Learning to love the Boom

For now, other factors contribute more than productivty (MFP) to our wealth

Sen­sa­tion sells, of course (“Salut DSK!”). Today’s Aus­tralian car­ries a gloom-laden account of Trea­sury Sec­re­tary Mar­tin Parkinson’s address to the Mel­bourne Institute’s Eco­nom­ic and Social Out­look con­fer­ence about struc­tur­al chal­lenges posed by the min­er­als boom.

But news­pa­pers have been slow­er to pick up on two oth­er talks at the same con­fer­ence that I found still more valu­able. One was by Tony Abbott, who lucid­ly explained why the Gillard/Brown car­bon tax is an expen­sive, insuf­fi­cient­ly-eval­u­at­ed, decep­tive pol­i­cy that is inap­pro­pri­ate for its stat­ed objec­tive (no remarks at all about cli­mate change, inci­den­tal­ly).

The most inter­est­ing paper I have seen, how­ev­er, was a time­ly, typ­i­cal­ly-enlight­en­ing pre­sen­ta­tion by Gary Banks (Pro­duc­tiv­i­ty Com­mis­sion Chair­man) enti­tled Australia’s Min­ing Boom: What’s the Prob­lem?. It is on the same top­ic as Parkinson’s talk but based on a longer view and—while not appar­ent­ly incon­sis­tent with the Trea­sury view—much more san­guine about the strength of the econ­o­my and the man­age­able size of future chal­lenges.

The prob­lems posed for Aus­tralia by the min­ing boom are not the asso­ci­at­ed struc­tur­al changes. To the extent that we have a two (or more) speed econ­o­my, that should be wel­comed as the mech­a­nism by which we are cap­i­tal­is­ing on our exter­nal good for­tune, yield­ing high­er liv­ing stan­dards for Aus­tralians. The real chal­lenge con­fronting pol­i­cy mak­ers is to ensure that the adjust­ments can pro­ceed smooth­ly. This also means hold­ing the line on past reforms that have enhanced our econ­o­mys flex­i­bil­i­ty and avoid­ing intro­duc­ing new rigidi­ties.

Banks prac­tices what he rec­om­mends: sift­ing the evi­dence before decid­ing that a prob­lem exists and well before leap­ing to a “solu­tion”. In the course of a short paper and pre­sen­ta­tion Banks describes an econ­o­my that has changed, dra­mat­i­cal­ly, for the bet­ter since our last min­er­als-led boom in the 1970s thanks to a long—and incomplete—series of struc­tur­al reforms based on evi­dence and con­sul­ta­tion not ide­ol­o­gy and lead­er­ship “elites”. He reviews the options for sav­ings, invest­ments, “res­cu­ing” indus­tries suf­fer­ing the appre­ci­a­tion of the dol­lar and for recov­er­ing fis­cal bal­ance after the “stim­u­lus” (sug­gest­ing we put the clean­ers through one trou­bling trough of gov­ern­ment excess)…

Manufacturing share of output has fallen steadily for decades as our wealth has tripled

Banks begins by look­ing at the wood, rather than the trees. The “two speed” min­er­als boom econ­o­my is in fact a won­der­ful source of nation­al luck and rich­es; the sup­posed “hol­low­ing out” of the man­u­fac­tur­ing sec­tor and the rapid growth in ser­vice sec­tor employ­ment is an accel­er­a­tion of a long-estab­lished trend (and any­way, man­u­fac­tur­ing out­put con­tin­ues to grow); infla­tion is well-con­trolled thanks to a float­ing exchange rate that allows the real-rate of exchange to rise as nec­es­sary, keep­ing prices under con­trol, and; wage set­tle­ments have been unex­cep­tion­al dur­ing this boom, thanks to the dis­man­tling of the old cen­tralised wage-fix­ing struc­tures.

He sees no ben­e­fit in a “sov­er­eign wealth fund” to ster­ilise for­eign income flows (which as Ken Hen­ry has observed can also be achieved by retir­ing gov­ern­ment debt) and he notes that, in view of our expo­sure to uncer­tain events (Chi­nese growth rates, sov­er­eign defaults in Greece etc) indi­vid­u­als seem to be man­ag­ing their own income volatil­i­ty risks with­out the use of less effi­cient wealth funds.

Banks acknowl­edges that labor pro­duc­tiv­i­ty has fall­en but points out that the weak­en­ing of the output/input ratio is due to the mas­sive increase in labor and cap­i­tal inputs into min­er­als (and oth­er) sec­tors; we are enjoy­ing unprece­dent­ed wealth as a result, so there is hard­ly any call for con­cern about a short term decline in pro­duc­tiv­i­ty (of course, pro­duc­tiv­i­ty must rise again in future to sus­tain growth once the boom dis­si­pates). Only in the long run is pro­duc­tiv­i­ty (as Krugman’s dic­tum has it) “near­ly every­thing” about the sources of wealth. In the short-term—where we live and make pub­lic policy—there are oth­er fac­tors that may pre­dom­i­nate (see the graph at the top of this post).

Banks has rec­om­men­da­tions to make on the top­ic of “fis­cal con­sol­i­da­tion” to restore the bal­ances that we had achieved pri­or to the GFC stim­uli. On the income side, Banks declines to offer a view about the appro­pri­ate lev­el of a min­er­als resource tax, except to note that it is a sub­ject of keen inter­est to the own­ers of com­pet­i­tive resources in Latin Amer­i­ca, imply­ing that there is a big penal­ty for squeez­ing too hard. On the expen­di­ture side, he notes that a num­ber of pro­grams for which there was lit­tle evi­dence of net ben­e­fit before their adop­tion (“Cash for Clunk­ers”, the “green” car ini­tia­tive) have been with­drawn. He says noth­ing of the NBN—although it too is un-eval­u­at­ed, an extra­or­di­nary tech­no­log­i­cal risk (locked-in to fibre) and a ret­ro­grade monopoly—possibly because the Com­mis­sion has already crit­i­cised the absence of a cost-ben­e­fit analy­sis and the NBN is now set­tled pol­i­cy of the Labor/Green/Independent alliance.

Instead—reprising a theme he devel­oped last year— Banks launch­es into defence pro­cure­ment:

…no doubt there is more low-hang­ing fruit wait­ing to be picked. For exam­ple, the case for Aus­tralia spend­ing $36 bil­lion or so on anoth­er dozen home­made sub­marines, when import­ed alter­na­tives could be pur­chased for a frac­tion of the cost (and risk) has nev­er been ade­quate­ly explained pub­licly notwith­stand­ing the gen­er­al­ly acknowl­edged fail­ure of the Collins Class prece­dent. The whole area of defence pro­cure­ment seems ripe for a thor­ough inde­pen­dent review

Although his speech repris­es (and extends) remarks he made last year on fis­cal pol­i­cy and the struc­tur­al chal­lenges of the min­er­als boom, Gary Banks has again done us great ser­vice in this talk. The Com­mis­sion demon­strates, for­tu­nate­ly, that good pub­lic pol­i­cy prac­tice can mod­er­ate and make sense of what is oth­er­wise a con­fused and sen­sa­tion­alised bat­tle between inter­est­ed agen­das.

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