Holes appear as Treasurer tries to convince with verbal flourishes

The more detail we get on the government’s Future Made in Australia plans, the more holes appear. This week, the Treasurer wheeled out the rhetorical flourishes in yet another attempt to convince the public that his reheated stale protectionism was something new and shiny.

Unfortunately, his speech coincided with the announcement of a massive whack of taxpayer support to lure a US-based tech company to set up in Queensland. This deal is the very definition of the phrase ‘picking winners’.

Although in the past the Treasurer has rightly been criticised for using ambiguous language, we can now see exactly what he means, and where he is right and where he has gone wrong.

For example, at one point he notes, “the scale of subsidies in the three major global economies of course dwarfs anything Australia can offer”. This is absolutely correct. Australia cannot even hope to compete in a subsidy war in manufacturing.

However, he went on to justify indulging in the global green subsidy race anyway by claiming that it would be “preposterously self-defeating to leave our policies unchanged in the face of all this industry policy”.

This is absolutely incorrect.

Counter-intuitively, Australia would benefit most from the subsidy war precisely by not taking part at all. We should buy our cheap batteries from America and Germany and our cheap solar panels from China or any other country foolish enough to waste their taxpayer dollars on subsidising our imports.

Not only would this likely do far more to actually reach net zero than any industry policy — after all, consumers react strongly to price signals — it will have the added benefit of improving our productivity and our living standards.

And we can direct the savings towards the net zero transition, if that is what the voters want.

The Treasurer also claimed that industry policy could be used to create a stronger nexus between our security interests and our economic ones.

There is a kernel of truth in this, but the areas where there is a genuine security interest in domestic industry are very limited. In practice this is just a smokescreen for picking winners: for example it’s not at all clear how manufacturing solar panels,or indeed quantum computing, represent a national security interest.

In fact, our national security interests are far better served by having the strongest and most productive economy we can. Far better than by attempting to protect scores of favoured industries that claim some tenuous connection to national security interests.

Which means far less industry policy, not far more. That is not merely economic theory; it is the practical lesson of Australia’s deep historical fixation with protectionism.

Unfortunately, the Treasurer prefers a different history.

It is telling that he opened his address by talking about Chifley and Keynesianism, not Hawke and Keating and the modernisation of Australia’s economy. For those who perhaps don’t remember, one of the things Chifley is most remembered for is his failed attempt to nationalise Australia’s banks.

He also justified the need for greater government intervention in the economy because of the prevailing economic uncertainty. The Treasurer doesn’t want to nationalise the economy, he is just the latest person who thinks he can do a better job directing its course than the market can.

This would be challenging during benign economic conditions, it is impossible during economic turbulence.Economic uncertainty does provide opportunities for growth, but government is poorly placed to recognise and act on them.

It is truly extraordinary that the Treasurer can say “Our medium-sized, open economy and small population means we don’t have the internal markets to insulate ourselves from the world in ways that others can, even if we wanted to” and not realise this means industry policy can never work.

Australia cannot force the world to recognise us as a renewable energy superpower (whatever that means) through the use of subsidies any more than we could create a viable car manufacturing industry.

A taxpayer subsidies wave does not make businesses more competitive, it just makes them reliant on ever more subsidies.

Yet we continue to return to industry policy; at least in part because of a fetishisation of manufacturing above all other industries.

It is true that manufacturing once provided a middle-class income to a lot of unskilled workers. Labor, in particular, continues to pine for those jobs because of the power unions once wielded in the manufacturing sector.

But that time is long past.

Modern manufacturing is a capital-intensive business, not a labour-intensive one. The economic evidence on this is abundantly clear: it is capital-intensive automation that has driven the decline of manufacturing jobs in western countries.

It has not been due to globalisation and trade and therefore cannot be reversed with industry policy. Even if we succeed in re-establishing a manufacturing base in Australia, the jobs will not return.

Moreover, Australia is a high-wage country, with a relatively small consumer base, and rising energy costs. We are also a long way removed from low-cost suppliers and the mass markets necessary to provide the scale that would make manufacturing competitive here.

Far from having a competitive advantage in manufacturing, we are starting at a distinct disadvantage.

Instead, our niche is in high-end, low-volume bespoke manufacturing: not the type of industries that warrant (or need) a complete reorientation of our economic policy to support.

It would be nice if the government for once recognised our actual economic strengths, particularly in services, rather than continuing its doomed quest to remake the past.

Simon Cowan is Research Director at the Centre for Independent Studies.