Uneven economic freedom disadvantages everyone

Economic freedom has become the buzz word in much new research around the world. It is made up of secure private property rights, the freedom of contract, and public policy that does not play political favourites with interest groups. It relates closely to economic growth, job creation and poverty eradication, and influences general perceptions of optimism, self-reliance and well-being (AFR, 6/12/2001, ‘Tried and true way to economic growth’).

Conventionally trained economists appear to be puzzled by these findings, as they have learnt that economic growth is the result of capital accumulation, resource exploitation, skills formation and the like. However, the old neoclassical economics of growth identifies only proximate causes of growth and begs the question of what makes people accumulate capital and skills or open natural resources. The answer is that economic freedom is the key to all of that.

In most walks of life, Australians enjoy a reasonably high degree of economic freedom compared to the third world and the over-regulated, sclerotic and senescent economies of Japan and most of western Europe. They take their freedom for granted, just as we do the presence of fresh air, until we get asphyxiated. This explains why the new international research has found less resonance here than overseas.

Since the Whitlam years, when Australian economic freedom had been taken to a nadir by much impatient interventionist activism, our property rights and freedoms to choose have gradually improved, indeed faster than in many comparable economies. The present vigour and can-do spirit in the Australian economy in the global downturn is now widely attributed to the microeconomic reforms that enhanced our economic freedom on several fronts. We are, however, still well behind the United States and the United Kingdom, which are setting the benchmark for competitors in the global market place. This explains the weak dollar, a crutch for propping up aggregate demand, but a dangerous one, as other young southern hemisphere economies with uncertain institutions show, for example Argentina, Brazil, New Zealand.

Australia’s longer-term economic problem is that the economic reforms petered out with the Keating Prime Ministership and have at best been timid in the Howard era. As a consequence, economic freedom is very uneven. It denies us the full benefits of past reform sacrifices and makes for long-term instability, like a table with uneven legs. The two deformed legs, so to speak, are industrial relations and big government. A new report of Economic Freedom Watch, which the Centre for Independent Studies just published, shows that – as of early 2002, Australians do not have sufficient freedom to use their labour and talents and that the burden of government by taxes and regulation is excessive. Since the middle of 1999 things have improved somewhat, but they still make for a harmful ‘economic freedom deficit’ vis-à-vis the USA.

Labour market reforms have been stifled by the reactionary Senate majority and some States. But this is not the whole story. Enterprises – or rather the industrial relations directors of these businesses – have rarely used the freedom granted to them by the Workplace Relations Act to negotiate genuinely free employment contracts. Instead, the Australian Workplace Agreements deal with top-ups and incentives, on top of old-fashioned industry-wide awards. Such are the consequences of having lived under an unfree, centralised system: many hesitate to grasp the new freedoms now available to them! Managers in factories up and down the country will acknowledge that labour relations have greatly improved since the bad old days, but they are not aware that their firms are now competing with factories, ports and mines overseas where work practices, flexibility and productivity are blossoming under much freer conditions than we have. Moreover, some unions still can flex their muscles and disrupt projects without having to fear the might of the law that would discipline any other Australians for interference and a similar abuse of power.

The burden of government remains high, partly because tax reform brought a new tax, GST, with new and cumbersome compliance costs, but the government still retains a top marginal income tax rate of 48.5 per cent (including the Medicare tax), which kicks in at an internationally low income level of $60,000. This is no way to attract and retain talent and job-creating investment. The consequences of such impairments of economic freedom are not immediate, but they work over the longer run with merciless power.

Big government has so far tried to exempt itself from the need to reform and many in government, at Federal and state levels, have been the most reticent to apply the lessons of globalisation to themselves, even when they applaud the new spirit of globalisation affecting others! The hidebound resistance to reform in government becomes evident, when the Tax Commissioner publicly describes the rule of law as "a distraction" and "clinical debating point", when State governments re-regulate private markets (such as Victoria has done with privately produced electricity), and when the Transport Department simply decrees that the $10 ‘Ansett tax’ on domestic tickets be retained and given to even more tourism promotion. In a truly free economy, governments are held to tighter standards.

We may shrug all this off, but in New York, Frankfurt and Seoul boardrooms Australian demarcation disputes and boycotts are big news! We may think that economic freedom is just a matter for big business. Yet, the young man with poor skills will not get a foot on the job ladder because some commission has decreed a minimum wage. Or households may soon suffer from California-style brown-outs, because their State government re-regulates electricity markets and decrees a price cap. The new 11 cent a litre milk tax (imposed for eight years) is favouritism to a lobby group that seems socially unjust. Shackles on economic freedom affect everyone.