Monday, November 12, 2007

Tuesday Column: Why Labor stands for next to nothing

John Howard is right about Labor. Launching his campaign yesterday he said it had spent the past ten months smothering “the beliefs, ideas and values it once argued”.

As he put it: “The people who once opposed tax cuts now support them; the people who once opposed (and it was the first thing Mr Rudd voted against when he entered parliament) a tax break for private health insurance now support it. They once opposed the Medicare Safety Net but now they support it; they once opposed parental choice in education but now they support it; they once opposed budget surpluses but now they support them.”

A former Labor leader in a position to know agrees...

Mark Latham came out of retirement last week to tell us that “any attachment to radicalism and progressive reform in the Labor Party ended a long time ago. If people vote for a change in government on November 24 they will be replacing one conservative administration with another.”

“No matter which party wins, Australia will still have conservative social policies: over-funded elite private schools, huge subsidies for private health insurance and bucket loads of middle-class welfare. Nothing of any note is going to change. We have reached the zenith of policy convergence in Australian public life.”

In the lead-up to the campaign Kevin Rudd himself as good as concurred, declaring that on spending and tax policy “there is no slither of light between us. That’s just the bottom line”.

From Education Tax Credits to economically risky tax cuts to handouts for carers and senior citizens to first homebuyer savings accounts to broadband to road funding, it looks as if Australia’s alternative Prime Minister and the current Prime Minister are doing everything they can to make themselves indistinguishable.

Each probably sees it as clever politics. Even modern politics. In fact it’s economics, and the concept is almost a century old.

In 1929 a United States economist named Harold Hotelling came up with what has come to be known as Hotelling’s Law, often described with reference to icecream carts on a beach.

Imagine a beach one kilometre long, Hotelling’s devotees say, serviced by only two icecream carts. The sunbakers are distributed evenly along the beach, which means that the best place for each ice cream cart is perhaps one third the way along and two-thirds the way along. An even better arrangement would be one quarter along and three quarters along. That way the longest that any sunbaker would need to walk for a refreshment would be 250 metres.

But in practice each icecream vendor will be tempted to grab a little bit of extra business by edging closer to the centre. Each will find itself closer to the other vendor’s customers and won’t lose its existing customers at the edges because they will have nowhere else to go.

The end result will be two vendors stuck right next to each other in the middle with, as Kevin Rudd evocatively puts it, “no slither of light” between them. Some sunbakers will have to walk up to half a kilometre to get served.

As Hotelling put it - the perverse result of competition where there are only two providers will be “socially uneconomical”, leading to “the needless shipment of goods and kindred deviations from optimum activities”.

Air travelers with memories of the old Ansett-TAA duopoly will recognise what he was talking about. Each airline’s Sydney to Perth flights would leave at the same time flying wingtip to wingtip. The standards of service were pretty much identical as were the prices.

Virgin, as with Compass before it, held out the promise of acting differently until Ansett collapsed, returning city-to-city air travel to a duopoly. Qantas and Virgin are not identical in the way in which Ansett and TAA once were, but they have reached an accommodation. One sets its prices just a bit below the other and leaves them there. Hotelling would call it a stable equilibrium.

Sometimes duopolies enter into formal arrangements not to compete, as it has now been found the cardboard box manufacturers Visy and Amcor did. But usually there is no need for a formal agreement. The cinema chains Hoyts and Village/Greater Union don’t work together in any formal sense but they each fight like hell to prevent a third player emerging and making their lives more complex.

So well understood is Hotelling’s Law that the Department of Communications paid heed to it a decade ago when setting up Australia's GSM mobile phone system. It made sure that there were three licensed operators from the moment transmissions started, rather than just the two preexisting phone companies, Telstra and Optus. Adding Vodaphone into the mix made it hard for the what had been the telecom twins to continue to cling together in the centre of the metaphorical beach.

Hotelling was among the first to observe that would happen on a beach where there were only two icecream vendors could also happen on the left-right political spectrum where there were only two major parties.

He wrote in 1929 that in the US competition for votes did not lead to “two strongly contrasted positions between which voters may choose. Instead, each party strives to make its platform as much like the other as possible.”

But not in the UK. There, with for a time three major political parties, each found it worthwhile to actually stand for something.

It could happen in Australia if the Greens became our third major political force. But Hotelling’s Law and the experience of Australian companies that have tried to break into a duopoly suggests that if that looks like happening each of the two majors will do everything in their power to cut off the emerging third force at the knees.

Kevin Rudd’s record in state politics suggests that he will run his administration as do many Labor state Premiers – in permanent campaign mode, never for a second allowing a slither of light to emerge that could cost votes.

John Howard warns that we will see the real Labor emerge after it has won the election. That’s what happened with the Coalition after it won the Senate in 2004. It rammed through a hitherto unannounced revolution known as WorkChoices and is about to pay the price.

I suspect Kevin Rudd has been watching, learning and vowing to keep to the centre.