AFTER REFORM: THE ECONOMIC POLICY AGENDA IN THE 21ST CENTURY John Quiggin University of Queensland and FH Gruen Visiting Chair, ANU FH Gruen Lecture Australian National University, 4 October 2016
A POLICY AGENDA FOR THE KNOWLEDGE ECONOMY Policy debate dominated by discussions of ‘reform’ Policy agenda set in 1980s Irrelevant or counterproductive today We need a 21st century policy agenda Previous reform era provides a way to think about this.
THE 20TH CENTURY INDUSTRIAL ECONOMY Three stages of production Primary: agriculture, forestry, mining Secondary: manufacturing Tertiary: transport, distribution, finance GDP and National Accounts Measure value-added, avoid double counting
HOUSEHOLD VS MARKET Central division between household and market production Roughly, between men’s and women’s work Households Household production Reproduce labour force Other non-market activity less important Charities, clubs, churches
AUSTRALIA IN 1980 A small rich industrial country (Arndt) Large but declining manufacturing sector Service sector growing, but problematic Postwar policy agenda exhausted and unsustainable No answer to the crisis of the 1970s
THE POLICY PROBLEMS OF 1980 Structural adjustment Crisis of Keynesian macro Wages and labour markets Fiscal crisis of the state Failure of financial regulation
THE POLICY RESPONSE: MICROECONOMIC REFORM* Australia at the Crossroads Getting prices right Free trade, tax reform Financial deregulation Floating currency, banking competition Rolling back the public sector Privatisation Labour market reform
STILL DRIVES POLICY DEBATE Reflexive responses not analysis Examples National Reform Summit Crisis rhetoric around debt and deficits Failed attempts to marketise human services (VET sector)
FATIGUE OR EXHAUSTION Elite policy discussion suggests public suffering from ‘reform fatigue’ Reality is that reform program is exhausted Key elements either completed, overdone or irrelevant
THE POLICY PROBLEMS OF 2016 Secular stagnation Growing inequality Increase in monopoly & arbitrage profits Climate change Financial instability Fiscal crisis of the state (still!) But ... Internet
SECULAR STAGNATION Low productivity and economic growth observed in many countries Gordon, Rise and Fall of American Growth Australia: Zero MFP growth since 2003 Eurozone: GDP still below pre-crisis level
GROWING INEQUALITY Rise of the top 1 per cent Within that group, top 0.1 and so on Peeling the onion With weak aggregate growth, less for everyone else Failure of ‘trickle down’
MONOPOLY AND ARBITRAGE Financial sector dominates profit share tax avoidance, regulatory arbitrage Key tech sectors monopolised by intellectual ‘property’ Privatisation and regulated monopoly Increasing concentration in many industries
CLIMATE CHANGE Biggest market failure in history (Stern) Energy prices don’t reflect social cost Health effects of coal make this even worse Urgent action needed, but market-based policies face resistance
FINANCIAL INSTABILITY Banks continue as before No real change since GFC rigging markets, facilitating tax evasion failing to finance productive investment Sector needs massive contraction Unlikely to come without a crisis
FISCAL CRISIS OF THE STATE Needs for human services increasing faster than market GDP But, still strong resistance to increased taxation Chronic debt/deficit ‘emergency’ Austerity
THE RISE OF THE INTERNET Developed as by-product of university research communications Architecture depends mainly on open- source software Value depends primarily on user-generated content: blogs, Twitter, Facebook Important but secondary role of physical infrastructure Info superhighway metaphor both illuminating and misleading
CONTRIBUTION TO GROWTH Currently accounting for 20-30 per cent of GDP growth McKinsey, World Bank, OECD, Allens Implies more than 50 per cent of TFP growth Largely ignored in policy debate
CONTRIBUTION TO WELFARE Substantial but hard to quantify Goolsbee and Klenow estimate $3000/ year based on time use of 1 hr/day in 2005 Must be much larger today So large that a valuation based on market prices may be impossible
THE KNOWLEDGE ECONOMY Obsolescence of value chain model Intellectual 'property' and monopoly profits Public goods and non-market production Education and training Research, development and communication
THE KNOWLEDGE ECONOMY Computing and telecommunications key to innovation Stagnation in transport, previously the leading sector Australia’s productivity debate misses the point
DEATH OF THE VALUE CHAIN Creation, dissemination and use of knowledge central to economic activity Does not involve processing of physical inputs Irrelevance of C20 notion of value added
SCALE ECONOMIES IN INFORMATION Cumulative and interactive nature of knowledge Implies potential for unlimited (qualitative) growth, even with finite resources Central difference between endogenous and classical/exogenous growth theory
INFORMATION AS A PUBLIC GOOD Non-rival Cumulative Exclusion difficult/inefficient ‘Publicness’ increases as dissemination costs fall By orders of magnitude in Internet era
CENTRALITY OF NON-MARKET ACTIVITY Wikipedia the canonical example But even commercial services are almost entirely non-market. 500 million tweets per day, Twitter revenue $0.01/tweet Facebook 300 billion user hours/year, FB revenue $0.03/hour
IMPLICATIONS FOR POLICY AGENDA Profitability unrelated to social value Wikipedia v WhatsApp Irrelevance of financial market valuations Prices and incentives less important Human capital critical Shift from market to household sector implies fewer hours of paid work
PRICES AND INCENTIVES LESS RELEVANT Prices no longer closely related to social opportunity cost Implies we can redistribute income with little social cost Return to progressive taxation More provision of public goods
A POLICY AGENDA FOR EGALITARIAN ABUNDANCE Towards a post-scarcity society Knowledge as the driver of productivity Universal post-school education Universal access to high-speed Internet Expanded and democratised program of research and communication
BEYOND SCARCITY Anything that can be digitised rapidly becomes free Potentially encompasses most of current GDP Internet of Things Shift from market to non-market activity
MARKET WORK, NONMARKET WORK AND LEISURE Keynes and Economic Possibilities for our Grandchildren A couple of generations early Take productivity gains as reduced hours of market work Guaranteed Minimum Income/Universal Basic Income What about housework?
UNIVERSAL POST - SCHOOL EDUCATION High school completion already accepted as a norm (over 80%) Need to do the same for university/ TAFE/trade training Success overall since 1980 but Failed reform of TAFE sector, for- profit fiasco
RESEARCH, DEVELOPMENT & COMMUNICATION Communication to broad public is essential Done better before 1980? The Conversation: A model for the future
AT THE CROSSROADS, ONCE MORE The 20th century model has broken down and the era of reform is over Knowledge economy is already here and will only become more important A future of egalitarian abundance is possible, but not guaranteed
AFTER REFORM: THE ECONOMIC POLICY AGENDA IN THE 21ST CENTURY John Quiggin University of Queensland and FH Gruen Visiting Chair, ANU FH Gruen Lecture Australian National University, 4 October 2016
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