Monthly Archives: May 2016

Forget the pundits, budget papers show Coalition – not Labor – wrecked the budget

What’s fascinating about mainstream budget punditry is that it’s essentially a fact-free zone. This is ironic, because it is one area of public policy where data is straightforward and readily available.

What cannot be disputed is that under the Coalition the deficit has blown out from $30.1 billion to $40.0 billion. Net debt has increased from $184.0 billion to $285.8 billion, gross debt from $325.5 billion to $477.0 billion.

As the budget papers show, this cannot be blamed solely on the sluggish economy. The Coalition’s policy decisions sent the budget further into the red. By contrast, decisions in Labor’s last term actually reduced the deficit. By any objective criterion, it is the Coalition who should be under interrogation over the budget.

But rather than opening the budget papers, pundits take their cue from prevailing wisdoms and gut instincts, aka the vibe of it. The dominating vibe is the so-called ‘daddy’ versus ‘mummy’ party divide. As the ‘mummy’, Labor thrives at ‘soft’ things, such as health, education. As the ‘daddy’, the Coalition leads on ‘hard’ things (being firm with finances, protecting us from baddies, etc). By some inexplicable psychological inference, pundits assume the converse to be true as well. Labor people are warm and fuzzy, so they must be bad at money. This does not actually follow, of course, but it’s the vibe. One could unpack the ideologies behind this reasoning but that is not my goal here.

For the pundit, the vibe seems to be confirmed by businesses support for Coalition economic policy. Pundits think the economy = business, because both share a money vibe. But business people are neither public economists nor impartial observers. On average they are relatively wealthy, especially those who work on financial matters and who have access to journalists. They stand to win from Coalition policy, so they back it in. Moreover, those who call the shots in media companies are themselves upper income managers.

These structural biases mean that Labor faces an uphill battle on economics. Pundits presume Labor to be wrong, until proven right.

Just today in the Australian Nikki Savva casually declares that “Labor’s costings don’t add up”. On what basis? Has she seen the costings?  Has she undertaken costings herself?

Nope, no basis needed. The Coalition told her so. And it rings true because everyone knows Labor is terrible with money. This is stock-standard practice for what passes as economic “journalism” in Australia.

It gets better. The Australian’s official newspaper opinion column asserted :

It is hardly surprising a Coalition intent on exposing Labor’s spendthrift policies and habits would use the highest possible figure, based on the most generous opposition rhetoric and promises it could find. Perish the thought that politics might intrude on an election campaign. We all know the jousting at play here. But the onus is on Labor to say which promises it will honour, which cuts it will no longer oppose and which savings measures it may assist through the Senate.

This single paragraph illustrates the hilarious extent of the punditry’s double standard. The Treasurer made a specific claim that Labor has a $67 billion black hole. Within a day, more than $30 billion of errors were identified in his calculation. Humiliating. But the Australian is sympathetic to a $30 billion error when it is a political strategy against the dirty socialists. That’s a black hole they can get behind. Sometimes the only way to beat the terrorists is to fight dirty, you know.

Notwithstanding this gross error, the “onus” remains on Labor. It’s Labor’s responsibility to continue to disprove a made-up number. Such is the presumption of Labor’s economic guilt.

So much for the punditry. Let’s venture out of this parallel universe and into the real world for a moment. As I previously argued, there is a simple indicator of a government’s fiscal discipline. Sum the budget impact of a government’s policy decisions, over four years, as published in the budget papers. This has the advantage of removing the impact of economic conditions outside the government’s control, such as change in terms of trade.

The figures are telling:

updated budget 2

(See here for the underlying data.)

John Howard’s term from 2004 to 2007 was by far the worst, costing the budget a whopping $202.2 billion. This is consistent with research from the IMF, which identified him as the most profligate Australian Prime Minister in recent decades.

Policy decisions in Labor’s second term actually reduced deficits by $45.7 billion. The Abbott/Turnbull Coalition government has abandoned this rectitude, increasing deficits by $17.8 billion.

So much for the vibe.

The sum of four-year estimates is by no means a perfect indicator. In particular, it does not capture the long-term budget position. But it is a reasonable starting point for estimating how much governments contributed to the surpluses or deficits during their time in office. That is the focus of much of the public debate.

The presumption of budget guilt should clearly be on the Coalition.

Gamblers should have the freedom to choose constraints

The community should enable gamblers to set, in advance, hard limits on the amount they bet.

Walk into a NSW pub or club at any given time, on any given day, and you will witness tragedy. You will find people with bodies hunched into pokie machines, empty faces gazing zombie-look into a whirl of colour.

Some of the gamblers are in control, only having fun. But some are miserable addicts; pouring their family’s livelihood down the drain.

It is hard to understand how our society considers it acceptable to actively facilitate and profit off such pathological self-destruction. It hurts not only the addicts themselves, but their families as well.

Few in the community would support dealers profiting off heroin addicts. Why is the principle different for gambling?

Putting aside innocent families, it might be argued that gamblers should be allowed to destroy themselves due to a principle of self-determination.

This viewpoint is increasingly hard to reconcile with empirical research from psychology and economics.

Traditionally neo-classical economists have assumed that an individual generally behaves as a unified subject who rationally maximises consistent and stable preferences. That implies a faith in our moment-to-moment choices. The famed micro-theorist Gary Becker even developed a model of “rational addiction”.

But decades of empirical work has shown that in many domains our choices in fact do not follow a consistency that is traditionally considered a minimum threshold for ‘rationality’.

Rather we display “hyperbolic discounting” – that is, placing a disproportionate emphasis on immediate pleasure over future welfare. For example, someone who chooses to wait 365 weeks for $120 rather than 364 weeks for $100, might make the reverse decision if it’s a choice between next week and this week. There is something seductive about receiving a reward right now, which distorts our usual preferences for patience. Thus our own choices about time and money are internally inconsistent.

A related area of research has shown how choices change depending on whether they are made in “hot” or “cold” psychological states. For example, in an addict’s calm reflective moments, they may have a genuine determination to quit. Their ‘cool’ long-term-focused self wants to rein sovereign over their ‘hot’, impulsive self.

This is not just cheap talk. They demonstrate willingness to pay, investing time and money into therapy and rehabilitation. And yet… in a moment of weakness the same person will go and get smack.

One way economists are conceptualising this internal inconsistency is to assume multiple ‘selves’, pulling individuals in different directions (for example here).

This leaves an obvious question. Which ‘self’ should public policy take as the authority for purposes of maximising self-determination? The ‘cool’ self with its eye on long-term wellbeing, or the ‘hot’ absorbed in its immediate impulses? We have to choose.

I would argue we should empower our calmer, more considered selves.

Applying this to gambling would enable gamblers to impose, in advance, a cap on the amount they bet each year.

To achieve this, the government could issue cards to everyone in the community who wants to gamble. Each card-holder would be given the option of setting an annual limit. If they choose to do so, they can lower the limit at any time, but not increase it. Gambling organisations would only be permitted to accept bets from those with a card (although card holders can elect not to have a limit). All card holders would see their yearly spending total at the start of each gambling session.

Ideally, this policy would be funded through cost-recovery arrangements levied on the gambling industry. Alternatively – if we wanted to be more libertarian – it could be recovered through fees on those who elect to use the cap facility. That way it wouldn’t financially affect anyone except the individuals who make a choice to use the service.

Given that this policy expands an individual’s choice set, even a dogmatic individualist would have a tough time mounting a coherent argument against it.

Privileging the long-term self over the short-term self has obvious moral and practical benefits. Free market liberalism, however, does the opposite.

The free market liberal model worked pretty well for a long time. But as our societies become wealthier, and as technology is allowing us to satisfy whims 24/7, our major social problems are increasingly caused by too much consumption as much as too little consumption.

Think of the major emerging health challenges – diabetes, obesity, drug and alcohol addiction – these are all related to impulsive consumption of temptation goods. One of the major demographics in the USA is experiencing an unprecedented decline in longevity due mostly to these temptations.

Only an expanded model of self-determination can address the growing gulf between spontaneous behaviour and what individuals really want for themselves. In this environment, maybe it will be the government – rather than the market – that will play the key role in expanding individuals’ capacity to self-actualise, to be who they truly want to be.

Confiscate half the income of all anti-vaxers (not just the poor)

Current penalties for non-immunisation are an imposing threat to the poor but completely fail to address shockingly low rates of vaccination in wealthy communities.

Since 2014, parents who do not vaccinate their kids lose eligibility for Family Tax Benefit A. This was a highly popular policy and supported by both major parties.

Losing FTB A is a big deal for poor families. For example, FTB A makes up around $21,000 of the $39,000 of assistance to an unemployed single mum with three kids. So the most vulnerable members of the community stand to lose around 54 per cent of their income.

But if you want to find immunisation shirkers, you look to the wealthy. Vaccination rates are inversely correlated with income. The wealthiest suburbs in Sydney like Mosman and Bondi have some of the lowest vaccination rates in the country. These people don’t care about FTB A, because they don’t receive it.

The obvious solution is to apply painful income disincentives consistently across the community. The government should therefore confiscate 50% of the total disposable income of all Australian families who do not vaccinate their children, regardless of wealth.

So a family in Mosman with a household disposable income of $250,000 would be fined $125,000 each year. Assuming this family has at least one child aged under 18 for a total of 25 years, they would pay $3.125 million. This might sound harsh, but it is proportionate to the penalty on the poorest and most vulnerable in the community.

The public health arguments are identical for both. The case is in fact stronger for families in Mosman and Bondi than most other areas because herd immunity is more at risk there. Blue collar areas like Campbelltown, where our hypothetical single mum lives, have the nation’s best vaccination rates.

Perversely, a consistent income disincentive would be more controversial than the inconsistent one currently imposed. Perhaps the stated justification of public health is really only half the story. The other half is a conservative morality tale. It’s the idea that whereas market income is a right, social security is a privilege. It’s a charity service conditional on ‘deserving’ behaviour.

But for a social democrat the entitlement claims are surely the reverse. Poor kids have a right to a decent relative standard of living, but the wealthy do not have the right to all of their labor and investment income. The latter is inherent in the principle of progressive taxation.

We could argue competing fairness claims all day, but this is irrelevant to protecting kids from diseases. As Matt Bruenig has argued, those who promote punitive income-confiscating interventions love to target social security, but there is no coherent justification for distinguishing between income sources when promoting good behaviour. The notion that infectious diseases care about social dollars but not market dollars is obviously absurd.

A fifty percent income cut is a tough penalty. I thought it was on the harsh side, but society has spoken. The penalty must be applied to all – rich and poor alike.