Category Archives: Politics & Economics

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?

GDP?

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.
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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.

100 Megabits

One of Kevin Rudd's main goals is to implement a blazingly fast nation-wide 100Mb/s national broadband network, at a cost of around $43b. This would place Australia at the pinnacle of world broadband networks. Frankly, I can't think of a single bigger waste of tax-payer's money than this (especially when we are due to run huge deficits). After all, what does one use 100Mb/s for? Movies, music and porn - that's it. I'm a fairly heavy internet user, yet I can't for the life of me think how I would use anywhere near 100Mb/s. You don't need 100Mb/s to check your email. You don't need 100Mb/s to do research for your high school essay. You don't need 100Mb/s to chat to your Mum over Skype. All you need it for is BitTorrent. Should the government really be spending several tens of billions of dollars of taxpayer's money on subsidizing BitTorrent? I don't think so - especially given that governments around the world are spending billions of dollars trying to fight copyright infringement. It would be much more cost effective to subsidize rental video outlets and adult stores, which would have the same effect for a fraction of the cost.

I see two possibilities for how this scheme could develop. First, given that it is estimated that use of the network by the end user will cost around $200/month, there is a very real possibility that few people will want to pay the price to use it, in which case the resources will have been wasted. Alternately, lots of people might start using the network for its speed which will put private sector ISPs out of business, since they will be unable to compete against this newly created, heavily subsidized behemoth. This could have devastating implications for the telecommunications industry and might effectively socialize this critical sector of the economy. Either of these possibilities is undesirable.

In Australia, like in other developed countries, the market has proven very effective at providing broadband services to our residents. If a 100Mb/s network hasn't already developed in the market, this is probably a fairly good indication that such a network would be economically unviable and therefore shouldn't be pursued by the government.

This post has been cross-posted at the Australian Libertarian Society's blog - Thoughts on Freedom.