As world leaders assembled for an awkward “family photo” at this year’s G20 summit, Vladimir Putin was placed on the far right. This was done, perhaps in part, to keep distance between him and Australian Prime Minister Tony Abbott, who threatened to “shirtfront” rugby tackle the Russian president.
Local newspapers put it comically; Putin has been “exiled to social Siberia.” But behind the photos of shirtless Putin on horseback, and all of the flamboyant posturing surrounding the G20 summit are serious geopolitical and economic issues that affect us all.
Interest-group politics veiled as pro-market reforms
Participating countries in the G20 summit produced a report including a “growth package”, a set of reforms which the OECD and IMF promise will yield, an oddly specific, 2.1% increase in economic growth by 2018.
Many of these reforms are not really about facilitating fair competition. Instead, they create and sustain private monopolies and tax loopholes. Don’t take our word for it, see the report for yourself. Below are the reforms.
“Reducing regulation and the costs of doing business”
In general, it is a good idea to minimize bureaucracy, and remove particular regulations that maintain artificial privileges (e.g. restrictive taxi licenses). The report does a good job of addressing that issue. In many cases, regulation does fall most heavily on small businesses and new entrants, giving an unfair advantage to large existing corporations.
But in the G20 growth package, this “reduction of regulation” includes the following kinds of policies which are not as competitive, fair, or beneficial as they may seem.
a. Privatizing Basic infrastructure
Utilities and basic infrastructure are often natural monopolies, meaning it is not practical to have a competitive market for them. Take water and sanitation for instance. There is only so much space in a city available for pipes, sewers, etc. It’s not feasible to have many competitors all using different pipes and subterranean tunnels. Giving the privilege of providing vital services to private companies cannot be expected to “boost the competitiveness of the economy and the efficient allocation of resources.” (G20, p. 9)
However, it is sure to create very profitable business opportunities at the expense of the public. To continue using the previous example, if a private company is given the monopoly to provide all of the water for a city, they will charge very high prices. If there is no other way to get water, than to pay the water company, people will pay whatever it costs; nobody can survive without water.
Sure, people would spend more money (increasing GDP) if they were forced to pay ever more in water costs. However, it wouldn’t necessarily mean any more real wealth had been created, or that people’s lives had been improved; it’s quite the opposite actually. Yet, the report implies that everything will be peaches and cream if we focus on maximizing this narrow metric of economic success.
“Observed productivity and price changes in key infrastructure sectors in the 1990s … are estimated to have permanently increased Australia’s GDP by 2.5 per cent.” (G20 p. 5)
b. Reducing Pollution Fines
“The Government has also removed impediments to investment by repealing the mining and carbon taxes. The repeal of the carbon tax alone is expected to reduce annual compliance costs by $85.3 million. Both these reforms will directly reduce compliance costs and will contribute to a more dynamic economy.” (G20, p. 9)
The claim that such taxes would “contribute to a more dynamic economy” is dubious. Instead, it would likely just increase windfall gains for big polluters. Reducing the cost of polluting reduces a company’s incentive to not harm the environment. In other words, it will likely greatly increase pollution. If you want a more dynamic economy and less pollution, simply stop taxing regular people for working and make up for the difference by taxing pollution more.
c. Deregulation of university fees
In our current education systems, the value of a university degree is more in the privileges it grants than the actual quality of the tuition. The biggest personal capital one gains from university are the personal relations and the pre-selection premium to one’s professional status – both of which involve strong network effects. Having gone to Harvard does give one access to certain labour markets regardless of what they happened to learn while studying.
Allowing education fees to soar in high-status universities is likely to cause further polarization of privilege, which reduces social mobility and structural adaptability. The one part of the growth package that actually seems to increase “equality of opportunity” (G20, p. 1) is that the government will be “supporting over 80,000 additional students in 2018 at an estimated cost of $820 million over 2014-15 to 2017-18.” (G20, p. 8) But these suggested public education subsidies and the resulting “price signals” (G20, p. 8) are likely to result in further windfall gains to elite-status universities – instead of encouraging improvements in education quality, as the growth plan insists it would. In other words, universities would simply increase tuition without improving education.
In a market where educational services were separated from assessing professional competence, such competition between the education service providers would be more likely to “improv[e] the quality of tuition”. (G20, p. 8) In the current academic degree paradigm, where status matters and is dependent strongly on the body of students applying to each university, competition is unlikely to work efficiently for the benefit of all students.
d. Tax exemptions and deferment for options used in employee compensation (G20, p. 10)
This looks like nothing but yet another tax avoidance loophole for a few highly paid classes of employees (such as top management). Most employees are not compensated with options in any case, and there is no sensible reason to subsidize compensation in this form over regular wages.
“New investment and infrastructure”
Under current low interest rates, governments are likely to borrow in order to build expensive infrastructure projects. This results in large increases in surrounding land values. If a train station is built for instance, those that own land nearby will see their land’s value increase dramatically, allowing them to charge buyers and renters more. This is an unearned or windfall gain as economists call it.
If however, the value of land is taxed, and owners pay more for owning the best land near the new infrastructure, everyone will benefit equally. Infrastructure can even be constructed using borrowed money that is then paid back with the increased revenue coming from rises in land value. In many cases, it would actually be profitable for the public sector, creating extra revenue for other purposes: increasing access to education and medical care, lowering harmful taxes, and even providing a citizen’s salary (a.k.a. basic income).
New infrastructure is great, but not if it is used as a means of raiding the public coffer.
This is part 1 of our coverage of the G20 growth package. Stay tuned for more.