`Government inflation' running high as regulations choke supply and push up costs

ADAM CREIGHTON
January 24, 2014
The Australian
IT IS a sad paradox of public debate that proponents of ever larger government and more regulation still have such a big constituency given the ample logic and empirical evidence that shows such policies harm people.
The latest lay down misere is found in the otherwise pedestrian consumer price index, which every three months tracks the prices of 87 types of commonly purchased goods and services from cars, biscuits and rent to pharmaceuticals, school fees and bus fares. The CPI is important, affecting the rate of growth of government payments, interest rate levels, and allowing a calculation of real wages over time.
The careful statisticians at the Australian Bureau of Statistics would never be so cheeky, but Adam Boyton, chief economist at Deutsche Bank in Sydney, did truth a service this week when he separated out those that are “largely the result of government policies, fees and charges, taxes and/or regulated prices”, about one-quarter of the total. He found “government inflation” is running at 5.7 per cent a year, more than three times the pace of all the other goods and services which are provided by private enterprise.
In 2013, childcare costs rose 8 per cent, education, hospital and medical services all rose 5.6 per cent, while clothing and footwear and household appliances fell despite a weaker dollar acting to push up their cost, and groceries and restaurant meals rose less than 2 per cent. This is a disaster for our living standards, especially as wage growth slows in the wake of the resource boom.
The gap has widened significantly since 2008 as gold-plating by inefficient government utilities accelerated and the Rudd government slugged carbon, alcohol and tobacco with higher rates of taxation. But from the introduction of the GST in the early 2000s to the election of the Rudd government — during which time the dollar oscillated wildly — government inflation was still running about double that of the private sector. “I’d call that period just the normal state of affairs,” Boyton told The Australian.
The current state of affairs arises from regulations that choke supply and push up costs. For instance, childcare costs are surging because the government insists on high teacher-to-child ratios — assuming parents are incapable of making a choice themselves — and on mindless qualifications for staff that, similarly, some parents might not care for.
Other regulations make it more profitable for private competitors to lobby clueless government officials to mandate generous increases in regulated prices rather than genuinely compete with each other. Private health insurance premiums, which, ridiculously, are still regulated by the federal Health Minister, are set to rise 6.2 per cent this year — as they do regularly.
Costs can be even more onerous when government actually provides services itself. In this case, unions tend to capture the workforce as governments are more susceptible to outrageous pay claims.
This means schools are run largely by and in the interests of teachers (ever falling class sizes cost a fortune despite little evidence it works). Hospitals are run largely in the interests of doctors and nurses, not patients. Health and education, two of the fastest-growing sectors of the economy, are little oases of Soviet-style planning replete with waiting lists and inefficiencies.
In both cases state and federal governments could privatise supply, but still subsidise demand by giving money direct to households. Of course, fear of widespread strikes (for reasons just outlined) would stop any such reform agenda.
Aggregate price indices like the CPI are interesting and useful, but come with abundant problems. In practice, they are contingent on what is included, how they are calculated — in the early 2000s Gordon Brown once slashed Britain’s rate of “inflation” by switching to a measure that excluded some housing costs.
And in theory the growing scope of government is undermining the entire free-market price system, which left alone is akin to a magnificent dashboard with green flashing lights that signals to business and individuals which goods and services to supply more of (prices are rising) and red lights that signal to produce less (prices are falling).
Such a dashboard costs nothing and requires no government intervention; and only a few people need to see a flashing light (observe a transaction) for the whole structure of the economy to begin to change in a way that makes people better off and ensures scarce resources are used efficiently as possible.
“If it were the result of deliberate human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind” wrote Frederic Hayek in his profound 1945 essay on the limits of knowledge.
Technological changes since then mean price changes, includes changing wage rates, are broadcast even more cheaply and quickly, making the whole system even more efficient.