The battleground between business, taxpayers and government for 2013 is taking shape. It is manufacturing and jobs.
On Wednesday, building materials company Boral announced at least 700 job cuts in Australia.
This followed Bluescope’s announcement on Monday that it was cutting 170 jobs at its Western Port plant in Victoria.
The reaction from various vested interests has been swift and predictable. Paul Howes, the secretary of the Australian Workers Union stated, “Australian manufacturing is being hit for six”. Opposition parties at both federal and state level have blamed their relevant governments.
The Federal government has said that it will respond in the near future. And that is where the battle will heat up.
Formally, the government will respond to the report issued by non-government members of the Prime Ministers Manufacturing Taskforce in August last year.
This report is a mixed bag. Indeed, it is exactly what you would expect from a group of representatives from business, unions and academia who have a vested interest in the manufacturing sector. It suggests reducing business tax, regulation and red tape (p.60).
It calls for increased government investment albeit on a “targeted” (i.e. picking winners) basis (p.61). To keep the academics happy, it calls for a (government supported) program that “will fund Industrial Transformation Research Hubs and Industrial Transformation” (p.68). Bizarrely, given recent overseas experience of housing bubbles, it calls for “measures to stimulate residential and commercial construction” (p.61).
Of course there is plenty of room for “incentivisation” (that is, handouts). Indeed, recommendation 2 (p.89) states that:
“The non-government members of the Taskforce recommend that a package of short-term measures be considered to help counter the cyclical factors confronting key manufacturing subsectors as set out in this report.”
Based on recent history, the government’s response to the report is likely to focus on short-term handouts. Recent examples include $42 million to Alcoa, and with the help of the Victorian and South Australian government, $275 million to General Motors.
Of course, they won’t be called handouts but rather, “strategic investment that will boost our economy, foster innovation, build new business opportunities and promote adoption of new … technologies”.
Call them what you will, they are funds from the taxpayers’ purse into the profits of private interests.
And in an election year, with the shadow of further job losses hanging over the government, the car industry is already lining up for its 2013 “strategic investment”.
But are these handouts bad?
Yes – because they ignore how and why modern economies like Australia are changing.
Manufacturing is only a minor part of the Australian economy. The report shows that services account for around 80% of Australia’s output, manufacturing and mining about 8% each, and the rest, agriculture. Manufacturing’s share of output has been steadily declining over the past century. And this pattern is observed in all developed economies.
Why has this occurred? Two European researchers, Schettkat and Yocarini reviewed the economics literature on the shift to services about a decade ago.
Their report, which covers studies back to the 1930s, suggests three inter-related reasons:
As we grow richer, we demand relatively more services (e.g. high quality health care) and relatively less manufactured output;
Changes in the way business is organised has seen manufacturing employees contracted out and reclassified as service employees, despite them doing the same tasks;
Productivity has risen faster in non-service sectors so we need fewer employees in manufacturing and agriculture to have the same – or even more – output.
While we can argue about which of these reasons is more or less important, they all lead in the same direction. The manufacturing sector has shrunk and will continue to shrink relative to the service sector. And this is a good thing. It means more people in better, safer, more stimulating jobs producing the things that consumers want.
Our obsession with manufacturing is reminiscent of the physiocrats, a group of 18th century economists who believed that agriculture was the source of all wealth.
While I suspect the National Party may still harbour some physiocrats, it is clear that our current politicians are largely “manuocrats”, people who believe that the source of all our wealth is manufacturing. Just like the physiocrats of three centuries ago, today’s manuocrats are wrong.
However, none of this helps the government. The temptation to hand out taxpayer funds to prop up dying jobs in manufacturing is strong. So expect to see more handouts in 2013 as the manuocrats and vested interests in manufacturing argue that, without them, we will all be ruined. And the taxpayers will have to fight back with their only weapon – their ballots at the federal election.
Felix MacNeill
Environmental Manager
Stephen, in light of your final sentence, how could people vote to reduce this problem?
Stephen King
Professor, Department of Economics at Monash University
Felix
Good point. However, our politicians are followers and if there is enough disquiet in the populace about handouts to manufacturing then politicians will pull back.
In part, it is useful to point out the absurdity of the handouts. For example, the Alcoa handout in June last year was about $70,000 per worker with no long term guarantees from the company. Given the turnover in the labour market, the workers would almost certainly have been better off if Alcoa closed the plant and paid them their redundancies, the government paid them each $70k, and they moved on with their lives. I discussed this before here:
http://economics.com.au/?p=9005
Theo Pertsinidis
Theo Pertsinidis is a Friend of The Conversation.
ALP voter
On some positions, Cowardice asks the question, ‘Is it safe?’
Expediency asks the question, ‘Is it politic?’ And Vanity comes along and asks the question, ‘Is it popular?’
But Conscience asks the question ‘Is it right?’
And there comes a time when one must take a position that is neither
safe, nor politic, nor popular, but must do it because Conscience says
it is right … This is the challenge facing us.
Dale Bloom
Analyst
“However in 2012, the trade balance is back in deficit due to sharp in value of exports and rising capital imports. Metals, coal and oil and natural gas account for 54 percent of total exports. Australia is a major importer of machinery and transport equipment, computers and office machines and telecommunication lasers.”
http://www.tradingeconomics.com/australia/balance-of-trade
It does seem service industries do little except eat up the money earnt from exports.
Outside of the major towns and capital cities, there are very few services, and basically the money earnt in rural areas is sucked into the cities to provide services for people living in those cities.
Without manufacturing, the cities are not viable, and represent a waste of natural resources, as well as being polluted, congested, suburban jungle eyesores.
Mark Harrigan
Dr
Dale where do you get your 30% figure from?
The government figures were 14.5 % in 2010, less than services at more than 18%
http://www.dfat.gov.au/publications/trade/trade-at-a-glance-2011.html
It would seem your claims are without substance
Dale Bloom
Analyst
Mark Harrigan
Ah statistics, statistics.
Some statistics show refined ores such as refined aluminium as being a manufactured item.
The composition of Australia trade at http://www.dfat.gov.au/publications/stats-pubs/cot-fy-2011-12.pdf gives interesting figures.
The main exports of the service industries are tourism and education.
Tourism has an extremly high ecological footprint, (and the land is totally cleared to build a tourist hotel). If someone wants to be paid backpacker wages…
Read moreCraig Minns
Self-employed
"more people in better, safer, more stimulating jobs producing the things that consumers want."
Like what, precisely? "Services" do not produce "things" at all - that's what the despised manufacturing sector does. At best, these jobs consist of people being paid to do things that other people simply don't want to do for themselves - wash the dog, clean the car, mow the lawn, wax the pubes, etc.
How is that meant to replace genuine satisfaction that comes from creating something useful where there was no more than raw materials previously?
Mark Harrigan
Dr
I sugguest Mr Minns you should try and understand what the Services Sector actually is?
It includes
Government
Telecommunication
Pharmaceuticals
Hospitality/Tourism
Mass media
Healthcare/hospitals
Public health
Information technology
Waste disposal
Banking
Insurance
Financial services
FMCG
Legal services
Construction
Food processing
Consulting
Gambling
Retail sales
Franchising
Real estate
Education
The examples you quote are from the relatively small Personal Services sector
Craig Minns
Self-employed
Thank you Mark,
I don't think "food processing" is a service - it's a manufacturing business
Consulting is too broad a term to be meaningful
"FMCG" is a class of product, not a service
Where did you get this list? I'd be checking your source.
As for the rest, but how much of it pays its own way? How much of it could be automated out of existence tomorrow, or go offshore, with no loss of "service" to the client? How much is just stuff the client can't be bothered doing for him/herself in…
Read moreMark Harrigan
Dr
Your right Craig - I pasted a laundry list from here -http://en.wikipedia.org/wiki/Tertiary_sector_of_the_economy which are "tertiary" sectors
A better list is here - since it is from Australia
http://www.dfat.gov.au/publications/trade/trade-at-a-glance-2011.html -
look at the section "Australia's industry structure 2010" - a definition that is still vastly broader than the limitations you implied - which I think unravels the logic of your original point
Craig Minns
Self-employed
Yes Mark, I used a rhetorical device to make a particular point. It seems to me that "service" jobs are in essence neither creative nor productive. The people in the field may exercise creativity in doing the job, but the purpose of the job is to perform a mundane task set. That makes them very amenable to mechanisation and automation. It also means that they're pretty unsatisfying.
Creative work is qualitatively different to service work, it seems to me. Not "better", but certainly more engaging…
Read moreMark Harrigan
Dr
Craig - I'm not sure what relevance that has to the proposed handouts to support manufacturring?
I also suggest you have a somewhat unrealistic and romanticzed view of manufacturing as an industry coupled with an unrealistic and narrow view of services?
Manufacturing today is highly automated - the creative bit is usually in the design. The manufacturing you appear to romanticize is more akin to artisan and craftmanship. These are to be admired I agree but I doubt you can attach the attributes…
Read moreCraig Minns
Self-employed
Mark, I work in a manufacturing environment. I have no romantic ideals about it or any other industry.
I deliberately didn't introduce any notion of manufacturing being "superior", merely qualitatively different, because I don't think such a notion is in any way helpful. The point was simply that the "service" jobs being touted as an economic saviour are doomed to go the same way and in the meantime they're largely make-work in many cases. So what then?
Mark Harrigan
Dr
Sorry Crig but that's another undounfed assertion - to characterize all service jobs as "doomed to go the same way and in the meantime they're largely make-work in many cases." is without substance.
You only have to look at the list of service jobs - which are far broader than your narrow rehetocial classification.
What matters is output for which Australia has comparative advantage - either now or which can be built. The sector (agricultre, manufacturing, mining, services etc) is irrelevant.
Chris O'Neill
Telecommunications Engineer
"the purpose of the job is to perform a mundane task set"
Sounds like a manufacturing job.
BTW, construction is a huge industry in Australia and it's virtually entirely a service industry.
Craig Minns
Self-employed
"Sounds like a manufacturing job."
Not really, just a narrow subset of mass-production assembly-line jobs could be classed that way, and those jobs have all been off-shored. The same will apply to all those service jobs that are not location-specific or that can be replaced by some automated process. Look at the rise of self-service checkouts and he decline in IT coding as examples.
Construction is a batched bespoke manufacturing operation. There are aspects of service in customer relations, but the core business is manufacturing the product as ordered.
Craig Minns
Self-employed
"without substance."
I think not, Mark. There is a large group of people who owe their job to filling and filing paperwork to comply with regulations that are entirely arbitrary. Much of that work is essentially "make-work", since it doesn't exist as a response to an operational need, merely because somebody said it must be done or else.
I've already given several examples of types of service work that are likely to disappear in short order and there are lots of others. I don;t see a bright…
Read moreMark Harrigan
Dr
I'm sorry Craig but I still think you are wrong. You characterized all service jobs as being "doomed to go". Just because you can point to some that are mundane does not establish the case that all are - that is where I think you are in error - no matter how many anecdotes you quote (the plural of anecdote is not data). To suggest that all service sector jobs are "make work" is clearly not the case.
You have not established any valid reasoning that says the manufacturing sector is in some way…
Read moreCraig Minns
Self-employed
Mark, I'm happy to concede that there are some needful services (I'm presently receiving the benefit of the medical service sector, albeit also enduring the "benefit" of the Workcover Qld "service", so I guess that's sort of balanced), however those aren't the majority and they don't pay their own way, on the whole.Sure, some do, for a time, but because there are low barriers to entry, some other country decides to get a slice of the pie, or automation (such as MOOCS in the tertiary education case…
Read moreMichael Shand
Michael Shand is a Friend of The Conversation.
Software Tester
What ever happened to the cry's about "Free Markets" - these companies change their tune rather quickly when they need help from the government
If its the 6th time in a row that the manufacturing sector has failed to be profitable then let them go bankrupt - Why are we flogging a dead horse, kicking the can down the road?
Unless these companies re-evaluate their business model there is no point giving these fat cats money for being failuires
David Briggs
logged in via Facebook
Stephen
Do you ever wonder if the basic lessons of comparative advantage and the benefits of free trade will ever find a secure foothold beyond the economic profession? The fact that our economy is dynamic and needs to respond to changes in market prices, as countries develop their manufacturing base (at lower factor cost), seems to be regulatory overlooked. That this debate has been argued for many years, most notably since the morphing of the Tariff Board into the IAC (now the Productivity Commission).
But still we read that manufacturing is essential, and that without it we "waste natural resources" and experience "pollution and congestion". Really? There is simply too much dishonest nonsense being written about the importance of protecting these sunset industries. In the end it is about protecting jobs at the expense of taxpayers, consumers and the emergence of industries better matched to our comparative advantage.
Dale Bloom
Analyst
One can look at Detroit and a number of cities in the US (or most of the cities in the US).
They lost manufacturing, and are no longer viable as cities, and many parts are not suitable to live in.
The local councils do not get enough rate money to adequately run the cities, because there are so few companies making profits to pay rates, and so few people earning enough income to pay rates.
At present, 30% of our exports are manufactured, so it is worthwhile keeping manufacturing to help offset our hunger for imports.
I also think our decline in productivity is related to our desire to import so much, and our desire to bring in so many immigrants, rather than do the work ourselves.
Stephen King
Professor, Department of Economics at Monash University
David
What really concerns me is that the 'I need a handout' group is so prominent at present and seem not to face more than superficial opposition. I think it is incumbent upon those who do understand ideas like comparative advantage and the gains from trade (as well as a bit of economic history so that we can look at long term trends rather than short term fluctuations) to make their voice heard.
Brendan S
Full time worker, part time philosopher.
"Short-term measures to counter the cyclical factors"
This is where the real problem is. If one believes that long-term, manufacturing is more than viable but indeed an integral part of a healthy economy (both in terms of productivity and the growth and retetion of intellectual capital), as for example, Germany has, then the focus needs to turn from 'handout' to 'investment'.
A strategy that can support during the 'famines' and reap reward during the 'feasts' would be much more effective for…
Read moreDoug Rankin
Plasterer
Well going by the essence of your article, Greece is the prominent economy in Europe and Germany is being sent broke by manufacturing.
Mark Harrigan
Dr
I think you have misread the article?
There are many reasons why Greece is an economic basket case and germaany is not. The level of subisidies is not one of them (although German subsidies to industry are around or below the OECD average).
What matters is that labour productivity in germany per hour worked is much higher than in Greece - and their tax and welfare system is entirely different.
What matters here is whether or not subisidies or handouts are being directed toward industries that can recover or build comparative advantage - as opposed to being used to prop up businesses and industry that is in decline?
Andrew Smith
Education Consultant at Australian & International Education Centre
Ironic that the Labor government in the 1980s encouraged services exports to ameliorate current account deficits e.g. international education, yet have done their utmost (along with previous govt., responsible departments at state and federal level etc.) to nobble the industry (estimates of 30,000 jobs lost & new commencements way down) due to biased and prejudiced media, commentators, demographers etc. creating alarm about "runaway population growth" etc. (there was conflation of definitions, lack…
Read more