Rich, egalitarian, low-tax Australia
From The Economist:
TWENTY YEARS OF reform in Australia did not roll off without resistance, so sweeteners were needed to buy off opposition. One of the most inspired was superannuation, a long word meaning private pension provision that the all-abbreviating Aussies call their “super”. Used in the 1970s and 1980s to please trade unionists (and helping to keep a lid on inflation), it has turned into the financial equivalent of the Swiss army knife, with a multiplicity of benefits.
In 1992 the Keating government made it mandatory for employers to pay a proportion of the wages of all but the very lowest-paid workers into a superannuation account. The payment, which was tax-deductible, was to rise in annual steps to 9%, where it is today, though by 2019 it should be 12%. Employees choose the funds that receive their payments.
The upshot is that most Australian workers, over 8m in total, now have a private nest-egg for their old age. No tax is paid when members withdraw from their fund; they can take all they want as a lump sum, subject to a limit, or buy an annuity. Aussies are now a nation of capitalists.
At the same time the state pension system, and therefore the taxpayer, is being progressively relieved of most of the burden of retirement provision, since eligibility for the state pension depends on both assets and income. As supers take over, the provision for old folks’ incomes will be almost entirely based on defined contributions, not defined benefits. So Australia is in the happy position of not having to worry too much about the pension implications of an ageing population, though it may have a problem for six or seven years after 2014 when the post-war baby-boomers stop work with supers only half filled.
The entitlement problems facing the West are not difficult to solve (in a technical sense.) They’re easy to solve. You just have to get on with doing it. My commenters always dismiss the Singapore model because their society is so different from ours. But there are few countries in the world more similar to America than Australia (I’ve lived there.)
And here’s the impact on equality:
Mr Howard claims Australia has a unique form of egalitarianism, and David Alexander, who used to work for Mr Howard’s treasurer, recently argued in Policy magazine that Australia has developed a model of small-government egalitarianism that uniquely combines economic liberalism and egalitarian policy structures. Citing figures from the Organisation for Economic Co-operation and Development’s 2010 Survey, he points out that, among rich countries, Australia had the lowest government spending and the lowest taxes. At the same time it ranked below average for income inequality and close to bottom for inequality of wealth, using the standard (Gini coefficient) measures.
Two factors, he says, contribute to these “fair dos” positions. One is Australia’s system for making welfare and other transfers to the less well off, which is the most progressive in the world. The second is its tax system, one of the most progressive in the OECD. The upshot is what Mr Alexander calls a platypus model. Just like its egg-laying mammal, Australia defies the categorisers by being neither small-government and inequality-tolerant, as America is, nor high-taxing and egalitarian, as the Scandinavians are. This exceptionalism, believes Mr Alexander, makes Australia a happy and harmonious society in which populism is less likely and the chances for difficult reforms and real competition are better. (Italics added)
But does all this egalitarianism hurt growth?
Only a dozen economies are bigger, and only six nations are richer””of which Switzerland alone has even a third as many people. Australia is rich, tranquil and mostly overlooked, yet it has a story to tell. Its current prosperity was far from inevitable. Twenty-five years ago Paul Keating, the country’s treasurer (finance minister), declared that if Australia failed to reform it would become a banana republic. Barely five years later, after a nasty recession, the country began a period of uninterrupted economic expansion matched by no other rich country. It continues to this day. This special report will explain how this has come about and ask whether it can last.
Those with a passing acquaintance of Australia will attribute its success to its luck in having such an abundance of minerals that its booming Asian neighbours want to buy. That is certainly part of the story. Yet Australia was not dragged down when a financial crisis struck Asia in 1997. And commodity exports have not always been fashionable. In the 1990s many thought they were evidence of an incorrigibly “old”, low-tech economy doomed to decline. Australia’s terms of trade””the ratio of its export prices to its import prices””seemed stuck at unfavourably low levels. Not until 2003 did minerals begin to boom again, though by then Australia had escaped both the Asian crisis and the recession that hit America in 2001. Five years later came the GFC, Oz-speak for global financial crisis. Yet that, too, failed to drive Australia into recession. Someone, other than Lady Luck, must have been doing something right.
Note to progressives: Stop talking about France! If the rich liberal states in the Northeast can’t even build high-speed rail in the Bos-Wash corridor, how the hell are we going to roll out the French model nationwide? And will Americans pay 50% of GDP in taxes? Australia’s the right model for progressives. Americans will support egalitarian measures that don’t hurt growth, and don’t require high taxes.
Tags:
12. July 2011 at 18:54
Australian economic policy has been relatively good since the early 1980s, at least until recently. But the cost of a low-tax welfare state is high effective marginal rates of taxation, caused by the compounding of normal marginal income tax rates and the withdrawal of means-tested benefits. Many lower to middle-income earners face nominal tax rates of 30% but effective rates of 50% or higher. A family with two children pays no net tax until reaching a family income of over $55k. The upshot is that 42% of Australian families pay no net tax. Even savings put into superannuation, which are tax-free on drawdown, face a positive effective marginal tax rate for all but the wealthiest individuals due to the withdrawal of the state pension as retirement income rises.
All of this must come at the expense of incentives and economic growth. But this has not been obvious because Australian marginal tax rates were so high to begin with in the early 80s.
12. July 2011 at 19:43
Meh, not gonna happen.
1) Australia doesn’t have anything quite like our EPA, which is very anti-business, their environmental agency is decidedly pro-business (I’ve actually talked to the guy who used to run it).
2) Its very easy (in terms of legality) there to start resource extraction, and here its a nightmare (and often illegal).
3) Its very easy there to start building there (exception being housing) and here (many states) it can take years of regulatory red tape before you can even break ground.
4) Its very easy to hire someone in Australia, here its a pain in the arse.
5) Its difficult to win an employment discrimination suit in Australia, here we have an entire government agency that just helps people file them.
6) Australian banks are far, far less regulated than US banks (and have been for most of the respective history of our two countries).
7) Australia has a much much smaller and cheaper military per capita.
12. July 2011 at 19:43
Also, compare US indigenous to Australian Indigenous and the Aussie ones have it way worse.
12. July 2011 at 20:19
“Egalitarianism” is Marxist hog wash. Properly, there is equality in the ballot box and before the courts as articulated by documents such as the American Bill of Rights. That is all.
There is no economic, existential or spiritual gain or advantage this progressive conceit of “equality”. More importantly, there is no reasonable and valid economic, moral, philosophical or spiritual foundation for it either: It is nonsensical on the face of it. Taking one man’s money and giving it to another to create a fiction of “equality” in fact has nothing whatsoever to do with equality, and is a perversion of that actual concept and condition of. This fiction is an insult to both men. Moreover it is an insult and an injury to civilization itself: A civilization cannot for long endure with such obvious lies held as truths.
If the West is to recover, it must push this nonsense aside in all its forms.
For America, this notion of “economic equality” being a desirable social goal or a legitimate pursuit of government dates only from the New Deal, but it has really only since the boomer Marxists have come to power has it hit the level of hysteria it has now. Even 20 years ago a national politician could not have got get away with this nonsense. When not too long ago Edwards ran fr the POTUS bad started ranting about “the two Americas” he was laughed off of stage. Now we have the sort of Marxist/Third way rhetoric brandied about that one would expect of a Lenin, a Mao, a Peron or a Chavez.
This is how far we have fallen. For most of our history men knew that they too wanted to be rich and saw the path through to it was liberty, hard work, and capitalism.
It s really none of the government’s business how much money anyone makes,and it is absurd to hold that it can somehow “right” the “wrong” of “economic inequality”. It cannot; it should not. Economic inequality is not a vice; it is a sign of a thriving civilization. This we have forgotten.
12. July 2011 at 20:33
[…] Scott Sumner thinks we should pay attention to the Aussie way of governing- low taxes and low income inequality: Note to progressives: Stop talking about France! If the rich […]
12. July 2011 at 21:40
Dude, you need to really start considering writing a book on your neoliberal ideas. Just print out every post you’ve written on neoliberalism and shove it into a book. Entitle it “In Defense of Neoliberalism.”
Your ideas are extremely unique and different from all other thinkers. My father and I have debates about the US versus EU model and I always send him your posts. He loves them.
12. July 2011 at 22:40
I think you might want to clarify that you’re calling primarily for the adoption of Australia’s policy structure, not their tax rates. Otherwise, the progressives will just use it as ammunition to raise taxes.
According to the Heritage Foundation, the tax burden in Australia is 30.5% of GDP, compared to 26.9% in the US. So adopting Australia’s model would still require increasing our tax burden (by half a trillion dollars next year).
As it happens, I just read the Bergh and Henrekson paper on government size and growth. According to their best estimate, increasing our tax burden 3.6% points would decrease the US growth rate by ~1/3 of point, all other things being equal.
So given people’s ideological tunnel vision, you should be very explicit that you don’t want to keep other things equal 🙂
12. July 2011 at 23:54
Doc,
The US is rich in red tape, while Oz is rich in red dirt, right? There is a trend in politics to polarize around the “dig em up, ship em out” mentality that makes the country attractive to overseas investors who need raw materials and maybe that competitive advantage (that benefits only a small part of the population and mainly foreign investors will go someday. Once the soil is used up or gotten too saline and the low hanging mineral fruit picked, who knows, maybe we will all go back to Europe. The US does not have that option.
But in earnest, Many things Americans do, Aussies do cheaper, despite a similar, and far more equal standard of living: public management, healthcare, defense, public transport and indeed, dealing with the indigenous population (which is far more mixed than the North American, en aboriginal status carries very attractive benefits; many stories about poor treatment tend to be exaggerated). But the same goes when one compares Canada and the US, I suspect. Americans may have more effective bureaucratic, political and managerial predators coexisting with a highly competent financial elite.
Maybe the difference lies in an originally class-based westminster style political system with compulsory voting and a tradition of “fairness”. Immune to scientific enquiry and hence interesting.
Scott,
I like your recent posts but they are so numerous, you risk losing that part of your audience that is not unemployed..
12. July 2011 at 23:55
Kevin Dick,
One of the things that annoys me about tax discussions is that people usually discuss them in terms of (superficial!) tax burdens, rather than composition.
Does anyone know what the overall spread of consumption taxes vs. investment taxes is in Australia?
Also, how bad must things be on the supply-side of the American economy if you can’t afford a normal tax burden without seriously hurting long-term economic growth? I’m sure some people would like to help me out by listing all the non-tax aspects hurting the US supply-side…
13. July 2011 at 03:50
Scott, I think you’ll find that John Quiggin (who gave you a mention in his Zombie book) talks a lot more about Australia than he does about France.
13. July 2011 at 04:54
@ Doc Merlin
As an Australian, I found Doc’s contribution laughable in its enormous ignorance of my country.
>> 1) Australia doesn’t have anything quite like our EPA, which is very anti-business, their environmental agency is decidedly pro-business (I’ve actually talked to the guy who used to run it).
This is wrong – each state in Australia has an Environmental Protection Agency, and there are numerous environment protection agencies and departments at a Federal level designed to ensure business doesn’t destroy our valuable natural environment (valuable because tourism is a massive part of our economy). This is a good thing by the way.
>> 2) Its very easy (in terms of legality) there to start resource extraction, and here its a nightmare (and often illegal).
Depends on where and what you’re mining. Coal, iron, nickel, etc is fairly easy. Uranium, no so much. Mining in heritage areas or areas with native title, not so much. This is a good thing by the way.
>> 3) Its very easy there to start building there (exception being housing) and here (many states) it can take years of regulatory red tape before you can even break ground.
Australia has some of the best building regulations (especially in terms of energy efficiency) in the OECD.
>> 4) Its very easy to hire someone in Australia, here its a pain in the arse.
Probably true. However, Australia does have a very well regulated labour market. This is a good thing.
>> 5) Its difficult to win an employment discrimination suit in Australia, here we have an entire government agency that just helps people file them.
There is a federal agency called the Fair Work Ombudsman (and another called Fair Work Australia) designed to protect workers and stop them from being exploited by their boss. Also, Australia has a high level of unionism compared to the USA.
>> 6) Australian banks are far, far less regulated than US banks (and have been for most of the respective history of our two countries).
This is the most laughable of your comments. Australia’s banking system survived the global financial crisis so well because our banking system is far *more* regulated than the USA, and has been for many decades. The Australian Government also guaranteed the banks during the crisis. This is a good thing by the way.
>> 7) Australia has a much much smaller and cheaper military per capita.
It’s a good thing. However, Australian military spending has increased to one of the largest areas of spending in the Federal budget (nowhere near as large percent as USA).
Cheers
A
13. July 2011 at 05:07
One point about the superannuation system in Australia is that contributions to super are taxed as are earnings. I’d also point out that most people need need to contribute over the 9% to save for retirement. The other downsides are that you can’t touch the money till you’re 65 (soon to be 67). Also, everyone’s super took a big hit during the GFC so retiring at that point of the cycle would have been difficult. Though on the whole it is a good system for the country, I’ve never understood why the US doesn’t find it an attractive system.
—–
As for the tax mix, 2007-2008 was about 25% various consumption taxes (including a VAT type tax), about a 40% was income and 20% company tax (with the rest being payroll, property etc). We will have a CO2 tax in July 2012 along with income tax cuts so I guess that will change the mix a fair bit.
13. July 2011 at 05:42
Scott,
You may be interested in what John Hempton ( http://brontecapital.blogspot.com/ ) has written about weaknesses in Australia’s regulation of superannuation funds. There are two major issues: weak asset custody checks make it possible to run Ponzi schemes ( http://brontecapital.blogspot.com/2010/01/dark-privatised-social-security-story.html ), and since customer assets aren’t segregated from the assets of the firms managing them, they can be seized if a broker-dealer goes under: http://brontecapital.blogspot.com/2008/10/1934-securities-exchange-act-and-all.html .
13. July 2011 at 06:00
Rajat, An ideal tax system has four features:
1. It taxes only consumption, not income from capital.
2. It is progressive
3. Taxes are low
4. The system is simple, with few loopholes.
Australia is far from perfect, but it does better than most. Certainly better than the US.
Doc Merlin, I see those points as being in support of this post. Is that your view?
Hattip, I disagree. I’m a utilitarian.
Thanks Joe. But I hate writing books, it’s time consuming.
I do have a long paper over at the SSRN website, called The Great Danes, in case anyone is interested.
Kevin, I definitely prefer the Singapore model (with much lower taxes than the US.) This is a message to progressives—you don’t need high taxes to meet progressive goals. There seems to be a dispute about which country has higher taxes. Might the low US ratio reflect the temporary recession we are in? Surely it was more that 26% before the recession? I seem to recall it was over 30%.
Rien, Those are good observations. The aborigines are in horrible shape (based on personal observation), but in fairness to the Aussie government, I’m not sure any government knows how to overcome the huge culture shock of a Western society suddenly being imposed on a society that had been isolated for 50,000 years. The US has similar issues dealing with its native American population. I don’t know the answer.
You said;
“I like your recent posts but they are so numerous, you risk losing that part of your audience that is not unemployed..”
You’ve got it all wrong, only the employed have time to read my blog. Readership is sky-high on weekdays, and falls dramatically lower on weekends. People read my blog at work, to ease the tedium of sitting in front of a computer screen all day.
W. Peden, Excellent point. Also recall that people like me pay very high taxes, say 40% – 45% (including everything.) This is because our system is riddled with loopholes, allowing others to escape taxes.
Kevin, That’s good to know, now if we could only convince Paul Krugman.
You have to understand that when I refer to “progressives,” I mean Paul Krugman. No one else exists for me. 🙂
Alex, I agree with some of your points, but:
1. I think Doc was referring to the difficulty to get approval to build in the first place. It’s extremely hard to build a building in Boston, for instance. Hence there is little new construction.
2. The US is known as having some of the strictest discrimination laws in the world (I don’t know about Australia.)
3. I can’t believe there is any other country in the world whose banking is regulated more than the US. Get a list of all the regulations US banks have to follow, it would fill a football stadium. When I redid my mortgage I had to sign 100 forms, most of them stupid regulations. I’d like to compare our regulation to yours–I’m sure ours is greater.
Our financial crisis was not caused by lack of regulation, but by counterproductive regulations, which encourage banks to make highly risky loans with government money. We’ve basically nationalized the entire liability side our our banking system—so much for capitalism in America. Dodd Frank did not address this issue.
Anthony, Glad to hear about the CO2 tax combined with income tax cuts–great idea. Important question: I assume if the savings are taxed going in, they are not taxed when withdrawn at 65. Is that right?
13. July 2011 at 06:01
H Peden,
GST (the primary consumption tax) revenue is appr 45 bn, capital gains appr 5.5. It depends on what you call consumption taxes (excise, luxury car tax, various service consumption related stamp duties at the state level) and “investment”. Compared to the EU Australians (in terms of scope and weight) are not heavily taxed for consumption and their corporate- and personal income taxes are similar to the EU average (wher consumption is far more heavily taxed. Australians consider themselves not lightly taxed. One peculiar aspect of politics in a country with fast growth and positive inflation is that bracket creep offers an opportunity to offer tax cuts (in nominal terms only of course. These tend to be targeted at rather narrow groups hence the tax code has become one of the most voluminous in the world.
Why anyone would like to use Australia as a model would probably be a mystery to anyone familiar with this monster
13. July 2011 at 06:02
John Paul, Those sound like serious problems.
13. July 2011 at 06:08
H Peden,
Of course the term “monster” applies solely to the tax element of all things Australian. It is a pretty good country otherwise..
13. July 2011 at 06:50
“Doc Merlin, I see those points as being in support of this post. Is that your view?”
I’m about 50-50, I see a lot of good in the Aussie system, at the same time I see the danger of excessive welfare state and high taxes.
Personally, I’d prefer the NZ system to the Australian system, but the Australian system doesn’t completely suck.
13. July 2011 at 07:29
Scott,
I’m not really sure what you mean by “The Singapore Model”. From what I’ve been able to glean about the country, it’s basically the most successful communist state in history.
On topic, Australia’s main cost savings relative to us come from having nationalized their hospitals and having a much smaller military. Their seemingly low tax figures seem to come from Superannuation. Superannuation is a fine policy, but forced savings are functionally rather similar to taxation.
Kevin Dick,
Those estimates for sensitivity to long-term growth from taxes are absurd, and at odds with the rest of the economic literature.
A quick sanity check can show that: Annualized growth in GDP/worker-age-population in the past 20 years has been 1.7% in Sweden and 1.6% in the US. Taxation as a percentage of GDP has been around 50% in Sweden, and around 32% in the US. Europe has had much higher taxes than the US for about 60 years now, but relative position of American GDP/Capita and Western European GDP/Capita has either been stable or converged.
Sweden isn’t an isolated example either. The rest of Europe was basically in the same range, other than the Netherlands, which had 2% growth.
13. July 2011 at 07:54
David Shor,
I’ve heard people call Hong Kong a communist economy, so Singapore certainly must be a communist economy as well.
13. July 2011 at 08:06
So Australia is the place to flee to when the **** hits the fans, and Western governments find themselves having to gore ever-more entitlement funds out of an ever-shrinking productive population?
13. July 2011 at 09:03
I think righties talk about France more often, lefties recognize that the nordic countries are better.
13. July 2011 at 09:03
W. Peden and Scott. I definitely agree with the point that Australia has a better model. I was merely saying you have to be careful when telling people something that:
(a) superficially agrees with their ideology (raise taxes)
(b) but actually implies a very different course (restructure entitlements)
13. July 2011 at 13:07
@ Kevin Dick
Actually, when you add in the portion of expenses that goes to the military (non-social benefits) in the US, I suspect you would discover the US is even more stingy than you suggest in terms of social benefits.
@ Doc Martin
I think you overstate the regulatory burden in the US, which has become the latest group-think propaganda effort by the more corrupt of our two corrupt parties, vsi-a-vis australia.
From 2000-2008 I would suggest you’d be HARD PRESSED to show just how anti-business the EPA was as an agency. In terms of enforcing laws on the books, the NRDC alone has gone to court dozens of times to enforce major pieces of legislation. Consider:
http://www.nrdc.org/about/victories.asp
If you think the EPA has been consistently anti-business, you simply have no clue. I suspect, you have no clue. I’ve talked to EPA officials as well, and they feel immensely constrained from all directions. In Dubya’s reign as moron in chief, he consistently appointed individuals with the stated intent to gut the EPA (and he dismissed christine todd whitman because once she got there, she didn’t go far enough).
Also, if you look at the variety of agencies in New Zealand and Australia, you might find just how much they actively do – from drug and health regulation (they are better than us, and their physician guidelines for things like public health and immunization are often better and more advanced than ours).
Australia, New Zealand, Singapore – all sterling examples of competent, efficient government. Without the bloat of the Pentagon, the NSA (currently 80,000 FTEs and GROWING), DISA, etc. not to mention the hoard of consulting companies that are compensated and employed off books.
Hey, I’m all for a smaller government (and cutting entitlements for the boomers, who should shoulder the blame for crushing their children beneath their iron boots of greed and debt funded short-termism). But let’s try not to drink the cool aid while we’re at it, eh?
Scott:
Uh, I wonder just how much of Singapore’s wealth relies on the asset value growth of real estate, which is, you know…
http://www.singaporeexpats.com/housing-in-singapore/housing-in-singapore.htm
Yes, that’s right, over 80% of singaporeans live in public housing. Tell me, how well do you think that would go over in the USA?
http://www.usatoday.com/money/economy/housing/2011-03-15-Singapore-public-housing.htm
Seems like everyone is wearing rose colored glasses today.
13. July 2011 at 14:47
Rien, You said;
“Australians consider themselves not lightly taxed.”
Is there any country where people see themselves as lightly taxed?
David; You said;
“I’m not really sure what you mean by “The Singapore Model”. From what I’ve been able to glean about the country, it’s basically the most successful communist state in history.”
Yup, just like the Soviet Union. That’s why every single index of economic freedom rates it number 2 in the world.
David; You said;
“Superannuation is a fine policy, but forced savings are functionally rather similar to taxation.”
I’d much, much, much, rather be forced to save, than be forced to pay taxes. I save anyway.
Statsguy, You said;
“Uh, I wonder just how much of Singapore’s wealth relies on the asset value growth of real estate, which is, you know…”
None, the survey didn’t include real estate. And obviously I don’t favor public housing. Nobody’s perfect. Indeed Singapore probably has 10,000 policies I strongly oppose. The problem is the US has 100,000.
Oops, you made the mistake of providing a link. In the very first paragraph they say much of the “public housing” is actually privately-owned. Make that 9,999 policies I strongly oppose.
13. July 2011 at 17:16
Australia has stronger prudential banking regulation than the US. Otherwise, the financial regulation is pretty light.
As for “best building regulation”, we have far too much official discretion which forces housing into “bureaucratic comfort zones” and is a real block to innovation in housing, or even retrograde. Australia houses built now are typically worse-designed for the climate than they were in c.1900. Apart from some “two speed economy” problems, we have way over-priced housing land from way too much land rationing.
But yes, basically we do well, particularly in mostly highly targetted welfare and provision for old age which is decreasingly pay-as-you-go.
13. July 2011 at 19:07
Silas, if that happens don’t come here by boat! 😉
Seriously, this might interest you Scott.
http://clubtroppo.com.au/2011/07/11/how-fair-is-australias-welfare-state/
13. July 2011 at 19:17
@ David Shor
You might want to have a look at the paper I referenced, before you conclude that it is “absurd” and “at odds with the rest of the economic literature”. They do review the literature and analyze the countries you think are counterexamples:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1734206
14. July 2011 at 01:29
Kevin Dick,
Interesting paper and supportive of the intuition that gvt, with its unique position in in- and output markets in which it buys and “sells”, is unlikely as good at wealth accumulation as private business and probably far worse at investing “profits”. It is likely to get lower funding costs (assuming it has its own currency!) and it often has the ability to force market outcomes. But all in all, no one seriously believes in general that a government that displaces business does something that boosts gdp. However, there are exceptions: certain businesses and even whole industries can manipulate markets and the gvt to create positions that afford even better rents than the public sector enjoys. Just look at poorly regulated private healthcare (like in the US) compared to the Australian system. Or compare the size of the legal services industry in the US with a non-common law country like Holland where tort (the market substitute for certain forms of regulation) plays much less of a disciplining role than regulation.
There are also situations where the gvt displaces a very large segment of local business and/or discriminates against it: not so long ago the gvt of Singapore (well documented, publicly argued) offered very attractive incentives to foreign investors (not only MNCs) not available to local businesses. And the state developed a state-owned business empire (now being privatized up to a point) that offered highly unfair competition to the locally owned private sector in areas such as access to land and top professional talent. This had something to do with lack of trust in the (mainly ethnic Chinese) local business community pre-LKY to contribute to productivity growth, since the gvt considered it backward and risk-averse.
All in all then, I would hesitate to derive too much from the relative size of gvt. Circumstances may be very important, institutional quality, etc. Governments waste a lot and do the wrong things, but so do businesses.
Maybe that is not what you were trying to prove with this quotation.
14. July 2011 at 01:33
@ StatsGuy
The EPA /is/ very anti-business /in effect/, for a good example of the difference, look at what happened in Eastern California wrt the Delta Smelt. In Europe or Australia that would have been laughed, /no one/ would have shut off the water to all those farms to protect a similar fish. There may have been EPA heads who weren’t very anti-business but the regs and laws already on the books, are more than just about any other country has to deal with wrt environmental protection. The sheer power and legal vagueness of the Endangered Species Act (which the EPA enforces) is one famous example. Another one, is wetland regulations which can be used to declare land protected wetlands, and you can’t get the designation removed (even if the land is never inundated), without paying hundreds of thousands of dollars. While there may have been politically appointed heads of the EPA that tried to force things the other way, the burden of law forces their hand and their behavior doesn’t have much effect on the bulk of the regulatory burden.
You give the example of the FDA versus Australia’s drug regulatory agency. The two are massively different. The FDA is /by far/ the strictest medical regulatory regiem. It makes many demands and requirements that are simply not required in almost any other country (including Australia).
Anyway my point is that Australia’s regulatory environment (some exceptions) is far less bad that the US’s at the Federal level. Yes, just like Australia each US state also has its own regulations (including environmental regulators.)
@Alex White:
“There is a federal agency called the Fair Work Ombudsman (and another called Fair Work Australia) designed to protect workers and stop them from being exploited by their boss. Also, Australia has a high level of unionism compared to the USA.”
You make my point for me. In Australia the agency works as an Ombudsman, in the US our agency helps discriminated people to sue their employers in court. Also, things that in Australia would just be laughed at as a joke, are lawsuit material here; for example: someone telling a racially based joke in a workplace. Reminds me of some employees we had to deal with at NASA when I was in florida. NASA kept them on staff because it would be cheaper to keep paying them a yearly wage than to deal with the (groundless) lawsuit if they tried to fire them.
“This is the most laughable of your comments. Australia’s banking system survived the global financial crisis so well because our banking system is far *more* regulated than the USA, and has been for many decades. The Australian Government also guaranteed the banks during the crisis. This is a good thing by the way.”
Ok, at this point I will have to assume you are unfamiliar with US banking law. The US is the most regulated western nation when it comes to banking. For example: many, many financial interactions are simply prohibited based on income. It would be /illegal/ for me, for example, to give money to a VC or a hedge fund to manage, as I am not high income (nor am I asset rich). It would be /illegal/ for me to give money to a friend to help him start a business (people do it anyway however). These sorts of things are where the phrase “three felonies a day” comes from.
Furthermore, the US has guaranteed consumer banks for decades. And the crisis in the US actually came about because of conflict between two different regulations. The accounting rules changed on how tier one capital had to be accounted for instantly making a large number of banks legally (but not practically) insolvent. This forced them to sell assets to accumulate more tier one capital under the new rules, which caused a crash in the asset prices. The ‘bailout’ was the treasury forcing the banks to sell them preferred stock (with a fixed payout of 6%!) so they would be adequately capitalized under the new rules. The actual amount of money the consumer banks had didn’t actually change very much at all, and their economic solvency didn’t change much at all either, just the accounting rules changed
However, the asset sell-off caused a crash which then affected the commercial banks and european banks (australia doesn’t have the legal split between commercial banking and consumer banking that the US does.)
In general, my argument is that the US has more (and worse for the most part) federal regulation than Australia.
14. July 2011 at 01:35
@ Kevin Dick
Agreed, thats the point I was trying to make.
Australia has high taxes so to achieve the growth it does it has to be rather market friendly. The US is less market friendly so to achieve its long run growth it has to have a lower tax regiem.
14. July 2011 at 01:39
@ Rien Huizer
“All in all then, I would hesitate to derive too much from the relative size of gvt. Circumstances may be very important, institutional quality, etc. Governments waste a lot and do the wrong things, but so do businesses.”
The difference is most businesses don’t have massive rents from taxation to allow them to keep making those mistakes for very long periods of time. The government does. When most businesses do something stupid, they pay for it both in governance (their stockholders voting) and from their customers. When a government doesn’t something stupid, the people who make that decision usually gain /more/ power to do more stupid things, because the problem becomes worse.
14. July 2011 at 01:41
@ Rien Huizer
I should add, sometimes voters punish the bad choices, but that punishment comes at long intervals and only affects politicians who would be in close elections anyway. People who are in ‘safe districts’ like John Baehnor and Nancy Pelosi are very unlikely to /ever/ be punished for their respective bad policy positions.
14. July 2011 at 03:24
Every time I see commenters such as those here going on about red tape and the EPA and anti business and too much taxes blah blah blah I’m just dumbfounded. Have they not been paying attention to the fact that we’ve been deregulating and slashing taxes for the last 30 years. With the help of Democrats and Republicans it’s been cut cut cut deregulate deregulate. Do they not realize that they won? Their Randian ideology is the ruling the roost. And the economy has never been shitier.
14. July 2011 at 04:02
Scott,
If you made an argument there, I didn’t see it.
Singapore has more than Public Housing. They literally have a department that centrally plans every square inch of the island for maximum economic growth. They own all the land, they run all the hospitals, they control most of the buildings. Government owned/controlled businesses make up around 60%-80% of GDP(Read about Temasek). Sure, they have bustling street markets and entrepreneurs, but the government controls the commanding heights with some help from multinational corporations.
The way to think about Singapore is that it’s an extremely well-run centrally planned state controlled by extremely competent benevolent dictators (Singapore has been known to cut electricity to districts that vote for the opposition). And they’ve done a great job! Singapore is on track to surpass New York in material living standards this decade.
But “Be strategically situated in the most important deep-water port in Asia and get yourself run by hyper-competent non-corrupt dictators” isn’t really a strategy that other people can copy.
14. July 2011 at 06:58
Doc,
I did not say that gvt inefficiency loses against private sector inefficiency all of the time. And businesses are not only S&P 500s, but especially lawyers, medical practitioners, banks, etc. Once the professionals control the infrastructure that gives them market power, there is no way to make then respond to market signals, except abrupt innovation. It is the matter of who and how controls the gvt’s economics (are the custodians’ incentives aligned with the public, the public sector or entities parasitic to the public. And who and how sets the rules that determine how businesses contract and compete. That is why I found it so interesting that someone mentiones a paper from Lund.
14. July 2011 at 07:00
Davis Shor,
Good description of Singapore. Or the Singapore that is about to be challenged. Nothing lasts forever OK?
14. July 2011 at 08:31
Lorenzo, You said;
“Australia has stronger prudential banking regulation than the US. Otherwise, the financial regulation is pretty light.”
I thought so.
Australia being short of land is like Saudi Arabia being short of sand, or Greenland being short of ice. I’m impressed that government policymakers could achieve that outcome!!
Peter, Thanks, I’ll do a post on that someday.
Miguel, But those that cut taxes and deregulated more did better than countries that cut taxes and deregulated less.
David, Why does every index of economic freedom have them #2 in the world? I could see one index getting it wrong, but all of them?
I’m sure an expert could list 100s of ways they are more free market than America. Laundry lists prove nothing.
Rocky Mountain states and Alaska are also mostly government owned–are they communist too?
Ironically half my commenters tell me Singapore in communist, and the other half tell me communist China is capitalist.
14. July 2011 at 09:38
Scott,
It’s very easy for an individual to open a business in Singapore, permit wise(Mainly because the government owns all the land and can regulate things in other ways). Taxes are very low due to government collecting it’s revenue from profits from state owned firms. Explicit government spending as a percent of GDP is low, mainly because the government provides benefits through state-owned companies. That’s enough to get you to the top of economic freedom rankings.
I’m not sure if you caught what I said before: Government owned and managed firms make up 60% of Singapore GDP (They’re called Temasek-linked countries, or TLCs). This isn’t remotely true in Alaska or the Rocky Mountains.
I don’t want to get stuck on definition debates, but the traditional definition of communism/socialism was when the government predominantly owned and controlled the means of production. Sure, there’s plenty of private business in Singapore. But there were actually a ton of private businesses in East Germany and Cuba, and even the Soviet Union had a McDonalds or two.
More broadly, I’ve always had issues with the “We should do X, like they do abroad, except for the thing that actually makes X workable/politically viable” arguments that people make. They’re particularly common with Australia and Singapore.
To throw another example, libertarians are always very fond of the relatively unregulated health-care systems of Singapore and Australia, without being aware that the primary component of both plans is that the government runs all the Hospitals and provides access to them nearly free of charge.
14. July 2011 at 18:15
David, I’d gladly trade our health care system for theirs, even with government-run hospitals. Our entire health care system (18% of GDP) is dominated by the government anyway. The “private health insurance” might as well be government, as with all the regulation there isn’t really a free market here in health care anyway. At least they waste 5% of GDP (at most), instead of our 18%.
If government-owned companies compete on a level playing field, and are not subsidized, they are functionally private. That’s true of Singapore Air, but wasn’t true of Soviet Aeroflot. I’m pretty sure anyone who flew on both airlines could spot the difference between communism and capitalism.
I’m not saying the Singapore government doesn’t intervene in many ways, but they allow enough competition to make the system pretty capitalist.
Many of the good things about Singapore and Australia are transferable, but the biggest advantage (small population) isn’t. Unless we split up into 50 independent countries, as I suggested in another post.
21. July 2011 at 18:27
Also David, as an Australian I can assure you that the government does not run all of the hospitals, first of all the government-run hospitals are run by the state governments; so there is a certain level of competition even in their case, secondly even those hospitals are mostly organised as some form of public-private partnership with the government providing the funds and a private operator doing the actual running, and finally while the big hospitals may be set up that way there are myriads of smaller hospitals and clinics that are wholly private; so at least in the Australian case your assertion is false.
22. July 2011 at 14:29
Thanks for the info Mabuse.
18. September 2011 at 23:36
A bit late, but if you want the background on Australian public policy and its dilemmas up to 1999, a paper with lots of graphs is here (pdf).
19. September 2011 at 09:34
Thanks Lorenzo, That looks interesting.