Learning the wrong lessons from crisis

One of Australia’s leading progressive think tanks, Per Capita, are holding their annual conference in Brisbane this week. It’s on ‘market design’ – in other words when, where and how to use markets to help deliver government services. It comes at a really unfortunate time though as politicians of all colours scramble to find fault with ‘markets’. Take for example Sarkozy’s recent “laissez-faire capitalism is over” speech, or the line No. 10 pushed that Brown long ago warned us that markets fail.

It would help to distinguish between at least three broad types of markets: financial markets which trade risk; goods and service markets which trade products between businesses and to households; and public service markets which provide government funded services but are not necessarily managed by government agencies (and could for example be run for profit).

Even such a simple definition shows how silly the politics has already got. When Sarkozy talks of the end of capitalism he’s beginning to slide into the goods and services territory – and to industry protection and state support policy. Even more bizarrely, the recently-dug-up speech which Brown gave at the SMF in 2003 is very much focused on the use and limits of markets in public services and is not a general theory of markets. (Amusingly it also talks a lot about the problem of state failure replacing market failure, a risk probably rising in significance daily.)

This ‘contagion’ effect is unfortunate: the financial crisis has some very specific and technical causes and shouldn’t lead us to hasty conclusions about the operation of goods and service markets (and junking long established competition policy) nor about public service markets (and putting unnecessary brakes on bringing the benefits of markets into public services when and where they can add value). In so far as there are general lessons about markets to be found from the financial crisis it’s the importance of good information for them to work effectively and of careful ‘agent-design’ (e.g. that the bank knows who the ‘right’ people to lend to are, and there’s no third party ready to benefit from misselling). But we knew all this already and the three broad market types I described each have specific features and come with very detailed theory as well as evidence and practice in how they work.

Perhaps it’s a good example of how societies – and politicians – respond to crises:

• We have to find historical precedence: so the current economic crisis is rivalled only by the Great Depression of the 1930s. (Actually it’s a poor comparison: we remember the Great Depression for the one in three who became unemployed and the almost half pushed below the poverty line, a human consequence that the current problems will have nothing to compare to, and not the fall in stock values.)
  
  
• We must all somehow be affected: perhaps this is some sort of solidarity effect, or maybe that people are perversely jealous of the attention a crisis gets. But it’s amusing that almost everyone is trying to claim relevance to the credit crisis at the moment. I’ve lost count of the number of times I’ve recently heard policy makers say things like “in the current turbulent times [environment/ social/ education/ insert random policy area] is now more important than ever”. Why don’t we just let the macroeconomists have their moment in the limelight and acknowledge that constitutional reform or what’s in the school curriculum isn’t the most pressing issue right now?
  
  
• Something must be done: we have to find the general lessons and apply them in all forms and in all places. So we get an equal and opposite reaction with for example politicians getting lukewarm on markets in public services. This is also a particularly common response following disasters whether natural or man-made with disproportionate reactions like with health and safety measures that represent extremely poor levels of cost-effectiveness.
  
  
• Obfuscation and denial of the root cause: a sensible reaction would be to say something’s gone wrong with (parts of) financial markets therefore we need to (1) stop this from worsening (2) limit the consequences elsewhere (3) reduce the chance of this happening again. We’re close to doing (1) now and attention is beginning to shift to doing (2) and (3) through fiscal measures and regulatory and banking reform. This will expend enough political time and effort without trying to fix all other areas of life with some element of market in. Arguably, even talking about the failure of ‘financial markets’ is far too loose a description – it is only some elements we now have problems with that will require fixing (e.g. subprime mortgages, derivative swaps) and the rest is effect on rather than cause of.
  

Anyhow I’ll be listening closely at the conference to whether (and for how long) each speaker drones on in generalities about the financial crisis and attempts to make convoluted links to other areas. I suspect the politicians will be the worst offenders...

End of the week...

Sorry for the gap in blogging this week – product of a mostly wasted week that culminated in a lesson why never to try doing a job interview by teleconference (or equally when in a different time zone).

So finishing up the week here’s a pick and mix of recent themes of the blog:

• Public administration: my work on public service reform and helping set up a new Public Service Commission has come to end. Last task was writing a speech for the new Chair on priorities for the Queensland Public Service. Set in the context of the Premier’s new Q2 targets, it argues the Government will need to build higher performing organisations, get serious about leadership and skills, work more effectively across agencies and continue to build on some good public engagement work. Accompanying slides with my favourite age-grade chart here, and further comment on this in a previous blog.
  
  
• Welfare reform: looks like a big plank of the welfare reform pilots could be in doubt with legal questions being raised whether income management is in breach of the Racial Discrimination Act. While specifically about the ‘intervention’ in the Northern Territories this would no doubt have implications for the welfare reform pilots about to start in northern Queensland (although the Government don’t seem ready to concede as yet).
  
  
• Crocodiles: the croc believed responsible for killing Scot Arthur Booker is off for a breeding programme because it exceeds – by 30cm – the cut off for ‘iconic crocodile’ status. It’s one thing to keep it, but you’d think they could quietly shunt it off to a retirement facility rather than an active breeding programme.
  
  
• Bad policy: legislation in New South Wales ‘accidentally’ allows tobacco sponsorship of racing events following a supposed drafting error. Clearly no accident and a disappointingly mild reaction from Action on Smoking Health (Clive: a cousin of the British group?) who are said to be ‘disturbed’. This comes at the same time as revelations in the UK about Blair’s involvement in the F1 exemption debacle a decade ago.
  
  
• Crap politicians: more evidence of the low bar for Australian politicians – a probe into Andrew Stoner’s comments that Federal MP Alby Schultz’s should be ‘blindfolded and shot at dawn’, and a new Committee being set up to find ways to punish bad behaviour in Parliament. Ultimately, the Australian public don’t seem to sanction such raucous characters at the ballot box which would be the best quality-control measure. Meanwhile in Queensland revelations about Ministerial interests still developing – a not unusual story but surprising no code of conduct exist here to prevent such holdings or set down clear standards about disinvestment procedures.

Australia's $10.6bn rescue package

Kevin Rudd this evening addressed the nation to give details of his $10.6bn ‘rescue package’. It is basically a massive fiscal stimulus package:

• $4.8 billion for an immediate down payment on long term pension reform;
  
• $3.9 billion in support payments for low and middle income families;
  
• $1.5 billion investment to help first home buyers buy a home;
  
• $187 million to create 56,000 new training places in 2008-09 (comment: small beer relative to the other items); and
  
• Acceleration of the implementation of the government's three nation building funds (education, health, infrastructure).
  

Benefits will start coming on line from early December with single pensioners receiving a lump sum payment of $1,400, pensioner couples receiving $2,100, and people receiving the carers allowance $1,000 for each eligible person in their care.

The rescue package comes on top of the guarantee over the weekend for 100% of bank deposits and is sourced from the c.$20bn surplus in the recent budget.

A good way to blow $10bn?

If a surplus ever was going to be drawn down now is probably the right time. What’s currently a credit crisis is soon going to become a nasty and lingering business recession here and elsewhere so an early inoculation against the downturn may be a good idea. IMF forecasts for Australia are for an economic slowing, although notably not the zero per cent growth facing many other OECD countries. Australia's well regulated banks also are generally in good shape so the landing is going to softer here than at home and this package may help ensure that's even softer and for worse off groups. $10bn is also not a huge amount of money in the scheme of things (c.1% of GDP) so it could be seen as a sort of insurance policy in uncertain times.

On the other hand there should be a few questions asked:

• Is it the right time to try and target a fiscal package? We’re in the eye of the storm of a credit crunch at the moment. Sure, the ‘real’ effects will land in due course in a business recession but what would be the cost of waiting another week or so to have a better idea of where markets are heading? The key to fiscal packages is ensuring they land at the right time and we'd have a better idea of when that might be in even a few days' time. Of course the timing is more about the politics but they'd be other ways to manage this (e.g. signal the size of the package but announce the timing in the next few weeks).
  
  
• Has there been sufficient time to fully think through? Perhaps they’ve been thinking about this for a long while and there's been some rigorous analysis. But I suspect not: and spending $10bn warrants serious examination to get it right.
  
  
• Is it appropriate targeted? The package is partially targeted but not completely – for example to all pensioners. If Australia’s income distribution is anything like the UK’s this is not a good way to tackle the potential poverty effects that Rudd says it is designed to – pensioners have the highest levels of income variance of any group.
  
  
• Some bad spending items in there. $1.5bn for first time buyers is more good money after bad.

Meanwhile, over in Blighty, Gordon seems to be getting some good headlines e.g. 'Gordon Brown has saved the world's financial system, says economics Nobel Prize winner' from today's Daily Mail as both Europeans and Americans copy elements of the British plan.

Subprime explained...

Bit off topic for the blog but in lieu of a regular article here's a highly amusing primer to the subprime market I saw today.

Iconic Queensland

Next year Queensland celebrates its 150th year of independence from New South Wales. As part of the 'Q150' events the Premier today invited nominations for icons that define Queensland’s identify. I’m not sure whether my vote counts but here it is anyway:

People...

• State-shapers: My slightly odd choice would be Kevin Rudd. Not because he’s now PM but because he ran the Queensland public service in the early 90s under the first Labor Government for over twenty years. Before this Queensland really was a banana republic having long been governed by a fascist Liberal government under Joh Bjelke-Peterson (e.g. public protests and street marches were banned in the 1970s and 1980s). So Rudd was an important figure in helping modernise the state (and no doubt will continue to have a role in shaping the state).
  


• Influencing artists: I’m going to go for the author Nick Earls as I’ve got to know him a bit and I think he’s a strong and effective ambassador for Queensland and of those soft influencers in life who often have much the more impact.



• Sports legends: Cathy Freeman. Obvious choice really – her victory in the Sydney Olympics 400m was a massive moment for Australia’s Indigenous population and arguably up there with the greatest sporting moments of all time.

Places…

• Locations: Brisbane's South Bank. It really is a fantastic stretch of well designed architecture – stretching from the Gallery of Modern Art at one end to the Kangaroo Point Cliffs at the other which much in between.



• Natural attractions: Great Barrier Reef. No contender here surely?
  


• Structures and engineering feats: the Kuranda railway in northern Queensland. Seriously impressive railway built by hand (mostly by Irish labour) in the 1880s through the rainforest, originally to serve the mines and now a spectacular scenic railway.

Stories…

• Defining moments: Expo ’88. This renovated large parts of Brisbane, particularly around the river. More to the point it was also a defining moment in that it put Brisbane (and Queensland) out to the world.



• Inventions and innovations: the cervical cancer vaccine developed at the University of Queensland.
  


• Events and festivals: has to be the Ekka.
  


• “Typically Queensland”: tough choice this one. Close contenders were XXXX beer and Queenslander houses. In the end, given that three-quarters of Queenslanders live along the coast I had to go for a beach theme… so invoking fully the laid back and relaxed beach lifestyle of the state the 'Boardie Short' wins this category for me.

The Brisbane outpost in the early 1860s:

The Courier Mail: A Feral Newspaper

I was reminded today of a brilliant quote from 'Yes, Prime Minister' about British newspapers and their readers:

Sir Humphrey: The only way to understand the Press is to remember that they pander to their readers' prejudices.

Jim Hacker: Don't tell me about the Press. I know exactly who reads the papers. The Daily Mirror is read by the people who think they run the country. The Guardian is read by people who think they ought to run the country. The Times is read by the people who actually do run the country. The Daily Mail is read by the wives of the people who run the country. The Financial Times is read by people who own the country. The Morning Star is read by people who think the country ought to be run by another country. The Daily Telegraph is read by the people who think it is.

Sir Humphrey: Prime Minister, what about the people who read The Sun?

Bernard Woolley: Sun readers don't care who runs the country - as long as she's got big tits.

Apart from just being very funny this does point to the remarkable diversity of Britain’s daily newspapers. In Queensland there is unfortunately only one daily newspaper called the Courier Mail. (One can of course get other national newspapers - which aren’t much better - but it’s only the Courier that focuses on the Queensland Government).

Disappointing then that it’s a complete rag. One case in point was a neither funny nor smart article at the weekend. It was supposed to be a satirical account of a bedroom conversation between Premier Anna Bligh and her husband Greg Withers (a senior public servant and Head of the Office for Climate Change). In the print version they had a double page spread with photo-shopped pictures of them in bed. Even if one thought that acceptable coverage for some public figures, it’s really a very crass way to attack the Premier and serves nothing but to undermine and discredit the office. And yes the Courier Mail is owned by Rupert Murdoch’s News Corporation - so it is very much a regular ad hominem attack.

I’m a strong supporter of the Reithian market failure approach to broadcasting and the media. What does this argue?

• That there are various positive externalities to community and society from having breadth and depth in media, such as improved debate and dialogue in society and hence greater ability to hold governments to account and improve the policy making and legislative process.
  
  


• That the value individuals gain from being informed or educated is never fully captured in market prices, and therefore that we tend to get an under-supply of good quality public information.
  
  


• That given there are increasing returns to scale in media, an unregulated market is likely to become dominated by a small number of providers (e.g. Rupert Murdoch) who then have power to exploit market price or can dump low quality products on the market.
  
  


• That there are informational deficiencies in media – e.g. that consumers may be unable to detect better or worse quality without experiencing the full spectrum of choices.

Which points to a couple of things. First, the importance of regulation and management of the media sector to avoid monopoly and market abuse. Second, that consumers are key. If they don’t demand better quality it won’t be supplied. (And unfortunately there isn’t really a culture of intellectual rigour or scrutiny in Queensland to trigger new entry). Third, there’s a strong argument for public support and subsidy. Mind due I'm not sure any of these arguments apply that well to the case of the Courier Mail.

Still, annoying to be stuck with no alternatives...

When crocs attack

An unpleasant end for Scot Arthur Brooker who was this week eaten by a giant crocodile in northern Queensland. An Australian resident and Vietnam veteran, Arthur was checking his crab pots while on a caravanning holiday when he disappeared. So far investigators have found his wrist watch, sandals, camcorder as well as some ominously large crocodile slide marks.

(A second sad crocodile story also this week was a seven year old boy who broke into a zoo in Alice Springs and fed over $6,000 worth of rare reptiles to 'Terry' the salt water crocodile.)

Anyhow, it's sparked a debate about whether Queensland should again start culling crocodiles, which it last did in the 1950s. (Which incidentally almost wiped out valuable Barramundi fish stocks due to an explosion in Catfish stocks). According to local MP Bob Katter "nature is completely out of whack... there has to be culling, human beings are dying here".

To Bob it's all quite clear: "The only way I'd like to see that croc is through the tip of the foresight and the shoulders of the rear sight of my rifle... and if there is any doubt as to which crocodile it is, they should shoot every crocodile in that area ... take out the lot."

In a similar vein, Liberal Senator Ian Macdonald intervened with "if human beings are congregating in an area then all crocodiles should be removed".

It's a pity Steve Irwin isn't around to give some perspective any more. It's clearly a very horrendous time for Arthur's family but perhaps some of these gung-ho MPs should reflect that maybe it is humans that are out of whack with nature.

After all humans might take a little more care about where they congregate. Final word courtesy of Terry of Lindfield: "Shooting the crocs seems a bit unfair... why not just feed them the members of the New South Wales Government?"

Kevin 747

During the election campaign Kevin Rudd was labelled ‘Kevin 24/7’ for his prodigious work rate and seeming lack of fatigue. Amusingly, he’s now been dubbed ‘Kevin 747’ for his supposed too frequent overseas trips. According to one Liberal frontbencher "he’s the Prime Minister of Australia, not the emperor”, which perhaps speaks more of his personality than propensity to jet off. However, it’s a bit reminiscent of criticisms of Blair in the early days, and there's growing rumbling about the trips, so is there anything in it?

• Too many? This was the PM’s eighth overseas trip this year (and 43rd day out of Australia). That doesn’t seem too many to me – you’d expect to have to do one or two more in your first year in office to establish yourself and there have been a number of extra things in the diary in 2008 (like the Olympics, G8 which Australia were invited to as a non-core participant, and the conference of the South Pacific leaders).
  


• Too costly? I’m sure they’ll be some ‘scandal’ in due course when a journalist FOIs and reports the combined cost of the trips. But in reality it’s likely to be a pretty insignificant amount in the scheme of things.
  


• Use the telephone? No doubt he does this too on a regular basis, but establishing the personal connections is pretty vital especially when new in office.
  


• Ignoring domestic priorities? The PM has a cabinet team of 18 ministers focusing on the domestic side, so Australia’s not going to fall apart because he’s out of the country for a few days. No doubt he’ll also be taking a whole host of domestic briefs with him, and his officials will have been tasked up with things to have ready for his return. In any case, the pretext to the current trip to the US – on the financial crisis – is a good example of where foreign and domestic issues overlap.
  


• Not the role of the PM? Unfortunately there aren’t many elected emperors to compare with whether or not foreign trips are what PMs should be doing. But try the opposite – would you want a PM just sitting brooding in Canberra rather than getting out and about and bringing new ideas back to the country?

Making the news in Queensland ...

Two Queensland news stories have dominated for over a month now. Together I think they show how difficult it is running a government in today’s media world. The first is about a sex offender, Dennis Ferguson. A repeat offender, Ferguson was released in July after the judge decided he wouldn’t receive a fair trial for his latest offense. Since then he’s spent the last month being hounded by the media and public from one safe house to another.

The second story is about a surgeon nicknamed “Dr Death” who is accused of gross incompetence while practicing in Queensland. Jayant Patel arrived in Australia several years ago, seemingly after various counts of professional misconduct in America. Employed without full checks, Patel was subsequently linked with the deaths of up to 87 patients. Fleeing back to America he was extradited back a few weeks ago and is awaiting trial. Again, there’s a good chance it’ll be thrown out because he won’t get a fair trial.

Both these stories have severely damaged the Government’s reputation in recent weeks, with them unable to gain any control. They are the sort of things that hit governments from time to time; I guess Queensland has been particularly unlucky to have both running together.

What to do? Like most others I’m pretty stumped...

• Distract with other announcements? Hard to see what would sufficiently grab the attention and in any case risks being accused of doing such would hardly win favours.
  


• Tackle head on? Difficult to see what government can actually do in these sort of situations. Any sign of interference with due process and they’ll surely get slapped down by the judiciary.
  


• Put your hands up and admit there’s nothing to be done? Yes, but the man on the street demands that something must be done.
  


• Tough it out with hard rhetoric and little action? Hmmm, maybe that’s the one.