Michael Keating. Deregulation, or improved regulation?

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1 November 2020.

Too often, the public debate is about whether regulation should be decreased. Regulation typically exists for a reason, however, and the issue should be how to regulate effectively.

The Prime Minister has embraced deregulation as a prominent feature of his reform agenda. But what does that mean? For businesses, the catchcry of deregulation is welcomed, as they see it as removing controls over them. On the other hand, too often, those people who have misgivings about a market economy react negatively to any suggestion of regulatory reform.

Instead, I contend we need to judge regulations by what they are intended to achieve, then how well they are working, and the costs and benefits to various legitimate interests. To illustrate this conclusion, first I consider the regulatory reforms introduced by the Hawke-Keating Governments, and second the possible reforms Morrison has indicated his Government is thinking about.

Regulatory reform in the Hawke-Keating era

I will argue that the key regulatory reforms of the 1980s did lead to improvements in the economy that were of widespread advantage to living standards and general welfare. This is probably a majority view, but there are some critics who believe that these reforms were a key element of a “neo-liberal” agenda which unreasonably preferenced individualistic market values and economic growth to the detriment of other values.

In fact, the three most important regulatory reforms introduced by the Hawke/Keating Governments were:

  • Deregulating the exchange rate and floating the Australian dollar.
  • Enterprise bargaining to improve productivity and the flexibility of the labour market.
  • Removal of industry protection.

First, floating the dollar, along with a more flexible labour market, are the principal reason why Australia was able to go for nearly thirty years without a recession. Avoiding the costs of a recession in terms of unemployment and loss of incomes is an enormous plus.

Maintaining full employment in Australia has always been more difficult because of our reliance on the export of primary commodities, and this in turn has made Australia especially vulnerable to external shocks. With a fixed exchange rate, there was no way of avoiding these shocks, which then flowed through to the domestic economy. But now the floating exchange rate acts as a shock absorber and mitigates the impact on the Australian economy from fluctuations in overseas demand.

ETUC CES. flickr cc. 

Equally, the fact that Australia’s labour market is now more flexible with enterprise bargaining, means that relative wage rates can more readily vary to encourage the redeployment of labour in response to shifts in industry demand. We continue to have a safety net, and award wages provide an alternative benchmark, if enterprise negotiations seem likely to fail. But the new flexibility in wage determination meant that for the first time, in the last mining boom Australia managed to achieve the necessary redeployment of labour to the new jobs, without setting off a wage explosion.

Second, the removal of protection for manufacturing industry meant that other non-protected industries were no longer disadvantaged competitively, and consumers gained from lower prices as well. The fear, however, was that lower tariffs would come at too high a cost to manufacturing itself and its workers. But in fact the volume of manufacturing production continued to increase after protection was removed, and it only peaked in 2007-08. This, of course, was almost two decades after protection was withdrawn, and the fall in manufacturing production after 2007-08, initially reflected the global financial crisis and then the increase in the real exchange rate associated with the subsequent mining boom.

Nor can it be shown that these regulatory reforms led to any increase in inequality. Instead, the increase in inequality over this period was largely driven by technological progress, which hollowed out middle-level jobs. Furthermore, the Hawke-Keating Government’s fiscal policies responded to largely minimise that negative impact from new technologies on the distribution of income. (see my book, Fair Share, co-authored with Stephen Bell, and my article, “Why Blame Neo-Liberal Economics, poste in Pearls & Irritations, 17 July, 2017).

Nevertheless, I also agree that regulatory reform in the Hawke/Keating era was not perfect, and some mistakes were made. The critical issue is whether these mistakes were of sufficient gravity that the regulatory reform should not have proceeded.

Two examples of mistakes in regulatory reform in the 1980s and 1990s of which I have some familiarity are:

  • Banking deregulation.
  • The provision of vocational education and training (VET).

In both cases the key mistake was to put too much trust in markets to preserve the quality of service provision. Subsequent experience suggests that there is not always sufficient consumer sovereignty and/or competition cannot be relied upon to ensure that business always then acts in the customers’ interests.

Thus a response to banking deregulation was that some banks took excessive risks in a more competitive less regulated market to increase their share of that market. Consequently, some banks went broke when their borrowers defaulted during the 1991 recession, and some other banks nearly did.  However, the authorities responded by re-tightening prudential regulation, including insisting upon greater bank capitalisation, and this is a principal reason why Australia later avoided the financial collapses experienced in some other countries during the GFC.

Similarly, initially the regulatory framework for VET in most States was very poor when VET was first opened up to private providers. However, the experience in South Australia, which did insist that only the best private performers would be eligible for public subsidies was that their training outcomes improved, and the unit cost came down. So again, it is the quality of the regulation that matters, rather than whether or not to regulate.

In sum, I suggest that both these two cases of banking deregulation and the private provision of VET services illustrate that regulatory reform can produce net benefits, but the new regulatory regime needs to be carefully designed, and reform does not mean little or no regulation.

The Morrison regulatory reform agenda

To date, the Morrison Government’s regulatory reform agenda has highlighted:

  • Industrial relations reform – the hardy perennial of conservative governments.
  • Skills and training.
  • Financial deregulation.
  • Simplifying environmental regulation.

Industrial Relations Reform is being pursued using five working groups comprised of employer and union representatives, as well as some individual experts, and covering:

  • Award simplification.
  • Enterprise agreement making.
  • Casuals and fixed term employees.
  • Compliance and enforcement.
  • Greenfields agreements.

From the limited public information, it would appear that these working groups are only intended to fine tune the regulatory system for industrial relations, and no revolutionary changes are contemplated. Even so it appears that none of the working groups have been able to achieve agreement, and the government may have to make its own decisions on any changes if it wants to proceed.

I also think the evidence shows that the Australian labour market is now very flexible and therefore not much further change is needed. I acknowledge that the changes introduced under JobKeeper to allow the employer to redeploy the labour within a firm were useful in that context, but how much difference they would make and whether they are necessary in a buoyant economy is less certain.

To my mind, the starting point in any consideration of changes to the industrial relations regulatory system should be a focus on what is necessary to protect the wages and job security of workers, both of which have fallen in recent years. This has damaged aggregate demand and is the principal reason for the economic stagnation experienced since around 2013.

If employers were prepared to concede how best to improve these protections, then it might be possible to make more progress on the other issues that could further improve labour market flexibility.

Skills and Training: Much of the Morrison Government’s agenda for skills and training reform relates to changes in the funding arrangements, but the agenda also includes review of the arrangements for the regulation of the quality of training and the number of qualifications and competencies approved.

This agenda is fine as far as it goes, but it misses the two most important issues. These are (i) the nature of skills needed in the future and how these are taught, and (ii) workforce development and the use of skills in the workplace (see my article posted in Pearls & Irritations, posted 2 July, 2020 for more detail).

Financial regulation reform: Only a year ago the Hayne Royal Commission found that financial regulation in Australia was sound. The main criticism was that it needed to be better enforced. And we have seen what can go wrong when financial regulation is inadequate – in the 1991 recession in Australia’s case, and in the GFC elsewhere.

Now however the Morrison Government wants to relax the financial regulation of bank lending to make it easier for customers to obtain a loan in future. No evidence has been produced that such a change is needed. Instead the risk is that mortgage defaults and bankruptcies will increase in future if loans are too readily available without sufficient regard for the credit risk.

Indeed, it is ironical that the Government wants to avoid propping up zombie businesses through the extension of JobKeeper, while it is encouraging their creation through poor lending practices.

Environmental regulation: The Government proposes to simplify and reduce the time taken for businesses to achieve environmental approval by handing the responsibility over to the States. This could work, but there is a need for care, and the Government has ignored the major concern that in many instances the environmental regulations have not been properly enforced.

It is therefore worrying that the Government apparently does not intend to act on the recommendation from its own review to establish an authority to better enforce environmental regulation in future. This would seem to be even more important if approval of projects under those regulations is to become the responsibility of the States.

Conclusion

In present circumstances it is not surprising that many people are suspicious of calls for regulatory reform that imply more deregulation. Too often these calls for deregulation come from vested interests and ignore what the purpose of the regulation is, and what is necessary to ensure that this purpose can continue to be protected.

Instead of just removing the regulations we need to review whether there are changes that could be made that would achieve the original purpose of the regulation more effectively.

Michael Keating is a former Secretary of the Departments of Prime Minister & Cabinet, Finance & Employment, and Industrial Relations. He is presently a visiting fellow at the Australian National University. 

Republished from John Menadue’s Pearls & Irritations 5 October 2020.

Photo Regulations. mccauleys-corner 2017.


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