Radical intervention threatens a return to Fortress Australia
Seasoned bureaucrats, who pre-pandemic would have run a mile from price caps on gas, are making radical calls on energy-market interventions.
One of the buzzwords at large in the globalist arena is polycrisis. It describes the confluence of today’s economic, health, social, climate and security maladies, which sees populist, desperate and spendthrift governments lunging for the controls: from price freezes to cash handouts, industry subsidies to curbs on foreign investment.
Intervention is back and, bit by bit, globalisation is being reversed, as countries disengage from the trading order that has been the engine of prosperity for decades. Lower growth and higher prices are just the beginning of this disintegration.
Visiting Australia last month, World Trade Organisation director-general Ngozi Okonjo-Iweala said deglobalisation would prove to be not only economically costly but also “would leave all countries more vulnerable to the global commons problems that now represent some of the biggest threats to our lives and livelihoods”.
“As the world navigates the polycrisis – climate change, pandemic, the war in Ukraine, economic slowdown, inflation, food insecurity, monetary tightening and debt distress – we need multilateral co-operation and solidarity more than ever,” Okonjo-Iweala told the Lowy Institute in Sydney.
This is the hazardous terrain Anthony Albanese confronts; his feet may be on shifting policy ground, yet poll ratings are heading towards the clouds. The pendulum has swung at home, shoved on by crisis-era fiscal and monetary settings, the supply crunch in energy, goods and materials, and the seismic shift to the left by the electorate, particularly millennials and Generation Z.
Seasoned bureaucrats, who pre-pandemic would have run a mile from price caps on gas, are making radical calls on energy-market interventions. When looming gas and electricity cost spikes threaten the viability of industries there is, however, no elegant solution, either bespoke or off-the-shelf.
The times are suiting the Prime Minister’s hands-on approach, as well as his longstanding predilections. The risks? To overreach and undermine, repeating the mistakes of governments past, but in a volatile era, with wobbly guard rails.
At heart, Albanese is a believer in the heft and ingenuity of the activist state. We’re seeing the rebirth of industry policy, promises of nation-building electrification, retrograde workplace bargaining, an enhanced safety net, and the inevitable end point – bigger government.
The national accounts for the September quarter confirm the shift in weight. The economy is 6.5 per cent larger than its pre-pandemic level, but government consumption and capital spending, across the three tiers, has increased by 15.3 per cent. Before Covid-19, public spending was 25.6 per cent of gross domestic product, and it’s now 27.7 per cent (only a touch below its pandemic peak). Governments’ annual resourcing is $46bn a year larger than it was three years ago.
Let’s get this straight: Albanese Labor didn’t break the glass on big government. It was bulking up during the Coalition’s years in power. The pandemic supercharged the trend, and the states and territories added to the public-spending blitz with a mix of ambitious, expensive and (in some instances) overdue health and education initiatives and transport mega projects.
How to pay for it, given voters want it all, is the question of our times.
The federal Parliamentary Budget Office has sketched out the challenge. In a decade, the National Disability Insurance Scheme will cost $100bn a year. Plus the budget will confront vastly higher interest payments, more spending on defence, aged care and health, increasingly funded by bracket creep, with average personal income-tax rates rising to record levels. It’s both risky and unfair but the community demands this bulked-up state.
That’s the medium term, which seemingly can wait, because the present is more urgent.
After October’s budget, which factored in a 56 per cent rise in electricity prices over 18 months, dealing with the war-driven energy price shock became a quasi-existential issue for the new government.
Treasury finds itself driving intervention in energy markets; in normal times, the central agency would be expected to argue for orthodoxy: letting the market find its equilibrium. Or, as economists would have it, allowing high prices to solve the problem of high prices.
As Treasury secretary Steven Kennedy explained last month, high prices send a signal to suppliers and investors that it is worth investing in the area and supply expands. As well, high prices send a signal to consumers to look for alternatives and adjust their pattern of demand.
“Calls for government intervention to address high prices are likely to get in the way of a necessary and ultimately helpful adjustment,” Kennedy told Senate estimates. But given today’s war-driven price shocks, he said the optimal response was “interventions that directly address the higher domestic thermal coal and gas prices”.
Jim Chalmers stresses he’s a reluctant intervener in markets. They always say that before losing their policy virginity. The Treasurer argues the response to the energy market price hikes is “responsible, reasonable, meaningful, temporary”.
But the critics see something more enduring, spooked by Treasury’s “reasonable pricing framework” in a proposed mandatory code of conduct. That “temporary” is hardening under populist heat. Albanese has also raised the prospect of a domestic gas reservation policy, as they have in the west.
What are the dangers? For one, interventions in their various guises can shred the gains of the past and take years to wind back. Productivity Commission chairman Michael Brennan warns shielding Australians from disruptive global price shocks through price controls would risk entrenching poor industry performance.
Speaking at last month’s Economic and Social Outlook conference, hosted by The Australian and Melbourne Institute, Brennan said the nation’s economic history showed knee-jerk responses during crises – such as gas reservation and price controls – were ultimately counter-productive.
“We have spent the better part of four decades in Australia on a policy path trying to remove efforts to shield domestic businesses from the world competition,” Brennan said. “I just caution that measures brought in to deal with a temporary affliction often have a habit of hanging around and are difficult to remove.”
Naturally, energy producers are resisting – and loudly. Behind the overblown lobbyists’ lingo of doom, the companies claim intervention in these markets undermines the confidence of customers and investors.
Akin to the pressures in housing, Big Energy argues the solution to high prices is not ad hoc intervention: it’s supply, supply, supply. Labor’s move will trigger a capital strike, they claim. Given the central role gas will play in long-term emissions-reduction policy, pulling the emergency cord now means the political economy on gas and other resources will be fraught, if not toxic, for years.
Energy is not the only area of concern. In the aftermath of the supply snarls during the pandemic, some goods are seen as fundamental to life and industry viability: from personal protective equipment to AdBlue for diesel fuel. Plus there’s the creep of the military-industrial complex: a meta and physical realm in peace, a phobia in these shaky times.
In the face of such challenges, one response gaining traction is re-shoring or friend-shoring, the idea you can relocate supply chains at home or to friendly countries that share your values. In its October economic outlook for Asia and Pacific, the International Monetary Fund highlighted increasing financial fragmentation as well.
The IMF analysis highlights the potentially large economic losses – for the world and especially for Asia – that could arise if the world divides into distinct blocs.
Such a move would spell doom for developing countries, as it would enhance socio-economic exclusion and political anger, not soothe it, and lower growth.
The WTO’s Okonjo-Iweala said that on the surface, such trends made sense in light of the supply-chain vulnerabilities, and some relocation of investment in highly sensitive sectors was likely inevitable.
“The issue is one of balance, as we all know that subsidising one industry or sector to relocate in a particular area on the basis of its priority or criticality is a slippery slope,” she told the Lowy Institute.
She said Boston Consulting Group estimated achieving full-scale self-sufficiency in semiconductors by region would require $US1 trillion in upfront investment and would result in chips that cost 35 per cent to 65 per cent more. WTO economists estimate that if the global economy decouples into two self-contained blocs, long-term global GDP would decrease by at least 5 per cent – worse than the damage from the global financial crisis.
“Large-scale reshoring could end up defeating its own purpose by making supply security worse instead of better,” Okonjo-Iweala said. “Locally concentrated supply chains would be more exposed to localised shocks, which are becoming more frequent with extreme weather events.”
This is the global backdrop for Labor’s aspiration for Australia to be a country “that makes things”. Certainly, this goal plays well to national pride and security. The focus groups pop like crazy on mention of this stuff.
But a few facts. Australia has always been a manufacturing country. Fewer people work in this sector than in the heyday of “Fortress Australia”, when tariffs kept the competition at bay at the expense of local consumers. But manufacturing accounts for 6 per cent of GDP and still employs around 900,000 workers.
“Australians worry about our shrinking manufacturing workforce and believe that we don’t produce anything any more,” Swinburne University of Technology’s Beth Webster told an ABS-RBA conference on the digital economy earlier this year.
“This is not correct – we have become more efficient. Manufacturing value-added since the 1970s has risen continuously despite a declining workforce. It should be hoped that, like agriculture and mining, we can produce sufficient manufacturing value-added with 1-2 per cent of our workforce in the future.”
Whatever the arguments for a country that makes things, employment is perhaps the weakest one. Economists point out that advances in robotics and information and communications technology have decreased the relative importance of labour in production processes. This structural shift, of course, narrows the wage advantage of Asia’s factories to the world.
Nevertheless, Labor is undeterred. There has never been a more opportune time to push the industry-policy barrow. Although the Coalition identified areas to build “resilience” and “sovereign capability” in the face of vulnerabilities exposed during the pandemic, its approach was all show and no go, the millions sprayed about notwithstanding.
Labor dismisses the nay-sayers. Industry and Science Minister Ed Husic asserts that even now, “among some in the community there is still this rusted-on sense that when it comes to industry policy, governments should not be ‘picking winners’ – that governments should only be considered as investors of last resort, intervening when the market has failed”, Husic told the National Press Club last month.
“This is a diminished view of the role of government and a missed opportunity. Governments can and should strategically and thoughtfully invest in the industries of the future.”
One of the foundation texts of this edition of Labor is The Entrepreneurial State by Mariana Mazzucato. The trans-Atlantic econo-influencer argues an innovative public sector has been the boldest risk-taker of all, not only fixing market failure but creating and shaping markets as well.
At the National Press Club, Husic drew attention to companies such as SpaceX, SolarCity and Tesla that have thrived largely due to US government investment, with those three receiving nearly $US5bn ($7.5bn). “This is what we intend to achieve through the National Reconstruction Fund,” Husic said.
The $15bn off-budget NRF will make loans, take equity stakes and provide guarantees for projects across renewables and low-emissions technologies, medical science, transport, agriculture, forestry and fisheries, resources and defence capability.
At the end of a visit here last month, IMF officials also considered the step-up in energy investment under the $20bn Rewiring the Nation program, which it said could play a key role in speeding up the deployment of renewables.
“Higher renewables penetration combined with adequate dispatchable capacity and an upgraded grid can improve the resilience of the electricity sector, reducing risks of disruptions and price spikes,” the mission concluded.
But the IMF also cautioned Canberra about these and other “off-budget” funds. These investments should be “phased judiciously – and, more broadly, a proliferation of such vehicles should be avoided”, its concluding statement said.
Another area of intervention is in critical minerals, such as lithium, now a key arm of geostrategy. At its annual meeting last month, Lynas Rare Earths chief executive Amanda Lacaze said Western governments had been asleep at the wheel as China built up its dominant position over the past 30 years.
While the recent flood of support was welcome, Lacaze told shareholders, those governments needed to stay the course – and focus on delivering the necessary infrastructure to help the industry grow rather than placing “a bet here and a bet there” on individual companies. “I find that particularly the Australians, the US and the Europeans really are struggling with the idea that if they want to be able to change these dynamics, they need not to have policy ADHD. They actually need to plan industry policy and stick to it,” she said.
Chalmers told a summit on these hot issues hosted by The Australian last month that public capital can be a strategic complement to private investment, such as managing early-stage risk and facilitating co-ordinated investments up the value chain. The Treasurer said Australia would be more assertive in this sphere.
“When we’re talking about investments in critical minerals we’re talking about investments in valuable resources, in strategically important land, in a product that has important future implications, and in industries that will underpin much of the global growth and progress in the 21st century,” the Treasurer said.
“This touches every tenet of our national interest.”
Chalmers also asserted that it’s not properly or widely understood just how fundamental mining is to the clean-energy transition that’s under way. “There are no batteries without lithium. No electric vehicles without cobalt. No solar panels and wind turbines without manganese. There is no net zero without mining,” he said.
Australia’s science agency has also called on Labor to develop a domestic solar manufacturing industry via a Silicon Action Plan. A CSIRO-PwC report urges Australia to rapidly expand the mining of quartz and develop smelting facilities to create silicon from the quartz rather than sending it offshore for processing. Reprising a stock line, Husic says: “If we mine it here, we should make it here.”
The free-market bulwark Productivity Commission, whose influence is waning in the capital at a time when it is under assault from organised labour, is a couple of months away from delivering to Chalmers its five-yearly review of how to improve our economy’s supply side.
The global context of disrupted trade flows, foreign-investment restrictions and technological decoupling is front of mind for commissioners. These developments all add costs and impede productivity growth, which could be made worse by policies that move Australia away from openness and multilateralism.
In its first interim report of the productivity inquiry, the PC recalls the bad old days of Fortress Australia, “born of a time of increased global instability and deep scepticism of reliance on international trade and capital flows for economic development”.
“It provides an important lesson in the economic (and cultural) costs of turning inward, which is relevant in a world where external threats – threats to national and cyber security, critical supply chains to name a few – seem to abound.
“Chief among these costs are that it can create powerful, often mutually reinforcing, avenues for rent seeking that are difficult to unwind once created.”
The PC says if government does get involved in supply-chain resilience it should opt for a “rigorous and least-cost approach”.
In better days, the previous PC blockbuster, Shifting the Dial, was basically ignored by the Coalition. We’ll see how pragmatic the purists are in this shifting terrain.
Labor talks a big game about boosting productivity, yet its contradictory policy moves, one after another, portend backsliding, costly traps, boondoggles and rent seeking. Still, voters want problems solved and Albanese is harnessing the populist vibe. Intervention rules, and Australia is part of the herd.
The WTO’s Okonjo-Iweala is pushing for reglobalisation: let businesses manage risks and diversify in a sensible manner, while governments should help by reopening markets. Otherwise, the current push to build resilience and security “could end up feeling like an own goal”.
“Taken too far, it could be dangerous for co-ordination around basic security interests, and unlikely to foster the kinds of international co-operation we need for effective collective action on global commons problems like climate change, pandemics, or sovereign debt distress,” she warned in her Lowy address.
“We would be naive to rule out the possibility that our era could meet the same end an earlier episode of power shifts and global integration did in 1914: with fear and mistrust giving way to strategic miscalculation, misjudgment, aggression and, ultimately, a world war. This time with nuclear weapons.”
That would dial up the despair to an omni-crisis and necessitate the mother of all interventions.
More Coverage
School holidays should be more than something parents must survive
The relentlessness of full days at home with children can be a shock to the system for those normally in a 9am-5pm work routine. Add to that the pressure to have fun, and it’s a perfect storm.
The big inflation gamble that has failed middle Australia
Like Joe Biden, Jim Chalmers and Steven Kennedy have bet the house on an economic policy dud.