Economics
Means testing – the cases for and against
Means testing can provide governments with fiscal flexibility, but it can also contribute to social segregation.
In 1974, just 18 months after being elected, the Whitlam government called a double-dissolution election to get 6 bills past an obstructionist Senate. The most important of these was about the establishment of Medibank, the precursor to Medicare.
It was of paramount importance not only because it displaced private insurers, but more significantly because its benefits were universal, not subject to means testing. There had been earlier universal schemes, but none on the scale and scope of Medibank.
Australia has muddled along with a mixture of universal and means-tested programs, without much public discussion, even though the choice involves basic principles of people’s public values. The bargain in Nordic countries is that governments collect high taxes and generally provide universal non-means-tested services, while in the US, at the other extreme for “developed” countries, only the “indigent” are eligible for government-funded services, and the very rich have various mechanisms to opt out of paying taxes. Because of the mixture of our arrangements, Australia falls somewhere in the middle of these extremes.
The government’s proposed changes to the National Disability Insurance Scheme have brought the question of universalism versus means-testing to our attention. It’s an expensive program, and is not subject to means testing, coming under review at a time when there is a need to increase public spending on human services and defence, and when the government is reluctant to cut taxes.
Robert Breunig, of the Tax and Transfer Policy Institute at ANU’s Crawford School, raises the question of means testing in a Late Night Live session Is Australia too generous to the rich? The case for tighter means-testing (17 minutes). He puts his arguments strongly: he presents a more balanced case in a Conversation article posted in April: By avoiding means testing, the government is giving handouts to the rich. (Radio and TV clips do not make for nuanced discussion.)
He mentions NDIS, energy bill relief and fuel excise reductions as expensive universal programs. He acknowledges the arguments that means testing for some programs can be difficult. (I feel offended and ripped-off when I see a Ford Raptor pull up at a pump, but I wonder how a means test on the fuel subsidy could be applied.) He also acknowledges the problem of poverty traps – the interaction of income tax and means-testing thresholds as people’s incomes rise from very low levels, resulting in a very high effective marginal tax rate. But his general point is that information technologies are making it easier for governments to assess means and therefore establish means tests.
A specific proposal relating to means testing is in a Policy Institute Australia paper Home truths: The case for rebalancing toward better means testing. They look at four programs they classify as comprising a social safety net – Child Care Subsidy, Parental Leave Pay, Aged Care and the Age Pension – and calculate that means testing these programs could save around $21 billion a year in government outlays. Unsurprisingly they find that older Australians have been some of the main beneficiaries of increased spending on these programs.
There are many good reasons for bringing the issue of universalism and means-testing to public attention, but any such discussion should acknowledge the complexities of the issues, and should not be used as part of a “small government” campaign.
The issues are indeed complex. Breunig places public parks and defence in the same category of universal goods as NDIS and fuel discounts, but they are in a different category, defined as “non-excludable” public goods. That is, any form of means testing or user pays is practically impossible for such goods. Then there are some programs providing “merit goods” – goods with high positive externalities. I enjoy some personal benefits from vaccination, but most of the benefits are enjoyed by society at large. Child care can be seen as a form of middle-class welfare for parents, but if done well it can carry huge benefits for the child in later life and for society as a whole.
Most importantly, there is the risk that the application of means tests can result in publicly-funded services becoming residualized services for the poor. If means-testing is to be applied, it should be applied to the way services are funded, not for access to the services. High-quality services will not be sustained if the well-off find it easy or are incentivized to opt out of shared services.
Providing a publc service
As examples, although the Pharmaceutical Benefits Scheme has means-testing provisions we all buy the same PBS prescriptions from the same pharmacies: we don’t have pharmacies for the poor. But we do have incentives for people to opt out of public schools and hospitals. In fact we all benefit when we share our roads with the owners of luxury vehicles: we can be assured that a pothole will be fixed rapidly when it has damaged the suspension of a Mercedes Maybach. (The real problem arises when the ultra-rich abandon their cars for private helicopters.)
The other impediment to a reasoned public debate on means-testing arises when it is used as a plank in the “small government” campaign, with the assertion that any saving through means testing should be directed to “budget repair” (even though it isn’t broken) and to tax cuts (even though our taxes are about the lowest in the “developed” world).
Our needs, however, are to provide more resources to an impoverished and struggling public sector, particularly at a state level.
Tax the rich
The case for wealth taxes has never been stronger.
If the market were working well, if our economy were truly competitive, there wouldn’t be any billionaires, explains Richard Denniss of the Australia Institute.
There must be something really wrong with our economy, because according to this year’s Financial Review Rich list, there are now 178 Australians with net assets of $1.0 billion or more. That’s up from 153 last year, even though we’re supposed be burdened by a “cost of living crisis”.
Richard Denniss made that point at a conference of economists, drawing on the basic and enduring theory of market economics, as described by Adam Smith and as taught in every microeconomics class. Everyone in his audience would have known the theory: in a competitive market high profits are transient, sustained only until competitors enter the market. If an entrepreneur or a business can sustain a profit long enough to accumulate a massive fortune, some part of the market model has failed.
Maybe there has been monopolization, not only in the textbook form of potential competitors being crowded out, but also in the form of privileges granted by the government – allocation of economic “rent” in economists’ terms. Monopolization results in lost opportunities for beneficial transactions– “deadweight” losses – and in the dulling of incentives for product or process innovation.
Maybe fortunes have arisen not from effort and risk-taking, but through sitting on idle assets in short supply: it’s revealing to see how many Australians on the Rich List attribute their fortunes to “property”.
Denniss’ points are in a session of The Economy Stupid, recorded live at a conference at the University of Canberra: Why not tax wealth, and why not start with billionaires?. The discussion covers most of the contested ideas about wealth taxes.
The usual arguments against wealth taxes are discussed and dismissed. Wealth taxes are not unprecedented: Australia had inheritance taxes until 1979; the pension assets test already acts as a de-facto wealth tax; and governments assess rates and land taxes on the basis of asset valuation. As for the point that wealth taxes cause investors to leave the country, Denniss asks how much iron ore Gina Rinehart would take with her if she decamped.
The arguments for wealth taxes are strong. They rest on the usual economic arguments against monopolization and lazy capital. They rest on the fiscal argument that as we find it harder to wring public revenue out of income and consumption taxes, we should turn to wealth: what we miss in income tax evasion and avoidance we may be able to pick up in wealth taxes. And they rest on the general arguments about progressivity and fairness: we have been much more conscious of inequities in income than of inequities in wealth, even though wealth disparities are growing very much faster than income disparities, and they tend to be more enduring – often intergenerational.
Those are all well-established arguments. In a post on the ABC website, Gareth Hutchens takes another step, reminding us how the explosion of the ultra-wealthy risks democracy. Drawing on the work of French economist Gabriel Zuchman, he describes the explosion of billionaire wealth in the United States and more generally in the world.
We have probably read about the Gilded Age of the late 19 th century, and the excesses of the roaring 20s, but as Hutchens demonstrates in a graphic from Zuchman’s work what is happening today is of a different order of magnitude, exemplified by Elon Musk’s $US1 trillion fortune. (Zuchman’s most recent book is We need to tax billionaires.)
Here in Australia we observe the political power of billionaires, most noticeably Gina Rinehart’s influence on One Nation, and Clive Palmer’s $50 million spending on his own party. Less visible are donations to hard right organizations, such as Advance.
These are problematic enough, but they are within the general framework of democratic politics, and some of their worst outcomes can be ameliorated through legislated funding reforms.
The financial power of the ultra-wealthy is such that they can bypass normal political processes, disregarding established rules and conventions, as is happening in the US. Marx wrote about the capitalist class, but if he were to observe today’s America (or today’s Russia) he would be looking at groups too small and tightly interconnected with one another and with those in executive government to be called a “class”. It’s something pre-capitalist, and unprecedented in the last two centuries.
Our modest policy reaction to artificial intelligence
The government’s policies on artificial intelligence are modest, but are about as far as they can go for now.
It was 1968, at the University of Adelaide school of electrical engineering. On Friday afternoons final year students and some of the staff would gather at a nearby pub, where discussion would turn to speculation on future developments in electronics and communication engineering.
We got much of it right, not because we were particularly clever, but because we could extrapolate from what we were doing in the laboratory, and from what we were reading in journals and magazines. The personal computer was many years off, but we could see it coming, and the more imaginative of us could envisage applications such as video communications between computers, navigation, and instant financial transactions.
But if someone had talked about social media, cyber-security, working from home, social isolation, addiction to computer games and other developments we would have asked him to share whatever recreational drug he was on. (The school was 100 percent male in 1968.)
So it is with technological breakthroughs, going back to the steam engine and possibly earlier. As a technology spreads we first use it to improve the way we have always done things. It’s the familiar story of rapid productivity improvement and technological disruption. The spinning jenny made for much cheaper textiles but it put weavers out of work, electricity allowed more streets to be lit up, but it put gas lamp lighters out of work. Understandably such developments are associated with a mixture of enthusiasm and apprehension.
That path is predictable, even by undergraduates chatting in a pub. But the consequential organizational, social and political changes are anyone’s guess.
So it is with artificial intelligence. On the timeline we’re somewhere around where computing and communications were in 1968, although for AI the path of technological development is very much faster. So far policymakers are concerned with those first round developments, and that is about as far as they can go for now.
In this context the Commonwealth has produced a well-researched document AI and employment in Australia, predicting that AI will do to routine cognitive activities what mechanization did to routine manual activities 100 years earlier. Least exposed to disruption will be those whose work requires human interaction (child carers, nurses) or physical manipulations (electricians, fork-lift drivers). Most exposed will be those in what Robert Reich called the “symbolic” economy (accountants, advertising professionals).
Unlike other waves of technological change, AI is likely to be more disruptive of university graduates than of people with trade qualifications. In the “most exposed” category are 44 percent of university graduates, but only 23 percent of people with VET qualifications. While earlier disruptions brought workers on to the streets, this one will probably result in a flood of submissions to Parliamentary and Productivity Commission inquiries – many written with the help of AI.
The Prime Minister has outlined the government’s initial response in a speech AI in Australia’s interests. It’s an upbeat approach, stressing our strong position to attract investment in the hardware of AI. We have land, sunlight, universities, stable government – almost everything an investor needs. (Water for data centres is a bit of a problem.) With those assets “we can set the terms, we can determine AI’s social licence”.
A condition of that licence will be attention to the interests of those in creative activities:
Australian writers, musicians, artists and journalists must retain ownership and control of their work. Our laws will spell that out, plain as day. An artist’s creative endeavour is their work and their property. No company should use Australian books, music, art or news to build or train AI without the artist’s control. That includes the artist’s control of the price and value of their work. Anything less, is theft.
It’s what we might call an established Labor approach to industry policy: reliance on the private sector, but with conditions, including concern for Australian sovereignty, and an assurance that there will be meaningful and dignified employment. In acknowledging the need for responsive regulation this is far from the laissez faire approach advocated by the Liberal Party.
Writing in Inside Story – Trust, but verify: Labor’s vision for AI – Julian Thomas of RMIT’s Centre of Excellence for Automated Decision-Making and Society describes the government’s approach:
… the creation of good jobs, not their destruction, is central to the prime minister’s vision of AI in the national interest; his conviction that work must remain central to human dignity and agency reflects a deep conviction, and one that remains institutionalised in the ALP.
Those are the principles; realization will be more difficult.
Didn’t you know that higher interest rates result in inflation?
The Reserve Bank ticks us off for our heretical beliefs on interest rates and inflation.
Nine thousand Australians have been subject to a NAPLAN-type test conducted by the Reserve Bank. While we generally get a “pass” grade on our understanding of monetary policy and of the RBA’s functions, on one critical question we fail, according to the Bank’s examiners:
Many of us believe higher interest rates cause inflation!
The source of this shocking revelation is an article in the Reserve Bank Bulletin –- Listening to Australians: A New RBA Survey of the Community – described by its authors as a survey of people’s economic understanding. (In reality it is about monetary policy and inflation – there is a lot more to economics than is covered in the survey.) The link above includes a 6-minute videoclip by Peter Rickards of the RBA, and the ABC’s Stephanie Chalmers has an article: Most Australians don't understand how interest rates affect inflation, RBA survey finds.
The survey reveals that inflation is Australians’ main economic concern – of much more concern than housing, interest rates, employment, government spending and climate change, particularly among those with lower incomes. That’s understandable, because we all experience inflation when we go to a supermarket or a servo, while at any one point in time we are less likely to be buying a house or looking for a job.
But what satanic heretical thinking has led us to believe that higher interest rates cause inflation?
Two possibilities.
One is a standard conceptual bias. We saw the RBA pushing up interest rates over 2022 and 2023, and inflation (as indicated by the CPI) didn’t fall: in fact it kept rising over 2022. The interest rate rises and the price of meat and gasoline rises. Of course it’s a cause and effect!
Eminent economists with qualifications from Oxford, the University of Sydney and the University of Melbourne, such as Angus Taylor, have encouraged us to think that way. A Labor government is elected, real wages fall, therefore it’s Labor’s fault. The share of renewable energy in the grid rises, electricity prices rise, the relationship is obvious. QED.
Exploitation of the post hoc ergo propter hoc fallacy is the oldest, and most over-used weapon in the political scoundrel’s armoury. Its role in blocking economic reform is significant, because in the short term most economic reform involves some degree of pain before benefits are realized.
The other possibility is an observation that many businesses, particularly small businesses, react to cost increases simply by raising prices, without considering ways to improve productivity. “Sorry, we’ve lifted the price of coffee because the landlord has pushed up the rent because of the rise in interest rates”.
It’s a symptom of an economy too dependent on weakly capitalized small businesses carrying too much debt, and on big businesses that don’t have to worry too much about competition.