Should businesses get compensation when policy changes?

Do businesses really think policy never changes?

The way they act when a change is proposed makes you think they never realised democracies worked like that.

House_of_Representatives,_Parliament_House,_Canberra

The mining industry would have us believe a mining tax on surging profits was impossible to anticipate.

The car lease industry feign they never dreamed the law might remove their favourable tax treatment.

The steel makers pretend charging for carbon was completely inconceivable.

The tunnel-makers insist they couldn’t foresee a world in which their tunnel wasn’t wanted.

Businesses who stand to lose from policy changes kick up a fuss about how they’ve been blind-sided.  All too often we are taken in by their sob stories. And we retreat from making policy changes we want.

Is this pretending part of the cut and thrust of political debate? It surely is. And yes, we can still make change over the sounds of protest when we really, really need to. For example, the government reintroducing fuel excise levy indexation.

Furthermore, change is costly. If we changed the rules every five minutes, that would make life hard for everyone. There has to be a balance.

But the pace of change in our society could be too slow if we take every business complaint at face value. Many business models depend on the status quo. This graph is a mock-up of why they might defend that status quo, and why that might be less than ideal for society at large.

costs of change
The horizontal axis shows rate of change. Think of that as bills passing the Senate. The vertical axis shows the payoff.

This graph shows a world in which policy change happens too slowly if we let businesses with an investment in the status quo drive policy.

So how do we bridge this gap? We want businesses to invest based on the current laws. But we also want the freedom to change those laws as soon as they are no longer useful.

I think there is a case for policy change insurance. That way if a law is changed that puts a business in the red, they can be compensated, but the taxpayer doesn’t have to be on the hook for it. If they don’t buy policy change insurance? Well they obviously weren’t too worried about that particular law!

Policy change insurance would be cheap to come by for laws that are rock solid. $0.01 a year would buy insurance against the government appropriating your land.

But if your business depends on something else, like funding for dodgy vocational education courses, then your insurance will be much more expensive.

tax reform constipation
An insurance company’s worst nightmare?

Prices in the insurance market would signal to firms what laws are more likely to change. Insuring against a one percent change in tax rates would be expensive. Insuring against a 20 per cent change would be cheaper.

That price signal should mean much less complaining when dubious programs are axed, and also signal to government which laws business honestly thought were steady. It makes both sides more honest.

The existence of this market should allow society to change its laws more often, if it wanted. In some ways I can’t believe it doesn’t already exist.  You can buy Sovereign Risk insurance if you operate in especially heinous jurisdictions, but there seems to be nothing for Australia.

(Perhaps it doesn’t exist because there’s no actual demand? That’d suggest we put even less stock in the bleating of ACCI et al.)

Further savings would come to businesses because they could sack their lobbyists. Of course, the ultimate lobbyists in this new model would be the insurers. They would become the most conservative institutions in history. Every law change would rip money straight from their pockets Strict laws against political donations from insurers would have to be enacted. Laws would also have to ban former MPs from ever working for insurers, etc.

Does this model make sense? Are there any reasons why policy change insurance wouldn’t work? Or reasons why it doesn’t exist already? Is it just simpler for government to pay compensation instead? Is my basic thesis that the pace of change is too low completely wrong? Please share your thoughts below!

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thomasthethinkengine

Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

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