Living with the consequences

John Howard triumphed on Telstra, and we?ll all have to put up with the results, writes Nicholas Gruen WHEN I think about John Howard?s latest triumph on Telstra I think of Oscar Wilde?s comment, ?When the gods wish to punish us they answer our prayers?. But Howard probably won?t wear the punishment. We will. The completion of the Telstra privatisation follows an all too familiar pattern. First Howard commits to an iconic reform. Then, as the political shenanigans escalate the media focus turns inevitably away from the quality of the reform and towards race-calling its political success or failure. It?s sad, but altogether fitting, because usually the policy has been adopted as a political symbol, without much care about its quality. Remember the GST. The commitment came, mysteriously enough, shortly after Howard ? assailed on all sides for lacking ?vision? ? had emerged from a short hospital stay. It had the support of most of the economics profession, who politely applauded Howard?s new found economic vision (while his shocked advisors wondered aloud what the hospital had put in his food and wondered if the vision was really an hallucination). But as attractive as it seemed in principle, the political capital the GST required could have been spent on lots more important tax reforms. For the amount of political capital Howard spent on GST we could have got far more economic and social benefit from more imaginative reforms, like taxes on inheritance, pollution and traffic congestion on our roads (raising revenue which could be returned to us as lower taxes elsewhere). And when it comes to cutting income tax, the highest effective marginal rates aren?t for high income earners, but for those in ?poverty traps?, who lose welfare benefits just as they start paying tax on any wages if they get work. But as its degree of difficulty escalated, the tax package got worse. As exemptions were negotiated the GST grew in complexity ? compromising one of its two big selling points. And the lavish personal tax cuts necessary to make the package electorally palatable removed the prospect that alleviating poverty traps would be a major part of the package. It was time to walk away. But that didn?t fit the political script. Other details of the package were cobbled together at the end of the process ? like the halving of capital gains tax which drove the property boom from which we?ve so far been extracting ourselves with our Reserve Bank?s now usual mix of skill and luck. The so-called ?free trade agreement? with the US followed a similar pattern. Negotiations were initiated for essentially political reasons. Many independent experts advised against the deal on principle, fearing it would compromise more important trade objectives elsewhere. I?m not sure they were right. But things got much worse. The Americans made their usual outrageous demands of free trading partners on intellectual property. But with the Bush administration facing election, they remained sublimely intransigent on the trade concessions they?d offer us. Once committed, Howard not only couldn?t walk away but insisted on an agreement in time for the forthcoming federal election. The result? A dud agreement we?ll be saddled with for years, all justified with specially commissioned modelling which, as economics Professor Ross Garnaut commented, didn?t even pass the ?laugh test?. And here we are again ? for the third and last time ? selling the rest of Telstra. Each time the government has handed out yet more compensation to get its iconic privatisation through the Senate ? not just cash but additional regulatory lead in Telstra?s saddle bags. Yet reform is being done in the wrong order. The first step ? much easier before the first lot of Telstra shares were sold ? should always have been breaking Telstra up as they did with AT&T in the United States. The local loop (the copper wire to your house) is a ?natural monopoly? ? being uneconomic for competitors to reproduce. So a separate infrastructure company should own it. Then the Telstra businesses that compete with Optus, AAPT and others to sell services like mobile and long distance telephony could be easily sold. The government could even privatise the profitable parts of the local loop monopoly infrastructure business. Its prices should be regulated, but so long as it didn?t own a downstream telco it wouldn?t play favourites between downstream providers. Not only would this produce a healthier industry structure, it would raise billions more revenue as investors avoided the uncertain losses of the commercially unviable parts of Telstra and the regulatory uncertainty going with them. As the industry economist Professor Joshua Gans put it, ?Get structure right and the rest will follow. Talk about a ?no brainer? in public policy.? Still, the groundwork for Howard?s approach was laid way back before he became prime minister, in 1991. Treasurer Paul Keating wanted to privatise the Overseas Telecommunications Corporation (OTC) to become the core of a new competitor with Telstra with immediate deregulation of the industry. But the new Minister for Transport and Communications persuaded cabinet to let Telstra swallow OTC. And while it digested its meal it was cocooned in a cozy duopoly with Optus for five more years. The minister? Kim Christian Beazley. ? Nicholas Gruen is Visiting Fellow at ANU and Melbourne University and CEO of Lateral Economics and Peach Discount Mortgage Broking. This article first appeared in the Courier Mail. Photo: Andrew Jeffre