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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But the big problem is that as the dole is withdrawn and tax is paid on wages, those going from welfare to work still often only see about 40 cents in each additional dollar they earn.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.

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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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