For The Labourer is Worthy of His Hire
Local Government and Industrial Relations:
Why Local Government is a Source of Rorts
Members and friends of The H R Nicholls Society.
Precis: I'll begin with a couple of familiar quotations.
It is getting harder and harder to support the government
in the manner to which it is accustomed.
Power tends to corrupt and absolute power corrupts
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.
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
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.
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.
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.
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
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
- 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
It is hard to believe that any of these practices
could be tolerated by an organisation that had to please
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
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
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
- 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
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,
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
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?