The story of the failure of Australian manufacturing is epitomised by H.V. McKay, the inventor and manufacturer of the Sunshine Harvester, which was a world-beating breakthrough in wheat-harvesting machinery. At the time of Mr Justice Higgins' famous 1907 Harvester judgement -- which established the arbitration benchmark of the living wage -- McKay's firm owned the largest factory in the country. H.V. McKay -- an innovative manufacturer and employer -- should have been as seminal in the development of the Australian economy as Henry Ford was for the US economy. That he was not was the result of poor public policy, epitomised by the Harvester decision, which was a keystone of the system that made innovative manufacturing next to impossible in Australia. We spent decades taxing other industries, via protection, to support manufacturing, creating a favour-seeking mentality, and redistributing those rents to workers and unions (and employer associations) via a mechanism, arbitration, which enmeshed manufacturing in a complex web of costly regulations. The result was the same as with highly-subsidised European agriculture -- we ended up wasteful and inefficient producers of everything. Producers whose first response to any difficulty was to call on government assistance. By the early 1970s, about 35% of the return from manufacturing was based on the regulatory privileges handed out by government but paid for by the rest of the community, particularly exporters.
As one looks at the labour market re-regulation agenda the union movement and the ALP is pushing -- and at the Howard Government's datacasting and broadcasting policy decisions (which restricts market entry, and thus innovation opportunities, in order to protect incumbents) -- we are in the process of making the same mistakes in new forms. A recent report, Rebuilding Australia: Manufacturing in the New Economy by Nixon Apple, commissioned by NSW Senator George Campbell, for the Amalgamated Manufacturing Workers Union (AMWU), epitomises this. As the AMWU is one of our more influential unions, and Senator Campbell is something of a power in the land -- Chairman of Caucus, a member of the ALP Federal Executive since 1986, National Secretary of the AMWU from 1988 to 1996 -- it is worth paying attention to.
The report was recently praised by Tim Colebatch in The Age (28 July). Since this is The Age, we can therefore be confident it recommends more government expenditure, more intervention or both (as indeed it does).
In confronting an issue such as prospects for manufacturing, unless one asks both what is government doing that it shouldn't and what -- given the difficulties and costs involved -- should government be doing that it isn't, one is at best being intellectually lazy and at worst a policy charlatan.
It is therefore difficult to take seriously a report on the problems and prospects for Australian manufacturing that nowhere mentions our labour market institutions, makes no attempt to explain origins of problems in manufacturing prior to 1983 and wants to abolish the Productivity Commission, the only government institution which engages in rigorous and systematic public examination of economic policy across portfolios. The report complains about a lack of investment, but nowhere examines reasons for our poor saving record -- the fundamental reason why we have so much foreign ownership and hence so much derivative manufacturing.
A fetish about manufacturing is a common feature among those who dislike economic liberalisation. It is clear, however, that, in longer term, the "manufacturing moment" is a relatively brief interlude in the transition from an agricultural to a service economy. Employment in production of goods (mining, construction, manufacturing) only overtook agricultural employment in the US in 1920, by 1930 it had been overtaken by employment in services, while manufacturing's share of US GDP has been falling since the early 1950s and most economic growth since that time has been in services. And even in manufacturing establishments themselves, the proportion of workers who are actually service workers (engineers, researchers, managers, etc.) has been growing. Nor is manufacturing an ideal job creator -- a recent IMF study, Deconstructing Job Creation, shows that relatively low employment in farming and in manufacturing makes a country a better prospect for high job growth. Apple points out that manufacturing has increased its share of GDP in various European countries: if your job creation record is sufficiently dismal, that is relatively easy to do.
Apple's report has the full range of ideas for "planned innovation" -- more government expenditure promoting R&D, sectoral plans, tax concessions, etc. Yet government subsidies are already 1.3 per cent of GDP, less than the 1.8 they were in 1982-83, but more than the 1.0 they were in 1972-73, and far more per person. Adjusted for inflation, in 1972-73, government spent $190 per Australian subsidising production and $380 in 1982-83; by 1998-99 it was $400 per Australian. We can be confident that a $400 tax cut per Australian ($1,600 for a family of four) would be of far more net social benefit -- once the compliance, inefficiency and administrative costs of collecting and handing out the money are considered -- than the subsidies themselves. Western societies have become far too cavalier about alienating from their citizens the income they have earned.
But Apple wants more such alienation (for our own good, of course). Since the Commonwealth is the tier of government with the cash, increased government expenditure to encourage manufacturing means putting the Department of Industry, Science and Research (DISR) in charge. The suggestion that DISR (or DISasteR, as it is nicknamed) should have more money to spend is one that cannot but send shivers up the spine of anyone familiar with that Department and Canberra processes. It is entirely typical of DISR -- which does not attract the best and the brightest of the public service -- that the working knowledge of the public servant responsible for one particular industry consisted of a walk-through of one facility and periodic chats with the Director of the industry body which, in the way of these things, primarily represents the big end of the industry. But "looking after" an industry is merely a career interlude, and one lacking any serious performance benchmarks at that.
When Senator John Button was Industry Minister, he essentially ran the hard bits out of his own office. Of his Coalition successors, John Moore gave every impression of never having met an rent-seeker he didn't like while the current Minister, Senator Minchin, is a right-winger who presumably doesn't believe in industrial welfare (which is what DISR hands out), but hasn't had the gumption to nuke his own portfolio's budget. DISR is not a body which inspires any sensible person with confidence.
What if government did undertake the expansion in expenditure on manufacturing that Apple suggests? The predictable results is the union movement would immediately line up for its chop -- a classic example was provided when the decision to pause tariff reductions in the car industry was followed directly by the car manufacturers agreeing to a 15% rise. The higher the political priority, the more the unions would attempt to rort the process. It is the old game: create political hostages so that the standard rorts apply.
As the authors of the above-mentioned IMF report point out, higher union membership is associated with higher wages: it is also associated with higher unemployment and lower job creation. Australian manufacturing unions in particular have shown a willingness to drive individual firms to the point of bankruptcy and beyond to make their point. Nothing has caused as much destruction in manufacturing employment as the metal trades wage surge of the early 1980s or the Hawke outbreak of the mid 1970s. (There is therefore a certain rich irony in unions now promising faithfully to be good boys and girls over the proposed large new Holden factory).
Whenever somebody argues for a government-led recovery plan ask yourself this question: what is the reliable and regular process of quality control which assesses the full cost of taxes, regulations and expenditure, carefully measures the actual social benefit and then reliably feeds back into government activity? The answer is, there is none. Any such process is, in fact, incredibly haphazard. Which is why scepticism about government activity is so legitimate.
And arguing for a government-led manufacturing recovery -- after decades of failure at doing just that -- is a particularly silly way of extending reliance on political mechanisms. After all, what happened to McKay's firm, International Harvester, scene of Higgins' triumph (sic) of social engineering? It was eventually sold to a Canadian company and then closed.
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