Paul Kelly poured his heart into a feature on the weekend which amounted to an obituary for the Australian car industry:
A turning point has come in Australian industry policy and the long history of car manufacturing. The Abbott government is heading towards the termination of the practice of throwing good money after bad and is set to burst the failing pretensions of the car lobby.
In the last election campaign, Kevin Rudd began – but did not pursue – the debate about what sort of economy Australia should be. Tony Abbott does not have the luxury of avoiding this issue.
Abbott may be attacked as the prime minister who shut the door on the car industry. But that is a false assertion. The truth lies elsewhere: Holden has made clear the cost of keeping its local operation is not worth the price.
Rarely have the arguments for more subsidies and more protection looked so weak. Rarely is a new prime minister given the opportunity for a tough yet responsible decision that is saleable into the community.
Joe Hockey is embracing a new framework: putting the interests of Australian taxpayers and a lower-cost economy before the interests of an uncompetitive automotive multinational. It is new terrain for a treasurer, but justified by the industry’s deterioration. This decision is less about cars and more about achieving a modern and competitive economy.
…Abbott stands at a flashpoint. He can use the car industry decision to highlight the changed economic, fiscal and cultural mindset he seeks to engender in the nation. That means mounting the argument for change, not just in the car industry but in the wider economy.
…Much of the argument is that because taxpayer assistance in Australia is less than in other nations, it should be continued. This is nonsense. The only valid argument is whether taxpayer assistance is fair for our society and efficient for our economy.
And here is where I part ways with Mr Kelly. There has been no effort by this or any previous governments to address Australian competitiveness. On the contrary, just about every major economic policy setting has been aimed at precisely the opposite for as long as it matters.
We have a higher inflation band in our reserve bank decision making than anyone else.
We have fiscal and superannuation settings that are singularly designed to inflate share and housing markets more than anywhere else.
We have extraordinary levels of industry concentration in every sector, locking in pricing power and killing productivity faster than anywhere else.
We have an industrial relations system that is overly tight and wage inflation oriented, certainly more so than other developed economies.
We have a tax system that favours mining over everyone else despite extraordinary levels of profitability.
We have a tribal political system that favours the two opposing polls of this rentier system – unions and the ASX50 (as opposed to labour and capital).
And we have a severe case of paralysing exceptionalism that prevents us doing anything about a currency that is grossly inflated by currency wars.
While these settings are in place, it is absurd to pick on manufacturing (including cars) and blame it for a lack competitiveness. Australia has a gigantic real exchange rate problem that is hollowing everything that isn’t either buried in the ground or fastened to it.
As the RBA finally acknowledged last week, Australia has Dutch disease. But it’s no ordinary case. It’s both a chronic and acute version that goes back decades and is now reaching its zenith. The multifarious distortions and protections have produced a rentier economy that now runs via legislative fiat.
It most certainly has to be fixed or our standards of living will fall, but let’s not pretend that manufacturing is in some way unique or the natural choice for carrying the adjustment. There are many much larger subsidies for other sectors whose removal would be more efficient and equitable and produce larger and longer term competitiveness improvements than killing cars. Why not abolish negative gearing which costs tax-payers $4 billion per year, or tax mining properly for an additional $5-10 billion, or force the major banks to pay for guarantees at billions per year?
Why? Because those sectors are better equipped politically to push the adjustment onto somebody else. Like the loon pond so often does, Kelly picks an easy loser.
If we look beyond our noses we will see that there is no “modern and competitive” economy on earth that does not have a vibrant manufacturing sector of some size. Australia’s is already the smallest in the OECD, tied with Luxembourg. If we let cars go it will shrink to 5-6% of output, half of the manufacturing proportion of the supposedly de-industrialised UK. Tilting your economy so far from diversity is not conservative economics, it’s a post-modern economic experiment.
Arguing that the car industry should die is the equivalent of amputating a leg to address a heart condition. Sure less blood will be needed for a while but it isn’t going to fix what might kill you. And if you get the triple bypass that you really need, you may find that you want to walk again.
