We have learned what “a stronger economy” means from the reforms of the 1980s and 1990s, which contributed substantially to the prosperity we have since enjoyed. Those reforms strengthened the economy not by enabling us to do the same things better (i.e. through improved productive efficiency), but because we moved from things we did less well to those we do better (i.e. by improved allocative efficiency).
The second policy message from that experience is that the strength of the economy depends on the response of individual enterprises as impediments to competition are removed.
But not the conclusion:
In this policy environment it is not surprising that car companies are queuing up for more handouts and demanding special treatment on the grounds that they create unique “external” benefits for activities elsewhere in the economy, that other governments protect their own car manufacturers and that employment in Australian manufacturing depends on the multiplier effect generated by car production and that without it the rest of the manufacturing sector would collapse. These are familiar arguments, without substance. The claim that it produces unique benefits throughout the economy (and that the rest of manufacturing would collapse without it) has been discredited by Bill Scales, who chaired Senator Button’s Automotive Industry Authority during the 1980s.
It is widely accepted that vehicle manufacturing employs 50k people directly and 200k indirectly (I can’t confirm it). Across the country manufacturing only employs 920k people now. In terms of the intellectual property and skills for a sustainable manufacturing sector, letting the sector would, therefore, be an enormous blow.
Australian manufacturing’s value added contribution to output is down now to about 7%, the lowest in the OECD tied with Luxembourg. While the theories of productivity enhancement are all sound, letting cars go would be a grand experiment in post-industrial economics. Given manufacturing is the single most important sector in generating productivity gains, one has ask if the national economy wouldn’t suddenly be confronting peak efficiency. I am aware, of course, that subsiding the car industry may not help this either!
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.