CIS Occasional Paper 125

Moral Wisdom and the Recovery been ofpondering Virtue for ps us cultivate Philosophers of information technology have l, and of pursuing some time now whether social media technology hel the virtuous ideal of knowing what it is to live wel into the moral that life in this new age. ormed our social These technologies have quickly worked themselvesabits and practices fabric of our daily life. They have not only transf landscape but also changed the very moral h e to live effectively in with which we navigate it. blic square? What are the moral skills we need to cultivat , Peter Kurti proposes the the social media world of the twenty-first century uepu to flourish and In an address given at Consilium in 2012 tury. practice of moral wisdom and the recovery of virt live well in the ideagoras of the twenty-first cen n the Religion and Charles Murray or Independent Studies. The Rev. Peter Kurti is a Research Fellow i the Free Society program at The Centre f MORAL

Related works: WISDOM The Kingdom of God is Forcefully Advancing and • David Coltart, (The Centre for Independent Studies, Forceful Men Lay Hold of It 14 September 2011) AND THE Do Secular Societies Promote Religious Extremism? • Tom Frame, (The Centre for Independent Studies, 7 April 2008) RECOVERY OF VIRTUE CIS Occasional Paper 125 Peter Kurti ISBN 978-1-86432-164-7 ISSN 0155 7386 POLICY CONTENTS ideas • debate • opinion Volume 29 No. 4 • Summer 2013-2014

FEATURES INTERVIEW

3 Bitcoin: A Primer for Policymakers 50 In Defence of the Northern Territory Jerry Brito and Andrea Castillo NT Deputy Chief Minister David Tollner speaks to Crypto-currencies promise to lower the cost of Sergei DeSilva-Ranasinghe about the defence of payments, but are threatened by excessive regulation. northern Australia.

13 The Charity Ball REVIEW ESSAYS Gary Johns 54 Mass Migration Changing the World Charities chase government money, and governments chase charity approbation. There is a better way. Exodus: How Migration is Changing Our World By Paul Collier Reviewed by Wolfgang Kasper 23 Time for Solar to Pay its Way Rajat Sood Solar feed-in tariffs are inefficient and costly to BOOK REVIEWS electricity users. 59 Why Australia Prospered By Ian McLean

31 The Consequences of High Government Debt: Reviewed by Stephen Kirchner Reinhart and Rogoff Versus Pundits F. F. Wiley 61 The Self-Transforming School The Reinhart-Rogoff controversy over government By Brian J. Caldwell and Jim M. Spinks debt reflects badly on the pundits. Reviewed by Jennifer Buckingham

45 Neville Bonner: A Legacy for Young Australians 62 The Righteous Mind Sean Jacobs By Jonathan Haidt Neville Bonner left an inspirational legacy for Reviewed by Joel Malan young Australians. POLICY staff Editor-in-Chief & Publisher: Greg Lindsay Editor: Stephen Kirchner Assistant Editor: Mangai Pitchai Design & Production: Ryan Acosta Subscriptions: Kerri Evans and Alicia Kinsey

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BITCOIN: A PRIMER FOR POLICYMAKERS Crypto-currencies promise to lower the cost of payments but are threatened by excessive regulation, say Jerry Brito and Andrea Castillo

itcoin is an open-source, peer-to-peer Bitcoin’s invention is revolutionary because for digital currency. Among many other the first time the double-spending problem can be things, what makes Bitcoin unique is solved without the need for a third party. Bitcoin that it is the world’s first completely does this by distributing the necessary ledger Bdecentralised digital-payments system. This may among all the users of the system via a peer-to- sound complicated, but the underlying concepts peer network. Every transaction that occurs in are not difficult to understand. the bitcoin economy is registered in a public, distributed ledger, which is called the block Overview chain. New transactions are checked against the Until Bitcoin’s invention in 2008 by the block chain to ensure that the same bitcoins unidentified programmer known as Satoshi haven’t been previously spent, thus eliminating Nakamoto, online transactions always required the double-spending problem. The global peer-to- a trusted third-party intermediary. For example, peer network, composed of thousands of users, if Alice wanted to send $100 to Bob over the takes the place of an intermediary; Alice and Bob Internet, she would have had to rely on a third- can transact without PayPal. party service like PayPal or MasterCard. One thing to Intermediaries like PayPal keep a ledger of note right away is account holders’ balances. When Alice sends that transactions Bob $100, PayPal deducts the amount from her on the Bitcoin account and adds it to Bob’s account. network are not Without such intermediaries, digital money denominated in could be spent twice. Imagine there are no dollars or euros or intermediaries with ledgers, and digital cash is yen as they are on simply a computer file, just as digital documents PayPal, but are are computer files. Alice could send $100 to Bob by attaching a money file to a message. But just as with email, sending an attachment does not Jerry Brito is a Senior Research Fellow at the Mercatus remove it from one’s computer. Alice would retain Center at George Mason University and Director of its a copy of the money file after she had sent it. Technology Policy Program. She could then easily send the same $100 to Andrea Castillo is a Program Associate for Spending and Charlie. In computer science, this is known as Budget Initiative at the Mercatus Center. the ‘double-spending’ problem,1 and until Bitcoin This article is reproduced here with permission of the it could only be solved by employing a ledger- Mercatus Center. keeping trusted third party.

POLICY • Vol. 29 No. 4 • Summer 2013–2014 3 BITCOIN: A PRIMER FOR POLICYMAKERS

instead denominated in bitcoins. This makes it charged with either creating currency units or a virtual currency in addition to a decentralised verifying transactions. This network depends on pay-ments network. The value of the currency users who provide their computing power to do is not derived from gold or government fiat, but the logging and reconciling of transactions. These from the value that people assign to it. The dollar users are called ‘miners’4 because they are rewarded value of a bitcoin is determined on an open for their work with newly created bitcoins. Bitcoins market, just as is the exchange rate between are created, or ‘mined,’ as thousands of dispersed different world currencies.2 computers solve complex math problems that verify the transactions in the block chain. As one Because Bitcoin is a peer-to-peer network, commentator has put it: there is no central authority charged with either creating currency units The actual mining of Bitcoins is by a purely mathematical process. A useful analogy is or verifying transactions. with the search for prime numbers: it used to be fairly easy to find the small ones Operation (Eratosthenes in Ancient Greece produced So far we have discussed what Bitcoin is: the first algorithm for finding them). But a decentralised peer-to-peer payments network as they were found it got harder to find and a virtual currency that essentially operates the larger ones. Nowadays researchers use as online cash. Now we will take a closer look at advanced high-performance computers how Bitcoin works. to find them and their achievements are Transactions are verified, and double-spending noted by the mathematical community is prevented, through the clever use of public-key (for example, the University of Tennessee cryptography.3 Public-key cryptography requires maintains a list of the highest 5,000). that each user be assigned two ‘keys,’ one private key that is kept secret like a password, and one For Bitcoins the search is not actually for public key that can be shared with the world. prime numbers but to find a sequence When Alice decides to transfer bitcoins to Bob, of data (called a ‘block’) that produces a she creates a message, called a ‘transaction,’ which particular pattern when the Bitcoin ‘hash’ contains Bob’s public key, and she ‘signs’ it with algorithm is applied to the data. When her private key. By looking at Alice’s public key, a match occurs the miner obtains a bounty anyone can verify that the transaction was indeed of Bitcoins (and also a fee if that block was signed with her private key, that it is an authentic used to certify a transaction). The size of exchange, and that Bob is the new owner of the the bounty reduces as Bitcoins around the funds. The transaction—and thus the transfer world are mined. of ownership of the bitcoins—is recorded, time- stamped and displayed in one ‘block’ of the block The difficulty of the search is also increased chain. Public-key cryptography ensures that so that it becomes computationally more all computers in the network have a constantly difficult to find a match. These two effects updated and verified record of all transactions combine to reduce over time the rate at within the Bitcoin network, which prevents which Bitcoins are produced and mimic double-spending and fraud. the production rate of a commodity like What does it mean when we say that ‘the gold. At some point new Bitcoins will not network’ verifies transactions and reconciles be produced and the only incentive for the ledger? And how exactly are new bitcoins miners will be transaction fees.5 created and introduced into the money supply? As we have already seen, because Bitcoin is a peer- So, the protocol was designed so that each miner to-peer network, there is no central authority contributes a computer’s processing power toward

4 POLICY • Vol. 29 No. 4 • Summer 2013–2014 JERRY BRITO AND ANDREA CASTILLO maintaining the infrastructure needed to support in that once Alice gives bitcoins to Bob, she and authenticate the currency network. Miners are no longer has them and Bob does, and there is awarded newly created bitcoins for contributing no third-party intermediary between them who their processing power toward maintaining the knows their respective identities. On the other network and verifying transactions in the block hand, unlike cash, the fact that a transaction chain. And as more processing power is dedicated took place between two public keys, the time, to mining, the protocol will increase the difficulty the amount, and other information is recorded in of the math problem, ensuring that bitcoins are the block chain. Indeed, every transaction that always mined at a predictable and limited rate. has ever occurred in the history of the bitcoin This process of mining bitcoins will not economy is publicly viewable in the block chain.6 continue forever. Bitcoin was designed to mimic While the public keys for all transactions— the extraction of gold or other precious metals also known as ‘Bitcoin addresses’7—are recorded from the earth—only a limited, known number in the block chain, those public keys are not tied of bitcoins can ever be mined. The arbitrary to anyone’s identity. Yet if a person’s identity were number chosen to be the cap is 21 million bitcoins. linked to a public key, one could look through the Miners are projected to painstakingly harvest recorded transactions in the block chain and easily the last ‘satoshi,’ or 0.00000001 of a bitcoin, see all transactions associated with that key. So, in the year 2140. If the total mining power scales while Bitcoin is very similar to cash in that parties to a high enough level, the difficulty in mining can transact without disclosing their identities bitcoins will have increased so much that procuring to a third party or to each other, it is unlike cash this last satoshi will be quite a challenging digital in that all the transactions to and from a particular undertaking. Once the last satoshi has been mined, Bitcoin address can be traced. In this way, Bitcoin miners who contribute their processing power is not anonymous but pseudonymous. toward verifying transactions will be rewarded through transaction fees rather than mined This process of mining bitcoins will not bitcoins. This ensures that miners still have an continue forever. Bitcoin was designed to mimic incentive to keep the network running after the the extraction of gold or other precious metals. last bitcoin is mined.

Pseudonymity Tying a real-world identity to a pseudonymous A great deal of attention given to Bitcoin in the Bitcoin address is not as difficult as some might media centres on the anonymity that the digital imagine. For one thing, a person’s identity (or currency is supposed to lend its users. This idea at least identifying information, such as an IP stems from a mistaken understanding of the address) is often recorded when the person makes currency, however. a Bitcoin transaction at a website, or exchanges Because online transactions to date have dollars for bitcoins at a bitcoin exchange. To required a third-party intermediary, they have not increase the chances of remaining pseudonymous, been anonymous. PayPal, for example, will have one would have to employ anonymising software a record of every time Alice has sent Bob money. like Tor, and take care never to transact with And because Alice’s and Bob’s PayPal accounts Bitcoin addresses that could be tied back to are tied to their respective bank accounts, one’s identity. their identities are likely known. In contrast, if Finally, it is also possible to glean identities Alice gives Bob a $100 bill in cash, there is no simply by looking at the block chain. One study intermediary and no record of the transaction. And found that behaviour-based clustering techniques if Alice and Bob don’t know each other’s identities, could reveal the identities of 40% of Bitcoin users we can say the transaction is completely anonymous. in their simulated Bitcoin experiment.8 An early Bitcoin falls somewhere between these two analysis of the statistical properties of the Bitcoin extremes. On the one hand, bitcoins are like cash transaction graph showed how a passive network

POLICY • Vol. 29 No. 4 • Summer 2013–2014 5 BITCOIN: A PRIMER FOR POLICYMAKERS

analysis with the appropriate tools can divulge the quicker than traditional payment networks. And financial activity and identities of Bitcoin 9users. because transactions are cheaper, Bitcoin makes A later analysis of the statistical properties of the micropayments and other innovations possible. Bitcoin transaction graph garnered similar results Additionally, Bitcoin holds much promise as a way with a larger dataset.10 Another analysis of the to lower transaction costs for small businesses and Bitcoin transaction graph reiterated that observers global remittances, alleviate global poverty by using ‘entity merging’11 can observe structural improving access to capital, protect individuals patterns in user behavior and emphasised that against capital controls and censorship, ensure this is ‘one of the most important challenges to financial privacy for oppressed groups, and spur Bitcoin anonymity.’12 In spite of this, Bitcoin users innovation (within and on top of the Bitcoin do enjoy a much higher level of privacy than do protocol). On the other hand, Bitcoin’s decentralised users of traditional digital-transfer services, who nature also presents opportunities for crime. must provide detailed personal information to the The challenge, then, is to develop processes that third-party financial intermediaries that facilitate diminish the opportunities for criminality while the exchange. maintaining the benefits that Bitcoin can provide. Although Bitcoin is frequently referred to First, Bitcoin is attractive to cost-conscious as an ‘anonymous’ currency, in reality, it is very small businesses looking for ways to lower the difficult to stay anonymous in the Bitcoin network. transaction costs of doing business. Credit cards Pseudonyms tied to transactions recorded in have greatly expanded the ease of transacting, the public ledger can be identified years after an but their use comes with considerable costs to exchange is made. Once Bitcoin intermediaries are merchants. Businesses that wish to offer the option fully compliant with the bank-secrecy regulations of credit card payments to their customers must required of traditional financial intermediaries, first pay for a merchant account with each credit anonymity will be even less guaranteed, because card company. Depending on the terms of Bitcoin intermediaries will be required to collect agreement with each credit card company, personal data on their customers. businesses must then pay a variety of authorisation fees, transaction fees, statement fees, interchange Although Bitcoin is frequently referred fees, and customer-service fees, among other to as an ‘anonymous’ currency, charges. These fees quickly add up and significantly in reality, it is very difficult to stay increase the cost of doing business. However, if a merchant neglects to accept credit card payments anonymous in the Bitcoin network. to save on fees, he or she could lose a considerable amount of business from customers who enjoy Benefits the ease of credit cards. The first question that many people have when Since Bitcoin facilitates direct transactions they learn about Bitcoin is, ‘Why would I want to without a third party, it removes costly charges use bitcoins when I can use dollars?’ Bitcoin is still that accompany credit card transactions. The a new and fluctuating currency that is not accepted Founders Fund, the venture capital fund headed by by many merchants, so the uses for Bitcoin may Peter Thiel of PayPal and Facebook fame, recently seem mostly experimental. To better understand invested $3 million in the payment-processing why people might want to use Bitcoin, it helps company BitPay because of the service’s ability to to think of it not necessarily as a replacement lower the costs of doing online commerce across for traditional currencies, but rather as a new borders.13 In fact, small businesses have already payments system. started to accept bitcoins as a way to avoid the costs of doing business with credit card companies.14 Lower transaction costs Others have adopted the currency for its speed Because there is no third-party intermediary, and efficiency in facilitating transactions.15 Bitcoin Bitcoin transactions are substantially cheaper and will likely continue to lower transaction costs for

6 POLICY • Vol. 29 No. 4 • Summer 2013–2014 JERRY BRITO AND ANDREA CASTILLO businesses that accept it as more people adopt MoneyGram, which charge steep fees for the the currency. service and can take several business days to transfer Accepting credit card payments also puts the funds.22 In the first quarter of 2013, the global businesses on the hook for charge-back fraud. average fee for sending remittances was 9.05%.23 Merchants have long been plagued by fraudulent In contrast, transaction fees on the Bitcoin ‘charge-backs,’ or consumer-initiated payment network tend to be less than 0.0005 BTC,24 or reversals based on a false claim that a product has 1% of the transaction.25 This entrepreneurial not been delivered.16 Merchants therefore can lose opportunity to improve money transfers has the payment for the item and the item itself, and attracted investments from big-name venture also have to pay a fee for the charge-back. As a capitalists.26 Even MoneyGram and Western Union nonreversible payment system, Bitcoin eliminates are contemplating whether to integrate Bitcoin the ‘friendly fraud’ wrought by the misuse of into their business models.27 Bitcoin allows for consumer charge-backs. This can be very important instantaneous, inexpensive remittances, and the for small businesses. reduction in the cost of global remittances for Consumers like charge-backs, however, because consumers could be considerable. that system protects them from unscrupulous merchants or merchant errors. Consumers may Bitcoin has the potential to improve also enjoy other benefits that merchant-account the quality of life for the world’s poorest. fees help fund. Indeed, many consumers and Improving access to basic financial services merchants will probably stick to traditional credit is a promising antipoverty technique. card services even if Bitcoin payments become available. Still, the expanded choices in payment options would benefit people of all preferences. Potential to combat poverty and oppression Those who want the protection and perks of Bitcoin also has the potential to improve the using a credit card can continue to do so, even if quality of life for the world’s poorest. Improving they pay a little more. Those who are more price- access to basic financial services is a promising or privacy-conscious can use bitcoins instead. Not antipoverty technique.28 According to one having to pay merchant fees means that merchants estimate, 64% of people living in developing who accept Bitcoin have the option to pass the countries lack access to these services, perhaps savings on to consumers. That is the business because it is too costly for traditional financial model of the Bitcoin Store,17 which sells thousands institutions to serve poor, rural areas.29 Because of consumer electronics at discounted prices of the impediments to developing traditional and only accepts bitcoins. The same Samsung branch banking in poor areas, people in developing Galaxy Note tablet that sells on Amazon for $779 countries have turned to mobile banking services plus shipping18 sells at the Bitcoin Store for a for their financial needs. The closed-system mobile mere $480.19 In this way, Bitcoin provides more payment service M-Pesa has been particularly low-cost options to bargain hunters and small successful in countries such as Kenya, Tanzania and businesses without detracting from the traditional Afghanistan.30 Entrepreneurs are already moving credit card services that some consumers prefer. to this model; the Bitcoin wallet service Kipochi As an inexpensive funds-transfer system, Bitcoin recently developed a product that allows M-Pesa also holds promise for the future of low-cost users to exchange bitcoins.31 Mobile banking remittances. In 2012, immigrants to developed services in developing countries can be further countries sent at least $401 billion in remittances augmented by the adoption of Bitcoin. As an back to relatives living in developing countries.20 open-system payment service, Bitcoin can provide The amount of remittances is projected to people in developing countries with inexpensive increase to $515 billion by 2015.21 Most of these access to financial services on a global scale. remittances are sent using traditional brick-and- Bitcoin might also provide relief to people mortar wire services such as Western Union and living in countries with strict capital controls.

POLICY • Vol. 29 No. 4 • Summer 2013–2014 7 BITCOIN: A PRIMER FOR POLICYMAKERS

The total number of bitcoins that can be mined is that programmers can easily develop. Since capped and cannot be manipulated. There is no bitcoins are, at their core, simply packets of data, central authority that can reverse transactions or they can be used to transfer not only currencies prevent the exchange of bitcoins between countries. but also stocks, bets and sensitive information.35 Bitcoin therefore provides an escape hatch for Some of the features that are built into the people who desire an alternative to their country’s Bitcoin protocol include micropayments, dispute devalued currencies or frozen capital markets. mediations, assurance contracts, and smart We have already seen examples of people turning property.36 These features would allow for the to Bitcoin to evade the harmful effects of capital easy development of Internet translation services, controls and central-bank mismanagement. Some instantaneous processing for small transactions Argentines, for instance, have adopted Bitcoin in (like automatically metering Wi-Fi access), and response to the country’s dual burdens of a 25% Kickstarter-like crowdfunding services. inflation rate and strict capital controls.32 Demand Additionally, programmers can develop for bitcoins is so strong in Argentina that one alternative protocols on top of the Bitcoin protocol popular bitcoin exchange is planning to open in the same way that the Web and email are run an Argentine office.33 Argentine Bitcoin use on top of the Internet’s TCP/IP protocol. One continues to surge in the face of Argentina’s programmer has already proposed a new protocol capital mismanagement.34 layer to add on top of the Bitcoin protocol that can improve the network’s stability and security.37 Bitcoin might also provide relief to people Another programmer created a digital notary living in countries with strict capital controls. service to anonymously and securely store a ‘proof The total number of bitcoins that can be of existence’ for private documents on top of the Bitcoin protocol.38 Other programmers have mined is capped and cannot be manipulated. adopted the Bitcoin model as a way to encrypt email communications.39 Another group of Individuals in oppressive or emergency developers has outlined an add-on protocol that situations might also benefit from the financial will improve the privacy of the network.40 Bitcoin privacy that Bitcoin can provide. There are many is thus the foundation upon which other layers legitimate reasons why people seek privacy in their of functionality can be built. The Bitcoin project financial transactions. Spouses fleeing abusive can be best thought of as a process of financial and partners need some way to discreetly spend communicative experimentation. Policymakers money without being tracked. People seeking should take care that their directives do not quash controversial health services desire financial the promising innovations developing within and privacy from family members, employers and on top of this fledgling protocol. others who might judge their decisions. Recent experiences with despotic governments suggest Challenges that oppressed citizens would benefit greatly Despite the benefits that it presents, Bitcoin has from the ability to make private transactions some downsides for potential users to consider. free from the grabbing hands of tyrants. Bitcoin It has exhibited considerable price volatility provides some of the privacy that has traditionally throughout its existence. New users are at risk of been afforded through cash—with the added improperly securing or even accidentally deleting convenience of digital transfer. their bitcoins if they are not cautious. Additionally, there are concerns about whether hacking could Stimulus for financial innovation compromise the bitcoin economy. One of the most promising applications of Bitcoin is as a platform for financial innovation. The Volatility Bitcoin protocol contains the digital blueprints Bitcoin has weathered at least five significant price for a number of useful financial and legal services adjustments since 2011.41 These adjustments

8 POLICY • Vol. 29 No. 4 • Summer 2013–2014 JERRY BRITO AND ANDREA CASTILLO resemble traditional speculative bubbles: times struggled with security; hackers successfully overoptimistic media coverage of Bitcoin prompts stole 24,000 BTC ($250,000) from a bitcoin waves of novice investors to pump up Bitcoin exchange called Bitfloor in 201249 and mounted prices.42 The exuberance reaches a tipping point, a massive series of distributed denial-of-service and the value eventually plummets. Newcomer (DDoS) attacks against the most popular bitcoin investors eager to participate run the risk of exchange, Mt.Gox, in 2013.50 (Bitfloor eventually overvaluing the currency and losing their money repaid the stolen funds to its customers, and in a crash. Bitcoin’s fluctuating value makes many Mt.Gox ultimately recovered from the DDoS observers sceptical of the currency’s future. attacks.) Of course, many of the security risks Does this volatility foretell the end of Bitcoin? facing Bitcoin are similar to those facing traditional Some commentators believe so.43 Others suggest currencies. Dollar bills can be destroyed or lost, that these fluctuations are stress-testing the personal financial information can be stolen and currency and might eventually decrease in used by criminals, and banks can be robbed or frequency as mechanisms develop to counteract targeted by DDoS attacks. Bitcoin users should volatility.44 If bitcoins were only used as stores of take care to learn about and prepare for security value or units of account, the currency’s volatility concerns just as they currently do for other could indeed endanger its future. It does not financial activities. make sense to manage business finances or keep savings in bitcoins if the market price swings When Bitcoin is used as a medium of wildly and unpredictably. When Bitcoin is used as exchange, however, volatility is less of a medium of exchange, however, volatility is less a problem. Merchants can price their of a problem.45 Merchants can price their wares wares in terms of a traditional currency in terms of a traditional currency and accept the equivalent number of bitcoins. Customers who and accept the equivalent number of bitcoins. purchase bitcoins to make a one-time purchase don’t care about what the exchange rate will look Criminal uses like tomorrow; they simply care that Bitcoin can There are also reasons for policymakers to be lower transaction costs in the present. Bitcoin’s apprehensive about some of Bitcoin’s exaptations. usefulness as a medium of exchange might explain Because Bitcoin is pseudonymous, policymakers why the currency has grown more popular among and journalists have questioned whether criminals merchants in spite of its price volatility.46 It is also can use it to launder money and accept payment possible that the value of bitcoins will become for illicit goods and services. Indeed, like cash, less volatile as more people become familiar with it can be used for ill as well as for good. the Bitcoin technology and develop realistic For one example, we can look at the infamous expectations about its future. Deep Web51 black market site known as ‘Silk Road.’ Silk Road takes advantage of the anonymising Security breaches network Tor and the pseudonymous nature of As a digital currency, Bitcoin presents some specific Bitcoin to make available a vast digital marketplace security challenges.47 If people are not careful, where one can mail order drugs and other licit and they can inadvertently delete or misplace their illicit wares. Although Silk Road administrators bitcoins. Once the digital file is lost, the money do not allow the exchange of any goods that is lost, just as with paper cash. If people do not resulted from fraud or harm, like stolen credit card protect their private Bitcoin addresses, they can information or photographs of child exploitation, leave themselves open to theft. Bitcoin wallets can they do allow merchants to sell illegal products now be protected by encryption, but users must like forged identity documents and illicit drugs. choose to activate the encryption. If a user does not The pseudonymous nature of Bitcoin allows encrypt his or her wallet, bitcoins could be stolen buyers to purchase illegal goods online in the through malware.48 Bitcoin exchanges, too, have at same way that cash has been traditionally used to

POLICY • Vol. 29 No. 4 • Summer 2013–2014 9 BITCOIN: A PRIMER FOR POLICYMAKERS

facilitate illicit purchases in person. One study and identities, but their transaction records will estimated the total monthly Silk Road transactions always be public and accessible at any time by law amount to be approximately $1.2 million.52 enforcement. Laundering money through Bitcoin, But the Bitcoin market amassed $770 million then, can be seen as a much riskier undertaking in transactions during June 2013; Silk Road than using a centralised system like Liberty sales constitute a small drop in the total bitcoin Reserve. Additionally, several bitcoin exchanges economy bucket.53 have taken steps to comply with anti-money Bitcoin’s association with Silk Road has laundering recordkeeping and reporting tarnished its reputation. Following the publication requirements.57 The combination of a public ledger of an article on Silk Road in 2011,54 senators system and the cooperation of bitcoin exchanges Charles Schumer and Joe Manchin sent a letter in collecting information on their customers will to Attorney-General Eric Holder and the Drug likely make Bitcoin less attractive to launderers Enforcement Administration’s administrator relative to private anonymous virtual currencies. Michele Leonhart calling for a crackdown on Silk It is also important to note that many of the Road, the anonymising software Tor, and Bitcoin.55 potential downsides of Bitcoin are the same as those facing traditional cash. Cash has historically Many of the potential downsides of Bitcoin been the vehicle of choice for drug traffickers and are the same as those facing traditional cash. money launderers, but policymakers would never Cash has historically been the vehicle of seriously consider banning cash. As regulators begin to contemplate Bitcoin, they should be choice for drug traffickers and money wary of the perils of overregulation. In the worst- launderers, but policymakers would never case scenario, regulators could prevent legitimate seriously consider banning cash. businesses from benefitting from the Bitcoin network without preventing money launderers Another concern is that Bitcoin can be used and drug traffickers from using bitcoins. If to launder money for financing terrorism and bitcoin exchanges are overburdened by regulation trafficking in illegal goods. Although these worries and shut down, for instance, money launderers are currently more theoretical than evidential, and drug traffickers could still put money into the Bitcoin could indeed be an option for those who network by paying a person in cash to transfer his wish to discreetly move ill-gotten money. Concerns or her bitcoins into their virtual wallets. In this about Bitcoin’s potential to facilitate money scenario, beneficial transactions are prevented by laundering were stoked after Liberty Reserve, overregulation while the targeted activities are a private, centralised digital-currency service based still able to occur. The challenge for policymakers in Costa Rica, was shut down by authorities on and regulators is how to develop a system of charges of money laundering.56 oversight that assuages their twin concerns about While Liberty Reserve and Bitcoin appear money laundering and illicit purchases without similar because they both provide digital currencies, smothering the benefits that Bitcoin is poised to there are important differences between the provide to legitimate users in their everyday lives. two. Liberty Reserve was a centralised currency service created and owned by a private company, Conclusion allegedly for the express purpose of facilitating Bitcoin is an exciting innovation that has the money laundering. Bitcoin is not. The transactions potential to greatly improve human welfare and within the Liberty Reserve economy were not jumpstart beneficial and potentially revolutionary transparent. Indeed, Liberty Reserve promised its developments in payments, communications customers anonymity. Bitcoin, on the other hand, and business. Bitcoin’s clever use of public-key is a decentralised open currency that provides a encryption and peer-to-peer networking solves public record of all transactions. Money launderers the double-spending problem that had previously may attempt to protect their Bitcoin addresses made decentralised digital currencies impossible.

10 POLICY • Vol. 29 No. 4 • Summer 2013–2014 JERRY BRITO AND ANDREA CASTILLO

These properties combine to create a payment 7 Bitcoin wiki, s.v. ‘Address,’ https://en.bitcoin.it/ system that could lower transactions costs in wiki/Address. business and remittances, alleviate poverty, provide 8 Elli Androulaki, et al. ‘Evaluating User Privacy in Bitcoin,’ IACR Cryptology ePrint Archive 596 (2012). an escape from capital controls and monetary 9 Fergal Reid and Martin Harrigan, ‘An Analysis of mismanagement, allow for legitimate financial Anonymity in the Bitcoin System,’ in Yaniv Altshuler, et privacy online, and spur new financial innovations. al. (eds) Security and Privacy in Social Networks (New York: On the other hand, as ‘digital cash,’ Bitcoin can Springer, 2013), http://arxiv.org/pdf/1107.4524v2.pdf. be used for money laundering and illicit trade. 10 Dorit Ron and Adi Shamir, ‘Quantitative Analysis of the Full Bitcoin Transaction Graph,’ IACR Cryptology Banning Bitcoin is not the solution to ending ePrint Archive 584 (2012). money laundering and illicit trade, just as banning 11 Entity merging is the process of observing two or more cash is not a solution to these same ills. public keys used as an input to one transaction at the Bitcoin could ultimately fail as an experimental same time. In this way, even if a user has several different digital currency and payment system. An public keys, an observer can gradually link them together and remove the ostensible anonymity that unanticipated problem could arise and undermine multiple public keys is thought to provide. the bitcoin economy. A superior cryptocurrency 12 Micha Ober, Stefan Katzenbeisser, and Kay Hamacher, could outcompete and replace Bitcoin. It could ‘Structure and Anonymity of the Bitcoin Transaction simply fizzle out as a fad. The possibilities for Graph,’ Future Internet 5:2 (2013). failure are endless, but one reason for failure should 13 Tom Simonite, ‘Bitcoin Hits the Big Time, to the not be that policymakers did not understand Regret of Some Early Boosters,’ MIT Technology Review (22 May 2013). its workings and potential. We are ultimately 14 Gabrielle Karol, ‘Small Business Owners Say Bitcoins advocating not for Bitcoin but for innovation. Better Than Credit Cards,’ FOX Business, Small Business It is important that policymakers allow this Center (12 April 2013). experimentation to continue. Policymakers should 15 Bailey Reutzel, ‘Why Some Merchants Accept Bitcoin work to clarify how Bitcoin is regulated and Despite the Risks,’ Payments Source (21 May 2013). 16 Emily Maltby, ‘Chargebacks create business headaches,’ to normalise its regulation so that we have the The Wall Street Journal (10 February 2011). One such opportunity to learn just how innovative Bitcoin scam involves Alice sending Bob a PayPal payment for a can be. laptop that Bob has listed on Craigslist. Alice comes by Bob’s house, picks up the laptop, and soon thereafter initiates a ‘charge-back’ (i.e. reverses the payment). PayPal generally requires proof of shipment before reversing a charge-back, so Bob is out of luck. 17 Vitalik Buterin, ‘Bitcoin Store Opens: All Your Endnotes Electronics Cheaper with Bitcoins,’ Bitcoin Magazine 1 David Chaum, ‘Achieving Electronic Privacy,’ Scientific (5 November 2012). American (August 1992), 96–101. 18 Amazon listing for a Samsung Galaxy Note tablet, 2 ‘Markets,’ Bitcoincharts, http://bitcoincharts.com/markets/. http://amzn.com/B00BJXNGIK. 3 Christof Paar, Jan Pelzl, and Bart Preneel, ‘Introduction to 19 Bitcoin store listing for a Samsung Galaxy Note tablet, Public-Key Cryptography,’ in Christof Paar and Jan Pelzl www.bitcoinstore.com/samsung-galaxy-note-gt-n8013- (eds), Understanding Cryptography: A Textbook for Students 10-1-32-gb-tablet-wi-fi-1-40-ghz-deep-gray.html. and Practitioners (New York: Springer, 2010), Chapter 6. Products on the Bitcoin store are priced in both bitcoins Sample available at http://wiki.crypto.rub.de/Buch/ and US dollars. At the point of purchase, Bitpay, a Bitcoin download/Understanding-Cryptography-Chapter6.pdf. payment processing company, determines the currency 4 Miners tend to be ordinary computer enthusiasts, but conversion rate and holds that price for 15 minutes. as mining becomes more difficult and expensive, the See the Bitcoin Store FAQ, www.bitcoinstore.com/faq. activity will likely become somewhat professionalised. 20 World Bank Payment Systems Development Group, For more information, see Alec Liu, ‘A Guide to Bitcoin Remittance Prices Worldwide: An Analysis of Trends in Mining,’ Motherboard (22 March 2013). the Average Total Cost of Migrant Remittance Services 5 Ken Tindell, ‘Geeks Love the Bitcoin Phenomenon (Washington, DC: World Bank, 2013). Like They Loved the Internet in 1995,’ Business Insider 21 As above. (5 April 2013). 22 Jessica Silver-Greenberg, ‘New rules for money transfers, 6 Note that this might be a boon to economic researchers. but few limits,’ The New York Times (1 June 2012).

POLICY • Vol. 29 No. 4 • Summer 2013–2014 11 BITCOIN: A PRIMER FOR POLICYMAKERS

23 World Bank, Remittance Prices. 40 Ian Miers, et al. ‘Zerocoin: Anonymous Distributed 24 Bitcoin wiki, s.v. ‘Transaction fees,’ https://en.bitcoin.it/ E-Cash from Bitcoin,’ working paper (Johns Hopkins wiki/Transaction_fees. University Department of Computer Science, Baltimore, 25 Andrew Paul, ‘Is Bitcoin the Next Generation of Online MD, 2013). Payments?’ Yahoo! Small Business Advisor (24 May 2013). 41 Timothy B. Lee, ‘An Illustrated History of Bitcoin Crashes,’ 26 Simonite, ‘Bitcoin Hits the Big Time.’ Forbes (11 April 2013). 27 Andrew R. Johnson, ‘Money transfers in bitcoins? Western 42 Felix Salmon, ‘The Bitcoin Bubble and the Future of Union, MoneyGram weigh the option,’ The Wall Street Currency,’ Medium (3 April 2013). Journal (18 April 2013). 43 Maureen Farrell, ‘Strategist Predicts End of Bitcoin,’ 28 Muhammad Yunus, Banker to the Poor: Micro-lending CNNMoney (14 May 2013). and the Battle Against World Poverty (New York: Public 44 Adam Gurri, ‘Bitcoins, Free Banking, and the Optional Affairs, 2003). Clause,’ Ümlaut (6 May 2013). 29 Oya Pinar Ardic, Maximilien Heimann, and Nataliya 45 Jerry Brito, ‘Why Bitcoin’s Valuation Really Doesn’t Mylenko, ‘Access to Financial Services and the Financial Matter,’ Technology Liberation Front (5 April 2013). Inclusion Agenda around the World’ (Policy Research 46 Today, merchant service providers accept the risk Working Paper, World Bank Financial and Private Sector Development Consultative Group to Assist the presented by the volatility and nevertheless maintain low Poor, 2011). fees. It remains to be seen whether this model will be 30 Jeff Fong, ‘How Bitcoin Could Help the World’s Poorest sustainable in the long run. People,’ PolicyMic (May 2013). 47 Most of the security challenges concern wallet services 31 Emily Spaven, ‘Kipochi launches M-Pesa Integrated Bitcoin and bitcoin exchanges. The protocol itself has proven to Wallet in Africa,’ CoinDesk (19 July 2013). be considerably resilient to hacking and security risks. 32 Jon Matonis, ‘Bitcoin’s Promise in Argentina,’ Forbes Renowned security researcher Dan Kaminsky tried, (27 April 2013). but failed, to hack the Bitcoin protocol in 2011. See 33 Camila Russo, ‘Bitcoin Dreams Endure to Savers Crushed Dan Kaminsky, ‘I Tried Hacking Bitcoin and I Failed,’ by CPI: Argentina Credit,’ Bloomberg (16 April 2013). Business Insider (12 April 2013). 34 Georgia Wells, ‘Bitcoin downloads surge in Argentina,’ 48 Stephen Doherty, ‘All Your Bitcoins Are Ours …’ Symantec The Wall Street Journal Money Beat (17 July 2013). Blog (16 June 2011). 35 Jerry Brito, ‘The Top 3 Things I Learned at the Bitcoin 49 Devin Coldewey, ‘$250,000 Worth of Bitcoins Stolen in Conference,’ Reason (20 May 2013). Net Heist,’ NBC News (5 September 2012). 36 Mike Hearn, ‘Bitcoin 2012 London: Mike Hearn,’ YouTube 50 Meghan Kelly, ‘Fool Me Once: Bitcoin Exchange Mt.Gox video, 28:19, posted by ‘QueuePolitely’ (27 September Falls after Third DDoS Attack This Month,’ VentureBeat 2012), www.youtube.com/watch?v=mD4L7xDNCmA. (21 April 2013). Smart property is a concept to control ownership of an 51 Wikipedia, s.v. ‘Deep Web,’ http://en.wikipedia.org/wiki/ item through agreements made in the Bitcoin block chain. Deep_Web. Smart property allows people to exchange ownership 52 Nicolas Christin, ‘Traveling the Silk Road: A of a good or service once a condition is met using Measurement Analysis of a Large Anonymous Online cryptography. Although smart property is still theoretical, Marketplace,’ Carnegie Mellon CyLab Technical Reports: the basic mechanisms are built into the Bitcoin protocol. CMU-CyLab-12-018 (30 July 2012). See Bitcoin wiki, s.v., ‘Smart Property,’ https://en.bitcoin. 53 Jerry Brito, ‘National Review Gets Bitcoin Very Wrong,’ it/wiki/Smart_Property. 37 J.R. Willett, ‘The Second Bitcoin Whitepaper’ (2013), Technology Liberation Front (20 June 2013). https://sites.google.com/site/2ndbtcwpaper/2ndBitcoinW 54 Adrian Chen, ‘The Underground Website Where You Can hitepaper.pdf. Buy Any Drug Imaginable,’ Gizmodo (1 June 2011). 38 Jeremy Kirk, ‘Could the Bitcoin Network Be Used 55 Brett Wolf, ‘Senators Seek Crackdown on “Bitcoin” as an Ultrasecure Notary Service?’ ComputerWorld Currency,’ Reuters (8 June 2011). (23 May 2013). 56 ‘Liberty Reserve Digital Money Service Forced Offline,’ 39 Jonathan Warren, ‘Bitmessage: A Peer-to-Peer Message BBC News—Technology (27 May 2013). Authentication and Delivery System,’ white paper 57 Jeffrey Sparshott, ‘Bitcoin exchange makes apparent move (27 November 2012), https://bitmessage.org/ to play by U.S. money-laundering rules,’ The Wall Street bitmessage.pdf. Journal (28 June 2013).

12 POLICY • Vol. 29 No. 4 • Summer 2013–2014 FEATURE

THE CHARITY BALL Charities chase government money, and governments chase charity approbation. There is a better way, argues Gary Johns

harities do much good. Then again, 33% of their income from government and only so do government and business. Each 9% from philanthropic sources.4 Charities have sector has an important role to play placed themselves in the hands of government, in Australian society and each should a predicament that some charity elders have Cbe judged on its performance. The examples of described as a crisis of identity: ‘They do not charity in this essay are not designed to single know who they are and they do not know why out failures; rather, they illustrate elements of the they are doing what they are doing.’5 charity market that, with improvement, could As the welfare state has grown so have drive better charity. charities. Not-for-profits grew more than double Consider this statement about the role of the real growth rate of the economy in the seven charities: ‘Civil society [for our purposes, charities], years to 2006–07.6 In 2007, there were 51,000 sometimes conceived as the third sector, was tax concession charities, 24,000 of which were once held to have stood apart from business eligible deductible gift recipient charities (DGR). and the state.’1 If charities ever stood apart from In 2005–06, individuals claimed $1.5 billion in government, it has been a long time since many deductible gifts.7 In 2011, there were 55,000 tax stood on their own feet. Charities’ fears that concession charities and 28,000 DGRs. government would crowd them out have not In 2010–11, nearly five million Australians been realised. Charities grow because they deliver claimed $2.2 billion in deductible gifts. Nearly government services that were once the preserve 40,000 individuals claimed gifts of more of charities. Charities also grow because some than $5,000, amounting to $910 million.8 donors are reassured by government support for These amounts substantially understate the charities, thus providing confidence to the donor.2 extent of giving. It is estimated that in 2004, They also grow because charities spend some of Australians gave $5.7 billion in donations; about their time and money lobbying government, 50% of the population gave another $2 billion usually for more money. And why not—it pays through charitable gambling, charity auctions, handsomely. Governments also seek approbation dinners and other events where they received a from charity spokespersons, whose community benefit in return for their support. Around 92% of trust is higher than in politicians.3 I call the this went to non-for-profit organisations.9 relationship the charity ball—it goes round and round. Accountability—regulate or Australia’s oldest charity, The Benevolent inform for a better market? Society, which this year celebrates its 200th As the charity ball bounces along, anniversary, has an income of more than government and philanthropists $80 million per annum. Almost 82% of its (‘large’ or ‘wholesale’ donors) income comes from government. Only 4% comes are beginning to ask questions from donations. The Benevolent Society may be described as a government sub-contractor. The society is not alone: economically significant not- The Hon. Gary Johns is an Adjunct Professor at the for-profits (largely charities) in Australia derive Queensland University of Technology Business School.

POLICY • Vol. 29 No. 4 • Summer 2013–2014 13 THE CHARITY BALL

about charity performance.10 Donors believe that The Australian Indigenous Education Foundation their contribution can make a difference,11 and (AIEF) claims it ‘has found a way to make the they are influenced by charities’ performance, best education available to the most marginalised so it is in the interests of charities that their children in [Australia] … by offering scholarships performance is scrutinised by donors.12 The which cover their school or university fees.’18 problem is that relevant and reliable information The founder has stated: ‘Our program is not about is rarely available in Australia.13 This absence needs cherry-picking the best and brightest kids, it’s to be remedied. about giving opportunity to kids of all walks of life who want to make the most of those A recent Productivity Commission report opportunities, irrespective of where they come 19 on the sector treated all dollars—donor from.’ Clearly, the charity is sensitive to the claim that such programs of assistance can appear dollars, tax-assisted donor dollars, and to be successful by selecting people who would charity-government contract dollars—as otherwise have succeeded, without such assistance. charity ‘inputs.’ According to their own measure, however, their target are ‘the most marginalised,’ meaning A recent Productivity Commission report on disadvantaged. Selecting those who want to succeed the sector treated all dollars—donor dollars, tax- is, of course, an important element in success. The assisted donor dollars, and charity-government AEIF states that it is looking for students who contract dollars—as charity ‘inputs.’ This view are ‘tapped into the idea they could achieve masks the essential tension in the relationship more,’20 but it would presumably choose the most between government and charities, and between marginalised among those who show promise. charities and private donors.14 After all, ‘where The two case studies that the AIEF allowed to be the money is coming from will impact where featured in its recent extensive press coverage were the attention is directed. The source of funding students who appeared to be not at all marginalised.21 will impact to whom charities are accountable.’15 The most marginalised students are those who Currently, private donors, often with tax-assisted live in remote Aboriginal communities—20,000 donations, are generally not well informed about children on Aboriginal lands attending Aboriginal charity performance.16 Charity performance is now schools. ‘These students had by far the worst results, a product of the charity activist, often without with failure rates often exceeding 90 per cent.’22 the input of donors. Charity activists sometimes The case studies promoted by the AIEF appear approach every problem with the same set of to not satisfy its goal. In addition, it is highly solutions; they are said to ‘problem surf.’17 Some likely that scholarships could have been made are also in the business of exaggerating problems available at less expensive schools, possibly in the for which they have ‘the solution.’ Anytime you region where students lived. read the headline, ‘1 in 4 Australians’ (… fill in Charities are susceptible to singing the praises the problem) or some other bold claim, be wary of their own performance and picking easy marks. of the accuracy of the data. For example, although It is a cheap way to perform, unless someone, the number of homeless people in Australia is perhaps a donor, pulls them up. reported as 90,000, the actual number of people sleeping rough on the streets is 7,000. The definition A remedy of homelessness has been expanded to include, Competition among charities for informed donors among other things, those who live in supported should overcome the tendencies to problem accommodation, which is the solution for some surf, exaggerate claims and solutions, and overly causes of homelessness. Nevertheless, homelessness rely on government. Suggestions of the type of charities always report the 90,000, never the 7,000. information required range from highly Take a different example of the need to sophisticated, such as a predictive market in check whether a donation is put to best use. charity products, to the mundane, such as minimal

14 POLICY • Vol. 29 No. 4 • Summer 2013–2014 GARY JOHNS registration information required by the Australian supplicant and lobbyist to government, but it Charities and Not-for-profits Commission should seize the opportunity to allow donors to (ACNC).23 The charity sector cannot escape some help drive performance. Government need not form of accountability. Currently, governments fund a centre for service effectiveness when the impose a mild level of accountability because tax Australian National Audit Office is quite capable dollars are indirectly at risk. Donors, however, of scrutinising government service contracts. should impose a form of accountability as part Charities and philanthropists should fund owners of charitable deeds. evaluations. In this way, the donor market may Well-informed donors, especially philanthropists begin to deepen and mature, perchance once more with an investment sufficient to justify inquiring to become a voice apart from government. about charity performance, are the best chance of both forestalling government regulation and One charity industry insider recently driving a better charity market. Donors can ask commented that charity tax deductions hard questions of charities. Ask a child sponsor were ‘chickenfeed’ compared to charity working in less-developed countries to name government contracts. the village they have ceased working in because it is functioning well enough to look after its own as a result of charity. Lobbying Meanwhile, governments get on with regulation. The ACNC will register charities and require an There is something unsatisfactory about annual return to be lodged with the commission, taxpayers’ money being used to fund details of which will be shared with the public.24 charities that are campaigning for things In 2014, larger charities will have to lodge a that we may disagree with.32 financial return, the details of which should enable public scrutiny of charity efficiency.25 The As well as seizing the opportunity to drive a federal opposition has announced that it will more effective market, charities should seriously abolish the commission, but continues to ‘support review lobbying. The Benevolent Society lobbied transparency and accountability of public funds,’ government for better provision as early as 1862 presumably through another commission.26 when the NSW government took responsibility The ACNC may well be prompted by for those once housed by the society in the Productivity Commission recommendations to Benevolent Asylum. The society proudly boasts that improve data collection about sector performance its president was a leading voice in the campaign and its availability to the public. One suggestion for the old age pension introduced in 1901.33 The is for the government to fund the establishment of Benevolent Society spends $2 million per year on a Centre for Community Service Effectiveness to charitable activities from its endowment fund, promote evaluation.27 Concentrating on charity which comes from donations, $700,000 of which effectiveness is a good idea. Although donors are is spent on ‘influencing social change by advocating affected by efficiency in charity fundraising and for policy reform.’34 The ‘reform’ aims to create a disbursement,28 these may not indicate an effective ‘fairer’ Australia and bewails ‘growing disparity in charity and are perhaps better suited to internal income and job opportunities,’ an all-too-familiar management purposes.29 Nevertheless, work on cry among those disposed towards big government a national standard chart of accounts for charities and redistribution. Such policies do not necessarily is well advanced so that comparisons in efficiency result in public benefit. will, in time, be possible.30 International studies suggest that ‘political One charity industry insider recently activity’ or lobbying increases donations.35 The commented that charity tax deductions were same may hold in Australia. Australia’s foreign ‘chickenfeed’ compared to government contracts.31 aid charities, for example, raise $1 billion per The charity sector may well continue to be a annum but it is unknown how much lobbying has

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expanded its coffers. But the bigger prize is official become charitable purposes. Charities will be less foreign aid for which charities lobby. Official aid constrained to lobby and less constrained to do is $5 billion per annum and rising, and Australian less charity. charities receive $289 million of it.36 It is clear Given that common law has been changed where the best return on effort lies. A recent to accommodate lobbying, a statute disallowing advertisement signed by 17 charities urged the lobbying may be the only way to constrain this use federal government to spend more on foreign aid. of funds, as is the case in most other common law The charities purported to represent ‘more than jurisdictions. The opposition has agreed to abolish two million Australian households who generously the Act, although not necessarily to legislatively support international aid organisations each year.’37 undo the High Court decision, if indeed that is The two million presumably agreed to donate possible. Of course, there are organisations such their private funds to charities. Perhaps they were as The Centre for Independent Studies (CIS) aware that the Australian government also makes and the Institute of Public Affairs (IPA) (where donations on taxpayers’ behalf, but it is doubtful I was a senior fellow for some years) that have they gave charities permission to press government charity and DGR status. They are deemed research to spend more on foreign aid. institutions and their purpose is to further public discourse, which includes promoting or opposing International studies suggest that ‘political changes to law. Research institutions that rail activity’ or lobbying increases donations. against government provision and its debilitating The same may hold in Australia. effect on liberty—IPA and CIS—should be especially wary of promoting a culture of paid lobbying among charities. No charities I know Charities in Australia have always been free to lobby for less government. lobby, so long as they maintained charity work Political parties have been publicly funded as their dominant purpose. Thanks to a decision since 1984, and the idea that government should of the High Court in Aid/Watch Incorporated v. pay organisations to play politics has entered the Commissioner of Taxation in 2010, charities are Australian culture. It is important, though, that now free to lobby and do no charity work subsidised lobbying should never be able to displace whatsoever.38 The High Court decided that a charity. There is indeed something unsatisfactory charity engaged in ‘lawful means of public debate about using the power of government to do concerning the efficiency of foreign aid directed to charities’ bidding. The law privileges one group of the relief of poverty is a purpose beneficial to the voters who, having covered the costs of organising community.’39 Justice Heydon, in the minority their ‘voice’ on the basis of charity reputation and judgment, found that ‘Aid/Watch did not have government privilege, proceed to lobby government, the goal of relieving poverty. It provided no funds, placing them and their views ahead of other goods or services to the poor.’40 Justice Kiefel in citizens’ voices. the minority decided that Aid/Watch’s ‘pursuit of a freedom to communicate its views does not Taxation qualify as being for the public benefit.’41 If the tax office had challenged a charity set up tocut The key element of charitable activity foreign aid, arguably a public benefit, the High or enterprise is the simple mechanism of Court would have run a mile. a person being motivated by the need of The federal government has written the another or a cause, and responding to it.43 substance of the High Court decision into law to legitimise ‘promoting or opposing a change to So why do charities need taxpayers’ help? After any matter established by law, policy or practice all, charities would survive on after-tax dollars and in the Commonwealth, a state, a territory or would not be beholden to government, or subject another country.’42 Advocacy and lobbying will to scrutiny if they got off the drip. The cost of

16 POLICY • Vol. 29 No. 4 • Summer 2013–2014 GARY JOHNS foregoing tax advantages, however, is that the considerable direct government assistance. The cost of philanthropy may rise and less of it would benefits accrue to individuals and only indirectly flow to charities. By lowering the price of giving, to the public. Why throw in an extra subsidy? tax incentives potentially increase the amount Again, politics, not logic, decides these matters. donated and the number of individuals donating. No government will disturb these constituencies, The same, of course, could be said ofany but in failing to do so they weaken the case for industry. There is, after all, an opportunity cost of ‘other-regarding’ and public benefit charity. philanthropy and charity.44 There are alternative Charities and donors receive taxation benefits. beneficial uses for these resources. The balance of these is worth investigating. The critical taxation question is whether A range of taxation advantages such as payroll additional giving induced by taxation deductions is tax and stamp duty concessions from state greater or less than the value of the tax deductions government assists charities.48 The Commonwealth provided. Best estimates suggest that ‘a one per government provides fringe benefits tax (FBT) cent decrease in the cost of giving [as a result exemptions for employees of eligible institutions of the taxation deduction] results in a 0.51 to and deductible gift exemptions for donors to 1.26 permanent rise in the amount of giving.’45 charities with DGR status. The value of reportable At the low end, this means individual giving rises fringe benefits in 2009–10 was $5.6 billion and the by less than the value of the tax subsidy, so that value of individual gifts (including distributions there is some ‘crowding out’ and only a minor from private ancillary funds) in 2009–10 was increase overall. At the high end, giving rises by $2.2 billion.49 Some in the charity sector would more than the value of the tax subsidy, resulting like to have fewer funds used in FBT and more in a higher level of giving by the individual and access to DGR.50 They do so to rebalance support a major increase overall. There is evidence for large rather than small charities. They also to suggest that high-income individuals are argue that most FBT benefits accrue to well-paid more likely to give more than the value of employees. These arguments are strange. There a tax deduction.46 is little reason to suspect that small charities are Regardless, in political terms, no government better than large charities or that higher paid is about to remove tax assistance for all or most workers are not worth their benefits. In broad charities. They may, however, look at changing the terms, however, taxation should assist the donor, ‘incentive’ target and the nature of the assistance. not the charity worker. Putting to one side debate about the efficacy of grants or rebates as opposed to deductions,47 two questions need to be addressed—whether some The critical taxation question is whether charities deserve assistance and whether the balance additional giving induced by taxation between the donor and the charity (or charity deductions is greater or less than the employees) is right. value of the tax deductions provided. Some charity activities such as lobbying are of doubtful public benefit but profitable for the charity. Some charitable purposes are doubtful on Accountability and its limits other grounds. There are almost 5,000 school or A key part of the charity ball is that government has college building funds that are DGR status charities. rarely been prepared to ask what charities do with A case could be made that these are self-regarding, donated money and charity is keen to remain free rather than for the public benefit. Since when is of regulation. But every dollar misspent is a dollar giving to one’s child’s school a charity? The same that has little or no public benefit. Well-informed could be said for public hospitals and Technical donors could drive a better charity market. The and Further Education (TAFE) institutions and Productivity Commission has charted a path to universities. These are, to all intents and purposes, a better charity market, but with a significant commercial activities with paying clients and weakness: the omission of the donor.

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The commission’s formulation suggests that ‘symmetry’ of information in the charity market, apart from access to capital, there are several ways must be found to allow reporting good main constraints to improving productivity in the information. The burden of information should charity market: a danger of excessive regulation;51 not, however, be so great as to divert large resources lack of information and evidence on outcomes; from charitable works or prove a disincentive and weak mechanisms to reallocate resources to to donate.57 more productive charities.52 There is one other. Although the commission argued that competition Big donors plays ‘at best a weak role as an incentive for Most donors are insufficiently organised or have productivity improvement in charities,’ charities insufficient investment to demand scrutiny of nevertheless compete.53 Charities compete for charity performance. Fortunately, big philanthropy government contracts—their major source of has arrived and attention is turning to market income—and for donors. function. There are few measures of charity market In common with most associations (including function, where ideally a major portion of monies political parties), activists, not donors, are the flows to the most needy via competition between driving force. Political parties that seek to maximise charities for donations. There is little concept, for votes, however, must balance the desires of active example, of the optimum number of charities or members with the desires of voters. Businesses whether more charities results in greater public that seek to maximise profits must balance the benefit.58 There are few measures of charity desires of owners with the desires of consumers. performance, although the costs of fundraising It is not clear-cut what charities seek to maximise,54 and disbursement as well as impact are beginning but ideally, charity should maximise ‘impact.’ to be counted. Nevertheless, it is worthwhile Impact is such a contestable idea, however, that observing that well-informed consumers and it is likely only to emerge out of the struggle for investors drive markets. While consumers of control between the organisation which runs the charity services are not likely to be in a position charity and those who support its causes through to choose their ‘product,’ donors should be in a donations (of time and money). The political position to choose which charity to support, or at essence of the well-informed donor theory is that the very least, to ask pertinent questions. the donor can act to offset the enthusiasms of Who are the donors likely to drive a better charity activists, and the fear that governments charity market? Twiggy Forrest, Bill Gates, Warren hold of program evaluations.55 Buffett, and others, for example, have pledged to donate half their wealth to charity through the Giving Pledge.59 The public benefit of these The Productivity Commission has charted generous actions is welcome but not obvious. a path to a better charity market, There are opportunity costs, because it means but with a significant weakness: their money will no longer be available for wealth the omission of the donor. creation. When a donor of the resources of those mentioned above steps into the charity arena they could overwhelm the charity. In The economic essence of the theory is that essence, they become the charity. They could, donors can drive an effective market by choosing however, drive sophisticated cost-benefit analysis which charity to support. Donors can strengthen to guide charitable priorities and highest the reallocation of resources to more efficient impact philanthropy.60 charities, and improve allocations across charitable In Australia, fewer than 15,000 individuals gift causes. Evidence suggests that charity ratings do $15,000 or more a year to charities. In addition, affect donor behaviour.56 At present, information there are 900 private ancillary funds that distribute about charitable works is held by charities and it is about $200 million per year.61 In time, these donors not easy to convey to others. To achieve greater would probably constitute the informed market.

18 POLICY • Vol. 29 No. 4 • Summer 2013–2014 GARY JOHNS

Large trust companies are beginning to ‘engage’ better culture of giving in Australia.’ It researches with philanthropists to maximise the social impact charities and generates ideas on better ways to give. of their clients’ investment in charity.62 These Unfortunately, GiveWell Australia has ceased to changes could not only drive existing charities to operate as an information site. respond, but also stimulate greater competition Fortunately, there is a great deal of experience among charities or the growth of new charities. in charity performance measurement, mostly in The issue is the limitations to reporting. It is the United States. GiveWell USA, for example, not sufficient, for example, to have charities report claims: ‘Unlike other charity evaluators, which in a narrow band of financial ratios. There is focus solely on … assessing administrative or no reason to assume that charities with higher fundraising costs, it focuses on how well programs fundraising costs are ‘worse buys.’63 Just actually work.’69 GiveWell only recommends those because a charity may be an efficient fundraiser charities that can make a strong case that they are does not mean it is effective in directing resources significantly improving lives in a cost-effective way to the causes it serves.64 But while donors and can use additional donations to expand their need not consider fundraising costs as the proven programs. determining factor in their decision to invest, there is no need to have an ‘empty policy locker’ The sector, as a whole, has resisted either. The donor needs to know about performance monitoring. There are, however, fundraising costs in conjunction with program signs that performance monitoring by other delivery. Together, these provide powerful agencies is possible. information for improving performance. A recent senate inquiry recommended that the [then foreshadowed] ACNC investigate the costs Another independent operator, Charity and benefits of a GuideStar-type system in Australia Navigator (CN), serves more than three million to encompass all not-for-profit organisations.65 unique visitors and informs approximately GuideStar UK is an information repository that $10 billion of charitable donations each year. provides information about all registered charities CN rates charities by financial health and in England and Wales.66 Unfortunately, the quality accountability and transparency.70 Evaluations on of the information is not sufficient to inform financial health are based on information each donors in a way that would have them decide charity provides in its tax returns. From the data, how their monies will be best used. A 2006 CN generates measures of financial efficiency; survey of 73 of the United Kingdom’s largest it also intends to rate results and drive change charities reporting on GuideStar concluded: by rewarding charities that publish rigorously collected feedback from their beneficiaries with Charities more readily provide descriptive rating points. information … about organizational Providing metrics for results is the most difficult motives … stakeholders have little part of the performance exercise. Fortunately, there indication of the effectiveness and efficiency are signs of development. There is a professional with which charities are operating.67 body and international association supporting social impact analysts.71 These indications of The sector, as a whole, has resisted performance movement towards rigorous external scrutiny to monitoring. There are, however, signs that drive competition between charities in the name performance monitoring by other agencies is of better use of donor monies are to be applauded. possible. For example, the private company GiveWell Australia believes that a ‘more A donor guide informed and generous giving will lead to a more The idea that Australia should have a national accountable, efficient and effective charitable register of charities to better inform donors is sector.’68 GiveWell was formed in 1997 to ‘foster a well established and the ACNC has embarked on

POLICY • Vol. 29 No. 4 • Summer 2013–2014 19 THE CHARITY BALL

that journey. What information such a register the community or, more generally, to make the should contain is, however, still some way from world a better place. Identifying with a cause may being settled. be a shallow basis on which to decide to spend The contention is that donors should drive the money. Charities work on simple messages of charity market with their choices. Rating charities hope, messages that assume a great deal of by means of objective performance is a worthy knowledge. For example, whether sponsoring a goal, but it can be resource intensive and may child in Africa is the best way to assist a child, and not answer the donors’ questions. Rather than why in Africa? establish a charity rating agency and website, it may Overall, 34% of givers claimed some sort of be more feasible and preferable, at least as a start, direct affiliation with the organisation to which to establish a donor guide on a website. they were donating. For 25%, this affiliation was that they (or members of their family) used People give to what they know. If they know the service it provided (some of these were also more or different, they may give differently. members of the organisation or volunteered for it). Affiliation could be held to be self-serving, a form of insurance for the future. Donors want a warm inner glow from giving People give to what they know. If they know and they have biases as to the cause to which they more or different, they may give differently. Those may give. A donor’s preferences may, to some in the survey who answered that they did not give extent, be shaped by the frequency of events were doubtful about the money’s use or that too or distorted by the prevalence and emotional much would be soaked up in administration, or that intensity of the messages to which we are exposed.72 too little would reach those in need. These doubts Charities want to find and solve problems; they displayed a lack of trust in charities, although they identify needs, sometimes with attitude. They have may have been convenient reasons to not give. their agendas and they sell their cause. Satisfying Nevertheless, they were factors that may have been donors and perhaps correcting their biases may overcome with better information. be achieved by creating tools to allow donors Matching the desires of donors and charities to work out to whom they want to give and is something to which markets are well suited. why. A charity rating will not answer the most Markets are at their best when donors and fundamental questions about which cause is most charities freely interact, and where donors are well important to the donor, unless they are first exposed informed of the most important aspects of the to a wider set of data about the relative merits of operation of charities and the policy context in causes. The latter would be one purpose of the which they work. donor guide. According to the most recent large survey of Conclusion donor attitudes in Australia, undertaken in 2004, The charity sector in Australia is characterised by the 87% of Australians gave to charity; most of the charity ball syndrome. Charities chase government money went to charitable organisations.73 Almost money, and governments chase charity approbation. half the donors gave because they identified There is a way to deflate the charity ball and relieve, with the cause and the people whose assistance to some extent, the burden of government regulation is the object of the cause. Close to a third said on charities. Some proportion of the charity dollar they gave because of a sense of reciprocation for is also misallocated or misspent. Throwing open services already provided, or anticipation that help the market to better-informed donors can help might be needed in future. For just under one- solve these weaknesses in the present market. The eighth, the main reason was a desire to strengthen beneficiaries of charity have the most to gain.

20 POLICY • Vol. 29 No. 4 • Summer 2013–2014 GARY JOHNS

Endnotes 21 Patricia Karvelas and Justine Ferrari, ‘Funds secure 1 Lester M. Salamon, ‘Putting the Civil Society Sector on lifetime of opportunity,’ The Weekend Australian the Economic Map of the World,’ Annals of Public and (11–12 May 2013). Cooperative Economics 81:2 (2010), 177. 22 Rhonda Craven, Anthony Dillon, and Nigel Parbury 2 Jyoti Khanna and Todd Sandler, ‘Partners in Giving: (eds), In Black and White: Australians All at the Crossroads The Crowding-in Effects of UK Government Grants,’ (Ballan: Connor Court, 2013), 14. European Economic Review 44 (2000), 1555. 23 Steven H. Goldberg, Billions of Drops in Millions of 3 Edelman, ‘NGOs most trusted institution globally’ Buckets: Why Philanthropy Doesn’t Advance Social Progress (19 January 2012), blog post. (New Jersey: Wiley, 2009), electronic edition. 4 Productivity Commission, Contribution of the Not-for-Profit 24 ACNC (Australian Charities and Not-for-profits Sector (Canberra: Government of Australia, 2010), 72. Commission), Not-for-profit Reform and the Australian 5 Stephen Judd, Anne Robinson, and Felicity Errington, Government (January 2013), 1–33. Driven by Purpose: Charities that Make the Difference 25 ACNC (Australian Charities and Not-for-profits (Sydney: Hammond Press, 2012), 4. Commission), 2014 Annual Information Statement: 6 Care has to be taken in interpreting these figures, as Public Consultation Paper (March 2013), 1–30. there has been considerable growth in the fields in which 26 Kevin Andrews, ‘Civil Society and the Role of charities abound, health, education, the environment, Government,’ address to The Centre for Independent but the trend seems unmistakable. Productivity Studies (Sydney: 23 April 2013). Commission, Contribution of the Not-for-Profit Sector, 27 Productivity Commission, Contribution of the Not-for- as above, 63. Profit Sector, as above, 112. 7 ATO (Australian Taxation Office), Taxation Statistics 28 Woods Bowman, ‘Should Donors Care About Overhead 2005–06: Charities and Deductible Gifts (November 2007), Costs? Do They Care?’ Nonprofit and Voluntary Sector 96–101, 196). Quarterly 35:2 (2006), 288–310. 8 ATO (Australian Taxation Office), Taxation Statistics 29 Ted Flack, The Mandatory Disclosure of Cost of Fundraising 2010–11 (Canberra: ATO, 2013), 101. Ratios: Does it Achieve the Regulators’ Purposes? (Brisbane: 9 The Prime Minister’s Community Business Partnership, Centre for Philanthropy and Nonprofit Studies, Giving Australia: Research on Philanthropy in Australia Queensland University of Technology, 2004); Noel (Canberra: 2005), vii. Hyndman and Ray Jones, ‘Good Governance in 10 Philanthropy Australia, for example, offers courses in Charities: Some Key Issues,’ Public Money & Management assessing social impact. 31:3 (2011), 151–155; Christine M. Ryan and Helen 11 René Bekkers and Pamala Wiepking, ‘A Literature J. Irvine, ‘Not-for-profit Ratios for Financial Resilience Review of Empirical Studies of Philanthropy: Eight and Internal Accountability: A Study of Australian Mechanisms That Drive Charitable Giving,’ Nonprofit International Aid Organisations,’ Australian and Voluntary Sector Quarterly 40:5 (2010), 942. Accounting Review 22:2 (2012), 1–45; Dan 12 Karen A. Kitching, ‘Audit Value and Charitable Pallotta, Uncharitable: How Restraints on Nonprofits Organizations,’ Journal of Accounting and Public Policy Undermine Their Potential (Medford: Massachusetts: 28:6 (2009), 510–524; John M. Trussel and Linda Tufts University Press, 2008), electronic edition. M. Parsons, ‘Financial Reporting Factors Affecting 30 ACNC (Australian Charities and Not-for-profits Donations to Charitable Organizations,’ Advances in Commission), 2014 Annual Information Statement, Accounting 23 (2007), 263–285. as above. 13 Greg Chen, ‘Does Meeting Standards Affect Charitable 31 Private conversation with author. Giving?’ Nonprofit Management & Leadership 19:3 32 Nick Seddon, Who Cares?: How State Funding and Political (2009), 350. Activism Change Charity (London: Civitas, 2007), 62. 14 Productivity Commission, Contribution of the 33 The Benevolent Society, ‘Celebrating 200 years,’ website. Not-for-Profit Sector, as above, xxxv. 34 The Benevolent Society, 2012 Annual Report (2012), 30. 15 Stephen Judd, et al. Driven by Purpose, as above, 304. 35 Jill Nicholson-Crotty, ‘Does Reported Policy Activity 16 Productivity Commission, Contribution of the Reduce Contributions to Nonprofit Service Providers?’ Not-for-Profit Sector, as above, xxiii. Policy Studies Journal 39:4 (2011), 591. 17 Jessica E. Boscarino, ‘Surfing for Problems: Advocacy Group 36 ABS (Australian Bureau of Statistics), Yearbook Australia Strategy in U.S. Forestry Policy,’ The Policy Studies Journal 2012, 212−214. Some foreign aid organisations do not 37:3 (2009). have charity status. 18 AIEF (Australian Indigenous Education Foundation), 37 ‘Foreign Aid Must Reach the World’s Poor,’ The Australian website. (21 December 2012). 19 Andrew Penfold, ‘From locked up, to looking up,’ 38 High Court of Australia, Aid/Watch Incorporated v. The Weekend Australian (9–10 February 2013). Commissioner of Taxation [2010] HCA 42. 20 Rick Morton, ‘A $100 million plan to deliver a better 39 As above, [47]. future,’ The Australian (7 May 2013). 40 As above, Justice Heydon [60].

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41 As above, Justice Keifel [86]. 58 Philippe Barla and Pierre Pestieau, The Optimal Number of 42 Parliament of the Commonwealth of Australia (2013), Charities (2005), unpublished, 1–7. 9, Part 3 Division 11(1)(l). 59 Giving Pledge, http://givingpledge.org. 43 Stephen Judd, et al. Driven by Purpose, as above, 82. 60 Ellie Buteau and Phil Buchanan, The State of Foundation 44 Frederic Fransen, ‘The “Opportunity Cost” of Performance Assessment: A Survey of Foundation CEOs Philanthropy,’ Philanthropy Daily (2010); The Freakwenter, (Cambridge, MA: The Center for Effective Philanthropy, ‘The opportunity cost of philanthropy’ (2008), blog post. 2011), 1–20; Melinda T. Tuan, ‘Measuring and/or 45 Productivity Commission, Contribution of the Not-for-Profit Estimating Social Value Creation: Insights Into Eight Sector, as above, 174. Integrated Cost Approaches’ (Bill & Melinda Gates 46 As above, 172. Foundation, 2008). 47 Kimberley Scharf, ‘Public Funding of Charities and 61 ATO (Australian Taxation Office), Taxation Statistics Competitive Charity Selection,’ University of Warwick 2009–10: Charities and Deductible Gifts (Canberra: (2010); Productivity Commission, Contribution of the 2012), 109. Not-for-Profit Sector, as above, Appendix G.32. 62 The Trust Company Limited Annual Review 2012 48 Productivity Commission, Contribution of the Not-for-Profit (Sydney: The Trust Company, 2012), 1–18. Sector, as above, Appendix E. 63 R. Steinberg, ‘Should Donors Care About Fundraising?’ 49 ATO (Australian Taxation Office), Taxation Statistics in Susan Rose-Ackerman (ed.), The Economics of 2010–11 (Canberra: 2012), 106–109. Nonprofit Institutions (New York: Oxford University Press, 50 Community Council for Australia, ‘Not-for-profit Sector 1986), 348. Tax Concessions Working Group,’ submission (2012), 6. 64 Philip Berber, Patrick L. Brockett, William W. Cooper, 51 Peter Kurti, In the Pay of the Piper: Governments, Not-for- Linda L. Golden, and Barnett R. Parker, ‘Efficiency in profits, and the Burden of Regulation, Issue Analysis 139 Fundraising and Distributions to Cause-Related Social (Sydney: The Centre for Independent Studies, 2013). Profit Enterprises,’ Socio-Economic Planning Sciences 52 Productivity Commission, Contribution of the Not-for-Profit 45:1 (2011), 2. Sector, as above, 228. 65 Standing Committee on Economics, ‘Disclosure Regimes 53 As above, 227. for Charities and Not-for-profit Organisations,’ Senate 54 James Andreoni and Abigail A. Payne, ‘Is Crowding Out of the Commonwealth of Australia (2008), 3. Due Entirely to Fundraising?’ Journal of Public Economics 66 GuideStar UK, www.guidestar.org.uk/Default.aspx 95 (2011), 334–343. (GuideStar, 2012). 55 Deborah Cobb-Clark, The Case for Making Public Policy 67 Alpa Dhanani, ‘Accountability of UK Charities,’ Evaluations Public. Better Indigenous Policies: The Role Public Money & Management 29:3 (2009), 186). of Evaluation (2013), 90; Productivity Commission, 68 GiveWell Australia, www.givewell.com.au. Contribution of the Not-for-Profit Sector, as above. 69 GiveWell USA, http://givewell.org/about. 56 Margaret F. Sloan, ‘The Effects of Nonprofit Accountability 70 Charity Navigator, www.charitynavigator.org/ (2012). Ratings on Donor Behavior,’ Nonprofit and Voluntary 71 SIAA (Social Impact Analysts Association), http:// Sector Quarterly 38:2 (2009), 220–236; Greg Chen, ‘Does siaassociation.org/ (2012). Meeting Standards Affect Charitable Giving?’ as above. 72 Daniel Kahneman, Thinking Fast and Thinking Slow 57 Clair Null, ‘Warm Glow, Information, and Inefficient (Allen Lane, 2012), 2467. Charitable Giving,’ Journal of Public Economics 95:5–6 73 The Prime Minister’s Community Business Partnership, (2011), 455–465. as above, viii, 36.

22 POLICY • Vol. 29 No. 4 • Summer 2013–2014 FEATURE

TIME FOR SOLAR TO PAY ITS WAY

Solar feed-in tariffs are inefficient and costly to electricity users, argues Rajat Sood

etail electricity tariffs have risen sharply they benefit and which cannot be reversed. With in recent years, partly due to the the overall loss of economic welfare to date introduction of the Gillard government’s from the installation of solar panels likely to carbon pricing scheme in July 2012, exceed $5 billion across Australia, it is time for Rbut largely due to the enormous rise in solar to pay its way. charges for using low voltage ‘poles and wires’ distribution networks. A decade ago, distribution The impact of solar and transmission network charges in NSW Since around 2009, growth in electricity demand comprised 45% of customer tariffs compared to has moderated and even fallen as the rise in air approximately 55% of tariffs now (excluding conditioning penetration has slowed and higher the carbon price effect) and about half of current prices have reduced industrial and household tariffs including the carbon price.1 Network costs consumption. This has occurred at the same time have also risen rapidly in other states. as the huge wave of network investment due to This need to fund major investments in the earlier growth in demand is starting to abate. network infrastructure can, in turn, be attributed But despite these more benign conditions, the to a confluence of factors: tighter reliability network tariff component of electricity bills may standards mandated by state governments in continue to rise for the majority of customers. response to a string of high-profile blackouts like The reason lies in the ongoing growth in power the one in southeast Queensland in 2003; the supplied by domestic solar PV panels, combined rapid take up of domestic air conditioning units with the largely volumetric structure of regulated over the last decade, which caused peak demand network tariffs applying to residential and small to soar by 36% from 1999 to 2009;2 ongoing business customers. As more solar panels are growth in population and dwelling numbers; the installed and produce more energy, the demand for need to replace ageing infrastructure installed grid-supplied electricity falls. This in the 1960s and 1970s; and a regulatory regime means the cost of the network made deliberately generous to asset owners investment undertaken in recent in response to concerns about infrastructure years needs to be recovered from ‘bottlenecks’ and exemplified by the queue of a smaller base (in kilowatt hours coal ships at Queensland’s Dalrymple Bay port (kWh)) of grid-supplied electricity. in 2005. As network and retail tariffs rise Electricity consumers now face the risk of retail to reflect the declining base of tariffs rising further as the large-scale installation of solar photo voltaic (PV) panels reduces the contribution of the growing number of solar Rajat Sood is an economist at Frontier Economics. households to the recovery of previously incurred For more than 15 years, he has advised governments, network costs. This highlights the need to ensure regulators and energy businesses on energy market solar households make an efficient contribution design, regulation and reform. The views expressed in this to recouping the cost of investments from which article are his and not necessarily those of his employer.

POLICY • Vol. 29 No. 4 • Summer 2013–2014 23 TIME FOR SOLAR TO PAY ITS WAY

consumption, more customers find it worthwhile • the total energy produced by a domestic PV to install solar panels, perpetuating the cycle. This unit (‘gross’ FiT, which applies in New South leads to what AGL colourfully calls the electricity Wales, the Australian Capital Territory, and market ‘death spiral.’3 The ‘death’ refers to merchant the Northern Territory), or energy businesses (such as AGL) that earn profits by selling power, rather than the network businesses • the energy produced by a domestic PV unit who are guaranteed a regulated return on their not consumed by the resident household capital expenditures. or small business and is exported back Higher network tariffs are likely to exert into the grid (‘net’ FiT, which applies in all regressive distributional effects. Poorer consumers other states).9 seldom have the wherewithal to finance the large upfront costs of PV installations, even with The most egregious case was the NSW gross relatively short payback periods. In addition, FiT, which continues to apply to PV units of up to poorer households are more likely to rent rather 10 kW and purchased before 28 October 2010.10 than own, making it much harder to invest in It offers a payment or rebate of 60c/kWh for PV units.4 all energy produced by such units up to the end of 2016. This rate compares to a typical retail Higher network tariffs are likely to exert electricity tariff of approximately 28c/kWh.11 regressive distributional effects. Under this policy, an average Sydney household Poorer consumers seldom have the consuming 6,500 kWh of electricity per annum wherewithal to finance the large with a standard 2 kW PV unit that produces upfront costs of PV installations. 2,850 kWh per annum would face a retail tariff that is a small fraction of what non-PV households pay for power. Well-informed customers who How did we get here? installed larger units can receive from their There is, of course, nothing inherently wrong supplier net payments of up to thousands of with incumbent electricity businesses losing dollars per annum. The enthusiasm with which money or with technological advances leading to this offer was taken up led to the FiT being radical changes in industry organisation. Indeed, dramatically reduced for new installations, to the it is the hallmark of a dynamic market economy. point where customers installing PV units are From a public policy perspective, problems arise facing a net FiT as low as 6.6c/kWh. This is a rate only when change occurs due to unwarranted determined by the NSW regulator, Independent government interventions. In this context, Pricing and Regulatory Tribunal (IPART), to reflect domestic solar PV installation has benefited (and the true value of power injected back into the continues to benefit) from several forms of subsidy. grid.12 Other jurisdictions also have substantially First, all domestic renewable electricity cut FiTs, with Victoria’s net FiT dropping from sources benefit from subsidies through the federal 60c/kWh to 8c/kWh,13 South Australia’s from government’s Small-scale Renewable Energy over 44c/kWh to 9.8c/kWh,14 and Queensland’s Scheme (SRES) and its predecessor, the Renewable from 44c/kWh to 8c/kWh.15 Energy Target (RET).5 The current SRES subsidises While the generosity of FiTs has been wound the installation of a typical 2kW PV unit in Sydney6 back in recent years, the wholesale price of PV by approximately $1,500, lowering the price units has fallen substantially over the same period. from $5,300 to $3,800.7 While still significant, The fully installed cost of domestic PV units the subsidy used to be five-fold in absolute terms (excluding the RET/SRES subsidy and GST) was on the first 1.5 kW, offering up to $7,500 for approximately $12,000/kW in 2008, $9,000/ a PV installation.8 kW in 2009 (when PV take up began in earnest), Second, state and territory governments offered and $2,600/kW in 2013. This has been partly extremely generous feed-in tariffs (or FiTs) for: due to more efficient, larger-scale manufacturing

24 POLICY • Vol. 29 No. 4 • Summer 2013–2014 RAJAT SOOD processes. However, it is also the result of major The first consideration is that the energy supplied plant investments in China and elsewhere leading by a single household’s PV unit will not by itself to substantial global excess capacity.16 Falling enable the household to be self-sufficient in power. panel prices have partly offset the decline in FiTs Solar PV units produce significantly less power on (see Table 1). cloudy winter days than on sunny summer days, While the Australian Energy Market Operator and they produce no power at all at night. This (AEMO) forecasts a short-term slowdown in the means households wanting a continuous supply of rate of PV installation, it expects the total capacity power need to rely on either the grid for overnight of installed rooftop PV to rise from 1,240 megawatts and backup power or a combination of oversized (MW) in February 2012 to 5,100 MW by 2020 and PV units and battery storage. For example, a typical 12,000 MW by 2031.23 The latest figures from the Clean Energy Council show that nearly 2,300 MW had been installed by the end of 2012.24 This means The energy supplied by a single household’s either PV installation during 2012 was artificially PV unit will not by itself enable the household boosted by customers’ attempts to beat the closing to be self-sufficient in power. Solar PV units dates of some high FiTs or that AEMO’s ‘moderate produce significantly less power on cloudy uptake’ PV forecast is too conservative. winter days than on sunny summer days, and they produce no power at all at night. ‘Grid parity’ or grid subsidy? The holy grail for the PV industry is achieving what is misleadingly called ‘grid parity,’ which Sydney household consuming 6,500 kWh per means PV-produced power is available—without annum would need at least 5 kW of installed PV any subsidy—at the same amortised per-unit cost (and more likely 6–7 kW) to generate its full as the retail price of grid-supplied electricity.25 electricity requirements, plus sufficient storage If power supplied from solar PV truly incurred capacity to meet peak demand and maintain lower costs than power supplied from the grid, supply over a number of consecutive cloudy/ it would be efficient for households to avoid dim days and nights. Batteries large enough to connecting to, or disconnecting from, the network. support normal domestic usage are currently However, this definition of grid parity ignores two prohibitively expensive. A report by the Australian important considerations. PV Association showed that in 2012, the cost of

Table 1: Solar PV subsidies and unsubsidised installed costs

Year (August) NSW FiT17 Qld FiT18 Vic FiT19 (net) SA FiT20 (net) RET/SRES Installed PV (gross then net) (net) subsidy cost22 (based on Sydney21 2kW unit) (excl. (2kW unit) STC subsidy and GST)

2009 - 44c/kWh - 44c/kWh $6,600 $9,000/kW

2010 60c/kWh gross 44c/kWh 60c/kWh 44c/kWh $6,600 $6,000/kW

2011 6.5c/kWh net 44c/kWh 60c/kWh 44c/kWh $2,060 $3,900/kW

2012 7.7c/kWh net 8c/kWh 25c/kWh 25.8c/kWh $1,900 $3,000/kW

2013 6.6c/kWh net 8c/kWh 8c/kWh 25.8c/kWh $1,500 $2,600/kW

POLICY • Vol. 29 No. 4 • Summer 2013–2014 25 TIME FOR SOLAR TO PAY ITS WAY

off-grid systems (which include storage) was more network costs. Customers at existing than triple the cost of grid-connected PV systems, premises (already connected to the grid) at $10,000/kW compared to $3,000/kW.26 A recent without storage should not be able to report prepared for the Clean Energy Council avoid contributing towards sunk network suggested that based on existing tariff structures, the costs by installing PV units. Allowing demand for residential storage is likely to remain such avoidance artificially subsidises a minuscule part of the market even by 2030.27 PV installation The second consideration is that virtually all network investment, once made, is irreversible For premises in new developments or and therefore considered a ‘sunk cost’ from an existing customers acquiring storage: economic perspective. This means the avoidable It may be efficient to install solar PV or ‘opportunity’ cost of using existing grid units if the amortised cost of power from infrastructure is relatively low. Even if all existing PV plus adequate storage is below the full premises in a network were able to become self- retail price of power. This is a more robust sufficient in power and disconnect from the grid, definition of grid parity than the common it would not mean that the resources expended in one and reflects a more appropriate building the network to serve those premises could comparison of the economic benefits and somehow be redeployed to serve other purposes. costs involved in a solar PV investment. Premises in potential new developments are in a different position, because the network may However, it may not be efficient to install solar not have already been extended to cater for their PV units if customers who can acquire power from power needs. solar PV plus storage at a lower cost than the retail tariff are willing to contribute to sunk network It may not be efficient to install solar PV costs, even if this is less than the contribution made units if customers who can acquire power from by existing customers. That is, it could be efficient solar PV plus storage at a lower cost than the for network businesses to price discriminate in favour of customers who can credibly retail tariff are willing to contribute to sunk demonstrate their ability to bypass the network. network costs, even if this is less than the Such ‘prudent discounts’ are already a feature contribution made by existing customers. of the regulatory regime governing high voltage transmission networks. Taken together, these considerations have Any solar PV installation that occurs despite several implications: a failure to meet these conditions is likely to be inefficient. Such installations would benefit from For existing premises without energy an implicit subsidy from customers who continue storage facilities: It is only efficient to to obtain their full power needs through the install solar PV units if the amortised existing network. As none of the 2,300 MW of cost of power from the units is below the solar PV installed to date would have met these (undelivered) wholesale cost of power conditions, the loss in overall economic welfare produced by grid-connected generators. so far due to domestic solar PV is likely to be So PV units must be able to generate substantial. The broad magnitude of the welfare electricity more cheaply than conventional loss can be estimated by conservatively assuming coal- and gas-fired generators. Comparing that the weighted-average cost of PV installed the amortised cost of PV power to the from 2009 to 2012 has been about $4,000/kW28 full electricity retail tariff (in line with and PV units have a life of 25 years. Further the common meaning of grid parity) is assuming that a PV unit in most Australian capital inappropriate because a large share of the cities produces approximately 1,500 kWh/kW/ retail tariff serves to help recover sunk year,29 and the true value of the electricity produced

26 POLICY • Vol. 29 No. 4 • Summer 2013–2014 RAJAT SOOD

Table 2: Economic welfare losses due to solar PV

Average subsidy-free Annual average True value of PV Installed domestic Excess cost of power cost of installed PV capital city PV based on escalated PV to end 201232 from solar PV 2009–1230 output31 8c/kWh, 25-year life ($3 million/MW * and 8% discount rate 2,300 MW)

$4,000/kW 1500 kWh $1,500/kW 2,300 MW $5.8 billion

by PV panels is about 8c/kWh (in line with recent previous tariff structures. For all other customers revised FiTs and escalated at 2% per annum in who choose to install or increase PV units in the real terms), the average excess cost of power from future, revised network pricing arrangements PV has been at least $2,500/kW. With 2,300 should apply. MW installed as at early 2013, the value of the Economic theory generally supports setting inefficiency is likely to be well over $5 billion so far prices at marginal cost to promote allocative and rising. efficiency, that is, allocating resources and final goods and services to their most valuable uses. What is the solution? When electricity demand was rising strongly, The obvious first step to stopping the inefficient much debate about efficient pricing focused on installation of solar PV is to cease offering the direct determining the ‘long run marginal cost’ (LRMC) subsidies outlined above. As noted, the generosity of the network. LRMC is a forward-looking of the SRES and jurisdictional FiTs has already measure of opportunity cost that takes into account been reduced markedly in recent years. The current the present value of incremental capital costs solar PV subsidy provided through the SRES is incurred to meet increased demand. However, at least now comparable to the subsidy offered to with sluggish or falling demand, notional LRMCs large-scale renewable plants such as wind farms. for most network businesses would have fallen FiTs now generally offer PV customers a reward for significantly. This means tariffs should focus exporting power to the grid based on the estimated on recovering sunk costs in ways that minimise avoided cost of grid-connected generation. This disincentives to use existing network infrastructure. leaves the structure of network tariffs as the This could be done by using two-part tariffs, or primary remaining factor encouraging inefficient Ramsey pricing, which involve setting higher PV installations. prices for consumers less likely to reduce their The source of the problem with domestic consumption. Given their current reliance on the network tariffs is they mostly seek to recover sunk existing grid for overnight and backup power, network costs through consumption-based tariffs. solar households are not likely to be much more So to the extent that customers who install PV inclined to reduce their consumption in response to units can reduce their consumption of grid- higher network charges than non-solar households. connected power, those customers can avoid The application of more cost-reflective tariffs can contributing towards sunk network costs. be as simple or complex as political circumstances Network businesses, which are in most and customer data availability permit. At a cases guaranteed to recover their costs, should minimum, it would make sense for a greater be encouraged to adopt more cost-reflective proportion of network sunk costs to be recovered pricing approaches. This should be subject to through fixed per-premises or per-meter charges grandfathering provisions that insulate customers than through volumetric consumption-based who installed PV in good faith on the basis of tariffs. For example, rather than paying a volumetric

POLICY • Vol. 29 No. 4 • Summer 2013–2014 27 TIME FOR SOLAR TO PAY ITS WAY

network tariff of 15c/kWh (out of a full retail charges for supplying estate homes from the tariff of 28c/kWh) on their 6,500 kWh of typical existing grid. In these circumstances, and assuming consumption, Sydney customers could face retail the developer acts in the interests of the future tariffs that incorporated: purchasers of its houses (a big ‘if’), the developer may choose not to connect its estate to the grid. • a fixed monthly charge of $50 that would This would be a perfectly rational decision but recover the bulk of sunk network costs, plus may not be economically efficient. This is because so long as the developer was willing to contribute • a variable tariff of 5.8c/kWh on consumption to the costs of the existing network, it could be volume to signal the current relatively low least-cost overall for the developer to connect LRMC of increased network usage. an estate to the network and not install PV. Based on the figures cited above, even if a The fixed monthly charge could vary on developer could install solar PV and adequate variables not directly related to consumption, such storage for its estate at an amortised per-unit as meter type (premises with high-capacity three- cost of 25c/kWh (less than the 28c/kWh retail phase meters could be levied a higher charge than tariff), it could be more efficient for the network customers with more common single-phase meters) business to offer the developer a lower tariff to or even rateable property value. induce the developer to connect to the grid. If the network business succeeded, the developer The application of more cost-reflective tariffs would save money and the network would obtain a contribution to its sunk network costs. The can be as simple or complex as political contribution would be less on a per-customer circumstances and customer basis than the $600 per annum paid by its existing data availability permit. customers, but it would be more than what the network would receive if the estate bypassed Such a shift would radically alter the public’s the grid altogether. Of course, such approaches and industry’s understanding of the concept of raise difficult public relations issues for network grid parity and deter a great deal of inefficient PV businesses and the regulators that oversee and investment. This is because rather than comparing approve pricing strategies. Nevertheless, they offer the amortised per-unit cost of solar PV against the hope of stemming the losses to the Australian a retail tariff of 28c/kWh, existing customers economy—particularly poorer customers who without storage options would compare the cost cannot finance PV installation—that are accruing of solar PV against an avoidable volumetric under the existing pricing arrangements. tariff of 18.8c/kWh (reflecting a 5.8c/kWh network charge plus a 13c/kWh retailer charge). Conclusion Where potential customers in new housing The falling cost of solar PV installations highlights developments are concerned, or where the the weaknesses of existing distribution network availability of cheaper storage makes disconnection tariff-setting methodologies. If nothing is done, by existing customers viable, the situation may electricity bills for the majority of households will be more complicated. It may be efficient for continue to rise as wealth is either lost or transferred network businesses to price discriminate in favour from customers without PV panels to those with of customers who can credibly demonstrate their panels. More cost-reflective network tariffs could ability to bypass the network altogether through a help deter inefficient PV investment. As regulated combination of sufficient PV and storage capacity. networks have relatively weak incentives to stem To see why, consider the example of a residential these inefficiencies, it is up to policymakers to step property developer who estimates that across its in to advance the interests of non-PV electricity new estate, the cost of sufficient PV and storage is customers and the Australian economy as a less than the present value of the lifetime network whole. Fortunately, the Australian Energy Market

28 POLICY • Vol. 29 No. 4 • Summer 2013–2014 RAJAT SOOD

13 See Government of Victoria, ‘Energy and Earth Resources: Commission has indicated that it sees problems Victorian Feed-In Tariff Schemes’ (Department of State with the current network pricing arrangements Development, Business and Innovation). applying to solar PV customers, and the Standing 14 See Government of South Australia, ‘Solar Feed-in Scheme.’ Council on Energy and Resources has submitted 15 See Government of Queensland, ‘How the Solar Bonus a proposal suggesting changes to network pricing. Scheme Works’ (Department of Energy and Water Supply). Prompt changes are necessary to curb further 16 See, for example, Platinum Asset Management, The Platinum Trust Quarterly Report (30 June 2012), 18. rises in electricity bills caused by a costly boom in 17 For various years, see IPART (Independent Pricing and subsidised solar power. Regulatory Tribunal of New South Wales), ‘Reviews: Retail Pricing.’ 18 See Government of Queensland, ‘Solar Bonus Scheme: Endnotes Current Eligibility for the Scheme’ (Department of 1 See IPART (Independent Pricing and Regulatory Energy and Water Supply). Tribunal of New South Wales), Review of Regulated 19 See Government of Victoria, ‘Energy and Earth Resources: Retail Prices for Electricity—From 1 July 2013 to 30 Victorian Feed-In Tariff Schemes,’ as above. June 2016, Electricity: Final Report (Sydney: IPART, 20 See Government of South Australia, ‘Solar Feed-in June 2013), Figure 2.1, 18. Scheme.’ As of 1 October 2013, the SA FiT has been reduced 2 See Australian Energy Regulator, State of the Energy to 9.8c/kWh. The SA regulator has made a draft decision Market 2010 (15 December 2010), 19. to reduce this further to 7.6c/kWh in 2014. 3 Tim Nelson and Paul Simshauser, ‘The Energy Market 21 Based on prevailing STC multiplier applied to 31 STCs Death Spiral—Rethinking Customer Hardship,’ AGL plus STC of 1 applied to 10 STCs. Assumed August Applied Economic and Policy Research, Working Paper STC prices of $40 in 2009 and 2010, $20 in 2011, $27 No. 31 (June 2012). in 2012, and $37 in 2013. 4 Tim Nelson, Paul Simshauser, and Simon Kelley, 22 For prices up to and including 2012, see Australian ‘Australian Residential Solar Feed-in Tariffs: Industry PV Association, PV in Australia 2012 (June 2013), Stimulus or Regressive Form of Taxation?’ Economic and Table 13, p. 27, available for a fee. For 2013 price, Policy Research 41:2 (North Sydney, NSW: AGL Energy see www.solarchoice.net.au/blog/solar-pv-price-index- Ltd, September 2011). august-2013/. The 2013 price is grossed up for an STC 5 For some history about the Small-scale Renewable subsidy of approximately $1,500 and then 10% is Energy Scheme (SRES), see Clean Energy Regulator: subtracted for GST. Renewable Energy Target, ‘Small-scale Renewable 23 AEMO (Australian Energy Market Operator), Rooftop PV Energy Scheme (SRES)’; see Climate Change Information Paper 2012 (20 June 2012), iii, 11, 12. Authority, Renewable Energy Target Review, Final Report 24 Clean Energy Council, Clean Energy Australia, Report (Government of Australia, December 2012), Chapter 5. 2012, 49. 6 See Trade in Green, Small Generation Unit STC 25 Australian PV Association, PV in Australia 2012 Calculator, website. (June 2013), Table 13, p. 27. 7 Solar Choice, ‘Solar PV Price Index—September 2013,’ 26 See Australian PV Association, PV in Australia 2011 website. (May 2012), tables 12 and 13, p. 27. 8 See Wayne Swan (Deputy Prime Minister and Treasurer) 27 Marchmont Hill Consulting, Energy Storage in Australia, with Penny Wong (Minister for Climate Change) and Commercial Opportunities, Barriers and Policy Options, Peter Garrett (Minister for the Environment, Heritage Clean Energy Council, Version 1 (2 November 2012). and the Arts), ‘Building Australia’s Low Pollution 28 Based on the installed PV prices from Australian PV Future with Renewable Energy and New Solar Credits,’ Association, PV in Australia 2012 (June 2013), Table 13, joint media release (Canberra: 17 December 2008). p. 27, weighted by installed PV figures of 83 MW in 2009, 9 See ESAA (Energy Supply Association of Australia), ‘Energy 381 MW in 2010, 872 MW in 2011, and 933 MW in & You: Feed-in Tariffs,’ website. 2012 from Clean Energy Council, Clean Energy Australia, 10 See NSW Trade and Investment, ‘Solar Bonus Scheme,’ Report 2012, 49. website. 29 Clean Energy Council, Consumer Guide to Buying Household 11 For example, retailer EnergyAustralia currently offers Solar Panels (Photovoltaic Panels), Volume 14 (26 August a discounted electricity tariff ranging between 25.4-29c/ 2011), 4. kWh (depending on usage) throughout most of Sydney. 30 Australian PV Association, PV in Australia 2012 See the ‘EnergyAustralia,’ website. (June 2013), Table 13, p. 27. 12 See IPART (Independent Pricing and Regulatory Tribunal 31 Clean Energy Council, Consumer Guide to Buying of New South Wales), Solar feed-in tariffs—The subsidy-free Household Solar Panels (Photovoltaic Panels), as above. value of electricity from small-scale solar PV units from 1 July 32 Clean Energy Council, Clean Energy Australia, 2013, Energy: Final Report (2013). Report 2012, 49.

POLICY • Vol. 29 No. 4 • Summer 2013–2014 29 Become a member and support the CIS

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THE CONSEQUENCES OF HIGH GOVERNMENT DEBT: REINHART AND ROGOFF VERSUS PUNDITS F.F. Wiley says the Reinhart-Rogoff controversy over government debt reflects badly on the pundits

y the onset of the 2008–09 global Relatively unknown research financial crisis, anyone with a passing team sparks media frenzy interest in the consequences of excessive Enter three University of Massachusetts scholars: debt was familiar with economists Thomas Herndon, Michael Ash, and Robert BCarmen Reinhart and Kenneth Rogoff. Pollin, who quickly became known as ‘HAP.’ Reinhart and Rogoff (I’ll call them ‘RR’) In April, HAP released a harsh critique of RR’s had spent years studying debt crises, and few 2010 paper, arguing that it contained fatal errors.3 economists were as qualified as RR to interpret They revealed an embarrassing calculation error events as they unfolded. They accurately predicted in one of RR’s spreadsheets, which they examined that the hangover from the crisis would be long as part of their critique. They also argued that RR and painful—and that public debt would increase omitted data points without justification and used rapidly to offset any contraction on the private side. an unconventional weighting method in their The second prediction, in particular, led to statistical averages. In response, RR acknowledged further research on government debt. In a 2010 the calculation error but defended their dataset paper, titled ‘Growth in a Time of Debt,’ RR and weighting methods.4 suggested that economic growth tends to be The academic dispute quickly went viral, with unusually low after government debt rises above heavy coverage by bloggers, newspapers and even 90% of GDP.1 They confirmed this result in The Colbert Report. But instead of a measured, a second paper in 2012, which dug deeper into balanced assessment of the perspectives of two the growth-debt relationship.2 The 90% result teams of academics, we saw what happens when a soon became RR’s best-known work, familiar to politically charged research debate lands in the laps policymakers throughout the world. of pundits with preconceived ideas about what the

RR in the crosshairs But fame has its drawbacks, as RR learned the F.F. Wiley is a professional name for an experienced hard way. They were a prime target for populist asset manager and thought leader whose work has been economists who prefer to downplay the risks of included in the CFA program and featured in academic excessive government borrowing. Even though journals and many other industry publications. He has their conclusions were consistent with the findings advised and managed money for all types of investors, of other researchers, RR were the best known of including large institutions, sovereigns, wealthy individuals, the bunch and most clearly in the crosshairs. and financial advisers.

POLICY • Vol. 29 No. 4 • Summer 2013–2014 31 THE CONSEQUENCES OF HIGH GOVERNMENT DEBT: REINHART AND ROGOFF VERSUS PUNDITS

research should say. Media reports were filled with on one calculation in RR’s first paper on debt and misinformation. growth—arithmetic average economic growth rates My first goal here is to straighten out several from 1946 to 2009. Figure 1 shows the competing fallacies that took hold. I’ll then add editorial views on these average growth rates. comments and ‘scores’ on each of the parties From this simple chart, pundits launched involved, as well as observations on the poor a giant game of ‘whisper down the lane.’ We were quality of the contributions from much of fed a succession of incomplete, exaggerated, the punditocracy. misleading and erroneous reports, as explained in these eight observations: For all the public focus on RR’s calculation 1. For all the public focus on RR’s calculation error, it didn’t have a meaningful error, it didn’t have a meaningful effect on effect on their results. their results. As reported by HAP in their paper (p. 7), it changed the arithmetic The second goal is to share an example of the average in the >90% bucket on the right value of RR’s extensive government debt database. hand side of the chart by 0.3%. That’s I’ve been using this data in my own research for a pocket change. But the error’s insignificance few years, and recently published a study exploring was emphasised in only two of the many the outcomes of 63 high government debt early accounts I read (by Justin Fox of the episodes. The conclusions challenge conventional Harvard Business Review and Brad Plumer thinking about the implications of rising of the Washington Post).5 In a couple of the public debt. very earliest reports on HAP’s paper, pundits eventually backtracked by adding a mix of It’s always politics—Never personal clarifications, corrections and updates to Before starting with the fallacies in the RR- their original posts, presumably after HAP controversy, it’s important to recognise the recognising they overstated the error’s principal combatants’ biases. First, it’s clear that significance.6 But both left their prose RR truly believe that excessive government debt written in a way that continued to emphasise leads to lower growth—on a conceptual basis—as it. And their later clarifications didn’t stop do many other people. Second, these beliefs don’t other commentators from reporting that the sit well with HAP, who argue that RR have too growth differences shown were explained much influence over public policy decisions in the entirely by the error, which is untrue. Nor United States and Europe. did they prevent sensational titles such as HAP suggest that policy could be less austere ‘How an Excel error fueled panic over the in both regions. They don’t like to hear politicians federal debt’ (LA Times), ‘FAQ: Reinhart, repeat RR’s warnings about the dangers of high Rogoff and the Excel error that changed debt, and hoped to discredit RR and end RR’s history’ (Bloomberg BusinessWeek), ‘Math in a perceived role in current policies. HAP’s paper time of Excel: Economists’ error undermines concludes with the statement: influential paper’ DailyFinance( ).7

RR’s findings have served as an intellectual 2. Much of the reporting extended beyond the bulwark in support of austerity politics. 2010 paper, leading readers to believe that The fact that RR’s findings are wrong HAP’s critique invalidates RR’s other work, should therefore lead us to reassess the including their 2009 bestseller, This Time is austerity agenda itself in both Europe and Different.8 An LA Times report even claimed the United States. that RR ‘popularized’ the 90% threshold in their book. In fact, the book did no such But HAP didn’t challenge the full breadth of thing, nor did RR publish any similar results RR’s thinking and research. Instead, they focused before 2010.

32 POLICY • Vol. 29 No. 4 • Summer 2013–2014 F.F. WILEY

Figure 1: HAP results versus RR results

Sources: Carmen M. Reinhart and Kenneth S. Rogoff, ‘Growth in a Time of Debt,’ American Economic Review 100 (18 January, 2010); Thomas Herndon, Michael Ash, and Robert Pollin, ‘Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff,’ Working Paper Series 322 (Political Economy Research Institute, University of Massachusetts, Amherst: April 2013); Cyniconomics.

3. The dispute centres on the slope and so wrong, but the accusation became a significance of the line in Figure 1, particularly part of many reports, just like the other the last segment leading to the 90% bucket, falsehoods. In late May, RR finally posted not whether it’s rising or falling. But that screenshots from the ‘WayBack Machine,’ an didn’t stop pundits from writing their independent site that stores whole web pages accounts in ways that suggested disagreement from the past, to prove that their data was about the line’s direction. Moreover, RR accessible as far back as October 2010.10 pointed out that they placed more emphasis Unfortunately, it was too late to sway many on medians than averages (which is entirely of those who had read about RR’s alleged consistent with a review of their work), secrecy, formed their conclusions, and and the medians escaped HAP’s critique moved on. without comment (more on this below). The fact that HAP’s average economic growth 5. Contrary to claims by HAP, the austerity calculations yielded similar results to RR’s push in Europe wasn’t triggered in any way, medians received almost no attention in the shape or form by RR’s research. It’s based public discussion. on northern Europe’s struggle to limit the potential damage to its own economies 4. Despite RR’s data being posted on from fiscal crises in the peripheral countries their websites for public access, pundits in the context of the European Monetary outrageously claimed that it wasn’t made Union.11 In other words, it’s largely a matter available.9 It’s not clear why they got this of regional politics. What’s more, to the

POLICY • Vol. 29 No. 4 • Summer 2013–2014 33 THE CONSEQUENCES OF HIGH GOVERNMENT DEBT: REINHART AND ROGOFF VERSUS PUNDITS

extent that policymakers even noticed RR’s figure implies a sharp drop-off or ‘cliff’ at the advice, they would have heard a message of exact threshold point. As an example of a caution about austerity. The public record correct interpretation of RR’s research, Tyler shows quite clearly that RR was opposed to Cowen of Marginal Revolution—one of the policies of ‘withdrawing fiscal stimulus too most heavily trafficked economics blogs— quickly,’ choosing instead to emphasise the wrote in 2010 that 90% wasn’t ‘sacred’ or critical importance of structural reforms, ‘stable.’14 I always saw it as merely the upper and in some cases, debt write-downs.12 limit on one of RR’s buckets and a reasonable marker to use in conclusions. Such markers are needed to make sense of complicated RR never presented 90% as a magic number— risks. And yet, anti-RR pundits suggest that where 89.9 is a clear, sunny day and 90.1 it’s bad research to attempt an answer to the a class 5 hurricane—nor did they neglect to question: ‘At what point does debt become recognise that correlation is not causation. a problem?’ This is just as illogical as a slam on the AHA for its advice that we should lay off the fats if our cholesterol rises above 200. 6. While HAP and many others made a fuss about RR’s alleged influence over the media, Keeping score with much complaining about a particular And now for the scorecard I promised. I’ll start Washington Post editorial that referenced the with RR. 90% threshold, this part of their story was thankfully refuted by, well, the Washington -0.5 for an Excel error that should have been caught Post. Weighing in on the dispute, the ‘WaPo’ before publication. But this is a minor issue, as editors noted that it was ‘preposterous’ to I pointed out above. I reread the paper to check blame RR for global austerity, and that the effect, and the error didn’t change a single word. RR’s hold on their own thinking was ‘rather We all make mistakes, and this one wasn’t even overstated in some quarters.’13 a factor. It’s like the stumble that costs a distance runner a fraction of a second but doesn’t change 7. Similarly, RR aren’t puppet-masters his position in the race. I repeat: It didn’t change controlling Republican budget strategies a single word. in the United States, notwithstanding Paul Ryan’s reference to their research, which No score on the debate over the weighting method. was discussed by HAP in their paper and RR have a clear and logical defence for their repeated many times by RR’s critics. I’m not approach, while HAP offered a reasonable criticism. aware of any public comments from Ryan This happens all the time in academia. People on the matter, but it seems unlikely that think and act differently, and they also approach we’ll wake up one day and read about his research differently. conversion to the ‘debt doesn’t matter’ school based on HAP’s critique. No score on HAP’s accusation that RR selectively omitted certain data points. I have no reason 8. Finally, RR never presented 90% as a magic to doubt RR’s defence that their dataset wasn’t number—where 89.9 is a clear, sunny day complete when they wrote the paper. I’ve used their and 90.1 a class 5 hurricane—nor did they data on several occasions and seen it evolve, with neglect to recognise that correlation is not significant additions to their government defaults causation. The 90% threshold is similar to in 2011, for example. And it takes time to build the 200 mg/dL cholesterol level that the such a large dataset that you can use with American Heart Association (AHA) warns confidence, let alone share with your peers as RR will ‘raise your risk’ of heart disease; neither have done graciously.

34 POLICY • Vol. 29 No. 4 • Summer 2013–2014 F.F. WILEY

-1 for the interactional effects of their various spreadsheets, and written the first article to hit the methods. Based on the mix of methods that RR blogosphere, triggering an avalanche of coverage chose, HAP pointed out that the average growth on financial and political sites. Because of this rate for RR’s >90% bucket assigned a 14% weight ambush, many people formed their opinions to a single year’s growth in New Zealand. The without seeing both sides of the story. year happened to be 1951, when New Zealand’s economy reportedly (but not correctly—see -1 for the analysis of interactional effects. While HAP’s scores below) contracted by 7.6%. This these effects were noteworthy, it turns out that seems too much weight for such an extreme result HAP got them wrong. As Reinhart disclosed on and it would have been helpful for RR to highlight her website, she discovered that the 1951 New its effect. But it’s hardly the intellectual travesty Zealand GDP data in RR’s initial dataset (they HAP made it out to be. Empirical work is always had turned to other sources by the time of their vulnerable to outliers in the data. The important 2012 paper) was incorrect, thanks to an error in thing is not to make your methods perfect, which a third-party database that’s heavily used and is impossible, but to recognise their limitations. highly regarded by economists.15 HAP then compounded the error by adding New Zealand +10 for their contribution to their field. Yes, I’m data for 1946 to 1950, which was also incorrect.16 biased in that I believe RR have built the world’s That New Zealand featured so prominently isn’t most comprehensive history of the types of risks surprising; I too had dropped the country from that are most threatening to us today. Their dataset unrelated research published in March 2013 and book are tremendous accomplishments. because I hadn’t sorted discrepancies in data And remember, they operate in the field of obtained from different sources.17 Considering macroeconomics. If you were to review all the HAP’s vehemence in attacking RR’s data choices, published papers in this field for the last, say, HAP should have investigated these 100 years, and weigh them against real-life events, choices more thoroughly before publishing the vast majority could be shown to have major their critique. shortcomings. Many have done real damage, leading policymakers to adopt views that are It’s no exaggeration to say the foundations hopelessly disconnected from reality. It’s no of conventional macroeconomic theory have exaggeration to say the foundations of conventional macroeconomic theory have been discredited been discredited repeatedly in the last century. repeatedly in the last century. And of most concern are the papers that rely on unrealistic, abstract theories, not a 2% disagreement in a historical -3 for failing to acknowledge the most important average. By comparison, HAP versus RR is ho-hum. of RR’s results on the empirical relationship between growth and debt. HAP had no comment Here are my scores for HAP: whatsoever on the very first result cited in RR’s 2010 paper—the finding that the median growth +2 for delivering a helpful critique on one aspect rate is about 1% lower when debt rises above of RR’s paper, with a comprehensive collection of 90% of GDP. And HAP also failed to comment charts that clearly illustrates the historical results. on the first result cited in RR’s 2012 paper, which also referenced a growth difference of about 1%. -2 for the way it was done. Reports from both Based on RR’s papers and interviews, it should be sides suggest that RR gave their spreadsheets to no surprise that pre-2013 accounts of their research HAP but didn’t even receive an advance copy highlighted the 1% difference, as John Mauldin of the critique. Before RR knew of the analysis, and Jonathan Tepper do in their 2011 book, blogger Rortybomb had already read HAP’s Endgame: ‘Rogoff and Reinhart show that when critique, interviewed the authors, examined their the ratio of debt to GDP rises above 90 percent,

POLICY • Vol. 29 No. 4 • Summer 2013–2014 35 THE CONSEQUENCES OF HIGH GOVERNMENT DEBT: REINHART AND ROGOFF VERSUS PUNDITS

there seems to be a reduction of about 1 percent remarkable force. One only needed to read a few in GDP.’18 But HAP chose to focus exclusively of the more critical essays and comment threads to on arithmetic averages over a single time period see RR subjected to a treatment normally reserved and calculated a revised difference of, well, about for crooks and felons. 1%. In other words, they asked us to cross out Most remarkable about this episode is how RR’s 1% and replace it with their more ‘accurate’ everyone became instant experts on exactly 1% (see Figure 2). So what exactly was the difference how RR described their research to policymakers we were arguing about? all over the world. I must have been the only one Overall, HAP certainly offered some analysis who missed the nightly Reinhart and Rogoff Hour for consideration, while pointing out weaknesses on national television. in the 2010 paper, as is expected in a critique. Which brings me to the scoring for the pundits But they just as certainly failed to disprove RR’s who unleashed the frenzy. Their contribution thesis that high debt tends to be associated with isn’t so much a number but an odour. They left lower growth. a stench of hypocrisy and a strong whiff of political trickery by using sensational language Assigning a score to the pundits and misrepresenting the real issues. In the meantime, pundits inclined towards loose It’s easy to see why they sided with HAP— fiscal policy launched a character assassination of the pundits are philosophically opposed to any

Figure 2: HAP results versus RR preferred results

Sources: Carmen M. Reinhart and Kenneth S. Rogoff, ‘Growth in a Time of Debt,’ American Economic Review 100 (18 January, 2010); Thomas Herndon, Michael Ash, and Robert Pollin, ‘Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff,’ Working Paper Series 322 (Political Economy Research Institute, University of Massachusetts, Amherst: April 2013); Cyniconomics.

36 POLICY • Vol. 29 No. 4 • Summer 2013–2014 F.F. WILEY research suggesting that high government debt And yet, this may be the most important can have unwanted consequences. Moreover, economic question we face. Historical attitudes they emphasised the insignificant spreadsheet towards budgeting and debt are one of the major errors because no one would have otherwise paid dividing lines between developed countries and attention to their rhetoric. banana republics. We cannot afford to forget In using HAP’s critique as an opportunity what needs to be done to stay on the right side of for political chest banging, pundits themselves that line. In that spirit, I’ll share my own made clear errors in articles written to heap scorn contribution to demonstrate the usefulness of on someone else’s errors. Add the many critical RR’s data. While recent debate has centred on the points they failed to mention, and much of the relationship between debt and growth, I undertake Reinhart-Rogoff reporting amounted to nothing a slightly different exercise: more than a witch-hunt. • Take each historic instance of government Diagnosing the real problem borrowing rising above 105% of GDP Unfortunately, witch-hunts are usually successful. (America’s ratio before a major GDP Few lay people stuck with the debate long redefinition in August) enough to work through the onslaught of misinformation in the weeks after HAP published • Eliminate those instances in which creditors their paper. Those who did follow it watched received a lower return than originally the smear campaigners modify their message promised, due to defaults, bond conversions, as the truth trickled through. But rather than service moratoriums, and/or debt owning up to their errors, critics devised new cancellations strategies for discrediting RR’s research. Paul Krugman, for example, retreated to • Of the remaining instances, consider whether little more than a charge that RR overstate the and how the debt-to-GDP ratio was reduced. causal effects of debt on growth, proclaiming that causality is from growth to debt.19 But the public In other words, let’s see what history tells us record shows that: about America’s debt ratio and what comes next. You may find the answer surprising. • Far from denying the effects of growth on debt, RR are among the most accomplished researchers on this topic. Most remarkable about this episode is how everyone became instant experts on • Krugman’s charges flatly contradict the exactly how RR described their research to advice he offered in 2003 when the parties policymakers all over the world. I must have responsible for rising debt were ideological been the only one who missed the nightly foes rather than friends. In these instances, he complains about the risks of ‘sky-high’ Reinhart and Rogoff Hour on national television. interest rates, ‘fiscal train wrecks,’ and the ‘threat to the federal government’s solvency.’20 What 63 high government In retrospect, the travesty here isn’t an debt episodes tell us inconsequential Excel error but a strong I start with 63 episodes of debt reaching the disincentive to anyone who dares answer the 105% threshold, as shown in the Table 1. These question: ‘How much debt is too much?’ Team are drawn from RR’s debt database, with just a Krugman has shown it will do whatever it takes to few eliminations that are explained in the notes discredit serious attempts to answer that question. at the bottom.

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In addition to screening for breaches of 105%, remains above 90% (and there are many) are I need to establish the end of each episode as excluded from the analysis. well. For this, I use a 90% threshold to identify I also record the peak debt ratio on every periods of genuine debt ratio reduction. With path from 105% to 90% and use this figure to each episode beginning at 105% and ending sort the rows in the table. After narrowing the after debt falls below 90%, there’s a reasonable dataset (see below), I focus mostly on time improvement from start to finish. Recent periods of debt ratio reduction—from the peaks struggles with high debt in which debt-to-GDP to the end of each episode.

Table 1: Episodes of debt breaching 105% of GDP and then falling below 90%

* First year in range is also the first year following a gap in the data. Source: Cyniconomics calculations of high debt episodes in the January 2013 Reinhart and Rogoff data.21

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My next step is to remove the episodes that separately, using a rule that’s sure to anger the included a credit event, which could be a default, Walloons but is reasonable: Any country with an bond conversion, service moratorium, or debt economy equal to or bigger than the Netherlands cancellation. In a large majority of cases, the is large, while a small economy means that a credit event was needed to bring debt-to-GDP country’s output is similar to or less than Belgium’s. under control. Once they’re removed from the initial dataset, I’m left with 11 episodes, all of The large countries tell us them showing a reduced debt ratio without any to stop running deficits recognised creditor haircuts. There are nine episodes in the large country group But then I add three episodes—the Netherlands (see Figure 3). from 1814 to 1873, the United Kingdom from I discussed five of these in an article published 1918 to 1965, and Egypt from 2003 to 2007. in March, titled ‘Answering the Most Important These stand out because there was significant debt Question in Today’s Economy,’ where I set the reduction well after the respective credit events, debt threshold considerably higher at 150% of although I also considered the global importance GDP.22 I argued then that we should be wary of each of their debt battles. of claims that massive debt ratios are not a big With the three additional episodes, I have deal because some countries have been there 14 instances of relatively successful debt reduction. before. In all the cases I considered, countries that Note that 12 of them occurred in economies recovered from huge debt totals enjoyed advantages considered today to be developed, with only one that no longer exist. In the nineteenth century, (Egypt) occurring in an emerging economy and circumstances included resource-rich colonies one (South Africa) being something of a hybrid. that the British and Dutch exploited to ease My last step is to consider how the debt ratios budget pressures. After World War II, debt proved were reduced. I look at large and small countries temporary largely because the combatants ran large

Figure 3: Large countries breaching 105% debt-to-GDP

Source: Cyniconomics calculations using Reinhart and Rogoff’s ‘This Time is Different’ database.

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Table 2: Debt reduction and budget balances in nine large countries

Source: Cyniconomics using B.R. Mitchell’s data, consolidated in 2008 into three volumes on International Historical Statistics. Also Fritz Bos’ data from his 2008 OECD Journal of Budgeting paper on ‘The Dutch Fiscal Framework.’ Also the OMB and BEA for the United States.

non-defence surpluses and only needed to bring often preach that deficits are nothing to be their soldiers home to restore budgetary discipline. concerned about. The United States has run I also argued that inflation isn’t the solution deficits in all but two years since Keynesians began that many make it out to be. Without fiscal to dominate policymaking in the 1960s. And not measures and financial repression, inflation only surprisingly, every one of the episodes listed above takes you so far in resolving a serious debt problem. predates our 63-years-and-counting of chronic In extreme cases, it can exacerbate the problem. budget shortfalls. It turns out that these findings are only slightly Needless to say, history doesn’t reflect kindly weaker when I lower the threshold to 105%. But on present attitudes about budgeting. It shows the particular results that stand out this time are that the pre-1960s belief in fiscal discipline from the last three columns of Table 2. The third- may have had some value after all. Without it, to-last column shows the average budget balance we may have never witnessed a large country from the year after debt-to-GDP peaked to the recovering from today’s debt levels without first year it was reduced below 90%. The last two slamming its creditors. columns show the number and percentage of years in which there was a surplus. Together, the The small countries reduced figures show that every one of the large countries debt in a variety of ways that reduced debt without a credit event did so But what about the small country history? Do by balancing its budget. Put differently, the large the little guys offer a different solution? There country history suggests that the only reliable way are five episodes in this group (see Figure 4). to solve a debt problem is to stop running deficits. I’ll address them in chronological order. Long ago, policymakers would have regarded this finding as common sense. But current South Africa, 1932–35 (peaking in 1932) perspectives are distorted by years of bad ideas in Debt ratios in 1930s South Africa were reduced economics. Keynesian economists, in particular, not by balancing the budget but through rampant

40 POLICY • Vol. 29 No. 4 • Summer 2013–2014 F.F. WILEY

Figure 4: Small countries breaching 105% debt-to-GDP

Source: Cyniconomics calculations using Reinhart and Rogoff’s ‘This Time is Different’ database.

growth. Nominal GDP jumped over 13% annually Belgium, 1946–48 (peaking in 1946) between 1932 and 1936, while inflation was close Like 1930s South Africa, Belgium didn’t attempt to zero. The trigger for the boom was the United to balance its budget after World War II. Rather, Kingdom’s September 1931 decision to abandon the Belgian debt ratio was reduced by reconstructing the gold standard and devalue its currency. The the economy after it was left in tatters by the South African pound devalued at the same time German occupation, and with help from friends. because it was legally tied to the British currency. From post-war lows in 1946, GDP bounced Why was the GDP boost so large at a time of back in the next two years at an annual rate of depression in most of the world, including other 13% in real terms and 24% in nominal terms. countries that severed their links to gold? Fiscal challenges were also mitigated by Marshall The answer is that the devaluation provided Plan assistance from the United States, beginning not just a gain in global competitiveness but in 1948, and some war debt forgiveness before a revaluation in South Africa’s most valuable that. And with debt growing much more slowly assets—its wealth of underground resources and than the economy, debt-to-GDP was cut from particularly gold. As a small country producing 118% to 75% in just two years. half of the world’s gold, there was nothing more important to its economy than the price of its Ireland, 1986–90 (peaking in 1987) gold reserves. And once those reserves were and Belgium, 1987–2006 (peaking in 1993) revalued upwards, it was off to races. Multiplier Here are a few data points describing each of effects from the gold mining boom rippled these European debt battles, dividing the Belgian through the economy, pushing GDP higher and experience into two sub-periods with slightly debt-to-GDP lower. different characteristics.

POLICY • Vol. 29 No. 4 • Summer 2013–2014 41 THE CONSEQUENCES OF HIGH GOVERNMENT DEBT: REINHART AND ROGOFF VERSUS PUNDITS

Figure 5: Debt reduction in Ireland and Belgium (budget balances, growth and inflation)

Source: Cyniconomics calculations using data from the IMF World Economic Outlook database (October 2012).

And here are my observations: which averaged nearly 2% of Irish GDP in the latter half of the 1980s, and Belgium’s status as • Strong growth explained the speed of Europe’s Washington D.C., with much of the Ireland’s debt ratio reduction, while Brussels economy driven by the European Union, steady Belgian growth also contributed and to a lesser extent, NATO. Before extrapolating to falling debt ratios, especially in their debt battles to the United States, there are the 1990s. three points to consider. First, America’s highest decade-average primary • Belgium achieved the second leg of its debt surplus in the six decades since World War II is reduction, from 2001 to 2006, by reducing 0.9% in the 1950s.23 That’s nearly 4% lower than its budget deficit to 0.4% of GDP. the Ireland and Belgium figures above. Second, at current interest rates, the United States would • Strong primary balances were a critical need to run an overall budget surplus of over 2% ingredient in each instance. of GDP to match the Irish and Belgian primary surpluses. This has only happened once every The Ireland and Belgium experiences seem to 100 years or so (two times in US history—1816 validate the idea that it’s okay to run a deficit as and 1948). Third, over a more complete credit long as the primary balance shows a large surplus. cycle, Irish and Belgian debt reduction appears We know this approach to be valid mathematically to have been temporary. As of early 2013, IMF and it worked in these instances. The challenge estimates placed general government debt at is that it’s extremely difficult to maintain such a 117% of GDP for Ireland and 100% for Belgium. delicate balance through cycles of business, politics and war. Egypt, 2003–07 (peaking in 2005) Moreover, both Ireland and Belgium exploited Egypt’s high debt episode in the period just unique advantages: Ireland’s generous support before the global financial crisis was mitigated by from the European Union via structural funds, three IMF programs in the 1990s and a 1991

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Figure 6: Debt reduction in Egypt (budget balances, growth and inflation), 2006–07

Source: Cyniconomics calculations using data from the IMF World Economic Outlook database (October 2012). restructuring, which eased repayment terms while creating ‘blocked accounts’ earmarked for lenders. • Be conquered by an evil, genocidal dictator. I’ll set these advantages aside, though, and share (And then grow strongly with the help of figures for budget balances, growth and inflation. some friends after your liberation.) The good news is that Egypt offers another example of debt ratio improvement without • Run a huge primary surplus. (Nearly 4% balanced budgets or even a primary surplus. higher than the United States has averaged What’s more, the path from 105% to 90% didn’t in any post-World War II decade.) require the double-digit real growth rates of 1930s South Africa or 1940s Belgium. Growth was • Be like modern Egypt. (Do I really need certainly strong, but inflation was even higher and a qualifier for this one?) outpaced interest rates on government debt (not shown). Therefore, Egypt reduced its debt ratio So maybe the smaller countries don’t really show largely through a combination of high real growth us the way? and low real interest rates. The bad news is that Which brings us back to the approach followed the high inflation that eroded the debt also led to by the large countries in the database: Balance higher food prices and political instability. the budget. These countries weren’t satisfied with marginal Conclusions improvements that still leave gaping deficits. Going back to the question of whether the (Think about the celebratory ‘all clears’ that were small country group tells us anything we didn’t declared in the United States in May 2013 after learn from the large countries, here are the four the Congressional Budget Office dropped its approaches that succeeded without a credit event: deficit forecast to ‘only’ 4.2% of GDP.) They didn’t claim victory after reaching the standard • Strike gold and devalue. (But for an EU target of a 3% deficit. More importantly, economy as large as the United States, we’d their debt battles predate the use of Keynesian need to discover hundreds of Fort Knoxes.) economics as an excuse for profligacy.

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I’ll say it once more: Balancing the budget is 8 Carmen M. Reinhart and Kenneth S. Rogoff, This Time the only way that a large country has ever wound is Different: Eight Centuries of Financial Folly (Princeton, down a 105% debt-to-GDP without haircutting NJ: Princeton University Press, 2009). 9 See, for example, Paul Krugman, ‘How the case for austerity its creditors. Not for the first time, the common has crumbled,’ The New York Review of Books (6 June 2013). sense solution is the only approach that’s worked. 10 Carmen M. Reinhart and Kenneth S. Rogoff, Letter‘ to Note: For details on the credit events that PK,’ Carmen M. Reinhart’s website (25 May 2013); F.F. accompanied 52 of the 63 high debt episodes in Wiley, ‘It’s time to change focus from Reinhart-Rogoff Table 1, see ‘Technical notes for 63 high witch hunts to Krugman’s contradictions,’ cyniconomics. government debt episodes’ on Cyniconomics: www. com (28 May 2013). 11 See, for example, ‘Is the academic premise for austerity cyniconomics.com/2013/09/18/technical-notes- in the Eurozone crumbling? Not quite …’ Open Europe for-63-high-debt-episodes/. blog (17 April 2013). 12 Carmen Reinhart and Kenneth Rogoff, ‘The Reinhart and Rogoff response to critics about intent: Debt, growth, and reality,’ Carmen M. Reinhart’s website (30 April Endnotes 2013); ‘Reinhart and Rogoff: Selected interviews, op-eds and media on the policy response to crisis,’ Carmen M. 1 Carmen M. Reinhart and Kenneth S. Rogoff, ‘Growth in Reinhart’s website. a Time of Debt,’ American Economic Review 100 (2010), 13 Editorial, ‘Rogoff-Reinhart error is not the source of 573–578. global “austerity”,’ The Washington Post (21 April 2013). 2 Carmen M. Reinhart, Vincent R. Reinhart, and Kenneth 14 Tyler Cowen, ‘What’s the critical debt-GDP ratio,’ Marginal S. Rogoff, ‘Debt Overhangs: Past and Present,’ Journal of Revolution blog (23 July 2010). Economic Perspectives (forthcoming). 15 ‘A note on the New Zealand data,’ Carmen M. Reinhart’s 3 Thomas Herndon, Michael Ash, and Robert Pollin, website (27 April 2013). ‘Does High Public Debt Consistently Stifle Economic 16 See, for example, Matthew C. Klein, ‘Reinhart and Growth? A Critique of Reinhart and Rogoff,’ Working Rogoff were right about New Zealand,’ Bloomberg View Paper Series 322 (Political Economy Research Institute, (30 April 2013). University of Massachusetts, Amherst: April 2013). 17 F.F. Wiley, ‘Answering the most important question in 4 See Chris Cook, ‘Reinhart-Rogoff recrunch the numbers,’ today’s economy,’ cyniconomics.com (20 March 2013). ft.com blog, Financial Times (17 April 2013); Carmen 18 John Maudlin and Jonathan Tepper, Endgame: The End of M. Reinhart, ‘Response to critics about content,’ the Debt Supercycle and How It Changes Everything Carmen M. Reinhart’s website (26 April 2013). (Hoboken, NJ: John Wiley, 2011), 113. 5 Justin Fox, ‘Reinhart, Rogoff, and how the economic sausage 19 Paul Krugman, ‘Reinhart and Rogoff are not happy,’ is made,’ HBR blog, Harvard Business Review (17 April The New York Times (26 May 2013); Paul Krugman, 2013); Brad Plumer, ‘Is the evidence for austerity based ‘How the case for austerity has crumbled,’ as above. on an Excel spreadsheet error?’ Wonkblog, Washington 20 Paul Krugman, ‘A fiscal train wreck,’ The New York Times Post (16 April 2013). (11 March 2003). 6 Mike Konczal, ‘Researchers finally replicated Reinhart- 21 I limited the analysis to sovereign nations by excluding Rogoff, and there are serious problems,’ Next New Deal two episodes in South Africa between the Boer Wars and Rortybomb blog (Roosevelt Institute, 16 April 2013); one in Sri Lanka from the same period. I also left out Matthew Yglesias, ‘Is the Reinhart-Rogoff result based large debt-to-GDP swings in Ghana following its on a simple spreadsheet error?’ Moneybox blog, Slate 1957 independence, after failing to find corroborating (16 April 2013). accounts in narrative histories. All other episodes meeting 7 Michael Hiltzik, ‘How an Excel error fueled panic over the 105%/90% criteria (above) are included and based the federal debt,’ LA Times (16 April 2013); Peter Coy, on central government debt where available, general ‘FAQ: Reinhart, Rogoff and the Excel error that changed government debt otherwise. history,’ Bloomberg BusinessWeek (18 April 2013); 22 F.F. Wiley, ‘Answering the most important question in Eamon Murphy, ‘Math in a time of Excel: Economists’ today’s economy,’ as above. error undermines influential paper,’ Daily Finance blog 23 F.F. Wiley, ‘Testing Krugman’s debt reduction strategy (19 April 2013). (and finding it fails),’ cyniconomics.com (10 June 2013).

44 POLICY • Vol. 29 No. 4 • Summer 2013–2014 FEATURE

NEVILLE BONNER: A LEGACY FOR YOUNG AUSTRALIANS Neville Bonner left an inspirational legacy for young Australians, says Sean Jacobs

he life of the late Senator Neville Bonner in Aboriginal affairs, grand gestures such as Prime (1922–99), Australia’s first federal Minister Paul Keating’s 1992 Redfern speech Aboriginal parliamentarian, imparts and Kevin Rudd’s 2008 National Apology to the powerful lessons of participation and Stolen Generations seemingly capture and engage Tindividual self-agency that are of great value to a much wider swathe of younger Australians. Even young Australians. In many ways, Bonner’s public today’s politically aware younger generations, life anticipated the challenges faced by current when recalling landmark Indigenous Australians, today’s leading Indigenous figures like Warren will far more likely refer to Eddie Mabo, helped Mundine and Noel Pearson, whose centre-right along by the 1997 film The Castle, where Mabo’s political and philosophical alignments have drawn name is followed by good-humoured succession of consternation and even outrage in some circles.1 ‘It’s the vibe, it’s the Constitution.’ Born into unglamorous circumstances in There is, however, a deeper explanation for northern NSW in 1922, Bonner’s early life was Bonner’s relatively slim legacy. His political marked by countless setbacks. From dairy hand philosophy and personal style disfavoured to stockman, Bonner spent his early life in NSW Aboriginal separatism and acts of public and Queensland working ‘all different types of belligerence that accompanied the Aboriginal labouring jobs known to man.’2 In 1945, he moved rights movement then. As a firm believer in the to Queensland’s Palm Island, where he gained assimilation of Aboriginals into mainstream a number of positions of responsibility through Australia, he distrusted the message of non- his professional approach to compromise and integration preached by the radical elements of bargaining over confrontation. Bonner formalised his era. Bonner, therefore, was a man of great his political credentials in the mid-1960s through character but with an unexciting conservative the Brisbane-based One People of Australia League. message, not the flamboyant type to capture In 1971, he won a senate vacancy to become a headlines or make it into history pages. Liberal senator for Queensland. It was a journey made difficult by his Activism as a poor fit complexion, only a year of formal schooling, and Yet the late 1960s and 1970s— a political philosophy that practised self-agency formative decades in Bonner’s and integration over dependence and separatism. political ascendance—elevated Bonner’s was a life with broad lessons that can protest over compromise. On inspire not only young black Australians but also streets and campuses across the any Australian grappling with notions of heritage Western world, public protests and identity. and confrontations were the

A slim legacy Given his historical achievements, however, Sean Jacobs is a federal policy adviser and co-founder of Bonner is a curiously under-celebrated figure, the website ‘New Guinea Commerce.’ especially among younger Australians. As milestones

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dominant medium for advancing causes such as a 2012 ABC Hindsight program, ‘Compromise sexual liberation and anti-Western sentiments. and Confrontation: Senator Neville Bonner,’ Roger Scruton recalls a minor insurgency of features Bonner receiving a steady stream of targeting the ‘bourgeois’ he had seen as a student racial taunts from protestors during an outdoor on the streets of Paris in 1968.3 For the ‘radicals’ interview. Never short of eloquence, Bonner of his generation, ‘Great victories had been calmly responded to the astonished reporter: scored: policemen injured, cars set alight, slogans ‘If they’d have been more original, then perhaps chanted, graffiti daubed.’ I’d have something to worry about.’6 The radical element of Australia’s Aboriginal In Queensland, the frenzy against Bonner rights movement actively imported this type of went beyond the usual ‘Uncle Tom’ rhetoric behaviour. In 1970, in fact, Bonner warned against and escalated to death threats, becoming serious the Black Power movement in the United States enough to warrant a police investigation. A 1971 and cautioned that applying such militancy in Commonwealth police report summarises: Australia ‘would pit coloured against white, white against coloured, Australian against Australian.’4 Senator Bonner supports the authorities The goal of colourless equality, it seemed, had in their dealings with the aboriginal begun with honourable intentions, yet changed question and it is no doubt for this reason course when seized by a movement promoting that the radical element is against him. Aboriginal self-determination, autonomy and a Senator Bonner is himself an aboriginal.7 life for Aboriginals well apart from the perceived corrupting oppression of mainstream Australia. Coming of age Bonner had armoured himself from an early age with values of individualism and self-agency, In 1970, Bonner warned against the giving him the strength to deal with such vitriolic Black Power movement in the United hostility. As a skinny youngster in Lismore, States and cautioned that applying such Bonner and his brother, Henry, would often walk militancy in Australia ‘would pit coloured the 5 km into town, where they would call out to houses offering to do odd jobs.8 This was how against white, white against coloured, Bonner learned to take advantage of opportunistic Australian against Australian.’ employment as he travelled throughout northern NSW and central Queensland. Self-sufficiency and persistence characterised Assimilation and its discontents not only Bonner’s pursuit of economic opportunity Activism through street protest did not fit well but also his responses to racial hostility. One with Bonner—he preferred promoting Aboriginal of his first tangles with prejudice was brief integration and advancement by working through but heartbreaking. While still in Lismore, an Australia’s established institutions. His ascendance opportunity arose for the Bonner brothers to to the federal Parliament in 1971—the pinnacle attend the primary school there. Amid the of Australia’s Westminster democracy—reinforced excitement, their mother, Julia, who died when his fierce belief in fully participating in Australia’s Bonner was 12, had fashioned school shirts out democracy. ‘We do not want an Aboriginal of stiff calico flour bags. By lunch-time, however, parliament,’ he would tell the Senate. ‘We want to the entire school had fled, alarmed at the presence be part and parcel of the Australian community. of two Aboriginal boys.9 Bonner did not receive a We want to see more Aborigines in this chamber.’5 formal education until years later, and even that In 1971, after entering Parliament, protestors was a brief one. at the newly erected Tent Embassy across the then Bonner’s early experiences of persistent Parliament House broadcast their resentment of verbal taunts could have set the foundation Bonner and his approach. An audio extract from for a life of resentment and hostility. However,

46 POLICY • Vol. 29 No. 4 • Summer 2013–2014 SEAN JACOBS in a well-refined balance of individualism and his Indeed, over his 12-year senatorial career, he served Aboriginal heritage, Bonner told his biographer, on many senate and parliamentary committees. Angela Burger: Bonner also made up for his limited administrative skills through his rhetorical gift. I am happy now that I am a black man, A character in Patricia Shaw’s short story, ‘The an Aborigine. I am fiercely proud of the Senate Vacancy’ (Quadrant, November 2009), fact that I am a descendant of the original says: ‘He’s a damn good speaker. He could crucify owners of this continent. When I was you … and grab a hunk of sympathy votes a little lad, however, those trite rhymes at the same time.’13 Even in his many heated hurt me and of course we knew we were debates, particularly with his counterparts in the different.10 Queensland government, it is difficult to locate examples of Bonner’s eloquence unravelling. This Bonner’s choice of the Liberal Party as the is noteworthy, especially in a period when sharp formal vehicle for his philosophy came from language, even in formal political circles, could be the self-agency he had refined in his early years. scathing. Bonner perhaps reserved the most direct At the 13th annual Federal Council for the language for Queensland Minister Russ Hinze Advancement of Aborigines and Torres Strait during a charged radio debate on Queensland Islanders, he was tormented publicly as a ‘black land legislation: ‘The day I shut up for you, Hinze, Judas’ for supporting the Liberal-National it’ll be a red letter day for Australia.’14 For Bonner, Coalition. In a revealing oratory of his raw political a coarse life did not bow to coarse language. motivation, Bonner said: It is unsurprising that Bonner was never I came up the hard way. What I have seriously considered for a federal achieved, I have achieved because I was able to stand on my own black feet. I say ministerial position, particularly to heck with you. I’m going to do what the Aboriginal Affairs portfolio. I can to promote the image of my race. A man’s political and religious beliefs The battle with Hinze, however, and the rest are his own concern. If my beliefs don’t of the Bjelke-Petersen government, would again accord with yours, that’s just too bad.11 expose the balance Bonner maintained between his individualism and commitment to Aboriginal Bonner a senator affairs. Towards the end of the 1970s, further Saddled by these events, and the persistent need commitments to the Liberal Party and Queensland to balance personal beliefs with divisive questions would pull Bonner in many directions. In a 1992 of Aboriginality, it is unsurprising that Bonner interview, a decade after leaving office, Bonner was never seriously considered for a federal revealed a list of commitments he had made to himself ministerial position, particularly the Aboriginal before entering Parliament ranking in order God, Affairs portfolio. According to Fred Chaney, the nation, Queensland, and the Liberal Party. All Bonner’s friend and senator for Western Australia commitments, he noted, were intertwined with from 1974 to 1990, a ministry ‘would have put advancing the interests of Aboriginal Australians.15 him in an impossible position’ and undermined Maintaining this hierarchy, however, was the unique Aboriginal advocacy role he performed.12 impossible in practical terms. His battle with the Additionally, with little formal education, Bjelke-Petersen government over Aboriginal land Bonner initially coped poorly with the inevitable reserves unravelled his broad support among his flow of paperwork attached to a senate position. Queensland counterparts. Without his party’s Capabilities, however, can be developed and support, Bonner was relegated from first to third Bonner quickly improved his administrative on the Liberal senate ticket during the 1983 functions to perform his senatorial responsibilities. double dissolution.

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A black Liberal? Significance Despite his departure from the Liberal ticket Young people today can draw a number of in the 1983 federal election (Bonner ran as an lessons from Bonner. His life is littered with independent), and his subsequent electoral defeat, countless challenges requiring resilience, courage, Bonner’s choice of the Liberal Party is surprising grit, determination, and repudiations of pity to both a general and younger audience, who now or difference. ‘I have graduated [from] the tend to see black politicians as purely associated university of hard knocks,’ he said in his Maiden with the centre-left of politics. This assumption Speech, ‘My teacher was experience.’ Persistence is most pronounced in the United States where, is a worthy lesson for young people in an age of since the 1960s, the Democratic Party has become instant gratification. almost synonymous with African-Americans. At its broadest, however, Bonner’s legacy to Similar assumptions drove Bonner towards the young Australians is the lesson of participation. Liberals; the Labour Party, he felt, should have At a time when running for Parliament been less presumptive and fought for his vote. In catapulted him into a lonely fraternity as the lone canvassing political party manifestos, Bonner was Indigenous face, and even earned him an apparently persuaded by the Liberal philosophy army of enemies, Bonner’s life emphasises the concept of being ‘in the arena’ rather than a passive Bonner’s choice of the Liberal Party is bystander. This should be an inspiration for the self-imposed handicaps some young Australians surprising to both a general and younger place on themselves. In some youth minority audience, who now tend to see black circles, for example, it is still common to hear politicians as purely associated with that finishing high school or pursuing certain the centre-left of politics. professions is ‘not for us’—a view based entirely upon complexion rather than any real examination and Robert Menzies’ statement of Liberal beliefs.16 of individual capability or passion. One suspects that, due to his sheer grit and The individualism Bonner espoused, but self-made success, Bonner gravitated towards balanced with his Aboriginal identity, is another Menzies’ timeless dictum that ‘it is the individual powerful lesson. While culture is important, whose efforts produce progress.’ it should not be a prison that binds and Bonner’s emphasis on individual identity over constrains. This approach—using culture as ‘the group’ also resonates with African-American a tool for advancement—has slowly won Republicans. Condoleezza Rice, for example, advocates, particularly among Australian notes that her choice of the Republican Party was Indigenous leaders. In a 2012 speech to the primarily based on a distrust of identity politics Northern Territory Parliament, Minister for and the anguish of being constantly boxed in or Aboriginal Advancement Alison Anderson echoed categorised because of her skin colour. ‘I hated Bonner’s philosophy from decades earlier: identity politics,’ she wrote in her 2010 family memoir, Extraordinary Ordinary People, ‘and the We Indigenous people need to be more self-satisfied people who assumed that they were like other Australians. I do not mean free of prejudice when, in fact, they could not we should abandon our beliefs or our see beyond colour to the individual.’17 Bonner, language, but like dozens of other cultures similarly, was cognisant and proud of his in Australia, we must learn to combine our Aboriginality, but he was never bound by own identities with participation in the assumptions that his heritage should determine broader society that will not weaken us.18 his political orientation.

48 POLICY • Vol. 29 No. 4 • Summer 2013–2014 SEAN JACOBS

Conclusion 3 Roger Scruton, ‘Why I Became A Conservative,’ The New Criterion (5 February 2003). Over the last 40 years, Bonner’s legacy and 4 Angela Burger, Neville Bonner: A Biography (South philosophy of integration and assimilation have Melbourne: McMillan, 1979), 63. clearly endured. The Tent Embassy, far from its 5 Tim Rowse, ‘Out of Hand: The Battles of Neville Bonner,’ high turbulence of the 1970s, now lazily torments Journal of Australian Studies 21:54/55 (1997), 96–107. crowds of tourists and school students. Nearly 6 ABC Hindsight, ‘Compromise and Confrontation: Senator Neville Bonner’ (29 April 2012) 70% of people of Aboriginal descent now live 7 ‘Threats Against Neville Bonner and Aboriginal in urban areas and stand testament to Bonner’s Establishments in Queensland,’ National Archives of philosophy of self-determination. On the other Australia, circa 1971. hand, encouraging Aboriginals to live entirely 8 Angela Burger, Neville Bonner, as above, 3. separate lives from mainstream Australians—an 9 As above, 6. initiative Bonner detested—has had devastating 10 As above, 8. 11 As above, 64. and tragic consequences for Aboriginals in 12 ABC, Hindsight, ‘Compromise and Confrontation,’ remote areas. One hopes the late senator’s life, as above. his persistence, participation and identity, 13 Patricia Shaw, ‘The Senate Vacancy,’ Quadrant will motivate young Australians, regardless of (November 2009). background or race. 14 ABC, Hindsight, ‘Compromise and Confrontation,’ as above. 15 Tim Rowse, ‘Out of Hand,’ as above. 16 Ian Macdonald, ‘Tribute to the late Senator Neville Endnotes Bonner’ (21 November 2011). 1 ‘Warren Mundine abused on Twitter because he voted 17 Condoleezza Rice, Extraordinary, Ordinary People: A Memoir Liberal,’ news.com.au (10 September 2013). of Family (New York: Random House, 2010), 134–135. 2 Interview with Robin Hughes, Australian Biography, 18 Alison Anderson, ‘Reconciling Culture and Modernity,’ www.australianbiography.gov.au (13 January 1992). Policy 28:4 (Summer 2012–13), 5.

POLICY • Vol. 29 No. 4 • Summer 2013–2014 49 INTERVIEW

IN DEFENCE OF THE NORTHERN TERRITORY

NT Deputy Chief Minister David Tollner speaks to Sergei DeSilva-Ranasinghe about the defence of northern Australia.

ompared to other Australian states, through exercises held in and around the region. the Northern Territory’s contribution Exercise Pitch Black, for example, is estimated to Australia’s national security is less to have contributed about $25 million to the well known. David Tollner, the Territory’s economy. CTerritory’s Deputy Chief Minister and Minister ADF personnel and their families are an for Defence Liaison and Defence Industry integral part of our community and I want them Support, spoke to Sergei DeSilva-Ranasinghe to get the most out of their time in the Northern about the contribution of the Territory to the Territory. Darwin-based Defence personnel Australian Defence Force (ADF), the relocation have been involved in operations to East Timor, of the 7RAR battalion from the Territory to Iraq and Afghanistan. In fact, large numbers of South Australia, the capabilities of the Territory’s personnel from the 1st Brigade in Darwin are defence sector, efforts to attract further serving in Afghanistan. Also, Territory-based investment, defence cooperation with other personnel engage daily in the border protection states, and his government’s policy initiatives for activities associated with Operation Resolute. Territory’s defence sector. Defence personnel and their families comprise 6% of the Territory population. Accordingly, Sergei DeSilva-Ranasinghe: What contribution most Territorians have friendships or relationships has the Northern Territory made to shaping the with Defence families. Whether that is while ADF, Australia’s strategic policy, and overseas serving on school councils or through involvement expeditionary operations? in sports clubs or while engaging with the community, we all at some time interact with David Tollner: Territorians have had a long history Defence families. Territorians provide support with the defence of Australia from as far back as to Defence families, as does the NT government. the establishment of Fort Dundas on Melville For example, we are sponsoring the Island in 1824 and the bombing of Darwin in 1st Brigade’s monthly functions 1942. This history is not only with the ADF but for the families of personnel also with the defence forces of other nations. deployed overseas. These events Initially, this was exemplified by the United keep families in touch and States during World War II, and later with other maintain communication between forces in our region engaging in multinational the brigade and their families. exercises in the Territory and surrounding regions. Most of us experience firsthand Approximately 10% of the ADF’s personnel are located in the Territory. The recurrent defence expenditure in 2011–12, estimated at David Tollner is the Territory’s Deputy Chief Minister $1.58 billion, is a significant contribution to and Minister for Defence Liaison and Defence Industry the Territory’s economy, and is further boosted Support.

50 POLICY • Vol. 29 No. 4 • Summer 2013–2014 DAVID TOLLNER the contribution Defence families make to our Australia would improve geographic disposition community. As Minister for Defence Liaison and provide variety to allow rotations from and Defence Industry support, I aim to maintain tropical conditions during a soldier’s service. a close relationship with Defence and the various This has changed a little now that the Army is organisations that support ADF personnel and implementing common structures for its brigades their families. under Plan Beersheba. However, the Adelaide From a policy perspective, the NT government option still provides a rotation for soldiers is continuing a long history of engagement with outside the tropical and subtropical conditions of Defence, most recently making submissions Darwin, Townsville and Brisbane, where the to the Senate Inquiry into Defence Procurement, regular Army brigades are based. the Australian Defence Force Posture Review, the Defence Industry Workforce Strategy, and the 2013 The Territory may only have 1% of Australia’s Defence White Paper. It is important to continue population, but it also has great opportunity engaging with Defence to promote cost-effective for industry and investment. support strategies for Defence presence in our region. Sergei DeSilva-Ranasinghe: Tell us about the Sergei DeSilva-Ranasinghe: What was the Territory’s defence sector and what differentiates rationale behind relocating the 7RAR battalion it from the defence sectors of other states? to South Australia? David Tollner: Before answering this question David Tollner: This is really a question for the I need to put a few things in perspective. The federal government. There has been some Territory’s population is approximately 234,000, misconception on the reasons for the relocation about 1% of Australia’s population, of which of 7RAR to Adelaide, particularly in the South 130,000 are located in the greater Darwin region. Australian media. In 2005, the Australian The total permanent labour force in the Territory government made a commitment as part of is 120,000. Based on this, it would not be ‘The Hardened and Networked Army Plan’ appropriate to make direct comparisons between to relocate an Army battalion to Adelaide. the size and depth of Territory industry to that Initially, the Australian government intended of the larger states. to relocate 3RAR from Sydney to Adelaide. The Territory may only have 1% of Australia’s The plan went through a number of iterations, population, but it also has great opportunity and a later decision to expand the Army by two for industry and investment. Deloitte Access battalions resulted in the delinking of 5/7 RAR in Economics forecasts the Territory economy to Darwin to establish two separate battalions, 5RAR grow, on average, by 4.7% annually for the next and 7RAR. five years (2011–12 to 2016–17). This is the Both 5RAR and 7RAR continued in Darwin highest growth rate of all Australian jurisdictions. until each reached a level of operational capability, This growth would be driven by a number of allowing 7RAR to be successfully relocated to significant resource sector projects and associated Adelaide as part of the Australian government’s investments, particularly in the oil, gas and mining plan. Due to the growth of 5RAR, the number industries. I am sure the southern states suffering of Army personnel in Darwin has remained from economic downturns would love to have such unchanged despite the relocation. a growth forecast. ‘The Hardened and Networked Army Plan’ The Territory is renowned for punching cited Adelaide’s geographic location as ideal due to above its weight. A large and growing number of its access to central and northern Australia via the Defence platforms are based in the Territory. then new Darwin-to-Adelaide rail link. Retaining For instance, 70% of the Armidale-class patrol mechanised battalions in northern and southern boats are located at the Darwin Naval Base.

POLICY • Vol. 29 No. 4 • Summer 2013–2014 51 IN DEFENCE OF THE NORTHERN TERRITORY

More than 75% of Australia’s Tiger armed visiting for exercises. The experience gained in reconnaissance helicopters are located at servicing heavy equipment in remote locations Robertson Barracks, along with 70% of Australia’s for the oil and gas, mining and transport sectors Abrams tanks and a large number of ASLAV and makes Top End industry well suited to supporting M113AS4 armoured vehicles. Additionally, a full Army equipment. Industry skills and capability squadron of F/A-18 Hornet jet fighters operate associated with supporting fisheries and other out of RAAF Base Tindal. Indeed, 25% of commercial maritime activities are directly Katherine’s population is made up of defence transferable to Defence operations. Many Territory personnel and their families. enterprises support the Armidale class patrol boat The NT defence support industry is diversified fleet through the prime contractor DMS Maritime. across a number of sectors—predominantly To cater to the significant growth in northern construction, oil and gas, mining and transport. Australia’s oil and gas industry, mining and There are very few Territory businesses solely the growing opportunities with Defence, the focused on defence. Historically, the workflow from population base within northern Australia needs defence has been such that focusing only on that to grow. Also, new technologies associated with sector was not viable. oil and gas, mining and defence create economies of scale for investing in upskilling and developing industry capability. The growth of industry needs To cater to the significant growth in northern to be viewed in a holistic way and not focus solely Australia’s oil and gas industry, mining and the on the individual industry sectors. This provides growing opportunities with Defence, economies of scale to attract the investment the population base within northern needed to stimulate industry growth. Australia needs to grow. The agreement for rotations of US Marines through Darwin each year, the increased activity by US Military aviation assets (US Air Force and US Marines) at Australian air bases, and increased While states such as South Australia and Victoria visits by US Navy and Marine ships at Australian are focused on building air warfare destroyers ports for exercise and training in the region will and submarines, the Territory’s industry has provide opportunities for local businesses across focused on providing capability to sustain a range of industries. Also upgrading our own equipment based in the Territory. Local small and ADF equipment and hardware with new armoured medium enterprises have been extremely successful vehicles, replacing the Armidale patrol boat fleet, in this when given the opportunity by Defence. and replacing the Classic Hornet aircraft will The local industry is quite innovative and has create a critical mass of work in the region and provided Defence with reliable engineering fixes opportunities for local industry to grow. for recurring problems with some systems. This The agreement announced in June by the has been evident in repairing armoured vehicles Australian government to progress from 250 and patrol boats to cite two examples. NT to a larger rotation of around 1,150 Marines to industry is good at providing practical solutions northern Australia from 2014 provides the next to real problems. step in opportunity for industry. With larger deployments accompanied by air and ground Sergei DeSilva-Ranasinghe: Why is the Territory equipment, possible support opportunities exist a suitable location for local and foreign defence for local industry through existing Defence sector investment? logistics networks. This opportunity should grow for industry in the future, as the intent over David Tollner: Development of the local Defence coming years is to establish a six-month rotational industry is focused on sustaining locally operated presence of up to 2,500-person Marine Air major Defence platforms and other platforms Ground Task Force (but not before 2016).

52 POLICY • Vol. 29 No. 4 • Summer 2013–2014 DAVID TOLLNER

With significant opportunities on the horizon in Queensland on associated land maintenance in northern Australia, the strategic location of activities and challenges. We have a large enterprise Darwin as Australia’s only capital city in the north network in Brisbane, Townsville, Darwin and and Australia’s gateway to Asia, the Territory Adelaide. This association, together with links presents an outstanding opportunity for foreign between the Australian Industry and Defence investment, not just in the defence sector but also Networks (Northern Territory and Queensland), in oil and gas, mining, construction, tourism, allows the NT government to identify common primary industries, and clean and renewable energy. issues and challenges.

Sergei DeSilva-Ranasinghe: Is your government Sergei DeSilva-Ranasinghe: What policy initiatives seeking to expand cooperation and links with do you have for the Territory’s defence sector? other Australian states or with defence sectors outside Australia? David Tollner: Defence has a very large investment in the Northern Territory base facilities and David Tollner: The Territory does not have the vast training areas such as the Bradshaw Field Training resources and budgets of the southern states. The Area, which is more than 8,500 sq km in size. The ADF is located in the northern part of Australia recent ADF posture review confirms the strategic due to its strategic and geographic importance. importance of Darwin and the Northern Territory We will not argue to have ADF equipment and to Defence and its operations. personnel relocated to the Territory where there is Defence industry posture on the other hand not a strategic benefit to Defence. is concentrated in the southern states. This At the moment, the Territory does not have CLP government will engage with Defence and the industry base to build air warfare destroyers industry to align industry posture with Defence or submarines. We can, however, support ADF posture. We will work with Defence and industry equipment located here and provide economic to develop industry capability and capacity in and operational efficiencies in doing so. We do the Territory to support Defence equipment, not need the whole pie, just an adequate portion wherever possible, close to where it is based. to allow our industry to provide Defence with The benefits for Defence are reduced costs and effective, efficient and value, and reducing increased efficiency, such as reduced freight costs equipment downtime. of moving to the south parts and equipment for With one 1st Brigade battalion, 7RAR, repair and increased availability of equipment due located in Adelaide, we already have a link to to shorter repair times. South Australia. The Darwin-to-Adelaide rail link We will continue to promote local industry provides the logistics supply chain between the and communicate the cost effectiveness of using brigade and its subordinate unit; it also provides local industry to support Defence in northern an efficient mechanism to link the tropical training Australia. We will draw on the significant areas at Bradshaw, Mt Bundey, and Kangaroo Flat opportunity for the growth of the Northern in the Territory with the non-tropical training Territory through major resource developments, area at Cultana in South Australia. Mechanised the increased Defence presence (in particular, the equipment dispersal between 1st Brigade Darwin US Marines) and the Australian government’s and the 1st Brigade detachment in Adelaide focus on the north as detailed in the Asian Century facilitates training in the two regions without White Paper as drivers to attract investment necessarily moving large amounts of equipment in, and commitment to, industry development in between locations. northern Australia. We are particularly encouraged With the three regular Army brigades located by the Coalition’s 2030 Vision for Developing in Northern Australia (Brisbane, Townsville and Northern Australia. We look forward to participating Darwin), the Territory engages with industry in the plan.

POLICY • Vol. 29 No. 4 • Summer 2013–2014 53 REVIEW ESSAY

MASS MIGRATION CHANGING THE WORLD

Exodus: How Migration Is Changing Our World By Paul Collier Oxford University Press, 2013 $26.50, 306 pages ISBN 9780195398656

nternational mass migration has been rising Having built a successful business, married sharply, in particular from poor, often a local girl, and raised a big family in England, dysfunctional economies into affluent ones. Hellenschmidt was interned and cruelly wronged In 1960, fewer than 20 million from poor at the start of World War I. His son avoided countries lived in the developed world; a similar fate at the start of World War II by in 2000, there were more than 60 million and changing his name to Charles Collier. Iincreasing steeply since. The influx of destitute, Collier’s book addresses the prospect of future poorly skilled and culturally different people is mass migration from poor, dysfunctional to affluent now causing much toxic popular sentiment in the countries. Collier argues that policymakers and rich world. It also makes mainstream politicians the public should not base their judgments about uneasy. Most of them would rather shirk serious prospective mass immigration from poor countries engagement with legal and illegal migration. on past favourable experiences, because most In his new book, Exodus, Paul Collier—Oxford migrants used to come in limited numbers and hailed University economist and author of the acclaimed from culturally similar backgrounds to the host bestseller The Bottom Billion, about the world’s societies. What is the probability poorest—makes a valiant, dispassionate and of sustained mass immigration of valuable effort to clarify the issues, where ‘limited low-skilled people from the Third evidence collides with strong passions’ (p. 255). World? To answer the question, it He analyses how mass migration affects the host is appropriate to take a look at the societies, the migrants, and those left behind in the big demographic picture. Third World. He does so in language accessible to Since demographic projections the general reader. tend to be more reliable than Collier was motivated to write this book by his grandfather, Karl Hellenschmidt, who had migrated in the nineteenth century from an Wolfgang Kasper is a Professor Emeritus in Economics impoverished part of Bavaria to Europe’s then at the University of New South Wales. most prosperous city, Bradford in Yorkshire.

54 POLICY • Vol. 29 No. 4 • Summer 2013–2014 WOLFGANG KASPER

Table 1: UN mid-range population projections (2013)

$ millions (rounded) % change p.a.

1950 2000 2050 1950–00 2000–50

China 555 1,275 1,395 1.66 0.18

India 358 1,017 1,531 2.09 0.82

Other Asia 486 1,388 2,596 2.13 1.26

Africa 221 796 1,803 2.56 1.64

Pacific islands 3 8 17 2.28 1.32

Latin America/Caribbean 167 520 768 2.27 0.78

Europe 547 728 632 0.57 –0.28

Northern America 172 316 448 1.22 0.70

Australia/New Zealand 10 23 30 1.64 0.54

World 2,519 6,071 7,851 1.76 0.77

Source: United Nations, ‘World Population to 2300,’ Economic and Social Affairs (2013), tables 3 and 4, 27–28. climate forecasts, long-term policies should in ageing, affluent nations. Informed, objective my opinion be informed by these divergent political thinking about this looming phenomenon prospective population trends. In 1950, 29% of is therefore urgently needed. the world population lived in countries considered Collier draws on economic analysis and developed, but only 12.6% will live in these same insights in social psychology, moral philosophy, countries in 2050, and it will be an aged population institutional economics, and above all, on the at that. Migration pressures, already high, will rise ‘identity economics’ of George Akerlof, the 2001 enormously. For example, the annual lottery for Economics Nobel laureate.1 Collier rejects pure 50,000 migrant visas to the US attracts around economics: ‘Moderate migration is liable to confer 14 million applicants. A large Gallup poll revealed overall social benefits, whereas sustained rapid that 40% of poor-country inhabitants said they migration would risk substantial costs’ for the would emigrate if they could. Even if this number residents of rich countries (p. 63). Collier rightly looks exaggerated (Collier thinks not by much, says that the effects of migration on host societies p. 167), large numbers of destitute Africans, West follow an inverted U-shape: There are gains from Asians and people from parts of India will appear modest migration, but growing losses from high on our doorsteps before mid-century. Wide migrant flows, a conclusion that is viscerally productivity and income differentials between plausible to most ordinary citizens. His key rich and poor nations will add to the migrant question therefore is: ‘How much immigration push. Information about life in rich countries is should policymakers encourage? How much more becoming more and more accessible to all. should they try to stem?’ (p. 58). He contradicts Diasporas from poor countries are now facilitating those many economists—including international additional migration to developed countries. They bureaucrats—who argue for the completely have always served as powerful accelerators of unhindered international mobility of people. migrant flows. Transport is becoming more and This universalist, purely utilitarian argument more affordable, at least for middle-income families would raise mankind’s average productivity and in poor countries, who are the main source of income—pretty close to obtaining a free lunch. migrants. These are push factors for accelerating But it is wrong, because mass migration comes migration of poorly educated people into the with numerous social drawbacks.

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People are not traded goods, nor are they beneficial social cooperation, and feel less happy.4 mere production factors, such as financial or Multicultural apartheid is a real cost of mass physical capital. They come with engrained values, immigration (pp. 242–244). attitudes, habits and skills, and affect the host One evident consequence is that nationwide society’s identity in profound and durable ways. loyalty, and hence, the redistributive welfare state, It is therefore necessary to extend one’s analysis gets eroded. Collier regrets this. I do not. I am not beyond narrowly utilitarian economics to look at shocked by new research by Torben Andersen, who the impact on social institutions, rules, norms and showed that immigration makes the Scandinavian organisations. These constitute a society’s cherished welfare model less viable, because migrant groups identity and create the comfort of mutual regard, have more dependents and lower skill levels.5 It is i.e. ‘benign fellow feelings’ (pp. 33–34 and 61–67). likely that other valuable public goods, too, will There is the potential for immigrants to enrich no longer be financed. On a recent visit to France, the diversity of ideas and attitudes in the host I wondered whether those costly-to-maintain society, thus improving its evolutionary capacity.2 Gothic cathedrals—now surrounded by Eurabian But there is also the danger that uncontrolled mass bazaars full of idle, angry, poorly educated young immigration will produce a fragmented, conflict- men—will still be maintained in 20 years. The ridden society burdened by high transaction costs.3 clash of civilisations will not so much become manifest in distant macro-conflicts and wars, but There is the potential for immigrants to rather in cultural micro-clashes in Blacktown and Brunswick, Fortitude Valley and Fremantle. enrich the diversity of ideas and attitudes Of course, the rate of assimilation of immigrants in the host society, thus improving its into the mainstream has important bearings on evolutionary capacity. the effects of mass immigration on host societies. The influx of culturally not-so-distant Continental It is the great merit of Exodus that it extends the Europeans into Australia, for example, led to analysis to these crucial trust-building aspects of an overwhelmingly positive narrative about communal and national life. Social capital—trust- ‘New Australians.’ But Collier shows that building institutions, shared values, and productive substantial numbers of people from more distant attitudes—does not come about automatically, cultural backgrounds, who cling obstinately to but is acquired by slow intellectual and political their traditional clannish, tribal ways, are likely effort over many generations. Collier, an expert on to trigger a woeful decay of valuable social capital. underdeveloped societies, shows how rare mutual He also surveys the literature on the impact of trust and selfless cooperation are, and how easily immigration on business (positive for profits); these assets are destroyed by selfish opportunism. wages (small impact, except possibly negative for He cites fascinating case studies from the Third the least skilled); social housing (substantial World about cruelty and total disregard for fellow crowding out of incumbent families); demand human beings that would horrify do-gooders with for schooling (potential classroom conflicts and no knowledge of such countries. Migrants, who flee reduction of standards); access to other public- poor, mistrust-ridden communities, often transfer domain goods (more queuing); criminality familiar trust-destroying, fractious social attitudes (reflected in the disproportionate share of foreigners to the high-trust and therefore rich societies. Here, in prison populations in Europe, but not in their influence destroys inherited, shared social America); and housing market distortions when capital. Collier agrees with eminent American wealthy migrants snap up prestige real estate. social scientist Robert Putnam, who has shown He even investigated whether high-performing that a high level of immigration leads to lower migrant children—and not only the offspring of levels of trust throughout society. Faced with a East Asian ‘tiger mothers’—lower the aspirations mass influx of aliens, the incumbent inhabitants of local working-class children. Collier concludes ‘hunker down,’ have fewer friends, withdraw from that the ‘overwhelming consensus among

56 POLICY • Vol. 29 No. 4 • Summer 2013–2014 WOLFGANG KASPER economists that migration has been such a good comparative-static model based on many tacit thing’ is hard to support (pp. 116–117) and ceteris paribus assumptions, which makes an bemoans the economists’ ‘tin-eared detachment occasional cameo appearance throughout the from workable ethics’ (p. 133). book. But, on the whole, this is a wise book. Although the discussion of the impact of mass It makes a solid and thought-provoking immigration on affluent host societies takes up only contribution to an increasingly controversial half the text of Exodus, I can be brief about the policy area. Collier has shown courage in tackling effects on the migrants and the communities they the prospect of sustained mass immigration leave behind. The migrants and their families, who from the Third World—and in defending normally help finance the cost of migrating, are the right of nations, and indeed the duty of likely to reap massive economic benefits, but may governments, to restrict free access to rich nations’ also incur social and psychological losses. Collier traditional common property of good internal quotes studies that indicate more unhappiness and external institutions. When discussing illegal among new immigrants than among those who migration to Australia, Collier even says that a duty stayed behind. If alienation extends to the children to rescue illegal migrants in trouble at sea must of migrants, the social and psychological losses can be delinked from subsequent rights to residency be great. Typically, only middle-income families (pp. 249–250). Collier also argues for abandoning in poor countries have the wherewithal to finance the ‘progressives’ impossible trinity’ of rapid the migration of family members. Therefore, migration, generous social welfare, and compassion with the world’s poorest cannot count multiculturalism (pp. 264–265). He wants as a motive for a generous migrant intake. policy to encourage migrants out of the ‘comfort The consequences of an exodus for those left zone of cultural separation’ (p. 270). Detected behind are hard to assess, though often overall illegal immigrants should only be granted a beneficial (p. 223). Collier tentatively concludes right to work, but no access to social welfare that emigration and foreign diasporas, as well as (pp. 266–267). the return of migrants from affluent democracies, may exert some indirect positive feedback on the normally disastrous governance of poor countries. Collier has shown courage in tackling the The economic costs of a drain of more educated, prospect of sustained mass immigration young and motivated people can be considerable, from the Third World—and in defending even if remittances mitigate this effect. In 2012, the right of nations, and indeed the duty remittances from developed countries to low-wage of governments, to restrict free access ones totalled $400 billion, i.e. four times total to rich nations’ traditional common property global aid flows and roughly equal to foreign direct of good internal and external institutions. investments. Remittances partly compensate for the loss of breadwinners when the young and talented depart. People who fail to make it to Although immigration has not yet caused the ‘promised lands’ or are deported—the United serious damage to affluent nations that Collier and States, for example, deported some 400,000 illegal I think possible, Collier advocates a preventive migrants in 2011—often return home to their policy of: frustrated families in shame and with debts. • fixing ceilings on migrant admissions ••• • actively selecting immigrants (not relatives, I shall pass over my philosophical differences but skilled, employable people) with Collier about collective, coercive redistribution, as well as a few of his empirical • giving preference to persons from culturally assertions. I was also not taken by the simplistic, close backgrounds

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• admitting as asylum seekers only refugees Alas, given the enormous increase in the from genuine conflict zones, and only on migration potential; widespread ignorance about a temporary basis (in line with the original the importance of shared institutional capital; UN conventions). widespread cultural self-contempt; and an aversion among our comfortable, affluent fellow citizens He also makes a strong case against official against resolute border-protection, it is quite multiculturalism and in favour of integrating possible that Collier will remain the prophet of migrant minorities. The ideal future a future social calamity, rather than the motivator society for Collier is a multi-racial society of clear thinking and resolute, rational action. united by a fused culture of shared institutions, aspirations and values.

He also makes a strong case against official Endnotes multiculturalism and in favour of integrating 1 George Akerlof created the sub-discipline of ‘Identity Economics.’ George Akerlof and Rachel Kranton, migrant minorities. The ideal future society for ‘Economics and Identity,’ Quarterly Journal of Economics Collier is a multi-racial society united by a fused 115:3 (2000), 715–53. Akerlof and Kranton showed culture of shared institutions, aspirations and values. that people are often influenced not only by their own As Collier does not pay much attention to preferences and personal incentives, but also by the probability of the developed world being commitments to groups to which they belong and the swamped by an avalanche of poor migrants, group norms. See George Akerlof and Rachel Kranton, I have cited the latest UN population statistics Identity Economics: How Our Identities Shape Our (see Table 1). These global demographic shifts Work, Wages, and Well-Being (Princeton, NJ: Princeton make it probable that the concerns discussed University Press, 2010). The shift from incentives to in Exodus will become acute. Policymakers and collective commitments has opened a can of worms in economic theory, which cannot be analysed in the public must therefore begin to think clearly, this review. rationally and dispassionately about this prospect. 2 Wolfgang Kasper, ‘Immigration, Culture, Nationhood: Will we marshal sufficient pride in our civilisation, Into the Next 200 Years,’ Quadrant (December 1988), as well as the energy and the knowledge, to 52–56; Wolfgang Kasper, ‘Populate or Languish—New proselytise newcomers about the value of Zealand Immigration Policy,’ Policy (Summer 1989), 26–28. Western civilisation? What are the essential 3 Wolfgang Kasper, ‘Immigration, Institutions, Harmony ingredients on which our trust-based social order and Prosperity,’ Quadrant (November 2001), 6–10; is built and which must be defended at all cost, Wolfgang Kasper, Sustainable Immigration and Cultural if the common weal is to be upheld? In what Integration, Policy Monograph 55 (Sydney: The Centre respects must new settlers be expected to for Independent Studies, 2002). 4 Robert Putnam, ‘E Pluribus Unum. Diversity and comply with the morality and the institutions of Community in the 21st Century,’ Scandinavian Political Australia’s traditional society? And in what Studies 30:2 (2007), 137–174. respects may diverse habits be tolerated or even 5 Torben M. Anderson, Migration, Redistribution and the encouraged? This requires hard intellectual work. Universal Welfare Model, IZA Discussion Paper 6665 The time to do it is now. (Bonn: Institute for the Study of Labor, 2012).

58 POLICY • Vol. 29 No. 4 • Summer 2013–2014 BOOK REVIEWS

Why Australia Prospered: One of the most unfortunate and mistaken The Shifting Sources of narratives about Australia’s economic history is that Economic Growth its prosperity rests on a combination of a generous By Ian McLean natural resource endowment and dumb luck. This Princeton, Princeton sits a little uneasily alongside the ‘tyranny of distance’ University Press, 2013 narrative, which emphasises Australia’s geographic USD$35, 281 pages isolation. Certainly, there was little about Australia’s ISBN 9780691154671 geography or climate that would itself predict prosperity. What is perhaps more surprising is that ost Australian resources have played a smaller role in Australia’s economic historiography has focused prosperity than many assume. After the wool and on the question of ‘extensive’ economic gold booms of the nineteenth century, mining was Mgrowth, that is, the long-run growth in the size a minor player in the Australian economy until and composition of the Australian economy and the 1960s and arguably remains so today relative its links with the rest of the world. Ian McLean’s focus to the size of other sectors of the economy such is on the related but far more important question as services. of the sources of ‘intensive’ growth, that is, growth Drawing on the work of some economic in real income per capita. How has Australia historians of the United States, McLean raises managed to remain either on or close to the the possibility that Australia’s natural resource frontier of global living standards for most of its endowment is actually endogenous rather than 225-year history? McLean does not have new or being a gift of nature. This is surely correct. definitive answers to this question, but his book Mineral resources do not discover, extract and is the best synthesis of what we know from the export themselves. Embargos on exports and other available evidence. regulations, particularly the Western Australian Australia’s relative prosperity is in some ways government’s refusal to grant prospectors or readily explicable. Australia is an institutional and companies title to explore for iron ore before 1961, cultural transplant from the United Kingdom and inhibited the earlier development of Australia’s has been closely integrated into the UK and world resource endowment. Australia has avoided the economy for its entire history. Australia’s prosperity ‘resource curse,’ thanks largely to its institutional is shared by the UK, US, Canadian and New inheritance from the United Kingdom. Even Zealand economies, albeit punctuated by episodes today, in the wake of an unprecedented boom in of relative outperformance and underperformance. Australia’s terms of trade, many casual observers These episodes are useful in identifying the more would be surprised to learn that the direct specific sources of Australian prosperity. However, contribution of mining accounts for only 11% for the Australian project to have been an economic of GDP, although the boost to incomes and failure would have required a significant departure international purchasing power from the terms of from the institutional and cultural forms found trade boom is economically more significant than in the other Anglo-American economies. McLean its contribution to domestic output. ventures a number of counterfactuals that might Australia did experience a 50-year stagnation have seen Australia take a different and less starting with the 1890s depression and ending with prosperous course. Yet it would seem likely that there the onset of war in 1939. While the economic data was a strongly path-dependent, even deterministic, covering this period is patchy, the anthropometric element to Australia’s prosperity. Indeed, there is evidence speaks loudly. There was no gain in the evidence to suggest that the Anglosphere’s general body mass index of military recruits between 1890 prosperity has deep historical roots that may explain and 1920, and only marginal gains on the part of why similar levels of prosperity have not been World War II recruits compared to World War I commonly achieved in other parts of the world. (p. 175). The 1890s depression left a significant

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overhang of public sector debt, followed by the the war, manufacturing made a significant shock of World War I and the era of de-globalisation, contribution to exports, thereby easing the which did not reverse until the end of World recurring balance of payments constraint War II. Australia underperformed comparable on growth at that time. No doubt some economies through this period, but international efficiency gains a from freer trade regime conditions were hardly conducive to the success were forgone: but how important these of a small open economy. The protectionist were as an offset to the other benefits turn at the time of federation in 1901 may noted is a matter of speculation. (p. 254) also be implicated in this relative and absolute economic underperformance. There is much one could object to in the above The role of government in Australia’s economic passage, not least the view that wartime output development poses interesting questions. constitutes an economic benefit rather than a The colonies began as military prisons and cost (which is not to say these costs should not the state dominated early economic activity, have been incurred). The wartime regime of although a private sector was also quick to administered prices makes calculation of emerge. Remarkably, Australia was on the economic value through this episode suspect if not frontier of global living standards in the meaningless. The balance of payments constraint mid-late nineteenth century and successfully is an argument for floating exchange rates and adjusted to major economic shocks with a very open capital markets, not protectionism. It does small government share of GDP, ‘without a national not take much imagination to come up with government and with colonial governments a counterfactual to the federation ‘settlement’ in in each of the affected colonies lacking many which Australia emerged even better positioned of the institutions and sources of advice now to take advantage of global prosperity post-World regarded as essential for macroeconomic War II. This would have made for a useful thought management—such as a central bank and a phalanx experiment in addition to some of McLean’s other of economists’ (p. 86). counterfactuals in which Australia takes a less An interesting question is the extent to which the prosperous turn. ‘Australian settlement’ of compulsory arbitration, McLean’s book raises more questions than tariff protection, and White Australia from 1901 answers, but is an accurate reflection of the state of hindered economic development. McLean is knowledge in the field of Australian economic history. sympathetic to the view that tariff protection With economic history dying out in Australian helped the Australian economy out of its 50-year universities, it would seem increasingly unlikely stagnation with the onset of World War II, setting that there will be further substantial advances the stage for post-war prosperity. in the field without a significant commitment from a new generation of scholars. The definitive The goal of diversifying the economic economic history of base by encouraging industrialisation may, Australia has yet to be for a period, have been an appropriate written. But for those looking means of securing social objectives of high for an introduction to population growth through immigration Australian economic history, and the maintenance of real wages. In McLean’s focus on intensive hindsight it is clear that encouraging growth is an appropriate manufacturing through tariff protection starting point. resulted in Australia being much better placed to secure economic benefits during Reviewed by Stephen the war against Japan, and, following Kirchner

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The Self-Transforming ‘unchaining’ schools from many of the command- School and-control dictates of government departments By Brian J. Caldwell and allows schools to be more innovative and responsive, Jim M. Spinks and ultimately, to provide a higher quality of Abdingdon, Oxon: education. The authors define a ‘self-transforming Routledge, 2013 school’ as a school that ‘achieves, or is well on the way £25.99, 221 pages to achieving, significant, systematic, and sustained ISBN 9780415660594 change that secures success for all of its students, regardless of the setting’ (p. 4). All self-transforming chool autonomy is a schools are self-managing schools but not all high priority in education policy these days. self-managing schools achieve transformation. This Brian Caldwell, arguably one of the world’s is the key message in the book—and an extremely Sleading authorities on school autonomy, calls it important one in the current policy climate. a ‘megatrend.’ In Australia, federal and state There is a tendency to view school autonomy as governments are pushing for decentralised either being snake oil or cure-all. The Australian decision-making in public schools to varying Education Union argues that there is no relationship extents depending on particular jurisdictions. between school autonomy and school performance All schools, even those within a system, are while others, such as federal Education Minister different. The idea that the people working in Christopher Pyne and education writer Kevin schools are able to run them more effectively Donnelly, seem convinced that the evidence of than someone in an office hundreds of kilometres a positive effect of autonomy on performance away is not exactly a new revelation. The Karmel is conclusive. report in 1973 said: As with almost all education policy, however, the reality is more complicated. Over the last decade Responsibility will be most effectively in particular, improved data collection has discharged where the people entrusted allowed better analysis of the relationship with making the decisions are also the between characteristics of schools and education people responsible for carrying them out, systems and their performance on international with an obligation to justify them, and in assessments. These analyses show an uneven impact a position to profit from their experience. of school autonomy. Schools with high levels of capacity improve when given greater autonomy. Brian Caldwell and Jim Spinks have been Struggling schools will struggle even more without developing and influencing policy in school the support of a central authority. When the governance in Australia, the United Kingdom statistical association between autonomy and and Canada for several decades. Their latest book, performance is assessed at a system level, the good The Self-Transforming School, is the fifth in a results and bad results can average each other out, series by Caldwell and Spinks. Its release marks giving the appearance of no impact. 25 years since their first book, The Self-Managing The same pattern is evident when countries are School (1988), which argued the case for compared—greater school autonomy has positive allowing public schools a greater degree of effects in school systems in high-performing, freedom to use their resources, albeit within developed countries but negative effects in a centrally determined framework. Within a low-performing, developing countries. In addition, decade, the Victorian public school system had as Caldwell and Spinks explain, the most recent implemented many of their recommendations. studies show that autonomy is most strongly In The Self-Transforming School, Caldwell and related to improved performance in systems with Spinks go beyond the structural and procedural certain other characteristics, namely, accountability aspects of self-management to describe how and parental choice.

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These findings of heterogeneous effects of non-school factors, they sensibly suggest that autonomy, depending on school capacity and other England and Canada provide more suitable policy aspects of school governance, must be considered lessons for Australia. Canada shows that a highly when evaluating the efficacy of policies to devolve dispersed population with several jurisdictions can more power to schools. For autonomy to have a function effectively without a federal department of positive impact, schools must have sufficient financial, education. The ‘academies’ model in the United intellectual and social capital. Kingdom shows how leaping the ideological divide Much of the debate over school autonomy and to create productive partnerships between self- self-managing schools is misinformed. Although managing public schools and private corporations ‘autonomy’ is the current buzzword in schools can work to the benefit of students. policy, Caldwell and Spinks distinguish between The Self-Transforming Schoolcovers a lot of ground, autonomous schools and ‘self-managing schools,’ including contentious topics such as funding, explaining that in a system of schools, such as curriculum and testing. It is characteristically the public system, schools are not completely restrained and politically neutral on all these issues. autonomous. They still work within a centralised These features of Caldwell framework but have greater freedom to manage and Spinks’ work have their resources. contributed to their longevity Given that the strongest opposition to school in the education policy field. autonomy has come from teachers unions, it is Hopefully, they will continue disappointing that The Self-Transforming School to influence policymakers for does not address the role of unions in the policy many years to come. debate, and how they may be doing their members a disservice. Good teachers have much to gain from Reviewed by Jennifer school governance arrangements that give them Buckingham greater professional freedom. It is difficult to believe that the concept of self-managing schools was then, and is now, controversial. Caldwell and Spinks describe self-managing schools as a ‘common-sense The Righteous Mind: approach’ to school governance. Others seem to Why Good People think that giving public schools some relatively Are Divided by Politics modest powers, such as the ability to choose their and Religion teachers and control their own budgets, is part of By Jonathan Haidt a radical ‘privatisation’ agenda. These charges have Vintage (reprint edition), been levelled at the modest but growing numbers 2013 of Independent Public Schools in Western Australia $21.46, 528 pages and Queensland. Independent Public Schools ISBN 9780307455772 have also been inaccurately described as charter schools. They are not; charter schools are operated eaders are asked to consider the following by private organisations, not government. scenario described in the opening pages of No modern education policy treatise would Jonathan Haidt’s book The Righteous Mind. be complete without reference to the ubiquitous RA man goes to the supermarket once a week and OECD Programme for International Student buys a chicken. But before cooking the chicken, he Assessment (PISA). While Caldwell and Spinks has sexual intercourse with it. Then he cooks it and discuss the validity of using PISA performance to eats it. No one gets hurt. guide policy, and while they dismiss the theory Is the behavior wrong? Is the man within his rights that the success of strong PISA performers like to do so? Haidt says if you are a liberal (in the Finland and the Asian states is attributable to American sense) or a classical liberal, you will probably

62 POLICY • Vol. 29 No. 4 • Summer 2013–2014 BOOK REVIEWS give a nuanced response that acknowledges the groupish beings, so when circumstances conspire man’s right to do what he wants, as long as it does to sharpen political division—as has been in the case not hurt anyone. If you are not a classical liberal, in the United States since the 1990s—(American) you probably think such behavior is wrong. liberals and conservatives become increasingly We are now entering the fascinating world antagonistic towards each another (Part 3). of morality. This summary counts as a spoiler, but the book’s With morality, most of us like to think of ourselves journey is as important as its destination. Readers arriving at moral positions on the basis of reason. can expect to be titillated by quirky scientific It was therefore not without trepidation that findings (washing our hands make us more I began reading the opening chapters of Haidt’s judgmental), and learn why Hindus perceive it book, which claims we are all slaves to our intuition immoral for widows to eat fish. Moreover, Haidt is in the sense that when making judgments we first adept at drawing the red line between his experiences follow our gut feeling and then use our ability to and the developments in various academic fields to reason to find ways of justifying the (intuitive) decision relevant questions that we can all relate to. In doing we made. so, Haidt brings academia ‘down from the bookshelf’ The ‘we’ may come as an affront to some Policy to remind us of the real importance of these fields to readers. Surely Haidt is thinking of less gifted our understanding of ourselves. people or those dye-in-the-wool conservatives The book’s most interesting discussion covers his and (American) liberals. After all, the book is research into identifying five traits (or foundations) written for an American audience with today’s upon which morality is based: care, fairness, political polarisation in mind. Alas, Haidt seeks to loyalty, authority and sanctity. Using the Internet demonstrate this is true of everyone (including (yourmorals.org) to test 132,000 people, classical liberals), only some of us are a little Haidt and his co-researchers found that for those more clever at convincing ourselves otherwise. on the far political left, morality consisted almost Moreover, as a psychologist he knows his science entirely (only) of the care and fairness foundations. and has the knowledge of great thinkers such as As one moves to the right of the political spectrum, Hume on his side. So sceptical readers should put the loyalty, authority and sanctity foundations on their thinking caps before picking up this book. feature and weigh increasingly more, the upshot Haidt’s arguments about our self-deluding nature being mutual incomprehension for those on were explored in his previous book, The Happiness the left and right of each another’s morality. Hypothesis, where he crystalised his findings into As a self-identified (American) liberal, Haidt the analogy of an elephant (representing our contends the left’s incomprehension of the right is intuition) and its rider (representing our reason), most severe due to the left’s inability to empathise with the rider being more or less at the mercy of with the right on the three moral foundations they the elephant. Though imperfect, the analogy sticks do not share (loyalty, authority and sanctity). Haidt and is typical of Haidt’s writing style whereby he says this gives conservative messages a broader tries to make the academic and lofty accessible appeal, which he calls ‘The Conservative Advantage’, for a non-specialist audience. If the high-profile with reference to George W. Bush’s electoral victories. academic accolades are anything to go by, he does Annoyingly, Haidt wrongly identifies Hayek as a this without compromising his professional integrity. conservative, and for the most part lumps classical In the The Righteous Mind, Haidt builds upon the liberals with conservatives. While the classical liberal elephant-rider analogy to answer the topical issue voice should not be exaggerated, having himself of why Americans have become so politically discussed classical liberalism as an alternative moral partisan. In a nutshell, our morality is pre-determined matrix, Haidt only cursorily attempts to show how and we are less open to reasoning than we perceive it fits into his overall theory. (Part 1); morality means different things to different Similarly, although the book’s chapters read people and we can be categorised into moral convincingly on a micro basis, Haidt fails to tie groupings (Part 2); and people are primarily the individual parts into a convincing narrative.

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For example, in Part 3, he cites Australian research own devices. Could the same political polarisation to explain that genes predetermine traits likely to occur in culturally similar Australia? Maybe make us of a conservative or liberal disposition; we classical liberals can outbreed the others before however, given the importance of this claim to it’s too late. Perhaps these shortcomings are Haidt’s wider hypothesis, the topic is dealt with inevitable given the book’s broad scope, although in too superficial a manner to overcome the the weighting of the book’s focus could have sceptical reader. been better. I would have preferred less attention Furthermore, if the antecedents of America’s on the admittedly curious topic of how and current political polarisation lie in Western culture’s why people cooperate, and more focus on the interaction with human nature, as Haidt argues, implications of Haidt’s theories. It would also it would seem relevant to ask why this has occurred have been interesting to hear more on how Haidt now, and why this extreme polarisation is unique proposes to break this descent into polarisation. to America. The book’s sub-title suggests this is on Notwithstanding the above criticisms the book the cards. Regrettably, Haidt barely addresses the has many strong points. Haidt’s intellectual curiosity issue, only mentioning the ideological realignment is impressive and his enthusiasm infectious. The that occurred in the Southern American states in book is written in an entertaining style while the 1960s, and Newt Gingrich’s advice in 1995 giving the reader a sense of studying some of life’s to newly elected Republican Congressmen to big questions from Plato to leave their wives and families in their home states today. Even if you, like me, find (apparently, it’s bad for the nation when Republican yourself not entirely convinced congressmen and their families socialise with at the end of it, then like the Democrat congressmen’s and their families chicken story, you certainly in Washington D.C. on weekends). will not be worse off. Beyond this rather dubious explanation and a reference to a website, readers are left to their Reviewed by Joel Malan

64 POLICY • Vol. 29 No. 4 • Summer 2013–2014 CIS Occasional Paper 125

Moral Wisdom and the Recovery been ofpondering Virtue for ps us cultivate Philosophers of information technology have l, and of pursuing some time now whether social media technology hel the virtuous ideal of knowing what it is to live wel into the moral that life in this new age. ormed our social These technologies have quickly worked themselvesabits and practices fabric of our daily life. They have not only transf landscape but also changed the very moral h e to live effectively in with which we navigate it. blic square? What are the moral skills we need to cultivat , Peter Kurti proposes the the social media world of the twenty-first century uepu to flourish and In an address given at Consilium in 2012 tury. practice of moral wisdom and the recovery of virt live well in the ideagoras of the twenty-first cen n the Religion and Charles Murray or Independent Studies. The Rev. Peter Kurti is a Research Fellow i the Free Society program at The Centre f MORAL

Related works: WISDOM The Kingdom of God is Forcefully Advancing and • David Coltart, (The Centre for Independent Studies, Forceful Men Lay Hold of It 14 September 2011) AND THE Do Secular Societies Promote Religious Extremism? • Tom Frame, (The Centre for Independent Studies, 7 April 2008) RECOVERY OF VIRTUE CIS Occasional Paper 125 Peter Kurti ISBN 978-1-86432-164-7 ISSN 0155 7386