Bite Size Advice. Paul J. Thomas
for things that are beyond their control. Let’s all be honest about the respective roles that we play in the functioning of our economy.
Posting Date: 3 March 2014
Over regulation
Politicians have made an art form of over engineering things. Governments often rush through knee-jerk legislation in response to consumer or media pressure. Yet, sometimes the best response to an event or crisis is to take a collective deep breath and wait until the dust settles instead of making policy on the run.
In the era of the 30 second TV grab, our political leaders are quick to jump on the bandwagon of consumer sentiment and pander to voters and the popular press. However, in their bid to act decisively, governments often behave impulsively and fail to address or solve the underlying issue. The end result is unnecessary regulation on business, the cost of which is invariably passed on to the consumer.
In a recently released report, Deloitte Australia estimates that government regulation costs the Australian economy a staggering $94 billion a year. This red tape, together with private sector rules and regulations, is “...the biggest single drag on our nation’s productivity”, according to Deloitte. In the report, Deloitte laments the proliferation of new government rules:
Not even the federal government knows how many rules you are meant to obey. In fact, we don’t even know how many government bodies currently have the ability to set rules in the first place, let alone the number of rules those agencies have laid down.
The Report, Get out of your own way: Unleashing productivity, also takes aim at business. Deloitte argues that while the private sector needs rules, it has “...overdone it, spawning an entire industry”. Australian businesses spend $21 billion per annum on self-imposed rules, which generate a stunning $134 billion a year in compliance costs. “When combined”, says Deloitte, “the costs of administering and complying with public and private sector rules equate to a quarter of a trillion dollars a year.”
Deloitte notes that a cost saving of just 10 per cent of that total would equal 1.6 per cent of national income. This is an achievable target and one that business and government should set as a goal. However, both the public and private sectors “regulate in haste and repent at leisure, with each additional rule ratcheting up the pressure on our economy”.
Alarmingly, Deloitte claims that one in every 11 employed Australians now works in the compliance sector.“As a result there are already more ‘compliance workers’ across Australia than there are people working in the construction, manufacturing or education sectors”, the report states. The rise in new ‘compliance workers’ is a key reason why Australian productivity growth has been in low gear:
New technologies are delivering a huge dividend but we’re not seeing the gains... ‘back-office’ workers such as switchboard operators, mail sorters and library assistants have been rapidly shrinking as a share of the workforce, yet those productivity savings have been swallowed up amid the rising cost of Australia’s compliance culture.
In any country, the key drivers of economic growth are population size, workplace participation rates and productivity levels. An increase in any one or more of these factors leads to economic growth and improved economic prosperity. Deloitte, quite rightly, notes that one way to improve productivity is to reduce red tape.
Improving productivity is not just important for businesses – it’s also linked to higher standards of living for us as citizens. The reality is that if we don’t find ways of becoming more productive, our way of life will suffer. Our need to boost productivity by reducing regulation is critical. The time to act is now.
Posting Date: 10 November 2014
Depositor protection dilemma
We all know you can’t insure a car for more than it’s worth. This is because insurance companies understand something called moral hazard. Moral hazard is a concept saying that people will take risks if they have an incentive to do so. Ergo, if my car is valued at $10,000 but is insured for $20,000, I might be tempted to torch it.
Moral hazard can entice individuals insulated from risk to behave differently than they would if fully exposed to the risk. Examples include tenured professors becoming indifferent lecturers, insured drivers being less vigilant about car theft, protected managers making poor decisions and unemployed workers being less inclined to look for a job while on government benefits.
The subprime crisis is another example of moral hazard. Many US financial institutions recklessly lent money to people with poor credit histories to buy overpriced houses. They deliberately lowered their credit assessment standards knowing that they could package dodgy loans into mortgaged backed securities and pass off the risk of default to unsuspecting investors.
Moral hazard is commonly associated with any type of safety net including deposit insurance. At the height of the Global Financial Crisis (GFC), governments around the world guaranteed the deposits of citizens in banks and other financial institutions. Most commentators believe that this unprecedented intervention was necessary to protect the global financial system from meltdown.
As the crisis passes, the OECD is urging Australia to fulfil its promise to remove its deposit guarantee which, it argues, is a moral hazard. Nevertheless, the OECD acknowledges that both depositors and banks now believe the Federal Government will always come to their rescue in times of trouble.
The belief that a bank is too big to fail represents a classic moral hazard. If the public and the management of a financial institution believe it will receive a financial bailout to keep it going, management – in theory – may take more risks in pursuit of profits. Yet, there’s no evidence that the deposit guarantee has actually encouraged Australia’s Approved Deposit-taking Institutions (ADI’s) – i.e., banks, building societies and credit unions – to behave recklessly.
We have a strong prudential regulatory system governing ADIs in Australia. While there’s no doubt that moral hazard in financial services is real, our robust regulation and good practices prove that this risk can be mitigated.
The GFC shows that governments will act to save banks which are too big to fail. This gives our ‘Big Four’ Australian banks an implicit guarantee and an unfair advantage over smaller credit unions. That’s why I believe the current retail deposit guarantee scheme should be maintained after its proposed review date in October 2011.
As someone who is a staunch believer in free markets and survival of the fittest, I can fully understand why the Reserve Bank of Australia opposes the extension of the deposit guarantee. I too accept that governments should not be the first port of call in times of crisis. However, some form of depositor safety net for all ADIs is essential to provide a more level playing field for Australian credit unions and building societies.
The deposit guarantee scheme provides protection for ordinary depositors, fosters competition in banking and doesn’t cost the taxpayer a cent. In short, it’s a necessary evil if we are serious about the mutual sector being a viable alternative to the Big Four banks.
Posting Date: 6 September 2010
Stop the pandering
Everyone has theories. We all have our own explanation for why things work the way they do. I’ve had a theory for as long as I can remember and it relates to short-term thinking. Whenever we make decisions based on quick fixes, instant gratification and populism, we suffer long-term consequences. We see this time and time again in politics, business and even our homes.
We all intuitively know that true leadership is not a popularity contest. This is why prime ministers, CEOs and parents must be capable of making unpopular decisions at times. The