Category Archives: Politics & Economics

A case for universal basic income

Within modern libertarian-leaning circles, there has been increasingly vocal support for introducing a Universal Basic Income (UBI) — an unconditional state-financed income guarantee for all citizens. This is often met with surprise from those more social-democratic leaning, who, interestingly, are increasingly supportive of the idea too, albeit approaching it from the social rather than the economic angle. I believe the arguments from both sides are valid, and regardless of which way you vote or whether you lean left or right, we should support the introduction of a UBI as a replacement for our existing welfare systems.

Government efficiency

Perhaps the biggest gripe with current social welfare spending is how inefficient governments are at handling it, which is hardly surprising, given that governments simply aren’t very strongly incentivised to be efficient. A UBI is the most simple and efficient social spending program that can be envisioned and owing to its inherent universality and uniformity it disempowers politicians from manipulating it for political purposes.

We can effectively eliminate all forms of existing welfare (including unemployment benefits, aged and disability pensions, maternity and paternity leave, carers allowances, and student income support) and their associated bureaucratic infrastructure, replacing it with a script that makes automated periodic bank transfers to everyone. The entire existing infrastructure can be completely dismantled and put to rest, along with all its operating costs and overheads, and the associated labour put to better use than paper-pushing.

This isn’t only more efficient for the government, but also for recipients, who are no longer burdened with battling against bureaucracy and can instead turn their attention to more productive things.

Benefits for the unemployed

A common and completely correct criticism of conventional unemployment benefits is their creation of ‘poverty traps’, induced by the extremely high effective marginal tax rate (EMTR) imposed upon the unemployed when they gain employment, whose income upon gaining employment is discounted by their loss of benefits. Their effective pay increase is the difference between these (not very much for a low-income worker), yet their respective increase in workload is from zero to full-time. This is equivalent to paying a very high rate of income tax, typically far higher than the highest marginal tax rates in even highly progressive systems. This creates an enormous disincentive to seek employment since people aren’t likely to switch from unemployment to full-time work if it only earns them an extra cup of coffee. With an unconditional UBI in place, any new income earned is not discounted by benefit reductions, and the person’s marginal income remains their actual income.

Eliminating this poverty trap barrier would foreseeably result in far greater incentive amongst the unemployed to seek and hold onto employment. Additionally, by not being stuck in a situation where people have the “I have to take any job I can get otherwise I’ll be homeless” mindset, people are more likely to find themselves in jobs that suit them and provide a positive future outlook.

With social security conditional upon being unemployed and a minimum award wage in place, those with labour productivity below the minimum award threshold are forced onto social security. Marginal income is discounted by the social security baseline, which is a very low differential for low-skilled workers, creating a ‘poverty trap’ that disincentivises employment.
By removing the minimum wage and replacing social security with a UBI the poverty trap is eliminated.

Additionally, in eliminating the minimum award wage we prevent low-skilled workers from being priced out of the labour market altogether given the inevitability that some workers will be unable to readily find employment in which their skillset empowers them with productivity above this imposed threshold, thereby condemning them to unemployment.

Benefits for workers

Amongst low-skilled workers in particular, there is significant bargaining asymmetry against employers — to the employee, everything might depend on keeping their job, whereas to the employer the cost of replacing them is relatively low. A UBI to a significant extent offsets the former issue, placing workers into a stronger workplace bargaining position without the need for regulatory mechanisms of highly questionable efficacy to attempt to enforce it. This increases the labour market competitiveness of workers.

The same argument extends to self-employment. A low-skilled worker might self-employ by undertaking odd jobs, or contract- or app-based work, which don’t provide long-term job security but ought to be encouraged.

Labour market mobility

Throughout much of the developed world, savings rates are very low, providing a significant hindrance to labour market mobility — the ability for people to switch between jobs. Since it can be very challenging to line up a new job timed exactly right to match the exit from an existing one, transitioning between jobs is effectively disincentivized by this savings barrier. This creates an employment trap that inhibits people from placing themselves into jobs to which they are best suited and most likely to be successful and productive at.

Increased mobility in the labour market is enormously beneficial not only to workers, but also to employers, and reducing inefficiencies that undermine mobility have huge economic benefits. This doesn’t only apply to upward mobility, whereby people shift into jobs with higher income, but especially to sideways mobility, where people change jobs to better suits their conditions or gain new skills. A UBI improves overall labour market mobility by ensuring that employees aren’t economically trapped into jobs that aren’t right, or where they could find something better, which isn’t a good outcome for any of us, either individually or collectively.

How to introduce a UBI

Given that introducing a UBI represents a major structural reform, it is important to be mindful of minimising disruption during implementation. If poorly executed it could shock the system and cause destabilisation. A suggestion for how to smoothly go about implementing this is as follows.

Take all existing employment contracts and automatically overwrite them to subtract the introduced UBI amount from the specified income, with no other contractual changes — the legislation effectively negotiates down all salaries by an amount equivalent to the newly introduced UBI, which everyone now receives. The UBI amount is effectively contractually refunded back to the employer via reduced liability, with no perceived change in income by employees.

We could similarly eliminate mandatory superannuation — a hugely inefficient and inequitable system — instead converting whatever fraction is necessary into income taxation to finance the component of the UBI stream that replaces the pension and allowing workers to retain the rest.

Effect of legislative renegotiation of employment contracts to discount incomes by the newly-introduced UBI. For illustration here I let the UBI be equal to the minimum award wage, at which point those previously earning the minimum wage now earn nothing. This necessitates the right for employees to choose to cancel current contracts and renegotiate them if they choose.

There is one obvious pitfall in the above figure, being that at the bottom end of the labour productivity spectrum legislatively renegotiated incomes become extremely small or indeed vanish in the limit where the UBI equals the previous minimum award wage. Clearly it isn’t viable for those employees to accept that. But that isn’t to say that their labour is actually worth nothing. The purpose of the legislative override is only to balance the various money flows, but it simultaneously skews incentives.

Two ways to navigate this issue are:

  1. Complement the legislation with the right for employees (but not employers) to exit their contracts and choose to either reapply with newly negotiated salary. Employees can realistically negotiate their salaries upward at this point given that their labour still has value, however they would now be doing so in competition against a bigger pool of competitors given that the minimum wage has now been abolished. The new market value is expected to be less than before (due to increased labour market competition).
  2. Introduce the UBI gradually over time, discounting the pre-existing benefits stream by an equal amount until over time it evaporates entirely and can be abolished. This has the advantage of mitigating sudden labour market shocks that a spontaneous introduction would induce and allow the market to find new pricing for labour on its own without top-down intervention.

Given that employers have all now been granted an employment cost reduction equivalent to the UBI paid to their employees, the cost of the UBI can now be compensated for by tax liabilities to the employer via company tax. For this to remain budget neutral the new tax liabilities would in total be greater than before since they now also must cover those who are unemployed but now received the UBI, which corresponds to the unemployment rate, offset by whatever the costs of the previous, far less efficient unemployment benefits schemes were. All things combined, in countries with low unemployment and/or highly inefficient public sectors, this is unlikely to be a major burden.

Money flow between employers, employees and government.
Upon transitioning to the UBI the flows change, with no perceived change in incomes. If the UBI takes the same value as conventional benefits, which it needn’t necessarily, there is no perceived change in benefits or net taxation either (tax rates would however have to increase).
If we opt to introduce the UBI gradually to minimise labour market shock, the money flow would instead look like this. We discount the benefits flow by the UBI, and the UBI is gradually ramped up until the difference is zero at which point the previous benefits scheme is abolished. Although this approach is a longterm one, it is likely more politically viable to pursue given the aversion politicians have to making major structural reforms that cause short-term shocks (after all, the next election is always in sight). Politicians aside, major shocks to the labour market are generally unwelcome anyway, and slowly swapping in a UBI using this approach (which I’m going to name political annealing) allows us to smoothly interpolate from one to the other, thereby allowing new market prices for different forms of labour to be properly established.

To maintain parity from the income tax side, existing income tax rates should be renormalised such that income and UBI combined are taxed equivalently to previous incomes without the UBI. This implies workers’ marginal tax rates to be pushed upwards to remain tax revenue neutral since they are effectively promoted to higher tax brackets.

Now everything is roughly financially equivalent from the perspective of both employees and employers, the primary difference being that the unemployed have now been absorbed into this new system, with the previous one being dismantled.

Benefits for employers

From the employer’s perspective, especially small businesses employing low-skilled workers, this is a massive boon, since the cost of employment is reduced to the differential between what it previously was and what the new UBI provides. However, they’re receiving the same labour in exchange, so the ratio between the reduced labour cost (indirectly subsidised via the UBI) and the original labour cost (the worker’s full income) provides a multiplier on the productivity of their employees. This ratio is largest for low-income workers, thereby stimulating demand for their employment. Businesses are now better off to the effect of a UBI per employee, which can be recovered via company tax adjustments to finance the UBI.

Social benefits

It’s easy to see the attractiveness of this from a social-democratic perspective. But not just in the trivial sense that it directly undermines poverty. More generally, it places every member of society in a position of greater independence. People in abusive relationships are better able to leave. People have a greater genuine choice in making life decisions, both personally and professionally, and are less easily coerced. People who need lifestyle or career flexibility for health reasons are in a far stronger position. And perhaps most importantly, the impact on general mental health within society is likely to be significant, by removing enormous insecurities, particularly during periods of labour market volatility.

A more powerful monetary tool

During the course of the current COVID-induced economic crisis, it has become clear that central banks have exhausted their fiscal tools in stimulating consumption, and have entered a cycle of concocting ever more elaborate and extreme new ones out of desperation. This has arisen because their tools are largely limited to manipulating the money supply via interaction with financial markets. But that isn’t where consumption takes place, it’s where investments are made and assets held. Consumption is driven down here, not up there.

With well-considered legislation in place, a UBI provides a monetary tool for stimulating consumer spending via the injection of additional funds — in addition to the regular UBI flow under the umbrella of fiscal policy, central banks have the option of supplementing it with monetary stimulus. This provides the most direct possible mechanism for stimulating consumer price inflation (CPI) as opposed to conventional monetary stimulus via open market operations (OMOs) which largely affect asset price inflation. Unlike manipulating income tax rates, this is not conditional on people being employed (and less likely to spend than those who are not), and the latency between pulling monetary levers and their impact on CPI is minimised.

This is not to advocate for more monetary intervention by governments, who have consistently demonstrated themselves not especially competent in doing so, but rather provides tools that are more effective in achieving what they’re ostensibly intending to do. It doesn’t take a genius to see that when interest rates are near zero, pumping more cash off the press into financial markets isn’t going to be hugely effective at stimulating consumption. This represents a trickle-up rather than trickle-down approach to economic stimulus, the latter being oft criticised as being ineffective, which it is.

Economic & social robustness

During COVID, various governments scrambled to introduce mechanisms to protect businesses from the catastrophic impact of having neither workers nor clients. One approach, which seems to have worked reasonably well here in Australia (the so-called JobKeeper scheme) was for the government to temporarily pay the incomes of companies’ employees, thereby allowing businesses to go into hibernation and be insulated from payroll liabilities, ensuring that existing employees’ employment is retained. A UBI would have made this kind of response far less chaotic.

A UBI provides significant robustness against future pandemic scenarios and other temporary but catastrophic labour market shocks. There is no need to rush to put new legislation into place to absorb such shocks, the infrastructure is already in place. Companies, especially small businesses with limited financial buffers, needn’t wait for governments to decide if and when they will consider programs like JobKeeper, which has seemingly been very effective at protecting businesses from their employees being prevented from working.

Small government

While a UBI is a ‘big government’ initiative and therefore might be unpalatable to many on the political right, it needs to be seen on a comparative basis relative to what we currently have, a social welfare system that ostensibly aims to achieve the things a UBI will but does so with massive bureaucratic overhead and inefficiencies that in many ways create more problems than they solve.

Dismantling a hugely complicated set of systems focussing on different aspects of social welfare and reducing them to a single streamlined one that requires very little overhead to maintain is very much aligned with small government philosophy and massively reduces the number of levers the government has to play with and therefore play politics with.

The redundancy of human labour

It seems likely a UBI will become inevitable at some point in time based on the expectation that as automation and AI continue to advance, increasing numbers of workers will simply not be able to compete with the productivity of machines. There’s only so much retraining we can do before trying to do something that machines can’t do better becomes futile. And this isn’t an expectation that applies only to low-skilled or manual labour, but inevitably will over time impact the competitiveness of even the most highly skilled jobs. With this kind of inevitable future outlook, the conventional libertarian philosophy of “leave the market to itself” will simply not be capable of addressing society’s needs.

We are in an era where automation dominates productivity, a trend that will inevitably continue escalating exponentially. It simply isn’t plausible that in the long term we will be able to compete against the machines we invented, and the need for state intervention to subsidise income will be necessary to ever-increasing extents. A UBI is the most practical and efficient way to achieve this, with the most positive outcomes both economically and socially. It would be complete intellectual capitulation for libertarians and conservatives not to allow free-market philosophy to evolve and accommodate for the hard reality that our labour is becoming worthless and that a UBI is the best way to accommodate for this in a manner entirely congruent with the remainder of free-market philosophy. As we outsource our productivity to machines, we mustn’t outsource all the return also.

The incentive tradeoff

The fact that a UBI implies higher marginal tax rates, even if net tax revenue remains the same inevitably raises the perfectly legitimate criticism that this skews incentives and may undermine competitiveness. There is truth in that, however while higher marginal rates act as a disincentive these are counteracted by newly created incentives, specifically more competitive workers, more streamlined government, a more efficient and less regulated labour market with greatly increased mobility, and most importantly all those who were previously priced or regulated out of the labour market altogether no longer face those roadblocks and are able to compete.

From the perspective of businesses, who now pay higher tax rates to effectively reimburse the UBI, they have the new incentive that labour costs have been reduced, providing a multiplier on return on investment into labour, and face fewer regulatory barriers when negotiating employment contracts since we can now safely dismantle many existing employment regulations.

Vote Script for President

Ladies & Gentlemen — Allow me to introduce our new Minister for Social Services.

On the ABC

Here’s what I think about the ABC issue. From an economic perspective, yes cutting funding would save money from the budget and reduce government debt. And going a step further, it’s almost certainly true that the ABC would be more efficiently run were it privatised outright and be more competitive. So I don’t argue with the economic reasoning. And certainly, in most other industries I would argue for keeping the government out, for exactly these reasons.

But when talking about the ABC, there’s much more to it than the economic argument. Having diverse media, representing a cross section of different interests, is essential to democracy itself. If all our broadcasters were monopolised by the same corporate interests, diversity in journalism would suffer immensely, it would be biased, and the people would be less informed and not be exposed to a diversity of views and opinions. And undermining or privatising the ABC would cause this.

When I watch TV (I hardly ever do since I don’t own one), I exclusively watch the ABC and SBS, since, in my mind, they are the only broadcasters with any depth or quality in their journalism. I think Abbott agrees with me on this, and this is precisely why he doesn’t like the ABC – he doesn’t want to be criticised or held to account. The commercial broadcasters, in my mind, are severely deficient in the quality of their journalism, are completely lacking in balance, and fail to be critical of government. Abbott agrees and that is what he wants.

ABC journalism has been essential in recent years in being critical of government (regardless of which party is in power), and doing its job of conducting interviews and covering stories which hold politicians to account. Democracy would suffer if this wasn’t the case.

So if you’re going to comment on this post, don’t waste your time with the economic arguments. I already agree with the economic arguments. Instead, argue why undermining or demolishing the ABC is good for the quality of journalism in our country and why it is good for democracy.

The National Broadband Network – Government vs. Coalition

Some time ago I blogged about the Australian National Broadband Network (NBN), the centrepiece infrastructure policy of the current Labor government. I’d like to follow up on this issue from a different perspective. In the meantime, both the government and opposition have dedicated themselves to a national broadband policy. So I’d like to analyse the issue in this new context. In this post I will no longer ask the question “should the government build a national broadband network?”, but rather “given that both sides of the House have committed themselves to a national broadband scheme, which is the superior model?”. I’m firmly of the opinion that the Government’s NBN policy is by far the superior model.

First let’s compare the Government’s and the Coalition’s models. The Government’s NBN policy will roll out optical fibre to almost every premise in the country (93% fibre coverage, with various other technologies, such as satellites or wireless, reaching the remainder that are remote and inaccessible). This is the so-called ‘fibre to the home’ (FTTH) approach. It will guarantee 100Mbps downstream bandwidths to all areas covered by fibre, and is easily upgradeable in the future to 1Gbps speeds (indeed optical fibre is capable of far more than this). The Coalition’s scheme on the other hand relies on ‘fibre to the node’ (FTTN) technology, whereby fibre is rolled out to cabinets on the street corner, which are subsequently connected to individual premises using existing copper cables. The Coalition claims this will guarantee 25Mbps downstream speeds, but will be much cheaper than FTTH.

Let’s begin by considering the cost issue. The Coalition criticises the NBN as being too costly, claiming that their FTTN approach is vastly less expensive (the Coalition claims $17b less). If we work off the assumption that the copper infrastructure ‘comes for free’ then this might be a reasonable claim. But it doesn’t. The reality is that the Australian copper network is nearing the end of its lifetime and will be in need of complete replacement in the near future followed by ongoing maintenance. To my knowledge, this cost has not been factored into the Coalition’s estimates, which significantly underestimates the total long-term cost of the network. Fibre has a very long lifespan – on the order of at least half a century. This is not the case for copper, which deteriorates very rapidly, requiring constant maintenance or downright replacement. I suspect that once this is factored into the pricing, the Coalition’s plan will not be quite as cheap as touted. Telstra currently spends $1b per year maintaining their copper network. Accumulate that over the life expectancy of the NBN and you’ve got a hell of an expense on the order of $50b for maintenance alone. Then there’s the energy consumption cost. Powering optical fibre is very cheap – light doesn’t take much energy to produce and transmit. Copper on the other hand uses electrical signals, which, when deployed across the entire country, adds up to a very hefty electricity bill (according to one estimate I read, such a copper network would require the equivalent of at least a whole coal-fired power plant to drive). To my knowledge, this has also not been factored into the Coalition’s estimates. In summary, it’s highly debatable whether, all things considered, the Coalition’s plan will actually be cheaper in the long term. But let’s for a second give Abbott the benefit of the doubt and assume that he’s spot on in estimating that his FTTN scheme is $17b cheaper than Labor’s FTTH. With a population of roughly 22 million, and amortised over a life expectancy of around half a century, this amounts to $15 per person per year in net savings (admittedly not accounting for compound interest or return). This is a pretty small additional price to pay for an immensely better network, which almost certainly has economic multiplier effects worth well in excess of $15/person/year. The economic arguments being touted by Abbott and Turnbull seem like lunacy.

Next there’s the bandwidth issue. The Coalition themselves admit that their FTTN scheme guarantees vastly inferior bandwidths compared to FTTH. In the case of FTTN they guarantee 25Mbps downstream (which can only be guaranteed if you’re living right next to a node, and deteriorates exponentially with distance from the node). This is barely more than what lots of existing broadband customers can access with today’s infrastructure. Furthermore, it’s not upgradeable, as the 25Mbps figure all but saturates what’s possible with copper technology. The Government’s FTTH scheme on the other hand will guarantee 100Mbps downstream, which, as mentioned earlier, is easily upgradeable tenfold (and probably more) in the future. There are fundamental physical reasons why copper will never achieve these kinds of speeds (electrical channels are subject to capacitive coupling, interference and resistive loss – light isn’t). Thus, if one of the objectives of a national broadband policy is to be future-proof then the Coalition’s plan is dead in the water.

The Coalition’s broadband policy seems incredibly shortsighted. We need to factor in Moore’s Law – the exponential growth in demand for computing power and bandwidth. Tony Abbott and Malcolm Turnbull have stated that their alternative caters to today’s demands (Turnbull: “The Coalition plan would meet current demand for broadband services”). While a couple of tens of megabits (at best) may satisfy today’s needs, it most certainly doesn’t satisfy tomorrow’s, and it strikes me as myopic to base a major technological infrastructure project worth tens of billions of dollars purely on today’s needs. The advent of ultra-high-def (4K) video will already saturate the bandwidths being promised by the Coalition, not to mention applications in 10 or 20 years time (e.g. future developments in cloud computing or higher-def, multi-channel video). By the time the Coalition’s infrastructure is complete, it is likely to already be obsolete technology. If we’re going to spend tens of billions of dollars on such an infrastructure project, then the most pressing requirement should be that it caters for tomorrow’s needs, since this infrastructure, being as expensive as it is, should last us decades, not months.

If we’re going to invest this kind of money in such infrastructure, then we should only pay for the infrastructure once. The coalition’s plan will require paying for it over and over again as the copper network deteriorates, until, ultimately, people realise that it can’t provide the bandwidths we need, at which point we’re going to have to reinvest in the infrastructure from scratch and roll out FTTH anyway. So why not just do it right in the first place?

The final issue I’d like to touch upon is that of competition. The Coalition consistently criticises the NBN for being an uncompetitive monopoly. I heavily dispute this. Inevitably such infrastructure will be a natural monopoly. It makes zero sense to have half a dozen fibre lines running into each household, each owned by a different provider, to compete with one another. It would be hugely economically inefficient since the majority of it would be unused (of course, if secondary providers do decide they wish to run additional cables into people’s households, they shouldn’t be legislatively prevented from from doing so, but I can’t see this happening). So the best we can hope to achieve is to maximise competition within the context of this natural monopoly. The way the Government intends to achieve this is by structurally separating the wholesale and retail divisions of the NBN, such that the infrastructure is owned by NBN Co., but they don’t have the right to sell it to individual consumers. Rather, there is a level playing field in which third-party retailers can purchase bandwidth wholesale from NBN Co. and resell it to the consumer. This is exactly what’s being proposed by the Government. Under the proposed scheme, there will be no barrier to market participants purchasing bandwidth wholesale, so that even small competitors will be able to enter the broadband market. This will create the closest to a competitive market that we can realistically hope to achieve with such a project. A broadband market with a level playing field in which even small competitors can compete is a pretty decent deal.

Laughably, Tony Abbott recently said it’s a mistake to put all our eggs in the one basket (i.e. spend all our money on fibre as opposed to spreading the investment across a diverse range of technologies). This is an absolute joke. When it comes to traditional investment and portfolio management theory, certainly the ethos “don’t put all your eggs in the one basket” is a very wise philosophy. But when it comes to technological infrastructure, this doesn’t make any sense whatsoever. Surely it makes sense to choose the superior technology (fibre) and use it universally rather than investing in a mix of inferior technologies (copper) just in the name of “not putting all your eggs into one basket”. Should we equip school computer laboratories with a mix of cutting edge PCs and 1990’s 386 computers, just because we don’t want to put all our eggs into the one basket? No, we should just choose the best technology and employ it universally. Should we equip half of our defence forces with Soviet MiG fighter jets for the sake of diversity, or should we just universally adopt the latest NATO fighters? It’s a no brainer.

Given that both sides of politics have committed themselves to investing in such infrastructure using public money, it makes zero sense to choose the technology to cater only for today’s needs, which has to be continually replaced and upgraded, and which doesn’t cater for tomorrow’s needs.

The NBN is inevitably going to be one of the big policy issues determining the upcoming federal election in September, and the fact of the matter is that the Coalition’s policy is a joke – it’s much (much) slower, it’s almost certainly not cheaper, it’s not at all upgradeable (unless we abandon the copper and switch to fibre), and it doesn’t accommodate for tomorrow’s needs. Why waste the money?


I’ve always been bemused that GDP growth is the standard metric for economic strength and standard of living. I think GDP growth is a very weak metric. My reasoning is that GDP measures the strength of the economy in dollar value. What GDP ignores is that, as a result of momentous technological progress, what we get for a dollar is growing much more rapidly than GDP. For example, if you purchased a computer ten years ago, and then a computer today for the same dollar value, what you get for your money today is orders of magnitude more than what you would have got back then. My smartphone is infinitely more powerful than my first PC. So in my mind, metrics for valuing technological development are far more critical than metrics measuring production by dollar value. Governments seem to completely ignore this. They become very concerned when GDP growth isn’t up to par, whether it’s 0.1% higher or lower than anticipated, while ignoring the fact that nonetheless technology is exponentially powering ahead as strongly as ever before. As a result, many consumer goods are developing very rapidly, as is our (technological) standard of living. I’d like to see more widespread use of technological development metrics when evaluating the strength of the economy. No single metric can fully characterise an economy or its people’s standard of living. We need to employ a greater diversity of metrics to fairly reflect this and technology should be at the forefront.

The case against stimulus

Following the global financial crisis (GFC) governments all around the world, including Australia’s, engaged in knee-jerk stimulus spending, aimed at ‘kick starting’ the economy. Advocates argue that such spending stimulates demand, which subsequently triggers increased circulation of money and credit. I’d like to dispel some misconceptions about such policy.

The entire stimulus argument is based on demand side (or Keynesian) economic principles. However, demand side stimulus is only one approach to stimulating an economy. The other is supply side stimulus, involving tax cuts and removing regulation barriers, which inhibit production. Supply side stimulus has the advantage that, like demand side stimulus, it stimulates circulation of money, but has the added benefit that it stimulates people to earn more, invest more and save more. In this sense, supply side stimulus is superior to demand side stimulus.

The argument that Keynesian economics, i.e. the government borrowing large sums of money and spending it, is beneficial is based on false assumptions. When the government borrows money, it doesn’t come out of thin air. Rather, it is borrowed from someone. That someone is generally the private sector. Thus, to establish whether Keynesian stimulus is beneficial one must ask the question “does the government or the private sector allocate capital more efficiently?”. If the government allocates capital more efficiently then it makes macro-economic sense for the government to borrow money. However, if the private sector allocates it more efficiently then it is counter-productive to do so. If the former is always the case then it would make sense to abolish the private sector altogether and transition to a centrally planned economy. Clearly this isn’t the case. While in some instances government spending is more valuable than private sector spending (e.g. vital infrastructure that the entire economy critically depends upon), this isn’t always valid. Thus, before engaging in Keynesian stimulus one must analyse the details of how the government plans to spend the money, and evaluate whether this spending represents more efficient allocation of capital than what the private sector would otherwise do. The answer to this question varies, depending on the government’s and the private sector’s spending intentions. The problem I have with the stimulus packages of various world government is that they haven’t performed a full macro-economic cost-benefit analysis to determine whether their allocation of capital is optimal. Rather, they present simplistic arguments for the benefits of stimulus spending, and then spend the money willy-nilly without much consideration as to whether its allocation is superior to the commensurate private sector spending.

To compound the problem, governments retrospectively justify their stimulus spending by arguing that the economy has improved since the policy was implemented. This is a highly unscientific claim, as the governments have no idea how the economic dynamics would have evolved had they not engaged in stimulus spending. The reality is that economies naturally periodically go through boom-bust cycles. Therefore to wait for a bust cycle, implement a particular policy, then wait for the recovery and claim that it was a direct consequence of policy is folly.

I won’t argue that government spending is always bad, nor will I argue that governments borrowing money is always bad. What I do argue is that world governments have presented a simplistic and shallow case for their actions and have failed to perform any in-depth analysis of its overall benefits. Therefore I remain highly skeptical about the merits of their actions. Their actions have put major world economies into almost inescapable levels of debt, which in the long term will result in higher taxation and lower provisions of services and infrastructure. In the long term this could be catastrophic.

On the labour market

This is the speech I gave recently to the Liberal National State Council on the labour market.

Ladies & Gentlemen,

The labour market is a particularly important issue facing our society at the present time. It affects many different areas of our society, including the unemployment rate, workplace conditions, people’s income and job satisfaction.

In particular, I’d like to discuss the ups and downs of different approaches to the labour market and what I think is the optimal approach.

The labour unions have long advocated a highly regulated approach to the labour market. They strive to enshrine workplace conditions, salaries and the content of workplace contracts in law.

One area in particular that unions actively try to enshrine in law is salaries. The unions have long tried to regulate incomes in the form of minimum award wages. This approach is fundamentally misguided. Legislated minimum conditions achieve only one thing – to make it illegal for people to work. If someone has a productive capacity of $6 an hour and the minimum award wage is $5 and hour, that person will have no difficulty getting a job. If we now increase the minimum award wage to $8 an hour, that person is not going to get a salary increase to $8 an hour – they’ll be out of work. And all other labour market regulations have a similar outcome. They price people out of jobs, undermine their ability to negotiate the terms of their workplace contracts, and make the labour market extremely inefficient and uncompetitive.

I advocate a different approach altogether. There should be only one workplace law, and that is to enforce contract. The contents of a contract ought to be something that is freely negotiated between the employee and the employer. But once that contract is signed it needs to be respected – by both parties. And enforcing this contract should be the role of government.

The unions are very critical of this approach. They argue that people deserve better conditions than what they agreed to in their contracts and they resort to extortion tactics to achieve these better terms of contract. They engage in strike action, immoral political lobbying, rallies and sometimes even violence to achieve this objective.

The unions also argue that they are there to represent workers. Let there be no mistake, unions do not represent workers – they represent paying members. They represent people who pay a significant amount of money to be represented by these organizations. As a result, people who choose not to join a union are left at a competitive disadvantage. Even worse, people without jobs are at a huge competitive disadvantage because not only do they not receive any union representation, but they are priced out of the market by artificially high minimum award wages.

Essentially what unions do is to artificially pump up salaries and conditions that are not commensurate with productivity gains. This has exactly one effect, and that is to create inflation. When people earn more, without a corresponding increase in productivity, people have more money to buy goods with, but the amount of goods to buy hasn’t changed. So money loses its value, which is inflationary and results in higher interest rates. And when interest rates increase, people are paying more on their mortgages, more on their car loans, more on their credit card debt, and so any gains made by increasing their salaries is completely wiped out by the higher interest rates. This is completely counterproductive.

There is no better person to decide the terms of their contract than the prospective employee. Employees don’t need to have their terms, conditions, and salary dictated by either unions or the government. In a free society, people should be at liberty to negotiate these things for themselves.