2013: The battle between the taxpayers and the manuocrats

Prepare for more handouts: the taxpayer is the meat in the sandwich between politicians and manuocrats - those who believe the source of all our wealth is manufacturing. AAP

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.