A modest proposal for manufacturing

If there’s one thing that bugs me about the Australian economy and business it is rent-seeking. It is that practice of big businesses wielding political power for shareholder and personal gain. It is a doubly toxic pursuit because it not only means that Australians often have to pay extortionate prices for goods but it retards productivity for the economy overall, meaning we all get richer more slowly (except for the protected few).

But, as I have before, I’m going to make one exception to this frustration, for manufacturing.

As we know, manufacturing has been targeted for extermination by the macroeconomic high priests of the RBA and Treasury, to free up resources for the mining boom. To my mind, this is an unacceptable and unnecessary risk for the national economy involving an enormous punt on an untried and untested  political and economic model in China. Just why we should allow our export mix to tip completely towards commodities is beyond me.

And so, today, I am going to offer some free advice to the Australian Industry Group, the manufacturers peak body and lobby about how to begin a rent-seeking campaign of their own.

First, however, we must diagnose the problem. And a couple of stories in The Australian do a good job of that this morning. Let’s contrast the rent-seeking maestros, Australian miners, with their manufacturing brethren. First, the miners:

With gold trading at new records, above $US1600 an ounce, and with new projects rushing to come into production, you’d expect to hear few complaints in the booming West Australian goldmining town of Kalgoorlie. But on the opening day of the Diggers & Dealers talkfest yesterday, it became quickly clear that hostility towards the Gillard government’s mining and carbon taxes would dominate discussion among more than 2200 delegates who flew in from around Australia and the world.

Diggers chairman Barry Eldridge set the tone within the first five minutes when he launched a blistering attack on the “extreme” and “superficial” policies of Labor and the Greens, during his opening address. Even Tony Abbott wasn’t spared, with Mr Eldridge predicting a future Coalition government would be unlikely to axe the mining tax, as promised, because it would be reluctant to forsake such a big revenue hit.

In his presentation, Integra Mining chief executive Chris Cairns paraphrased former Beatle Ringo Starr when he said: “Everything the Gillard government touches turns to crap.”

But the biggest talking point among delegates yesterday was the large neon sign outside Kalgoorlie’s historic Palace Hotel that reads: “Carbon tax. Mining tax. Useless Independents. Gillard & Co have to go — ASAP.” The scrolling sign just below the top balcony of the famed watering hole is the most watched in Kalgoorlie as it has long displayed in bright-red print the gold price that has determined the town’s fortunes for the past 120 years.

This is perfect execution. Here we have an industry sector enjoying the greatest boom conditions for 150 years, yet there is NO acknowledgement of the fact. Note the toxic blend of anti-government rhetoric, gutter slurs, universal righteousness, a strong sense of building conflict and division and, above all, a national media brand pumping it out with gusto.

On the other hand, in the same paper, we have the following from the AIG on behalf of manufacturers:

Heather Ridout calls it the “boom and gloom” economy. She knows most of her members are mired in gloom and some have moved right on to doom.

The point was reinforced by the further slump in manufacturing in July, revealed yesterday by the Australian Industry Group.

The latest manufacturing activity index fell 9.5 points to 43.4, well below the 50- point level separating expansion from contraction. The record for new orders fell even more dramatically, down 14.4 points. No sense of improvement coming there.

It’s a message well timed for the Reserve Bank as it meets today to decide whether to raise the cash rate for the first time since November.

Despite the shock inflation figures in the June quarter providing hard evidence that inflation is on the march, any move to raise rates in this environment would be greeted with horror by most of business as well as by households.

The AI Group is fully aware of the dilemma facing the RBA.

“Perversely, the only indicators of broad business conditions showing an increase were input costs and wages, both of which are negatives for industry,” Heather Ridout said yesterday.

A nice, gentlemanly phrase and a balanced assessment of the macroeconomic conditions faced by the sector. This could be a couple of ladies discussing the kids lunches.

No, AIG, parlor discussion is not the way to save your members. What you need is conflict, outrage and moral panic. Here’s how to get it:

  • pay for some partial analysis by a hired gun economics firm that shows how many jobs are going to be lost in the sector over the next decade
  • go and see the editors of the major media outlets and offer exclusive coverage of your campaign until one agrees to cover it in detail
  • declare a national crisis for manufacturing
  • declare war on the unholy alliance between the Gillard government and currency speculators
  • discredit the RBA as ivory tower economists that are out of touch with real Australian families
  • begin an huge advertising campaign that directly attacks the Gillard Government around the job losses
  • enlist the help of the unions. And get some protests going
  • declare the threat to house prices in the event that mining is allowed to destroy all other sectors
  • hijack the national tax summit and make it address the high dollar through a sovereign wealth fund

And voila! Policy action on the manufacturing crisis.

Comments

  1. Not going to happen, going by Ms Ridout’s performance on QANDA last night – the discussion was about polite discussion and shutting down any sort of “abrasiveness” in debates….

    • Totally agree. You have to be reasonable. The problem won’t last forever. Once the miners have dug out the easy to get stuff, virtually taxfree, they’ll move on to the next host country.
      OK, so we’ll be left with, no manufacturing, fewer jobs, no sovereign wealth fund, ruined agricultural paddocks, poisoned water supply.
      But we’ll have an ETS, lots of holes and some really neat ghost towns.

    • declare the threat to house prices in the event that mining is allowed to destroy all other sectors

      Now you’re talking! But you haven’t gone nearly far enough. What the AIG needs to do is demonise mining.

      This is a war over the future of the Australian economy, and the miners aren’t playing nice. The AIG (and others) need some serious pushback with some emotive, and yes divisive, slogans that cut-to-the-chase with ordinary Australians.

      There is already a nascent anti-mining push in the bush revolting against coal-seam gas and coal-mining expansion in prime agricultural regions. This has brought together an unholy alliance of farmers and the Greens.


      Mining: They get rich, you get high interest rates.

      Mining: They buy football teams, while you struggle with your mortgage.

      Mining: $300,000 a year for driving a truck.

      Mining: Their profits up, your house value down.

      Mining: Profiting from environmental vandalism.

      Mining: Destroying Australia’s prime agricultural regions.

      Mining: You can’t eat coal and iron ore.

      Abbott has done a great job linking the yet-to-be carbon tax with all the ills affecting the domestic economy. Its high time someone told the true story, and definitively linked the mining boom with the grim economic conditions in the mainstream economy.

    • Have recommended previously they utilise the expertise of The Minerals Council – in conjunction with the miners – get things done.

  2. What policies could the government actually implement even if the manufacturing lobby was successful?

    It is VERY difficult to even (1) isolated the causes of this LONG TERM TREND, (2) intervene with any of them, and (3)ensure any kind of success. I mean, what is the policy goal here? A lower dollar? Is that all?

      • I am suggesting that mining and manufacturing are very similar industries at the mercy of global conditions and even if we implemented all of your suggestions, major changes to this long run structual trend are unlikely.

        For example-
        Corporate tax breaks would benefit miners as well as manufacturers.
        Tax deductions for R&D etc will also benefit local miners.
        A SWF will invest abroad, supporting foreign demand for our coal and minerals.
        A resource rent tax might have some effect.

        Compared to the power of global currency speculation, I can’t see these policies making much of a dent in the dollar which seems to be the biggest factor hampering any manufacturing.

        • why not have exchange rates determined by running optimization programs that minimize trade imbalances …by definition all countries would have to participate, mercantilists would have to abandon pegs etc.

  3. H&H agree on most, especially the SWF.

    But somewhere along the line the issue of productivity is going to have to be addressed, not just in manufacturing but the wider economy as well (especially agriculture).

    High comodity prices aside one of the key compeditive advantatges remaing with australian mining was the productivity gains born of the 80s and 90s.

  4. Maybe MB should go to AIG with the proposal to run the campaign for them?

    AIG does not need a policy goal, just to have an equal voice with mining and politico-housing complex.

    What’s their policy goals? Only to rent seek from what I see every day!!

  5. Brilliant, but I get sense the Heather Ridout may have heavily invested her super in BHP shares…

  6. “Switzerland, which is 100% dependent on imported petroleum and whose workers are among the highest paid in the world, is doing so well exporting its high-priced products, rather than blaming China for the massive US trade deficit. The U.S. unemployment rate is 9%; the highest since the Great Depression and our $646 billion goods trade deficit represents some 6 million destroyed American jobs. Switzerland, has a 3.1% unemployment rate, a $20 billion trade surplus and although the Swiss Franc has appreciated some 60%, making Swiss products correspondingly more costly than ours in China, yet it prospers because it exports. Switzerland’s trade surplus with China last year grew 30% over 2009. On a per-capita basis Switzerland, which imports 4.3 times more than the US, exports 9.3 times more to China than we do.”

    Just another post to add emphasis. Maybe we need to support a political movement that aim to bring about political and economical reform by copying the best of the SWISS

    • Finland runs trade surpluses too. You have to wonder why a “Nokia” didn’t start here or a major global biopharma didn’t start here. Probably need an economic historian to answer but culturally I guess we have relied on commodities and the chances of getting start up support for a Nokia or a Roche would be buckleys and none.

      I think all countries should have trade surpluses (ok joking)

      On a related topic, maybe instead of having exchange rates determined in a casino they should be determined from a continually running global optimization program.

    • Swiss manufacturing relies exports of chemicals, electronics and precision equiptment. Not cars, metals (steel, aluminium) and food.

      While it may be argued that our agriculture advantages give us a compeditive advantage in food manufacturing, the same can certainly not be said for metals or automotive/machinery.

      In order to move up the manufacturing value chain a signifcant shift in the expected capability and productivity of unskilled labour is required. The government needs to stop using manufacturing as a bogan employment office (assessing new projects on the number of jobs) and start looking at it as a genuine long term industy.

      Socially the country needs to adjust to the idea that the level of education and skills expected of an unskilled worker needs to rise. The idea of leaving school at 15 for a 100k job (mines, ports, steel works etc) has to be removed from the national psyche. Of course conscription probably helps Switzerland with their ‘gap year’ and workforce issues – but thats a completely different topic.

      As retail, the other big unskilled employer improves worker productivity (think self serve checkouts, online shopping) the available supply of unskilled labour for manufacturing will grow, although it remains to be seen how the industy, and the economy, will adapt to this.

    • Well said jack.

      I think it was you a week or so ago who pointed out that gold is not a bubble.

      Kudos. Keep up the good work.

  7. Great post, David.
    I’m a little concerned that the degree of aggressiveness you propose would drop us into a similar, “perpetually polarized”, and thus irreconcilable, political dialogue a la USA. (Ugh!)

    I believe Andrew Bolt bought to light a critical issue with respect to our “Houses & Holes” economy::
    “China, the world’s largest steelmaker and iron ore consumer, has set a target of dramatically increasing ore imports from Chinese-invested resources in the steel industry’s 12th Five-Year Plan (2011-2015), an industry official said. Iron ore imports from Australia, Brazil and India accounted for 62.3 percent last year.

    Li Xinchuang, deputy secretary-general of China Iron & Steel Association, told China Daily that the country will only be able to break the grip of the three major global miners — Vale SA, Rio Tinto, and BHP Billiton — if it gets half of its overseas ore requirements from Chinese-invested sources.

    “China currently owns less than 10 percent of imported iron ore. We should seek 50 percent of ore from Chinese-invested overseas resources in the next five to 10 years,” he said….

    Liu Han, chairman of Hanlong, told China Daily that West Africa is emerging as a key region, as investment in Australia and Brazil faces a number of challenges. “Australia and Brazil both have great resources, but they don’t provide many opportunities for Chinese investors due to rising cost pressures and policy barriers…”

    A clear warning that the Holes will fall silent over the next 10 years.

    Although the Scandinavian models provide some guidance, the most important step is to get the “leadership” focused on the issue of long-term economic health.

    But what “leaders”? Any takers for that job?

    And I think we want the RBA on-side in that. They have shown some awareness of late, so maybe we want to convert them, rather than alienate them?

  8. Manufacturing got gutted years ago, how will it compete now with cheaper labor??
    Capital goes were it gets the lowest taxes and highest return.

    • You’re completely correct. We took the bait years ago on market deregulation and charged down the path of wiping out manufacturing without stopping to consider where our value creation was going to come from in years to come.

      We are now a crude colonial country living in a modern setting.

      The British Empire used to restrict the sale of capital equipment to the colonies in order to maintain those countries as a source of raw materials only, and create a barrier to the production of value added goods. They wanted to keep us poor, hungry, tired, dumb and too busy keeping our heads above water to ask questions.

      What’s got me stuffed is how we’ve happily and knowingly moved back down this same path without so much as a whimper.

      Somebody managed to convince us that we could hold our own in a global marketplace on the strength of being a service economy yet nobody saw it for the BS that it was.

      We’re now just another outpost in the imperial designs of an ailing US super economy, now hoping to tie our leaky boat to the rising fortunes of the Chinese economy.

      Great leadership….Dickheads.

  9. “But, as I have before, I’m going to make one exception to this frustration, for manufacturing.”

    Please don’t. Not only does Australia not have a comparative advantage in manufacturing, we actually have a comparative disadvantage. There are a few Australian manufacturing companies who have found a niche in which they can be successful (eg Fleetwood, ARB) and they seem to still be making profits despite the high dollar. Let their weaker siblings die if they cannot hack the pace.

    • Alex, the problem with what you say is that you are assuming that we will always have something of value to the global economy. At this stage we have resources, primary production and yes, a smattering of niche manufacturing, but what happens when these are out of play for one reason or another? Increase extraction costs, higher taxation, drought, adverse exchange rates and so on…

      At some point, our ability to pay our bills, or even simply service our debts will result in our inability to borrow money from overseas with which to buy the essentials of life, the same ones we used to produce domestically, and thus maintain our standard of living.

      The end result is an inevitability – long term yes, but inevitable none the less.

      No one is saying that we should support poor performing manufacturing in this country, but we should be looking at how we can support and develop a vibrant, differentiated manufacturing sector to somewhat balance our trade profile and maintain some measure of production capability.

      Still, everybody is allowed to have a dream and I guess that’s mine for some strange reason.

    • Alex,
      No Tariffs, homogeneous products, resources can move from making one product to another with equal facility, perfect market knowledge, no transport costs. All the bunkum assumptions needed for “Comparative Advantage” theory to work.

      Australian manufacturing is every bit as good as anyone’s manufacturing given a chance. You seem to think that because some manufacturers survive, the ones that fail must be weak and good riddance to them. We do not have a level playing field. Most countries tilt it in their own favour. Your excessively doctrinaire approach would make Australia’s economy lopsided and leave Australians poor and vulnerable.

  10. “Just why we should allow our export mix to tip completely towards commodities is beyond me”

    Maybe our leaders think this is a good idea because China has a mantra:
    ‘Use their resources first’

  11. Our only chance to manufacture something are niche market products based on new original inventions. The problem is that such products require investment in R&D and later venture capital to fund implementation. R&D has been culled and there’s very little of it left and VC, especially seed, is very hard to come buy in Australia. I tried it twice with different patented inventions. It was a very frustrating process and the response that I was getting from VCs was along the lines: invest your own money, start production and come back when you need to expand your market, we will then fund it. If I could get to that stage the last thing that I’d need is VC. I would rather borrow money from a bank rather than give away a lion share that VCs usually require. I ended up selling the first invention out of frustration. It ended up in Asia finding a pretty good market there. I am still holding on to the other invention in the hope of commercialising it some time in the future. I’ve invested my own money in building a prototype and will have to spend more in building an improved one. Trying to make anything in Australia is not cheap and the cost of entry is very prohibitive so unless there’s some government support it’s a tough gig.

    I was pissed off when krudd was handing out money to people for spending on consumer products made overseas, without any hope of any long term return. If that idiot had designated even part of the stimulus on R&D and implementation of many ideas generated in this country, there would have been at least some hope of having return on such investment.

    One of my mates tried to commercialise a nanotech based invention in Australia and guess what? He got funding from the Singapore government and moved his company there.