Showing posts with label manufacturing. Show all posts
Showing posts with label manufacturing. Show all posts

Friday, May 19, 2023

Climate change will hurt, but we can still be the Lucky Country

What are we in for with climate change? How will it change the environment, the way we live and the way we earn our living? Is it all bad news for the economy, or is there some upside? And, by the way, how much is it costing us as taxpayers?

The previous federal government didn’t want to think about these questions, much less talk about them. You could read the budget papers each year and hardly find a mention.

But all that’s changed with the change of government. So, no surprise that last week’s budget has a lot in it about climate change.

In various parts of the budget papers, the Albanese government acknowledges that, with the globe already having warmed by an average of 1.1 degrees above pre-industrial levels, global warming will continue changing our weather (short-term changes) and climate (longer-term patterns) for the rest of this century.

It will endanger more species and reduce biodiversity. It will adversely affect human health, with more days of extreme heat leading to more deaths of old people.

The productivity of labour and the number of hours worked are expected to decline as temperatures increase, particularly for people who work outdoors in agriculture, construction and some manufacturing.

Treasury expects farming yields to decline, and I expect that, over time, the production of different crops and the grazing of animals will migrate to the parts of Australia where the climate is less unsuitable.

Speaking of migration, you’d expect our population to grow faster where it’s relatively cooler, with fewer people wanting to live where it’s even hotter than it is today.

And that’s before you get to people – refugees, even – moving between countries in response to rising sea levels. Starting, in our case, with people from the islands of the South Pacific.

Treasury says the increased frequency and severity of natural disasters will also lead to reductions in the production of goods and services through disruptions to economic activity, and to the destruction of private property and road, bridge and rail infrastructure.

It shows that the value of insurance claims has steadily increased over the past decade, with temporary peaks caused by the floods in Queensland and NSW in March 2013, Cyclone Debbie and Sydney hailstorms in March 2017, then bushfires and hailstorms in NSW and the ACT in the last quarter of 2019 and the first quarter of 2020.

So far, the greatest insurance claims – $6 billion-worth – were from the floods in south-east Queensland and NSW in the March quarter last year. Then there were (less costly) floods in NSW, Victoria and Tasmania late last year.

Treasury says our economy will be reshaped by both the physical impacts of climate change and by the efforts of the more than 150 countries that have now signed up to the target of net-zero emissions by 2050. What they do will affect us, plus what we ourselves do.

Australia is one of world’s biggest exporters of fossil fuels, so we can expect our exports of coal and gas to decline steadily over the next decade or two, as our overseas customers reduce their own greenhouse gas emissions from burning the dirty fuel they bought from us.

Of course, not all of them will have their own plentiful sources of renewable energy. They’ll have to import it from somewhere, just as they’ve had to import our fossil fuels.

Which gives us an opening. As our great apostle of smart climate change, economics Professor Ross Garnaut, was first to realise, Australia’s huge expanse, full of sun and wind, means we’ll be able to produce far more renewable energy than we need for our own use. And do it cheaply.

Gosh, what good luck we’ve got. Turns out the move to renewables will give us a “comparative advantage” in international trade we didn’t know we had. All we’ve got to do is play our cards right and get in quick before other, less well-endowed countries sign up our potential customers.

The former government wasn’t interested but, as the budget papers make clear, the Albanese government is. The “net-zero transformation”, which represents one of the most significant shifts in the industrial structure of the economy since the Industrial Revolution, “holds major opportunities for Australia, given our endowment of renewable energy sources and our large reserves of many critical minerals,” the papers say.

There is a problem, however. As yet, there isn’t an economic way to ship raw clean electricity and green hydrogen across the sea to other countries.

But this could be a good thing. We can “embed” our renewable energy in our mineral exports by further processing our iron ore into green steel, and our bauxite into green aluminium, before we export them.

Whereas in the old, fossil fuel world the further processing of our minerals before export wasn’t “economic” (profitable) – in the renewables world it could well be economic.

Get it? We could give our declining manufacturing industry a whole new lease on life. What’s more, it would make economic sense to do the further processing out in the regions, close to the solar and wind farms generating the clean electricity.

Implementing such a transformation would require huge capital investment and risk-taking, the early part of which would have to come from the government.

So, yes, climate change – both the bad bits and the good bits – will come at a great cost to the budget, and thus to taxpayers.

The budget papers reveal the Albanese government planning to spend an extra $25 billion on new climate-related programs over several years in its first budget last October, and now a further $5 billion in last week’s budget. Don’t think that will be the last of it.

So, get ready to hand over more in taxes as the government seeks both to ameliorate the costs of climate change and turn the world’s energy transformation to our advantage.

At least now we’ve got a government willing to get off its backside.

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Monday, April 17, 2023

How party politicking let mining companies wreck our economy

A speech by former Treasury secretary Dr Ken Henry last month was reported as a great call for comprehensive tax reform. But it was also something much more disturbing: an entirely different perspective on why our economy has been weak for most of this century and – once the present pandemic-related surge has passed – is likely to stay weak.

The nation’s economists have been arguing for years about why the economy has grown so slowly, why real wages have been stagnant for at least a decade, why the rate of productivity improvement is so low and why business investment spending has been so little for so long.

Most economists think we’ve just been caught up in the “secular stagnation” – or slow-growth trap – that all the advanced economies are enduring.

But Henry has a very different answer, one that’s peculiar to Australia. Unlike everyone else, he’s viewing our economy from a different perspective, the viewpoint of our “external sector” – our economic dealings with the rest of the world.

What conclusion does he come to? We’ve allowed ourselves to catch a bad case of what economists call “Dutch disease” – but Henry thinks should be renamed Old and New Holland disease.

When a country discovers huge reserves of oil or gas off its coast – or, in our case, the industrialisation of China causes the prices of coal and iron ore to skyrocket – all the locals think they’ve won the lottery and all the other countries are envious. Now we’ll be on easy street.

But when the Dutch had such an experience in the 1960s, they eventually discovered that, while it was great for their mining industry, it was hell for all their other trade-exposed industries.

Why? Because the inflow of foreign financial capital to build the new industry and the outflow of hugely valuable commodity exports send the exchange rate sky-high, which wrecks the international price competitiveness of all your other export and import-competing industries: manufacturing, farming and services.

Not only that. The rapidly expanding mining industry attracts labour and capital away from the other industries, bidding up their costs. Their sales are down, but their costs are up. You’re left with a “two-speed economy”. Remember that phrase? It’s what we’ve had for a decade or two.

Well, interesting theory, but where’s Henry’s evidence that Dutch disease is at the heart of our problems over recent decades?

He’s got heaps. Start with the way the composition of our exports has changed. Between 2005 and today, and in round figures, mining’s share of our total exports has doubled from 30 per cent to 60 per cent. Manufacturing’s share has fallen from 40 per cent to 20 per cent. Everything else – mainly agriculture and services – has fallen from 30 per cent to 20 per cent.

Over the same period, exports grew from 20 per cent of gross domestic product to 27 per cent. This means mining exports’ share of GDP has gone from about 6 per cent to more than 16 per cent. Manufacturing exports’ share has fallen from about 8 per cent to 5.5 per cent.

Next, who buys our exports? China’s share has gone from about 10 per cent to more than 45 per cent. Actually, that was the peak it reached before China’s imposition of restrictions after some smart pollie decided it would be a great idea for Australia to lead the charge of countries blaming China for COVID. Since then, China’s share has fallen to 30 per cent.

Since 2005, mining’s share of total company profits has gone from about 20 per cent to 50 per cent. Manufacturing’s share has fallen from about 20 per cent to less than 10 per cent. Financial services – banking and insurance – have seen their share fall from 20 per cent to less than 5 per cent.

Now, what’s happened to those industries’ share of total employment? Manufacturing’s share has fallen from more than 9 per cent to about 6 per cent. Financial services’ share has been steady at a bit over 3 per cent. Mining’s share has risen from less than 1 per cent to 1.5 per cent. You beauty.

“In summary,” Henry says, “mining employs a very small proportion of the Australian workforce – except in the boom times, when it induces a worker to leave other jobs for mine-site construction work – generates about 60 per cent of Australia’s exports, about half of pre-tax profits (mostly repatriated overseas to foreign shareholders) and exposes the Australian economy to highly volatile global commodity prices and a heavy strategic dependence upon a single buyer, China.”

Not to mention the way mining leaves us heavily exposed to “the risk of global decarbonisation”.

How have we profited from being a mining-dominated economy? Real GDP per person – a rough measure of our material standard of living – has been in trend decline for two decades. In the decade pre-pandemic, “we recorded the sort of growth rates only previously recorded in recessions,” Henry says.

This weakness is largely explained by our poor productivity performance. Though no one else seems to have noticed, our productivity growth is negatively correlated with our “terms of trade” – the prices we get for our exports, relative to the prices we pay for our imports.

That is, when our terms of trade improve, our rate of productivity improvement worsens. And our terms of trade are largely driven by world commodity prices, especially for coal, gas and iron ore.

Now the tricky bit. Why would a mining boom depress productivity improvement? Because of the way it raises our real exchange rate – our nominal exchange rate, adjusted for the change in our rate of production-cost inflation relative to those of our trading partners.

The resources boom increased our nominal exchange rate by about 25 per cent. Then, by 2011, high wages growth and weak productivity growth relative to our trading partners had added a further 35 per cent to the rise in the real exchange rate, Henry calculates.

This caused our non-mining producers to suffer a “profound loss of international competitiveness”. Is it any wonder that, between the turn of the century and 2019, the annual rate of investment by non-mining businesses fell from 7 per cent of GDP to 5 per cent?

The result is that two centuries of “capital-deepening” – increased equipment per worker – have stalled. This move to “capital-shallowing” explains our poor productivity.

And also, our move from current account deficit to current account surplus. “We are exporting [financial] capital because Australia has become an increasingly unattractive destination for doing business in the eyes of foreign investors and Australian [superannuation] savers alike,” Henry says.

“The mining boom has left us with a very big competitiveness overhang that will probably take decades to work off,” he says, including by decades of weak growth in real wages.

What should we have done differently? Had we applied a rational tax to the windfall profits of the mining companies, we would not only have retained for ourselves more of the proceeds from the export of our own natural resources, but also caused the rise in our real exchange rate to be lower.

Remember Kevin Rudd’s proposed “resource super profits tax”? The mining lobby set out to stop it happening, telling a pack of lies about how it would wreck the economy. The Abbott-led opposition threw its weight behind the mainly foreign miners.

Julia Gillard consulted the industry and cut the tax back to nothing much. The incoming Abbott government abolished it.

Petty, short-sighted politicking caused us to sabotage our economy for decades to come.

Read more >>

Sunday, April 2, 2023

Climate choice: cling to past glories or strive for prosperous future

The big question facing our political leaders is: are we content to allow climate change to turn us from winners into losers, or do we have the courage and foresight to transform our mining, energy and manufacturing industries into clean energy winners?

For most rich countries, playing their part in limiting global climate change is simply about switching from fossil fuels to renewable energy. For us, however, there’s a double challenge: as one of the world’s biggest exporters of fossil fuels, what do we do for an encore?

When it comes to deciding how we can earn a decent living, economists are always telling politicians to pursue our “comparative advantage” – concentrate on doing what we’re better at than other people, and they want to buy from us; then use the proceeds to buy from them what they’re better at than we are.

Turns out our “natural endowment” makes us better at farming and mining. Climate change will be bad for farming (not that the world will stop wanting to eat), and the only future for fossil fuel exports is down and out. It may take a decade or two to reach zero, but there’ll be no growth from now on.

Most economists have little to say about what you do when your natural endowment becomes a stranded asset and our comparative advantage evaporates. Except for Professor Ross Garnaut, who was the first to realise that nature has also endowed us with a bigger share of sun and wind.

If we tried hard enough and were quick enough, we could not only produce all the renewable energy we need for our own use, but find ways to export it to less well-endowed countries, probably embodied in green steel and aluminium.

This, of course, involves innovation and risks. We’re talking about technological advances that haven’t yet been shown to work, let alone commercialised. Doing things that have never been done before.

When it comes to technology, Australia is used to following the leader, not being the leader. Until now, this has been sensible for a smaller economy like ours. But we’re facing the impending loss of our biggest export earner. If we can’t find something just as big to sell, we’ll see our standard of living rapidly declining.

The threat we face isn’t quite existential. We’ll still be alive, just a lot poorer – and kicking ourselves for not seeing it coming and doing something about it.

The solution’s in two parts. First, the federal government must make clear to the coal and gas industries, the premiers, the mining unions and the affected regions that there’ll be no further support or encouragement for anyone pretending they haven’t seen the writing on the wall. Anyone trying to stop the clock and keep living in the past.

There’ll be plenty of support and encouragement, but only for those industries, workers and regions needing help to move from the old world to the new. As part of this, the government must do what now even the UN secretary-general says every country must do: end subsidies of fossil fuels and use the money to assist the move to renewables and green production.

Help coal miners relocate or retrain – whatever. Promise that, wherever it made sense, the new renewable and green industries would be set up near the old mines.

Ideally, the policy of ending the old and moving to the new should be bipartisan. No opposition should take the low road of courting the votes of those preferring to keep their head in the sand.

But if that’s too much to ask of a two-party duopoly, Anthony Albanese and the Labor premiers should take their lives in their hands and overcome their life-long fear of what the other side will say when you put the national interest first.

Second, pick winners. Econocrats spend their lives telling governments not to do that – not to subsidise new industries you hope will become profitable.

Trouble is, politicians being politicians, you can be sure they’ll be putting taxpayers’ money on some horse in the race. And if they’re not trying to pick winners, they’ll be doing what they’re doing now: backing losers. Which would you prefer?

More importantly, it’s a neoliberal delusion that new industries just spring up as profit-seeking entrepreneurs seek new ways to make their fortunes. Doing something never done before is high risk. The chance of failure is high. Banks won’t lend to you.

We don’t stand a chance of becoming a green superpower without a lot of government underwriting with, inevitably, some big losses. But I can think of many worse ways of wasting taxpayers’ money.

Read more >>

Monday, October 25, 2021

Morrison's deal: Nationals rewarded for agreeing to harm the regions

Let me be sure I’ve got this right. Scott Morrison is ending his Coalition’s deep divisions over climate change by agreeing to pay billions in regional boondoggles in return for the Nationals refusing to lift their veto of any increase in Australia’s commitment to reduce emissions by 2030.

The usual way blackmail works is that the blackmailer returns to you something you really value in return for you paying the blackmailer an arm and a leg.

But the way Morrison’s deal with Barnaby Joyce and the Nationals will work is that Morrison – or rather, the taxpayer – spends billions on projects of doubtful value in return for the Nats’ agreeing to nothing more than symbolism: to reduce carbon emissions to net zero by 2050, which will be after all the signatories are dead and gone.

The first point is that agreeing to net zero emissions in 29 years’ time is a decoy and a fig leaf if that’s all you do. To make it real you have to make a commitment you can be held to: a much bigger progress payment in the next nine years to 2030.

That, of course, is what the Glasgow conference is about. The major countries agreed on net zero months ago (as have all our premiers and many of our business and industry groups). That’s just the price of admission to the room.

What you do in the room is proudly announce the big increase in your commitment over what you promised at the Paris meeting in 2016. Those few leaders unwilling to commit to a significant increase will be pilloried as “free-riders” (aka bludgers) on the other countries – and rightly so. You’re a brave man, Scott.

But the second point is more important: all of us will be worse off if Australia’s selfish delinquency damages the global effort to limit the extent of global warming, but the biggest losers will be the small businesses and voters the Nats’ claim to represent – the regions.

The regions will be the biggest losers because, of all the industries, agriculture will be the hardest hit by continuing global warming. Farmers’ loss of freedom to keep clearing land will the least of their worries.

But the regions lose also because we don’t get on with expanding our renewable energy industries – most of which happens in the regions – and lose any “first-mover advantage” in establishing the new generation of manufacturing industries processing hydrogen, clean steel, clean aluminium, and even clean cement using all-renewable electricity. This, too, will happen in the regions.

That is, we don’t get on with generating the new, well-paid and skilled jobs for mine and gas workers to move on to as the rest of the world stops buying our coal and gas.

The amazingly perverse nature of Morrison’s deal with the Nationals – we pay them for refusing to allow us to get on with protecting ourselves against the world’s turn away from fossil fuels – has been brought to our attention in a study by Matt Saunders and Dr Richard Denniss, of the Australia Institute, All Pain No Gain, released today.

They argue that whatever the final cost of the deal turns out to be – no doubt a lot more than its announced cost – it will be far exceeded by the cost to the economy of us not acting earlier to reduce emissions.

To put it the other way, modelling commissioned from Deloitte Access Economics by the Business Council of Australia finds there would be significant benefits to the economy if we lifted our target to reducing our emissions by 46 per cent by 2030.

Comparing this with other modelling by Deloitte, the authors calculate that the additional benefits over the next 50 years would have a “net present value” (the value in today’s dollars of all the incomings and outgoings over the next 50 years) of more than $210 billion.

Now, I never take modelling results too literally, but the Business Council’s argument does make sense. The higher target leads to increased investment in renewables, which increases growth and jobs, as well as greatly reducing the cost of electricity (because, once you’ve built the plant, the cost of extra solar and wind energy is negligible).

Morrison’s excuse for not increasing the 2030 target is that, without the coming new technology, this would force choices and cost jobs. But he’s got that the wrong way round.

As the Business Council (and the Grattan Institute before it) have explained, forcing the pace in industries where the technology is already well-developed – electricity and electric vehicles – leaves more time for the technology to be developed in other industries.

With friends like the chancers of the National Party, the regions need Morrison to see more sense.

Read more >>

Monday, August 23, 2021

How Morrison can get going towards net zero - if he wants to

Scott Morrison seems keen to keep his job as Prime Minister, but not so keen to do the job PMs are paid to do: make tough decisions in the nation’s interests. So it’s up to the rest of us to step into the breach. And when it comes to the decision Morrison fears most – getting to net zero emissions by 2050 – no one’s keener to help out than Tony Wood and his team at the Grattan Institute.

Wood begins where everyone with any sense begins: by noting that the best way to reduce emissions at minimum cost to the economy - and all the people in it - would be to introduce a single, economy-wide price on carbon emissions.

But the temptation to win elections with populist bulldust about “a big new tax on everything” proved too great and so, with that off the table, we must find other, more interventionist, sector-by-sector ways to skin the cat (many of them requiring additional government spending, which will have to be paid for somehow).

The basic strategy for reducing our emissions is clear: move from fossil fuels to renewable ways of producing electricity (plus the use of batteries to store it), then meet all other energy needs with electricity. In practice, it’s more complicated, of course.

Official projections foresee emissions from electricity falling substantially over his decade, while the next four largest sources of emissions either grow or, at best, plateau. Grattan is producing a series of five reports proposing relatively easy and obvious ways of achieving early reductions in emissions in each sector.

Its thinking is to get early progress because, even if we were to reach net zero emissions just before 2050, that wouldn’t be sufficient to stop the increase in the global average temperature being a lot greater than 1.5 degrees – which is about as much as we can take without major social and economic disruption, not to mention personal discomfort.

If we take as many easy shots as we can now, that buys more time for technological advances to help us with the harder stuff. Getting some momentum going should help build public acceptance of the need for more, as well as giving business a clearer picture of where we’re heading and the risks it runs if it ploughs on regardless.

In any case, the latest report of the UN’s Intergovernmental Panel on Climate Change isn’t likely to be the last telling us temperatures are rising faster than earlier thought. It wouldn’t be surprising to see the 2050 deadline brought forward.

Wood’s first report in Grattan’s five-part series covered the transport sector. It proposed measures to achieve an early move to electric cars, while we wait for hydrogen technology to help with heavier transport.

Wood’s second report, on the industrial sector, was released on Sunday. This covers emissions arising from the production of coal, oil and gas – as opposed to their customers’ use of their products – emissions from the mining and processing of other minerals and metals, and emissions from processing in manufacturing.

As well as burning fossil fuels to help extract fossil fuels, coal, oil and gas production involves “fugitive” emissions of greenhouse gases during the extraction process.

The sector’s emissions have increased significantly since our base year, 2005, mainly because of our foolish decision to permit three different companies to build huge liquefaction plants on an island off the coast of Queensland and turn us into one of the world’s largest exporters of liquid natural gas. Liquefaction, it turns out, involves massive emissions.

The entire industrial sector accounts for almost a third of our total emissions, which are projected to be little changed over the decade. The good news is that 80 per cent of its emissions come from just 187 large facilities. Most of these are subject to the federal government’s existing “safeguards mechanism”, which sets a baseline – or maximum - for each facility’s emissions.

So Wood’s chief proposal is for this mechanism to be modified and extended. Existing facilities should be required to use technologies now available to gradually reduce their emissions. New facilities should be required to meet benchmarks substantially lower than existing ones.

“From now on,” Wood says, “every decision to renew, refurbish or rebuild an industrial asset potentially locks in emissions for the coming decades. Getting these decisions right will be critical for reaching net zero.”

Of course, when it comes to the many facilities producing fossil fuels for export, their future prospects will be affected more by other countries’ climate-change policies than by ours. Good luck finding customers for fossil fuels as the reality of global warming catches up with them as well as us.

Read more >>

Saturday, December 26, 2020

Working from home takes us back to the future

If there’s one good thing to come from this horrible year, surely it’s the breakthrough on WFH – working from home. This wonderful new idea – made possible only by the wonders of the internet – may have come by force, but for many of us it may be here to stay.

If so, it will require a lot of changes around the place, and not just in the attitudes and practices of bosses and workers. With a marked decline in commuting – surely the greatest benefit from the revolution – transport planning authorities will have to rethink their plans for more expressways and metro transport systems.

If we’re talking about fewer people coming into the central business district and more staying at home in the suburbs, over time this will mean a big shift in the relative prices of real estate. For both businesses and families, CBD land prices and rents will decline relative to prices and rents in the suburbs.

In big cities like Melbourne and Sydney, as so many jobs have moved from the suburbs to office towers in the CBD and nearby areas, the dominant trend in real estate has gone from position, position, position to proximity, proximity, proximity. Everyone would prefer to live closer to the centre.

If you measure the rise in house prices over the years, you find the closer homes are to the GPO, the more they’ve risen, with prices in outer suburbs having risen least.

But if WFH becomes lasting and widespread, that decades-long trend could be reversed. If you don’t have to spend so much time commuting, why not live further out, where bigger and better homes are more affordable and there’s more open space?

Maybe apartment living will become less attractive compared to living in a detached house with a garden, with a corresponding shift in relative prices. And if we’re going to be working at home as a regular thing, maybe we need an extra bedroom to use as a study.

It’s interesting to contemplate. But before we get too carried away, let’s remember one thing: in human history, there’s nothing new about working from home. Indeed, when you think about it you realise humans have spent far more centuries working at home than not.

We’ve been working from home – not having a factory or office to go to – since we were hunters and gatherers. That was all the millennia before the beginning of farming about 10,000 years ago.

In all the years before the start of the Industrial Revolution in Britain in the 1760s, most people earned their living from farming, and farming was done next to – and sometimes inside – the hovels of peasant workers or, in less feudal times, the homesteads of farmers.

You know that in Europe and other cold climes, families lived with their farm animals during winter. Much work would have been done in nearby sheds.

In the Middle Ages, most tradespeople worked at home. Blacksmiths, carpenters, leather workers, bakers, seamstresses, shoemakers, potters, weavers and ale brewers made their goods in their homes and sold them from their homes.

This was work suitable for women as well as men, and it could be combined with childcare and other, income-earning farm work.

In the early days of capitalism, from the 1600s to until well into the Industrial Revolution, much use was made of the “putting-out” system, as The Economist magazine describes in a recent issue.

“Workers would collect raw materials, and sometimes equipment, from a central depot. They would return home and make the goods for a few days, before giving back the finished articles and getting paid,” it says.

“Workers were independent contractors: they were paid by the piece, not by the hour, and they had little if any guarantee of work week to week.”

Is this ringing any bells?

Being economists, the magazine notes that when Adam Smith wrote The Wealth of Nations, in 1776, it was perfectly common to work from home. Smith famously described the operation of the division of labour in pin-making – not in a dark satanic mill but a “small manufactory” of perhaps 10 people, which could well have been attached to someone’s house.

Eventually, however, the putting-out system gave way to full-on manufacturing in factories – despite the resistance of the machine-smashing Luddites who preferred the old ways.

The move to factories was an inevitable consequence of the development of bigger and better machines in the unending pursuit of economies of scale. Workers moved from the farm to the factory and then, as technological advance continued, from highly automated factories to city offices and, eventually, sitting at a desk staring at a screen.

It’s economic development and the pursuit of ever-greater material prosperity that opened the geographic divide between home and work. Which is not to say that further technological change – including the advent of Slack and Zoom – can’t make it possible to bring them back together for many, though obviously not all, workers. Provided, of course, that’s what workers and, more significantly, bosses see as being to their advantage.

Here, too, it’s worth remembering a bit of history. The Economist notes that, according to some economic historians, workers were exploited under the putting-out system. Those who owned the machines and raw materials enjoyed enormous power over those whose labour they used.

It was difficult for workers spread across the countryside to team up against the bosses and their take-it-or-leave-it offers. Crammed into a big factory, however, workers could more easily join together to ask for higher wages. Trade unions started to grow from the 1850s onwards.

Happy speculation aside, there’s no certainty how much working from home will take on. If it does, there’s a risk that will be because bosses see it as a new way to cut costs. That really would be turning the clock back.

Read more >>

Monday, May 11, 2020

How Morrison can give us a bright economic future

A big part of getting economic life back to normal involves restoring people’s faith that the future will be full of opportunity for progress. But that ain’t easy because the gloom of recession kills our belief that things could ever get better. And the longer we think like that, the truer it becomes.

So Scott Morrison needs to accept the paradox that returning the economy to normal demands that we don’t return to squabbling politics as usual, nor to governing primarily in the interests of the Liberal Party base and its corporate donors.

Why not? Because it wasn’t working well even before the virus arrived. The economy’s growth was weak and, that being so, business was reluctant to invest. Morrison is right to say we must grow our way out of debt and deficit, and that – ultimately, at least – we need a private sector-led recovery.

But with the recession leaving business with even more idle production capacity than it had last December, it’s delusional to expect that some tax incentive could prompt a surge in business investment.

So what can the government do that would get business investing? It can fix the dysfunctional attitudes to energy policy that are blocking much-needed investment in next-generation electricity production.

And the plain truth is that no government refusing to face the reality of climate change stands any hope of convincing us that our economic future is bright. What’s so stupid is that if the government weren’t so committed to helping losers fend off inevitable change in the economy’s structure, it would see more clearly the huge potential for Australia to be a big winner in the post-carbon world.

Only drawback: exploiting that potential would require huge private sector investment. Oh, that’s right, it’s the present lack of need for more investment that will slow any recovery.

Climate change has already started to bring much damage to our personal health, agriculture and tourism, but our hesitation to get on with helping to combat it is partly explained by our long-standing and lucrative comparative advantage as a major exporter of fossil fuels.

But a report by Tony Wood and colleagues at the Grattan Institute, to be published today, confirms Professor Ross Garnaut’s assessment that our abundant resources of wind and sun give us a potential comparative advantage in renewable energy – particularly if we get in early.

Wood also confirms Garnaut’s view that our money-making potential lies not so much in exporting renewable energy directly but indirectly, by using wind and solar to make energy-intensive "green" commodities for export.

Get it? If we play our cards right – if Morrison displays his newfound ability to provide the nation with genuine leadership – we could begin a whole new era of manufacturing industry in Australia, only this time one built on comparative advantage rather than protection.

Wood says the list of potential energy-intensive manufactures includes aluminium, aviation fuel, ammonia and steel. Tens of thousands of jobs could be created, comparable to the existing 55,000 geographically-concentrated carbon-intensive jobs.

How does a revived green manufacturing industry sound as a plan that could convince climate-change worriers (that is, everyone with a brain), business people and workers that there is a future for our economy?

And here’s the best bit: Wood says the economics favour establishing the new green manufacturing industries where a large industrial workforce is already established - such as those in central Queensland and the Hunter Valley.

"It is cheaper to make green steel in those places, where labour is available and affordable, than in the Pilbara – despite the cost of shipping iron ore to the east coast," he finds.

Notice the political attraction of this idea? You don’t leave the workers in these regions to their fate as the world’s inevitable move away from fossil fuels turns their mines into stranded assets, you set them up to work in a new carbon-free industry.

Wood’s investigations see most potential in moving to "green steel". At present, most steel is made by using coking coal and a blast furnace to reduce iron ore to iron metal. Trouble is, burning the coal produces much carbon dioxide. Green steel, by contrast, involves using renewables electricity to produce hydrogen for “direct reduction”, turning the ore to metal, with water as the byproduct.

Ultimately, the massive investment needed for new green industries would have to come from the private sector. But the government would need to get the ball rolling by helping to fund a steel flagship project – maybe one that starts by using natural gas, before progressing to hydrogen.

The happy notion that governments can sit back while the private sector pioneers new, radically different industries works well in textbooks, but not the real world.
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Wednesday, January 29, 2020

Zero net carbon choice: do we want to be losers or winners?

You may regard economists as a dismal lot, always reminding us of the cost of this or the risk of that. But there’s one prominent economist with a much more positive story to tell.

Professor Ross Garnaut is more prophet than gloomy economist, a man with the vision of a better future that our politicians have lost as they squabble over votes.

The Morrison government trembles at the thought of the Paris agreement’s goal of achieving zero net carbon emissions by 2050. All it can see is the need for higher taxes and the loss of jobs in coal mining. Garnaut, by contrast, sees a golden opportunity for us to shift from an industry in terminal decline to a new set of industries with bright prospects in the low-carbon world that’s coming.

Garnaut foresees that, if we rise to the challenge of climate change, we "will emerge as a global superpower in energy, low-carbon industry and absorption of carbon in the landscape".

This vision is set out in his latest book, Superpower, which seems to offer something for everyone. Do you regret the decline of manufacturing? Garnaut sees how we could give it a new lease on life.

Have you always thought that, rather than sending our minerals off for further processing abroad, we should do it ourselves? Garnaut sees how we can.

With climate change making the land hotter, drier and more prone to bushfires, do you fear for the future of farming? Garnaut sees the bush getting a whole new source of income and activity.

Do you fear that, with the decline of coal mining, regional Australia will be left even further out of the economic action? Garnaut see all the new industries created by the world’s move to renewable energy being located in the regions.

Of course, as the author of two government reports on our response to climate change, Garnaut has form as a prophet. In his first report in 2008, he relied on scientists’ advice to predict that "fire seasons will start earlier, end slightly later, and generally be more intense. This effect increases over time, but should be directly observable by 2020."

On the other hand, Garnaut now admits that even his second report, in 2011, has been overtaken by events. Then, he calculated that the cost of moving to renewable energy would come early and reduce our rate of economic growth for many years before it was eventually outweighed by the benefits of climate change avoided.

Now, he sees that the move to renewable energy won’t cost a lot, low-carbon electricity will be cheaper and will give us major new export opportunities. These more positive benefits will come earlier than the benefit of less climate change.

The cost of moving to all-renewable electricity has been transformed by two things. First, the huge reduction in the cost of solar panels and lesser falls in the cost of wind turbines and batteries.

Second, by the fall in global interest rates to record lows, which seem likely to persist. Whereas much of the cost of coal-fired electricity comes from the cost of the coal, with solar and wind power almost all of the cost comes from setting up the system – sun and wind are free. Lower interest rates mean the capital cost is much reduced.

So far, a chunk of Australia’s prosperity derives from our huge natural endowment of coal and gas. Now Garnaut has realised that, relative to the size of our population, Australia is more richly endowed with sun and wind than any other developed country – or our Asian neighbours.

So zero-emissions electricity will be cheaper to produce (though we may have to pay more in transmission costs). More significantly, our carbon-free power will be much cheaper than other countries’.

Carbon-free electricity is the key to our efforts to achieve zero net emissions overall, and to our various opportunities to profit from the world’s move away from fossil fuels. Our transport emissions will be slashed by moving to electric vehicles and increased use of public transport.

The scope for exporting our electricity through submarine cables – or via tankers of electrolysis-produced hydrogen – is limited. But this will now make it economic to further process alumina, iron ore, silicon and ammonia before we export them. That processing is best done adjacent to the mine site.

At present, plastics and many chemicals used in manufacturing are produced from fossil fuels. But we will have more plentiful supplies of (renewable) biomass – plant material – than many other countries, which we can use to produce plastics and chemicals for ourselves and for export.

The "net" in zero net emissions implies that the world will still be emitting some carbon dioxide, but these emissions will be offset by "negative emissions" as atmospheric carbon is captured and sequestered in soil, pastures, woodlands, forests and plantations.

Guess what? Few countries have more scope for "natural climate solutions" such as carbon farming than we do. We need research to improve the measurement of carbon capture, but we have so much scope that, after meeting our own needs, we could sell carbon credits to the rest of the world. This could be a new rural industry, much bigger than wool.

To maximise our chances of benefiting from the move to a low-carbon world, however, we have to get to zero net emissions sooner than the other rich countries, not later.
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Monday, June 3, 2019

How to dud manufacturing: be the world’s biggest gas exporter

Did you know Australia has now overtaken Qatar to be the largest exporter of natural gas in the world? But, thanks to private profiteering and government bungling, this seeming triumph comes at the risk of further diminishing manufacturing industry in NSW and Victoria.

It’s yet another example of naive economic reformers stuffing things up because real-world markets don’t work the way they do in textbooks.

Last week Dow Chemical announced it would close its Melbourne manufacturing plant due, in part, to high gas prices. This came after RemaPak, a Sydney-based producer of polystyrene coffee cups, and Claypave, a Queensland-based brick and paving manufacturer, went belly-up citing rising gas prices as an important contributing factor.

“Many other manufacturers are close to making critical decisions on their future operations,” according to Australian Competition and Consumer Commission boss Rod Sims. “If wholesale gas prices do not [come down], it is just a matter of time before they follow Dow, RemaPak and Claypave.”

When expected world liquefied natural gas prices rose last year, Australian gas suppliers were quick to raise their prices to local manufacturers, which use much gas in their production processes.

But expected world prices have fallen significantly over the past six months. Have the three suppliers dominating our east coast market cut their prices with the same alacrity? No. Most commercial and industrial users will pay more than $9 a gigajoule for gas this year, with some paying more than $11.

Why haven’t suppliers cut their prices? Because their pricing power means they don’t have to if they don’t want to. Why would they want to? Only because the government threatens them with something worse if they rip too much off their customers.

This was the big stick the softly spoken Sims was carrying last week as he urged them to do the right thing.

Is this the best way to regulate a market? No, but once you’ve stuffed it up you have little choice. The stuff-up evolved over some years, under federal governments of both colours and, predictably, with a lack of federal-state co-ordination.

It began in the resources boom, when Labor’s Martin Ferguson approved the construction of no less than three gas liquefaction plants near Gladstone in Queensland. That was one plant too many.

The companies secured the cost of building their plants by writing future contracts to export LNG to foreign customers. The first two companies secured the supply of sufficient gas from local sources, but the third had to scramble for what it needed to meet its sales contracts.

They expected far more gas to be available than transpired because they failed to anticipate the NSW and Victorian governments’ moratoriums on fracking for unconventional gas from coal seams.

Until the construction of the liquefaction plants – which enabled gas to be shipped overseas – the east coast gas market was cut off from the world market. This meant its prices were much lower than world prices.

The federal government knew that allowing the plants to be built meant opening the east coast market to the (much bigger) world market, forcing local prices up to the “export-parity price” or LNG “netback” price.

But, as Sims noted in a speech last week, the east coast was "just about the only region in the world that allowed unrestricted exports”. By contrast, when our west coast gas market was opened up, the West Australian government insisted on reserving sufficient gas to meet the needs of local users at local prices.

So, the east coast market opening was textbook pure (and much to the liking of the gas companies). Trouble was, the market worked nothing like the textbook promised. Lack of competition meant prices shot up to way above the export price.

The gas producers were able to overcharge the big industrial users, the three big gas retailers – AGL, EnergyAustralia and Origin – charged the smaller industrial users even more, and the pipeline owners whacked up their prices, too. Retailers’ prices peaked at $22 a gigajoule.

The threat to manufacturing was so great that Malcolm Turnbull eventually stepped in. Arming himself with the “Australian gas domestic security mechanism” (permitting him to set up a domestic reservation scheme), he forced the LNG producers to agree to offer domestic users sufficient gas on reasonable terms.

Now, however, prices have drifted back above export-parity. And the Australian Energy Market Operator is warning that gas shortages in NSW and Victoria could arise as soon as 2024 in the absence of major pipeline upgrades to allow more gas to flow from Queensland, or new sources of supply emerging.

This uncertainty adds to the risk of manufacturers giving up the struggle. The easiest and best solution would be for the Victorian government to lift its restrictions on development of – would you believe – conventional gas deposits.
Read more >>

Saturday, November 10, 2018

Services are taking over the economy – despite the politicians

One test of whether our political leaders are looking to the economy’s future or clinging to its past is whether they show an understanding that most of our future lies in the services economy.

Whether they hanker for an economy where most people earn their living by growing things, digging things out of the ground or making things.

Probably only the dearly departed Malcolm Turnbull passes this test, with his early enthusiasm for innovation and agility. Kevin Rudd said he didn’t want to be the leader of a country that didn’t make things. Scott Morrison took a lump of coal into the Parliament to show where his allegiances lay.

But as the Organisation for Economic Co-operation and Development reminds us in its latest report, the shift from producing goods to performing services is fundamental to the process of economic development.

Every country’s economy starts on the economic development journey with most people working on the land, and others in mines. That’s where we were in the 19th century. About a hundred years ago, the great migration from the country began, with more and more people moving to the city to work in factories.

By 1971, employment in manufacturing had reached 1.4 million workers. Manufacturing’s share of total employment in Australia reached 25.5 per cent a little earlier in 1966.

But from that period on, employment in manufacturing began to decline, both in absolute numbers and as a share of the total.

It – and employment in the other goods industries: agriculture and mining – declined as a share of the total simply because employment in the services sector grew much faster.

So, for at least for the past 50 years, it’s services that have been going up while goods industries have been going down. That’s true whether you look at shares of total employment or shares of total production (gross domestic product).

When you turn to the absolute numbers of workers, they’ve been declining in agriculture for more than a century. Today, just 325,000 people work on the land.

In manufacturing, they’ve been falling since 1971, to be down to 980,000 today.

Mining employment got a fillip from the resources boom, but even its job numbers have resumed their decline since 2013, and are now down to 245,000 – or just 2 per cent of our total employment of 12.6 million.

There’s nothing peculiarly Australian about this move from farming to manufacturing to services. You can see just the same progression in other rich economies and in “emerging” (that is, rapidly developing) economies.

It’s been unfolding before our eyes in China since it began opening its economy to the world in the late 1970s. It was all the people leaving its farms to work in city factories that, a few years ago, took the proportion of the world’s population living in urban areas to more than half.

Returning to Oz, don’t get me wrong. Some of us will always be working in the goods part of the economy. That’s particularly true of Australia because, though we’ve never been great shakes at manufacturing, we have had, and will continue to have, a comparative advantage in agriculture and mining, relative to other countries.

Note this: though the number of people working in the three parts of the goods sector has been falling, that doesn’t mean we’re growing less food or digging fewer minerals. Our annual production of food and minerals and energy is greater than ever. Even in manufacturing, our annual production has been falling only since 2008.

How can production go up while employment goes down? Easy. Increased productivity of labour caused by automation – technological advance. The use of more and better machines has made farming, mining and manufacturing more “capital-intensive” and so less “labour-intensive”.

That’s the thing about the goods side of the economy: it’s relatively easy to use machines to replace men (and women). And this isn’t bad, it’s good – for two reasons. First, it’s helped make goods cheaper, thus making us more prosperous.

Second, it’s much harder to use machines to replace workers delivering services. Robots will change this to an extent, but by not nearly as much as the alarmists claim.

And it’s not hard to think of more services we’d like other people to do for us. That’s why total employment is higher than it’s ever been. And why further growth in services’ share of total employment and production is inevitable and inexorable.

Where will the new jobs be coming from? That's where.

The OECD report tells us that, in 2014, the goods sector’s share of production was down to 17 per cent (agriculture 3 per cent, mining 6 per cent, manufacturing 8 per cent), with the services sector’s share up to 83 per cent – about average for the OECD.

Within services, the biggest industries are: business services, 14 per cent of GDP; wholesale and retail trade, 10 per cent; financial services, 9 per cent; construction, 8 per cent; health and aged care, 7 per cent; education 5 per cent and defence and public administration, 5 per cent.

A favourite argument the goods industries use to exaggerate their importance to the economy is to point to their higher share of exports (a widget sold to a foreigner is more virtuous than one sold to a local, they claim).

A third of all our agricultural production is exported. For manufacturing it’s more than a quarter (bet you didn’t know that) and for mining it’s more than 90 per cent. For services it’s a mere 11 per cent.

This means that, as usually measured, agriculture contributes 8 per cent of total exports; mining, 40 per cent, manufacturing 26 per cent, and services, 26 per cent.

Education of overseas students is now our third biggest export, after iron ore and coal. Tourism is the other big one.

But the OECD points out that the goods we export have inputs of services embedded within them. Allow for this and agriculture’s share of total export “value-added” drops to 5 per cent, mining’s to 30 per cent and manufacturing’s to 13 per cent, while services’ share rises to an amazing 52 per cent.

Services are taking over the economy. Live with it.
Read more >>

Wednesday, September 27, 2017

Closing out the world won't fix our problems

Talk about a slow burn. It's 10 years since the beginnings of the global financial crisis, the greatest economic collapse any of us will ever see. Things ought to be back to normal by now, but they aren't.

The world is still picking through the wreckage, deciding what should be kept and what dispensed with. What needs to be done differently to restore normality and ensure there's never another disaster like that one.

A lot of people were surprised the retribution didn't happen at the time: bankers sent to jail, famous economists and their theories discredited, presiding politicians pushed out to pasture, their reputations in tatters.

For a long time, it looked as though the same people who brought us the disaster were kept on to clean up the mess. "Sorry about that. Poor execution. Nothing wrong with the basic policies, of course. Won't let it happen again."

Now, however, there's a revolt by disillusioned and angry punters evident in many developed countries: the Americans voting in an outsider oddball like Trump, the Brits voting to quit the European Union then knackering the government trying to arrange it, the French electing a president from neither of the two main parties, the Germans re-electing Mummy Merkel, but only after reducing the combined vote of her party and the main alternative to their lowest share since the war.

It's a similar story in Oz, where last year's election saw one voter in four avoiding the two main parties and the resurrection of One Nation to scourge the establishment.

Fancy footwork by the Rudd government at the time allowed us to escape the GFC with only a few scratches. Turns out it's not that simple. The economy's been below par ever since and, for the past four years, our growth in wages has been as weak as in the other advanced economies.

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Trouble is, when the pressure for change comes from the grassroots rather than frank admission of failure on the part of the policy elite, the great risk is that we'll flip to populism – policies that are popular because they sound like they'd make things better, when they wouldn't really because they misunderstand the deeper causes of the problem.

Much of the discontent has centred around globalisation – the breaking down of barriers separating countries.

Globalisation is a popular target because it can be blamed for the fall in jobs in manufacturing as well as the admission to our country of people who look different and have strange habits. Are they taking our jobs or just taking over our country?

But though it's true that some of the jobs lost in manufacturing have shifted to other countries (providing employment and income to people much poorer than any of us), our compulsive fear of foreigners blinds us to the much greater role played by automation.

As Dr Andrew Leigh, federal Labor's shadow assistant treasurer and a former economics professor, writes in a new book for the Lowy Institute, Choosing Openness, advances in technology have been shifting jobs from the farm to the cities, and now from manufacturing to the services sector, continuously since Australia became a federation.

This means attempting to "make Australia great again" by restoring protection – reducing our openness to the world – can't work. We'd have trouble establishing many new factories, and those we did would employ a lot more machines than workers.

What restoring protection would do, however, is raise the prices of all the goods we protected – starting with cars, clothing and footwear – worsening the cost of living of all working people.

It's too easy to forget the benefits of globalisation along with the costs.

Apart from being a bit too late, trying to return to White Australia would rob us of greater human links with rapidly developing Asia, where we all know our best hope of future prosperity lies.

Overall, we've gained more than we've lost from the successive waves of new technology, as well as from the way we opened our economy to the world in the 1980s. Trying to re-erect the shutters would be a costly mistake.

Overall, employment has just kept growing – which is not to deny that many less-skilled men formerly employed in manufacturing have not been able to find satisfactory employment.

The sensible conclusion is that there have been losers as well as winners, but little has been done to help the losers – with the winners required to do more to kick the tin.

"The chief challenge," Leigh says, "is to deal with the inequality that can accompany technological change and economic openness.

"This is not just a matter of fairness; it is also essential if we are to deal with the political backlash against openness.

"A spate of studies in economics and psychology have shown that humans exhibit loss aversion [we prefer to avoid losses more than we prefer making gains] and are more conscious of headwinds than tailwinds.

"Open markets require egalitarian institutions," Leigh concludes.

He's right. This is the key principle of reform we lost sight of after the departure of Hawke and Keating.
Read more >>

Saturday, October 1, 2016

Breaking news: classical Athens had an economy

Did you know that classical Athens didn't have an economy? If you find that hard to believe, you should - because it's not possible.

But if you read the many hundreds of books written about Athens in the classical period, you could be forgiven for imagining that all those philosophers, poets, artists, politicians and generals existed in a world where the mundanities of making a living and raising a family didn't exist.

This may be because the authors of those books thought that, beside the glories of Athens' literature, art, architecture and history, mere economics wasn't worth mentioning. Soo boring, darling.

Or it may be that, in the minds of the authors of earlier centuries - maybe even in the minds of the Athenians themselves - an association with "trade" carried a social stigma. Like using the lavatory, it was a necessary evil not to be mentioned in polite society.

But when Peter Acton, who studied classics at Oxford but ended up as a management consultant, finally got the chance, he decided to search out whatever information he could find to set the record straight and complete the picture of Athenian life.

Athens' classical period ran from the defeat of the second Persian invasion of Greece under Xerxes to when Athens and the rest of Greece came under the control of Alexander the Great. So, the fifth and fourth centuries BCE.

Whatever they did to keep body and soul together that long ago must have been small and primitive, right?

Well, no. Acton found Athens at the time had a large and thriving manufacturing sector, defined broadly to include both mining and construction.

He set out his discoveries in the book Poiesis: Manufacturing in Classical Athens, which I'll summarise. "Poiesis" comes from the same Greek root as "poetry", but means "to make".

It seems the Athenians had a lot of manufactured items in their homes. They were at the stage of economic development where the more accoutrements you could acquire, the better off you were (whereas we're closer to satiation with goods and prefer acquiring experiences).

"Athenian Man was as likely as not to have made many of the products used in his own home and probably depended for a good part of his sustenance on manufacturing for sale," Acton says.

"However rich he was, his wives and daughters would make their own clothes, working alongside some of their slaves and perhaps supervising others in the household's workshop.

"Every time he went outside, he would be surrounded by evidence of production: the smells and the smoke of smithies and pottery furnaces, the clack of looms, the hammering of carpenters and sculptors, carts rattling through the streets full of stone or wood or bales of fine cloth or jars of imported oils."

It seems likely that more than half the city's residents would have spent at least some of their time manufacturing products for sale or home consumption, Acton estimates.

This would involve almost all the slaves, of course, either helping with household production or working in a gang for one owner.

"A reasonable estimate is that around a quarter of the free population of all status levels, men and women, worked at making things," he says.

Manufacturing activity ranged in size. "It is a common mistake to see manufacturing as having undergone a steady progression from self-sufficiency based on home crafts to mechanised mass production.

"In reality, individual craftsmen, small workshops, co-operative production arrangements and large factories have coexisted over millennia in various societies, not least in classical Athens."

Although written accounts of economic life are sparse, archaeological finds are a different matter. Material evidence gives us clues about the occupations followed.

Wood, for instance, suggests foresters, sawyers, carpenters, furniture makers and boat builders. Stone suggests quarrymen, stonemasons, sculptors, mosaicists and haulers.

Metals imply miners, blacksmiths, armourers, silversmiths, goldsmiths and coiners. Clay implies potters and tilers; hides say tanners and cobblers; reeds say rope and basket makers; herbs say healers and perfumers, and wool says fullers, dyers and weavers.

Manufacturing, Acton contends, was the great leveller. Whereas agriculture was real capitalism, contributing to social inequality, trade and industry helped to level income and status.

"The social mobility, employment opportunities and relatively even distribution of wealth that accompanied the rise of commerce helped Athens to avoid the revolutions that the Peleponnese suffered regularly."

By Acton's estimate, the classical Athenians enjoyed a high standard of living - not just compared with other people at the time, but even compared with any other society until recently.

Economic growth in Greece was up to 0.9 per cent a year, twice as fast as in England and Holland before the Industrial Revolution.

By classical times the basic daily wage was about six times that required for subsistence, and half Athens' population lived a life that was better than the typical Briton's in the 18th century.

Conspicuous consumption became increasingly common in the fourth century BCE. "Some couches and tables were highly ornate and inlaid with gold or silver.

"Men and women wore jewellery of outstanding craftsmanship and decorative ceramics or silverware for festivals might take several years of work."

Health, as measured by bone density, increased rapidly, even though urbanisation tends to have the opposite effect.

Houses, though not luxurious, were large and comfortable, typically with roof space larger than the median single detached house in the United States in 1997. The extra space accommodated more furniture and possessions.

Athens engaged in much trade. Massive imports of grain allowed her farmers to pursue their comparative advantage, producing olive oil and wine for export.

They also imported luxury items such as fine cloth, spices, dyestuffs and precious metals, often for further processing in Athens.

But it was rich in raw materials, including marble, limestone, clay and silver.

Sounds like Athenians then were doing better in relative terms than many of them are today.
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Saturday, May 30, 2015

The economy: old dog shows signs of life

With bad news this week from the March quarter survey of business capital expenditure, we need cheering up. Fortunately, budget statement No. 2 shows Treasury has been looking under every rock to find some good news.

It kicks off its annual assessment of the economic outlook by reminding all us worriers that the economy is entering its 25th consecutive year of growth, which is the second longest continuous period of growth of any advanced economy in the world.

And, we're reminded, though the economy has grown by less than its medium-term average ("trend") rate of 3 per cent-odd for five of the past six financial years, and is now forecast to grow by just 2.5 per cent in the financial year soon to end and 2.75 per cent in the coming year, this still leaves us as "one of the fastest growing economies in the advanced world".

Treasury gives us an update on the story we've become so familiar with in the past few years: the boom in investment in new mines and natural gas facilities is fast subsiding, leaving a big vacuum in economic activity that needs to be filled by faster growth in the rest of the economy.

To encourage such growth, the Reserve Bank has resumed cutting the official interest rate, such that it's now fallen 2.75 percentage points since its peak in late 2011, to a record low of 2 per cent. And, despite all the complaints about spending cuts, Joe Hockey has ensured his budget is only a minor drag on economic activity.

In response, we're now getting quite strong growth in new home building, and consumer spending is stronger than it was.

Fine. But that brings us to the crux of our continuing sub-par performance: business investment spending. Treasury expects mining investment to fall by more than 15 per cent this financial year, then by 25 per cent in the coming year and a further 30 per cent in 2016-17.

Yipes that's precipitous. And Treasury fears non-mining investment will show only modest growth until 2016-17 when it should increase by 7.5 per cent.

Put mining and non-mining together and you see business investment spending is the economy's continuing weak spot. After falling by 5 per cent last financial year, total business investment is expected to fall by another 5 per cent in the year just ending, then by 7 per cent in the coming year and even by a further 3.5 per cent in 2016-17.

Now you see why this week's figures for business "cap-ex" were such a downer. They really confirmed Treasury's dismal outlook. They showed a weak outcome for the March quarter and an unexpected deterioration in how much non-mining businesses expect they'll be spending in the coming financial year.

Moving right along, Treasury reminds us the economy does have a couple of things going for it apart from rock-bottom interest rates: one is lower petrol and oil prices and another is lower electricity prices (with more falls to come in some states).

And then, of course, there's the lower dollar, down mainly because the prices of our mineral exports are down, but perhaps also because our interest rates are lower than they were relative to those of other countries.

Our "real" exchange rate – that is, after adjusting the nominal exchange rate for our inflation rate relative to those of our trading partners – appreciated by about 30 per cent during the mining prices boom, but since September 2011 it has depreciated by about 13 per cent.

That's bad news for businesses and households buying imports, of course, but good news for Australian firms competing against imports in the domestic market. It's also good news for Australian exporters, who now get more Aussie cents for every US dollar they earn.

Treasury is forecasting strong growth of 5 or 6 per cent a year in the volume (quantity) of our exports over the next few years. Most of that is increased exports of minerals and energy as new mines come on line, but some of it comes from faster growth in non-mining exports.

On the other side, Treasury's expecting the volume of our imports to fall by 3 per cent in the year just ending and by a further 1.5 per cent in the coming year, before growing moderately by 2.5 per cent in 2016-17.

Why? Mainly because of fewer imports of heavy mining equipment, but also because the lower dollar will allow local firms to recapture market share from imports.

Such as? A classic exporting and import-competing industry is tourism. Real travel spending by international visitors to Oz has grown by 11 per cent since the start of 2012, whereas real travel spending by Aussies travelling abroad has decreased by 11 per cent.

The combined effect has been to turn our balance of trade in tourism services from a small deficit to a much bigger surplus. The increased inflow of tourists has been shared by all states.

Remember how much our leaders bang on about the big bucks to be made from China's rapidly growing middle class? Tourists from China accounted for more than a quarter of the growth in tourist spending in Oz last financial year.

The more than three-quarters of a million Chinese visitors that year spent an average of $8600 per person with our businesses.

Now get this: the volume of our exports of medium-skilled and technology-intensive manufactures has grown almost continuously over the past 30 years, as have our exports of high-skilled and technology-intensive manufactures, with the latter now bigger than the former.

It's really only the low-skilled and labour-intensive manufactures that have fallen back. The starring industries make goods such as pharmaceuticals, professional and scientific equipment, and machinery and transport equipment.

Strikes me we're not dead yet.
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Saturday, May 9, 2015

Two-speed economy has gone away

Remember the two-speed economy we used to hear so much about? Well, no one in the media has thought it worth mentioning, but it's gone away.

It's remarkable how the media can get so excited about some "problem" but then never mention it again.

The two-speed economy was caused by the first two stages of the resources boom, of course, with the high commodity prices and mining investment boom causing the resource-rich states to grow much faster than the other states. The others were held back partly by the boom-caused high dollar making life much harder for trade-exposed industries such as manufacturing and tourism.

According to an article by Sam Nicholls and Tom Rosewall in the latest Reserve Bank Bulletin, Western Australia's real gross state product grew at an average rate of almost 5 per cent a year after 2003-04, and Queensland's grew at 3.5 per cent, compared with 2.5 per cent or less in the other states.

But with commodity prices coming down (and state governments' mineral royalties falling) and construction projects winding up, the mining states' economies are now growing more slowly.

The boom is now in its increased production phase, but this is much less labour-intensive than building new mines and natural gas facilities, meaning less money stays in the state economy rather than going to foreign owners.

Meanwhile on the other side of the fence, the Reserve Bank's bargain-basement level of interest rates has helped consumption spending and home building to grow a bit more strongly in the other states, particularly NSW and Victoria.

With their tax receipts boosted by much higher conveyancing duty from their housing booms, the NSW and Victorian governments won't keep such a tight rein on budget spending.

The dollar has now fallen a long way (though its decline has been inhibited by the "quantitative easing" – money creation – in most of the major advanced economies) and this is starting to revive manufacturing and tourism.

Differences in each state's industrial composition, as well as differences in their rates of population growth, mean the states never grow in lock-step. Barring commodity booms, the nationwide growth rate is rarely far from the growth rates in NSW and Victoria, simply because these two states constitute more than half of national gross domestic product.

We're returning to that more usual state. Nicholls and Rosewall examine the "standard deviation" in GSP growth rates as a summary measure of the degree of variation in growth across the states. They find it has declined recently to be only a little above its long-run average.

Another way to compare the states' economic performance is to look at differences in their rates of employment growth and levels of unemployment, though you have to remember to allow for differing rates of population growth.

Doing this shows that "the variation in state unemployment rates has declined recently, to be well below its average level since 2000", the authors say.

Of course, although the states may now be growing at more similar rates, a decade of disparate growth can't help having a big effect on each state's share of the total Australian economy.

Are you sitting down? Over the 10 years to 2013-14, WA's share has increased from 11 per cent to 17 per cent. Amazing. And get this: WA now has by far the widest gap between its share of the economy and its share of the nation's population, just 11 per cent.

Queensland's economic share has increased by 1 percentage point to 19 per cent. (Mining accounts for a much smaller share of Queensland's economy than of WA's, and the Sunshine State is also more dependent on tourism, which was hard hit by the high dollar.)

The Northern Territory also benefited greatly from the mining boom, with its share of the national economy increasing by about a quarter. In absolute terms, however, it remains tiny.

But if the mining states' share has grown, the other states' shares must have shrunk. In round figures, NSW's share is down 4 points to 31 per cent and Victoria's is down 2 points to 22 per cent. South Australia's and Tasmania's shares are down a combined 1 point to 6 per cent and 2 per cent.

Now let's look at differences in the states' industrial structure. Although most industries' share of each state's economy is similar, there are some big differences, particularly in primary industry.

Mining accounts for a remarkable 30 per cent of WA's economy and 9 per cent of Queensland's, compared with about 2 per cent in the other states.

Agriculture accounts for 8 per cent of Tasmania's economy and 5 per cent of SA's, compared with a national average of 2 per cent.

Victorians see their state as heavily dependent on manufacturing but in truth it accounts for 7 per cent of their economy, the same as for NSW and not far from the national average of 6 per cent.

With NSW fancying itself as the nation's financial capital, it shouldn't surprise that "business services" – financial and insurance services; professional, scientific and technical services; media and telecommunications – make up 30 per cent of its economy.

What may surprise manufacturing-mesmerised Victorians is that they're not far behind at 27 per cent. This compares with shares ranging from 19 per cent down to 14 per cent in the other states.

A last startling statistic. Because our exports are dominated by minerals and energy, and because WA has such a large share of the nation's mining industry, the authors estimate that with just 17 per cent of the economy, WA supplies a stunning 43 per cent of our exports.

No wonder the Sandgropers like to imagine the rest of us are bludging off them.

But it's a mercantilist fallacy that nations make their living by selling things to other nations (and importing as little as possible). Selling goods and services to other Aussies is no less virtuous.
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Wednesday, July 23, 2014

Big cities have become the engine of the economy

Old notions die hard. If you took all the production of goods and services in Australia and plotted on a map where that production took place, what would it look like?

Any farmer could tell you most of the value is created in the bush. A miner, however, would tell you - a bunch of ads have told you - these days most of the wealth is generated in areas such as the Pilbara in Western Australia and the Bowen Basin in Queensland.

Then, of course, there are the great manufacturing states of Victoria and South Australia - with most work done in the suburbs of Melbourne and Adelaide, but also regional cities such as Geelong.

That make any sense to you? It's completely off beam.

A report issued this week by the Grattan Institute finds that, these days, 80 per cent of the dollar value of all goods and services in Australia is produced on just 0.2 per cent of the nation's land mass. Just about all of that is in our big cities, as close in as possible.

The report, by Jane-Frances Kelly and Paul Donegan, finds that big cities are now the engines of our prosperity. If you take just the central business districts of Sydney and Melbourne - covering a mere 7.1 square kilometres - you have accounted for almost 10 per of Australia's gross domestic product.

What do workers do in all those city offices? Nothing you can touch. That's how much the economy's changed.

To find the economy as many people still imagine it to be, you have to go back 50, even 100 years. About 100 years ago, almost half Australia's population of 4 million lived on rural properties or in small towns of fewer than 3000 people.

Many of these would have been market towns serving the agricultural economy. Agriculture and mining accounted for a third of the workforce. And only about one in three Australians lived in a city of at least 100,000 people.

These days, agriculture employs only 3 per cent of workers and contributes only 2 per cent of GDP. Our two biggest CBDs contribute at least four times that much.

By the end of World War II, manufacturing had become Australia's dominant industry. At its height in 1960, the report reminds us, manufacturing employed more than a quarter of the workforce and accounted for almost 30 per cent of GDP.

The rise of manufacturing shifted much of our economic activity - our prosperity - to the big cities, but mainly to the suburbs. Suburbs away from city centres had lower rents and less congestion.

Postwar growth in car ownership made possible the shift to a manufacturing economy with a strong suburban presence. It also led to the demise of many small towns and the rise of regional centres.

Today, however, manufacturing employs only 9 per cent of the workforce and accounts for just 7 per cent of GDP. The thing to note is that this seeming decline in manufacturing has involved only a small and quite recent fall in the quantity of things we manufacture in Oz.

Similarly, the decline in agriculture's share of employment and GDP has occurred even though the quantity of rural production is higher than ever. The trick is that these industries didn't contract so much as other parts of the economy grew a lot faster, shrinking their share of the total.

One of those other parts is mining, of course. But get this: "While Australia's natural resource deposits are typically in remote areas, workers in cities make a critical contribution to the industry's success," the report says.

"For instance, in Western Australia, where the most productive mining regions are located, more than one third of people employed in mining work in Perth."

That's partly because of fly-in fly-out, but mainly because many of these workers are highly skilled engineers, scientists, production managers, accountants and administrators.

So what explains the greater and still-growing economic significance of big cities, so that Sydney, Melbourne, Brisbane and Perth now contribute 61 per cent of GDP? The rise of the knowledge economy.

Increasingly, our prosperity rests not on growing, digging up or making things, but on knowing things. Our workforce is more highly educated than ever, and this is the result.

"Knowledge-intensive jobs are vital to the modern economy. They drive innovation and productivity, and are a critical source of employment growth. In the last 15 years there has been much higher growth in high-skilled, compared to low-skilled, employment," the report says.

Knowledge-intensive activities aren't confined to jobs in the services sector, but are also increasing in mining and manufacturing. They often involve coming up with new ideas, solving complex problems or finding better ways of doing things.

But here's the trick: it suits many of the knowledge workers, and the businesses that employ them, for those workers to be crowded into big cities, as close in as possible. When you're all packed in together, there's more scope for the transfers of expertise, new ideas and process improvements known as "knowledge spillovers".

Such spillovers come particularly through face-to-face contact. Large cities offer employers knowledge spillovers and a large skilled workforce. They also offer people greater opportunities to get a job, move to a better job, build skills and bounce back if they lose their job.
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Monday, July 7, 2014

Tough times restore productivity performance

It's official: Australia's rate of improvement in the productivity of labour returned to normal during the reign of Julia Gillard.

How is that possible when big business was so dissatisfied and uncomfortable during Gillard's time as prime minister? The latter explains the former.

According to figures in a speech by Reserve Bank governor Glenn Stevens last week, labour productivity in all industries improved at an annual trend rate of 2.1 per cent over the 14 years to the end of 2004, but then slumped to an annual rate of just 0.9 per cent over the six years to 2010.

This is what had big business rending its garments over the productivity crisis. Egged on by the national dailies, chief executives queued to attribute the crisis to the Labor government's "reregulation" of the labour market, its failure to cut the rate of company tax, plus anything else they didn't approve of.

Except that, according to the Reserve Bank's figuring, labour productivity improved at the annual rate of 2 per cent over the three years to the end of 2013.

So why no crisis after all? Well, as wiser heads said at the time, much of the apparent weakness in productivity was explained by temporary factors such as, in the utilities industry, all those desalination plants built and then mothballed and, more significantly, all the labour going into building all those new mines and gas facilities.

No doubt much of the recent recovery is explained by the many mines now starting to come on line - meaning we can expect the productivity figures to remain healthy for some years. Few extra workers are being employed to produce the extra output - another way of saying the productivity of the miners' labour is much improved.

But mining hardly explains all the improvement, so what else? At the time when business complaints were at their height, many businesses - particularly manufacturers - were suffering mightily under the high dollar.

Many have been forced to make painful cuts, abandoning unprofitable lines and laying off staff. Some have gone out backwards, with the best of their workers being taken up by rival employers.

Guess what? Such a process is exactly the sort of thing that lifts the productivity of the surviving firms. In their dreams, chief executives like to imagine their productivity - which they perpetually conflate with their profitability - being improved by governments doing things to make their lives easier.

But requiring them to be lifters rather than leaners - which is pretty much what That Woman did - usually gets better results. And since the dollar remains too high and seems unlikely to come down anytime soon, it's reasonable to expect the non-mining sector's productivity performance to continue improving. Who told you productivity was soft and cuddly?

As for the convenient argument that the productivity slump must surely be explained by Labor's "reregulation" of the labour market under its Fair Work changes, it's cast into question by some figuring reported in another speech last week, from Dr David Gruen, of Treasury.

Gruen examined the rise in nominal wages over the decade to March this year, as measured by the wage price index, then compared this aggregate rise with the rise for particular industries. In contrast to the days when wage-fixing really was centrally regulated, he found a far bit of dispersion around the aggregate.

Wages in mining, for instance, rose a cumulative 9.7 percentage points more than the aggregate. Wages in construction rose by 5.4 percentage points more and wages in the professional, scientific and technical sector rose by 2.5 points more.

By contrast, wages in manufacturing rose by a cumulative 0.9 percentage points less than aggregate wages. Those in retailing rose by 4.3 points less and those in the accommodation and food sector rose by 7.6 points less.

Notice any kind of pattern there? It's pretty clear. Wages in those industries most directly boosted by the resources boom rose significantly faster than aggregate wages, though not excessively so considering it was a 10-year period.

By contrast, wages in those industries worst affected by the boom-induced high exchange rate - manufacturing and tourism - rose more slowly than the aggregate. Retail had its own problems, with the return of the more prudent consumer, and its wages grew by less than the aggregate.

That's just the dispersion you'd expect to see in a "reregulated" labour market? Hardly.

What it shows is that we now have a genuinely decentralised and more flexible wage-fixing system, delivering wage growth in particular industries more appropriate to their circumstances.

If that's reregulation, let's have more of it.
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Wednesday, April 16, 2014

Why manufacturing in Australia has a future

Few things about the economy are worrying people - particularly older people and those from Victoria and South Australia - more than the decline in manufacturing. But many of our worries are misplaced, or based on out-of-date information.

For instance, many worry that, at the rate it's declining, we'll pretty soon end up with no manufacturing at all. And everyone knows that, unlike other states, Victoria's economy is particularly dependent on manufacturing.

But Professor Jeff Borland, a labour economist at the University of Melbourne, has written a little paper that sheds much light on these concerns.

It's true that manufacturing's share of total employment in Australia is declining. But this is hardly a new phenomenon, which suggests the end may not be nigh. Half a century ago, manufacturing accounted for a quarter of all employment. Today it's 8 per cent.

And almost none of that dramatic decline is explained by a fall in our production of manufactured goods. The great majority of the fall in manufacturing's share is explained simply by the faster growth of other parts of the economy, particularly the service industries.

It's true, however, there's been a (much less dramatic) decline in employment in the industry over the years. Employment in manufacturing reached a peak of 1.35 million in the early 1970s. Today, it's about 950,000. Of the overall loss of 400,000 jobs, about 200,000 occurred during the '70s, about 100,000 in the recession of the early '90s and the rest since the global financial crisis in 2008.

Many people would explain this decline in terms of the removal of protection against imports in the '80s and the very high dollar since the start of the resources boom in 2003. But, in fact, the great majority of it is explained by nothing more than automation.

How do I know? Because if you look at the quantity (or real value) of manufactured goods we produce, it reached a peak as recently as 2008, and has since fallen just 6 per cent. Nowhere have the machines of the computer age replaced more men (and I do mean mainly men) than in manufacturing. Is this a bad thing? It would be a brave Luddite who said so.

The consequence is a change in the mix of occupations within manufacturing, the proportion of machine operators, drivers and labourers falling by 10 percentage points since 1984, with the proportion of managerial and professional workers increasing by about the same extent. The proportion of technicians and tradespeople is little changed.

But there's also been a change in the types of things we manufacture, with the share of total manufacturing employment accounted for by textiles, clothing and footwear falling from 11 per cent to 4 per cent since 1984, while the share accounted for by food products has risen from less than 15 per cent to more than 20 per cent.

The share of transport equipment (cars and car parts) is down, but the share of other machinery and equipment is up by much the same extent.

The next thing that's changed a lot since 1984 is the location of manufacturing in Australia. Then, almost 70 per cent of manufacturing employment was located in NSW and Victoria; today it's down to 58 per cent. Then, NSW had more manufacturing workers than Victoria; today they have 29 per cent each. (Bet you didn't know that.)

But if the big two states now have smaller shares, which states' shares have grown? The two we these days think of as "the mining states". Western Australia's share has risen to 10 per cent, while Queensland's share has almost doubled to 21 per cent. (Bet you didn't know that.)

So far, South Australia's share of national manufacturing employment has fallen only a little to 8 per cent.

This tendency for manufacturing's distribution between the states to become more even over time, plus the much faster growth of other industries, has made all states less dependent on manufacturing for employment, as well as narrowing the gap between the most dependent (SA on 10 per cent of its total employment) and the least (WA on 7 per cent).

Whereas in 1984 Victoria depended on manufacturing for 21 per cent of its jobs, today it's 9 per cent. (See what I mean about out-of-date information?) Victoria's more dependent on the health industry (12 per cent) and retailing (11 per cent), with almost as many jobs in professional services as in manufacturing.

The wider conclusion is that, though the faster growth of other industries has made all states less dependent on manufacturing for jobs, this doesn't mean manufacturing's dying. Its actual output hasn't fallen much, though it's using fewer workers to produce that output.

The unwritten story is there've been big changes in what Australia's manufacturers produce: less stuff that relies on protection against imports and more stuff that fits with Australia's comparative advantage. You see that with food products - including things such as wine-making - now being the biggest category within manufacturing, employing 20 per cent of all manufacturing workers.

You see it also in the growth of manufacturing employment in the mining states - a spillover from the resources boom.

Manufacturing is undoubtedly suffering from the high dollar. But, apart from that, it's in good shape. It has shed some fat and is fitter and wirier than it has ever been, better able to survive in a harsh world.
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Wednesday, March 5, 2014

Job prospects not as gloomy as you may think

I can always tell when people are getting anxious about unemployment - including their own. It's when a journalist thinks they'll be increasing the sum of human knowledge by adding up the number of redundancies announced in recent weeks.

The latest list is Qantas 5000, Holden 2900 (by 2017), Toyota 2500 (by 2017), Forge Group 1470, Alcoa 980, Sensis 800, WA hospitals 250 and BHP Billiton Mitsubishi Alliance 230.

That's more than 14,000, we're told, and doesn't count the expected job loss among the makers of car parts, which "experts" put at between 25,000 and 50,000. To this you can add declining job opportunities among public servants - though no one seems to worry much about them.

There are two tricks in exercises such as this. The first is that although 14,000 or even 64,000 may seem huge numbers, they're not. Most people have no feel for just how big our economy is. Those figures have to be seen in the context of a total workforce of 11.5 million people, which grows by 170,000 in an average year, or more that 14,000 a month.

Most people have no idea how much turnover there is in the jobs market. Every month tens of thousands of people leave their jobs and a similar or bigger number take up new jobs. The economy is in a continuous state of flux.

The second trick is that the media only ever show us the tip of the iceberg. We're told about only a fraction of the things that happen. Only a fraction of them are announced to the media, so most of what happens goes unreported. And among all the things that are announced, the media select just a few of the juicier items to tell us about.

The items they select tend to be the bigger and badder ones. News that a new business has just hired 100 workers may get reported somewhere - probably in the local rag - but it won't get the trumpeting Qantas' announcement did.

So we're told about the big job losses but not the small losses and almost nothing about the job gains, big or small - even though we know from the official statistics that the gains usually outnumber the losses.

When people hear news reports about redundancies at this factory and that, many conclude we must be heading for recession. This time it ain't that simple. After a record 21 years since the severe recession of the early 1990s, we're overdue for another one and, with the economy quite weak at present, it wouldn't be impossible for us to slide into recession this year.

But the explanation for the planned job losses we're hearing so much about isn't a downturn in the economy, it's continuing change in the structure of the economy - the size of some industries relative to others.

Much of the pressure for structural change is coming from advances in technology, particularly the digital revolution. It's this that's turning the newspaper industry inside out - no one seems to shed many tears over us - and is in the early stages of cutting a swath through retailing.

In Qantas' case, it's still making the painful adjustment to the deregulation of airlines initiated by Jimmy Carter in the 1970s, combined with management incompetence and union intransigence.

But the biggest source of structural change is the resources boom and the likely permanent rise in the dollar it has brought about. People tell you it's all behind us, but when the mining industry's share of the economy doubles to 10 per cent in the space of a decade, the adjustment this imposes on the rest of the economy is profound and protracted.

Clearly, these forces for structural change are beyond the control of any federal government, Labor or Coalition. The truth so many people find so hard to accept is that there isn't a lot we can do about them except ride them out.

In its impotence, the Abbott government is claiming its plans to remove the mining and carbon taxes will be a great help. Only the one-eyed would believe that. Labor has sunk to the depths of attacking the government for its failure to protect Australian jobs and demands to see its "jobs plan". What's Labor's jobs plan? Maintain the handouts to crumbling industries.

It's seeking to exploit the fears of people who are uncertain about where it's all going to end. Well, last week Dr David Gruen, of Treasury, published projections of the various industries' shares of total employment in 16 years' time, 2030.

I must warn you these figures come with zero guarantee. Just because you're smart enough to turn the handle of an incomprehensible econometric model doesn't mean you know any more about what the future holds than the rest of us.

Surprisingly, the projections suggest manufacturing's share of total employment will decline by only a further 1 percentage point. Similar declines are projected in transport and warehousing, construction and (thankfully) financial services. The biggest relative employment decline would be in wholesale and retail trade.

Utilities, media and telecommunications, and, surprisingly, mining are projected to experience minor declines in their shares of total employment. Agriculture's share may rise by a percentage point, while that of education and health may rise by more than 1.5 points, and professional and administrative services by almost 3 percentage points.

We won't all be dead.
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