Published in gg’s blogg on 22 July 2016
The Australian Government’s hands-off approach to the loss of manufacturing industries fails to account for the fact that structural change is a cause of increased income inequality. Its approach to industry support will have to be one of the early considerations of the Turnbull Government, encouraged by the Nick Xenophon team and others who are described in some quarters as nothing more than a fresh wave of populist and protectionist upper-house crossbenchers.
Reliable agencies as diverse and independent as the Reserve Bank of Australia (RBA), the Productivity Commission (PC) and the Australian Council of Social Service (ACOSS) have published data showing that inequality in the distribution of income and assets in Australia is increasing.
The RBA demonstrates that this has less to do with household characteristics (age, years of completed education, family status) than with what it calls ‘income shocks’, such as being laid off and being unemployed for a long period.
The link between increased income inequality and structural change in the economy is one that seems to have gone largely unnoticed.
The post to this blogg of 22 July 2016 (Structural change in the Australian economy) argued that the standard response of both sides of politics to structural change in the economy has, for many years, been ‘Let the market rule’. What drives the market is an industry’s unsubsidised current and future cost of production – in Australia compared with overseas, or in Adelaide compared with Brisbane – and the price its products can command. If an industry fails on these counts it is unsustainable and is likely to be written off by government.
A more complete analysis of the effects of not supporting an existing industry in Australia would include consideration of where (and how soon) employees laid off could expect to find work, and the impact on the national distribution of income of the ‘shock’ displaced workers will experience.
This more complete analysis of industrial closures is being sought by Nick Xenophon and his team, as well as a number of others. This has been described in the press as ”a fresh wave of populist and protectionist upper-house crossbenchers”.
National analysis of the pros and cons of industry subsidies should include an understanding of the dynamics of employment and unemployment. We need to know what proportion of those who are unemployed were laid off from a declining industry, the proportion laid off from an industry that is still employing workers, and the proportion who have never had a job. The best policy prescriptions for each of these groups may be quite distinct.
In the case of the first group, some sort of industry intervention to maintain existing jobs would do the trick. In the case of the third, the question is how the government can encourage the establishment and growth of industries and firms that can provide work for people who may have been out of the workforce for a number of years and for those who have never had meaningful paid employment.
South Australia is fertile ground for some sort of intervention in the free market for industrial change. (See the Opinion piece in The Drum, 22 June 2016, by Greg Jericho.) It has had the lowest employment growth of any State since the 2013 election and only Tasmania has a lower percentage of its adults in employment. South Australia’s employment-to-population ratio of 57.6 per cent is below the national average of 61.1 per cent. It also has the lowest percentage of full-time workers and is more dependent on manufacturing than other States. While the manufacturing industry employs 7.5 per cent of all workers across Australia, in South Australia it is 9.1 per cent.
And it’s not just in Australia that the free market tide might be turning. A more interventionist or protectionist stance has been proposed for the United States by Bernie Sanders, who won support for the view that the benefits of free-trade agreements are not shared by everyone.
(Incidentally, the Productivity Commissions itself has found few benefits of Australia’s current free-trade agreements. Apart from anything else, the economic models used to evaluate Free Trade Agreements tend to exaggerate the benefits, ignore many of the costs and assume away unemployment effects.)
The Turnbull Government has recognised the seriousness of South Australia’s employment situation by using government procurement preference as the basis for its decision on submarine manufacture.
The Productivity Commission (PC) has suggested that the decision to build $50 billion worth of submarines in South Australia represents the greatest industry subsidy in Australia for many decades. It is estimated that choosing manufacture by a French company, but based in Adelaide, and with a preference for Australian steel, adds around 30 per cent to the total cost. The result is an extra cost of some $11 billion.
Treasurer Scott Morrison has said that the Government’s defence industry plan is a key component of supporting the transition of the Australian economy. He says the submarine builds will directly secure over 3,600 jobs as well as thousands more through the supply chain.
The PC reports that in 2014-15 Australian taxpayers and importers in effect paid $15.1 billion in total assistance to help manufacturers cope with global competition. This was comprised of $7.8 billion from tariffs on goods imported into Australia; $4.2 billion in direct budget outlays for things such as research and development; and $3.1 billion in direct tax concessions to industry.
Compared with these annual figures, an estimated one-off cost of around $11 billion for the submarines is relatively modest. Ian McCauley has pointed out that we pay almost that amount every year to subsidise the private health insurance (PHI) industry. That is $6.4 billion in direct budgetary outlays and about $4.1 billion in revenue forgone, because the PHI rebate is not subject to income tax and because those with high incomes who hold PHI are exempt from the Medicare Levy Surcharge.
The transformation of industry is clearly seen in motor vehicle manufacture. Ford has in effect stopped making cars in Australia and Holden and Toyota will go by 2017. This will result in the loss of up to 200,000 jobs, many of them in South Australia. This will add to the number of Australians who, despite record economic growth, are on the margins. To do nothing risks bequeathing to our children a society in which they have fewer chances than we had – one in which life opportunities are determined by postcode or family background.
The Productivity Commission is clear about three key areas for work to avoid such a situation: the importance of children’s early years in shaping their life chances; the fundamental importance of education in shaping the trajectory of young people’s lives into the future; and the importance of jobs as a pathway out of poverty for many people of working age.
Compared with the manufacturing of motor vehicles and submarines, New South Wales’ greyhound industry has been subject to quite a different prescription for structural change. More on that later.
In the meantime, let’s agree that there are strong but poorly quantified links between industry policy and inequality, and show that we care enough about the latter to consider industry policy with a heart.