Category: People’s wellbeing and the economy

Reprinted from Croakey.

To market, to market, to buy a fat pig…two case studies of economic change
Editor: Marie McInerney. Author: Gordon Gregory: December 6 2016.

Much has been written and said about the reasons behind Brexit, the Trump ascendancy and the move away from the traditional major parties at this year’s Australian election. A common theme has been a failure to recognise how economic change in the context of globalisation has left many people behind.

In this post, Gordon Gregory discusses two quite distinct Australian case studies of a link between structural economic change and income inequality: the proposed closure of the Hazelwood coal mine in Victoria and the attempted shutdown of the greyhound industry in New South Wales.

Gregory, the former CEO of the National Rural Health Alliance and an economist, says that historically such industry changes as these have been left largely to the free market to sort out – triggering a wave of social, economic, regional and political implications.

Arguing that governments, the private sector and regional communities can collaborate and work proactively to generate new jobs and industries for towns and regions that will otherwise be centres of poor health and of political alienation, he says Hazelwood provides a highly-visible opportunity for properly managing the shift.

Gordon Gregory writes:
The Brexit vote, the 2016 federal election in Australia and Donald Trump’s ascendancy are all seen as evidence of increasing disillusionment of ‘the middle people’ of a nation with its established political elites.

One of the more popular explanations of this phenomenon is essentially economic: that at a time of economic globalisation and industrial change, many people have not experienced improvements in their material wellbeing.

For many decades there has been a free market or hands-off approach by governments in Australia to industrial change. But with mounting evidence that structural change in the economy is a significant driver of income inequality, which in turn lays the basis for political disaffection, governments are well advised to take a closer interest.

Agencies as diverse as the Reserve Bank of Australia (RBA), the Productivity Commission 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. That is not news. But what may be is the fact that, as the RBA demonstrates, this has less to do with household characteristics (for example age, years of completed education or family status) than with what it calls ‘income shocks’, such as being laid off and being unemployed for a long period.

The transformation of Australia’s industry on a grand scale is seen in the loss of our motor vehicle manufacturing, with up to 200,000 jobs set to go in the next 12 months, adding to the number of Australians who, despite record economic growth, are on the margins. And there are daily losses on a smaller scale.

If alternative jobs are not found, this becomes fertile ground for the growth of popular demand for trade protectionism. Both Brexit and Trump owe their success in part to a naive belief that, where trade policy is concerned, ‘charity begins at home’. That sentiment is finding increasing expression in Australia, as evidenced by the views of some on the Senate cross benches and by the less public expression of opinion by some in the major party blocs.

Greater trade protectionism will harm everyone, especially weaker and smaller trading nations whose people can least afford it. This makes it even more important to find alternatives which can work within individual nation states to deliver economic benefits – better full-time work, stronger and more sustainable incomes – to families and regions that have been missing out. And the benefits of such alternatives will include better population health and lower healthcare costs.

To do nothing risks bequeathing to our children a society in which there are fewer economic opportunities than we have had – and one in which wellbeing is partly determined by the place in which someone lives. Unavailability of work is already one of the strongest of the social determinants of health – and one that helps define the difference between rural and metropolitan areas.

Industrial change is a social issue

Australia has numerous towns which have lost one or more of their main economic functions and, as a result, have experienced population decline. Small timber mills, abattoirs and flour mills have closed and, where there is little alternative use for the land on which they stand, they remain as sad and ironic monuments to Australia’s economic progress.

City areas have experienced such economic change in equal measure. But because of the high value of land and infrastructure and the relative ease with which they can be redeployed, there are fewer visible reminders of it in the cities.

The economist’s dismal prescription in these circumstances has usually been along the following lines.

⦁    They help policy makers to be prepared for the inevitable by identifying and scrutinising industries or individual entities (eg factories) experiencing rapid structural changes and which are unlikely to be economically unsustainable in the medium term without government support.

⦁    The inevitable happens. A significant industry or plant closure occurs. Jobs are lost.

⦁    The economist will remind everyone that Australia is a trade-exposed nation, and that the free market is its friend.

⦁    Led on by political action, the economist ­– dark-souled, unwilling – will offer opinions as to whether particular populations (groups in the workforce) or regions (particular towns, for example) are bearing ‘an undue proportion’ of the costs of structural change, and whether the speed of industrial change they confront is ‘unreasonable’.

⦁    This results in a decision about whether assistance or compensation of some kind should be made available to those populations and/or regions in order to ease but, critically, not to prevent the adjustment.

A complete analysis of the pros and cons of those decisions ought to 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 are likely to be quite distinct.

Greyhound industry: structural change going to the dogs?

Events over the past 18 months in New South Wales’s greyhound industry provide a fascinating case study of a radically different approach to industry change, using a paradigm based not on the market but on ethics and objective evidence.

In the early days, when it seemed to have been successful, Premier Baird’s decision shone like a beacon to show that structural change could be initiated, planned and managed by government acting on the basis of anticipation of the national interest and ethics – in this case relating to the treatment of animals. Had it been successful it might have been seen as a model for action on any sector of the economy or factory, mine or plant deemed to be inimical to the national interest or unethical.

In his announcement of the proposed greyhound racing ban, Premier Baird said:

“Over the coming months, we will consult with the industry to help minimise the pain as best we can for the innocent industry participants as we work towards an orderly industry shutdown. We will develop a strategy to work with the RSPCA to manage the welfare of existing greyhounds. And the transition arrangement for Greyhound Racing NSW assets (like greyhound racing tracks) will ensure they are used for open public space, alternative sports facilities or other community use.’

However the recent state by-election in Orange and its impact on the NSW National Party mean that the consequences of this new approach are still being played out.

This courageous approach to structural change faltered on the rock of  vested interests and a failure to garner political support for the decision early enough. The venture has ended in tears but may still prove to be instructive in terms of how economic change can be initiated by proactive government decisions rather than by The Invisible Hand.

Hazelwood: more power to the people?

Writing at Guardian Australia, Gay Alcorn has described the planned closure next year of the Hazelwood power station in Victoria’s Latrobe Valley as “a symbol of many things: the government’s wavering commitment to climate change, our reliance on coal, and now, the massive structural transformation under way in the energy market.”

More than that, it is also a classic demonstration of the roles – played and not played – of governments, the private sector and the local community in economic and industrial change that is the result of market forces.

The State and Federal Governments are both concerned and both involved. Wendy Farmer, spokeswoman for Voices of the Valley, has been quoted as asking why, when both governments knew that Hazelwood would close sooner rather than later, there was no transition plan already in place.

The closure of ‘Australia’s dirtiest power station’ will inflict further job losses on a region which is already one of the most disadvantaged parts of Victoria, with unemployment estimated to be 19.7 per cent in Morwell and 14.6 per cent in Moe.

The State Government has earmarked more than $80 million to attract new industries to the area and provide employment and training support for workers. The workers themselves are in their mid-50s on average and their union, the CFMEU, has negotiated generous conditions and redundancy packages over the years. They are likely to receive more than $300,000 on average in redundancies.

The Federal Government has established a Ministerial task group focused on three issues: helping the workers (through a financial package, support for local infrastructure and regional jobs); energy security; and energy pricing.

It says it has also committed more than $400 million to defence, road and community programs in the Latrobe region, including a $200 million upgrade to the East Sale RAAF Base.

Martin McKenzie-Murray has written on the series of mine fires that have affected people’s health so directly and on the legacy the plant leaves to the region.

The complete story of Hazelwood is yet to be told. It includes rehabilitation of the mine site and the ongoing impact of the massive pit fire. It has national implications for energy markets, particularly after South Australia blacked out on 28 September. And it has implications for climate change policy and the environment.

But of the greatest importance from the health point of view is Hazelwood as a test case of a collaborative tri-partite approach to regional economic change. The decisions taken must put the health and economic interests of members of the community first.

To win back popular support and credibility, governments need to  have a sharper eye on the health and wellbeing effects of economic change – and to demonstrate that they are guided by empathy and compassion, not merely by the dismal science.

Much of my working life has been spent on matters relating to structural change in the economy. It sounds pretty dry but in fact it’s full of human interest and also important. And it is a topic of great current importance to Australia.

My first job was on the Farm Amalgamation Research Project in England. (One had to speak very clearly when using the acronym.) It was a research study on the dynamics of the way in which farms were being amalgamated and what it meant for agricultural production.

In 1971 I joined a similar study at the University of New England, focused on the impact of the dramatic fall in the price of wool on land ownership and productivity in some of the woolgrowing regions in New South Wales and Western Australia. Were woolgrowers postponing productive expenditures, such as superphosphate or flock management, or were they able to tighten their belts sufficiently by reducing personal household or family expenditures? (You can guess the answer.)

And was it neighbours, corporate interests or new entrants to agriculture who were buying up woolgrowing country?

These are the sorts of human decisions that drive change in one of the leading elements of agriculture’s structure: the number of farms.
Some of their results are well-known. In 1981 there were about 263,00 farmers in Australia. In 2011 there were 157,000 – a reduction of 40 per cent. The number has been falling for many decades as small farmers find it hard to make a living and sell up to larger operators, and as some family farmers don’t have a successor.

The numbers do not fall evenly through time. Events like major droughts have a major impact. For example, there was a decline of 15 per cent in just 12 months during the 2002-03 drought. And by 2011 there were 19,700 fewer farmers in Australia than there had been in 2006, a fall of 11 per cent in five years.

This structural change in agriculture has some serious implications for the economic base of country towns; for the industry’s productivity and income; and for environmental sustainability.

Agriculture has been changing shape but is still a productive industry contributing substantially to the nation’s wellbeing.

A number of other industries have also experienced big structural changes, including meat processing, timber milling, textiles clothing and footwear, and motor vehicle manufacturing. Many towns in Australia that used to have abattoirs, timber mills or textile manufacturing businesses – and in which these were major employers – have had to adjust and find new industries or lose population.

The economist’s (rather dismal) prescription in these circumstances has usually been along the following lines.

Identify and scrutinise sectors experiencing rapid structural change, in terms of their ability to compete with global suppliers and so to be economically sustainable without government support in the longer term.
Remind everyone that Australia’s is a trade-exposed nation, whatever it produces, and that the free market is our economic friend.

Identify populations (groups in the workforce) and regions (particular towns, for example) that are bearing ‘an undue proportion’ of the costs of such structural change, and/or situations in which the speed of change is ‘unreasonable’. Judgements are involved!

Make a balanced decision about whether compensation should be paid in some form or other to those populations and/or regions in order to ease but not prevent the transition.

If it is decided that there should be ‘intervention in the free market’ that is driving structural change, propose the best sort of compensation, which might be income support (to industries or workers), retraining, relocation assistance or special safety net provisions, and how (and for how long) such compensation should be managed.

This has been the normal prescription for many decades now.
But is there a different medicine, a better approach?

Nick Xenophon may well be among those who thinks there is.
[ – to be continued – ]

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.