Labour joins capital in the manufacturing fight

Advertisement

From The Australian this afternoon:

UNION leader Paul Howes has attacked the Reserve Bank and Treasury for allowing interest rates and the dollar to skyrocket.

The Australian Workers Union boss called for a change in the RBA board’s make-up, saying the current directors had allowed rates to remain high for too long, and lashed the quality of advice from Treasury bureaucrats.

“We have a situation where manufacturing, agriculture, tourism, are all under huge threat, frankly because of inaction by the RBA, some pretty dodgy economics from Treasury,” Mr Howes said in a speech to Labor MPs today.

He said it was imperative that interest rates were lowered to kick start the vital economic sector.

“Frankly if the Reserve Bank’s current directors are not going to act on this we need to review the make up of the RBA,” he said.

I’m not advocating re-regulating the way interest rates are set, but we have to recognise the fact that it is not sustainable for our economy to have interest rates that are so much higher than the rest of the world and to think that a dollar sitting between parity and $1.10 is normal or our economy is adjusted to deal with it.”

Mr Howes said Treasury was wrong to rely on the resources sector to replace lost manufacturing jobs.

“Now, some Treasury types will tell you that this closure of our steel industry is inevitable, it’s meant to happen,” he told Labor MPs.

“But this thinking ignores a fundamental issue – our resources are not renewable. The simple fact is our economy can’t rely on just mining.”

So, at last some fight. Too late, and most likely at the verge of a global crisis that will squash the dollar anyway, but the unions have joined the Australian Industry Group (AIG) in the campaign against the extinction of manufacturing. These are encouraging signs, with Howes broadening the base of attack to all tradable goods sectors. He should be seeking a formal alliance with education and tourism bodies. Maybe even retail.

Advertisement

But Howes is wrong to target the RBA. The solutions to Dutch disease are not monetary, they’re fiscal. As Willem Buiter said of Dutch disease on Inside Business recently:

The only way to avoid it is to leave the stuff in the ground, right, and that would really not be wise. Now, the degree, however, to which this occurs and whether or not it is simply overshooting, depends on domestic policies, especially fiscal policy.

So, the way to minimise the degree of the Dutch condition and stop it from turning into a Dutch disease or even natural resource curse is to use tight fiscal policy and to save privately or publicly a large part of the windfall gains, rather than all spending it immediately. And where you spend it, you know, spend it on investments, private or public, that yield their returns over a long period.

So fiscal tightening, high national saving rates are the way to minimise the severity of the Dutch disease. Anything else, including monetary policy, is second order.

Howes should refocus and redouble his attack and aim straight at the government. He seems to have some grasp of this. Back to The Australian:

Advertisement

As the nation’s manufacturing industry suffers from the pressures of the record high dollar, Mr Howes said Australia should establish a sovereign wealth fund, improve its productivity and take China to task over its undervalued currency.

Mr Howes said it was no secret Australian productivity had stagnated in recent years. He denied his stance was anti-foreign investment.

“Our productivity needs to be revisited, but in a spirit of consensus and investment, rather than through the self-defeating prism of cost-cutting, eroded conditions and employee-employer conflict,” he said.

He said Australia should be part of a diplomatic effort to make sure China did “the right thing” and floated its currency to alleviate the pressure on local manufacturers.

“Cracking down on China’s currency manipulation should be right at the top of our foreign policy agenda,” he said.

Australian Steel Institute chief executive Don McDonald, who addressed about the meeting of about 25 Labor MPs, said the steel industry was facing a “dire” situation.

He proposed an Australian industry participation plan that would apply to projects over $100 million to ensure Australian firms’ participation.

“The only work that is occurring in construction at the moment is in resource construction and infra, as Paul said some 90 per cent of that is going offshore,” he said.

“There is an immediate opportunity with strong government leadership and supportive policies to get this work to stay here and that would be in a way that’s not protectionist, that doesn’t contravene WTO and it’s not subsidies,” he said.

I’m not much of a fan these proposals. They are really just protectionism in another guise. And, in an economy running at near capacity, such measures only palm the adjustment onto another tradable goods sector. Australian manufacturing can compete fine so long as it’s not hobbled by a huge currency overshoot.

At least, however, Howes and Ridout of the AIG are now singing from the same hymn sheet.

Advertisement
About the author
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.