The future of economics: Reimagining economic reform

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The future of economics:Reimagining economic reform

Australian Fabians National Policy Conference: Economics, equity and trust in the twenty first century

Nicholas Gruen

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BackgroundAustralia’s experience is unique. ALP has been the party of economic reformResults have exceeded New Zealand, US, UK

– economic growth – equity

ALP drove reform, not the rightALP’s reform was in the spirit of Adam Smith

• systematically sympathetic towards the poor• suspicious of privilege• persuasion rather than power

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BackgroundReform gradually morphed into deregulatory formula

Now encountering diminishing returns.

Further areas of reform– rats and mice

• taxis, post, newsagents, pharmacies

– reforming the tax - welfare interface– health, education and federalism

A new canvass

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Traditional ideas of the economy

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New frontiers: New themes for reform

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Information

Major theme of economics –since Hayek, Arrow, Stigliz and Akerlof–Yet little attention to improving information flows.

In workplaces workers compensation premiums are a good proxy for OHS performance

–should be disclosed to all prospective employeesJob satisfaction could be measured and published by workplace

–producing a market in job satisfaction

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Information

Information can drive improvements in health and educational performance.

We should audit the Report on Government Services

Generate and publish information on –objective performance of • investment advisors• real estate agents

–customer satisfaction and error rates of selected other areas

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Public information on past performance

Agent 1Agent 2Agent 3

Prognosis420,000$ 415,000$ 450,000$

Accuracy of past prognoses

5%-2%-15%

Expected price

441,000$ 406,700$ 382,500$

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‘Gruen Tenders’

Hospital AHospital BHospital C

Raw Prognosis

2.0%4.0%1.5%

Correction for accuracy of past prognoses

-30%25%30%

Expected chance of adverse event

1.40%5.00%1.95%

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RiskApproaches to government risk are primitive

–Government balance sheets are a residualPrivatisation, fiscal consolidation and retirement incomes policy has improved productivity but worsened risk bearing

–foisting risk on private sector is costly• Sydney’s cross-city tunnel may be a turning point

–Governments should borrow to invest• Like families and firms

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Risk

Large risk management agenda sketched out by Shiller which governments should help foster risk markets in such things as

• GDP growth• House prices by suburb • Employment prospects - by skills

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LawWe only really have a legal system for the rich and those with access to legal aid

• Otherwise you risk your life savings

We need a legal system which is• independent• timely• cost effective

Legal procedure must ensure legal resources are commensurate with the magnitude of disputes

Right to pre-emptively forsake appeal • subject to opponents’ right to appeal on bearing all costs

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Complexity, defaults and simplification Complexity is a major economic issueWhat happens ‘by default’ becomes increasingly important.

We should simplify life and improve outcomes for ‘default’ behaviour

–superannuation and investment–presumption that complex contracts are reasonable• a duty to disclose unreasonable provisions

–End tax returns for most employees

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Regulation Regulation is hugely important

– Debate still bogged down in left-right sloganeering– No country has done it well

Some ideas • Regulation is an interface in a complex system

– between government and persons (actual and legal)• Responsiveness to new ideas, information and needs is crucial• Rghts to alternative compliance• We need new institutions to mediate the ‘politics of detail’.

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Macro governance

Rule of law requires independent institutions that cohere through political changes in government.

–Judiciary–Monetary policy

And obligations to obtain independent advice –Industry assistance

If we believe in the power of government to manage the economy we must develop its independence

–begin with obligations to receive independent fiscal advice like Victorian Government Auditor General

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Tax

Tax pollution–greenhouse gases–congestion

Difficult to establish the debate from Opposition

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Oppositions can initiate change !The more complex our society the less powerful is, central ‘command and control’

• the more powerful are attitudes and decentralised decisionsAchieving reform from Opposition would be good for

• Australia• the Opposition, which would be actively building its vision, rather than just

carping from the sidelines. Areas where one can start from outside government

• Job safety and satisfaction ratings• Investment advisors keeping public sample portfolios• Default superannuation

And health and education are with the State Governments!

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What’s reform for?These ideas can not just help us become richerNot just help us manage ‘the economy’ and minimise government expenditure - as worthwhile as those aims are They can make important contributions to

– the quality,– security and – fairness of our lives

And the fitness of our institutions for their purpose