Bailout nation

Last night MB hosted a stonking bare-knuckle debate following my Can manufacturing seize its opening? post. One of my main reasons for writing the post was to expose the political economy in which we find ourselves. By that I mean what is currently accepted as reasonable behaviour in the relationship between government, business, the media and the people.

There is no doubt whatsoever that the boundaries in these relationships have changed dramatically in the past decade and not for the better.

How so? First, some history.

In his book, The end of certainty, Paul Kelly describes how the Labor government of the 1980’s swept aside many decades of protectionism and rent-seeking behaviour and forced businesses to compete in a global setting. The result was a spectacular turnaround in Australian productivity through the nineties as businesses as diverse as board shorts and bionic ear makers flourished in global niches.

The key ingredient in this success was a context of simple rules for business in which they aimed their best innovative efforts at competing for custom, rather than lobbying government for captured markets.

We cannot say the same of today. We now live in an environment in which any business that is threatened with significant job losses can lobby successfully for a bailout. And surely, Australia’s failing productivity performance is, in part, the outcome.

So how did we get here? I see several very important moments. The first is the arrival of the mining boom and its effect on pretty much everyone. As I showed recently, in its early years, the mining boom delivered bounty across the nation via its bailing out of, and then enabling the further growth of, the housing bubble. Along side that, and of increasing importance in redistributing mining revenues, was mining royalties and corporate taxes that enabled tax cuts for individuals. Since 2008, this has become the primary redistribution channel.

This largesse has two effects, one psychological and the other structural. The psychological element is of entrenched entitlement thinking, a general expectation of easy prosperity that is anathema to the spirit of meritocracy. The second element, the structural shift, is that it is now government that controls enormous swathes of money in the economy. All state governments have virtually doubled their revenues in the past decade. Many parts of the private sector cannot say the same. The role of government is thus commensurately larger in all of our lives.

The next important shift occurred in 2007 when BHP and Rio sought to merge. There was no justification for the merger beyond the monopoly gouging of the Chinese. Yet the government rubber stamped it as mining executives paraded their influence across the capital. The ACCC blessed it. And a green light was sent to everyone that Australian rent-seeking was the new black.

Thankfully, the GFC arrived just in time to kill the deal. But the GFC also bought with it a greater calamity for the fading culture of competition in Australian business: the conduct of the bank bailout.

When the GFC struck, all four large Australian banks faced imminent insolvency as they could not roll over their wholesale debts. Of course, it made no sense whatsoever to let them fail, given a simple guarantee of these debts was enough to stabilise them (as well as a few small demand side measures!). But the conduct of that bailout was dreadful. It was and remains shrouded in a secrecy I facetiously call Invisopower!  And it drew in government, the RBA and regulators, none of whom have addressed the bailout with candour. For the most part, all we get is the endlessly repeated platitude that they, and the banks, are world class.

This secrecy painted in glowing neon lights across the Canberra sky that it was open for back door business. And it wasn’t long before business came knocking. In fact, they were invited. Throughout 2009, the Rudd Government negotiated its original Carbon Pollution Reduction Scheme (CPRS) behind closed doors. The policy was announced up front, and an endless procession of special exemptions were struck with business interests as they traipsed to Canberra.

Then the same approach was adopted with the Resource Super Profits Tax (RSPT). Only the negotiations didn’t proceed fast enough and the business interests publicly attacked the government. The special exemptions were then negotiated with a gun shy new Prime Minister.

This newly defined set of boundaries (or lack of) has thus given birth to a new business methodology. Interest groups now determine elections and our leaders. In 2007, the Coalition government was put to the sword in part by a union campaign against Work Choices. The in 2010, the miners slayed Kevin Rudd.

All of these episodes have the consequence of encouraging rent-seeking in business. In an economy dominated by concentrated monopolies, duopolies and oligopolies this is a red rag to a bull. Why compete when you can simply lobby or pressure the government to prevent competition. Even as both you and the government trumpet your “free market credentials”.

Then there is the small consequence of our fraying democracy.

One wonders where this political culture comes from. It is tempting to see it as the triumph of state political practice over federal. After all, state politics is basically the business of negotiating with interests and Labor has been doing it in the major jurisdictions without much interruption for a long time. Kevin Rudd came from state politics, as did the new wave of number crunchers. Any reader analysis in this regard would be welcome.

There are other factors too. The role of the infrastructure sector in 2000s is important. Their recruitment of former politicians and key bureaucrats smelled of regulatory capture. There is also the calamitous failure of the ACCC in allowing duopolies and oligopolies to form in every major sector. Then there is the collapse of some sort of independent centre in our media.

Then again, maybe it’s just the way it all goes. As Karl Marx observed, capitalism has an inherent tendency towards ever greater concentration. Then collapse.

Comments

  1. In 2008, the Coalition government was put to the sword in part by a union campaign against Work Choices.

    Rudd was elected in 2007. Kevin 07. Remember?

  2. I would suggest that this change is a result of the growing voting power held by the retired community.

    In the past the main way to reach large voter blocks was by town hall meeting, workplace meetings and trying to appear non offensive to others in the media.

    With a large block of voters only able to be reached by media these days the power of that media is growning. With retired persons traditionally voting against change (not conservative, but conservative) the success of these ‘keep things the same’ and ‘anti xxxx’ campaigns.

    • JC thats not what I meant at all.

      Prior to the 80s the retired community was a very small voting segment. principally because people pretty much worked until 65 and got a pension.

      Today with ‘early’ retirement and superannuation this segment is growing.

      The key difference between the retired segment and most other voters, is that they are not as strongly influenced by single industry issues (related to their current employment). This makes them able to take ‘big picture’ decisions, but also be influenced more by the media.

      I was not suggesting that retired persons should not be able to vote at all. I was suggesting that this voting block might be the reason for the effectiveness of recent media campaigns.

      • Dirt Digger, you are out of touch with the reality. To think that the media has more power because the retirees don’t have a club to gather before elections, or because they are too many, is simply extremely poor judgment. You are putting the carriage after the horse. Media power has nothing to do with the retirees as well as the governments attitude toward their people. The problem is the big capitals are getting bigger than the sovereign funds and they are the real masters of our life, not the governments. the governments are their puppets. It is happening in USA and it happens here too.

      • Lori, maybe making the leap between media and one particular voting sector is weak.

        I was drawing on the experience in the states where the AARP is a very powerful political force. With non compulsary voting the turnout rates amoungst the retired are very high compared to the rest of the nation. This makes this group a very powerful force in US politics.

      • I entirely agree with Lori. This is happening around the world and we are not an exception. National governments are becoming lapdogs of supranational capital and sacrifice interests of their electorates. Bailouts of TBTF using taxpayers money are standard policy tools almost everywhere in the western world.

  3. Political fundraising is the root cause. In the long run we will get better policy if we pay political parties from the public purse.

    • What politican parties get public funding? Seems more likely to go to the established parties and block the rise of independants etc…

      • Exactly.

        The problem isn’t advertising by vested interests. Neither is it reporting by corporate media, which are vested interests beholden to advertising revenue from other vested interests. Advertising and reporting are merely free speech, which by its very nature favours those who can afford to buy an audience. For the rest of us, free speech is the right to be ignored rather than shot.

        The real problem is UNIVERSAL SUFFRAGE — that is, the system in which every enrolled elector can actually cast a vote at every election.

        If you’re a candidate, universal suffrage maximizes the number of electors to whom you must present your message. Thus it maximizes the cost of a successful campaign, and hence maximizes the influence of those with money to spend.

        The solution is CONVENED-SAMPLE SUFFRAGE: For each election, in each electorate, invite a random sample of the enrolled voters to gather in one place (or one video conference). Pay them for their time, so that they can afford to accept the invitation. Let them hear and cross-examine the candidates for several days. Then let them vote as an electoral college — choosing the candidate(s) that the entire enrolled electorate would have chosen if it had heard the same arguments. In short, don’t take the campaigns to the electors at great expense; bring a sample of electors to the campaigns.

        The influence of advertising and media reporting on the electoral college would be similar to their influence on the jury in a court case: not very much.

        On balance, convened-sample suffrage would increase each citizen’s chances of affecting the outcome. The reduction in your chances of voting would be exactly compensated by the increase in your chances of being the “tipping” voter if you did vote; and the opportunity to speak and ask questions in the electoral college would be a further avenue of influence. Universal suffrage is beguiling because it offers the certainty of having a say. But the greater probability of having a say (100%) is more than offset by the reduced probability that your “say” will swing the outcome.

        Worse, under universal suffrage, your chances of affecting the outcome are so remote that it is not rational to spend time informing yourself about the issues for the purpose of voting (although it may be rational for other purposes). Thus universal suffrage leads to almost universal RATIONAL IGNORANCE, which in turn increases the susceptibility of voters to the propaganda of moneyed interests.

        But if you are selected as one of (say) 100 members of the convened sample in your electorate, your chances of affecting the result will suddenly become quite significant. So you’ll make the effort to get informed.

        Government by the few tends to be corrupt. Government by the many tends to be ignorant. Representative democracy is supposed to be the solution; but under universal suffrage it merely allows the ignorant many to choose the corrupt few. Convened-sample suffrage induces a sample of the many to purge their ignorance before they choose the few.

        Yes, convened-sample suffrage introduces a random sampling error. But that’s better than the present systematic bias in favour of moneyed interests. I defy any reader to identify any other problem under convened-sample suffrage that does not have a counterpart, as bad or worse, under universal suffrage.

        — Reposted from http://is.gd/7inhFL .

      • What an interesting idea.

        I support the exploration of this problem-space.

        In an effort to meet the challenge of identifying other problems with CS-suffrage:

        1) how would the level of compensation be determined? I know the courts have a system for compensation for jury duty. The system should equally encourage all randomly selected people to spend their time off from work actively researching the policies of candidates.

        2) the random sample would have to be big enough so that the extreme views (whatever they may be) of those selected do not sway the result disproportionately.

        3) Maybe this change is too big to be accepted (where is this currently being done?)

        These questions are raised to aid the vetting process, I quite like the sound of this idea.

      • (1) This is not a complete answer, but:

        (a) If the payment for serving on the electoral college were less than a member’s normal pay, the employer would be more willing to subsidize the employee to serve on the electoral college than to serve on a jury.

        (b) Because the cost of a universal-suffrage election (including public funding of campaigns) would be avoided, one could afford to be generous in paying the members of the electoral college.

        (2) An articulate wingnut in one electorate might cause problems; but that sort of thing should average out over all the electorates. In contrast, plutocratic bias doesn’t average out.

        (3) As far as I know, convened-sample suffrage isn’t being done anywhere.

      • Why not just have a convened-sample parliament? Cut out the electoral college, take a sample of the electorate to serve as a parliament, pay them a salary, and see what happens.

      • “Why not just have a convened-sample parliament?”

        Because that eliminates from the selection criteria not only money, but also talent, enthusiasm, and past performance in the job.

      • Gavin, my comment was tongue in cheek. However, I am not convinced the current system does a good job at selecting for talent, enthusiasm and past job performance.

        I’ll leave the last word to you. We’re getting a bit off topic.

      • What about the prospect of bribery/corruption within the sample group? Or some form of party politics within the sample group? The smaller the sample group gets the more concentrated become the points of failure.

        Smart people ALWAYS find a way to game the system… that’s what got us where we are now. Combine that with the law of unintended consequences and the idea seems doomed.

        Good thought experiment though.

    • Far to easily exploited. Should any Joe Blogg could start their own political party in their garage and be eligible for public funding? Do we stop people from creating new political parties? How is that democratic?

      No a far more possible solution would be to pose limits on the amount of donations a political party is allowed to accept in a given year. But even then you’d have a rush of the biggest contributors that would crowd out the little guy.

      Maybe limit that maximum that a single person or entity can contribute? But then you’d just have people setting up shell companies just to donate..

      I’m afraid there’s no silver bullet to the funding problem, we just need to rely on our politicians to act with integrity and in the interests of the nation and not their contributors…

      • Financial independence would mean that BHP has it’s discussions with the Gov’t of the day at 9.00am Monday, not some 800$/ head fundraising dinner.

        We are outraged when Journalists, Radio jocks, Police or lawyers help themselves to some easy cash, but not politicians. When any loby group or business approaches the Gov’t, I want to know what they asked for and what they presented as evidence during the request.

        We treat the transcript of a 100$ shop lifting court attendance with more seriousness than issues with 6 more zeroes. It staggers me that an ebay sock vendor provides more credible and tangible evidence of due dilligance than anything I have seen on the NBN.

      • You raise good points, I would also add to the list the preference of many politicians post politics to seek lucrative positions in major corporations – not likely to rock the future career prospects too much!

  4. There is a lot of truth in what you say and the removal of protection increasd global outlook and efficiency and productivity to a certain extent. The success stories are there as you describe. However this has gone too far. As I have pointed out my business works in a field where protection in China with a duty on imports is 23% and into Australia is 0 or 5%. In addition the Chinese currency is undervalued. No concessions were negotiated by Garnaut and his free traders. Now with governments and regulators all pervasive and taxing and a 40% overvalued dollar and uncompetitive interest rates the sector is cascading downwards. On top of the above factors the carbon tax is virtually protection for exporters of value added goods into Australia ie reverse protectionism. How stupid can policy makers become?

    • +1

      If we focus on why we are uncompetitive we may just find a solution.

      But redistributing wealth from successful to unsuccessful sectors is just ridiculous. We have seen plainly that bailouts just dont work, yet there is a clamour to tax mining in order to bailout the rest of the economy!

      It boggles my mind…

      • Can we target a tax at the actual exporting of raw materials in stead of the profit margin?
        Thereby making it more profitable for them to process and value add the minerals here in Oz.

        Just an idea.

      • The WA royalties scheme is along those lines royalites for ores are higher than those for concentrates (part processed) and they are higher than those for metal.

      • makes sense, I just cast the anodes but there would be half the workforce on site without smelting and refining.

      • Pete, the rationale to PROPERLY tax mining is in the Henry Review. Read it. The great economic reform challenge ahead is to remove the handbrake on jobs and business in our current tax system and for government instead to take its revenues from economic rents. That means Land Value Tax and the original Resource Super Profits Tax.

        Rather than sneering at this as a transfer from successful to unsuccessful secors, we need to recognise the tremendous tax burden that stifles initiative economy-wide and explicitly directs ambition toward rent-seeking.

        The Australian Treasury is more far-sighted, principled and unselfish than you and I. We need to back them against the craven behaviour of politicians and oligarchs.

      • Regardless of how you want to see it, the simple fact is that this IS a transfer from successful to unsuccessful economic sectors. That doesnt change no matter how you frame it (lipstick on a pig and all that).

        Currently we have a mining boom. Great. So you increase taxes on the mining sector. OK. Now roll forward 5 years, we no longer have a mining boom. Taxes disappear, you still have the transfer payments you have committed to for supporting other industries. You have actually done nothing to properly address the underlying issues, and simply create an unintended problem down the track.

        Instead, how about finding and treating the ACTUAL problems that are hurting competitiveness? if you want to improve competitiveness in other sectors look at the actual problems. If that involves reducing tax burdens, then reduce govt spending along with it instead of increasing tax revenues from a different and uncertain source. at least that way you are creating a stable future platform and not simply hurting one industry to prop up another.

        My point is, there are many ways to skin a cat, and increasing taxes on transitory profits is one of the worst ways to do it.

        PS: The idea behind economic rent taxes is that more productive land earns “rent” over less productive (ie marginal) land, and the differential between the two is an unnecessary surplus that can be taxed without impact (ie the return on the marginal land is sufficient, and anything greater is a ‘super profit’). This is a patently ridiculous concept that has been demolished by economists over a century ago. How it still persists is beyond me, and how Henry has got away with using it as a justification is even more perplexing to me.

      • Oh really. So there is no economic difference between a cow paddock and Collins Street? The latter has had 170 years of human activity and lavish infratructure spending capitalized into its land value, virtually all of which is privately captured. So why is that land value an inferior revenue base to taxing wages and business?

        Winston Churchill once described land as ‘The mother of all monopolies’. He was dead right and the land is an ideal base from which government can fund its work.

        And mining profits certainly are transitory. When the ore is depeted the miner exits, leaving nothing but mullock heaps. The sub-soil is owned by government (royalists, read The Crown) in Australia for very good reason: to balance the rights and obligations of landowners, miners and the wider populace.

        The professional economists who allegedly drove a stake through the heart of Land Value Tax, they’re the same ones who foresaw the recent bursting of The Great Australian Land Bubble and kindly warned the populace against land speculation on credit. I say, anyone who didn’t see this coming and shouted ‘Fire!’ does not deserve the title ‘Economist’.

        The GFC amply demonstrated the intellectual desert the economics profession occupies. If they were medicos or accountants or bridge engineers, they would be strung up from the lamp posts for the misery they have needlessly inflicted on the trusting citizens who merely expected them to do their job to the best of their abilities.

      • You seem to have completely missed my point. I did not once mention a land value tax, only the super-profit tax and the folly of taxing mining “super profits”.

        In fact i dont think your post addresses anything i said at all, unless i have completely misunderstood you?

      • Pete’s 3.36 pm post below doesn’t have a ‘Reply’ button so I must respond here.

        Mining booms ARE transitory and cause great displacement of other industries when a country’s terms of trade adjust and render them wildly unprofitable.

        That makes the case FOR an RSPT, not against.

        I was mainly commenting on your ps, and its bald assertion economists had airly dismissed taxing economic rents a century ago. Ken Henry removed the stake from that vampyre’s corpse and it lives! It lives!

  5. Bare knuckle indeed.

    After suggesting the winners from the two-speed economy could show a bit of sympathy for the losers, and new contributor to MB “juk” suggested I could busk in the mall.

    This is precisely the kind of attitude that will breed contempt for the mining sector. They are rolling in cash, almost entirely due to good luck rather than hard work, and they tell the rest of us to get stuffed.

    The problem for them is the losers from the two-speed economy vastly out number the winners (despite what Gittins! might tell you) and that means huge headaches for the mining industry, politicians and policymakers.

    • I’m not new to MB, i just don’t come here very often because the Green Left Weekly provides most of my communist news.

      You have my sympathy. If that was all you wanted we’d be OK. But you feel you have a right to demand someone else’s hard earned money. Then you have the audacity to claim that their money was gained by luck not hard work.

      You can’t even show a link between the cause of your problems and how demanding someone else pays for it will even solve the problem. You can’t because it won’t.

      You have an unarguable position, your demands are more like begging and that’s why i suggested you go busk in the mall.

      • Why? So you can ignore it because it doesn’t suit your argument? Like these gems:

        How do you acknowledge that the exchange rate is the problem, but the solution is to tax an industry that is subject to the same problem, where this won’t even fix the problem, just subsidise some of the symptoms?You’re clearly not looking for a solution, you’re looking to penalise. Tall poppy anyone?

        and:

        So we preserve a diversified economy by removing the international parasites sucking a interest rate differential out of borrowed money. That’s our money being siphoned overseas. And you don’t care….

        and:

        You still think it’s a domestic problem and you think that what we have is capitalism and that more unequal taxation will fix capitalism.

        and:

        the swiss can correctly identify the problem, but here in australia we just use this intentionally poor economics to move closer to communism and push through a bandaid for extremely poor financial management from our government.

        All these comments were ignored by the people who write rants for this blog, yourself included.

      • “Then you have the audacity to claim that their money was gained by luck not hard work.”

        There was a lot of luck involved. Either that or fraud, take your pick.

    • Fanboy had you KO’d on the couch mate.

      The fact of the matter remains that the losers in the two speed ecenomy have spent 20 yrs riding a debt fuelled “Equity Mate” gravy train and didnt give a toss that globalisation was driving manufacturing in Oz to set up shop where labour costs are a poofteenth of what they are here because they were all feeling “Rich”.
      This in turn has led to a pile of business starts big enough to fill every Dumpy in Oz that just arent viable unless the Ponzi is artificially propped up.

      Now the losers have a credit crunch headache and are blaming resources for it and want us to cough up the panadol… or maybe I should term it “Milky Wilkies”? I seems to match.

      Some people are just going to have to re-skill and move to where the work is.

      • What is this line about nobody caring about manufacturing for ever? Not true of me.

        I’ve been publishing material against the decline of manufacturing for over a decade.

        As for your other point, that the losers of the two speed economy are just whinging, the tradable goods sector is NOT a part of that.

        This is just another way of bullying real argument out of the way in favour of mining.

      • I was not accusing you of having no care H&H, but neither am I bullying.

        How is tradeable goods not part of the equation here? With the house ATM caused wealth effect directing money to services and the devaluation of the $US resulting in a high $AU surely it is right there in the mix of things?

      • Blister Tap:

        I have no debt. I have never participated in any “Equity Mate” gravy train. While I agree that our housing/credit binge is a big part of our problem, that’s not the cause of the decline in well-managed, low debt trade-exposed businesses.

        They have been wiped out by the rampant Aussie dollar and the mining boom.

      • But our Dollar is really where it is due to QE1&2 and its effects on commoditiy prices and the trading of them,coupled with Chindia’s demand, yeah?

        I didnt accuse you of riding the debt train, just stating the effects.

      • Commodity prices are much higher in all currencies not just USD.

        The demand for iron ore and coking coal (in particular) is all China. Not India, not Japan, not Asia. China. This largely due to a stupendous, credit-driven investment boom, where China now produces half the world’s steel.

        Australia is now hopelessly leveraged to the Chinese investment boom.

        So, here we are, allowing our non-mining trade exposed sectors to wither and die, with absolutely no plan to cope with the inevitable China bust.

        Plan A is hope and pray China doesn’t stumble. There is no Plan B.

      • Oh I agree, there is no Plan B.

        And to some extent therein lies the difficulty. We either adhere to the globalisation game plan: follow the money exploiting our natural comparative advantage accepting the attendant ‘costs’ (high AUD, transition and/or decline in some sectors, utilising this period to establish some other niche in the global marketplace to replace the dependence on finite resources; or we engineer a gradual departure from or selective finessing of the some participation in a free-trade floating exchange rate globalised world.

        That should be the real debate, not opportunistic attacks on any single sector alone.

        It’s ideology, where do we sit? We used to like the game, did quite well out of it alas conditions which are entirely a logical part of this game are no longer in our favor (at least partially, of course totally in our favor in regard to the resources boom) and we don’t want to play anymore!

        Milking resources for all their worth to support other sectors is not the solution, because no structural change has taken place. Boom ends, resources no longer able to be milked – what then?

        We’d be really stuffed.

    • Sorry mate, but just because there are winners and losers doesn’t mean the winners have to pay for the losers, otherwise you’d have people losing on purpose. That isn’t what a market economy is about.

      H&H does raise the valuable point about a business policy shift from focusing on their industry and more on getting their profits from political outcomes though. This definitely distorts the market as well and it’s hard to argue that we have a well regulated market economy given the past decade.

      Something we have imported from the US maybe? Although somehow I don’t think you’ll ever see an Australian politician EVER dragging a corporate leader over the coals like I’ve seen in clips of American senate/committee hearings.

  6. This is a good history lesson for me as I was away for all of it up until Rudd got rolled. Thanks H&H.

    I’m not sure what the reasons are, but what I see is badly thought out policies, and people there days, not just the grey vote, are expecting better governance and that’s not happening. I don’t think any of the parties have what it takes to be honest. We have an extreme government now, but likewise with Tony what does he bring other than he won’t spend like this lot.

    I believe governments now MUST have a macro economic view on which policies are developed, but do they get bad advice from the Tresuary/RBA, or the focus groups I don’t know.

    There needs to be change such that governments are held accountable, and maybe if their pensions were linked to the health of the nation it might make a difference.

    There are too many professional politicians who have ever held a productive job that is outside politics. These people have a guaranteed pay cheque from day one, and they end up with a golden pension no matter what they do. Where else in the workforce is that possible?

    This situation is like the GFC; they never saw it happening. How many other industries are they going to bail out before they realise we have a policy disconnect in most of the economy?

    • One point i dont see mentioned too often is the difference in govt appointments between the Howard and Rudd govts.

      Using Treasury as an example, Ken Henry is a left-leaning fellow who was appointed by Howard as Treasury secretary. he served as an important counterbalance to the Howard govt, and Treasury’s analysis count be counted on to be relatively impartial (or at least not too biased towards the govt) because of that difference in ideology.

      However, under Rudd you saw Henry trotted out repeatedly by the govt as a political tool. The checks and balances were largely removed by the Labor govt and we have had poorer governance as a result.

      Now i dont think that Liberal and Labor are any different inherently; they both spent too much and neither invested enough in the country. But that difference in governance is one aspect that has lead to worse policy outcomes over the past few years.

  7. I think China Fanboy must have some sore fingers from all those replies.

    Spineless politicians + super rich cooperations = not much hope of meaningful policies for the general public.

  8. Man, Are you on fire !! Bravo again.
    .
    I predicted the Bluescope debacle weeks ago. Now let me make one more prediction.
    .
    In a year’s time, all the mining fanbois will be squealing about the unfairness of it all, when they are replaced by former manufacturing workers, willing to work at a fraction of their wage – starting a mining wages race to the bottom of deepest mine in Pilbara.
    .
    BHP is getting in to the game early –
    BHP throws out a jobs lifeline to BlueScope Steel workers

    .
    If you think BHP are doing it out of the goodness of their heart, I got a mine to sell to you in the Pilbara.

    • Which brings us to stage two of Collapsis Australis…………

      When unemployment rises through 6% into 7 or even 8, wages will stall and desperate job seekers will be screwed to the wall by employers. Inflation will still be there thanks to easing policies of US and Europe. People will struggle to make ends meet regardless of interest rate settings and those on high wages now better brush up on their kebab rolling skills.

      The dollar is finally seen for what it is, and gets hammered, driving up the cost of everything (remember, we don’t actually make anything here). Petrol costs $1.80/L and everything transport related goes up in price.

      The housing market will die in the bum, taking real estate agents and bankers down with it. Miners will still be doing OK, but Chinas slowing will eat into their profits and drive down wages in that sector.

      Worst case?? We shall wait and see…….

      • “The housing market will die in the bum, taking real estate agents and bankers down with it.”

        Then at least some good will come out of the whole debacle

        the sooner this nation gets over its navel gazing obsession with property speculation the better

    • “In a year’s time, all the mining fanbois will be squealing about the unfairness of it all, when they are replaced by former manufacturing workers, willing to work at a fraction of their wage – starting a mining wages race to the bottom of deepest mine in Pilbara.”

      Hasn’t this site been claiming that has been the RBA’s policy all along? Hollowing out the rest of the economy to push mining wages down.

      • Yes, but the fanboys need to have it spelt out explicitly as to what it will do to their paychecks.

    • Today’s West was reporting that next year there will be an estimated 37,000 vacancies in the resources sector!

      And Mav, despite what many think, a lot of these jobs would require retraining and upskilling, wages should remain satisfactory for some time to come. The last thing (if the boom continues) anyone would want would be production losses via industrial action over wages disputes.

  9. “In The end of certainty, Paul Kelly describes how the Labor government of the 1980′s swept aside many decades of protectionism and rent-seeking behaviour and forced businesses to compete in a global setting. The result was a spectacular turnaround in Australian productivity through the nineties as businesses as diverse as board shorts and bionic ear makers flourished in global niches”.

    Another narrative might be that the Hawke Keating reforms of the 1980’s – removal of tariffs, deregulation of banking, opening up of capital account, move to inflation targeting & independent central bank etc. – simply moved the rent-seeking from the old industries (manufacturing, textiles) to the post-industrial ones (finance, real estate). And that the productivity growth of the early 90’s was a natural response to the early 90’s recession.

    I’m not saying the pre-1983 economy was perfect, or that some of the reforms weren’t needed. But maybe they weren’t all positive.

    In my opinion, the lack of reform in the context of the two speed economy, has less to do with the political power of the miners and far more to do with the extremely poor and immature nature of policy debate in this country. Suppose we wanted to support manufacturing etc. What are the options:

    – Protection – The whole political consensus is against it (so this is a non-starter)
    – Resources Tax & SWF – For the SWF to work, we would have to partly move from an inflation targeting / independent central bank regime, to a regime where the RBA would also target a stable exchange rate (not a peg) and would seek Fiscal assistance to manage the inflationary/deflationary effects of their policies (similar to Norway). I ask you; Can anyone really see this happening? Exclusive inflation targeting by an independent central bank is pretty much an article of faith in this country.

    That’s why I don’t think anything will happen. We will continue to fritter away the one-time boost to national income and allow productivity growth to drag behind the rest of the world.

    • Interesting to see a different take on the past.

      With respect to the support of manufacturing any real solution will have to be broarder based that a MRRT. If its the high dollar that really is the root cause of the issue (and not efficiency, overseas tariffs etc) then we need to be sure to cover the future causes of a high dollar.

      Who is to say that the next boom in exports wont be soft comodities, or gold ?

      NZ currently has a high dollar caused by a boom in food manufacturing exports (dairy) that is killing other local manufacturers.

      The reason the effects of the current mining boom are so much higher than previous is the fact that gold traditionally acted as a buffer for the minerals industry. ie investment was either directed towards industrial minerals or gold as the prices tended to move in opposite directions.

    • Sweeper, I too confess to being slightly pessimistic that anything other than a frittering away of this boom will occur.

      As H&H said in the article, government coffers have been awash with money and not a surplus to be seen.

      Government savings in the good times appear an alien concept.

      • During the Costello/Howard era, Australia did have a surplus, so it was not an ‘alien concept’. After that we got the GFC.

  10. Then you have the audacity to claim that their money was gained by luck not hard work.

    Oh, I didn’t realise record commodity prices were due to hard work. Silly me.

    Miners are reaping a one-off bonanza from natural resources that belong to all Australians. Once the miners have dug everything up and shipped the profits overseas investors, we can’t dig them up again.

    The link between the resources boom and the demise of non-mining trade exposed sectors has been clearly demonstrated here time and time again. If you don’t understand it, that’s not my problem.

    Again, this is all about maintaining a diversified economy for when the boom ends. We now have a situation where many more Australians in the slow lane of the two-speed economy than the fast lane. Add up the number of people employed in manufacturing, retail, tourism, education, and residential construction, and compare that to people employed in mining and related sectors. Its not even close.

    Now you might not think that’s a problem, but as the situation worsens, and worsen it will, it will become a HUGE political problem. Last time I looked we were still a democracy.

    Abbott will surely win the next election, but once he kills off the carbon tax bogeyman he’ll have nothing else to blame, and all the problems of Dutch Disease will remain. Indeed, they will be much worse.

    So what can a smart politician demonise once the carbon tax is off the agenda. The answer is obvious, and its a opportunity any decent politician could drive a truck through.

    • “Miners are reaping a one-off bonanza from natural resources that belong to all Australians. Once the miners have dug everything up and shipped the profits overseas investors, we can’t dig them up again.”

      That is what bothers me. These very rich people claim it’s because of their hard work, but it’s really because of the huge welfare handout that they got from the government in the form of too low royalty charges.

    • Most booms are built on a combination of hard work and fantastic good fortune.

      Our resources sector has always been here, most just never noticed nor particularly cared. Here ticking over, investing in projects often for marginal return – China growth and record commodity prices a most fortuitous combination.

      But there was a lot of hard work getting projects going before that.

    • “Oh, I didn’t realise record commodity prices were due to hard work. Silly me.”

      I suppose record costs are a spot of good fortune too?

      “Once the miners have dug everything up and shipped the profits overseas investors, we can’t dig them up again.”

      Perhaps you should have invested in them then? You haven’t been forced not to have you?

      “The link between the resources boom and the demise of non-mining trade exposed sectors has been clearly demonstrated here time and time again.”

      Humour me and describe how mining cause the demise of the transport, health, government, finance, housing, banking, retail, and construction sectors? Then lastly have a crack at manufacturing.

      “We now have a situation where many more Australians in the slow lane of the two-speed economy than the fast lane.”

      Really? and what caused that? The slow down in equity driven retail? A move to saving over debt? A reduction in the oversupplying of housing? All of which are necessary good things. There should be more of it.

      “as the situation worsens, and worsen it will, it will become a HUGE political problem”

      Hopefully then we can get some leaders with integrity and perhaps an understanding of economics. So that we can solve the core problems, rather than make popular yet incorrect moves that only kick the can down the road. If australia can’t find the integrity and talent to make the correct decisions, then we’ll all be poor. Or at least those who are left behind will be.

      “Abbott will surely win the next election, but once he kills off the carbon tax bogeyman he’ll have nothing else to blame”

      Except the real cause of course, but hey, it’d be rude to trot that one out.

  11. I believe Australia will end up being saved by a commodity price crash.

    What we see in Australia is a miniature version of the crisis in EU : we have a common currency across incompatible sectors of our economy. Taxing the mining sector more doesn’t solve the underlying issue. Instead, the mining companies should pay their taxation in future delivery contracts instead.

    Paying with goods instead of money is an old idea. Instead of paying a tax on profit, the mining companies will pay a percentage of their output in future contracts instead. If the price of metal and coal goes up, the Government gets more, and vice versa. The cashflow for the mining companies will be improved during the current expansion, they will be partially insulated from a price crash, and they will borrow less money from overseas. The government can ‘hold on’ to the future contracts as a way to lessen the pressure on the Australian dollar like a SWF. It’ll be a ‘win’ for everyone.

    • Now this is interesting. Govt can either hold the future contracts and use as a financial asset to participate in commodity increases as you describe, or sell it on to gain revenue for stimulus/anti-cyclical policies, or they could call the contract and allocate subsidised material to value-adding manufacturing, either for export or internal use.

      Could this result in perverse incentives though I wonder? Govt incentive is to string out the mining boom -> maintain high commodity prices -> maintain high rate of inflation?

      I like these alternative forms of transfer payments. Keep ’em coming!

    • That is a really interesting idea.

      It might run in to the same problem I highlighted before though. Nobody will accept anything which challenges the macroeconomic hegemony of the technocrats at the RBA.

  12. Also interesting to note during the Howard period is the rise of focus group politics H&H. Cramming 5-10 people in a room of different demographics and using that as some kind of guide of what the public will think.

    I’d actually be interested to know if it’s done as much in the US as it is here?

  13. Houses & Holes, thanks again for a compelling analysis. I think you would agree with me that its ridiculous that some industries like the car makers get loads of government largesse (valued at around 6 billion in ‘adjustment’ and ‘green’ funds) while other industries get sweet FA.

    • If we don’t retain some form of heavy manufacturing industry, and people who know how to run it….we leave ourselves extremely vulnerable in a volatile world. Since WWII we have had the luxury of picking and choosing our fights….that will not be possible in the next 50 years.
      For that reason I believe we should always have at least some capacity in steel production and milling, and therefore should move to bail out the steel industry whenever its necessary. Maintaining a capacity in heavy manufacturing is, and always has been, strategically essential.

  14. The resources DON’T belong to all Australians. We happily sold them off years ago for trinkets…new cars, TV’s etc.
    We continue to do so.
    Our solution now is to retract all our agreements and confiscate private property. It is the road to hell.

    Why are we just attacking the mining industry here? I repeat the dollar is NOT high because of mining production. We still consume more than we produce, hence we run a massive and continuous CAD.

    If we are going to continue with these stupid rants against miners because they earn a lot of money, we should start including Banks, lawyers, wharf labourers, over-paid Publc ‘servants’ and unmitigatedly stupid over-paid university economic academics and a whole host of other over-paid blocks within our society.
    If we are to tax mining companies for large profitws (however it is to be measured) then the same measure ought to be applied to all businesses.
    ‘Tax them all” I say!!

    • “If we are going to continue with these stupid rants against miners because they earn a lot of money, we should start including Banks, lawyers, wharf labourers, over-paid Publc ‘servants’ and unmitigatedly stupid over-paid university economic academics and a whole host of other over-paid blocks within our society.”
      .
      We live in the age of specialization, and I have decided to pick on miners.
      .
      Pick one of the above and put it on your to-do list.

  15. In this thread we seem to be blaming ‘industry’ of all types for being rent seekers.
    Has the Australian population as a whole not become members of a ‘cargo cult’ or become rent seekers when you consider the rise and rise of government welfare payments. Not only welfare for the middle class but new forms of welfare such as proposed no-fault insurance, increasing demand for mental illness safety nets etc. We seem to have moved away from a welfare for those who genuinely need it to welfare because we think its our right. We don’t seem to want to take responsibility for our own circumstances and if we have a problem its generaly someone elses fault.
    Now about those miners…

  16. Mav
    In these pages we’ve discussed
    -the problems of an over-size
    over-bloated over-paid tertiary sector
    (including the FIRE economy)that has
    resulted from more than 50 years of
    stupidity and bad government
    -the problems of trying to manufacture
    here in the face of
    -stupid work laws
    -stupid WHS laws
    -high Govt taxation
    -Taxation on employment
    -poor education
    -etc
    -problems associated with the results
    of speculative and subsidised capital
    flows and their effect on the value of the A$
    -etc etc etc for hundreds of pages

    Now, instead of really looking at the problems and solutions, we are having a stupid fit of rage against an industry that is now prosperous. ONE of the reasons it is prosperous was that people invested in it way back in time when the outlook was not what it is now.
    At that time the rest of Aus was building bigger houses, and the only thing the giant superannuation industry created by Keating was doing was, paying itself an absolute fortune at our expense and investing in more and bigger shopping centres.

    Now after all that discussion the whole thing has been reduced to a, sometimes, hate filled rant at the mining industry because it is doing well. It’s hardly likely to solve anything.

    • That is not fair – we rant far more about the housing-banking-politico complex than we do about the Chindia-mining-fanboi complex.
      .
      All of us, including you, are victim of the above two biggest elephants in the room, in one way or the other.. not so much by the other stuff you have listed – over-bloated, over-paid tertiary sector, work rules etc.
      .
      Their turn will come..it is about priorities. Otherwise, we will become like the US – where teatards are attacking foreign aid, EPA and the Education department for spending cuts.

  17. H&H, interesting article and great background, thanks.

    One flaw, a myth often repeated – time to end it once and for all:

    “Then in 2010, the miners slayed Kevin Rudd.”

    The miners did not slay Rudd, his own party did, Gillard long waiting in the wings, considered a sure election winner.

    I recall Gary Gray here in WA almost crying into his weeties so concerned was he about the RSPT, he certainly did not want it. Rudd was rolled in true Labor style.

    Yeah, sure an active and effective campaign was launched against the proposed tax, rightly so. The miners opposition was vocal and open.

    No back room deals to end the RSPT there…unlike the back room deals to dispense of Rudd.

  18. Mav I’m not trying to attack you or anyone elase here. However read back through the whole of the comments on this blog and
    “Can manufacturing seize its opening? ”

    All debate about the causes of the malaise has been drowned out in a rather bitter nasty unfair attack on the mining industry and those associated with it.

    I’ll state the FACT again. The mining industry certainly means we have a higher dollar than we would otherwise have if we had no mining industry. However it is NOT the primary cause of our over-valued currency and the current malaise in manufacturing AND THE EARLIER DESTRUCTION OF RURAL COMMUNITIES.

    Perhaps the primary cause of the current malaise is our own malaise!

    • The confusion I think stems from my suggestion that manufacturing embark on a bitter campaign against mining to save itself in the national interest.

      It’s nothing personal.

  19. H&H you write an amazing amount of stuff for this site so I reckon you are entitled to one or two rants from time to time. No criticism there. I’d meant to make that plain in my comment but forgot to do so.
    My remarks were more aimed at the tone and irrationality of much of the comment.

  20. Jumping Jack Flash

    the problem with bluescope is Easy.
    globalisation, or its epic fail means we all need to find niche markets to exploit or otherwise we need to work for a few dollars a day to be globally competitive with developing nations.

    how do we compete when quality is the same but production overheads are orders of magnitude higher here compared to others in the global marketplace?

    and why force other successful businesses to buy items from local businesses at a loss when they could be maximising profits by buying cheap materials of the same quality from overseas? Raise the red flag comrades! Are we capitalist pigs or not? Do we have freedom of choice or a dictatorship?

    get competitive locally by matching wages and conditions and then overheads in developing nations, or get packing overseas. Another victim pulled into the globalisation vortex.

    The US is catching on, they just need to start employing all those desperate and displaced workers in sweatshops.

  21. Jumping Jack
    Damn I’m having trouble telling whether your tongue is stuck in your cheek!

    On the one side we have to be efficient which includes restructuring on a micro and macro level.
    On the other hand, before we ditch any more industries and skills, we need to get our dollar to a sustainable level where we can produce at least as much as we consume and no longer need to borrow from all over the world all the time nor sell off our national pride and resources in exchange for trinkets that wear out after a few short years.

    What may be more competitive to buy from China this year may not be so in a year or ten. Then where the hell are we?
    Unfortunately the latter is what is coming our way.

  22. The only manufacturing industry in Australia with a global advantage is food, which is why they’re all foreign owned now.
    Due to the small size of Australia’s population, any industry that performs well ends up being bought up by some foreigner. The only exception are protected industries like banking.

    While there is little point with manufacturing in Australia, the high Australian dollar offers an opening to develop a manufacturing base in Indonesia. More than China, the country of 230 million people to the north is our future.

    Australia does not have any avenue to invest the ‘river of gold’ flowing from the mining boom, which is why they all went into the housing bubble. What we need is to SHIFT those money into Indonesia instead where there is a higher growth potential.

    This is where we need political leadership and diplomacy. We’ll need trade agreements and a promise that Australian executives will not end up in prison every time a business deal goes wrong. (i.e. China). Unfortunately, as the fiasco with the live cattle export has shown, our politicians haven’t got a clue..

    • Ronin
      There is a river of gold but if we are to invest it we have to save it first. We are still spending more than we earn so there is nothing to invest in Indonesia or anywhere else. Net offshore investment requires a Current Account Surplus which requires net savings of the combined Govt and private sectors.
      So we have to have higher taxes, or less spending by Govt, or higher interest rates and more saving by the Private sector…or, of course, a combination of two or more of the above.
      Unfortunately none of these things are on the current political agenda from any political party that I can see….oh except the Carbon Tax which is a tax on production! Great!

      After all that we then require the diplomatic skills and awareness you describe.

  23. SCARE 20.12.2012
    (Stop Corruption And Repression Effective 20.12.2012)

    Banks were given a very important privilege to create money in the form of extending credit. This function requires diligence and careful consideration in regard to individual credit risks as well as to overall credit levels in the system. The financial crisis revealed that the banks were operating at too high a leverage and with too much risk. They were used to be saved by the Central Banks and certain that in times of difficulties the Central Banks were there to save them. They were like trained dogs and their master Greenspan or Bernanke would always be there to rescue them when unforeseen difficulties arose.

    That may be true but that does not absolve them from their obligation to monitor overall debt levels in the system as well as being diligent in evaluating the debtors ability to not only service a debt but to be able to repay it over time. The banks clearly failed in this function that is the core function of banking but focused mainly on their compensation packages. The way these bankers enriched themselves in the process of driving the financial system into a wall was appalling and the average income earner was never able to comprehend their schemes but preferred to simply ignore them. Of course, the bankers explained their outrages income levels with free market principles of supply and demand, where the best simply could be hired with those kinds of benefits only. In hindsight those superior managers seem to have missed their mark considerably. The most interesting aspect of all of this is the fact that, after we have been more than 3 years in this financial crisis, the bankers continue to loot the system as if nothing ever happened.

    True to form the Central Banks “saved” the financial system by saving those great financial institutions without whom the system would have collapsed, as was argued. Hardly were we out of the danger of collapse, the banks immediately went back to their old ways and were certain that this was a problem that would occur just once in a lifetime and now all was clear again. The real problem, however, had not been addressed but had simply been muddied.
    In actuality, the losses produced of extending unsustainable levels of credit by the banks have been transferred to the public. Different ways were chosen to achieve this task in the form of free money for the banks, injection of government funds into some institutions, increase of basic money supply and so on.

    The threat of system collapse would have been labelled blackmail if it would have occurred in another setting. However the bankers were able to influence the media, the legislators and regulators in their favour with all the financial resources available to them. Nobody was made to take any responsibility and no one was taken to account.

    This represents a serious violation of the spirit of the Rule of Law that is the basis of western society. It seems that now the new rule is Might is Right. This changes many parameters in the compass of the social system within the western world. No one can be sure on what level and when one will be subjected to the financial abuse of those elites. Presently, the people in charge are trying to enhance financial repression of which one form is to keep interest rates below the level of inflation which affects mainly those that lived within their means over the past many years; another clear violation of the spirit of the Rule of Law as it transfers losses from bad investments to the innocent and decent part of the population. In addition, the increased level of government debt puts in doubt all those benefits promised by governments the world over.

    It is interesting how the banks were able to confuse the public who was/is unable to grasp the actual situation. But considering the banker’s great financial resources, it seems not that much of a miracle to influence the media and the legislator and having politicians do their bidding. The question is what the heck can WE, THE PEOPLE do about it.

    Usually, we could address such things on a political level as we are a democracy, right? But it seems that the system has been corrupted by all the money sloshing around and it is extremely difficult to find any electable person that will act against those powerful interests. In addition, it will take many years until sufficient numbers of persons with the new thinking and with integrity not to be corrupted by those lobbying efforts will be elected to office that will implement the changes needed. So, what should we do? Start a revolution?

    Well, the blackmail used by the banks may be the only way to address the injustices that have occurred over the past few years. They showed us how to leverage one’s limited resources to achieve one’s goal. Therefore the following proposal to start the movement “SCARE 20.12.2012” should be seen in this context. The idea is that if by that time (20.12.2012) some serious injustices have not been removed from the system, people will start to withdraw their money from all financial institutions driving them into default. And it might work, because those who hesitate to support this threat may be left with no money as the banks will have to close down before all has been paid out.
    Now, what demands are made if that scenario is to be avoided.

    1. Bankers and past Bankers (all those working in the financial industry that earned in excess of $500k plus annually for more than 2 years during the past 15 years and this without any downside risk i.e. risk of financial losses, except the possibility of losing their job) have to be made personally accountable for their past activities and be removed from any such position that might directly or indirectly have influence on the money creation and lending aspects of the economy (this includes regulating agencies and politics) before 20.12.2012.

    2. Present and past regulators have to be made personally accountable for their past activities and be removed from any such position that might directly or indirectly have influence on the money creation and lending aspects of the economy (this includes financial institutions and politics) before 20.12.2012.

    3. Politicians that accept any financial support from institutions that are involved in the money creation and lending aspects of the economy will have to face a jail term of no less than 2 years without the possibility of parole.

    When these 3 points are implemented before 20.12.2012, we the public will not destroy the financial system but support the way to find back to the RULE OF LAW and away from the idea of MIGHT IS RIGHT.