The treasurer has been batching at the Lodge with the prime minister during the current COVID lockdown and one wonders what they talk about over dinner or the odd game of pool.
But with the government camp-in due to end on Thursday, I want to offer some unsolicited advice to Josh Frydenberg: use this unique opportunity to fill a couple of gaps in Scott Morrison’s education.
Now this is no easy task. The PM is an educated man with a formidable arsenal of skills. Indeed, he holds a degree in economic geography from one of Australia’s great universities. But as an advocate of lifelong learning I believe there’s always room for improvement.
Perhaps the most glaring gap in Morrison’s intellectual repertoire is a proper appreciation of what economists call “externalities” — actions that positively or negatively affect others which are not mediated (or “internalised”) by the market’s price mechanism. They are “external” to it.
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An example: when I bid against you for a residential property that’s bad for you. Either I win the auction and you don’t get the house you wanted, or you win but have to pay a higher price. But the rules of the auction balance the harm I cause you with the good I provide to the seller.
On the other hand, when I drive a car which emits carbon dioxide that has negative effects on others because it contributes to climate change. It’s a negative externality.
At this point I anticipate Morrison saying something along the lines of: “Now hang on, Josh. I didn’t always get driven around in a Comcar. I remember how this works. My friends, my voters, my people — they buy petrol in a market. So it’s just like your property auction example.”
“Very good, Scott,” I would say. “But …”
When folks buy petrol in Australia they pay the market price, which doesn’t factor in the climate-change externality. Petrol excise arguably does factor in other externalities from driving, like congestion and the impact on roads and traffic fatalities. Now we can discuss whether the petrol excise is set at the right level to balance the good of driving (convenience, freedom, even fun) with the harms of congestion and traffic accidents. Maybe it’s too high or too low. But it’s in the neighbourhood of right.
“So you’re right, Scott. The way to balance the good side and bad side of driving is through a carbon tax. That’s why a bunch of us in the Liberal Party are for that.”
Now any good teacher anticipates the next question, which might go like this: “Wait, wait, Josh. I’m for technology not taxes. That’s a great line by the way. It’s so good. It’s the best. Incredible. Best line ever. Anyway, can’t we invent our way out of this climate change thing? I thought Angus was meant to be on that.”
And of course, he’s right. Kinda. We could and should do some of that as well. For instance, government could provide further R&D subsidies for green energy technology. But — and as Frydenberg knows all too well — one must always be careful of industry policy and “government winner picking”. That almost never works.
All good economics lessons have a teaser for the next class. So at this point I would congratulate the PM on anticipating where we’re going in the course: “You’re way ahead of me here. You’ve already figured out that technology and taxes are complements not substitutes. Doing more of one makes doing more of the other more attractive. They go together. Like a beer and a pie at a Sharkies game. Or a high-vis vest and a camera.” (Teaching note: always try to make examples relatable and apply to major life decisions for the students.)
If I were in a cheeky mood — and the treasurer does have an excellent sense of humour — I would remind the PM that this whole externalities thing is a pretty useful framework. It applies to many other things — such as COVID.
When people get vaccinated they help themselves, but they also help others by generating immunity in the community. This time it’s a positive externality. So instead of taxing it we should subsidise vaccinations. We can do that in lots of ways. We can lower the barriers to getting vaccinated, and make vaccination a passport to social interactions like mass gatherings and visits to indoor venues without having to take a rapid antigen test each time.
Any good instructor finishes with a big-picture, deep, philosophical observation. The perfect one here comes courtesy of Nobel-prize-winning economist Bengt Holmstrom who, when teaching exactly this material, likes to observe: “Government and businesses fundamentally do the same thing. They both internalise externalities.”
Richard Holden is professor of economics at UNSW business school and president-elect of the Academy of the Social Sciences in Australia. Twitter: @profholden