Sshh! Don’t mention industry policy

The RWDBs seem to automatically dismiss The Age’s Ken Davidson as a communard dolt. So posting an item agreeing with him isn’t likely to endear me to the anti-luvvies. But we centrists call it as we see it without fear or favour.

Davidson raises a critical issue in his column today, that neither major party seems prepared to face: industry, infrastructure and skills training policies and the consequences of the current lack of them:

Australia’s balance of payments deficit is now close to unsustainable because the Howard Government slashed infrastructure spending and investment in human capital formation programs established by the Keating government in training and retraining, higher education, and industry assistance policies such as the 140 per cent research and development allowance. Australia’s external deficit blew out because Australia’s hitherto fast-growing exports of elaborately transformed manufactures collapsed.

Davidson made this point even more clearly in a column in early August:

Australia is losing the elaborately transformed manufactures race. According to the National Institute of Economic and Industry Research, Australia’s elaborately transformed manufactures trading deficit between 1996 and 2003 rose from $18 billion to $74 billion. This growing gap is not being covered by Australia’s traditional commodity exports.

If Australia had untapped capacity in elaborately transformed manufactures due to exclusion from the US market, that would be a reason to sign the FTA. But Australia’s share of the global elaborately transformed manufactures market is contracting because the Howard Government removed support for the development of a sophisticated Australian manufacturing industry in its first budget in 1996, by abolishing the Development Import Finance Facility and cutting back the Export Manufacturers Development Grant and the 140 per cent research and development subsidy. As a consequence the growth in R&D, which underpins development of elaborately transformed manufactures, has stagnated since 1996 after a decade of 10 per cent a year real growth. Over the same period, the annual growth of elaborately transformed manufactures exports decelerated from 18 per cent to just under 2 per cent. So for the want of a few hundred million dollars in judicious industry support, Australia’s elaborately transformed manufactures deficit has blown out by about $50 billion.

In today’s column, Davidson also makes a crucial linkage that Mark Latham should also be highlighting to diminish Howard’s undeserved reputation as a sound economic manager:

Worse, the Government’s deflationary budgetary policies could have led to rising unemployment except for the Reserve Bank offsetting easy monetary policies that allowed the money supply to grow at twice the rate of the economy. This growth enabled the banks to borrow heavily overseas, and this money was poured into the housing market. This in turn led to inflation in house prices and the huge level of household debt that Howard is now trying to exploit to retain office.

Labor’s failure to confront this issue suggests either that it is ignorant of the connections and the Government’s responsibility for this outcome, or it doesn’t believe voters are capable of absorbing the message.

Far from future surpluses being the saviour of the “aspirational” voters in the mortgage belt, their only salvation lies in an incoming government being prepared to fund a massive infrastructure program in transport, communications and education, together with an industry policy, and all designed to boost exports of elaborately transformed manufactures so as to curb the growth in foreign debt.

The Government could borrow up to $12 billion a year for infrastructure investment without adding to the burden of government debt as a proportion GDP, and without putting upward pressure on interest rates.

I agree, and I’m buggered if I know why these crucial issues have barely been mentioned in this election campaign. I fear that the answer may be that Latham is just as much an unimaginative captive of neoliberal orthodoxy as Peter Costello. One of the few things Howard has going for him is that he’s such a cynical opportunist that he doesn’t give a rat’s about neoliberal orthodoxy or any other principle if it conflicts with the imperatives of short-term power. Howard’s remarks yesterday about infrastructure spending illustrate this propensity perfectly.

At least there are some tentative indications in Labor’s industry policy document (such as it is) that someone in Latham’s Shadow Cabinet understands the issues:

Only one in four manufacturers in Australia invest in R&D, few collaborate with the public sector, and most spend more on their electricity bills than they do on R&D. This investment void is not sustainable ¢â¬â it is not a sign of a modern, advanced economy.

But all the policy document manages to promise is to “develop a National Manufacturing Strategy in partnership with industry and the union movement“. Wow! Visionary stuff indeed!

At least Barry Jones’ much-maligned Knowledge Nation document proposed a range of concrete initiatives for stimulating R & D, capital investment, skills training, fostering “sunrise industries” and so on. Costello’s politically devastating but intellectually bankrupt dismissal of it as “Noodle Nation” may well be the single greatest political tragedy of the last decade, because it seems to have frightened Labor away from this entire policy area.

With a bit of luck, however, they’ll take it more seriously in government than they have in opposition under Latham. The reality is that capitalism just isn’t very good at investing in things like R & D or training, and private or public-private models for creation of public infrastructure are notoriously problematic. The main reason the private sector isn’t good at these things is that the risks are too great and the rewards too uncertain and long-term for the “invisible hand” of the market to operate.

No advanced economy that I can think of has achieved that status without substantial government initiative and encouragement in these areas. Even in that great bastion of “free” enterprise the United States, R & D and capital investment have always been underpinned by massive defence and general government procurement spending. The American aerospace and computer industries simply wouldn’t exist without it. Even the Internet that brings you this post is an artefact of scientists working on the public purse on defence-related projects.

I’m not talking about socialism or even “picking winners”, just inserting some rather large rungs for corporate Australia in that ladder of opportunity. As Davidson argues, borrowing to finance productive investment is a positive not negative thing for governments to do, and the sooner someone effectively challenges the simplistic orthodox neoliberal line on government debt the better. But I doubt it’s going to happen during the election campaign. Not even Latham is that “crazy-brave”.

About Ken Parish

Ken Parish is a legal academic, with research areas in public law (constitutional and administrative law), civil procedure and teaching & learning theory and practice. He has been a legal academic for almost 20 years. Before that he ran a legal practice in Darwin for 15 years and was a Member of the NT Legislative Assembly for almost 4 years in the early 1990s.
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still working it out
still working it out
2022 years ago

I agree completely with everything you’ve said in that post. Its just so sad that we can’t get a decent amount of investment in R&D and ETM’s in this country. There’s no question the talent is there to turn out some real world beating products in these areas.

I think that Latham does understand this. He has shown himself to be very interested in policy. Its not though the link between R&D spending and economic growth is as hard to understand.

I just think that there has been a strategic decision by Latham’s political spinsters not to run with this as an issue in the election for the following two reasons.

One:, its complicated. You have to use big words like Elaborately Transformed Manufacturers to explain it. It can be done, but its hard and Latham risks looking a bit “intellectual”.

Two: you have to fund it. If you’re going to talk about R&D then you look a bit of a hypocrite unless you put some real money (ie hundreds of millions of $$) on the table. With Labour trying very hard to underspend the coalition in order to shore up its economic credentials any money spent of some sort of “Knowledge Nation” policy will come straight out of Health and Education.

Basically, making R&D a serious part of the election campaign does not seem to fit in with the fairly cautious strategy Labour has taken into this election. Can’t say I blame them, though it is very sad.

I’m hoping (really, really hoping) that once Labour have won the election they’ll try and implement a serious R&D policy. Labour does, after all, have a good track record in this area. One reason to vote for Labour even if Costello took over the Liberals.

Geoff Honnor
Geoff Honnor
2022 years ago

Just a hunch, but I think that the absence of industry policy election debate may well be related to the difficulty of translating said policy into punter-pleasing soundbites. I of course respect and admire you so I read to the end of the post. However, if you were published in the Tele, most people on the 654 bus would have turned to the daily horoscope after the first sentence.

This yearning for policy detail is a charming tendency of yours Ken, but it would make your average election strategist go cross-eyed at the thought. Rework it into a couple of paras connected by “ease the squeeze” and you might be talking to the ALP. On the Coalition side, I fear that “industry policy” might just involve giving toolkits to apprentices – where, after all, would industry be if apprentices had no toolkits? – and a good old pork barrelling to the marginals all round.

Ken Parish
Ken Parish
2022 years ago

Both Geoff and “Still Working it out” make the same point, and it’s a good one. The electoral imperatives no doubt dictate the extent to which it’s wise to go into detail on policies that could easily be misrepresented, or which might in themselves confuse the voters or cause their eyes to glaze over and have them reaching convulsively for the remote control or mouse button. So I wouldn’t really object to Labor not discussing industry policy, if I believed they understood the issues and would implement the policies after the election anyway (leaving aside issues of mandate and democratic legitimacy). My fear is that Latham really is a convinced neoliberal with a few extra frilly bits, and that therefore he won’t be receptive to the arguments of people like Davidson on industry policy even after the election. That would be a disaster.

yarraside
yarraside
2022 years ago

“Worse, the Government’s deflationary budgetary policies…”

Would that be Davidson-speak for Howard and Costello running budget surpluses as opposed to Labor’s $10 billion deficits?

Red Ken then attempts to give the RBA credit for low unemployment, and suggests this has been achieved in spite of the Government’s economic management?

Come on.

Davidson has zich cred as an economic commentator – even the ALP regards him as being on the lunatic fringe. This latest column just underlines why.

Ken Parish
Ken Parish
2022 years ago

yarraside

Davidson has his weak points, but he talks a lot of sense as well. As far as I know, Keynesian theory on how to deal with a recession still holds true. That is, governments need to spend and go into deficit or else the recession is liable to get deeper and more prolonged and maybe even become a depression. The Hawke/Keating government deficits of 1989-93 or thereabouts flowed from the application of orthodox Keynesian theory to a recessionary situation, and the recession in turn flowed from inexperience with operating the economic levers of a deregulated economy. Hence they left monetary policy too loose for too long in the wake of the 1988 stock market crash (for fear of a recession), and then over-corrected to take the heat out of the economy. Thus it was an artefact of learning the ropes of managing a modern deregulated economy. They were mistakes that Howard would have duplicated had he been in power (assuming that he would have had the guts to make the reforms in the first place – which is highly doubtful).

You’re certainly correct that it was (and is) desirable if not essential to run surpluses through the good times so government can afford some Keynesian pump priming during a recession. But Howard hasn’t even done that in any coherent way. The surpluses he’s achieved in the last few years have been minimal, and quite deliberately so in order to deny Labor any room to manoeuvre on policy promises (and to fund pork-barrelling). And even the surpluses achieved in the earlier Howard years mostly came from flogging Telstra and other public assets rather than recurrent spending cuts.

I’m not an economist, so I can’t be sure, but I think Davidson is right in claiming that there is room for substantial government borrowing for infrastructure, stimulating R & D etc without putting pressure on interest rates. That would especially be the case if simultaneously they introduced policies to restrain the growth of private debt e.g. returning CGT to a situation where it is similar to marginal income tax rates; quarantining negative gearing deductions on rental properties etc.

The Howard government has a quite bizarre policy of encouraging non-productive private debt (borrowing on credit cards to finance private consumption spending, and borrowing from banks for mostly unproductive rental property investment) while refusing to borrow at all for productive long-term purposes. It doesn’t make any sense. Davidson is right. If a corporate board pursued these sorts of policies they’d be sacked for gross incompetence (although they’d probably rip off the shareholders for huge golden parachute payments on the way out).

James Hamilton
James Hamilton
2022 years ago

Geoff Honour in his comments made me feel awfully guilty about only skimming your post and reminded me that I am a piss poor attempt as a politics junky. Do you think Geoff was being ironic and sort of confessing he did not read the whole either? I hope so. It does go to the heart of Geoff’s and Still’s main thesis that it is all too complicated to market to marginals. Too dry for me and I vaguely remember getting an economics degree once.

Anyway I’m sure you and the bolshie guy have made some telling points about this though, Ken. Too move away from your post on governemet policy relating to this a bit, our lack of commitment in the area of R&D has been a bit of an item of cult paranoia for a while among Those Who Know These Things. There has always been this vibe of “all we do is dig stuff up and gather ozone depleting cattle for export in cruel boats and hence we are all going to be deservedly rooned” and while I acknowledge the real concerns, the bad bits just don’t ever seem to come about.

I do wonder if we are not being a bit harsh on this and previous governments. Could this whole issue have a cultural component? Could it be that “we” are all just a tad culturally unwilling to put aside our money for something that may not yield immediate results or intangible results? I read stuff about how much is spent on this in other countries, US etc, and it seems that we are not really willing as a people to sacrifice the beer money on some pipe dream like research. It’s a bit the same with charity, leaving money to schools, faculties, opera companies etc in our wills.

There might be a bit of “It is terrible and the government must DO something about it, pass me a tax cut..” to this topic. No government has made investing R&D illegal as far as I am aware.

Graham
2022 years ago

Well, this would partially explain the brain drain. It’s all very well training scientists, engineers, etc and then have them emigrate because we don’t have the jobs to keep them.

Fyodor
2022 years ago

Ken,

I agree with much of Davidson’s critique of the Howard government, but a lot of it is balderdash, PARTICULARLY his views on “industry policy” and trade.

His commentary on international trade flows is skewed to his arguments, and neglects to mention the effect on our trade deficit from the outstanding economic growth we’ve experienced relative to our trading partners (leading to greater import growth than export growth), and the fact that most countries’ share of ETM exports have declined relative to the powerhouse performance of China.

It’s also interesting to note that Donaldson quotes a lot of the NIEIR’s research without stating that they prepared the report for the Australian MANUFACTURING Workers’ Union in their submission to the Senate committee on the US FTA.

What’s so fantastic about ETMs anyway? Japan’s been running massive trade surpluses on ETMs and their economy’s been flat for more than a decade.

The Hawke-Keating government tinkered extensively with injecting money into training, R&D, industry policy yadda yadda and had fundamentally little impact on our competitiveness in exporting ETMs. In fact, one of their better policies involved withdrawing industry support by cutting tariffs. This is the sort of micro-economic reform that has simply been forgotten over the last decade under both Keating and Howard.

I seriously doubt that spending more money on R&D, training, education etc. is going to have as much impact as getting the basic stuff right, i.e. low interest rates, sophisticated and flexible capital markets, a favourable exchange rate, favourable tax regime, stable macroeconomic environment, competitive advantage etc.

It’s not at all self-evident that throwing more taxpayer money at R&D and training will suddenly make Australia a manufacturing powerhouse. Decades of “industrial policy” taught us that much.

Phil
2022 years ago

“Getting the basic stuff right” has run its course and the theory of diminishing returns has well and truly kicked in, IMHO. Examples?(1) Employers have outsourced training/education to workers and terms of employment have been casualised. Sensibly, workers should invest in themselves, but before or after paying the rent/food/etc? (2) Most of the heavy/hard infrastructure in this country was built ages ago. But if you keep running surpluses throughout the budget cycle as a matter of dogma, where does the money come from to maintain, let alone extend it?

Geoff Honnor
Geoff Honnor
2022 years ago

?”Geoff Honour in his comments made me feel awfully guilty about only skimming your post and reminded me that I am a piss poor attempt as a politics junky. Do you think Geoff was being ironic and sort of confessing he did not read the whole either? I hope so. It does go to the heart of Geoff’s and Still’s main thesis that it is all too complicated to market to marginals. Too dry for me and I vaguely remember getting an economics degree once.’

Geoff did read the whole post James, but he was also reliant on irony – the friend of non-politics junkies everywhere…

Mark Bahnisch
Mark Bahnisch
2022 years ago

One of Keating’s best ideas was to take over the sclerotic TAFE system from the states – unfortunately never seen through. One of the worst long term things for our economy during the 90s was the capture of the technical education system by employers pushing a “contestable” system – code for opposition to transferable trade skills as opposed to narrow industry oriented training. It’s been obvious since about 1998, according to labour market economists, that serious skills shortages are looming. At the same time, in Howardian Australia, we’ve surfed the back of record household debt, unsustainable property prices, and a range of classic investment bubble indicators, while utterly neglecting long-term investments in skills, human capital, and innovation. Until 1995 we were on an upward trend in terms of elaborately transformed manufactures, but we’ve since relapsed into an ethereal nether world of “she’ll be right” with no sustainable indicators for long term growth in terms of productive investment – another financial market driven boom as in the late 80s which will have a similar outcome. I hope for justice’ sake that Latham loses, and Howard and Costello are still around to reap what they have sown.

Jacques Chester
Jacques Chester
2022 years ago

Ken,

Australia has run trade deficits on a more or less uninterrupted basis for nigh a hundred years. We aren’t broke yet.

More to the point, has it ever occurred to you that some of these deficits, being spent on overseas high tech, are in fact being put to work in an R&D lab in Japan, or the USA, or India for that matter? We get the improved goods here in Australia. What’s to fuss about?

I wouldn’t accuse you of picking winners – no need to, it’s baldy evident in your musings – but I would accuse you of a submerged economic nationalism. It’s very 1930s.

Mark Bahnisch
Mark Bahnisch
2022 years ago

Jacques, as you no doubt know, the 30s was the decade of autarchic economic policy when almost every nation was protectionist. Given that a lot of the trade deficits you refer to are because of an imbalance between consumer imports and exports of untransformed primary and mining goods, how would you suggest we keep the good ship Oz from sinking in a sea of consumer and housing bubble driven debt over the next decade or so – given our sterling record under the Howardians of disinvestment in skills, research and innovation?
Banana republic recidivus?

wmmbb
2022 years ago

Not much of a constructive form has been said, or seemingly can be said about the related Industrial Relations Policy, or even Workplace Relationships Policy, except that it has some importance to me, which is not to say that I know a lot about it. Why so? Is it simply an electoral policy no-go area, to be put aside while the real business of the swaying the mariginals is worked on?

Mark Bahnisch
Mark Bahnisch
2022 years ago

wmmmbb, Labor in my view has a story to tell that’s worthwhile about the IR policy – however, I think they took a strategic decision to keep mum about it to let the Dear Leader’s scare campaign wash away into the ether – the Fin Review has had nothing in it for the last month or so but anguished screams from Big Business about “turning the clock back” etc. Which, incidentally, is untrue. IR has always been the domain of rhetorical hyperbole. However, Latham and Emerson came out swinging on this in yesterday’s Australian. I can’t find the link to post easily, but I did some work as a consultant to the Qld Government on their Industrial Relations Act, and I’ve commented on Backpages on what I think about Labor’s IR direction federally – bearing in mind that Emerson (a Queenslander) has said that it’s largely based on the Qld and NSW state legislation. One would hope more Qld than NSW as the NSW jurisdiction is unnecessarily legalistic and adversarial – I haven’t yet had a chance to analyse the federal policy. Anyway, if it’s anything like what I’ve read in the papers, it ought not to frighten anyone concerned with productivity, flexibility, competitiveness etc but ought to deliver real gains for employees.

Paul Watson
2022 years ago

Jacques Chester wrote:

Australia has run trade deficits on a more or less uninterrupted basis for nigh a hundred years. We aren’t broke yet.

As other commentators have inferred, borrowing to build infrastructure (= investing in the future) is one thing, but our so-called “miracle economy”

Jacques Chester
Jacques Chester
2022 years ago

Mark, Paul;

I agree that there are institutional or structural problems with Australia’s economy. I just don’t think that trying to spend on this or that program is where the solution lies.

If you ask me, we have a skewed monetary system. If this makes me a Austrian whackjob, then forgive me father for I have sinned. But it seems obvious to me that if:

a) Interest rates are incredibly low,
b) People are encourage by tax breaks to buy property, and
c) Arising from a) and b) we have an extremely inflationary housing market; that
d) Somebody will be left holding a very heavy bag.

It’s not sustainable, but it’s as predictable as rain in the wet season that artificially low interest rates encourage unsustainable malinvestments. This is the basis of the austrian business cycle theory, and if you ask me, it makes perfect sense.

As to trying to encourage R&D here in Australia, it may simply be that other countries have a much higher comparative advantage in these areas. Given that only a few of our universities turn up in worldwide top 100 lists, this seems eminently possible. Given that the benefits of a discovery in America flow to Australians, why fight it?

trackback
2022 years ago

Fear, loathing, etc #14

The state-by-state (minus one state, plus one territory) Newspoll breakdown is reproduced below, with a little commentary. The best guidance at this stage remains the ALP’s five-point beyond-margin-of-error Newspoll/Morgan lead. Since the weekend’s pol…

trackback
2022 years ago

Fear, loathing, etc #14

The state-by-state (minus one state, plus one territory) Newspoll breakdown is reproduced below, with a little commentary. The best guidance at this stage remains the ALP’s five-point beyond-margin-of-error Newspoll/Morgan lead. Since the weekend’s pol…