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Monday, June 24, 2024

How to make Australia richer

Joseph Stiglitz on how to make Australia richer

Nobel laureate economist Joseph Stiglitz discusses the bedrock of a fair economy, balancing freedoms and the role of government.

Richard Denniss Professor Joseph Stiglitz, welcome to Australia. John Maynard Keynes once said “practical men who believe themselves to be quite exempt from any intellectual influence are usually the slaves of some defunct economist”. It’s decades since you and other Nobel prize winners debunked the intellectual underpinnings of neoliberalism. Are Australians slow to change their minds or is this a global problem?

Joseph Stiglitz This is a global problem. Keynes was writing about the United Kingdom and we have the same problem in the United States. One example: Milton Friedman argued in 1970 that economic efficiency required firms to maximise their shareholder value, and that’s all they should do. He believed it would be almost criminal if they did anything else, and if a chief executive worried about the environment beyond what was required by the law, he should be removed. At the time that he made these powerful rhetorical claims, I was doing research with colleagues asking that question from an analytical point of view and publishing the results in good academic journals, and we showed that he was wrong.

History shows that just because an idea is wrong doesn’t mean it won’t overwhelm other alternatives, and we need to ask why.  What Keynes should have talked about is the role of powerful interests. And when there’s a conjunction of interests and ideas, you really need to watch out. For instance, the idea that unregulated free markets would lead to economic efficiency was widely supported by the financial industry. That led to deregulation. But when it came to the 2008 [global financial] crisis, the same individuals who claimed that government shouldn’t get involved in markets came to government and asked for hundreds of billions of dollars. That exposed a kind of hypocrisy. The idea of small government was useful initially, and powerfully advocated, until that idea wasn’t useful to the powerful interests any more.

RD Speaking of power, the gas industry in Australia is very profitable and very powerful, and adamant we shouldn’t impose a super-profits tax on them. What’s the worst thing that could happen if we did?

JS Jokingly, the answer would be you have a better environment and incomes would go up. Most likely, a windfall profits tax wouldn’t have any effect on investment. It doesn’t reduce the viability of a gas project. You don’t need a 1000 per cent return on your investment to keep operating. So a super-profits tax would not lead to less investment in gas, that’s the almost certain outcome. It would transfer money from the foreign owners of the gas to Australians, making Australia richer.

We need a democratic debate. The problem is, as we move away from ‘one person, one vote’ to ‘one dollar, one vote’, these debates get a lot harder to have.

RD  Sounds like hell!

JS Exactly. For Australians it’d be a big win. Of course, the gas companies say it would reduce investment, but if that were true – which it almost surely is not – in terms of achieving carbon neutrality by 2050, that’s good too. Making Australia less dependent on fossil fuels earlier is a good thing for two reasons. One, you’re going to have to reorient your economy to a green new world and the earlier you do it, the better off you are. The second thing is most economists think Australia probably suffers from “Dutch disease”, which was identified after the Dutch started extracting gas from the North Sea. That drove up the exchange rate and the more gas they produced, the weaker the Dutch economy became. If Australia has the same disease, reducing production of gas would likely increase the income of Australians.

A windfall profits tax on gas isn’t the only revenue reform idea that would improve the wellbeing of Australians. The big global technology companies and your banks could pay a lot more tax without harming the economy.

And there are opportunities to close the tax loopholes that deliver so much money to those at the top. All over the world, multinationals are, by and large, not paying their fair share of taxes. One of the invidious aspects of globalisation is that it’s opened up a Pandora’s box of ways by which multinationals avoid taxation. It’s particularly objectionable when the multinationals are making their profits by extracting Australia’s resources – resources which really belong to the people of the country – and when the multinationals undermine the viability of domestic firms, as is happening in many countries where the technology giants have been operating. They have shown the same ingenuity in avoiding taxation as they have in developing innovative technologies. That’s why a digital tax is being enacted in so many countries.

There are other taxes which actually improve the overall performance of the economy, correctly measured. Environmental taxes can help reshape the economy in a more environmentally friendly way, and well-designed financial taxes and capital gains taxes can help curb speculation.

And finally, never underestimate the importance of a progressive tax system. It’s the bedrock of a progressive society.

RD  So why don’t governments around the world who claim to worry about budget deficits just collect more tax from industries like gas or coal or big tech? What’s holding them back?

JS That’s very simple. Hard politics. Money. If you look at the question in terms of GDP, employment or any dimension of creating a better society, you would raise these taxes, particularly the windfall profits taxes and company taxes.

A basic precept of economics is that taxes on profits are non-distortionary and that’s where a government should be focusing tax collection. Why would you tax something like labour when you can impose a windfall profits tax? It’s not as if the company or its chief executive did anything that resulted in their mega-profits. Why should they be enriched – and the people of Australia made poorer – simply because Putin decided to invade Ukraine? The simple answer is that the recipients of those profits are very wealthy and, unfortunately, in many democracies our political system is better described as “one dollar, one vote”, than “one person, one vote”.

RD You recently wrote a book called People, Power and Profits: Progressive Capitalism for an Age of Discontent. Do we need to rethink the role of government if we want capitalism to become more progressive?

JS We need to rethink the role of government if we want to have a successful economy. If we don’t do that, not only will we have problems with the economy, we will have problems with our society and our democracy. In the 21st century we talk a lot about the role of innovation in the economy, but innovation is based on research. The internet, mapping DNA and the innovations that saved us during Covid-19 – the mRNA vaccine platform – were all driven by government research. The private sector often does a very good job of bringing these ideas to the market. But the basic research is supported by government.

As we become a more innovation-focused economy we also become an economy that’s more dependent on skills, so we need more public investment in education. And we need not just the hard forms of infrastructure, like roads, but the soft forms, like childcare, which allows parents to go to work. As our economy has evolved, it’s become more and more important for government to provide these basic services.

And as we have become more urbanised, we’ve come into constant contact with others. That means there are what economists call “externalities”, where the actions of one person impact on those around them. When you have externalities, you need regulation. Now, those on the right try to sell such regulations as oppressive, but if you didn’t have stoplights in New York City, you would have gridlock, not freedom. And what is a stoplight? It’s a simple regulation to help us all take our turn.

RD So when we invented the car we had to invent the stoplight, and when we discovered asbestos was dangerous, we banned it. But what about the gig economy and tech platforms? Do we do we need to regulate these innovations?

JS We clearly need to regulate the gig economy. There are actually many dimensions to that kind of regulation, the first of which relates to market power. Market power, including the power to engage in discriminatory pricing, undermines the efficiency of the economy and leads to more inequality, and societal divisions make it difficult for society to function.

The second is, the algorithms at the heart of much of the gig economy can actually lead to discrimination in ways that are very invidious. We’ve worked hard to reduce discrimination in our societies. Discrimination by algorithms is just as bad as discrimination by people.

Then there’s a whole set of other harms associated with mis- and disinformation and the incitement to bad behaviour online. Many countries have rights to free speech, but there’s no right to virality, to rapidly spreading misinformation about, for example, vaccines being dangerous. There are always conflicts between one right and another; one person’s  “freedom” is another person’s “unfreedom”. One person’s right to have a gun impacts another person’s right to live. You can’t call “fire” in a crowded theatre – we took away people’s “right to free speech” because of the dangers to others. We need to keep rebalancing these rights.

RD “Balancing” these things sounds more like a democratic question than an economic one, so what role do economists play in figuring out the way forward?

JS We need a democratic debate. The problem is, as we move away from “one person, one vote” to “one dollar, one vote”, these debates get a lot harder to have. They become especially hard to have in the absence of a robust and diversified media. A few very wealthy people disproportionately controlling the media is a problem for democratic governance in many countries.

We need to separate out the voice of the self-interested from the voice of the rest of our society. They have a right to their voice, but let’s understand that when they say this or that policy will kill the industry, they mean it will hurt their profits and they will be less rich. We need to take these claims with a grain of salt.

The rise of social media means we need to rethink regulation of the media more generally. We need new research and new solutions. We didn’t have social media and the social harms of social media when the old rules were drafted. We need to resist the idea that just educating people is enough. Sometimes we label things as poisonous and sometimes we don’t even let shops put dangerous products on the shelves. We need to always be exploring that boundary about the role and rights of the individual, the role of regulation and the government, and about how to keep our democracies and societies safe. That’s not just a role for economists, but other social scientists as well. Indeed, it’s a question that all citizens need to be thinking about.

Joseph Stiglitz has been touring the country as a guest of The Australia Institute.

This article was first published in the print edition of The Saturday Paper on July 23, 2022 as “Future progressive”.

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