Crispin Hull's Portico: Subsidies

Thursday December 19th 2013

Portico: Subsidies

The trouble with economic rationalism is that it is neither rational nor economic. At least as practised by Australian politicians. For them, it is obeyed with varying degrees of purity.
We had a couple of classic statements of pure economic rationalism from Treasurer Joe Hockey and Prime Minister Tony Abbott in the past week or so.

  • Hockey - ''The bottom line is that governments should not be in the business of propping up private-sector operations.''
  • Abbott – “It is incumbent upon all private companies to run themselves effectively and profitably.”

The trouble is, this purity had rings of St Augustine about it: “Oh Lord, give me chastity and continence, but not just yet.”

The adherence to economic rationalist theory in this week’s statements were for future application to Qantas and the car industry, not a general statement of government conduct in the present.

So Hockey’s bottom line of not propping up private-sector businesses, did not stop him from deciding to prop up GrainCorp in the face of a US takeover bid. No chastity just yet when you are being done over by your National Party partners, in particular the gleeful Barnaby Joyce.

And Abbott’s finger wagging about effective and profitable running does not extend to $3 billion in government subsidies for the mining industry or the tens of millions handed to pharmacists who can delay passing on savings when drugs come off patent.

(Oh, is that why my friendly pharmacist has started to offer generic drugs more readily, I hear you ask. I thought they were doing it to help patients.)

Then there is the $5.4 billion a year subsidy to one of our most inefficient industries – tax deductibility for private-health-insurance premiums. But then Abbott once said that deductibility of private-health-insurance premiums “is in our DNA”.

No Augustinian continence (self-control) just yet when faced with big industry lobbyists or aging middle class voters.

If we were to take this week’s “Qantas- and car-industry-only” statements of pure economic rationalism and apply them across the board, the Government would be wallowing in cash.

But it would not necessarily be the rational or economic thing to do. Markets fail all the time. Some things are worth subsidising, even permanently. Others are worth helping with seed money. But others are a rent seekers; bludgers on the government tit; policy blackmailers; lazy or incompetent.HE

It is just plain silly, inconsistent and hypocritical to meet a call from Qantas for a change in government policy with some economic-rationalist tripe about governments not being in the business of propping up private-sector operations, when about $20 billion in government spending a year goes into precisely this activity – propping up private sector operations.

It would be much more rational and better for the economy if the government explained why it is helping some industries and not others and if it made the process more open. And “being in our DNA”  whatever that means -- is not exactly a rational explanation.

Once you start that explanation process, you would come across some pretty woolly thinking on both sides of politics.

Governments seem to throw money at the car industry because they have always done it. The agreements remain commercial-in-confidence, so the taxpayer has no hope of knowing if there is value for money.

We saw that this week. The decision for Holden to leave Australia was made in Detroit. We have given all this money to the company and there was obviously no guarantee for Holden to stay in the long-term. Apparently, there was no penalty for leaving, either. GM’s mainly US shareholders have taken the subsidies with no obligation to repay even part of them now they have pulled out of their side of the (apparently unenforceable) bargain.

And why did we throw money at the car industry when management happily negotiated higher wages than necessary and when it is not producing cars that Australians want to buy.

Qantas, too, cannot seem to get its costs under control and it has wasted a bucket on the JetStar foray. Why do we give diesel fuel rebates of $3 billion a year mainly to the mining industry?

Also, countries with a single national health insurer spend less for equal health outcomes than Australia. The private health-insurance industry spends about 14 per cent of income on administration, compared to less than 5 per cent for the public health-insurer. Why are we rewarding inefficiency?

A true economic and rationalist approach would be to ask whether we are getting value for money. The Productivity Commission does this from time to time, and does a good job, but it is restricted because it must work to references from the government, so some major subsidies are ignored and some references are skewed or are too narrow. Subsidies often have no time limits and the details of other industry assistance (especially to the car industry) is secret.

A good way to force more scrutiny would be to put sunset clauses on all subsidies and make all assistance conditional upon disclosure and a certain amount of self-help and wage restraint.

Instead, we have glib ad-hoc statements dressed up as statements of philosophic principle but which apply only as convenient or not just yet. And what exactly does Abbott’s election-night statement of being “open for business” mean? Does it mean the classic economic rationalist requirement for a level-playing field with minimal government interference – no favours for anyone and let the market decide? Or does it mean that some businesses will be more equal than others?
It looks increasingly like the latter. The only discernable pattern we have as to who or what gets government assistance is the beneficiaries’ strength of lobbying and their electoral pressure.
Labor likes highly unionised workforces and tends to support those industries. The Coalition likes big pharmacy; big mining and grey voters. Neither approach is especially rational or economic. By all means let the government hand out some seed money and tax incentives to new industries. But car manufacturing ceased to be a new industry in about 1955. If it is not up to surviving now, it never will be.