Monday, April 2, 2012
You could count on one hand the economists who do some lateral thinking and throw into the debate some new way of viewing a problem and overcoming the familiar difficulties.
But one economist who does come up with new ideas to think about is Dr Richard Denniss, director of the Australia Institute. He observes that while everyone's been debating whether the mining boom's a good thing or a bad thing, no one's focused on the obvious question: what rate of growth of the mining industry is consistent with the national interest?
And in a paper to be published today, written with Matt Grudnoff, he puts his conclusion: The Macro-Economic Case for Slowing Down the Mining Boom.
Why has this idea not occurred to anyone before? Partly because of the unthinking belief of almost all business people, politicians and economists that all economic growth is good and the faster the better.
When the new Queensland Premier announced his intention to speed up the approval process for new mines, most of the aforementioned would have nodded in approval. But why is faster than the economy can cope with better?
Partly, Denniss argues, because
of the way economists divide economic issues into micro and macro. As a micro issue the focus is on allowing private interests to make profitable investments as they see fit, with no more government intervention than is necessary to limit damage to the local environment.
As a macro issue the focus is on taking whatever strength of demand the private sector serves up and "managing" it to ensure it leads to neither excessive inflation nor excessive unemployment. If demand's too strong you raise interest rates to chop it back; if it's too weak you cut rates to beef it up.
But Denniss argues the boom's too big to fit this neat division. According to the Bureau of Agricultural and Resource Economics, there are 94 mining projects worth $173 billion at an advanced stage of development (plus a lot more at earlier stages).
For the miners to attempt such a huge amount of activity in such a short space of time inevitably creates what Denniss calls "macro-economic externalities" - adverse spillover effects on the rest of the economy, in the form of skilled labour shortages, wages pressure and probably a higher-than-otherwise dollar.
No one understands this better than the Reserve Bank, of course. But the higher-than-otherwise interest rates it has and will use to limit the inflation fallout from the boom aren't intended to (and couldn't be expected to) limit the boom.
Rather, they're intended to crimp the rest of us - in particular, consumer, housing and non-mining business investment spending - to "make room" for the boom-crazed miners. This will succeed in controlling inflation, no doubt, but what reason is there to believe it will lead to the most efficient allocation of the nation's resources?
Denniss suggests this thought experiment: if all of Australia's mineral resources were controlled by a profit-maximising monopolist, would it respond to the present exceptionally high world prices by building as many new mines as possible as quickly as possible?
Would a monopolist bid against itself for scarce labour and infrastructure capacity (to get the minerals to port and onto ships)? Or would it invest in training and infrastructure before it began expanding production?
His point is not to advocate monopoly, obviously, but to make clear the potential for conflict between the interests of the miners and the interests of the nation.
We are a monopolist in the sense that all the natural resources belong to us. Which means it's up to us to ensure they're exploited in the way that benefits us most. In this we need to remember the miners are largely foreign-owned (meaning we retain little of the after-tax profits) and the resources are non-renewable.
How much do we lose if they stay in the ground a little longer? Are we really expecting that within a decade or so the world won't be willing to pay much for them?
We're a monopolist also in the sense that it's our economy and we bear all the cost of the inflation and excessive exchange rate generated by the foreign miners' mad dash to expand production. We aren't a monopolist in the sense that we control the world supply of coal and iron ore, but we are big enough in the world market for our actions to have a significant effect on world prices.
A monopolist would be more inclined to sit back and enjoy the high world prices and less inclined to madly expand production and thereby undermine the high price (to coin a phrase). And to the extent a monopolist did expand, it would start with the most profitable opportunities and progress towards the least profitable.
Denniss's point is: why should we allow the miners to turn the decision about which mines get built first into a race rather than a ranking? And why should we bear the macro-economic costs generated by the miners' race to be first out the door with our resources?
He proposes that new mining projects be required to bid at auction for a set number of development permits. This would ensure the most profitable projects proceeded first.
And if you don't like the sound of that, he says the same effect could be achieved by removing the mining industry's present subsidies on fuel and alleged research and development spending.