New Australia

Free Market Failures

In recent times many more people are finally realising that unfettered free market economics is not in the public's best interest.

Market Failure # 1: The Environment

Current market systems fail to effectively price exploitation of common resources.

Examples are:

• The Atmosphere: The atmosphere can be used for free dumping of waste products. This has led to the current climate crisis as Carbon Dioxide & Methane can be dumped into the atmosphere for free while alternative energy sources such as solar receive no such free ride.
• International Waters: As well as being used for the dumping of all kinds of waste, resources in the ocean such as fish can be harvested without control. This has led to the gross over-exploitation of fish stocks world wide.

The simplest way to resolve this problem is for governments to shift an agreed level of taxation to the exploitation of these common resources. An example would be governments agreeing to raise a percentage of their tax revenue from a carbon and methane tax. As all nations would have the same tax-target - perhaps 10% of their revenue - this scheme is equitable. (This is the solution recommended by NewAustralia - See our Tax pages.)

Another solution is the 'Cap and Trade' solution. However, the first problem with any global 'Cap and Trade' scheme is to resolve what the 'Cap' is for each nation. China and India would want this to be allocated on a per capita basis but other nations will never accept this. Existing or proposed 'Cap and Trade' schemes are highly complex and distorting due to the large numbers of free permits and exemptions that are inevitably given away to vested interests.

Market Failure # 2: The Current Account Deficit

Leigh Harkness's graph of the relationship between bank credit and the current account deficit (See: Balanced Trade page.)

Australia has run up a huge Current Account Deficit in the belief that only public debt is important and private debt will look after itself.

The huge Current Account Deficit gives rise to a number of problems:

• As most of this debt is denominated in foreign currency, the companies that have borrowed this money and on-lent it in Australian Dollars are vulnerable to adverse currency shifts.
• Most of the money has been used to create asset-price bubbles of no productive value. As the debt is secured by the same assets that are subject to the bubble, lenders are vulnerable to asset price corrections.
• In free market economics if a small to medium sized company makes a mistake it goes bankrupt and competitors take its place. However, if a large company looks like going bankrupt it receives a huge cash injection as it is 'too big to fail'. Thus tax payers have a vital interest in ensuring that large companies like the banks do not borrow and lend money to the point of their own destruction

NewAustralia believes Australia should aim to have balance the Current Account Deficit over the any given 5 to 10 year period. This can be done using an Optimum Exchange Rate system.

Market Failure # 3: Private Debt

Competitive pressure on lenders coupled with the ability for unlimited overseas borrowing has led to risky lending to 'sub-prime' borrowers.

NewAustralia believes Credit Limits is needed to avoid:

• Borrowing up to 100% of the value of the security.
• Excessive borrowing relative to the likely income level of the borrower.

Free market economic theory suggests government intervention in this area is not required as:

• Borrowers and lenders are rational.
• If they are not then either or both of them will go bankrupt and it serves them right.

Recent events show where this logic leads us!

Market Failure # 4: Unemployment

In response to the current down turn many employers are choosing to 'slash and burn' their workforce, allegedly to cut costs. This doesn't make much sense now, and would make less sense if employers had to pay for the unemployment they created.

See the Jobs page for solutions to the unemployment problem.

Government Bonds not PPP's

'Public Private Partnerships' are one of the worst ways of financing government outlays. Their only "benefit" is to shift debt off-balance sheet so that the level of debt is not clear to the electorate. All government borrowing should be via the issue of government bond. Existing PPP projects should be re-financed using bonds. This would yield substantial savings over the life of the debt due to the much lower interest rates of bonds compared to the effective interest rate of PPP's.

In Sourcing

Far too much core government business has been outsourced at great cost. This has primarily been to provide someone else to blame rather than to achieve any measurable public benefit.

Core government enterprise such as provision of public transport, education, health and defence need to be brought 'in house' to save billions of dollars.

In the case of defence this would also substantially improve the self-reliance of the defence forces.

Tighter Financial Regulation

Tight specification of what derivatives are allowable and who can trade in them. Permanent ban on new short-sell contracts. Strict limits on borrowing money to buy financial instruments. Tight control of insurance, especially of financial instruments and loans.

Economic Challenges

There are five major challenges to the world's economic system:

• The Credit Crisis: This has been due to deregulation that has allowed excessive lending with inadequate security. Australian Governments should respond by introducing Credit Limits and an Optimum Exchange Rate system. Taxes on speculative financial transactions such as a tobin tax should be considered.
• Climate Meltdown: If the world chooses to take no effective action to deal with Climate Change then a wide range of adverse effects will begin to impact the world economy. This will commence with the sharp write down of property near sea-level, increasing water & food prices and heavy losses caused by storms. Governments are starting to assess the impact of sea-level rises which will start to reduce the value of previously prime coastal sites. At the same time continual population increases add to pressure on dwindling resources. Shifting to Climate Taxes would go a long way to resolving this problem at minimal cost.
• Peak Oil: A wide range of authorities believe peak-oil production has been reached or will be reached shortly. Australia is particularly vulnerable due to decades of neglect of the rail system and sprawling car-dependent suburbs. Solutions include replacing oil with alternative fuels such as CNG or electricity and a more sustainable transport system.
• Currency Chaos: The US and the Euro zone have a choice between significant devaluation of their currencies, debt default or decades of austerity. This will re-inforce the dominance of China, India and the rest of Asia in the new world order.
• War: In response to resource shortages caused by Climate Change, Peak Oil and Population Growth new wars are likely to be initiated. Australia should strive to stay out of these conflicts as far as possible while building a strong cost - effective defensive capability. Australia should also increase its economic self-reliance using an Optimum Exchange Rate mechanism.

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