Should the Government be bailing out manufacturers?

Matt Drennan looks at the Government’s decision to support certain industries and whether it is completely necessary.

When I first started studying economics, there was a popular argument concerning infant industries. Industries that are just being established need to be protected until they get sufficient scale to enable them to compete on the world stage, or so the argument went.

The adjunct to this was that manufacturing industries deserved special consideration because they helped build a necessary skills base – welders, carpenters, plumbers, etc.

You know, useful guys that when thrown together on a desert island with a supermodel can wander off into the jungle with nothing but a pocket knife and build a condo to impress the said supermodel in less than 24 hours.

(For those mere mortals amongst us who work in service industries, about two thirds of the workforce, we are apparently not regarded as providing core skills worthy of government bailouts).

The latest such foray to support manufacturing by the Gillard Government was to keep Holden in Australia for another 10 years and cost taxpayers $275 million.

Well, actually it cost a lot more than that.

The latest package was on top of many millions relating to the Automotive Transformation Scheme, the recent deal to pay Ford $34 million to keep producing cars in Victoria until 2016, and on it goes...

Picking winners

Picking winners is hard when it comes to the racetrack, even for guys I know who spend way more time than they should studying the form.

When it comes to bureaucrats sitting in Canberra who don't know one end of a screwdriver from the other, the exercise becomes fraught with danger.

Worse still, many of the recent commitments to support various manufacturing businesses appear to have been made completely off the cuff, coming directly from the politicians without any prior consultation. These knee-jerk reactions border on suicidal.

The reality is that if a Government wishes to give an industry the best chance of survival in a difficult economic climate, it achieves nothing by reacting to individual company cases. Even the head of the Productivity Commission acknowledged as much in a recent speech.

A more effective approach is to make the business environment more favourable for such industries by attempting to influence the macroeconomic factors impacting on them.

A lower Australian dollar, lower interest rates and better business loan availability all have a role to play.

But above all, productivity must be lifted.

The head of the Productivity Commission used an interesting example in his speech to highlight just how much productivity has deteriorated in certain industries.

He noted that research at a particular company had shown man hours required to pour a cubic metre of concrete had increased from 9.1 hours in 1998 to 11.3 hours in 2012. On this rough measure, that’s a fall in productivity of almost 25 per cent.

While bad enough in its own right, when you consider that in all likelihood most of Asia was improving its productivity over this period, it is truly damning.

The causes of this collapse in productivity are plain to see and are being shouted from the rooftops by our industry leaders:

• general overregulation and inconsistent/overlapping state and federal regulation;
• union militancy and an inflexible industrial relations system under the Fair Work Act;
• an uncompetitive taxation and investment regime;
• the ‘go it alone’ approach to a carbon tax levied at more than double the rates prevailing in Europe; and
• the failure to establish a true sovereign wealth fund to ensure that at least some of the benefits from the current resources boom are not frittered away.

Policy inconsistencies

While attempts are being made to address these issues, it appears to me that many aspects of policy are in direct contradiction to what is occurring in practice.

Take the recent conference among CEOs and State and Federal leaders, which agreed to reduce red (and green) tape.

In practice, however, the new carbon tax is supported by voluminous legislative documentation, miners are crying foul about the ramp-up in environmental regulation around coal seam gas exploration, and retailers are seeking new legislation to remove the $1,000 duty-free cap on imported consumer goods.

The Fair Work Act has greatly expanded the matters on which companies must consult with the workforce – and virtually guaranteed union involvement in every step of the process.

The industrial relations environment has deteriorated significantly, causing a spike in industrial disputes and a commensurate loss of productivity.

It is a good thing we don’t have an excessive amount of Federal Government debt or bad loans in our banking system. If we did, we might have to join the EU and ask for a bailout package.

Matt Drennan is a business and financial markets commentator.