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Aug 31, 2011

Manufacturing ... there's nothing left to cut

As much as people didn't want to lose jobs, most could see that the manufacturing jig was up.


Yesterday, my suggestion that Labor could be regarded, for the purposes of thinking ahead, as done like a dinner, brought an angry response — largely from old Labor loyalists, who appear to prefer fantasy to reality in assessing what needs to be done. Many appeared to loathe the Greens more than they hated the Right, thus replaying the old ALP Right-Left wars, now stretched across two parties — and to be reminded that the Greens would sail on in the Senate while Labor fell apart, was particularly unwelcome.

The whole point of the exercise was to presume an Abbott Coalition victory, with all that that entailed, and think strategically about what the Left and progressive forces should do, in a situation when the two houses become divided along Right-Left lines, and politically antagonistic. That may not happen, but — given the decrepit state of Labor, created in part by its unthinking loyalists — it’s likely that it will, and it’s worth thinking it through.

Yet the political dilemmas of the Left are merely a part of the whole, and the other dimension of that is the grievous political problems faced by the Right, as they try and perpetuate Howardism, under conditions where it is ceasing to be viable. Tony Abbott’s each-way bet on the steel industry was a wake-up call to many on the Right, that it had to get its house in order. The coal-seam gas issue was able to be dismissed as an anomaly, which it wasn’t — it was simply the first major eruption of a contradiction on the Right, between conservatism and neoliberalism, one that can no longer be ignored.

Howardism? Yes, the term seems fair, it is not ideology inflation. Howard created a stabilised form of economic liberalism and social conservatism, with Australian characteristics. A modest social welfare/social market state was retained, as the Hawke/Keating neoliberalisation was extended. A moderate culture war was undertaken, with careful attention to the limits imposed by the social liberal nature of Australian life — Howard thus quashed Abbott’s eagerness to have a full-bore culture war on abortion, stymied efforts to ban flag-burning, etc. That combined with a reduced-tax, low-reinvestment strategy is sufficient to call it a specific philosophy.

The problem with Howardism was that the conditions of its success created a dilemma for those who followed. We are having a debate about manufacturing now, because it was in the Howard era that most of that sector was fully and finally given away, and replaced by … well, by nothing at all. We simply broke bits off of Australia and sold it on. As an economic strategy it was less Hayek than Beverly Hillbillies — find stuff in your backyard and move into a McMansion.

What history will damn Howard and Costello for — as it will damn Thatcher and Reagan — is that in giving away the old world, it spent no money or energy building anything to replace it. They simply juiced a century of embedded industrial development, a vast network of social, intellectual and physical capital, for a good look on the balance sheet. Howard, better than Thatcher, understood the sense of social dislocation this created, and argued that a socially conservative state policy was necessary to compensate for that effect,  politically and culturally.

Thus all that crap about Bradman, Anzac, values, etc, was designed to reassure people that the place they lived in hadn’t really changed, despite the great sucking sound everyone heard everywhere. (Keating had had what is an essentially Left version of that, based on an anti-British cultural nationalism — their fight was essentially one of content not of form).

So far, so good for the Right. Across the Keating-Howard era, manufacturing essentially disappears as a major economic sector. In that, they are identical. But look closer, and there’s an important difference. When Hawke and Keating mounted a war on protection in the early ’90s, they had a vast penumbra of uneconomic manufacturing to cut into. In the late ’80s, the inner-city suburbs of major cities were still place of work — of factories and workshops cheek-by-jowl with houses and flats. They went in a decade, and the utter transformation of a place such as Brunswick in Melbourne serves as a microcosm of the country — a place of textile factories that became ghost buildings in a snap, and then overpriced spec apartments.

But, as much as people didn’t want to lose jobs, most could see that the jig was up — that there was something absurd about making shoes in Collingwood, dresses in Redfern, fabric in Footscray — when they could be done so much cheaper elsewhere. On that, there was a broad deal of implicit agreement between the neoliberal elites and the masses.

The difficulty now, for both major parties supporting this move, is that it’s a one-time deal. Like a diet that goes too far — cutting first fat, and then muscle and organ tissue — the obsessive free trade/comparative advantage mantra makes no distinction about what is being lost. In that, it wilfully blinds itself with the abstract generalities of economic theory, to its particular effects on the ground, and how they are viewed. The  public lacks that bias, and retains its willingness to take things on a case-by-case basis.

Thus, the evisceration of manufacturing could proceed in the Keating era, because everyone could see the sense of it — there was no compelling collective reason we needed to produce our own shoes (though there may be all sorts of social and cultural reasons for it) and most people can see that. But steel is a different matter, and most people can see that too.

Under Howard, the country began to enter a second stage of de-Fordism — all the obviously uneconomical industries had been wound up, and the process was starting to affect industries that might be viable. The continuation into the Gillard era has taken it to the point where the threat is poised over industries that any intelligent person might say are essential to the independence of a modern state, steel being the pre-eminent example.

What characterises the current period is the absence of anything left to cut. You can’t show your fearless commitment to the global market without hacking into something people think might be necessary to a viable independent country. A type of political anorexia takes hold, in which a permanently distorted image of the body politic guides action. Cutting a little more, would make things perfect.

The Howardist ethos was always an efficient form of fantasy (thus it came to grief over WorkChoices) but it was viable. Its success made Abbott’s continuation of it impossible — it was a cover by which the remainder of Australia could be disassembled and shipped away.

Now the contradictions are coming to the surface and neither major party is equipped to cope with it. From 1983 onwards, the Labor centre argument has been that free-market economics could be harnessed to supplying the revenues needed to funnel back into tackling poverty and inequality. This is still the position taken robotically by Craig Emerson and the free-market power elite within Labor. Long since most people have wondered if there is not something fundamentally wrong with a country giving away its most basic means of life, and trusting to the possibility that it will always be able to buy what it needs in a global market.

This is the gap that Tony Abbott has exploited — in typically cack-handed fashion, but nevertheless … But it’s a high-risk strategy because it has the capacity to crack the Right open irrevocably. Labor can, in the last instance, always reconcile these contradictory notions on the grounds of pragmatic social interest — for the Coalition it represents the fundamental contradiction between its twin political poles, the prudence and traditionalism of conservatism and the anarchic possessive individualism of classical liberalism.

The more that the latter undermines the former, the more that the Right falls apart as a political formation. The slow death of the National Party has been the most obvious example of that, but it will pop up everywhere — the Coalition has peddled a fantasy to its followers, and now they demand its maintenance — an Australia unchanged in key respects, but nevertheless relentlessly free market, with the exception of rural subsidies … and capital subsidies to industry … and … and …

In diving in to the eye of the storm, Abbott has been admirably creative and audacious, but he needs to be. He is coming from the political tradition of B.A. Santamaria, who was not so much protectionist as autarchic, arguing for a de-urbanised Australia with millions of families resettled on small farms, ruled over by bishops and protected from the depredations of running water and radio, etc. The Cold War pushed Santa to abandon such a radical social vision — all the more so when it was taken up by the New Left — and subsume his movement to the secular Right. He never liked them much, and he loathed Howard and free-market consumerism, and Abbott, his disciple has never managed to shake off those influences.

Hence, his bizarre acquiescence to Barnaby Joyce’s demand to be shadow minister of finance — a man who does not believe in finance in the modern sense, considering it “usury”. With major corporate capital demanding a neoliberal framework, and the “heartland” demanding the lost world of the postwar settlement, the Coalition is squeezed worse than Labor. It is easy prey, not only for Labor, but for forces to the Right of it, chiefly Bob Katter. Luckily for the Libs, both of those are so inept that they constitute minimal challenge.

Meanwhile, for Katter and the Greens, such circumstances represent unparalleled political opportunity — if they have the courage to be audacious. Katter should radically and finally renounce any fealty to the beliefs of his former allies, and position his nascent party as radically pro-Australian, unequivocally positive towards protection and the common good of the nation. The Greens should also make an unequivocal pitch to such localism — but from the Left tradition of communitarianism, a community that happens to be a (multi-ethnic) nation.

Both parties should push the major parties to declare where they stand, which side they come down on. In Labor it would serve to isolate the free-market elite, the power intellectuals, who believe that Australia should be ceaselessly reconstructed against its public wishes. In the Coalition, it would serve to sow total internal conflict. Those who yearn for the verities of either side will be disappointed. The sides are changing their most basic composition, as the world does.

*This is part of a Crikey series Make or Break: the state of Australia’s manufacturing sector.



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27 thoughts on “Manufacturing … there’s nothing left to cut

  1. John Reidy

    Interesting, certainly from an economics POV there is no difference between Keating,Howard,Rudd and Gillard.
    And it makes sense that while we could cut manufacturing in the ’80s and ’90s there is nothing left that should be cut.
    Not withstanding them media it really testifies to the ineffectual ALP machine that they can’t handle Abbott, Turnbull should give them much more trouble.

  2. Matt Hardin

    Comparative advantage means that countries should do what they are best at and that will end up with the most productive world. The argument is extended to individuals but a contradiction arises. What if you are best at what is no longer done in your country? The answer is unpleasant for the individual concerned.

    We need to have opportunities within the country that may not be economic but allow people to work. Unemployment is the ultimate in inefficiency.

  3. billie

    The danger with comparative advantage is that if you import all your food and you have lost the export markets for your commodities you will have a very hungry population. Why do Australian politicians put us in the same position as Irish peasants in the 1700s? Only by maintaining a diverse economy can we weather the inevitably changing economic conditions. Not even the Roman empire lasted 200 years

  4. beryceann@bigpond.com

    This is one of the best articles about Australia I have read in a very long time. Thank you!

  5. Stevo the Working Twistie

    We are Jack, and we’ve sold the family cow for a handful of beans. There is a giant at the top of the beanstalk, and we’ll be able to enrich ourselves for a while – until the giant stirs. When the iron ore and coal and all that have run out, I hope the world is in desperate need of plumbers, plasterers, chippies and bricklayers, because they’ll be the only people we have left with any “trade” skills. The rest of us will be computer nerds or unemployed.

  6. Whistleblower

    Unless you want to protect manufacturing for strategic reasons, there is no argument for manufacturing to occur in Australia if it can be undertaken more cheaply elsewhere. The laws of comparative advantage require you to pay excessive costs for protected industries if you are not prepared to rely on cheaper imported products. Eventually the wheel will turn full circle and virtually no manufacturing will occur in this country except for products for which the cost of transport protects the product cost to the point where local industry can compete because of its relatively short life transportation costs.

    The danger is that course in times of conflict that you may not be able to import required commodities, and as there is therefore an argument for subsidising the manufacture certain products in the community for strategic reasons. This would include vehicle manufacturing, weapons manufacturing, and critical logistic elements such as heavy transport and possibly ship and aircraft maintenance and repair. The cost of any such protection should be borne by the federal budget as an impost over all Australians to fund national security, without necessarily distorting the market for products by artificially inflating the prices by tariffs. It is likely that within 10 years there will be no manufactured goods made in Australia other than those having natural importprotection as a consequence of high transport costs relative to product value.

  7. Chess C

    Thank you. Finally someone who gets it.

  8. bjb

    Hey Guy – great article.

    All the “free traders” prattle on about how protectionism is bad and this comparative advantage nonsense, then tell us that we should become a “knowledge economy” (the same broken record we’ve been hearing since the Hawke/Keating days).

    Just what are these knowledge industries, and can someone please explain how it is likely that Australia can compete as a “knowledge economy” with China and India who quite possibly have more university graduates each year than the entire population of Australia.

  9. David Hand

    Interesting series of articles Guy.
    I suggest to you however that the departure of manufacturing is not a one way door as you suggest. Though closing the No6 blast furnace at Port Kembla, with the loss of all those skills is a very difficult move to reverse, manufacturing can return to Australia in the same way it left. All that needs to happen is for our standard of living to decline so that we are poor enough to be competitive.

    But of course this is not going to happen. Over the past 40 years, consumption has massively moved into services. We can only have so much “stuff”and our needs have developed to the extent that most of us now work in services.

    The other thing to recognise about China is the economies of scale. It’s not just low wages and an artificially low exchange rate. When you are manufacturing every flat screen TV in the world, the economies of scale are truly massive and the whole world is better off because of it.

    I do take Matt’s point though. Economic rationalists (like me) often get criticised because we ignore the human cost. It is felt very keenly by the victims of changing economic conditions and in my view is a vital role of government to assist the transition.

    But protecting jobs is not a justification for retaining uncompetitive industries, particularly in a trading country like Australia. Our collective wellbeing lies in excelling at what we do best and importing what we aren’t competitive at. As a community, we must support those affected by change.

  10. CML

    Great article Guy. But what the hell do we do about it? No one who has the power to change things is listening. The major interest of those in power is making money for themselves and their mates, coupled with greed, greed and more greed!
    However, you have just reinforced my view, that Abbott will last about 12 months as PM before things start to fall apart. He is a political lightweight who gives no indication of having the vision and intestinal fortitude to deal with the massive problems you elucidate in your article. And neither has our current PM Gillard, hampered as she is by the likes of Craig Emerson and his ilk.
    Perhaps we need to “rub out” our current political fiasco and start a new drawing.

  11. CML

    Great article Guy. But what the hell do we do about it? No one who has the power to change things is listening. The major interest of those in power is making money for themselves and their mates, coupled with greed, greed and more greed!
    However, you have just reinforced my view, that Abbott will last about 12 months as PM before things start to fall apart. He is a political lightweight who gives no indication of having the vision and intestinal fortitude to deal with the massive problems you elucidate in your article. And neither has our current PM Gillard, hampered as she is by the likes of Craig Emerson and his ilk.
    Perhaps we need to “rub out” our current political fiasco and start a new drawing.

  12. CML

    Great article Guy. But what the hell do we do about it? No one who has the power to change things is listening. The major interest of those in power is making money for themselves and their mates, coupled with greed, greed and more greed!
    However, you have just reinforced my view, that Abbott will last about 12 months as PM before things start to fall apart. He is a political lightweight who gives no indication of having the vision and intestinal fortitude to deal with the massive problems you elucidate in your article. And neither has our current PM Gillard, hampered as she is by the likes of Craig Emerson and his ilk.
    Perhaps we need to “rub out” our current political fiasco and start a new drawing.

  13. ZA

    I’d be interested in a follow on article about the Services Industry in Australia. In particular those that are either being outsourced/offshored (or bringing in 457 visa professionals/guest workers onshore). Some examples (like the ‘Knowledge Economy’ jobs) include Information Technology, Call Centres, Legal/Accounting Services, Financial Services, Aviation (aka Qantas) etc. (Even Children’s Cartoons/Animation produced for the ABC is done overseas!!! What ‘career options’ will our children have???)

  14. michael r james

    @David Hand at 1:59 am

    A question for you: are economic rationalists truly rational? The evidence is all against it. You want to believe despite all the evidence that labour costs are the main determinant of all industrial production. For some things it is certainly true (as Guy wrote, shoe making, textiles) but steel making? Hardly. Read my earlier post on this (below). And incidentally those giant flatscreen tv plants are in South Korea (Samsung & LG) and many other brands (including Sony) subcontract to those same production lines. And do you know that both South Korea and Japan have longer employee holiday entitlements than Australia (34 and 36 versus 28)–does it look to you like those horribly uncompetitive labour conditions are crippling their industry?

    MICHAEL R JAMES Posted Tuesday, 30 August 2011 at 4:49 pm |
    …….the steel industry’s lack of competitiveness has nothing to do with productivity. They could bring in coolie labour and work them 24/7 until they died on the job and it would make no difference to the fundamental problem: China’s (and much of Asia’s) currency is about 40% undervalued and AUD is about 40% overvalued. The international monetary system and the international financial system are both dysfunctional. Given that these have changed at approximately 30 year intervals in the last century we are well overdue (since the Nixon Shock withdrawal from the Gold-Dollar link in 1971) for a serious rethink/remodelling of how exchange rates are determined.]

  15. Gavin Moodie

    One knowledge industry is education, which is Australia’s 3rd biggest export after coal and iron.

  16. Matt Hardin

    Careful Gavin, you don’t want the economic rationalists to decide that state funding of education is a subsidy! 🙂

  17. David Hand

    Firstly, economic rationalists are no more or less rational than people of alternalive views. Economic rationalism is a label applied to those of us who believe that markets are the best way for a society to allocate resources.

    Secondly, my comment about chinese/korean/whatever production lines was more about the economies of scale rather than low wages. In fact it is the protectionist lobby in this thread that has been more focused on that issue.

    Thirdly, your coolie labour analogy is patently wrong. Labour is the second biggest input cost behind raw materials. But raw materials are supplied through a commodity market and most of it comes from us. I don’t know how you are so sure the Asian currencies are artificially low, but it is irrelevant to the input price of iron ore.

    So the Chinese/Indians et al pay exactly the same as Bluescope for iron ore and coking coal. (They may have some local coking coal but no iron ore). That makes labour the single biggest variable cost in the steelmaking process.

    Fourthly, I can assure you that the average downtrodden worker at Bluescope Steel enjoys significantly more holidays than the 28 you put forward as an Australian norm.

    Fifthly, I absolutely concede that Bluescope Steel was badly run and there were other strategies available to keep the mill working at capacity. Most of my

  18. David Hand

    Options for Bluescope to maintain its production levels were around increased workforce flexibility.

  19. michael r james

    @DAVID HAND Posted Thursday, 1 September 2011 at 5:20 pm

    “increased workforce flexibility” are weasel words that mean, “we the management will demand more and more of the workforce for lower wages and conditions”.

    Wages have little to do with the overall costs of steel mills. The US still produces half of its steel and little Belgium exports three times Australia’s total production.

    Bluescope can claim what it likes but their predicament is due to 1. exchange rate change and 2. poor management (over dependence on exports, less focus on being competitive in Australia & failure to focus on specialist products). As Bernard K wrote in an earlier piece, if they were serious about salary costs they should have forgone their own excessive bonuses and taken a paycut themselves. Blaming the workers is shameful and cowardly.

  20. kuke

    Steel is different. But propping up old dirty steel making isn’t wise.

    We could’ve excelled at high-quality, low-emissions/non-coal steel production, but BHP cocked-up their Port Headland HBI plant and Rio Tinto off-shored their HIsmelt technology to India.

    It still makes sense to me if you have the gas and iron ore in spot with plenty of room for solar power , why can’t you produce good clean steel locally and subsidise it for these benefits?

  21. John Reidy

    Ross Gittins summed the tension up well between ‘competitive advantage’ and supporting unconpetitive industries – with the comment WTTE
    the purpose of all economic activity is to benefit the people concerned
    It isn’t to prop up poorly managed companies – in this case we have the useful comparison between Bluescope and One Steel.
    Companies will fail – it is human nature to point the blame somewhere else.
    That isn’t to say that industries should be left to die – in the name of economic rationalism.
    South Korea (and for that matter Japan) have a ‘competive advantage’ in electronics manufacture, however in the last 60 years they consciously worked to achieve this.

  22. David Hand

    Workforce flexibility are not weasel words, though the bruvvers would like everyone to believe that they are. It has a tangible impact on the survivability of industries.

    We are seeing it in Qantas at this moment as the traditional workforce with its decades old pay and conditions hang on like grim death in the face of fierce international competition, appealing to patriotism and a fear campaign that foreign engineers are useless and planes will crash. Meanwhile, the Qantas executive are doing what is required for the airline to survive.

    And executive pay is a red herring. Outrageous bonuses for poor performance are grotesque because of issues of fairness and equity but their cost, compared to say, guaranteed overtime, overmanning and other restrictive work practices will not influence the survivability of a business like Bluescope.

  23. kookla

    Thank you Guy – a most informative and thought provoking article. What about the Services Industry?

  24. Matt Hardin

    @David Hand

    Except that workforce flexibility is used almost exclusively to lower the pay and worsen the conditions of employment. I have never seen it used in a way that means that ordinary workers are better off.

    It is not about the cost of executive pay but the fact it appears to be so excessive as to be essentially unearned.

    Qantas is a good example. The engineers, pilots and cabin crew – over a period of decades – built a reputation, through their efforts, of safety, effectiveness, efficiency and service. They were well rewarded for the efforts both through pay and conditions and the satisfaction of a job well done. Qantas traded on that reputation but did not want to pay to have the standard of work done. The result lower quality, fewer customers, less revenue and now decisions to replace the people who built up the company with cheaper employees and worse conditions. Now that the chickens are coming home to roost on the poor decisions of the senior management it is not they who are paying the costs but the “greedy” pilots and engineers.

    Management and executives are paid their comparatively large salaries to ensure that the way the company is run is profitable and provides the quality of service that people expect at the price the service is offered. If they cannot do that they need to be sacked as poor performers not continually offered higher and higher paying gigs. I cannot think off the top of my head of any CEO or board member who has been sacked for poor performance (without getting the equivalent of decades of pay for the average employee) nor of any who have been personally financially punished for taking the course that leads to workers losing their jobs. If I am wrong, please enlighten me.

  25. David Hand

    Hi Matt.
    I agree with your sentiment about excessive levels of executive remuneration. Apart from those doing time, the only big name I can pick off the top of my head being sacked for poor performance was Batchelor at AMP but even he walked away with over $1m.

    The disparity between pay and conditions of workers and captains of industry makes the issue indefensible the point of natural justice. The hard reality however is that companies that do not change and evolve over time do not survive and it is when the pressure comes on and the competitive position of the business is being eroded that management mostly comes to the workforce and asks for change.

    Examples of flexible work arrangements benefiting everyone including the workers are mostly achieved through contracting out some elements of the work. Many many people set themselves up to supply outsourced support to an organisation they used to work for and end up significantly better off. You see it mostly in engineering, I.T., ancillary work such as cleaning, property management and logistics. An example od flexibility benefiting everyone is in the mining industry. The 4 day on – 4 day off rosters used in most mines contradicts Fair Work Australia rules by having no week end penalty rates but then your average basic miner in Central Queensland can earn over $140k.

    A lot of the time, companies outsource because they cannot persuade their workforce to be more flexible. Many government departments and trading divisions operate like this.

    You’ve not chosen a good example with Qantas. Qantas is being killed by a cheaper Virgin domestically and a group of Asian carriers who are cheaper and provide significantly better service.

    Your beatific picture of patriotic hero pilots, engineers and cabin crew, toiling for decades do build an iconic airline that is the best in the world, only to have it destroyed by incompetent management, shows you haven’t flown on Qantas much recently and have probably watched too many “Evil Corporation” movies. Qantas management have made plenty of mistakes, but they must do someting about the expensive elderly 25 year plus staff on the best employment deal going in the aviation world, or they will go out of business.

    Greater flexibility may have meant sacrificing pay and conditions at Bluescope Steel but hey if it had happened, maybe 1000 steel workers may still have jobs.

  26. Gavin Moodie

    One might add that bosses would have more authority in leading their workers to adopt more ‘flexible’ working conditions if they took the lead in accepting worse conditions. The move to performance pay for bosses would perhaps be a step in the right direction, ‘cept that pay committees keep changing the rules whenever the performance criteria don’t produce the huge pay increases sought by bosses.

  27. beryceann@bigpond.com

    Reading the ongoing comments/debate on this article has been like watching a tennis match with no umpire – absolutely wonderful and hilarious at the same time. Two things to add:-
    Firstly, if you want to know why the PRC is the powerhouse production based economy of the 21st century read “Bomb, Book and Compass” by Simon Winchester; and
    Secondly, so-called workplace flexibility set in place by quiet amendments to industrial laws in 1999 and solidified later through Work Choices has produced two classes of employment in Australia. People working in the same organisation can be full time or part-time permanent with all the usual benefits of sick leave, holiday pay and protection against unfair treatment etc; or they are casual contracted staff allegedly receiving a higher hourly rate but none of the benefits of permanent employment. The ugly reality is that they work harder for longer, are much worse off financially and are vulnerable to a reduction in hours or summary dismissal if they protest. Across the country the vast majority of women now work under these conditions in skilled and semi-skilled positions including many State Public Service organisations, and it is a digrace. And let’s not forget the awful subterranean issue of temporary visa holders -many of them university students – forced to work anything up to 60 hours a week for slave wages – and yes we all know it is illegal – but who is doing anything about it? The debate about how we all should work may be a pleasant intellectual exercise for a few of us, but for the majority, the reality is starkly different.


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