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!

China Series Part 5: Is democracy over-rated?

This is the fifth in a five-part series on China. You can see the preceding parts here One, Two, Three, Four.

The achievements of China in the last two decades are incredible.

The share of China’s population living in poverty has fallen from 84 per cent to 13 per cent since 1980.

A nation with an average income of $205 in 1980 now has average income of $6000.

If the world’s aid programs had lifted 400 million people out of poverty, aid policy makers would barely be able to get out of bed for the pile of OBEs, Pulitzers, Nobels, Honorary doctorates, emmys, grammys and groupies littering their house.

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Beacon of hope (retired)

These crucial policy changes in China have come while “leading” democracies have spent billions of dollars on wars of whimsy in the middle east, blown up their financial systems, had great big shouting matches over threats to shoot themselves in the leg (i.e. government shutdowns), and put the greatest policy development efforts into “stopping the boats”.

When governments make policy with the “assistance” of the editor of the Daily Telegraph, the appeal of technocratism is huge.

That’s one reason why Australia’s biggest policy success of recent times has been monetary policy. It is set by an independent body, the RBA.

That’s also why Infrastructure Australia was set up, to try to wrest control of important billion-dollar investments out of the hands of here-today, gone-tomorrow MPs.

Just yesterday I read this story at the Federalist about the death of expertise, by Tom Nichols, a professor of National Security Affairs in the US.

“People in political debates no longer distinguish the phrase “you’re wrong” from the phrase “you’re stupid.” To disagree is to insult. To correct another is to be a hater.”

He cites the Dunning Kruger effect, which Wikipedia describes thus:

“unskilled individuals suffer from illusory superiority, mistakenly rating their ability much higher than is accurate. This bias is attributed to a metacognitive inability of the unskilled to recognize their ineptitude”

Are we too stupid and arrogant to be allowed to manage our own government? They say you get the government you deserve, and when I look at Australian governments at federal and state level, I conclude we must have been very bad indeed.

So. Should we look into benevolent dictatorship? The argument is an easy one to make when you are browsing World Bank statistics.

But one morning in late October, as I was about to pass under the Gate of Heavenly Peace in a cloud of smog, we saw a big bunch of protestors being dragged off to one side by Chinese police and secret police. I’d lived in China in 2003 and never seen this sort of thing before.

Then, minutes later, while we were inside the Forbidden City, a car blew up where we had been standing just before, killing five and sending dozens to hospital.

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That was frightening. The Chinese government blames the East Turkestan Islamic movement, based out in the majority-Uyghur west of China. They seek independence for a sliver of China near Russia. The Chinese goverment’s behaviour out there has been described by Amnesty as “years of attempted erosion of the ethnic identity of the Uighur people of the region by the ruling Han majority.”

You can’t as easily get away with that in a country with a free press and representative democracy.

Perhaps the most enduring image of Tiananmen square, for me, is these fire extinguishers, which are dotted around. When I saw them, I thought “What for? This square is made one-hundred per cent of stone. There is nothing flammable here.”

Image Then I looked around. Realised what the flammable material was. And I started to feel a bit sick.