well as an industry participant for generations and was finally being headed by two grandchildren in their 70s when along comes a Mr Gazal in the ?(1990s) and convinces the tenant farmers he would reinvigorate the company by a takeover offer. He pays 7.2 million after conning the shareholders that he would inject “new vitality” and “grow the compnay” but instead he promptly asset strips the company by holding a mass auction of land and property. He sold out the tenant shareholders land from under them – some who had been there for generations and produced happily for the company. He made 17 million on the deal along with Trevor Kennedy who reaped approximately 1 million and an island on a river near by (worth 3 million) for advising Mr Gazal.
    Nice one boys.
    That is a speculative short term personal wealth grab that has nothing whatsoever to do with production and this is what so many of our supposed entrepreneurs sank to in the era of financial de regulation from the 1970s on. They destroy good production, other peoples lives, have no interest in running businesses or production at all and only act to increase their own personal riches and to hell with any sense of social responsibility. Our so called great entrepreneurs and business people these days are commonly found doing jail time but their wealth remains intact for the next dirty deal when they get out (and even when they are still inside) because they have shifted their assets to their wives and other family members who keep the home fires burning while they shuffle around in pyjamas on weekend or home detention (spare me).

    This is the fault of too small a penalty and too little regulation but neither Ben S or Tony G would see it that way, faithful servants to the notion of smaller governments and less regulation, that they are.

  70. Tony G
    January 31st, 2009 at 18:26 | #70

    Alanna said

    “Do you alternate between Tony G and Ben S? Or are you two different perosnalities with remarkably similar views?”

    sock puppeteer[ring] is illegal on this site.

    I disagree with your view on history. A lot of Melbourne and Sydney and the other capitals were well developed at Federation. The Sydney rail company built rail in NSW before the government did.

  71. Alanna
    February 1st, 2009 at 12:26 | #71

    #70 Check your history Tony. Schedvin documents public sector investment from federation on very well. Rail was still being built well into the 1920s and certainly kerbing and guttering and the rest I mentioned in the urban areas. Do look it up Tony, but as I sugested to you earlier – no tax relief offered to the private sector would ever be enough.
    The private sector do two things well – profit maximise and cost minimise but the best cost of all is one they can make disappear altogether. Those two skills say nothing whatsoever about distribution and investment in shared social infrastructure. There is no point whatsoever in having two or three companies building water pipes to homes for example when economies of scale in capital and labour can be better achieved by a monopoly – in this case a public monopoly. The roads you mostly drive on Tony were built by the government as were the water pipes you access every day. Of course they cant just be constructed and not be maintained for the rest of the century – so whinging about taxes neglects completely the benefits that taxes bring, provided those taxes are not being wasted. Oh and it would appear there is just as much waste in the private sector as there is in government if recent events are anything to go by.

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