Thursday, November 26, 2020

It's time to go to bat for market forces

It could be the news of not one, but two, COVID-19 vaccines with over 90 per cent effectiveness that could be widely distributed before winter. It could be some economic green shoots, with some forecasters - particularly at the big banks - predicting a far faster recovery than first feared.

It could be just that it's nearly summer time.

Economic optimism is a good thing in more ways than one: it's like a self-fulfilling prophecy. Optimism breeds consumer and business confidence, which itself generates the desired investment and economic growth to beat the pandemic recession.

Of course, given what 2020 has dished out thus far, it might be wise to exercise some caution amid the optimism - lest we next suffer a plague of locusts or some other biblical black swan.

Yet, while the short-term issues associated with the recovery are crucially important, they're not the only serious economic problem we face.

Although it may seem like the sort of dull thing we used to be concerned about back when we didn't have any real problems (circa 2019), you may recall that wage growth leading into the recession was at near record lows, despite a 28-year run of uninterrupted economic growth.

As the Productivity Commission pointed out in its latest report on productivity, stimulating and maintaining productivity growth are the only things that will boost wages in the long term.

There are two roadblocks to rebooting productivity, one on the left and one on the right. From the right, the concern is the re-emergence of economic nationalism and protectionism. From the left, the issue is the strangling growth of regulation.

It took a long time for Australia to move away from protectionism. There is a serious risk that the border safety concerns of the pandemic will drive Australia, and the rest of the world, back towards the insular, protectionist attitudes that were prominent in the 1950s, '60s and '70s.

As the Productivity Commission explained, the "Fortress Australia" approach of protection all around was deeply flawed: "The walls of Fortress Australia were unable to protect us from the economic turmoil of the 1970s and contributed to Australia sliding down the income ladder."

Scepticism of a free trade-led approach to international relations had been growing for years before the pandemic.

In the United States, both sides of politics have been openly expressing hostility to the merits of free trade deals. President Donald Trump has been a strong proponent of economic nationalism: specifically the idea that America is a loser from trade with the rest of the world.

A big part of Trump's pitch to "make America great again" was bringing manufacturing jobs back to America.

Of course, the unexplained flaw in this argument is that most of the jobs were actually lost to automation not trade. And the ability to manufacture far more than we used to, at a lower price, thanks to automation and productivity gains, is one of the most tangible examples of why we should embrace a pro-market agenda.

A pro-market agenda is not a pro-business agenda: it's a pro-consumer agenda. After all, despite what the politicians say, the gains from trade do not primarily arise from chiselling out access to distant markets for producers.

The biggest benefit comes from the competition that foreign producers bring to domestic markets. Competition drives innovation and cuts margins: that means more products and lower prices for consumers.

Competition forces firms to become more efficient to thrive. Firms protected from that competition grow fat and lazy, taking their customers for granted because they have nowhere else to go.

Regulation is a different type of limitation on competition, one that is equally damaging and even more insidious. Whatever lofty language is used to justify them, regulations are primarily about government control over businesses and markets.

Sometimes that control is exercised effectively, for a good purpose; such as regulations around manufacturing standards for medicines and medical devices.

But more often, regulation - regardless of how well-intentioned government is - creates as many problems as it solves. Regulations may create barriers to entry and flow through into unaffordable price rises.

The best example here is childcare, where the National Quality Framework has driven rapid growth in prices and out of pocket costs, despite increasing government subsidies.

Overzealous regulators can also create perverse outcomes, like ASIC's enforcement of responsible lending laws.

And sometimes regulation exists solely for the purpose of protecting vested interests, to the detriment of consumers - such as restrictions on the placement and ownership of pharmacies.

The number and scope of regulations imposed by government has exploded in the last decade or so. It would be convenient to point to the global financial crisis and its supposed failure of capitalism as the genesis of this trend, but in reality a desire to tamper with market forces to control economic outcomes far predates this downturn.

The left of politics in particular has embraced the regulatory state, both because of a discomfort with markets and because the declining power of unions has weakened their ability to push their social and political agenda on business and society through industrial muscle.

The distrust of market forces and the supposed unfairness of the outcomes from free markets are common to both right-wing protectionists and left-wing regulationists. The COVID-19 pandemic has enabled and encouraged the expansion of these attitudes.

Yet, as the Productivity Commission and the governor of the Reserve Bank have both made clear in recent days, freeing up market forces is the key not only to emerging from the COVID-19 recession but to sustained income growth thereafter.

If the green shoots of recovery are indeed more robust than they seemed a few months ago, it will be because Australia's efforts at deregulation and opening of markets in the 1990s and 2000s made our economy one of the most resilient in the world, in spite of the hostility to those ideas that has been growing since then.

It will not be easy to reignite this agenda. A lot of the low-hanging fruit has been picked, and what's left will require taking on entrenched vested interests (particularly in the public sector, where the productivity gains promise to be the greatest).

But if we want broad-based wage growth, then it's time to go to work.

Cheap, abundant gas cooks the green guilt industry

The conviction that global warming requires us to find new ways to burn other people’s money is hard-baked into the narrative of environmentalism.

Last week, the Grattan Institute took to cooktop shaming to make that case for switching to electricity. If you’re cooking with gas, we were told, you’re playing with fire.

Banning the installation of gas in new homes is “a prudent, no-regrets option” as a prelude to phasing out gas altogether.

“It may be painful for some in the short term,” Australia’s richest think-tank concedes, “but neither wishful thinking nor denial will serve us well.”

Installing electric cooking and water heating appliances adds $2500 to the price of a new house, and retro-fitting an existing house will cost $3800 more. What about the poor people? No problem. Electricity companies can pay for new electric appliances and recover the cost over time through additional electricity charges, says Grattan.

Electricity may one day be cleaner than gas, but to force a switch now would only increase emissions. Cooking with electricity is effectively cooking with coal for 60 per cent of the time and gas for another 20 per cent.

The incessant demand to commit to a target of net-zero emissions by 2050, if not sooner, ignores the fact that we don’t yet have the technology to get there. Pragmatism is an inadequate response to the apocalypse they insist is heading our way. It is tempting for a Liberal government to avoid the argument by making the pledge anyway. After all, Scott Morrison’s government will be in its 12th term before it has to deliver.

Yet a commitment to net-zero emissions in 2050 demands that we accelerate emissions reductions now, leading to the dangerous, knee-jerk responses of the kind advocated by Grattan.

Gas is a fossil fuel, ipso facto, it must be purged from our energy supply, or so the thinking goes. Hence Grattan’s expectation that gas will inevitably play a declining role in our energy mix, and we must start turning down the flame right now, whatever the cost.

The path to net-zero emissions will be revealed in the fullness of time and may or may not mean turning off the gas. It is bound to include offsets, such as the sequestration of carbon dioxide into soil where it can be put into productive use, producing better food, more productive farms, greater drought resilience and biodiversity.

The notion that the energy sector alone can achieve net-zero emissions is an assumption it has become heresy to deny. For some, the cost of over-ambitious emissions reduction targets is proof of their virtue.

Economic pain and environmental gain have become inextricably linked in the climate change narrative. Last year the same think-tank warned: “Australia will need to make faster, more expensive changes to get back on track.”

Yet the assumption that efficient technology costs more than the technology it replaces runs counter to our experience. A Honda Civic today costs roughly the same as new model did in 1973 but delivers twice as much power and lower emissions, thanks to investments in research and development in a highly competitive market.

For the past 50 years, however, the environmental debate has become shrouded in apocalyptic thinking and overlaid by puritanical guilt, led by people who doubt the power of free-range human ingenuity to deliver a better future. In the dull, zero-sum world of sustainability, anything that adds to the joy of human existence imposes a cost on the rest of nature.

Rational thinkers on the centre-right have abandoned the space, leaving the ironically named progressives in charge. The oil crisis that gave birth to the hatchback reinforced the conviction that excessive consumption was draining the world of energy and that economic growth should be curtailed.

Innovation in both car manufacture and oil exploration has since allayed the fears that peak-oil was just around the corner, but the anxiety lingers.

Grattan’s speculative assessment that the price of gas will make it too expensive to bring down the price of electricity or the cost of industrial production underpins its claim that it is yesterday’s fuel.

Yet the spot price of gas has fallen considerably in the east coast market since its peak early last year. Lower-priced offers from gas-powered generators in turn helped bring down wholesale electricity prices, according to the Australian Energy Market Operator.

The removal of moratoriums to unlock supply in NSW and Victoria, together with the expected arrival of re-gasification terminals in one or more east coast locations, will further bring down prices, together with government moves to introduce more market transparency and new investment in gas pipelines.

The prospect of cheap and abundant gas should calm the nerves of those concerned about greenhouse gas emissions. The renewable energy sources in which we have invested so heavily will at last be able to pull their weight supported by quick-fire gas, which Chief Scientist Alan Finkel describes as “the perfect complement to wind and solar”.

The impossible trifecta of energy that is cheaper, more reliable and greener at last seems possible, a win-win for people and the planet.

This what a rational environmental policy might look like if a rational approach was ever articulated. It is advancement through incremental improvement rather than by abolishing capitalism and starting again.

A Liberal approach to the environment sees no conflict between economic wellbeing and the environment. Indeed, it recognises that a strong economy is a precondition for environmental improvement and that attempting to reduce energy consumption by constraining supply is a race to the bottom.

Crucially, it avoids the conceit of perfect knowledge in a policy realm that is exceptionally complex. It does not attempt to pick winners or over-promise. It prefers, in the words of FA Hayek, “true but imperfect knowledge, even if it leaves much undetermined and unpredictable, to a pretence of exact knowledge that is likely to be false”.

China’s ‘major’ Australian miscalculation

Xi Jinping is carrying out an aggressive plan to force Australia to obey China – but there’s something “major” he wasn’t banking on.

Chairman Xi Jinping is urging his nation onwards and upwards on a new Silk Road towards international dominance. But he’s hit an unexpected roadblock: Australia. Now he’s getting angry.

And his “wolf-warrior” diplomats are leaping into the fray. “China is angry. If you make China the enemy, China will be the enemy,” a Chinese diplomat “leaked” to Nine Newspapers on Tuesday.

And it’s all Australia’s fault. “Responsibility for causing this situation has nothing to do with China,” Foreign Ministry spokesman Zhao Lijian said in a conveniently timed address to state-controlled media in Beijing later that same day.

“The Australian side should reflect on this seriously, rather than shirking the blame and deflecting responsibility,” Zhao warned. He failed to reflect on Beijing’s role in the escalating standoff.

Prime Minister Scott Morrison, however, did. “Australia will always be ourselves,” he said. “We will always set our own laws and our own rules according to our national interests – not at the behest of any other nation, whether that’s the US or China or anyone else,” he said.

It’s exactly what the wolf warriors didn’t want to hear.

Chairman’ Xi’s ambitions seem likely to continue to be frustrated by Australia. But a frustrated Xi poses a “special kind of danger”, international relations analysts warn.

Beijing insists it has never interfered with other countries’ affairs. Nor is it interested in doing so, foreign ministry spokesman Wang Wenbin said last week.

On Tuesday, Beijing proceeded to do precisely that. It issued a dossier of 14 grievances against Australia. Addressing these “would be conducive to a better atmosphere”, an embassy official said.

Changing these behaviours to ones more sensitive to Xi Jinping Thought would result in restored economic ties. But there’s a problem. Australia has a history.

It’s a unique history that has produced an eclectic national culture of political incorrectness. Not to mention irreverence, independence and an inherent suspicion of authority. None of these suit an autocratic mindset.

They tend to sit uneasily enough as it is with just about every Australian elected government. Until they’re back in opposition.

The crackdown against Australia’s recalcitrance is just one element of Chairman Xi’s rush to cement power. At home, he’s moving hard against any possible perceived threat to the Communist Party he dominates.

He’s even adopted a new title – “helmsman” – once reserved only for the great founding father Chairman Mao Zedong.

“Xi Jinping certainly seems to be cracking the whip with a purpose and a force that, if not new, is certainly designed to impress upon the party, entrepreneurs, citizens and the rest of the world his authority and determination,” Oxford University China Centre research associate George Magnus told US media.

Helmsman Xi unveiled his revised five-year plan to a Communist Party assembly last month.

He urged his commissars to redouble their efforts towards turning his promises into reality. He wants China’s economy to double by 2035. He wants greater state control of Chinese businesses. He wants Hong Kong and Taiwan to submit to his will.

Meanwhile, Xi’s been busy securing his position. He’s made himself national police chief. As chair of China’s Central Military Commission, Xi has ordered an extraordinary series of overlapping military exercises – the latest testing civilian industry’s ability to adapt to military demands urgently. Xi blames an “intensifying situation and increasing risk of military conflicts” as the need for such war preparations.

His Premier, Li Keqiang, is calling on Southeast Asian nations to quickly agree with Beijing’s “Code of Conduct for the South China Sea”. Their compliance would demonstrate “wisdom and capability to take good control of the South China Sea and maintain the peace and stability of the South China Sea”.

On top of all this, Xi wants to reshape the international order in his own image. Which is where Australia’s getting in the way.

“Xi Jinping’s China is an infirm colossus that will be frustrated by unmet ambitions. A strong but frustrated country poses a special kind of danger. This is the China Nightmare,” writes American Enterprise Institute Director of Asian Studies Daniel Blumenthal.

“Although China was ruled by a dictatorship before Xi’s ascent, he has made a radical bid to obtain almost total authority over his country’s affairs. In doing so, he has paralysed the normal functioning of the state’s bureaucracy.”

But Beijing’s belligerence is backfiring. Instead of compelling international compliance, it’s forcing South East Asia closer together for mutual protection.

“The ‘Beijing model’ was supposed to be an efficient alternative to democracy, which was supposedly more sclerotic and incompetent. Instead, the Beijing model has now inflicted untold misery on its own people and the rest of the world,” Blumenthal writes.

Canberra and Tokyo this week signed a new defence deal making it easier from troops of both nations to work with each other. Though hurdles, such as making Australians subject to Japan’s death penalty, are yet to be resolved.

The need for such a “special strategic partnership” is pressing.

Japanese Premier Yoshihide Suga joined Prime Minister Morrison in expressing “serious concerns” about “militarisation” across South East Asia. They stated the alliance’s “strong opposition to any coercive or unilateral attempts to change the status quo and thereby increase tensions in the region”.

Beijing doesn’t accept such tensions exist. Its territorial claims are uncontested, it insists. And the opinions of neighbouring nations and international courts of arbitration are irrelevant.

“(The) Chinese side is strongly dissatisfied and firmly opposed to their press statement in which they accused China on the South China Sea and East China Sea issue”, Zhao said.

Foreign Ministry spokesman Zhao told a Beijing briefing on Tuesday that “some” Australians harbour ideological prejudice, regard China’s development as a threat.

He went on to say Australia’s actions had “seriously hurt the feelings of the Chinese people” – despite a Communist Party approved editorial having declared “Australia immature to be scared of Chinese scholars’ candid opinions”.

Australia, however, has its own feelings. And Prime Minister Morrison is unapologetic.

“Having a free media, having parliamentarians elected and able to speak their minds is a cause for concern, as well as speaking up on human rights in concert with other countries like Canada, New Zealand, the UK and others in international forums … if this is the cause for tension in that relationship, then it would seem that the tension is that Australia is just being Australia,” he said.

“Under Xi, the Chinese government’s goal is … a new network of strategic partnerships with China at the centre, and to propagate a “China model” of economic and political governance. It wants to create a new world order based on what it calls a “community of common destiny” that reshapes global institutions to be more compatible with the CCP’s own authoritarian governance,” Blumenthal writes.

Former Prime Minister Malcolm Turnbull summed up the situation last week: “These sorts of actions, whether it’s trade action like that or furious editorials in the Global Times or People’s Daily, are all instrumental, they’re designed to achieve a certain response, which in our case is compliance.”

Electric car tax spreads to new states

Controversial new taxes on electric cars are likely to be implemented by Victoria and NSW as well as South Australia.

Pitched as a way of making up for lost fuel excise revenue, special levies on electric vehicles are seen by supporters as a fair way of paying for road infrastructure, while opponents say extra costs will stifle growth of zero emissions vehicles.

Owners of conventionally powered vehicles pay for road infrastructure through fuel taxes of about 40 cents per litre, a cost owners of electric vehicles do not bear.

South Australia became the first state to commit to an electric car taxes in November, when treasurer Rob Lucas flagged plans to implement new levies for the 2021-22 financial year, in the form of extra registration fees, and mileage-based charges.

“Electric vehicles do not attract fuel excise and therefore make a lower contribution to the cost of maintaining our road networks,” Mr Lucas said at the time.

Victorian treasurer Tim Pallas revealed plans to introduce state levies on electric cars on Saturday.

Mr Pallas told the ABC “we need to recognise we have to put in place appropriate arrangements as we move to more electric vehicles and low-emissions vehicles on the network”.

Victoria will charge owners of electric or hydrogen powered vehicles 2.5 cents per kilometre for road use, while plug-in hybrid vehicles will pay 2.0 cents per kilometre.

It means electric vehicle owners who travel 15,000 kilometres per year will have $375 added to their registration bill.

By comparison, a Volkswagen Golf 110TSI owner who completes 15,000 kilometres of driving while matching the car’s official petrol consumption figure of 5.4L/100km would pay $342.63 in fuel excise currently taxed at $0.423 per litre.

The NSW Government also looks likely to implement EV-based taxes in the future.

A NSW Treasury review of federal financial relations published in June 2020 said “electric vehicles still use the roads and must share the costs of doing so”.

Treasurer Dominic Perrottet told The Australian last week EV taxes are “something that I’d obviously want to take to cabinet within the next 12 months”.

Infrastructure Partnerships Australia chief executive Adrian Dwyer released a report in November 2019 saying taxes on electric cars would be “a home run reform” and must be introduced quickly.

“Once there is an electric car in every street, the opportunity will be lost,” he said.

The Australian Automobile Association, parent body to motoring clubs such as the NRMA and RACV, says there is widespread community support for electric vehicles taxes.

A survey of more than 4000 of its members agreed that “owners of electric vehicles should contribute towards the costs of the nation’s roads in some way”.

AAA managing director Michael Bradley said the Federal Government should step in to make sure EV taxes are nationally consistent and do not stymie green car sales.

Electric cars represent far less than 1 per cent of Australian new car sales.

Tony Weber, chief executive for the Federal Chamber of Automotive Industries, said the Victorian Government’s decision to tax battery-powered cars could “kill the technology at its infancy”.




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