To be fair, new governments always make mistakes. The combination of inexperienced ministers and opportunistic public servants is likely to generate an alcopops tax. Rash election promises give rise to FuelWatch and GroceryWatch. Industry policy, however, has no such excuse. Intervention in the micro-economy lies at the very heart of the Federal Government's economic policy.
When Kevin Rudd became leader of the opposition he made the point that he didn't want to be prime minister of a country that didn't "make things". To that end, he installed Senator Kim Carr as industry spokesman; Carr is now the Minister for Innovation, Industry, Science and Research.
Back then, Carr said: "The Howard government ... believes that industry policy can be fixed by the market. That sort of market fundamentalism is an old-fashioned view inconsistent with the facts".
Actually, industry policy had not just been mugged by reality, it had been savaged.
The Labor Party released a comprehensive plan setting out its industry policy well before the election. This plan can be summarised in three points: pick winners; throw money at universities; and streamline government. This was not just pre-election fluff; both Rudd and Carr were serious. That plan is now being put into operation: money is being spent from the green-car fund and yet another government think tank is being established; money has been thrown at universities; and numerous inquiries are due to report in the second half of the year, though it is not entirely clear how government is to be streamlined. But the intention to "do something" is clear.
Early failure has not deterred Carr from picking winners. In February, Mitsubishi Australia announced the closure of its Adelaide plant. Just this month, Holden announced it would discontinue production of four-cylinder engines.
The Australian car industry has been dying for decades. This is not entirely due to tariff reductions. Over time, Australian car exports have risen while tariff protection has fallen. Those parts of the car industry that are internationally competitive will survive despite government intervention.
The Productivity Commission estimates that the car industry received $1.1 billion of support in 2006-07 alone. That money is ultimately paid by the taxpayer.
Of course, it isn't just the taxpayer who loses out. Workers are huge losers too. Inefficient industries continue to attract employees who often develop specific skills that are not easily transferable. When those jobs are lost, some employees lose their invested human capital and, while they often get other jobs, their market value is diminished. Not to mention the emotional costs and stress of having lost their jobs.
The dangers of industry policy are obvious in the car industry but less obvious elsewhere. The closure of manufacturing plants and the retrenchment of workers in protected industries are clear signs industry policy has failed. Consumers and the market have moved on. It is all very well to say that we need to think about consumer preferences in the future. That is what entrepreneurs do, not government. Government needs to concentrate on creating an environment in which entrepreneurs and business can flourish and where consumers can dictate their preferences.
Having a minister for innovation and industry is antithetical to the notion of consumer choice and entrepreneurial risk-taking. On the other hand, it is ideal for rent-seeking. It has been said that governments cannot pick winners but losers can pick governments. This has long been obvious in the market for tangible goods but Carr is also minister for intangibles -- innovation and research. Policy here is to give more money to university research, but not to teaching.
Government intervention in innovation also does not work well. In a recent US study it was found that privately funded research was more valuable over time than government-funded research. True, US governments have fostered a lot of innovation but that is largely due to civilian application of military research and development and NASA.
Innovation does not require a large cadre of research-trained university graduates. Better teaching at university, as opposed to more research, is likely to improve innovation outcomes.
The Government was elected to provide "new leadership" and "new ideas". Yet it was well known that Rudd opposed "market fundamentalism" and supported "industry policy". This is not new; it is a return to the bad old days of big government and state intervention in the economy. Sound economic policy is inconsistent with interventionist government. Government adds value by enforcing property rights and maintaining the rule of law.
If the Government wants to directly add value to the economy it should lower personal and company taxes, reduce bureaucracy, and rein in the ACCC. That is mundane, hard work and not nearly as exciting as picking winners -- yet it would do more for "working families" than anything else.
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