Mining was always going to crush manufacturing.
If you are in any doubt that as mining advances manufacturing inevitably retreats you can set yourself right by examining an extraordinary graph of mining and non-mining export earnings produced by Richard Denniss of the Australia Institute.
Over the past decade mining exports have climbed by around five per cent of GDP; non-mining exports have slid by around five per cent of GDP. The relationship has been almost exactly one to one.
That’s not to say the ratio won’t improve. Mining exports might one day do more than simply replace non-mining exports. There might one day be few other exporters left to crush, the massive investment in new mines and mining machinery currently underway might one day pay off in much higher earnings, as it is meant to. But what’s important are the directions of change. As the mining industry does better, other trade exposed industries do worse.
The main mechanism is straightforward. Higher minerals push up the Aussie dollar which makes exports harder to sell and imports much cheaper.
There’s also a secondary mechanism. The mining boom (particularly the mining construction boom) gets the Reserve Bank worried about inflation. It talks up the possibility of higher interest rates - until this month that’s exactly what it has been doing - and consumer and business confidence stall.
Step three takes place when our relatively high interest rates and talk of higher ones draws more money in from overseas pushing up the dollar further.
It’s bad for steelmakers, bad for any trade-exposed industry, and to a lesser extent also bad for industries with no competition from trade. If consumers and businesses are wary of spending - as the Reserve Bank has tried to ensure they are - they will be wary across the board.
There’s a view about that this is a reasonable price to pay... Our record mining investment should pay off big-time. By throwing far more than ever before at mining we are pushing ourselves out “further along the risk-return frontier,” as Reserve Bank assistant governor Philip Lowe recently put it.
The high dollar has positives for all of us, even as it makes it harder for some of us to compete. It increases the buying power of each dollar we earn and also the buying power of those we’ve saved. It is one of the ways in which the proceeds of the boom are shared more widely.
And jobs will take care of themselves. It is not carelessness that makes Treasury assume full employment in its modeling of tax and other changes, it is reality. Employment is usually close to full. The ratio of working age Australians to dependent age Australians is set to shrink from 2 to 1.5 in coming decades making workers even more prized.
So should we be worried?
You should if you are in the steel mills owned by BlueScope that are being squeezed out of business. Sure, they’ll probably be another job available for you somewhere, but it mightn’t be where you live and it mightn’t be doing the kind of work you are used to. Employment is growing fastest in the health and aged care industries.
Australia as a whole would have good reason to be worried if the mining boom suddenly ended. We might have lost the ability to make steel and cars even though, with the dollar low again, it would make sense to return to doing it.
To this the former Treasury head Ken Henry would reply that the boom isn’t likely to end any time soon.
In his final Senate appearance this year he said: “Lets' suppose that in 20 years time commodity prices come off, quite significantly. I would say to you then that the best industrial structure of the Australian economy then, in 20 years time, would be quite different from the one we had 20 or 30 years ago."
Firms in trouble need to face "the very real question of whether with the exchange rate being where it is they are able to remain in business".
But something else is lost with the ability to make steel and cars apart from flexibility we may turn out not to need.
It’s the ability to make steel and cars. Other nations subsidise those industries precisely because they think they are worth having - for defence reasons, for security of supply and also for emotional reasons. While much of my generation deals with intangibles in white collar jobs, we know our fathers made real tangible products in factories. We think it matters.
What can be done to make sure we continue to make things? OneSteel is making a better first of it than BlueScope, expanding its iron ore export operation as a hedge in the same way that newspapers are getting into the internet.
Getting behind the originally-designed mining super profits tax would have helped. It would have taken money from the miners and given it to manufacturers and other non mining companies in the form of a 2 percentage point tax cut - enough to offset the effects of the higher dollar for a while. Some may be regretting not getting behind it.
And staring down the Reserve Bank would help.
It’s been saying it’ll eventually have to push up rates because wage growth is running ahead of anemic productivity growth.
It is, but the measure of productivity growth relied on to make the claim is bogus:
Australia Institute research released this morning shows non-mining productivity growth is a very respectable 2.5 per cent. Mining productivity is plummeting pulling the average way down. As minerals prices get higher more and more resources are being thrown at mining and less and less productive mines are opening.
The gross value added per mining worker has almost halved since the start of the mining boom eight or so years ago. This shouldn’t surprise us, and it’s not a bad thing.
But it isn’t a reason to punish the non-mining economy even further. That’d be adding insult to injury.
Published in today's SMH and Age
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