I am an economic conservative, I’m proud of that fact. Kevin Rudd, 15 November 2007

And there we all were thinking he was only talking about the Budget.

There’s a pattern emerging in Kevin Rudd’s approach to economic policy, and it’s not a healthy one.

In early November, the Government unveiled its plan for the future of the Australian car industry — a future that looked an awful lot like the past, involving massive handouts, continuing — albeit reduced — protection, and promises of a better match between the products made by the local industry and the interests of Australian consumers — in this case, greenwash commitments to hybrid and more efficient vehicles.

This week’s ETS White Paper perpetuates the current carbon protectionism, in which the costs of carbon emissions from our biggest polluters are subsidised by the rest of us. There’s greenwash here too — indeed, the whole point of the exercise is greenwash. But under the ETS, our biggest polluters will continue to be subsidised, albeit more transparently, and some of them will only get 60% of the costs of their emissions paid for them.

As with the car industry, one of the major rationales for continuing carbon protectionism is that everyone overseas is doing it too. That argument doesn’t hold much weight with economists when it is used to justify manufacturing protectionism, but it seems to get an awfully good run when it comes to carbon pollution. To be fair, economists would be quick to point out that carbon costs are an externality and therefore there are no efficiencies to be gained from unilateral removal of protection, which is what an effective ETS (as opposed to the rubbish served up by the Government on Monday) would do.

The commonality is that the Government’s economic policy is all about preservation of our current industrial structure. Kevin Rudd, with his professed desire to govern a country that “makes things”, is seemingly committed to spend whatever it takes to preserve our car manufacturing sector, with its heavily-unionised workforce and convenient triopoly of multinational manufacturers. And he is now the author of a climate change program that invests heavily in protecting our biggest polluters. The Climate Institute has calculated that polluters will get over $4b worth of free permits in 2010 alone, and over $60b between 2010 and 2020 in total.

And that doesn’t include the Government’s heavy investment in carbon capture technologies, which are not so much protectionism as an effort to stave off threats to our coal industry.

The Government’s mindset seems to be that, whether the need for economic restructuring is driven by globalisation or the need to address climate change, it wants to somehow preserve a twentieth century economy, heavily reliant on manufacturing and carbon emissions. Rudd is indeed an economic conservative, one who likes belching smoke stacks and humming factories and their unionised workforces as evidence of a healthy economy. The Government talks about new jobs in renewable energy and new low-carbon technologies, but doesn’t accept the idea that any jobs in traditional industries might be lost as a consequence of reform.

It’s here where the Government’s claims to be following the same reformist path as the Hawke-Keating Government look hollow indeed. That Government accepted that there would be a cost in opening the Australian economy, particularly in traditional industries, but it had faith that the benefits in terms of jobs in new industries would far outweigh the costs. That faith was borne out, although it was the Howard Government that reaped the real benefits of those reforms.

Moreover, Hawke and Keating knew that the costs of reform would be borne most by its political base in the trade union movement. They went ahead anyway. That remains the gold standard of economic reform in Australian history.

The same painful logic applies to economic reform now, whether it involves removing protection from the car industry or our biggest polluters. Real reform will involve job losses, but the long-run benefits will outweigh the costs — not merely in jobs in new industries but in reducing the costs of climate change in a country more vulnerable than any other to its impacts.

For political reasons, however, the Government will not countenance any job losses. There will be no creative destruction on the Rudd Government’s watch.

And without the costs of reform, there will be no benefits. Talk of jobs in new industries like renewables will amount to nothing. There is still no incentive to invest in those industries. The maths haven’t changed. All the signals will continue to direct investment into polluting industries, or vehicle manufacturing, or coal mining.

Kevin Rudd in effect wants to freeze the Australian economy in time, trying to pretend it is forever 1999 and that we can prop up a car industry, export all the coal we can and pretend we have ages to deal with climate change.

Of course, the world will carry on regardless, and faster than ever. And the costs of catching up will get greater all the time.

Peter Fray

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