As we know, the economic mandarins of Canberra have targeted manufacturing for extermination to make way for booming mining investment.
To me, this is profound economic irresponsibility. Without an industrial base, no nation can expect to be consequential. There are three reasons for this.
First, the notion that services can carry the load does not add up. Services aren’t sufficiently exportable. The growth of Australian service exports has been solid enough, but is completely dominated by education and tourism, which have their natural limits. We had a moment in the sun in 2007, when it appeared the Australian LPT sector was set to take over the world. But that proved nothing more than a “buy at the top” chimera and it came crashing down for the very reason that most service economies do, it tended towards ponzi dynamics. Add to that the fact that services are a people to people business and the big growth ahead in services will be in Asia, where Australians are culturally hapless and don’t invest, and I see limited growth potential for Australian services exports.
Second, there are strong strategic reasons for the preservation of an industrial base. One does not wish war upon the world, but the history of humanity shows its frequent recurrence. Without a strong industrial base, indigenous defence manufacturing is weakened. Moreover, a country pays a price for a weak industrial capacity whether or not conflict ultimately eventuates. That price is the loss of the perception that you are capable of self-defense.
Third, without a strong manufacturing sector, for countries with large resources endowments, dependence upon commodity exports becomes ever increasing. That brings with it all of the political economy baggage of the Banana Republic. The oligarchs of the resource exporting sector grow in power, to the detriment of public good policy making. Thus, as the possibility of national interest policies that compromise these interests grows more remote, the economy becomes more and more exposed to the boom and bust cycles that afflict resource cycles. The early stages of this process are already apparent in Australia.
No, all nations of consequence, and especially those with strong resource endowments, need a strong manufacturing sector to remain an exports and political economy counter-weight to resources.
I’ve taken some time to set this framework because my next suggestion for how to change policy settings to save manufacturing will not be well received by many. It is simple: cut housing subsidies.
What good would that do, I hear you howl!
It would do this: house prices would fall and so would retail sales. We’d suddenly have lots of new resources for mining to soak up.
I don’t know the precise balance of changes that could be made. Some mix of tinkering with negative gearing, capital gains and first home owner grants to squeeze the bubble a bit will do. The changes could be phased in and interest rates would be cut as house prices slid lower over time. And that’s the point don’t you see. As interest rates fell, so would the dollar, easing the pressure on manufacturing.
In effect, the household and retail sectors would wear more of the burden of adjustment, not the external sector. That’s fair enough, they’ve both enjoyed debt-fuelled fantasy growth for long enough.
Of course I whole raft of micro-economic reform policies will also be needed to turn around the demise. Everything from industrial relations reform to stimulating R&D, as well as bank lending to innovation.
Politically, this just ain’t going to happen. But it’s pretty clear that some version of housing deflation is under way already and likely to worsen as recession stalks Western economies. A good start would be to let nature take its course with housing by not fiscally stimulating it. That lowers the dollar, which at least stops the bleeding.
