Showing posts with label comparative advantage. Show all posts
Showing posts with label comparative advantage. Show all posts

Friday, May 3, 2024

Is a Future Made in Australia a good or bad idea? Maybe a bit of both

What exactly is a Future Made in Australia? You can read the long speech Anthony Albanese made about it and still not be sure. My guess is it’s a slogan designed by spin doctors to mean whatever you’d like it to mean.

As I wrote on Monday, what I hope it means is that the government intends to secure our economic future by ensuring all the income we’re going to lose from the world’s decision to stop buying our exports of fossil fuels is replaced by us using our new-found comparative advantage of being able to produce renewable energy more cheaply than most other countries.

We can produce masses of the stuff but, because it’s expensive to export, we can set up new industries which use the renewable energy to produce green iron, green aluminium and various other green minerals and then sell them to the world.

Because such industries don’t yet exist, the businesses that start them will inevitably make mistakes from which later businesses will learn. So it makes hard-headed economic sense for the government to cover much of the cost of this learning-by-doing “positive externality” – this spillover benefit to the wider economy for which the original businesses will go unrewarded.

If that’s what Albanese means by making our economic future, he deserves all the support and encouragement the rest of us can give him.

But I fear his slick slogan was designed to remind people of the old goal of trying to ensure that as many as possible of the goods we consume are Made in Australia.

This was our aim for about half a century until, in the 1980s, the Labor government of Bob Hawke and Paul Keating rolled back the import duties protecting our inefficient manufacturing industry and opened our economy to the world.

But why would Albo and his smart economists, Jim Chalmers and Chris Bowen, want to reverse the bipartisan policy of the past 40 years and take us back to the future?

Well, some polling produced this week by Essential Report offers some big clues. Asked to what extent they supported or opposed the Future Made in Australia policy, 30 per cent of respondents said neither. I take this to mean most hadn’t heard of it, or weren’t sure what it involved.

But 51 per cent supported the policy, leaving only 19 per cent opposing it. Unsurprisingly, Labor voters were more supportive than Liberal voters. But this is surprising: two-thirds of Greens voters supported it.

Why so much support for the government policy with a snappy name but so little detail? More clues followed. Fully 70 per cent of respondents agreed with the statement that “the pandemic showed we cannot be wholly reliant on global supply chains”.

And 63 per cent agreed that “it was a mistake to allow the Australian car industry to close,” with 43 per cent agreeing that “the days of globalisation, where we just imported cheap goods from overseas are over”.

Against that, however, only 37 per cent agreed that “it is not the government’s job to support Australian businesses that can’t compete overseas,” and only 34 per cent that “the market will make the best decisions and government should stay out of the way.”

Get it? There’s strong support for the goal of self-sufficiency and making as much as we can locally – keeping the jobs and the profits at home, not sending them abroad.

It’s noteworthy, too, that support for Made in Australia is much stronger among those aged 55 and above than among those aged 18 to 34. Believing that a country must make things, not just deliver services is, thankfully, more a hangup of the old.

So, if Albo and his spin doctors see benefit in playing to the Bring Back Manufacturing crowd, it wouldn’t be so surprising.

Just so long as you don’t forget this: keeping the jobs at home seems no more than common sense but, when you think it through, you see it’s a great way to be poorer, not richer.

One of the main ways humans have made themselves richer over the centuries is what economists call “the division of labour” and the rest of us call specialisation.

We can use the same amount of labour to produce more goods and services by having workers specialise in doing what they do best. By now, the process of specialisation – which no doubt has yet further to run – has reached the point of specialisation within specialties.

But obviously, specialisation can’t work without exchange: I sell my stuff to you; you sell your stuff to me. And what makes economic sense for individuals also makes sense for countries. We don’t maximise our material prosperity by stopping specialisation and exchange at the border.

Countries also need to specialise in what they do best, exchanging their surplus production with other countries specialising in what they do best. Economists call this pursuing our “comparative advantage”.

Autarky – the pursuit of national self-sufficiency – seems like a good idea, but one of the most useful things economists do for the community is to explain why, contrary to common sense, self-sufficiency is a great way to be poorer than we need to be.

It’s a dumb idea because it involves wilfully forgoing the benefits of specialisation and the “gains from trade”. When we insist on making items we aren’t good at, those things will cost more that importing the same goods from those countries better at it than we are.

So we end up forcing Australians to buy the inferior and more expensive locally made goods by imposing a special tax or “duty” on the imports. This leaves us less money to spend on other locally made goods and services. So jobs created in the inefficient part of the economy come at the expense of jobs in the efficient part, causing us to be less well-off than we could be. Well done.

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