Of Eureka and Underdogs

My oped in today’s AFR is on targeted welfare. This is a topic on which I’ve learned a lot from the blogosophere over the last couple of years, so thanks to those who’ve helped shape my thinking on it. (And for those regular commenters who disagree with parts of it, just think how much worse it would have been if you hadn’t harried me on a particular point…).

Help the Poor, and Cut Taxes, Australian Financial Review, 1 November 2007

This week’s Treasury tussle featured an unusual moment, in which the debate turned to past reforms, and Peter Costello acknowledged the benefits of the macroeconomic reforms undertaken by previous Labor governments. But missed in the discussion was a chance to also consider another major shift of that era – from universal welfare to a carefully-targeted social safety net.

During the 1980s and early-1990s, means-tested public pensions, childcare benefits, and housing benefits meant that we could be proud of the way we looked after our poorest, while maintaining one of the lowest tax burdens in the developed world.

Unfortunately, the past decade has seen a steady slide away from that philosophy. With a few exceptions (such as the improved targeting of private school funding), much of the increased social spending in Australia has been devoted to universal benefits. The First Home Owner Grant, Private Healthcare Rebate, and Family Tax Benefit Part B are just three examples of policies that have enormous budgetary costs, but minimal social impact. By international standards, Australia’s welfare system is still reasonably well targeted, but we’re headed in the wrong direction.

Peter Saunders, from the Centre for Independent Studies, calls middle-class benefits the “tax/welfare churn”. But this implies that the problem is simply one of moving money around. In fact, because taxes have an efficiency cost, each dollar raised in taxes reduces economic output. Estimates of the efficiency cost varies, but the best recent estimate for the “deadweight burden” in Australia is around 20 cents in the dollar. Perhaps “tax, burn and churn” would be a better description.

Since most middle-class welfare benefits would probably fail an economic cost-benefit test, why does a government that touts its economic credentials support it? Because middle-class welfare always passes the political cost-benefit test. The well-hewn median voter theorem has a simple prediction: two parties competing for office will focus most of their energies on winning the support of the voter in the middle of the distribution. Targeted welfare may be good economics, but middle-class welfare is good politics. (As John Howard said last year, “People like getting a cheque from the government.”)

For its part, the Labor Party have raised questions in parliament about the wisdom of universal benefits, but have resisted calls to scrap such programs. Part of the explanation lies in the belief that universal programs are likely to be more politically robust than targeted ones: if we can put in place a program that will endure, why not accept a little waste? Yet the evidence for this argument is mixed. When the next recession hits, and the ‘razor gang’ comes to scrutinise at government spending, will they really preserve all those low-impact universal programs?

Moreover, there is a strong progressive argument in favour of targeted spending over universal benefits: it is more likely to reduce inequality. Rather than giving a flat education credit for two-thirds of families, why not pour more resources into improving the life chances of the neediest children?

Perhaps what we need is a new campaign advertisement, paid for by “Australians for Helping the Poor and Lowering Taxes”.  The commercial could start with a simple visual depiction of how middle class welfare works. A taxpayer hands over five $20 notes. The government representative calmly burns one of them, and hands back the remaining four.

The voiceover could then point out that people enjoy getting the Baby Bonus, but there’s little evidence that scrapping it would affect fertility rates or the wellbeing of new parents (camera shows new parents installing a plasma television). By contrast, an Indigenous child born today can expect to live as long as a non-Indigenous child born at the time of Federation (camera shows scenes from one of a dozen disadvantaged communities). If we scrapped the $1.1 billion Baby Bonus, we could put half the proceeds into tax cuts, and the other half into a series of randomised policy trials of programs designed to improve Indigenous health. Fade to black.

What is striking about middle-class welfare is that it offends values that both right and left should hold dear. Since our first major tax uprising at Eureka, Australians have resisted oppressive levels of taxation, and demanded that governments take no more from us than they need. At the same time, we have supported the underdog, reaching out a generous helping hand to those who need it most. A targeted welfare state fulfils both these principles. Middle-class welfare offends them both.

Commentators have long derided politicians who ‘spin’ the truth. But maybe the ones we need to watch for are those who spin our tax dollars out of our wallets and back in again – wasting 20 cents in the dollar along the way.

Dr Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

This entry was posted in Australian Politics, Inequality, Tax. Bookmark the permalink.

38 Responses to Of Eureka and Underdogs

  1. Sinclair Davidson says:

    Nice piece Andrew. What about EMTRs? Targeted welfare generates high EMTRs. Not that I’m opposed to targeted welfare, and I do support much lower taxes, but I feel that we on the centre-right are forever getting ambushed. Either we don’t care about the poor, (I truely do not care about the “disadvantaged” – a catch-all term for welfare bums) or we don’t care about incentive effects.

  2. Kevin Cox says:

    Andrew and Sinclair if you implement targetted welfare using our suggested approach of tagging money the problems associated with EMTRs can be overcome. (I presume the EMTR problem is the reduction in incentives caused by targetted welfare)

    We believe we have invented a methodology where any policy involving the expenditure of public funds can be implemented for a very low cost and be very efficient in the allocation of funds. This is because people receiving the funds do most of the administration and use markets to allocate the money for their use. We reduce the administration cost by tagging money to administer funds, check compliance and check on the effectiveness of programs. Total administrative costs should be 5% or less on any program.

    The last couple of weeks I took it as a challenge to come up with a way to address the housing affordability program that had the policy of objectives of

    make new housing affordable
    keep the price of affordable new houses when onsold near the price of building a new house
    increase the amount of money available for new house construction
    do not cause a collapse in the price of existing houses

    You can see the suggestions for the ACT government at http://cscoxk.wordpress.com/2007/11/01/affordable-housing-2/

    A lot of good policy ideas fall by the wayside when it comes to figuring out how to implement them. We have invented “a better trading system” that can be used to implement policies involving expenditures. We are policy agnostic – what we do is to suggest how to implement a policy for the lowest total cost and that will result in the most effective use of funds spent. This is really an outrageous claim but you are welcome to test us out by giving us a “small problem” and a little time.

  3. Andrew Leigh says:

    Sinc, EMTRs are relevant to some middle-class welfare, but not to 3/4 of the programs I’ve mentioned above (FHOG, BB, PHCR).

    I didn’t mean to imply that the right didn’t care at all about inequality, but the classic conception of the L vs R divide is that it’s about efficiency vs equity.

  4. “I didn’t mean to imply that the right didn’t care at all about inequality,..”

    Andrew, See how easily you slip from the poor (Sinclair’s word) to ‘inequality’ (your word), yet a lot turns on which is the problem. Interestingly, your op-ed is primarily about helping the poor, and not about reducing inequality as such. If you were worried about that, you would not be so against at least FTB A, which helps make a lot of people on average income closer to the most affluent in society. I don’t think it has any social benefits, but it does reduce income inequality.

  5. Matt C says:

    That was a really well argued oped. Thanks.

  6. Leon says:

    Good points both Andrews. Just to make a liberal point about the “tax, burn and churn”: some of the churning isn’t returned through hand-outs. So a better analogy might be: takes $100, burns $20, and gives you $50 worth of your kids’ schooling and GP visits in return and $30 cash-in-hand.

  7. Matt says:

    Andrew L, I can see your points about the churn and inefficiency aspects of programs which are merely handing over cash (FTB, Private Health, Baby Bonus). But there’s a strong case to be made for universal delivery of services, at least in terms of helping the poor. Services solely targeting the poor carry the ‘welfare’ stigma, and are often neglected as simply being a safety net, with few political consequences for poor performance. Compare standing in a queue at Centrelink to the newly rebranded Medicare/Family Assistance shopfronts.

  8. backroom girl says:

    Andrew – highish EMTRs are a price that I think is worth paying for a reasonable level of targeting. That said, if you try to target too many government programs on the basis of income, it is impossible to co-ordinate all the income tests to avoid severe overlaps, which often lead to EMTRs of over 100%, which are unequivocally bad. Part of the traditional solution to that is simply to use eligibility for one thing (such as disability support pension or the pensioner concession card) as a passport to other programs, but this has the downside of creating a sizeable ‘sudden death’ loss if a person loses eligibility for the ‘passport’ – the main reason, for example, that many single parents are reluctant to finally earn enough to leave pension.

    The ironic thing is that one of the main reasons that family assistance extends so far up the income distribution is because both sides of politics bought the argument that any EMTR of more than 60% is bad by definition (not that they have ever applied that logic to the targeting of unemployment benefits).

  9. Bruce Bradbury says:

    I’m not so sure that the efficiency argument is always relevant. Consider a ‘lump sum’ tax on people without children which is paid as a benefit to people with children. This does not have an efficiency cost (except to the extent to which it distorts fertility decisions). Family tax benefit (part A) is not very far removed from such a model. (part B is a different story).

    Indeed, if we think of universal child benefits as within-lifecycle payments to periods when expenditure costs are higher then we could describe them as efficiency-enhancing (assuming people cannot make their own private arrangements for this transfer). Mind you, this suggests recouping many of these payments via extra taxes on parents when their children have left the household.

  10. By definition, any tax that is solely levelled on people without children is not a lump-sum tax, unless it is a one off tax that does not recurr over time. If it recurrs over time, it can be avoided by having children. Thus a recurring tax on people without children will potentially influence peoples decisions about whether or not to have children.

  11. Andrew Leigh says:

    Much interesting discussion.

    Andrew Norton, I used ‘inequality’ rather than ‘poor’ since I assumed that my reference in the oped to progressives caring about inequality was what prompted Sinc’s comment. That said, shouldn’t I get some credit for not throwing up the red flag when Sinc described himself as centre-right?

    Bruce, I agree with you that lump-sum taxes are non-distortionary. But don’t we raise FTB revenues through marginal taxes?

  12. derrida derider says:

    I reckon you’ve been reading too much “evil” peter Saunders on churning.

    If your main objective is to give more money to the poor then targeting is indeed the most efficient way to do it – limited only by the incentive problems created by high EMTRs (EMTRs, BTW, are a measure of an efficiency problem, not an equity one).

    But point-in-time redistribution to the poorest is not the only goal of government spending – in fact it’s not even the main one for most of it. There are a whole range of reasons for the welfare state, ranging from missing insurance markets for health care due to adverse selection, to reducing inequality (as distinct from poverty), to raising lifetime welfare through income smoothing, to straight pro-natalist policy to address an externality from having kids, to better social integration and political sustainability of mass education, to a host of others.

    Now some people will argue that in some or even all of these cases we are either addressing a non-problem or we can address the problem more efficiently than through tax-and-spend. But that’s beside the point – the point is that we should argue each of these on a case-by-case basis with the arguments revolving about their intended purpose, rather just assume they are all about anti-poverty policy and then condemning them because they are not the most efficient tools for that.

  13. Sinclair Davidson says:

    Andrew – you saying I’m not a moderate? 🙂

  14. Verdurous says:

    Nice piece Andrew. Seems a very reasonable position.

  15. Sorry, Andrew, but explaining policies in a representative democracy with the median voter model does not convince me. The median voter model breaks down if there is more than one dimension. Voters have to decide about many dimensions at the same time. No use aplying the median voter model, if we know it is not applicable. Try something like probabilistic voting instead. If you do that, you will have to find distortions in the political process (e.g. lobbying) to explain, why intra-middle-class-redistribution becomes politically attractive, despite it being inefficent. If you cannot find these, you would need to ask yourself, what might be missing in your model if it yields different normative prescriptions from what a majority of people want.

  16. Andrew Leigh says:

    DD, with 200 more words, I would’ve gone into a discussion of alternative arguments for these policies. For example, in the case of the baby bonus, you might argue that prospective parents are credit constrained, or that a rise in the popuation has large positive externalities. In the case of FHOG, some contend that homeownership has positive externalities, and that new homebuyers are credit constrained (and that a few thousand dollars will make a big difference). I find all these arguments pretty weak, but I’d be curious to hear whether you’d defend any of the programs I critiqued on other grounds.

    Norbert, I’m aware of the critiques of the median voter theorem (indeed, my work on partisanship discusses them a little). But all the critiques are of course imperfect too (Roemer adds race as a second dimension, but this is still a gross simplification of reality). In this instance, it seems a useful tool, and it’s not clear to me that sidetracking into probabalistic voting has its place here. But I’m open to persuasion.

  17. Guy says:

    Nice, well-argued piece Andrew.

  18. derrida derider says:

    I’m not trying to argue for or against these polices here, Andrew – as I said, that should be done policy-by-policy.

    But they are not primarily antipoverty polices and so its not right to critique them as if they were; and that’s a point that doesn’t need 200 words to make.

  19. Damien Eldridge says:

    Of course, if it is a crediit constraint that is the problem, then perhaps you should be using an income contingent loan along the lines of HECS, rather than a pure subsidy. If a pure subsidy is to be justified on the basis of a market failure, then you would prably want to provide an argument that suggests children provide a Pareto-relevant positive externality.

  20. Kevin Cox says:

    Here is another policy option. Why not set up a system to offer alternative social welfare and taxation systems instead of trying to work out how to tweak the existing system.

    Allowing choice makes markets efficient. So if we want efficient social welfare and taxation systems why not have a market in these areas?

    An argument I have heard against choice in this area is that it is not equitable. But if everyone can choose which system they want to use then surely that is equitable?

    Each system would have to provide each person with a funds for health and education and pension income and other areas which the government now funds through transfer payments. There would be a mandated minimum average payment for each area. On the income side the system could only get funds from personal income. Anyone can join any scheme but changes could only occur on say the 5th anniversary of joining and on your birthday.

    The government would not tax income of those who decided to join a scheme.

    This is not such a radical idea because we already have a form of it in Australia because you can move between states and local government areas and come under different taxing and spending regimes. Why not have schemes where membership is not based on geography?

    Because anyone can join any scheme and because there are minimum average payments it means that the efficient systems will attract the most people because they will collect the least in income and supply the most in benefits.

    The schemes would be governed by the members.

    Anyone who thinks they have an idea on how best to run the social welfare and taxation system could now join a scheme and get elected to the board.

  21. Bruce Bradbury says:


    You say that we raise FTB revenues through marginal taxes. I say we raise them by paying lower benefits and/or having a lower tax threshold for non-parents. (I guess this just means that to sensibly talk about the effect of a tax, we have to clearly specify what the alternative is). If you accept my alternative, then the redistribution is non-distortionary (apart from fertility decisions).

    Damien, I’m not sure if the net child is a marginal social benefit or a cost – but given the low responsiveness of fertility to economic incentives, I don’t think this matters much. I agree that we should seriously consider HECS type arrangements.

  22. Damien Eldridge says:

    Sorry Bruce!!! It seems that I must have written my initial comment about lump-sum taxes after only reading the first part of your earlier comment and not the qualification where you said: “This does not have an efficiency cost (except to the extent to which it distorts fertility decisions).” (I can’t recall if this is what happened for sure, but I think it is what happened.) I apologise for this!!!

  23. Patrick says:

    I just got around to opening yesterday’s paper this morning – I thought it was an excellent opinion piece. Much better, especially, than Paul Krugman who would have insisted on DD’s extra 200 words just to insist that electing the democrats to congressthe presidency and senate would fix it all 🙂

  24. Patrick says:

    PS this site has a particularly evil-looking smiley.Quite inconsistent with the good-natured grin on the front page.

  25. Damien Eldridge says:

    Bruce, just to clarify, by the qualifier in your earlier comment, I meant the bit where you said “—(except to the extent to which it distorts fertility decisions).”. I honestly can’t remember for sure whether I had read this or not before commenting, but I suspect that I probably didn’t, since your qualifier makes the same point I made in my comment!!! Either way, I am sorry!!!

  26. Andrew Leigh says:

    DD: “But they are not primarily antipoverty polices and so its not right to critique them as if they were”
    I don’t think I’m guilty of that. For example, I acknowledged that the purpose of the BB might be to boost fertility rates.

    KC: “Why not set up a system to offer alternative social welfare and taxation systems instead of trying to work out how to tweak the existing system.”
    It’s certainly a bold approach, but as with water, my guess is that most people would prefer the government to incur the administrative burden, rather than taking it on themselves. I think choice makes sense in a few instances (superannuation, maybe), but not for most policies.

    P: “this site has a particularly evil-looking smiley”
    It’s my alter-ego.

  27. Kevin Cox says:

    Andrew the point is to give people a choice. If we gave people a choice then the default government run systems would lift their game in order to compete and we would get better systems.

  28. Damien Eldridge says:

    Kevin, imagine a universal health insurance policy like medicare. Because it is funded from everybodies taxes, the low risk people cannot opt out. This feature is essential if adverse selection problems are to be avoided. While people can argue about whether or not everyone should be able to obtain benefits under medicare, it is essential that they not be able to opt out of payments. How would your scheme avoid these types of problems?

  29. derrida derider says:

    Umm, Kevin, ever hear of the term “adverse selection”? Those with good prospects in the next five years would choose a low-tax low-welfare sytem, those with poor prospects a high-tax high-welfare system. Which would make the latter perfectly unsustainable (because by definition it would be composed of people who don’t earn much or are at high risk of not being able to work). But maybe that’s what you really want.

    Ther’s a reason why the moral philosophers insist welfare evaluations should be done behind a “veil of ignorance” – ie regardless of the evaluators’ own position or potential position. Google the term.

  30. Patrick says:

    Or as I’ve suggested to Kevin before, read Nozick. It works if you don’t mind letting the losers lose – which in theory is a good idea. In politics it is inacceptable.

  31. backroom girl says:

    I’m not sure whether adopting a HECS type approach to funding kids would be any improvement on the current system, except I guess it would allow the deliberately childfree to escape the dreadful burden of having to help support everyone else’s kids.

    Otherwise middle to high income earners would get additional assistance when their children were young and their income was low, which they would pay back later when their children were off their hands and/or their income was higher. Low income people would get extra money when their kids were young which they wouldn’t pay back later because they would still be low-income.

    Sounds like a more complicated way of achieving what we already do, really. And surely the fact of having a debt that you have to pay back once your income gets above the magic number would creates its own problematic financial incentive for some people.

  32. Kevin Cox says:

    DD I agree if you were not careful how you set it up what you say could be true but look at the rules I have suggested (which may need to be revised after more thought) Anyone can join any system. There is a minimum payout any system has to make for different functions (e.g. an average amount for education, an average amount for health etc). Organisations have to set their rules (policies) to fit within these rules. No one is making any evaluations on what should be done except the person involved who makes the choice between competing products. The “veil of ignorance” only applies if the participants are not making the choice.

    We are setting up a market for taxation and welfare where people can join and the organisations which give the best return for their dollar will “win”. If it is true that the current system costs 20% to administer – and I suspect that is an underestimate and if you take into account the cost to the participants of fitting into the system then if you can devise a system that costs at the most 5% to administer with no costs to the participants then you have 15% plus to distribute or not to collect. If I am right think of the productivity improvements to the country as a whole.

    Think of the problem not in terms of taxation or social welfare but in terms of an income redistribution problem under some broad policy rules about where the money has to be spent and from where it can be collected.

    A government that decides to implement it does not have to create any regulations associated with running the different schemes except for the global parameters and to allow them to exist.

    Being a great believer in the power of innovation and markets to give efficient results I am confident in predicting that the system will work and certainly willing to bet my money on building such a system. Sold the right way there is no political risk because people volunteer to join and those that don’t want to stay in the existing system can opt out at any time and anyone can join.

    It would seem to me that a government who allowed such a scheme has everything to gain and nothing to lose.

    Patrick this is not the same as Nozick. I am NOT advocating any particular policy on how to do the redistribution. Nozick is a policy setter. We are not advocating a particular policy. I sometimes suggest possible policies for illustration purposes. What I AM suggesting is we can create multiple policies and have them competing against each other.

    We do it all the time in the real world as every country has a different set of rules for taxation and welfare. What is so strange about having multiple sets of rules within a single country. (Some would argue that we have that anyway – one set for the general population and one set for the people who can afford lawyers and advisers and have ways of moving money around the world).

    I would also have the ownership of the systems being in the hands of the people who have chosen to use the system they are in – something like a cooperative but where the ownership shares could be sold.

  33. Patrick says:

    And what about people who aren’t able to contribute the average minimum required contribution? Presumably they will find it hard to join groups because they necessarily raise the burden on everyone else.

    something like a cooperative but where the ownership shares could be sold.‘ – like a company?

    My point about Nozick was that if you are such a great believer in markets then you should opt for the reduction of government to the enforcement of contracts, or its entire abolition. It sounds too scary to do but it would probably work quite well, average humans having made such a habit of exceeding the best-educated lefty’s expectations.

  34. Kevin Cox says:

    Patrick there is no incompatibility between markets and government involvement. It depends on how governments are involved. We can invent an economic system where government money is distributed through a market mechanism. That is what we suggest with Water Rewards. The market in that case is in technologies to reduce the use of water.

    I guess another way for me to express things is to say we have invented a way where we can have multiple economic systems operating in parallel. Most difficulties people seem to have with the concept is that they think there can be only one economic system operating at a time in a single country.

    One way of defining an economic system is to define it by all the economic activity that happens with a single currency. Using this definition then Australia has one economic system, the USA another etc. I may use the terminology in a different way to you but please forgive me and try to understand using my interpretation of the idea. The idea is that a currency defines an economic system which has various rules associated with how it operates. Instead of using the term currency to express the idea I could use the term tagged money, or vouchers but I think currency better expresses what is happening.

    Different economic systems interact through exchange rate conversions.

    What I now say is that we can divide the world’s economic systems not only on a geographic basis but also on a functional basis and within a geographic area we can slice and dice our economic system into many more sub economic systems.

    If you accept that this is possible the next question is why bother and that is what I am trying to illustrate. The difficulty with having a single “currency” or a single economic system is that you have to have one size fits all for different problems. The economic policy we need to solve housing affordability will be different from the economic policy we need to solve the lack of water which is different from the economic policy needed to solve the obesity problem.

    What we can do with what I am suggesting is to create economic systems (currencies or money) to address particular policy situations.

    Given that we can do this then we can now envisage multiple economic systems for a particular problem and create a market place in economic systems. That is, we are able to have multiple policy options operating in parallel for the same problem!

    This all sounds ridiculously complicated but it is in practice ridiculously simple to implement and operate and think about because we now have the technology to run different economies in parallel.

    The technology did not exist five years ago. If you think along these lines what an exciting time to be an economist. You now can invent your own economy to solve a particular problem that concerns you. You don’t have to try to fiddle with “the economy” to achieve particular results knowing that as you fiddle with one bit it will have implications elsewhere.

    I see a much greater role for governments in setting up structures to allow people to choose (markets) and in deciding how much money to spend on a particular problem. I see a much smaller role for governments in directing how money is spent. That is a greater role on where money is spent and a smaller role in how money is spent.

  35. cba says:

    Kevin: how does your idea differ from a voucher system except that private (instead of public) vendors compete for the vouchers by offering the best service? The problem with vouchers is that you still have to decide how much you want to spend on a given problem, but the answer to that is not always clear cut (e.g. what is the appropriate rate of retirement saving?). I also don’t see how interfering with one market wouldn’t affect others, as per your claim in the second last para above.

  36. Patrick says:

    The main problem I have with your ideas, Kevin, is that you have some weird bee in your bonnet about cash. Cash, of whatever currency, has value because it is the means by which we exchange our services.

    You don’t seem to accept that because you think it weird that providing money is one of the most valuable services that exist in a sophisticated economy. You don’t like the fact that houses are expensive for the simple and obvious reason that people want them in particular places and they are scarce.

    Houses are clearly not ‘unaffordable’, or their price would fall. Money is cheaper and more widely available, but that is different.

    Water rewards would be rendered irrelevant by having variable and non-regulated pricing at the meter level, as I believe some US power companies do. In fact it would probably be rendered irrelevant just by having unregulated pricing full stop, but individually variable pricing could take into account the numerous factors discussed here.

    When applied to public service delivery, your idea just does not come across as coherent. Basically, 99% of the population will be trying to exploit it for their own individual benefit and enforcement and adjudication costs will rapidly rise to about a few hundred percent of any benefit.

  37. Kevin Cox says:

    cba the system appears to be similar to vouchers but vouchers are inflexible. Another way of thinking of it is to think of it as restricted money or money with extra information attached to it. The critical part of the system is the “market place” where the money can be used and market places are critical because they offer choice and this enables learning to take place. Choice can be given by private or public providers it doesn’t matter as long as the buyer can choose. Different markets will interact with each other and the difference in exchange rates for the monies we use in the different markets will give a measure of “the cost” of dividing up the total market. For example Energy Rewards, a possible currency for the infrastructure market place for technologies to reduce greenhouse emissions, will initially sell for much less than their face value because the cost of renewable energies are dominated by capital costs not operating costs (which are much lower). My estimate is that for renewables electricity generation to be competitive the cost of capital needs to be about 4%. As the cost of infrastructure capital is at least 8% then we would expect Energy Rewards to sell for a substantial discount.

    Patrick cash or money is the key mechanism for control. What I am suggesting is that we can add other information as well as value to money. The earliest forms of money such as the clay tablets of the Egyptians had the date of deposit on them and the value dropped with age. When you use a credit card your money has who spent it, who received it and why it was spent attached to it. By adding information to cash we can achieve our policy outcomes. Providing resources using money is absolutely crucial to economic success.

    I object to the unnecessary inflation of house prices due to people taking advantage of the rules we have attached to the creation of money. I find it hard to say anything sensible about your interpretation of my beliefs such as the sentence “You don’t like…..” except to say that the sentence is a complete distortion of what I am trying to say and I will make no further comment on the piece of sophistry with respect to your definition of unaffordable housing.

    You completely misunderstand the reasons why we have Water Restrictions in our Cities. It is not about pricing but it is about investment. Non regulated pricing at the meter level is irrelevant. The problem with urban water is that we have not invested the money taken from consumers into increasing the supply. Increasing the cost of water, variable pricing etc does not make water authorities or private companies invest in infrastructure and the evidence is clear. Monopoly services will always exploit consumers be it Telstra when it could or Sydney Water. Water Rewards will fix the problem of Water Restrictions. Increasing the price of water or variable pricing will not.

    With respect to your last sentence I hope 100% of the population will be looking for the best deal. That is what markets are all about. Making the best choice for your own individual benefit. The trick is to construct markets in such a way that the benefits from cooperation are also realised.

    Your statement about compliance costs is completely wrong because the method to enforce compliance is similar to systems like EBay. These systems are voluntary and compliance is enforced by excluding people who find a way to cheat. Cheating is very difficult because the operation is transparent and all transactions have good records. The systems will cost the same as other transaction system and be no more than bank fees. Certainly not the 20% quoted earlier by others.

    The two arguments against the methodology I propose and which you have repeated are

    1. You should not restrict money with rules other than those we already have because restricting money will make economic systems inefficient in the way we allocate resources across the economy.
    2. It sounds too complicated and will be too expensive.

    My answers to the first is – we have problems whose solution requires the expenditure of money and that expenditure is unlikely to be globally optimal when measured in terms of unrestricted money. Directing resources towards the problem and using markets to allocate the money is the most efficient and simple and obvious way to solve these problems. The problems will not be solved if we rely on making them “globally competitive” or by directing expenditure without using markets to allocate the expenditure.

    My answer to the second is that these systems are simple from the point of view of the end user operation because we put most of the complexity inside the computer programs and they are inexpensive because information systems are amazingly cheap to operate if constructed appropriately.

  38. Leopold says:

    “Yet the evidence for this argument is mixed. When the next recession hits, and the ‘razor gang’ comes to scrutinise at government spending, will they really preserve all those low-impact universal programs?”

    I have a bone to pick here: when the next recession hits, the government of the day will be in mortal political trouble, and less likely than at any other time to do anything that would annoy middle-class voters in marginal seats.

    IMO only a nigh-invulnerable first-term government riding a wave of economic prosperity would dare tampering of the type you suggest.

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