For The Labourer is Worthy of His Hire

Local Government and Industrial Relations:
Why Local Government is a Source of Rorts

John Hyde

Members and friends of The H R Nicholls Society.

Precis: I'll begin with a couple of familiar quotations.

Farmer's Almanac:

It is getting harder and harder to support the government in the manner to which it is accustomed.

Lord Acton:

Power tends to corrupt and absolute power corrupts absolutely.

Power, like alcohol, breaks down the inhibitions of those who taste it, turning them away from their duty to personal gratifications that, in the case at issue, citizens do indeed find hard to support. Local government is a true government in that it has lawful resort to compulsion. Misuse of this power for personal gain is a form of corruption; and it is no less corruption if the gain is taken in forms other than cash.

The Problem

Clearly one does not get Daimaru service at City, Town and Shire Hall. Further, some of the services provided by local government are such that, if charged at cost, would not be purchased by anyone,not by the people who use them, nor by someone else acting in the name of charity. In short, they are make-work schemes. On the other hand, services such as road construction are on average valued by those who pay for them. It does not follow, however, that it was a good idea to spend a $100,000 on a road to two farms beyond North Woop Woop, nor that the main street could not have been paved at less cost.

Michael Moore has provided you with examples of some particularly hard-to-support practices. They have, to my satisfaction, demonstrated that local governments deliver much little-valued and over-expensive service. My job, as I understand my instructions, is to put this sort of behaviour in some sort of conceptual framework. I don't think I have been totally successful, in as much as some of the behaviour described and some that I have experienced has not yielded to my analysis. That is, it is, for all that I can tell, totally irrational behaviour from which everybody loses or it is motivated by nothing more than bloody-mindedness.

A question that interests me is how the devil the people who engage in these hard-to-support practices get away with them. After all, I was once a shire councillor. Hadn't I been charged with saving rate-payers from such waste? I confess that recollection of my council days does not leave me with a great sense of achievement.

The shovel leaning, short hours of work, perks of office, neglect of duty and arrogant disregard of customers' wishes that we associate with City Hall all contrast with attitudes levels of service and work conditions in, say, the much smaller corner store and the much larger Myers. It is unlikely, for instance, that the privilege of being rude to customers without inviting dismissal could last for long where custom has choice and must be wooed.

At first sight, it is surprising that employees, who apparently face keen competition for their jobs from the many unemployed and people employed at lower incomes in more arduous jobs, are not competed out of their jobs. Local Government seems, however, to have inadequate mechanism to exchange less satisfactory employees for more satisfactory.

The privileges enjoyed by local government employees, particularly those at management level, would seem not to be available to the same people in alternative employment. That is Local Government employees earn more than would be required to keep them in their present occupation. They thus gain true 'economic rents'. These are paid by rate-payers and users of local government services in higher prices or lower standards of service than would rule in perfectly competitive markets.

Economic rents are very nice if you can get them. We are by and large a rent seeking society. That is, a few saintly souls aside, we all want more money for less work with the privilege, without penalty, of cocking our snook at people we don't like.

Economic Rents

These economic rents, by no means unknown in the private sector, are to be found wherever any powerful organisation, but usually a government, has prevented open competition. The usual means by which governments create rents are discriminatory taxes such as tariffs, and laws restricting entry to activities such as medicine, road making and industrial representation. Those trade unions that are registered with industrial tribunals, including those that serve local government employees, are privileged organisations not facing effective competition.

Economic rents can be expensive. Tariffs and import quotas almost double the prices of cars and more than double the prices of some underclothing. The justly famed Robe River dispute, by breaking the unions' monopoly of the supply of labour raised labour productivity by a factor of three. Surprisingly, the Pilbara unions, preoccupied with work practices (or the practice of not working) may have actually reduced the pay packets of their members. Arguably the union officials, largely by use of their virtual monopoly of the flow of information, gained considerable rents at the expense of their employers, the mine workers, who would have been better off if these particular officials had, as they say in the Pilbara, "taken a powder".

The important point is that economic rents cannot be won by people who do not have the power to make other people pay for them. For our purposes, we can define power as the ability to make other people do what they do not want to do.

Monopoly power is the ability to exclude others from the relevant market or to prevent those within competing. Particularly in the short run, it can be derived from collusion, lying and various restrictive trade practices - hence our trade practices laws. In the long run, it usually requires government to enforce it.

The Mafia, and trade unions when they resort to baseball bat diplomacy, have power but it is not lawful power. Local and other governments, so long as they stick to due process, have power that is lawful. Indeed, the exercise of power is their raison d'etre.

Employee Combination

Local government employees combine into unions which negotiate awards that prevent certain of their conditions of employment from being competed away. By so doing they probably gain higher wages, shorter working hours and certain other conditions of employment (at a cost not only of higher rates but also of increased unemployment) than would be available to them had they not combined. This story is well enough known to H R Nicholls Society members for me not to repeat it.

However, the unions that "serve" local government employees are not conspicuously better organised than those that serve many industries where the public injury is apparently less. Indeed the scattered nature of local government must give union organisers trying to encourage solidarity some headaches.

There must be a special feature of employee rent seeking in the public sector that makes it uncommonly successful. I do not believe it is uncommonly strong unions. Rather, it seems to me uncommonly weak employers.

The Employer

Michael Moore began with Frank Hardy's list of particularly egregious economic rents. Some economic rents that are perhaps not as blatant as those or the Glen Fiddich in the Council Chamber bar are, nonetheless, far more costly. For what it was worth, while a Federal MP representing the citizens of 26 shires, I recorded a phenomenon until now ignored by political science: the quality of local government varies inversely with the quality of the Scotch in Council Chambers. For the record: in those days Mount Marshal was the best run shire in my electorate Ä it offered visiting MPs tea.

Here are some economic rents that are less obvious, but in aggregate more costly, than the Scotch and possibly even VIP aeroplanes. These are all circumstances that I have come across:

1. Bloggs a culvert expert who had been with the Shire for years built culverts very slowly and with scant regard to what nature was likely to ask of them. In consequence, some did not carry sufficient water to wash out the leaves and others washed clean away. For the same money the shire could have got itself a quicker worker who thought seriously about the behaviour of storm water.
2. A Clerk who got his pleasure from charging people involved in single-vehicle accidents with the offence of careless driving. The conspicuous demonstration of his authority, at great cost to all concerned, usually resulted in convictions by magistrates who then imposed only token penalties.
3. A librarian who was employed full time to deal with about a dozen customers a day.
4. A health inspector who insists that farmers miles from their nearest neighbours construct leach drains costing some $3000 in clay that holds water like a bottle. The so called rural crisis is so much of a government made problem that if farmers were suddenly denied all of the help of their own governments they would become quite prosperous.
5. In another Local Government Authority, the health inspector closed down my favourite French restaurant, because its kitchen was too small. The Subiaco Council closed several restaurants at about the same time but I am not aware in the other cases of their ostensible reason for doing so. What I do know is that Helen and I tend, these days, when in WA, to eat out in other suburbs. Is it going too far to suggest that health inspection, which does have legitimate functions, has become a high-priced make-work scheme producing economic bads?

It is hard to believe that any of these practices could be tolerated by an organisation that had to please customers.

Not only must successful rent seekers somehow exclude people who would offer a better or cheaper service than they offer, but they must identify a target that cannot escape paying. Who better than tax/rate payers whose alternative to paying is gaol.

If the shire, town and city authorities, faced competition for the right to supply the services that they in some cases offer their citizens and in other cases force upon them, then they would be unable to tolerate the worst practices of their own employees. Then rate-payers would take their custom to where they thought they would get best value.

The great advantage that shire employees possess is that selling the farm, home or CBD building and moving involves considerable cost. When the proximate government is bad enough people will flee Ä note the businesses leaving the City of Melbourne for South Melbourne and other suburbs and those leaving Victoria for other states. But citizens are largely locked in. In badly run municipalities selling the farm or whatever becomes possible only at lower prices than are needed to pay for similar land in the next shire. For good and ill, the rates and quality of the services get capitalised into the values of property. Many more people would leave Melbourne now, if they could but sell their property for what it owes them.

We have already observed that everybody wants economic rents, that rent seekers must find somebody who will pay and that tax and rate payers as individuals must stand and deliver. But citizens are supposed to be able to combine with others of like mind to protest via the ballot box. Further, MPs and Councillors are supposed to be the citizens' agents. Indeed, there is presumed to be a fiduciary relationship between Councillors and MPs and their public.

One might well ask, therefore, what the shire and city councillors were doing to protect rate-payer interests while their councils were being turned into employee benefit societies. Shire and city councils are often compared with the boards of public companies. There is however a much lower turnover of chief executive officers who do not find ways to reduce costs. If firms don't reduce costs, the company eventually faces take-over or bankruptcy. Shires and cities do not.

To take the example of an extreme employee benefit society that once existed in the private sector, Robe River Iron Associates. It was not bloody-mindedness, but the prospect of unsustainable losses, that forced Peko Wallsend, the managing company, to take a stand. When revenues are in some way guaranteed, such as they are with companies whose product is protected from competition, boards and CEO's do not face the same imperatives.

Councillors, like members of company boards, face periodic elections. What is more, unlike some company directors, councillors are not likely to control large parcels of votes that could ensure their re-election. And, unlike the situation at many company general meetings, they almost never enjoy an electorate that is broadly satisfied with their performance.

Certainly the measures of municipal efficiency are considerably less reliable than, say, "return to capital". Nevertheless, the evidence we have already heard today would more than suggest that the rate-payers are, in fact, pretty well informed. They are right in their belief that local government's performance is appalling. Why, then, do they not throw the current crop of councillors out?

Leaving aside Shires like Dalwallinu (where I was once a Councillor) where it was considered bad form to quit the Council before finding a replacement, rate-payers do get a choice. However, from bitter experience, they do not believe candidates who promise efficiencies.

When I joined the Federal Parliament I knew, or thought I knew, that I was such a small cog in the big fly-wheel of government that I was unlikely to have any appreciable effect on it unless I became a Minister. Small cogs have leverage over big wheels, but to attempt to apply that leverage against the established motion of the massive body is to leave the small cog stripped of its teeth and broken. I made speeches, it is true, but words are cheap. Had I tried actually to force change by, say, moving, in the Parliament, that the budget be reduced by a few million, I anticipated a fate similar to that of the little cog. In fact, after I had been in Parliament several years, without ministerial preferment, I did manage to alter the course of government just a little. You might say that I had learned how to apply a little pressure, the political engine's governor, to public opinion.

That I had so little effect on the National Government will, I think, surprise nobody. It may surprise you that I believe I had even less long-lasting effect on the tiny Dalwallinu Shire. (It has a budget of only a few million.) When I ask the question: would the important policies of the Shire have been different had somebody else filled my council chair, I cannot think of a single important policy that I changed permanently. One of my few changes, a means of keeping future loan liabilities before the Council, was abandoned shortly after I left the Council. I may have talked them out of some silly policies, such as owning yet another grader, but I can't be sure that I did.

Dalwallinu is a small place. There was no problem of being a small cog against too big a wheel there. Why was I so ineffective?

The proximate reason is that neither I nor any of my fellow councillors really understood the council, not in the way we each understood our own businesses. Shire counselling was a one- perhaps a two-day-a-month job and none of us was prepared to put in the hard work needed to understand such things as road construction, budgeting, the aspirations, strengths and weakness of the Municipal Officers Association, or whatever it is called now, and so on. Worse, none of us really understood such principles of good government as respect for the rule of law, civil liberty and property and the proper division of authority. Further, we had no idea of the economic principles that would help us to decide which tasks should be undertaken by the Shire and which left to the market. We were, in consequence, but putty in the hands of the staff, and the Shire Clerk in particular.

How do the situations of Councillors differ from those of Members of Parliament on the one hand and members of Company Boards on the other?

My position as an MP was different in these respects. I think they are all significant.

  • Being a Federal MP is a full-time job. Those MPs who are not damn fool enough to become over-paid and underskilled welfare agents do have time to learn how government works.
  • Federal Parliament is a big enough organisation to encourage MPs to specialise.
  • There is a considerable body of learning for MPs to turn to for instruction.
  • They have the assistance of staff, the parliamentary library, the analysis of bodies such as the OECD, Industry Commission, Reserve Bank and Treasury, and academic and press commentary.
  • Above all, the powers are divided between government and parliament (where Oppositions still have some rights), the upper and lower houses and the courts. This means that bad policies do not go uncriticised. The MP does not have to detect all the errors himself.

Councillors, although they do often have the advantage of being responsible for an organisation of a knowable size, do not have even the management advantages of MPs or have them only in small part. However, neither they nor MPs have the management advantages available to businessmen. Company Directors have significant further advantages over Councillors and MPs.

  • They do not have to identify the public interest. That is decided for them by both buyers and employees pursuing their own interests.
  • Since firms that do not adopt something approximating least-cost practices lose custom and profits, inefficiency is unmasked in ways that cannot be ignored ether by them or their staff.
  • Businesses have a relatively simple goal, profit. Community benefits, that the director does not need to know about, flow automatically from its ethical pursuit. Within modest limits its profit is fairly easily measured. Even in the short run, a conscious act of dishonesty is normally required to keep the truth about profit and hence efficiency from reasonably conscientious directors. In the long run, since a firm cannot go on paying dividends out of capital and houses of cards collapse, they help but learn about gross inefficiency.
  • Above all, businessmen do not possess power. Customers and employees can always walk away. They, therefore, do not need to hedge themselves about with processes that compel disclosure and divide authority. They do not have to operate in ways that treat all as equals, indeed, just the opposite: business is about making private deals with particular individuals, that of their very nature discriminate against all other individuals. There are few comments that I find more exasperating than the too frequent suggestion that government should be run like business. Without immense dangers, it cannot be. That it is not done, WA Inc aside, is the best measure of the political progress we have made since the times of the Tudors.

Weakness of Local Government

It would be totally wrong to think that the sort of problems that I have outlined are easily fixed. A deregulated labour market, and particularly proper defence of the right of free association will reduce the monopoly power of trade unions, actually enhancing their more legitimate functions. But I don't believe that this will do much to improve the situation so long as the employer has neither the capacity nor the will to direct its own staff to pursue the public interest and so long as there is no market mechanism that brings about a coincidence between the staff's interests and those of the citizens they nominally serve.

The obvious way to achieve the latter discipline is to privatise the delivery of the services. This is not possible for every service, but in most cases it is more than feasible.

For the rest we need to consider what can be done to improve the accountability of the staff to the councillors and the councillors to the public.

I know this is dreadful heresy in Local Government circles, but what is most needed is a formal Opposition. That is, somebody to keep the Shire/City Government honest.

Local Government lacks many of the checks and balances that are proper to the exercise of power. In this it is positively mediaeval. Those who govern locally are not as au fait as they ought to be with rule-of-law principles, division of power, disclosure, proper chains of accountability, the steps necessary to avoid conflict of interest, and the role and need for quasi-constitutional restraints. (The Local Government Acts do provide Local Government with effective, if not easily understood, 'constitutions').

Local government has no upper houses, no equivalent of question time and no organised oppositions. Sometimes, this lack of discipline and the fact that it is very close to bullying and begging vested interests, causes it to do some pretty dreadful things.

Libertarians, say that governments should confine themselves to their prime responsibility, the protection of the citizen's liberty. Their argument is tempting, but there are some other activities, where, at least in theory, government power can be used to the citizens' advantage. These cases are to be found only where it is impossible, or too costly, to maintain clear exchangeable property rights. Then there are free-rider problems, costs imposed on third parties, and benefits reaped by third parties. In short, there is market failure. Some degree of market failure is so common as to be normal. Markets are never perfect; but then neither is their alternative, government. The question that councillors and staff ask themselves should, therefore, never be: is there evidence of market failure? It should be: is there convincing evidence that, in this area, government failure will be less than market failure?

I believe that, if this question were answered honestly, local government would not try itself to produce the services that provide the sheltered workshops and occupy the petty tyrants, and the streets would be better swept to boot.

Very few even of the best councillors think in terms of market failure and government failure, weighing one off against the other to decide when to substitute government win/lose situations for market win/win situations. And, others, the little gilded gods, already know what people really should want.

You might think that democracy protects ordinary folk from the Leviathan. To some extent it does. No democracy has tolerated a government as intrusive as those of the Communist bloc. Nevertheless, periodic elections do not prevent over-fat governments from getting even fatter. Instead the election process itself encourages obesity. An elected official does not win office by appealing to 'the middle ground', a practice that would, in any case, be unjust to minorities. He gets elected by assembling a coalition of those vested interests that can organise to control a parcel of votes which are, in effect for sale to the politicians/councillors who will do his group's bidding. There was a time when politicians bribed their constituents with their own money, but that relatively honest practice is frowned upon today.

At each of the two levels of government I have practiced, other practitioners thought that the other level was more venal, more spendthrift and more high handed than they were themselves. Both were almost right. To a very large extent local government service delivery, like central government service delivery, is incurable. Therefore, I reach the same conclusion that others today have reached: privatise, contract out and generally ask less of government.

There is no other way.

Why HR Nicholls?