My article in today’s Guardian – The United States of Australia?

Are we witnessing the emergence of the United States of Australia?

Australia can have its cake and eat it too, because a healthy and materially secure population will repay enormous economic dividends. Instead, we’re going further down the US path


Originally published at, Monday 26 May 2014 14.40 AEST

australian dollar
‘Basically everything about the US system is worse for all but those at the top of the economic pyramid’. Photograph: Torsten Blackwood/AFP/Getty

In terms of social and economic policy Australia has, for the last 40 years or so, sat somewhere between the free market individualist policies of the Unites States and the social democracy approach of much of continental Europe. Australia has had effective social safety nets, free universal healthcare (as long as your teeth and gums don’t count as part of your body) and a relatively high standard of public education. However, our social safety nets and our healthcare system have never been as generous as those of Europe’s most successful social democracies.

Walking this line between the two apparent alternatives has been viewed by many as a good balance; humane but not too much of a burden to taxpayers. Political pressure has been maintained in both directions, balancing each other out and keeping us more or less static. Labor governments take us little baby steps closer to the European side and Coalition governments come in and take us a few baby steps back towards the US.

The 2014 coalition federal budget was aimed at dramatically upsetting this balance, taking several very large steps towards the US model.

Currently the majority of unemployed Americans get no unemployment benefits. Their public school outcomes are amongst the worst in the developed world and their public healthcare is extremely limited and particularly expensive for the mediocre outcomes achieved.

However, their system has resulted in relatively high levels of economic growth when compared to most of their European counterparts. The downside of this economic success story is that the overwhelming majority has gone to those who are already well off. The majority of US citizens have seen little or no growth in their real wages or material standard of living over the last 40 years. They work longer hours than Europeans, they have less paid leave, less penalty payments for working outside normal hours and less support should they lose their jobs. In other words, basically everything about the US system is worse for all but those at the top of the economic pyramid.

Perhaps even that would be OK if the US was the land of opportunity as it’s often claimed. Unfortunately even that’s not the case. In the US, the link between sons and fathers income is twice as strong as it is for Scandinavian countries. In other words, a child born to poor parents in the US is twice as likely to stay poor as one born to poor parents in northern Europe. The same goes for educational and health outcomes.

Which of these two directions we want to take is a critical question but it is not one that we are answering with our eyes open. The backlash against the Abbott and Hockey budget has been strong but, for the most part, it has not stemmed from an awareness of these bigger picture issues.

As I have written elsewhere, there is no shortage of money to pay for a high standard of education, healthcare and welfare, it’s just a matter of political priorities.

We are a relatively low taxing country with low public debt. We know that investment in a first rate public education and health system is critical if we value equality of opportunity and long term economic prosperity. These facts, together with a raft of options available to increase government revenue, provide us with a choice that the Abbott government doesn’t want us to know exists. We really can have our cake and eat it too because a healthy, well educated and materially secure population will repay enormous economic dividends in the medium to long term. There is no imperative to choose between deep spending cuts and economic ruin.

Hockey and Abbott have made their choice. They want us to follow further down the US path. They believe that if you want something, you should pay for it yourself. If you can’t afford it then you don’t deserve to have it because you haven’t worked hard enough or tried hard enough. Their ideology doesn’t recognise the reality; in the kind of society they want us to have if you can’t afford something you probably weren’t born to rich enough parents.

If we consider the wellbeing of all Australians to be important then the Scandinavian model is the clear winner. We can and should increase the proportion of GDP taken in tax and use it to provide the best opportunities to our young people and the best quality of life we can to society’s vulnerable, regardless of where or to whom they were born. This means first class universal education and healthcare and the guarantee of a decent standard of living. If these are not our aims then what is the point of economic progress?

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Budget vision

By Warwick Smith

No other event equals the release of a federal budget for a clear statement of what the government really intends for the country. Almost everything else they do is smoke and mirrors.

The budget tells us who or what the government favours, what they consider indispensable or sacred and what they wish to destroy. From a bigger picture perspective it also gives us some insight into their real vision for the future of the country… if they have such a vision that is.

What we see in the detail of a budget is often in stark contrast to the public statements of governments. As the great U.S. journalist I.F. Stone told journalism students:

“Among all the things I’m going to tell you today about being a journalist, all you have to remember is two words: governments lie.”

The budget is one of the few opportunities to see these lies exposed in print.

So, what does the budget tell us about the Abbott government’s vision for Australia and how does that compare to their stated values?

The much discussed $7 GP co-payment will, according to epidemiologists and doctors, lead to significantly reduced health outcomes, particularly for the poorest Australians. Despite the way it’s often reported, the Medicare co-payment is not supposed to repair the budget through increased revenue but by reducing the demand for medical services. The revenue will go into the medical research fund so it has no impact on budget deficits. GP visits are the early warning system of healthcare and are critical for effective prevention and early diagnosis of disease. Prevention and early diagnosis reduce health costs in the long run.

The GP co-payments, therefore, will not only result in poorer health outcomes but are also very poorly targeted as a cost saving measure. It would be naïve in the extreme to think that the coalition government are not aware of these facts. If the GP co-payment is not about good health outcomes and is not about saving the government money, what is it about?

The simple reality is that the Liberal party have always hated Medicare. They would love to destroy it but they cannot because it is so popular and so effective. The GP co-payment is just one blow in the death by a thousand cuts the Coalition intends to inflict on our universal healthcare system. Reduced federal funding for hospitals is another. Just like their Republican counterparts in the US who have so stridently opposed the introduction of a basic medical safety net, the Liberals are, at heart, social Darwinians. If you want something, pay for it yourself. If you can’t afford it then you don’t deserve to have it because you haven’t worked hard enough or tried hard enough.

Hockey’s philosophy is “if you can’t afford it you don’t deserve to have it”.

This underlying philosophy can be seen scattered throughout the rest of the budget. Joe Hockey has told us that everyone needs to do the heavy lifting for this budget. The exclusion of any long term measures that increase the contribution made by wealthy Australians tells us that Hockey and Abbott believe the wealthy already do enough heavy lifting and should not be further burdened. The people who need to contribute more are those in the middle and below but particularly the unemployed, the poor and the sick.

Small details that together reveal the bigger picture are everywhere. Tradies will have to drag their weary bodies onto building sites until they are 70. If you’re under 30 and you lose your job you’ll have to wait six months before you can get the dole (what you’re supposed to live on during that time is anybody’s guess).

All these changes are justified by the great lie that sits behind the 2014 federal budget; that there is a fiscal crisis that must be urgently addressed by cutting government expenditure. There’s no shortage of detailed commentary showing that this crisis is nine tenths fabrication but that doesn’t stop the government saying it nor stop many news outlets repeating it with a straight face.

Abbott and Hockey are jealous of all the governments throughout the developed world who have a genuine economic crisis to use as an excuse to reduce the size of government. So what do they do? They create a fictional crisis here so that they can join in the fun.

As Grover Norquist famously said, the goal is to “get government down to the size where we can drown it in the bathtub.”

Are there long term structural problems with the budget that should be addressed? Yes. Is dramatic government cost cutting required to address these problems? No.

The rest is smoke and mirrors.

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Great article by Tim Thornton in today’s Age on the problems with economics eduction

I couldn’t agree more with what Tim writes here. Having a background in science when I studied undergraduate economics at the University of Melbourne I was shocked by the uncritical adherence to flawed assumptions that was taught to undergraduates and the complete lack of critical analysis.

The problem with the way we educate economists

Originally published in The Age.
Date: May 13, 2014

Tim Thornton

Neoclassical economists control the curriculum, but a global wave of protest might change that soon.

It is widely understood across society that all is not well in the house of economics. In particular, there has been much criticism of the discipline’s inability to anticipate the global financial crisis, with even the Queen feeling compelled to ask Britain’s leading economists why they did not see the crisis coming.

More recently, there have been growing protests about the narrow way in which economists have been educated. Last week, 48 associations of economics students from 21 countries (including Australia) formed the International Student Initiative for Pluralism in Economics and published an open letter calling for deep reforms in the way economics is taught. The students point out how the narrowing of the curriculum has meant that many of them only get a simplistic, uncritical coverage of just one area of economics: what is known as the neoclassical school. This is the school that has been increasingly criticised as inadequate.

Why do so many students care, and why should we care, about the narrow and uncritical economics education they are receiving? The students correctly point out that the way economics is taught has consequences far beyond the university walls: it shapes the minds of the next generation of policymakers, and therefore shapes how societies respond to the substantial challenges of the 21st century.

Because the big choices that face our society are increasingly framed in economic terms, it is critical that students obtain an education that allows them to properly assess the options in front of them.

The students are dissatisfied for three reasons. Firstly, there is generally no required study of economic history or the history of economic thought. This produces graduates with dangerous levels of historical amnesia in regard to the world and to the discipline they assume they understand.

Secondly, contemporary economics students will rarely encounter any of the schools that compete with the neoclassical school: institutional, post-Keynesian, behavioural, Marxian, Austrian, feminist or ecological. These economics schools, which come from all points of the intellectual and ideological compass, make crucial contributions to building up our understanding of a complex and ever-changing economic and social world.

Thirdly, the curriculum fails to incorporate crucial insights offered by other disciplines such as politics, philosophy, history, sociology and psychology.

Student protests over economics curriculum is nothing new. At Sydney University, demands for greater pluralism were sustained over four decades. Tellingly, the situation could only be resolved by creating a separate department in the social science faculty: The Department of Political Economy. This department has prospered. Its first-year elective subject “economics as a social science” typically has enrolments of 600 to 700 students.

Total enrolments in its subject offerings have sometimes been over 3000. More importantly, many of its past students have gone on to make big contributions to the world and have also acknowledged how important political economy has been to their personal and professional development.

Why is the contemporary economics curriculum generally so narrow, and why is it so difficult to remedy? Various factors are at play, but a central reason is that neoclassical economists still hold the institutional power within traditional centres of economics teaching. While there can be some impressive individual exceptions, all too often neoclassical economists are uncomprehending, indifferent or hostile to pluralism.

Intellectual suppression, by means fair and foul, is all too common.

What is likely to happen from here? Having worked inside university economics departments for more than 10 years, and having undertaken a doctorate on the economics curriculum, I very much hope the students adopt a two-track strategy: they should keep asking for something better from departments of economics, but put just as much effort into investigating whether a pluralist economics curriculum can be taught from elsewhere in the university.

Sydney University’s Department of Political Economy offers one template by which this might be done. Other potential bases for a pluralist curriculum include departments of politics and management. Political economy could clearly grow in such places: the demand and need for it is strong, the benefits to individuals, companies and societies are well established.

We cannot know how this global wave of protest will play out. Perhaps the students will achieve change from within the traditional centres of economics teaching. Failing this, they have an alternative strategy of looking outside the traditional economics department.

Under this strategy, the implacably opposed neoclassical economists can teach and research what they like and they can call that work economics. The rest of us can build a pluralist economics and call it political economy.

Might the neoclassicals complain? Given their unshakeable belief in the superiority of their product, their well-known condemnation of monopoly power, their belief in the benefits of competition and customer choice, then surely they, of all people, could not object to a bit of competition on a level playing field?

Dr Tim Thornton is a lecturer at the School of Politics and Education at Swinburne University.

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My Op-ed on productivity in today’s Canberra Times

Longer hours means lower productivity for the public service

Originally published in The Canberra Times

Date: May 6, 2014

Warwick Smith

Job security in the public service is declining and conditions are under assault. Job security in the public service is declining and conditions are under assault.

Recently we’ve heard the federal government discussing the possibility of increasing the number of hours a week worked by public servants (“Public servants face longer working hours to boost productivity”,, April 19).

So, will making public servants work longer hours improve productivity? In short, no.

Economic and business commentators regularly bemoan Australia’s low productivity growth and suggest that lifting productivity is the answer to many of our problems. These commentators never ask the most important question: productivity of what, for what? What is it that we want to use more efficiently? The unspoken answer in public discourse in Australia is labour.

Labour productivity is traditionally measured as output per hour worked. Making people work more hours does not increase labour productivity. In fact, it almost always reduces average labour productivity because the extra hours are less productive.

Perhaps then the aim is to increase capital productivity (getting more work done for each taxpayer dollar spent). It seems plausible, on the face of it, that you might be able to wring a bit more work out of each employee by insisting on longer working hours, even if those extra hours are less productive. However, in the Swedish city of Gothenburg, trials are under way to reduce public service working hours in the name of greater productivity. They believe that by reducing the working day to six hours they will increase productivity during those six hours, reduce sick leave and create an overall more healthy and productive workplace. The contrast with the attitude here couldn’t be greater.

In Australia there has historically been an explicitly acknowledged trade-off for white-collar workers between the higher pay, tougher working conditions of the private sector and lower pay, better working conditions of the public sector. Good working conditions and job security have been among the most powerful factors that attract quality candidates to many public sector jobs. Job security in the public service is declining and conditions are under assault. This means the public service will have to pay higher wages or they will attract lower quality candidates. In other words, increasing public service working hours in the name of productivity is a self-defeating initiative.

Additionally, this initiative fails to acknowledge that many public servants already work longer hours than mandated by their contracts, particularly those in higher-level positions. Many of these public servants will meet the longer working hour requirements without doing anything different, thus producing no extra output. The impact, therefore, of instituting longer working hours will largely fall on the lower-income earners and those working in government shop-fronts and the like.

This push to lengthen working hours also ignores the lessons of economic history. Productivity improvements do not largely come from industrial relations changes, but from technological and cultural innovation and increased human capital.

If the federal government is serious about increasing productivity, both within the public service and in the broader Australian economy, it must take a longer view than the next election and pour money into research and education. The evidence tells us that such investments will pay for themselves in the long term.

As part of this there should be an injection of new funding in the CSIRO, as it has a fantastic record of producing practical innovations that have increased productivity not just in Australia, but around the world. The Australian Research Council and the National Health and Medical Research Council should similarly be expanded with substantial increases in research grants. Such grants should be untied and, subject to appropriate ethics review, simply provide the best researchers with money to do what they want to do. This is a proven method for creating genuine innovation – as opposed to research priorities dictated by bureaucratic or political preferences.

The proposals we’ve seen to further privatise universities and release them from fee constraints and the like must be resisted. It’s true that such moves might create a few better elite universities that are largely attended by the sons and daughters of Australia’s wealthiest families, but this would come at the cost of all of the rest of the university sector and the overwhelming majority of students and researchers. Entrance to our top universities should be merit based, not wealth based. This is not just a social justice issue but is also an efficiency issue. We don’t want it to be our wealthiest students who get the best education; we want it to be our best-qualified students.

We’d do well to think very carefully about the Swedish example mentioned earlier. Despite what economists’ models say, people are not like other resources and they need to be treated differently. The purpose of society is not to get better bang for your buck; it’s to create an environment in which people thrive. We should aim for smart, happy and healthy workplaces where people produce a lot during the time they are at work, rather than increasing their hours in a short-sighted attempt to squeeze as much out of each individual as we can.

Warwick Smith is a research economist at the University of Melbourne

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Resource rent tax – radio interview

I recently appeared on “On the money” on 2ser in Sydney (and other stations around the country through the community radio network).  I was explaining what a resource rent tax was and how it worked. As usual with this topic, a significant amount of the time available was spent explaining that the word “rent“, when used by economists, has nothing to do with the word “rent” as used by non-economists. It’s been suggested to me recently that we need to come up with a new term for economic rent to avoid all the confusion. Not sure how you’d go about doing that and garnering broad enough support that your extra term wouldn’t just add to the confusion.

On the Money is a great program which aims to demystify financial matters. The program I was on is not available for podcast but you can probably catch the show on your local community radion station.

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Op-ed in The Age: Treasurer’s agenda running out of truth

This article originally appeared in The Age.

Treasurer’s agenda running out of truth

by Warwick Smith

Joe Hockey has been talking non-stop about how the country is running out of money for Medicare, for the ABC, for welfare and for education. He’s said that ”we will either have to have a massive increase in taxes – and that means fewer jobs at the end of the day – or we are going to have to look at ways that we can restructure the system to make it sustainable” (”Hockey waves big stick, points to shortage of cash”, The Saturday Age, February 22).

Tony Abbott has said similar things, including repeating lines such as ”no country has ever taxed or subsidised its way to prosperity”. Those of us who know anything about tax economics know Hockey and Abbott are talking rubbish. Fortunately for them, most people don’t know much about tax economics and don’t want to know.

Have countries subsidised their way to prosperity? Do higher taxes mean fewer jobs? If we look at the 20 countries with the highest GDP per capita we find quite a few have much higher rates of tax as a proportion of GDP. Sweden, for example, has similar GDP per capita to Australia and takes 54 per cent of GDP in tax (compared with 31 per cent in Australia).

Most of these high taxing, high GDP per capita countries have low unemployment, low inflation and score very well on various measures of life satisfaction and wellbeing. Their existence and their success prove Abbott and Hockey wrong and demonstrate that there is another path to prosperity, one that also leads to less inequality while maintaining very high living standards for the overwhelming majority.

The reality is that Hockey and Abbott are ideologically conditioned to believe in small government and that government is incapable of doing things as well as private enterprise. This is precisely why Medicare and the ABC are at the top of their hit list. These two government-funded organisations are very efficient and very popular. They therefore must be destroyed because they prove wrong one of the central tenets of small government ideology.

We can easily pay for all the things Joe Hockey claims we cannot afford if we are prepared to increase government revenue. In my opinion, the first place to start would be tax expenditures (tax deductions or exemptions).

Treasury forecasts that next financial year we will spend over $45 billion in total on superannuation tax concessions, around $17 billion of which will go to the top 10 per cent of income earners.

We also spend over $8 billion a year giving concessional treatment to capital gains earnings and allowing negative gearing. Again, this money mostly goes to the more wealthy Australians and it artificially drives up house prices. You could easily add tens of billions of dollars to government coffers just from those sources without having to compromise on healthcare, education or the quality of our national broadcaster. We haven’t even begun to discuss the outrageous subsidies and tax concessions given to our mining and energy sectors – there’s billions more to be found there (and no, it wouldn’t send them to wall, that’s just more unsubstantiated rhetoric).

I don’t want to trivialise the structural problems that exist in our tax and transfer system and I certainly believe genuine tax reform is required. The above simply illustrates that there is plenty of cash to pay for Medicare, education and the ABC if Joe Hockey is prepared to look around.

We know as surely as the sun will rise tomorrow that Joe Hockey and Tony Abbott will not for a second consider the above sources of revenue. Welfare for the rich who contribute to both major parties’ electoral campaigns has been effectively removed from democratic scrutiny (and certainly not included in any definition of the ”age of entitlement”).

Still, even though we know they won’t do it, it’s valuable to know there are real alternatives to Hockey’s slash and burn agenda.

Warwick Smith is a research economist at the University of Melbourne.

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My new article in The Conversation – Tax reform is hard…so it’s time for an independent tax board

Just published today.

Tax reform is hard…so it’s time for an independent tax board

By Warwick Smith, University of Melbourne

The federal government’s Commission of Audit – tasked with finding efficiency and productivity improvements to deliver a surplus of 1% of GDP prior to 2023-24 – remains overshadowed by the many reviews that have come before it, specifically those related to taxation reform.

There certainly isn’t anything wrong with conducting an audit but it’s a big ask that the Commission deliver a surplus for the government, particularly given economists such as Ken Henry and organisations like the Grattan Institute and PwC have pointed out Australia’s tax and transfer system has fundamental structural problems. In the absence of substantial tax reform, it will become increasingly difficult for federal governments to balance their budgets.

“Just in order to address the budgetary impacts of an ageing population … we’re going to have to find another five percentage points of GDP in the form of government revenue.”
Ken Henry

Just a handful of the 138 Henry Tax Review recommendations have been implemented. Alan Porritt/AAP

Australia’s Future Tax System, often referred to as the Henry Tax Review, was generally applauded by economists and economics commentators. The report contained 138 recommendations. Since the review was completed in 2009, just a handful of these have been implemented and most of those have only been partially implemented.

Such is the power of vested interests and the fear of opposition scare campaigns that meaningful tax reform is becoming increasingly difficult. Many have argued that the era of serious policy reform is over. This may explain why an audit is seen as the main path to a budget surplus.

Imagine if, instead of being tasked with a tax review, the team headed by Ken Henry had been tasked with implementing a tax and transfer system. I don’t agree with every recommendation made by the Henry Review but if all were implemented I have no doubt our economy would be on a much more stable and sustainable footing. I doubt you’d find many economists who would disagree.

A Reserve Bank board for tax

I would like to float the idea of an Independent Taxation Board, something like the Reserve Bank board, which could be charged with actually enacting taxes and raising revenue. The government of the day could submit its policy priorities and desired revenue to the board and it would determine the most effective and efficient tax mix and rates for raising the desired revenue and meeting the stated social goals (while maintaining a relatively stable tax regime after the initial reform process).

If the actual raising of tax was left to technocrats, and the government was forced to be transparent about the goals it wanted achieved through the tax and transfer system, it would be very difficult to serve vested interests who have captured the government of the day. It would also be more difficult for governments to use deficits as excuses for cutting programs they don’t like – instead they would have to actually explain why they really want to cut them.

Under this scenario there would be no point in the mining industry spending tens of millions of dollars on an advertising scare campaign to derail tax reform because the Independent Taxation Board’s decisions would not be subject to parliamentary review.

Many potential pitfalls would need to be considered and avoided if this idea was to be implemented but none I have thought of so far is a deal breaker when contrasted with the current inefficient taxation system and the barriers put up against every serious reform proposal.

Scary stuff

I’m sure some would argue that the base and the rate of every tax should be subject to democratic scrutiny. However, as I’ve commented elsewhere, taxation economics is complex and very vulnerable to scare campaigns.

Tony Abbott’s scare campaign about the carbon tax putting a wrecking ball through our economy is a great example, as was the Labor opposition’s scare campaign about the introduction of the GST and the Coalition and mining company campaigns against the various mining tax proposals.

In every case mentioned above the opponents of reform were making statements which, to a tax economist, were obviously false or grossly exaggerated. However, the average person on the street doesn’t know much about tax economics and, for the most part, doesn’t want to know (believe me, my knowledge of tax economics is no asset at a party).

All of the above reasons make me think that democratic scrutiny of the details of the tax system is not necessarily desirable. But scrutiny and transparency of the principles used to derive the tax system is altogether warranted and desirable. At the moment, we have the former and not the latter.

In the absence of clear statements from the government requesting tax reform to be skewed to favour the wealthy, an independent board would surely make our tax and transfer system more progressive as well as making it more efficient and stable.

Would that be a bad thing?

Of course, the Catch 22 here is that the Independent Taxation Board represents a radical reform. How would it be implemented in this seemingly post-reform era?

Warwick Smith does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

The Conversation

This article was originally published at The Conversation.
Read the original article.

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