Catallaxy Files

An appreciation of ‘Director’s Law’ of public expenditure, coined by George Stigler in honour of Aaron Director and popularised by Milton Friedman, remains an important element within the intellectual repository of classical liberal/libertarian cautionary arguments against state expansionism.

The law relates to the implications of public sector action for the distribution of income. Specifically, the net effect of any government expenditure program will be to effectively redistribute income to the middle classes. As noted by Stigler, ‘public expenditures are made for the primary benefit of the middle class, and financed with taxes which are borne in considerable part by the poor and the rich.’

There are in effect numerous practical applications of Director’s Law, with an obvious one being the expansion of middle‑class public sector employment to administer programs, provide advice and deliver services in the name of the poor and downtrodden.

Last year I examined trends in the growth of state and territory government bureaucracy in great detail. The time period for that analysis was, by and large, 2000 to 2008 and it showed that the total number of workers employed by the states jumped from 972,300 to 1.2 million, with the greatest increase in the area of government administration.

Well, having looked at an extra year of data, it is clear that the public employment mushrooms in the tax‑financed fiscal commons continue to grow unabated. Of concern is that this growth is continuing in jurisdictions, such as Queensland and the ACT, that most urgently require fiscal consolidation to repair their parlous budgetary positions.

Using ABS data for total state public sector employment, and then adjusting for the number of tertiary education workers in each state and territory, I find that the number of state government workers has risen from 1.24 million in June 2008 to 1.28 million a year later. Numbers in the ACT grew by an obscene 13 per cent, followed by NT (9.3 per cent), Queensland (5.3 per cent), Victoria (five per cent), and WA (4.3 per cent).

I also retain archived data of public service numbers published by the jurisdictions through their various offices of public employment. This provides us with a different set of numbers to those provided by the ABS. According to this headcount data, there has been growth of about three per cent in the numbers of people employed within the state and territory public services over the twelve months to June 2009.

It is notable that no single jurisdiction cut public service numbers during the worst of the global financial crisis – if this is anything to go by, public servants are well and truly perceived by their state political sponsors to be protected species, while the more competitive and efficient private sector were forced to reduce labour numbers or labour hours for operational survivability (plus still paying taxes to fund public servants) from late 2008 onwards.

During the twelve to eighteen months after the onset of the global financial crisis, I would occasionally cast my eye over state government employment gazettes to check whether (at the time, likely debt‑financed) federal fiscal transfers to the states and territories for the purposes of implementing stimulus programs were having any effect on state government employment intentions.

Sure enough, advertisements regularly appeared whereby state governments would call for internal and external expressions of interest in employment positions, on proposed comfortable salaries, created as a result of federal funding. New mushroom varieties invaded the field of the fiscal commons, mixing with those existing varieties that seemingly just can’t or won’t be removed.

Consider the case of the now‑infamous ‘Building the Education Revolution’ (BER) capital works initiative for government schools, known more for its cost overruns and one‑size‑fits‑all design solutions than for anything else.

The federal government justified the BER as a means to promote employment. Sure enough, some key winners from this initiative have been the new and existing (but reassigned) middle‑class state bureaucrats who have been engaged to oversee the BER in government schools.

Every jurisdiction has established its own project team within their respective education departments to implement the BER program. These groups then liaise closely with central agencies, such as the Premiers Department and Treasury, to ensure whole‑of‑government coordination of the BER rollout.

The Queensland government has its own project team within the education department, and had even developed a ‘communication plan’ incorporating a target audience matrix, including principals’ associations, trade unions, the public and, of course, the need‑to‑please commonwealth government, for outlining the benefits of BER.

South Australia has crafted an elaborate network structure for overseeing the BER, including an executive taskforce, working party, business services unit, an operations team, and personnel involved in different facets of the program.

According to the Tasmanian Department of Education website, there are 13 staff overseeing the implementation of government schools’ BER in that state.

With glitches and systemic problems in the BER government school program element alike providing more make‑work opportunities for the state government appointees, not to mention issues such as fees received by managing contractors involved in program delivery, it becomes clear that the BER in effect manages to support the interests of those largely (but not exclusively) in the middle to upper reaches of the income distribution.

When it is considered that every political commitment to tax, spend and regulate requires a public sector employee to implement the coercive deed, and they would tend to be paid handsomely, it becomes clear that Director’s Law is always and everywhere a symptom of modern government itself. Ensuring that Director’s Law becomes less prevalent will require the significant roll back of the state.

Conrad Black at National Review Online lays it on the line about QE2:

Federal Reserve chairman Ben Bernanke’s plan to buy back $600 billion of outstanding U.S. Treasury bonds is an astonishing act of brinkmanship, splendid in its boldness, perhaps, but in fact, insane.

And why insane?

What is in contemplation is an immediate 30 percent increase in the money supply (as more conventionally defined), thrust in cash into the hands of largely foreign bondholders, designed to incite spending by those whose bonds are redeemed and to reduce the value of the U.S. dollar (despite official disclaimers), facilitating U.S. exports and discouraging imports. No international reserve currency has survived such a harum-scarum move intact.

And the consequences:

The Bernanke initiative will precipitate a war of devaluation between the yen, euro, and U.S. dollar, which have no value, other than opposite one another. There will be an immense flight to durable value, especially gold and some other commodities.

Black lays out a programme that could turn this around and even, in his view, make the current President amongst the greats. All he would have to do is repudiate everyone who had ever voted for him and walk away from his own past but a plan of action he has certainly described.

Christopher Pearson has finally stopped carrying on about education. This week he makes an argument against gay marriage. So he demolishes all the silly arguments in favor of gay marriage and trots out all the usual suspects against gay marriage. Then we get this

Among the reasons the Greens are so keen on same-sex marriage is that they want to reduce the population and drive down national fertility. Their refusal to discriminate positively in favour of heterosexuality and uphold the distinctive value of normal marriage shows their political project yet again for what it is: a dead end.

I’m trying to understand how that works – because gays can get married everyone else will have fewer kids?

The overall argument, however, goes something like this; marriage has valuable benefits that relate to providing stability that enhances child rearing. That is true. I got into trouble on ABC television for asking if a young lady with young children allegedly living in poverty was married. In economic terms we might say that marriage has positive externalities and indeed that was the justification (although not the terminology) for the massive expansion of welfare spending to families within children under the Howard government. What isn’t clear is why gay marriage, or even childless marriage, is a negative externality.

Marriage has other benefits that relate to wealth management. Of course, the greatest benefit is the emotional stability and satisfaction it gives to individuals. I would have thought those needs are independent of sexual orientation.

Julia Gillard’s opposition to gay marriage is entirely unprincipled. The ALP promised the Australian Christian Lobby that it would not enact gay marriage. Gillard is maintaining an election promise. The Greens, on the other hand, (a) think gay marriage is a good idea and (b) want to wedge the ALP. Gay marriage is a win-win for them. While I’m sure many Liberals oppose gay marriage the issue has advantages. It wedges the ALP. It shows the priorities of the parliament – a motion exposing the costs of the NBN couldn’t get through the House, but consultation on gay marriage could. It also terrifies those Christians who thought they could safely vote ALP. They’ll think a bit longer and harder next time. In the meantime I don’t understand why the Greens and the Liberals are helping Gillard keep her election promises.

China is tightening credit to rein in its inflation and has raised its reserve requirements to the highest rate on record. The consequences of a Keynesian stimulus are all of the corrections that must come after. The political downside of the adjustment process may be less potent in China than if the same were tried here but the judgment has clearly been made that fighting inflation must come first. The dire consequences of allowing inflation to just slip away are obviously fully appreciated.

The triple-R in the story below is the required reserve ratio that the People’s Bank of China has imposed on its trading banks.

The 50 basis point RRR increase, which takes effect on Nov. 29, should lock up about 350 billion yuan that banks could otherwise lend….

In addition to increasing required reserves and interest rates, China has also issued strict orders to banks to curtail their lending.

The paragraph that I have dropped out was the reporter’s comment that the Chinese are demonstrating confidence that the recovery has taken hold. I’d be less sure of that. It instead looks like they would rather take on the effects of a mild slowdown than have inflation entrenched. It is the willingness to accept that facts of life that slowdowns are inevitable that may mark the most interesting aspect of this tightening.

Unless credit is being withdrawn from somewhere and activity slowed, raising the reserve requirements cannot have the desired effect on inflation. But it is this willingness to accept a slowdown as one of the prices to pay for longer term growth that marks the main difference between Chinese policy and the policies we have seen in the West.

If they now cut marginal tax rates on personal incomes and then cut business taxes as well, the Chinese could have a Reagan Revolution of its own. The ironies of life never end.

Running late with the Roundup this week due to heavy demands for end of term papers at several universities, so the Mill has been working overtime. The most difficult one was for a postgrad lawyer in Oxford.

I wanted to list Skepticlawyers post on cheating but Don Arthur  got in first. So if you can’t beat them, link to them!

So be sure to check out Don’s Missing Link, even if you only read Skepticlawyer and Legal Eagle.

This is a story about the waves of entrepreneurs who made New York a growing and vibrant city for over a hundred years, posing the question, what will spark the next wave of regeneration? Hat tip to Coordination Problem.

Read the rest of this entry »

Ken Henry comes clean.

That is, to completely sterilise the terms of trade boom through fiscal policy, we may have to abolish all government spending.

Oh, okay.

Unfortunately he also talks about raising taxes. There is, of course, plan B and plan C. Plan B is let market forces take their toll. Plan C is let market take their toll and have government deregulate the economy as much as possible so private individuals can make their own choices.

But Dutch disease is just another form of creative destruction, and Canberra should not fear it. Economist Joseph Schumpeter recognized that while economists fixate on price competition, business also competes on cost and quality. If the prices of Australian goods and services are rising on world markets, this provides a clear incentive for Australian firms to either reduce their costs or to improve the quality of their offerings.

Rather than seek out government protection and subsidies, export-oriented firms should be innovating in response to a strengthening currency. This ultimately benefits consumers and, very often, the firms themselves. Similarly, governments should not be buying U.S. dollars and undermining market signals; they should consider reforms like tax cuts and red-tape cutting that allow firms to respond to market signals more quickly. Central bankers Glenn Stevens’s lack of concern on the exchange rate should, in particular, force Canberra to reconsider plans to re-regulate labor markets and to reconsider its expensive and economically wasteful emissions trading scheme that would make manufacturers significantly less competitive.

Seen in this light, a weak greenback can have its advantages for the rest of the world. The U.S. is an exporter of intellectual property and business know-how that often forms the basis of innovation. If more countries followed Australia’s lead, they would force the U.S. to bear the consequences of its fiscal irresponsibility, while also gaining more purchasing power to buy U.S. assets and technology on the cheap to help reform their own economies. What a smart idea.

While I favor plan C, I suspect few policy makers do.
(HT: Noodle)

Update: Noodle phones to say that Henry’s comment is probably wrong anyway. Government spending as a percentage of GDP is much higher than Mining as a percentage of GDP.

There is currently a case before Fair Work Australia – effectively the old Industrial Relations Commission with a  fancy new name – in which the Australian Service Union is seeking very substantial pay increases (between 14 and 50 per cent) for workers in the social and community services sector.

Overwhelmingly female, these workers are mainly employed by government departments and not-for-profit organisations, the latter relying on government funding for their operations.  In other words, these workers are either public servants or quasi-public servants.

The case is being prosecuted under the provisions of the Fair Work Act that relate to gender pay equality, which have been redrafted from previous statutes by now referring to work of comparable value rather than equal value.

Today it has emerged that the government has some reservations about the union’s claim. Linda White of the union had this to say:

“I think what they are realising is that equal pay is not just about concept, it is about actually paying women the money that their work should be valued at,” she said.

“I think what they are grappling with is what is more important in this sector – paying social and community services workers who work with the most disadvantaged, or buying fighter jets – and they are looking at the competing interests in their budgets.

“After probably over 20 years of under-funding the sector, it is all coming home to roost if our claim is successful.”

Ms White says she understands the case would have a significant impact on the budget.

“I have never heard an employer yet who says that they agree to pay people more money … but if you believe in equal pay then it is going to cost more money,” she said.

“In our heads of agreements we have understood that it might be a substantial amount of money and we have said that we are prepared to agree to phase in the money and to take account of budget estimates and forward estimates.

“It is a very generous phase-in that we have agreed do so we certainly understand all that but we can’t get around the fact that if you want to pay women what they’re worth, it is going to cost money – justice costs money.”

Deborah Cobb-Clark has an excellent piece in The Fin today on the case.  She makes the following points:

• Occupational segmentation in Australia does not contribute to the gender pay gap in Australia; indeed, it makes it smaller.
• Pay increases unaccompanied by funding increases will lead to job losses, which latter arenot welfare-enhancing to women workers or those they assist.
• The concept of ‘comparable worth’ was tried in the US, was found wanting and has been discarded.
• The gender pay gap in Australia is about the top of the earnings distribution.

It is pretty amusing to see the government change its tune on this issue, given Julia Gillard’s previously stated strong support.  (I have also written about the deep hyprocrisy of the South Australian government’s unilateral move to cut worker conditions for state public servants.)  For private sector employers, the message from the government seems to be a case of:

DON’T BEHAVE AS WE DO; BEHAVE AS WE TELL YOU TO DO. 

I have been in Sydney this week and have therefore been reading the SMH.  I was very amused by the lead story on Wednesday, written by Peter Martin, quoting Richard Denness from the Australia Institute (yes, that modestly titled organisation again) that on his analysis of APRA figures – for one financial year – it was settled:

THE FOUR BIG BANKS ARE CLEARLY PRICE GOUGING WHEN IT COMES TO THE MORTGAGE RATES THEY CHARGE. 

According to this pathetically limited analysis, Martin/Denness believe that the cost of finance facing the big banks has gone down, contradicting the analysis of the Reserve Bank of Australia (what would they know? oops, they anticipated in their latest decision that mortgage rates would increase more than the increase in the cash rate set by the RBA).  Amusingly, the lead story in The Australian that day was the complete opposite of Peter Martin’s line.

And then there was this absolutely bizarre analogy given by Denness about the price of hamburgers and how this relates to the price of meat.  Que?

Yesterday’s editorial in the SMH was particularly amusing: well, yes, the story was probably wrong but it was worth running because … because … this is an important story.

In today’s SMH, there is a much more modest piece by Peter Martin, much more modestly placed at the bottom of page 7, to the effect that … well, maybe the RBA has a point and that interest margins for the big banks have been steady since  2004, having fallen signficantly in the early years of the 2000s as the non-banks aggressively moved into the mortgage market, egged on by the benefits of securitisation (oops, part of the problem leading to the GFC). Frankly, I’m amazed that the net interest margin of the big banks hasn’t increased, given the temporary freezing out of the non-banks, the latter having nothing to do with anything the bank bigs have done.

But Peter Martin doesn’t want to give up, his point now is that NIM is really of no interest (que?) but the profit margin:

Between June 2009 and June 2010 [the profit margin of the big banks] rose from 23.1 per cent to 33.1 per cent, roughtly twice as much as the smaller banks.

But hang on, Peter, banks make profits from many activities, not just mortgages, and there is the release of the provisions for bad and doubtful debts in these profit figures.  Moreover, smaller banks have struggled for reasons that have nothing to do with the big banks.

What I find very disappointing, however, is that there is no further mention of the hamburger.

The reaction to QE2 – and I don’t mean our gracious sovereign – has been ongoing and continuous. Our little cartoon friends which I posted yesterday may be too cloying for some, but that it has raced through the internet with an almost instantaneous million-plus hits shows there is quite a demand to understand just what is going on. The real question is, can those in authority really be such fools?

For those who choose not to take their information from cartoon characters, there is today’s Wall Street Journal to turn to. In an article, “‘Refudiation’ of $600 Billion Printed Out of Thin Air”, there is a quite savage take down of this quantitative easing that raises all of the right kinds of questions:

Blinders off, common sense engaged, it’s time for us to ‘refudiate’ the notion that this dangerous experiment in printing $600 billion out of thin air, with nothing to back it up, will magically fix economic problems that were caused in large part by the government’s interfering with our free market system in the first place, and then made worse by the government’s reckless spending experiments with our children’s fiscal future. Instead of the tired, old Keynesian ideas behind Obamanomics, we need to turn to time-tested practices that are pro-free market rather than pro-big government. Some call this ‘free-market populism.’ It’s based on the realization that the best way to get the economy moving again is to get government out of the way, let the free market dictate winners and losers, and allow the private sector to grow our economy one job, one paycheck and one American dream at a time. It’s the only way we can restore much needed confidence and certainty in our economy.

Well, the battle lines are drawn, as they have been since the start of the GFC. We shall see how this ends up since we are now locked in to yet another experiment in Keynesian economic therapy. And it is not that these ideas are tired and old that gets me down. It is that they are wrong and stupid that is the problem.