‘Reform’ is the magic word

My column in today’s Fin. I should say that I didn’t pick the headline, and am a bit allergic to the use of “flaws” in policy discussion. No policy is flawless, so describing one as “flawed” doesn’t really say anything.

<h3>Reforms are full of flaws</h3>

As priests and magicians have always known, words are powerful. The right word uttered at the right time can indeed work magic, at least if the hearers believe it. The magical power of words is particularly evident in politics. In Australia, no word is more powerful than ‘reform’.

‘Reform’ means little more than ‘a change in form’ and, much of the time proposals for reform involve the reversal of previous changes, also presented as reforms in their day. But such is the power of the word that opposition to reform is unthinkable.

Since the 1980s, belief in ‘reform’ has been, quite literally, an article of faith for the Australian policy elite. This faith was formed on the basis of the cathartic experiences of the 1970s, when the older faith in rational planning by the public sector proved unable to deal with the economic upheavals of that decade. Faith in reform has proved utterly impervious to contrary evidence. The only answer to the failures of reform has been to conclude that more reform is needed.

The failure of reform is most dramatically evident in the infrastructure sector, and particularly for utilities such as electricity, telecommunications and water. The vision for these sectors as revealed by the reformers of the 1980s was an appealing one. The lumbering, overstaffed and inefficient government monopolies that had provided these services for decades would be swept away. In their place, reform would produce dynamic, innovative and competitive markets

The promised benefits were appealing. Consumers would not only get lower prices, but they would be presenting with a panoply of choices. Efficiency would be improved by allowing the market to guide new investment decisions.

The result would be a more dynamic and efficient economy. In making the case for the ‘Hilmer reforms’ in the early 1990s, the Productivity Commission estimated they would raise national income by 5 per cent. Other estimates were even more optimistic

And, for a while, everything seemed to go well. The first electricity contracts signed for business customers in Victoria reduced prices by as much as 40 per cent. Reformers promised that full retail competition would extend these benefits to households and small businesses.

Privatisation seemed to offer wins all round. Not only did governments collect large buckets of cash, but private owners promised new investment and innovation.

The fruits of reform were seen in the productivity statistics. The growth rate of multi-factor productivity, historically around 1 per cent per year, accelerated to 2.4 per cent in the mid-1990s, according to estimates released by the Australian Bureau of Statistics. Advocates of reform, most notably the Productivity Commission, did not hesitate to label this a ‘miracle’.

None of these benefits has lasted. The productivity ‘miracle’ turned out to be a blip. Although reform continued apace after 1998, multi-factor productivity growth slowed and even reversed. The gains of the mid-1990s surge were wiped out, and productivity growth returned to its long-run average rate, or below.

Privatisation has been a failure, most obviously in the case of telecommunications. Telstra’s infrastructure investment policy has been driven by the desire to extract the largest possible benefits from the system of regulation. The problems of the National Broadband Network can be traced, almost entirely, to the need to work around the obstacles created by the failed privatisation of Telstra.

But the failure of reform has been most clearly evident for electricity. Electricity price inflation has been consistently high for the last decade, and has now reached double-digit levels.

Electricity restructuring was misconceived in almost every possible respect. The vertical separation of the industry into generation, distribution and retail sectors created massive and economically counterproductive risk.

Reform encouraged distributors to run down the ‘gold-plated’ networks they inherited from the public sector, then produced huge price increases to finance new investment when capacity problems re-emerged. And, even though the issue was on the table by the early 1990s, the reformers ignored the implications of carbon dioxide emissions.

Despite this and other failures, the incantation of ‘reform’ retains its magical power. The politically and economically disastrous privatisation program in NSW was justified entirely on the basis that it was needed in order that reform could continue.

It is, perhaps, too much to ask that such an appealing word should be abandoned. But can’t we at least admit that the 1980s reform program has had its day, and look for some reforms more appropriate to the 21st century?

John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland. He is the author of Zombie Economics: How Dead Ideas Still Walk among Us

47 thoughts on “‘Reform’ is the magic word

  1. @Ernestine Gross

    “To what extent is the institutional environment (legal framework) linked to the financial economy instead of being linked to the real economy in various societies throughout history?”

    That is a most difficult question with an extraordinarily complicated answer (in theory). In practice, I suspect we can never answer that question anywhere near entirely. Some very large volumes have been written in the attempt to answer parts of it. (Marx’s Das Kapital Vols 1 & 2, Grundrisse and Keynes’s “The General Theory of Employment, Interest and Money” come to mind.)

    I favour turning away from such political economy theorising for a while and studying biophysical economics. It is the discipline which now promises to tell us most about what will happen next.

  2. @Ikonoclast

    The answer to Ernestines question in short is “far too extensively and intrusively at the cost to all non financial sectors”.

    My other response was lengthy and gave an explicit example but its in moderation.

  3. Capital controls, campaign donations and carbon dioxide Ernestine. All the big three Cs. need reform.

  4. Now that that great reformer, Greenspan, is no longer hailed Maestro after recognition that he messed so, here is some news about the fete-less fate of one of his sacred texts…
    Apparently “Atlas Shrugged”, the movie, has not been a spectacular success.
    http://latimesblogs.latimes.com/movies/2011/04/atlas-shrugged-producer-critics-you-won-hes-going-on-strike/comments/page/2/
    http://bighollywood.breitbart.com/jjmnolte/2011/04/28/exclusive-atlas-shrugged-producers-intend-to-complete-trilogy-cnn-msnbc-reject-their-ads/
    I suppose MSNBC, CNN and CNBC have decided they don’t want to be party to advertising a defective product.

  5. Now that that great reformer, Greenspan, is no longer hailed Maestro after recognition that he messed so, here is some news about the fete-less fate of one of his sacred texts…
    Apparently “Atlas Shrugged”, the movie, has not been a spectacular success.
    latimesblogs.latimes.com/movies/2011/04/atlas-shrugged-producer-critics-you-won-hes-going-on-strike/comments/page/2/
    bighollywood.breitbart.com/jjmnolte/2011/04/28/exclusive-atlas-shrugged-producers-intend-to-complete-trilogy-cnn-msnbc-reject-their-ads/
    I suppose MSNBC, CNN and CNBC have decided they don’t want to be party to advertising a defective product.

  6. I am not sure if you are being ironic or not, Ernestine. I seem to recall that you questioned the notion of an “energy theory of value” in the past (but I might be wrong).

    The key quote from that article is “The decline of energy available to do real work means we are all going to get a whole lot poorer over the next few decades.”

    You ask, “What is the most important reform?”, for the global economy. Clearly, the most important reform will be to reform our use of energy.

    1. We must use much less energy and in particular reduce wasteful use. Automobiles must be phased out and travel accomplished by foot, bicycle and mass transit. Rail and coastal sea freight must increase at the expense of road freight. The number of electric and electronic devices in houses must be reduced. Air conditioning must be phased out and replaced by smart design and naturally cooled buildings.

    2. We must switch from non-renewable sources of power to renewable sources of power, especially solar and wind.

    3. We must accept that our lives will be poorer and simpler and that several billions of excess global population will die before we can stabilise at a lower level. I, like most people over 55, will probably not be tough enough to survive this ten to twenty year transition.

    It will be a world for young and tough humans. In the words of Orlov when asked what will happen, “Some people can survive on bark and insects. The rest of us aren’t that tough.”

  7. @Ikonoclast

    That is the first half of the story. We ‘must’ do 1, 2, 3.

    But this means we ‘must’ have a economy directly opposite to what our corporations, politicians and academics want.

    It appears that popular opinion are being encouraged to adopt a ‘wait-and-see’ attitude, by interests who want to keep garnering their own wealth for a few years more.

    So unless some political breakthrough emerges, people will only support the necessary action on climate change when it is too late.

    Abbott and mining magnates, plus developers building concrete towers and expressways for cars whilst starving public transport, and ALP (and liberal) ministers still issuing oil and coal exploration licences whilst giving threadbare funding to renewables, are to blame.

  8. @Freelander
    Freelander. The black queen of laissez faire, Ayn Rand, was standing next to Alan Greenspan in the Oval office when he was first appointed by the Ford Administration.
    If the market smashes the movie Atlas Shrugged and its backers, I would be happy.
    Its miniscule compared to the damage her devoted disciple, the Messtro, caused. People are still fighting to fix the mess, and no we still dont have the absolutely necessary regulation of the hidden supercasino OTC derivatives market and it will happen again and again, as Brooksley Borne says, until we learn.

    What is galling is that when these mad princes of economic advice over 30 years to US governments during this time (Greenspan’s time… and his disciples Rubin and Summers) and their disciples (Geithner and Paulson and Bernanke) came face to face with the volcanic crisis of their own collective making in the GFC, what did they do?

    They called for the mother of all regulatory interventions – the bailouts, against all their deregulated free financial markets philosophies of the past 30 years. Against Ayn Rands own ideas. They didnt want to experience the bloodbath their precious market would have delivered to their free financial markets.

    The black princes didnt didnt quite have the guts for that… so they passed it straight on to taxpayers, ordinary people who lost their homes and their jobs across the globe, and who will spend years suffering the effects of the GFC.

    They say there are five financial industry lobbyists for every government financial economic adviser in the US even now. Where is the regulation of the OTC derivative market? Still not in place.

    The financial system in the US is still a mess and still beats with the black heart of Ayn Rand. I wonder if Ayn Rand had lived long enough would she too have said “I found a flaw in my philosophy”? She died in 1982. Ayn Rand was probably just one miserable escapee from a too heavy state run regime who lurched to the opposite extreme on the opposite side of the world and inflicted the equally dangerous ideology of laissez faire on the world, via Alan Greenspan.

    The butterfly effect in chaos theory.

  9. I was inspired by this Drum article http://www.abc.net.au/unleashed/561988.html
    and especially this quote by Tim Jackson.
    “The production of novelty [is] incentivised by the pursuit by the firm of expanding markets and achieving profits. [The last few decades have seen] a story of us being encouraged, persuaded perhaps, to spend money we don’t have, on things we don’t need, to create impressions that won’t last, on people we don’t care about, or worse still, who don’t care about us”

    We could redirect much of the energy and other resources we waste on the ‘novelty’ into building a sustainable society. Scented toilet paper would go. Air freighted American cherries would go. Poker machines would go. You could slash the pop music, film and fashion industries by 95% and they would still be producing more rubbish than quality.

    Make a list of all ‘novelties’ and tax them, heavily in some cases and put the money to good use transforming society physically and intellectually.

  10. No, Ikonoclast, I am not being ironic. I do not recall having been critical of the notion of an energy theory of value and I certainly don’t wish to leave an impression to this effect. (I may have made a comment on models which add an ‘energy’ factor into a neo-classical aggregate production function but this is not being critical of the research program.)

    I don’t know how much progress has been made in developing the ‘notion of an energy theory of value’ into theoretical models; there is a distinction and there is typically a lot of work between the idea and a theoretical model. To illustrate, there is a distinction between the notion of an energy theory of value and the statement that “energy is the true currency of the economy”. (This distinction can be seen in the Arrow-Debreu model where the notion of ‘value’ is a price system (a system of optimal weights for the specified model of a social system) from which ‘currency values’ can be derived. While using this model to illustrate my point, I don’t wish to signal that I believe this model is general enough to interpret an energy theory of value as a special case. But this model is good enough for realising that if our monetary prices would be close enough to the theoretical prices then peak oil and peak other resources and AGW would not be problems. So something new is called for and I wish I’d be younger to see what it will be.)

    I fully concur with your paragraphs 1 and 2 and I don’t have an opinion on paragraph 3 due to lack of relevant knowledge. I’d like to add, fixing the financial system simultaneously is important to mitigate the problem which those who work on an energy theory of value want to address.

  11. “The real economy (as opposed to the financial economy) is not an abstraction.”

    Perhaps ‘abstraction’ was the wrong word. What I was trying to get across is that the level of economic activity doesn’t keep a constant ratio to energy/resource use.

    “Every increase in physical size and in complexity costs exergy (energy put to useful work). Technological progress is an increase in complexity which still costs energy to run. There are limits on complexity in a closed finite system just as there are limits on the physical economy.”

    OK, but how large are those? The difference between our current energy use and the total output of the sun is 25 orders of magnitude, for example. We don’t have to reduce our energy use yet -it’s the side-effects that should worry us, not limits.

  12. My thinking these days is that physical realities lead changes and that political “leadership” not only fails to lead but follows the path of least resistance to the greatest short-term self-interest.

    Therefore, we won’t start conserving energy and using renewable energy until forced to by shortages. An enormous part of our current economy is what I call “frippery”; all of the luxury goods markets, gambling, holidays, entertainments and so on. Autos and houses could be half the current size and so on.

    Sunlight is low density energy (in watts per sq. m.). The issue is not the total amount of insolation available but its energy density and whether we can gather that effectively with massive infrastructures. The question is also whether we will have enough of the right materials to build those massive infrastructures. And whether we can do it in time. And whether we can use our endowment of fossils to fuel the changeover rather than blow the endowment on fripperies.

  13. Jarrah’s new formulation makes more sense.

    However I cannot see any relevance in whether the sun’s output is 25 orders of magnitude than our current energy use. So what?

    I can only smile when I see arguments such as;

    We don’t have to reduce our energy use yet -it’s the side-effects that should worry us, not limits.

    The only way to reduce “side-effects” is to reduce greenhouse gases. Energy use can be anything you want, anything convenient. It can go up or down. This does not matter and is not relevant.

    If energy use went down but only by switching to entirely fossil fuels, then we would end up worse than if energy use goes up (but supplied purely by renewables).

    Energy use is irrelevant – it is the source that is the problem – irrespective of the level.

  14. In more silliness we now have the beatification of JP II, predecesor and chief sponsor of the current pope. Ever a font of tact, ecumenicism and exemplar of doing what’s right, Ratizinger contacted perennial Zimbabwe leader, Robert Mugabe, telling him “Come see, old friend. Fellow devotee.” Unsurprising that these two infallible and unseatable dictators, neither of whom have much time for democracy, or human rights, enjoy each other’s company. Muammar Gaddafi has been unable to attend, unruly peasants and the funeral of his youngest son, detaining him at home.

    Almost goes without saying that Trevor is again somewhat put out. The JP II beatification miracle, yes, involving yet another nun, was also one of his. Trevor was also somewhat annoyed by the recent Easter celebrations. “I rise from the dead every morning” he exclaimed. “What’s the big deal?” His wife noted that prior to his resurrections he does appear to be breathing. “Simply an illusion” claims Trevor “I die every evening. And during the night miraculously give the appearance of continuing life by simulating inhaling, exhaling and the beating of my heart. Like to see him do that! Do you really have any idea how difficult that is?”

    Disregarding doubts raised by people like Trevor and others, looks like the Vatican Marketing Department have JP II half way on the path to joining McKillop and Mother Therese. With plans for cannonisation to take place in the second half of the year, a trio of life like replica dolls are expected to be available for purchase in time for Christmas. Mattel are hoping their release will make up for the declining popularity of Ken and Barbie.

  15. “Energy use can be anything you want, anything convenient. It can go up or down.”

    Actually it’s highly relevant. Living standards are highly correlated with energy use. Ideally we would massively expand our use of energy (contra Ikonoclast and his desire to undo the progress of the last hundred years), while massively reducing our impact on the environment.

    “The only way to reduce “side-effects” is to reduce greenhouse gases.”

    A very narrow view. Undesirable side-effects are numerous, depending on which energy source we nominate. Increases in CO2 are a real problem, but hardly the only one.

  16. Jarrah :

    Actually it’s highly relevant. Living standards are highly correlated with energy use. Ideally we would massively expand our use of energy (contra Ikonoclast and his desire to undo the progress of the last hundred years), while massively reducing our impact on the environment.

    It seems you have deliberately lost track of your own argument. If you really want to follow that logic please explain how we can massively expand energy use while massively reducing impact on the environment. No-one opposes this in theory.

    It is not relevant that there are numerous side effects, if you want to deal with climate change. You do not fix climate change by dealing with noise pollution (another side effect). Why introduce such a red-herring?

    By all means let people deal with other side effects but do not imply that this means “we do not have to worry about our energy use” [#39].

    If you want to continue with the “don’t worry” thesis, then you have to deal with climate change and not jump all over the place into vague “other side effects”.

    If you have followed the science you know there is plenty of reason why society has to worry about the adverse energy usage-greenhouse gas linkages.

    There is no alternative.

  17. A quick off topic. Economist Russ Roberts who interviewed John Quiggin recently regarding his Zombie book has helped produce a second short video in the Keynes versus Hayek series. It is quite amusing and I thought some here who are familiar with the debate and the history of it may find it enjoyable. Menzies House editor and conservative libertarian Tim Andrews is one of the extras. Economist Mike Munger plays the security guard. During the boxing sequence take note of the names of the guys coaching Keynes and Hayek.

  18. @Jarrah

    You said, “Living standards are highly correlated with energy use. Ideally we would massively expand our use of energy (contra Ikonoclast and his desire to undo the progress of the last hundred years), while massively reducing our impact on the environment.”

    Let’s unpack that;

    1. “Living standards are highly correlated with energy use.” Correct!
    2. “Ideally we would massively expand our use of energy… while massively reducing our impact on the environment.”

    The key word up front is “ideally”. Yes, “ideally” we would do that. However, I raise the question of what can we realistically do in the real world, governed as it is by the laws of physics and various limits and looming scarcities.

    3. “contra Ikonoclast and his desire to undo the progress of the last hundred years”

    I don’t desire the looming collapse. I predict it. There’s a world of difference between the two. Finally, some kinds of “progress” are of dubious value. But I will get too long-winded if I try to go into that here.

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