AFTER REFORM: THE ECONOMIC POLICY AGENDA IN

THE 21ST CENTURY

FH Gruen Lecture Australian National University, 4 October 2016

John QuigginUniversity of Queensland

and FH Gruen Visiting Chair, ANU

A POLICY AGENDA FOR THE KNOWLEDGE ECONOMY

Policy debate dominated by discussions of ‘reform’Policy agenda set in 1980sIrrelevant or counterproductive todayWe need a 21st century policy agendaPrevious reform era provides a way to think about this.

THE 20TH CENTURY INDUSTRIAL ECONOMY

Three stages of productionPrimary: agriculture, forestry, miningSecondary: manufacturingTertiary: transport, distribution, finance

GDP and National AccountsMeasure value-added, avoid double counting

HOUSEHOLD VS MARKET

Central division between household and market production

Roughly, between men’s and women’s work

HouseholdsHousehold production

Reproduce labour force

Other non-market activity less importantCharities, clubs, churches

AUSTRALIA IN 1980

A small rich industrial country (Arndt)Large but declining manufacturing sectorService sector growing, but problematicPostwar policy agenda exhausted and unsustainableNo answer to the crisis of the 1970s

THE POLICY PROBLEMS OF 1980

Structural adjustmentCrisis of Keynesian macroWages and labour marketsFiscal crisis of the stateFailure of financial regulation

THE POLICY RESPONSE: MICROECONOMIC REFORM*

Australia at the Crossroads Getting prices right

Free trade, tax reform

Financial deregulationFloating currency, banking competition

Rolling back the public sectorPrivatisation

Labour market reform

STILL DRIVES POLICY DEBATE

Reflexive responses not analysisExamples

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 exhaustedKey elements either completed, overdone or irrelevant

THE POLICY PROBLEMS OF 2016

Secular stagnationGrowing inequalityIncrease in monopoly & arbitrage profitsClimate changeFinancial instabilityFiscal crisis of the state (still!)But ... Internet

SECULAR STAGNATION

Low productivity and economic growth observed in many countriesGordon, Rise and Fall of American Growth

Australia: Zero MFP growth since 2003Eurozone: GDP still below pre-crisis level

GROWING INEQUALITY

Rise of the top 1 per centWithin that group, top 0.1 and so onPeeling the onion

With weak aggregate growth, less for everyone elseFailure of ‘trickle down’

MONOPOLY AND ARBITRAGE

Financial sector dominates profit sharetax avoidance, regulatory arbitrage

Key tech sectors monopolised by intellectual ‘property’Privatisation and regulated monopolyIncreasing concentration in many industries

CLIMATE CHANGE

Biggest market failure in history (Stern)Energy prices don’t reflect social costHealth effects of coal make this even worseUrgent action needed, but market-based policies face resistance

FINANCIAL INSTABILITY

Banks continue as beforeNo real change since GFC

rigging markets,

facilitating tax evasion

failing to finance productive investment

Sector needs massive contractionUnlikely to come without a crisis

FISCAL CRISIS OF THE STATE

Needs for human services increasing faster than market GDPBut, still strong resistance to increased taxationChronic debt/deficit ‘emergency’Austerity

THE RISE OF THE INTERNET

Developed as by-product of university research communicationsArchitecture depends mainly on open-source softwareValue 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 growthLargely ignored in policy debate

CONTRIBUTION TO WELFARE

Substantial but hard to quantifyGoolsbee and Klenow estimate $3000/year based on time use of 1 hr/day in 2005Must 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 activityDoes not involve processing of physical inputs Irrelevance of C20 notion of value added

SCALE ECONOMIES IN INFORMATION

Cumulative and interactive nature of knowledgeImplies potential for unlimited (qualitative) growth, even with finite resourcesCentral difference between endogenous and classical/exogenous growth theory

INFORMATION AS A PUBLIC GOOD

Non-rivalCumulativeExclusion difficult/inefficient‘Publicness’ increases as dissemination costs fall

By orders of magnitude in Internet era

CENTRALITY OF NON-MARKET ACTIVITY

Wikipedia the canonical exampleBut 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 valueWikipedia v WhatsApp

Irrelevance of financial market valuations

Prices and incentives less importantHuman capital criticalShift from market to household sector implies fewer hours of paid work

PRICES AND INCENTIVES LESS RELEVANT

Prices no longer closely related to social opportunity costImplies 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 societyKnowledge as the driver of productivityUniversal post-school educationUniversal access to high-speed InternetExpanded and democratised program of research and communication

BEYOND SCARCITY

Anything that can be digitised rapidly becomes freePotentially encompasses most of current GDP

Internet of ThingsShift 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 workGuaranteed Minimum Income/Universal Basic IncomeWhat 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 trainingSuccess 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 overKnowledge economy is already here and will only become more importantA future of egalitarian abundance is possible, but not guaranteed

AFTER REFORM: THE ECONOMIC POLICY AGENDA IN

THE 21ST CENTURY

FH Gruen Lecture Australian National University, 4 October 2016

John QuigginUniversity of Queensland

and FH Gruen Visiting Chair, ANU