Why don't governments get involved?
Governments would like to advance local transformative industries for several reasons:
- In general, manufacturing jobs involve higher skill levels than those in many of the service sectors and attract correspondingly higher remuneration. Higher value added per employee has general economic benefits including a higher general standard of living and higher individual contributions to social security and taxes in general.
- Manufacturing adds depth to the economy and improves the overall mix, including providing local markets for other industries and services, and thus economic resilience.
- Manufacturing may be particularly important in the event of an armed conflict that restricts critical trade in essential supplies and weapons.
- Traditionally, manufacturing jobs are perceived to provide a wide range of employment opportunities for workers ranging from recent migrants with poor English to engineers and scientists at the leading edge in technology. At its best, manufacturing can deliver a sense of pride in achievement and fulfilment to its workers.
Government assists and impacts manufacturing through regulation, planning, infrastructure, education and training, law and order, the value of the dollar and so on; but there is no longer any appetite for government to be drawn in to active participation in manufacturing activity, either through government owned enterprise or as an equity partner.
Nor is there any prospect for the protection of manufacturing through trade preference or tariff protection. Indeed such measures are generally prohibited by various free trade agreements (particularly with the USA) Australia has made. An exception is the limited local purchasing preference exercised by various State and Local governments.
But in recent times there have been two surprising changes in this perception. The first is the preparedness of governments overseas to socialise the losses of various banking institutions. This suggests that if a private company is big enough, or politically sensitive enough, democratic governments may become electorally committed to their survival. This is reflected in past, and even recent, business ‘rescues’ within regional Australia.
The second is the economic argument and justification for a carbon tax (or equivalent restrictions like 'cap-and-trade arrangements' on carbon production) based on the observation that carbon dioxide is an economic externality (or spill-over: an impact on a party that is not directly involved in an economic transaction). In this case the impact is a perceived threats to World climate; the ecosystem; and the future of agriculture.
Producers of carbon dioxide such as: car drivers; public transport users; households; and other consumers of industrial products; are not paying a price that reflects the full cost of that production. A tax (or cap on production) is thus economically justified to change private costs to resemble public costs and thus bring consumption costs into a more equitable equilibrium with real production costs (or vice verse).
It has been equally be argued that mineral exploiters are not paying a price that reflects the real value of those minerals to future generations and thus should be paying a like tax or be capped. A similar argument may pertain to soil and water or world forests.
Applying a mining tax has, a presently very small, penalising affect on Australia’s balance of trade. Such a tax will depress the value of the dollar relative to competitors currencies; implicitly diverting more economic resources to manufacturing; and other non-mining sectors; than would otherwise have been the case.
If the effect of a carbon tax or cap was to penalise coal exports, relative to other minerals originating in other states, one economic impact may be to accelerate their relative rates of exploitation; and NSW may well believe that it was inequitably dealt with.
It is often asked if the present free trade settings are prudent, given possible geo-political economic instabilities and uncertainties. But the issue then becomes how to decide on an intervention that would increase rather than damage future resilience; particularly as Australia’s current economic strategy may have, to date, led to a better outcome from the Global Financial Crisis than that of almost every other developed economy.
Because ‘industry’ protection ultimately resolves to encouraging some firm ‘to tool-up’ to produce a particular productlike an outmoded automatic transmission; a soon to be superseded weapon; or 35 mm film stock; a successful outcome requires a long term commitment to a particular company, or group of companies, and their ongoing product range. This level of involvement in commercial enterprise is very difficult for government to justify or sustain in the medium or longer term.
Government is notorious for selecting inappropriate product manufacturing to protect like lead-acid car battery manufacture or vinyl record pressing. It is almost impossible to decide what products will be ‘strategic’ in twenty years time. As a result governments find it 'safer' to support established, even dying, industries; and there are no votes in yet to be formed businesses.
When governments in Australia built trains and telephones; owned banks and airlines; protected car makers and clothing manufactures; and engaged in a myriad of other commercial interventions; they failed to provide similar support for the computer; microelectronics or advanced materials industries that now account for so much of the world’s newer manufactured products.
Under the free trade floating currency economic settings there is no ‘fortress Australia’. Australia does not need to (and cannot) do everything. There is no role for government in deciding we need to make this or that (typewriters, dial telephones, CRT televisions or computer monitors, video tape etc) even for infant industry or ‘strategic’ reasons.
The only exception, on defence grounds, is the sourcing of military equipment; an area fraught with cost overruns, technical shortcomings and often charged with apparent administrative incompetence (not exclusively Australian).
Under our current settings the decision to make something is a commercial decision made by business people and their employees, who lose their money and/or their jobs if the enterprise fails and make a nice profit and income if they are successful. In this context they cannot, or must not be allowed to, turn to government if they fail; to ‘bail them out’ to ‘privatise the profits and socialise their losses’.
These settings encourage Australians to be quick to exploit market changes and to demand (and give) value for money. Wealth is maximised by having a working population that is better able to contribute to the wealth creation process than competitor countries. This is optimised by a workforce that is multi talented and exceptionally knowledgeable, experienced and skilled in their chosen field.
Wealth is further optimised by not tying down these productive resources in the wrong kind of business or in the wrong locations on historical grounds. Unless manufacturing (or any) businesses retain their competitive advantage (or can be expected to rapidly regain it after a short setback – for example due to drought, war, or some other disaster) they need to close. Such closures need to be swift and their employees need to be assisted to find new productive businesses to work in; on occasion in another town or State.
The economic role of government in this economic paradigm is to provide the necessary externalities to the business including a social, educational and research environment in which appropriate skills and experience can flourish; to ensure that the physical infrastructure adequately supports commerce and to ensure that Government owned trading enterprises are properly and efficiently run in a competitively neutral way.
But as its ultimate aim is to optimise the standard of living of Australians, government also has a duty to support non-oppressive law and order; a healthy environment and lifestyle; as well as encouraging cultural and intellectual freedom of opinion and debate and these, sometimes competing demands, need to be balanced appropriately.