Is Australia Consuming the Economy to Death?

We’ve written for some time about what a waste of space the Federal government.

How it just sucks the life out of the private sector in order to fill the pockets of interfering and power-crazed bureaucrats.

Yet we’ve been told by all and sundry that a strong government is important, nay, crucial for the stability of both the economy and society. Without it, the argument goes, there would be anarchy in the streets.

That normally sane people would suddenly and without warning start killing people and looting shops. Motorists would begin driving on the wrong side of the road, children would instantly become illiterate, and all the old people would die because there wouldn’t be anyone to care for them.

If the result of the recent federal election has proven anything, it’s proven that the economy and civil society can continue on without the interference of jumped-up private sector failures, aka politicians.

It has proven what we’ve stated all along, that all you need is a very simple and basic set of laws that guarantee freedom, property rights and the right not to be harmed by others, and everything else will naturally take care of itself.

Sadly, we’re sure this political hiatus won’t last. Before long, one bunch of crooks and power trippers will team up with another bunch of crooks and power trippers, and voila, government is formed!

So, in anticipation, we’ll rely on a bit of Plato here. We don’t normally quote from the classics. Mainly because we’ve never read them – although after a quick browse, we’ll now put in an order with our favourite online bookshop. But we do recall some mangled quote about someone saying “democracy leads to despotism.”

Anyway, as usual, thanks to the interweb, within seconds we found what appears to be the genuine quotation from Plato’s The Republic:

“And so tyranny naturally arises out of democracy, and the most aggravated form of tyranny and slavery out of the most extreme form of liberty?”

There’s a whole bunch of other quotes from Book VIII of The Republic, worthy of publication here. But we won’t print them all, there’s too many. And besides, never having read The Republic before we’re wary of quoting anything without understanding the complete context.

But whatever the context, as standalone quotes, it’s hard to argue with the sentiment.

Here’s a couple that tickled our fancy:

“And then democracy comes into being after the poor have conquered their opponents, slaughtering some and banishing some, while to the remainder they give an equal share of freedom and power; and this is the form of government in which the magistrates are commonly elected by lot.”

And perhaps our favourite, which seems to sum up the public service perfectly:

“[F]or in the first place freedom creates rather more drones in the democratic than there were in the oligarchical State…Because in the oligarchical State they are disqualified and driven from office, and therefore they cannot train or gather strength; whereas in a democracy they are almost the entire ruling power, and while the keener sort speak and act, the rest keep buzzing about the bema and do not suffer a word to be said on the other side; hence in democracies almost everything is managed by the drones.”

Beware the elected and unelected drones! Until then, on with the rest of today’s Money Morning…

“Put the manufacturing fallacy to rest” wrote Jagdish Bhagwati in Tuesday’s Australian Financial Review (AFR). Bhagwati is a professor of economics and law at Columbia University in the United States.

We’ve read the article three or four times, but we’re struggling to understand the author’s specific point. Initially we assumed the author was claiming that manufacturing is unnecessary and that there’s no problem with an economy migrating towards a services based economy.

On second reading it seems as though he’s suggesting that the services industry can be just as innovative as the manufacturing industry. We can’t say we’ve thought about it too much. However, we will agree that the services sector can be innovative. Whether it is as innovative as manufacturers is something else.

But on reading it for a third time we think we’ve nailed his argument. It seems to be that both manufacturing and services are technologically innovative to a similar degree, just in different ways, and therefore it doesn’t matter whether an economy is manufacturing based or services based.

Bhagwati closes his argument with:

“Even if you wanted to curtail financial services, you could still focus on non-financial services. Diesel engines and turbines are not the only alternatives; many services, like professional therapy, nursing and teaching are available. The case for a shift to manufacturing remains unproved, because it cannot be proved.”

Er, really? Yes it can.

To paraphrase the case, Bhagwati suggests an economy doesn’t have to make things like engines and turbines, instead people can be therapists, nurses or teachers, and that’s just as fine.

It’s a viewpoint we’ve heard from many people. The idea that it doesn’t matter what an economy does, just as long as consumers are spending. Take today’s article in The Age:

“Investors yesterday cheered a surprise rise in household spending, after the national accounts showed consumers, as well as miners, driving a rapid return to boom conditions.”

The article goes on:

“Household spending was up 1.6 per cent, a similar pace to the rapid growth seen in 2007, before the financial crisis struck, defying predictions that higher interest rates would stifle consumers.”

But the cheering doesn’t stop:

“The chief economist at Nomura, Stephen Roberts, said some investors had feared the highly indebted and frugal consumer could be the Achilles heel of the Australian economy. But the figures showed households throwing caution to the wind, with the proportion of income saved falling to just 1.5 per cent, from 3.4 per cent.”

Hooray! Don’t worry about being “highly indebted”, throw “caution to the wind” and spend away. Yeehaw!

Clearly the author of the article, Clancy Yeates has failed to see the irony in what he/she has written.

So, is it true that it doesn’t matter whether an economy is manufacturing or services based? On the surface – which is the only place the mainstream can be bothered looking – it’s easy to argue (not that we agree with it) that it doesn’t matter.

People are employed and people are spending. What does it matter what they’re employed in. As long as the consumer is spending then that means a strong economy.

The problem is, it does matter. It matters a lot.

Let’s take Bhagwati’s examples for alternative services based careers – professional therapy, nursing and teaching. Yeah, sure, an economy could shift towards those industries. We’ll guess it’s a lot cleaner and safer than working in a factory.

But here’s the problem. Here’s why it’s important that an economy is either suitably diversified, or that the economy is able to trade its manufactures or services overseas. For instance, we’ll argue that it’s reasonably difficult to export professional therapy, nursing and teaching – with the exception of course, that foreigners come to Australia to learn.

Even if you factor that in, the export of education would be a tiny fraction compared to the amount of domestic consumption on education.

Anyway, getting back to the point. The reason it matters is to consider the following. Sure, someone could become a professional therapist or a nurse, but where will the therapist get the items needed to furnish his or her office? The therapist needs a desk, a couch, a chair, pens, carpet, notepads, etc…

Where will the nurse get the hospital bed, the stethoscope, the bed pan, the thermometer, the MRI machine, the X-Ray machine, and gawd-knows what else?

And where will the teacher get the blackboard, the whiteboard, the chalk, the desks, chairs and pens and pencils?

What about other services industries – where will the local coffee shop get the cappuccino machine from? Or the tables and chairs? Where will the local gym get their exercise equipment, the lockers and their uniforms?

It’s a nonsense argument to say that manufacturing doesn’t matter. It does. An economy needs to make things so that the services industry can provide their services. And if the economy doesn’t manufacture those products then it has to import them.

Now, importing isn’t a bad thing. It’s all part of having a comparative advantage. You do what you’re good at while allowing others to do what they’re good at.

The problem comes when an economy isn’t producing items or services that foreigners want or need. Therefore an economy falls into a consumption trap. Constantly consuming while at the same time importing the manufactures needed to satisfy the consumption. And without giving anything back in return.

Right now, Australia is falling into a consumption trap. Yet so far it has been lucky – that’s right, the good old resources sector. The resources sector that the amazingly quiet Emperor Ken Henry believes didn’t save the Australian economy from recession.

As it stands, Australia currently does have things foreigners need – resources.

You only have to look at the national accounts released yesterday to see that. And how the Australian economy has rapidly shifted over the last nine years.

It’s no surprise that the mining sector has grown over that time, while manufacturing has barely moved. In some categories, such as textiles, it has nearly halved. But in real terms, as a proportion of the overall economy, manufacturing has gone backwards.

To be replaced by an increase in the services sector: retail, accommodation, food services, transport, information media, and of course, the biggest winner, financial and insurance services.

Look, we’re not saying that the services sector is bad and the manufacturing sector is good. And we’re certainly not saying it’s unproductive, because it can be. For instance, it’s more productive for most people to buy readymade clothes in a shop than it is for them to go through the hassle of making their own clothes.

But it’s simply not correct for Bhagwati and others to claim that “a shift to manufacturing remains unproved, because it cannot be proved.”

In an economy that’s already manufacturing heavy, then that’s a reasonable point. But for one that isn’t then it’s a dangerous argument.

Especially for an economy that relies heavily on the sale of raw materials overseas. Nothing could be worse for Australia than pinning its hopes on a continuing resources boom while simultaneously legislating to destroy the manufacturing sector, and cheering the further indebtedness of the ever-consuming consumer.

Cheers.
Kris Sayce
For Money Morning Australia

Tagged as: debt, economy, employ, government, resource