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Competitive neutrality: Camels, pinballs, tilted playing fields and five minute arguments …

August 15, 2018 - 16:34 -- Admin

Cross posted from the Mandarin:

Unlike the more indefatigable (less defatigable?) John Quiggin, I don’t normally write submissions to Productivity Commission inquiries because … well let’s just say I haven’t found it an effective use of my time. When it comes to ideas that seem a little unfamiliar to their perspective often the best one gets is incuriousness, though more often new ideas encounter a kind of presumptive hostility.

But I did make a submission to their inquiry into competition in finance because I wanted to suggest a very simple idea, that I thought could make a big difference. Moreover it came straight from Downtown Reformsville. It’s a slight gloss on an old idea that’s been so central to Australia’s economic reform that we coined the expression by which it is known globally – ‘competitive neutrality’.

Indeed, I like to think that my proposal ‘completes’ the idea of competitive neutrality, putting it on an ideological level playing field as it were. This makes it serve the interests of efficiency and the public good rather than special interests whether they’re from business or government.

Since we’ve taken so seriously the idea that, if they compete with private firms, government enterprises should compete on a ‘level playing field’, shouldn’t we also take the converse idea seriously – that where governments have substantial investments in providing services exclusively to some group, they should provide them on an unsubsidised basis to all comers? I proposed this in another context – National Competition Policy – over two decades ago.

Silly me. The answer, in case you’re wondering is …

Well that was the answer in the Commission’s draft report on finance. A silence worthy of a holy order. The Commission made no mention of my submission or the ideas in it. But others took some interest. Martin Wolf of Britain’s Financial Times discussed my proposal favourably in a column. And the Greens adopted it (quickly topped and tailed for political consumption). So in their final report the PC break their silence.

They think it’s a bad idea. And here’s the thing. Maybe they’re right. But since the PC is supposed to be an expert clearinghouse of ideas, it needs to demonstrate that it has carefully considered both the pros and cons of an idea, and weighed them to come to a reasonable conclusion. Instead, tossing a new idea into a PC submission is a like flicking the ball into play on a pinball machine. Once it’s in the playing field, you know that, no matter how skilful you are on those flippers, eventually it will roll through or down behind them into oblivion.

Just as gravity always wins on the tilted playing field of a pinball machine, so ideas that are against the ideological grain – however slightly and however otherwise chiming with the economic reform playbook – ultimately go down the gurgler.

Here’s how it works. The PC points to some untoward possibilities. They don’t suggest how likely they are, how bad they’d be or what might be done if they did. Nor do they weigh those concerns against possible benefits. Rather than engage with an idea they simply gainsay it as John Cleese does in Monty Python’s classic argument sketch. My proposal got the five-minute argument. But it’s essentially the same story even if you get the full half hour.

In a complex world this shallowness of engagement ends you up back at your ideological priors. Nothing ventured: nothing gained. Come to think of it that’s not a bad motto for the PC and for so much else in our policy life.

There’s one other thing worth noting. Behind the theatre of arms-length objective inquiry, there’s always been a rich ‘back-channel’ to the movers and shakers in the central agencies and their political masters. Indeed, when I was on the Commission this sometimes made Commission meetings confusing because the Chair sometimes abetted by the Executive Commissioner (the Deputy Chair in the current structure) and the Head of Office, would suddenly close down a line of argument for reasons that didn’t really make sense. I’d figure out later that the argument was inconvenient to a direction they’d determined in consultation with the Treasurer or the Treasury. This doesn’t mean the PC simply does what it’s told, but they’re invariably in close touch on the shaping of any important report.

At its worst as Ross Gittins commented, on the PC’s report on the automotive industry in 2002, this degenerates into a farce:

“[It’s] the PC’s duty to make recommendations advantaging the economy as a whole, not help its political masters cook up deals acceptable to the politicians’ mates in the motor industry. And if designing camels as horses is the best the PC can manage in this era of over-bearing politicians then, frankly, an interdepartmental committee would be a whole heap cheaper.”

The finance inquiry seems to have been unusually influenced by the back-channel. The report on ‘finance’ (which excludes super) offers some fairly scathing comments about lack of competition in banking and financial advice but pretty tame remedies for doing much about it. However its report on superannuation seems more ambitious, at least when one considers the Government’s priors which are to not let the industry funds go unpunished for embarrassing the retail funds with their superior returns.

My guess is that the Commission is trying to design a super system which helps channel money into better performing funds but it knows the government won’t be enamoured of what that involves – which would be more money for not-for-profit government and industry funds and less for the top end of town. To lower the degree of difficulty and raise ideological alignment with the Commission’s perspective, the idea of competitive neutrality – giving all Australians access to government super – gets the chop.

And so citizens’ access to government super gets the five minute argument. The argument is so risible it occurred to me on reading it that we may actually be getting a wink and a nod saying in effect “We can’t run with your idea now, but we’ve made the arguments so bad they won’t stand in your way. In fact we’ve presented arguments for our case which are really arguments for your case!”. How’s this?

“When the Swedish Government launched their premium pension scheme in 1999, it established a government-owned default fund for individuals who did not choose a fund. Initially, more than two-thirds of new savers chose a fund. However, by 2011 almost all new savers were joining the default, and many likely did so by making a deliberate passive choice (Barr 2013). Reasons offered for the decline in new savers making an active choice include an excessive amount of fund choice, the dot-com bubble immediately after the launch of the premium pension, and the strong performance of the default fund compared with other premium pensions [my emphasis] …

“If allocated all default contributions, [a government] fund would fail to harness the benefits of competition for better member outcomes (as identified by the Murray Report, and implied in the terms of reference for this inquiry). [Unless of course the government fund manager harnesses gets individual fund managers to compete for the money which of course government fund managers virtually always do.] While having a government-owned fund competing to make the best in show list would enable benefits of competition, such an arrangement would still raise concerns about the potential risk to current and future taxpayers stemming from a government-owned default fund in the event of poor performance (potentially encouraging a more conservative investment strategy). It would also raise competitive neutrality concerns and possibly constitutional issues.”

Plop. Another pinball disappears into the bowels of the machine. So as you can see, with apologies for changing the metaphor, it is harder for a camel to pass through the eye of a needle than for the Commission to recommend government entities compete in a market. However competent and successful those government entities are, however dysfunctional and corrupted the market is.