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Bad economics and bad leadership

By Nicholas Gruen - posted Friday, 28 April 2006


The more I think of John Howard’s political style, the more I think of Paul Keating’s.

Both fought for the “middle ground” but by fomenting division rather than uniting people. Both preferred political gestures to political process. So neither delegated well. And both were culture warriors.

Former speech-writer Don Watson said Keating had “the metabolism of a cornered rat”, being unable to get excited until “the stakes were very high, preferably a matter of life and death”. Thus he went from one policy enthusiasm to another rather than steadily building his position. Howard is similar. (And has likewise been likened to - less truthful - members of the rodent kingdom!)

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If you’re thinking “that’s just how politicians are”, Bob Hawke’s political style is a sharp contrast on all counts. Howard’s proposed IR changes illustrate my point. They’re an impromptu mess.

A government that took office promising to cut red tape in half (and then introduced a mountain of new tax paperwork) has reformed IR regulation with a 687-page bill. It’s supposed to enhance workplace choices - but not if the Government doesn’t like your choice. You can swap two weeks’ leave for more cash, but you can’t even offer to trade less cash for re-instatement of your current protections against “unfair dismissal”. If your union suggests it, it can be fined $33,000.

I asked the Government’s WorkChoices hotline if this was true. A quite senior officer responded: “How would I know? The bill is 687 pages long”. That’s choice for you. In fact clause 101 D of the bill empowers the minister to ban any other choices made in agreements he doesn’t like.

But the big problem is that as the dole is withdrawn and tax is paid on wages, those going from welfare to work still often only see about 40 cents in each additional dollar they earn. Yet we’re still pre-occupied with cutting the 48.5 percent marginal tax rate for high income earners.

So, as right-of-centre labour market economist Professor Mark Wooden put it:

Ultimately, creating more competitive wage structures for low wage workers without damaging the incentive to work requires a fusion of welfare, tax and labour-market policies. Simply changing the way minimum and award wages are set will make little difference.

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Over the last nine years the Government has introduced major reforms in tax, IR and labour market programs. But it’s never properly addressed the interactions between them.

It didn’t have to be that way. In 1998 five economists proposed integrating tax, IR and welfare with a compensated minimum wage freeze. As real wages fell with inflation, low-wage working families would be compensated with gradually rising tax credits (effectively cash in their pockets). Blair and Clinton used tax credits to improve working family finances and incentives to work - and of course their own popularity.

The five economists’ plan would have reduced unemployment by around one percentage point, creating around 150,000 jobs (and perhaps double that) among those who need jobs most - the young and the low skilled.

To keep fiscal costs down at a time when government revenue was scarce, those without family dependents would have gone without compensation.

The unions opposed the plan because it was premised on a piece of economic commonsense the unions deny - that relatively high minimum wages like ours don’t price people out of jobs. The Opposition did what oppositions do - endorsing the pleasure (the tax credits) without the pain (the minimum wage freeze).

And the Government? Back then it was shy of creating losers. And once the ALP advocated tax credits, the Government opposed any policy with the same name, however different its specifications or context.

I reckon that then - and indeed now - it was not just the right way to go economically. It was also smart politics. Remember Bob Hawke, who got through far more difficult economic times than Howard, with a similar record of electoral success?

He sold Australians wage restraint by convincing them that their sacrifice was necessary, that it was fair, and that it would help build better lives for their families and their community - which it did.

Howard could have done the same. There’ll be no shortage of losers from his IR change - particularly if the economy slows. Yet the recent revenue bonanza could have allowed Howard to fund a “no losers” wage-tax trade-off.

I reckon it would make him unassailable as PM - as Hawke was during good economic times in 1985 and Menzies was all those years ago. (Both PMs were unashamed to pinch their opponents’ best policies.)

Australians want governments that know where they’re going and steadily work towards their vision. They don’t want improvised bits of class warfare cobbled together the moment there is a Senate majority.

It’s bad economics. It’s bad leadership. And as a few worried Coalition back-benchers and Senators are realising, it’s bad politics.

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First published in The Courier-Mail on November 23, 2005.



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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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