The end of manufacturing in Australia

Ross Gittins has a piece, drawing on research by Jeff Borland of the University of Melbourne, in which he presents a “glass half-full” view of the Australian manufacturing sector. He makes some good points, but the overall picture is misleading.

It’s true that, on standard statistical definitions of the manufacturing sector, there’s still a fair bit of employment and output, though both have declined in recent years and will almost certainly continue to do so, given the recent closure announcements. But what’s left of manufacturing looks very different from the mental image the word ‘manufacturing’ produces, at least for me: a large factory, with hundreds of manual workers producing complex industrial products (consumer goods, motor vehicles, industrial equipment and the like).

A closer look at Borland’s data reveals the following:

* Within manufacturing, the main growth area is food processing typified by the production of meat, bread, milk and wine. More traditionally manufacturing-oriented parts of the sector like canning fruit are in decline as we saw recently with the near-closure of SPC.

* As regards employment, the share of managerial and professional staff is expanding, while that of laborers and machinery operators, the kind of jobs we would typically think of as ‘factory work’, is falling. [1]

On the latter point, Borland shows that laborers and machinery operators now represent 30 per cent of a manufacturing workforce of 955 000, implying around 285 000 jobs in total, around 2.5 per cent of all employment. By contrast, in 2011, there were 290 000 schoolteachers in Australia.

To sum up, manufacturing in the traditional senses of the term, is no longer a significant part of the Australian economy. This has a number of implications.

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Tu quoque

I’ve written many posts and articles making the point that the political right, in most English speaking countries[1] has been taken over by a tribalist post-truth politics in which all propositions, including the conclusions of scientific research, are assessed in terms of their consistency or otherwise with tribal prejudices and shibboleths.

Very occasionally, intellectuals affiliated with the political right (conservatives and libertarians) will seek to deny this, arguing that isolated instances are being blown out of proportion, and that the right as a whole is committed to reasoned, fact-based argument and acceptance of “inconvenient truths’ arising from the conclusions of scientific research[2], [3].

But, far more often their response takes the form of a tu quoque or, in the language of the schoolyard, “you’re another”. That is, they seek to argue that the left is just as tribalist and anti-science as the right. Favored examples of alleged left tribalism included any rhetoric directed at rightwing billionaires ( Murdoch, Rinehart the Kochs). The standard examples of alleged left anti-science are GMOs, nuclear power and anti-vaxerism, but it is also sometimes claimed that US Democrats are just as likely as Republicans to be creationists.

I’ll argue over the fold that these examples don’t work. What’s more important, though, is what the tu quoque argument says about those who deploy it, and their view of politics. The implied claim is that politics is inherently a matter of tribalism and emotion, and that there is no point in complaining about this. The only thing to do is to pick a side and stick to it. What passes for political argument is simply a matter of scoring debating points for your side and demolishing those of the others. So, anyone who uses tu quoque as a defence, rather than seeking to dissuade their own side from tribalist and anti-science rhetoric, deserves no more respect than the tribalists and science deniers themselves, who at least have the defence of ignorance.

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Tim Nicholls makes a little progress in thinking about privatisation

All through the Bligh government’s three year campaign to sell public assets, I challenged Treasurer Andrew Fraser to a public debate on the issue, or at least to a response to the criticisms I and other economists made of the government’s case. Fraser never responded: even when we spoke at the same event (to a friendly business-oriented crowd) he gave his speech and left before anyone else was allowed on the platform. Doubtless, he made the judgement that this was the politically clever thing to do: by sticking to events that could be scripted, and relying on the authority of Queensland Treasury, he maintained controlled of public discussion. We all know how that worked out.

Now there’s a new Treasurer, pushing the same arguments. I challenged Tim Nicholls to a debate on the “StrongChoices” campaign[1]. I don’t suppose he’s going to respond in person, but he has at least acknowledged my criticisms (as reported by Paul Syvret) and attempted to rebut them in this piece in the Courier-Mail.

Nicholls’ argument is confused, as the case for asset sales has always been, but he does make at least some progress. The usual magic pudding is in evidence: selling assets is supposed to repay debt, finance new infrastructure spending and obviate the need for higher taxes to maintain services, all at the same time.

But there is one point of light: responding to my observation that the StrongChoices website counts the interest savings from selling assets and paying down debt, but not the foregone earnings of public enterprises, Nicholls says

the value of a government-owned asset is not the same in private sector hands. Governments are not well placed to act nimbly when it comes to changing markets and commercial decisions. Who thinks the value of Telstra would be the same if it reverted back to full government ownership? What about the Commonwealth Bank?

While Nicholls’s specific examples don’t work well (see below), he at least expresses the right general principle. Privatising assets is a good deal for the public if their sale price is greater than their value in continued public ownership (and assuming that the gain isn’t achieved by raising prices or reducing service quality). Indeed, that’s true of every kind of sale: there’s a net benefit only if the item sold is worth more to the buyer than to the seller.

So, there’s a simple fix for the StrongChoices website. Instead of quoting the total sale price for assets, give an estimate of the difference between the sale price and the value in continued public ownership. I did this for both of Nicholls examples, the Commonwealth Bank and Telstra (all three “tranches”) and found a net loss to the public in every case except T2, the second Telstra tranche where the value was inflated by the Internet bubble. Even in that case, we would have done far better off by selling the overvalued Internet assets and using the proceeds to buy back the rest of Telstra, as I advocated at the time, just before the bubble burst.

fn1. If, as has been reported, the Queensland Government paid good money to a PR firm for this ludicrous name, then there is certainly an opportunity to cut waste and efficiency by dumping.

Polls and punters

I’ve written a few times about the idea that betting markets provide a more accurate guide to political outcomes than do polls or ‘expert’ judgements or statistical models (which usually incorporate polls along with economic and other data). The problem is that, close to an election, they all tend to converge. So, the best time to do a comparison is early in the election cycle. Right now there’s quite a sharp contrast. The polls have had the (federal) ALP and LNP just about level for months, but the betting markets have the LNP as strong favorites.

One possible explanation is that governments generally do worse in polls than in election, so that the polls underestimate the government’s support. I’ve heard this claimed, but never seen any systematic evidence to support it. Another possibility is that market participants know something that’s not reflected in the polls. I’m sceptical on this.

The final possibility is that betting markets this far out from the election are thin and inefficient. If that’s right, then the odds for Labor look very favorable. I’m not going to bet myself (I did OK on my one foray into the US Republican primaries, but the hassle involved was too much to make it worthwhile), and I’m not giving betting advice.

Still, I’d be interested in responses from those among my fellow economists who’ve claimed efficiency properties for betting markets. I guess Andrew Leigh is precluded from commenting, and Justin Wolfers is a long way from the action in Oz, but I’m sure there must be others willing to jump in

The “People’s Budget” that doesn’t add up

The LNP government in Queensland is launching a massive and expensive campaign to persuade voters to accept the sale of publicly owned assets. This follows an earlier campaign by the Bligh-Fraser Labor government (remember how well that worked out!) and looks likely to make the same claims, with the additional (self-contradictory) claim that the Labor government, whose policies the LNP is now adopting, drove the state to dangerous levels of debt. In particular, the LNP campaign repeats the central error of Labor’s, namely the claim that selling assets provides a way to fund public expenditure without taxation.

Technology moves own. Whereas Labor gave us a printed pamphlet (reproduced on the web), the LNP offers an interactive website where we can make our own choices. This would in principle, be quite a useful contribution to public debate. If it were available generally, it would be possible for voters to weigh up various proposed initiatives, and assess whether new public services are worth the revenue measures that would be required to fund them.

Unfortunately, but unsurprisingly, this version is rigged. The website claims that it is necessary to reduce gross public debt by $25-30 billion and offers three ways to do so: raising taxes, cutting spending or selling assets. The more we do of one, the less we have to do of the others. I assume (and will check later) that the amounts listed for the tax and spending measures are derived from the forward estimates (four years). By contrast, the asset sales are a once-off measure.

The real dishonesty in the setup comes at the end. If we do want the government wants and agree to all the proposed asset sales, the estimated proceeds are $34 billion. The reward is a $1.7 billion saving in interest, which we are then invited to spend on desirable things.

There’s just one problem. The calculation has omitted the fact that, if we don’t own public enterprises any more, we forgo their earnings. Fortunately, there’s a relatively easy fix. The 2013-14 Budget Paper 2 has a section devoted to public non-financial corporations. The total Earnings Before Interest and Tax of these enterprises was $3.7 billion. Of this sum, $1.2 billion was paid to the state in dividends, about $500 million in tax-equivalent payments (state-owned enterprises aren’t subject to company tax, but make these payments in the interests of competitive neutrality) and the rest was either paid in interest on debt or retained to finance future investment.

How much will the public lose from the asset sales?. Most obviously, we will lose the dividends, which virtually wipe out the proposed interest savings. The tax equivalent payments are a loss to us as Queensland citizens, but (assuming the private owners pay similar rates of tax, which is not guaranteed) are offset by a corresponding benefit to the Commonwealth. And the debt calculation almost certainly includes the debt held by these enterprise, so part of interest we save is has already been covered by their earnings which will no longer be available. Finally, retained earnings contribute to future growth and are a real loss when an asset is sold.

So, if we sold everything, we would forgo $3.7 billion in income, far more than the $1.7 billion the government suggests we can gain. However, a close reading of the options indicates that the proposal isn’t for a complete sale. Electricity transmission and distribution assets are going to be retained, with some form of private participation. This is supposed to save $28 billion, whereas an outright sale would fetch more,

Still, an honest presentation of the proposal would have the asset sale yielding a net loss of up to $2 billion. Like its predecessor the LNP proposes to cash in the proceeds of privatisation and ignore the loss of revenue it entails