Sunday, 6 August 2017

Game of Mates

The rich get richer and the poor get poorer.  We all know that.  The question is, how do they do it?

A couple of years ago I reviewed French economist Thomas Piketty's opus, Capital in the 21st Century.  Piketty shows, using an impressive dataset and some simple equations, that the normal state of capitalist economies is that capital generates larger returns than labour, meaning that over time more and more of the resources in a society go to those who have capital.

In Western societies this process was reversed in the immediate post-war decades by a combination of factors.  Rapid economic growth was driven by the recovery from two world wars and the Great Depression.  This led to wages growth and inflation, which redistributed income away from capital and towards labour.  To add to this, governments funded the reconstruction through high rates of inheritance tax, limiting the ability of capital to accumulate across generations.

Since the end of the resulting boom in the 1970s the situation has returned to something more normal - economic growth has dropped back to a couple of percent, wages growth has slowed, and capitalists have succeeded in persuading governments to wind back wealth taxes and provide them with further tax breaks.  As a result inequality has grown steadily and is likely to continue to do so in the absence of any meaningful government intervention.  Calls for economic growth so that 'the rising tide will lift all boats' are just a diversion - unless we tax wealth and support high wages the rich will continue to get richer at the expense both of the poor and of cash-strapped governments.

I've just read a far shorter and more accessible Australian book that deals with the question from a different angle.  It is called Game of Mates: How Favours Bleed the Nation, by Cameron K Murray and Paul Frijters.  Murray is a Brisbane-based economic consultant and teacher, while Frijters is an academic at the London School of Economics.  How is it, they ask, that Australia has gone from one of the most equal societies in the Western world to one of the most unequal in the space of a generation?

Their answer is that the Australian economy is controlled by a group of mates, to whom they attach the collective name of 'James', who operate across government and business to enrich themselves at the expense of ordinary Australians, who they collectively dub 'Bruce'.  Of course neither James nor Bruce is exclusively male, or exclusively Anglo-Celtic, but the names allow them to speak simply about some very complex and opaque relationships.  Rarely, if ever, has a book about serious economic issues been this entertaining.

They illustrate how this mutual enrichment works in a number of different industries - property development, transport, mining, superannuation and banking, as well as a few others they look at in less detail. The Game of Mates operates a little differently in each industry, but the basic processes are the same.

Firstly, there is the giving of grey gifts.  These are opportunities to make money which are conferred by the Jameses in government to their mates in private industry at no or minimal charge, and at the expense of Bruce.  In the property development industry these take the form of land-use planning decisions which confer windfall gains on developers.  In the transport field they take the form of the shift from publicly provided road infrastructure to infrastructure provided by Public-Private Partnerships.  In mining, they take many forms - subsidised infrastructure, low levels of tax, and criminally small bonds for environmental clean-up which leaves huge legacy costs for government.  In banking they take the form of regulatory arrangements which favour the Big 4 banks over smaller financial institutions and keep out foreign competition.

Secondly, there is the network of mates.  If you look at any of these industries over time, people at various senior levels move back and forth between government and the private sector.  Retired government ministers sit on the boards or serve as executives of companies whose industries they oversaw in government.  Property developers become local government councillors.  Retired bank CEOs conduct inquiries into the banking industry.  Government urban planning managers depart for well-paid jobs in the development industry, or vice versa.  They mingle via industry forums, private dinners, consultation events and so forth.  In the process, they provide one another with favours, not through corruption or illegality, but through a shared understanding of what is good for their mutual interest.

All this is bolstered by a set of convenient myths.  The mining industry provides jobs.  Public-Private Partnerships are more efficient.  More housing supply will improve affordability.  Lower taxes are good for everyone.  Lower wages produce more jobs.  Governments must balance their budgets.  These myths, actively promulgated by James and promoted in our media (also owned by James) help to shield Bruce from the truth about how the Game is actually played.  Indeed, many Jameses believe these myths themselves, genuinely convinced that what they are doing is for the best.

How much does all this cost us?  This is a difficult question to answer precisely, but Murray and Frijters have a go.  Their method is to compare Australian practice with national or international 'best practice' in each of the industries.  For instance, in property development they compare the situation in most of Australia with that of the ACT, where a leasehold land-title system enables the ACT government to charge developers for development rights which those in other states get for nothing.  If equivalent charges were levied on developers across Australia they would net our governments an extra $11b per year in revenue which could be spent, for instance, on affordable housing or homelessness services.  In the mining industry, in addition to $36b  in subsidised infrastructure and unfunded environmental liabilities a 'best practice' taxation system based on Norway's would yield an extra $20b per year.

Transport infrastructure is a particularly interesting comparison.  Prior to the 1990s, all Australia's major road and rail projects were planned and managed by government.  Their projections of demand and use were generally accurate (in fact, slightly too conservative) and the infrastructure created was generally well used and fit for purpose.  However, in the 1990s governments, in a bid to avoid debt (in line with the myth that government debt is bad) shifted to using public-private partnerships. Murray and Frijters analyse 38 major projects built using this model and find that on average their actual use was 40% below what was projected during the planning stage.  Some of the resulting losses are borne by government in the form of implicit or explicit guarantees and ongoing maintenance contracts on under-used infrastructure.  Some is borne by ordinary travelers in the form of inflated tolls, 'funneling' away from less expensive public roads and greater congestion.  Their estimate of the total extra cost of these bungles is $42.8b.

And so it goes on from industry to industry, with the total cost of the Game of Mates well north of a hundred billion each year.  This is cost that is paid directly or indirectly by ordinary Australians in increased charges, more tax or reduced services.  However, every dollar lost by Bruce is not necessarily a dollar gained by James.  Much of the money is frittered away in inefficient processes and other forms of waste.  If Bruce loses $100 and James gains $50, this is a good deal for James, and he controls the game.

What can be done?  This is a difficult question, because James controls the organisations that should be fixing the problem.  Hence, more regulation just plays into James's hands not only because he is able to manipulate the process of creating new regulations, but has a monopoly on the expertise needed to comply.  Changing the government will not help because both major parties are in on the game.  Still, there are ways to change the game.  We can reclaim the value of grey gifts through charging for them, or keeping them in public hands.  We can create public competitors for private Mates to keep them honest.  We can open the way to disruptive new players by keeping barriers to new competitors low.  We can disrupt coordination between Mates by rotating key personnel, using overseas regulators for major decisions, and bringing in stricter laws to limit politicians' post-politics corporate and lobbying activities.

Us ordinary Aussies are being ripped off.  This is not because James is a bad guy.  Only rarely is he breaking the law.  In his position, most of us would do the same.  He often sincerely believes that what he is doing is for the best.  We don't need to change the players, we need to change the game.

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