Saturday, May 24, 2008

Saturday Morning Musings - the burden of compliance

Many Australians point to what they see as current problems.

I am not talking about things such as food or petrol prices, although these are real worries for many. Rather, many point to a pervading sense of unease, of oppression. Those same Australians press for Government action in general and to resolve specific problems. Unfortunately, they fail to realise that the second, the desire for action, is a major cause of the first, the sense of unease and feeling of oppression.

This post is not an argument for freedom or libertarianism. Rather I am writing as an economist. Here I want to show why I am concerned that the current system may bring Australia down, why I cannot share a positive view of our economic or social future in the absence of fundamental change.

Let me start with a simple example to set the scene.

In NSW, the Government changed the law increasing the log book hours required to get a driver's license from 50 to 120. It sounds so reasonable, teen-age driving deaths are a problem, increase the time required to get a license. However, now the practical problems are starting to bite.

120 hours is a lot of time. Over two hours a week if spread across the full year. Over four hours a week if spread over six months. Over eight hours a week if kids want to do it in three months.

Each learner driver must be accompanied by a licensed driver. That driver must spend the same time as a kid. Parents struggle to find this time, especially if they have two learners at the same time. Many households have only one car, so the family car is tied up for a lot of time.

One solution open to the wealthy is to pay for lessons. I tried to check lesson prices on-line, but most don't give it. However, assuming an hourly rate of $50, 120 hours equates to $6,000. That's a lot of money.

If we put the same value on parent time, the extra 70 hours equates to an average cost of $3,500 per driver. I haven't checked the number of kids in the 16 year old age cohort in NSW. On the basis that there is 100,000, the extra annual cost equates to $350 million.

The real numbers don't matter. A conservative back-of envelope calculation is enough to make the point that this is a high price.

Leave aside the equity and social issues, the fact that many lower income families cannot afford the price, I have done enough to establish that the change adds a high cost.

Two questions arise.

First, is it worth it in terms of lives saved? Leave aside the number of parents and kids who now have an incentive to break the law, if 100 kids are saved this equates to $3.5 million per life. That's a fair bit of money.

Second, can the same result be achieved in a different way? I think that the answer is yes. Focus on outputs, not inputs. Make the driving test tougher.

In considering both questions, remember that the provisional license requirements have been toughened in order to deal with just the same problem that has led to the extra seventy hours.

This is a small example that is replicated across the whole economy and every aspect of human life.

Some years ago I was friendly with a chap called Philip Miskin. Philip, the founder of the commercial bill market in Australia, had a fascinating life. But that's another story.

This night we were sitting in the Bill Acceptance Corporation offices in Sydney drinking scotch. Philip remarked that what he had done with the bill market was no longer possible. When I asked why, he explained that the growth in compliance costs meant that smaller firms could no longer afford the costs associated with the development of a new financial instrument.

This remark stuck in my mind.

Some time later, we were looking at Australian productivity and economic growth. My team attempted to break activities into two, those connected with administration and compliance, those devoted to investment and expansion.

We found that the importance of the first group was rising relative to the second. As it did, the relative dollars available for the new declined.

Later I added a further factor, the decline in the real efficiency of the modern organisation. This is too big a topic to deal with in this post, so just take it as an assertion for the moment.

There has been much discussion on the increased Australian productivity that has underpinned a significant part of our growth. When I drop below the aggregate numbers and look at the causes of that growth, I find a series of one-offs.

To my mind, we have picked off the low hanging fruit. I simply cannot see where future gains might come from in an environment where administrative and compliance costs will continue to chew up an increasing proportion of resources.

Australians may not understand the detail, but they can feel the pattern. We can see this in the business community's call for less regulation, in the Rudd Government's stated desire to reduce regulation as the next stage in micro-economic reform. Yet if you look at the detail of Government actions around Australia over the last six months, the focus on regulation and control continues.

One of the most interesting if disturbing responses to the pattern is the increasing tendency of people to opt out, to focus on the personal space. People talk about simplifying their lives, about downsizing. There is a growing focus on life-style, on the areas where people feel that they still have some control.

Our system is not going to collapse, at least not in the short term. What appears to me to be more likely is continued growth in system complexity and cost to the point that we will no longer be able to afford it. At that stage, things will start breaking apart.

We can, I think, already see an example of this in the current inquiry into the child welfare system in NSW. Here the combination of unrealistic expectations, organisational rigidity and the burdens of compliance and control have created what is essentially an unworkable system.

I do not see how the NSW Government can find the funds required to make the current system function. The costs are just too great. On the other hand, I cannot see fundamental change since this requires action to overcome broader systemic and political problems. By political I do not mean party political, rather the way that the NSW community now works.

In this case I think that there will be another patch, some forced change just to keep things going until the next crisis. At some point, however, accumulating problems across the whole system will force radical change.


Anonymous said...


It seems to me that the basic problem/s you are grappling with is/are resolvable by the simple expedient of changing one's definitions of the problem/s.

(As an economist I am sure you will be familiar with this technique?)

Driver's Licence; Baby Bonus; Compliance Costs; Child Welfare.


Issue all newborns with a driver's licence at the present cost of the Baby Bonus - revenue positive!

Redefine 'child' to be that age which is (statistically) the least expensive grouping. Moving average, of course, but I'm thinking maybe 35-45.

Compliance costs are a result of compliance requirements. Eliminate or reduce compliance requirements, and see the costs fall.

You are thinking I jest?

My driver's licence at birth idea is, I think, original. As for the rest - we live under this regime at present.


Jim Belshaw said...

Interesting line of argument, David. You comment on complinace caught my eye: do you actually know of an example where complinace requirements have been abolished?

Anonymous said...


I suspect like you I am most very tired of this tripping over just-in-time regulation (usually just that bit too late to make any difference, and always so politically expedient).

Compliance requirements abolished? - I would offer firstly Opes Prime.

While the ANZ Bank is my bank - and I have been served very well for many years by that association - I fail to see just how the ASX regs requiring significant holdings were ?waived? in the case of the now not insignificant holdings claimed by ANZ.

And just how a further loan of $90M gathered into their clutches securities said to be worth $700+M (thus covering their other exposed position/s) also fails the test of 'truth and fairness' to my mind.

Never mind - and I have no pecuniary interest in this by the way.

For a second proof of compliance requirements being abolished I suppose I could always drag (dredge?) up poor old David Hicks.

Despite my reservations at his (reported) actions, I have always felt it a good principle that a law should be in place before it is deemed broken and prosecuted - however ineptly (broken or prosecuted).

And read up on Wollongong height restrictions - (buildings) - and balance that against how low some of our 'civic leaders' will stoop.

So, if not abolished then at the least ignored, and at morally worst, subverted.

And I enjoyed your 'Australian dinner' - could taste the tastes. Wish I had your talents.


Jim Belshaw said...

Glad you liked the meal, David. I share your reactions on the cases you cite, although I would interpret them a little differently.

You wrote: "So, if not abolished then at the least ignored, and at morally worst, subverted." This drives to the heart of the matter. I think that I will take the points you raise and explore them in a further post.