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Some protection is essential

By John Turner - posted Wednesday, 21 September 2011


Any contribution to a discussion on protection should focus on what kind of country we wish for Australian citizens two or more generations from now. Lack of foresight may lead to Australian citizens, a few generations from now, living at a standard well below what is currently enjoyed.

Unheeded foresight in the past has led to mistakes in the earlier era when people with clearer long term views have been ignored in the pressure cooker of the then present. The English Crown's attitude to the American colonies, which led to the American War of Independences, is an example, as was ignoring Churchill's views in the early 1930's. There were few mistakes made in developing our productive capacity in the time of war or in the planning which gave Australia the Snowy Scheme and the consumer goods manufacturing industries to provide employment after WW2.

An understanding of modern monetary theory would also help. A government controlling a fiat currency pays all its internal bills and social security payment, by allocating account credits to the bank accounts of the recipients using computer keystrokes, increasing the amount the government owes the Reserve Bank. The Reserve Bank, which the citizens own through their government, honours those balances.

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People and businesses spend the new credit balances and almost all of that money flows back to the government as tax during or after the long sequences of transactions, which consequently occur. The tax collected reduces the government's indebtedness to the Reserve Bank. Any new balance not spent will be lent by the banking system to someone who will spend it. Using these sovereign powers sensibly, does allow a national government to nudge developments in a preferred direction.

If there is excessive inflationary pressure in the economy, often caused by over optimism in the community, the government is able to take actions that dampen the economy. An example of this is increasing the tax rates or increasing government borrowings by issuing bonds.

If the economy is slowing, the reverse actions are feasible, as was shown in the 2008/9 situation. Basically, balancing the internal sovereign government's budget is of little relevance and politicians and businesses that claim otherwise either do not understand or have another agenda. It is worth repeating: Arguing that sovereign governments needs to, or should, adhere to the budgeting rules applicable to a business or an individual, is either mischievous, a result of ignorance, or sometimes both.

The external account is a different matter. With a floating exchange rate such as we have in Australia, any imbalance in trade will initiate a correcting effect to the exchange rate. Because its fiat currency is the international reserve and trading currency, the USA is a special case. That situation has allowed the USA government, businesses and citizens to consume the resources and goods produced by other economies, simply by creating credit balances in the accounts of the suppliers of the items imported.

Those balances can be assigned to a bank in the home country of the supplier in exchange for the home currency, but the balances, then owned by a foreign bank, remain in the USA banking system. Those balances then provided the leverage for the growth of, and the misuse of, financial manipulation that led eventually to the GFC, but that is another story.

The advantage to the USA of the present reserve system was recently severely criticised by both China and Russia. Reconsideration of Keynes' Bretton Woods proposal, or some similar solution, is well overdue.

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The present national real assets situation of Australia needs to be understood and used to establish a long term view of Australia's potential. I would list the assets and their advantages and disadvantages as follows:

1. Limited areas of high quality arable land with adequate water supplies;

2. High rainfall only on fairly narrow coastal strip, particularly on the east coast, but separated by a mountain range from other, less well watered, arable land;

3. Seasonal rainfall over large tracts of rather flat tropical land where large-scale water storage of water for the dry season is not readily feasible;

4. Large tracts of marginal grazing lands usually with limited water supply for either stock watering or natural stock feed production;

5. Significant reserves of metal ores that require fossil carbon fuel for reduction of either oxide or sulphide ore to produce usable metals;

6. Reserves of coal that can only be regarded as significant on a per capita basis. Substantial reserves of shale oil, but very limited supplies of liquid fossil fuels;

7. Substantial reserves of nuclear fuels both of uranium and the inherently safer thorium ores; and

8. Fixed infrastructure such as homes, offices, dams, airports, ports, roads and the like and irrelevant things such as household and personal items.

There are distinct disadvantages attributable largely to the geography of this country. The initial white settlements picked what appeared then to be the best available sites and, once established, the markets of these sites attracted industries that rely on being close to their markets for success. For these reasons more than half the Australian population resides within a radius of about 100km from the population centre of two or three major capital cities.

Transport distances between the major population centres are substantial and this provides scale and transport advantages to manufacturers of consumer durables located in large external markets. This often comes with cheap labour costs or certainly low costs for any marginal increase in output, output which is often dumped in a foreign market.

The China situation is an example of this 'beggar thy neighbour' attitude in action. The Chinese currency has not been allowed to float, so is presently well undervalued. China thus makes imports expensive for its citizens and makes sure that its economy can expand to keep internal unemployment low and possible dissatisfaction and dissent at bay.

What do we want for the children coming into the world in Australia in the late decades of this century? Surely we want them to be secure, have an opportunity for an enlightening education, to have a sustainable reasonably high standard of living and a satisfying life into which they can then bring their own offspring.

One question to answer is, "Can this aim be achieved by an unplanned largely deregulated economy?"

I do not think it can in the present atmosphere, where instant gratification seems to be the aim of many people and business models.

Carbon, in the form of coal, illustrates this problem. If domestic and foreign consumption of Australian sourced coal is allowed to grow at projected rates then, by any reasonable estimate, coal will be exhausted within about three or four generations and when exhausted substantial production of metals such as iron, copper or aluminium from oxide or sulphurous ores will be impossible.

Technology will not rescue us from the immutable laws of chemistry and physics. Carbon, as coal, is the only reducing agent available, in sufficient quantities and at an affordable cost for the production of not only iron and steel, but most other metals.

Enlightened discussion and planning is essential if this particular impediment to human comfort is to be delayed as long as possible. We will arrive at that point sometime in the future but surely we should delay that day of reckoning as long as possible and not have it arrive for our grandchildren's grandchildren. Coal is also a source of feedstock for many other products.

For this exercise, consider what would be necessary to make our coal and metal ores last for a population of 40 million for say four times as long as present plans. That would require that we ease back on our exports of these raw unprocessed products and start to live without exporting assets to buy current consumption items, contrary to what we are doing at present.

What would that mean for our future employment?

It would mean that we would have to restart producing many of our consumer durables, structural and infrastructure materials and transport equipment. Probably it would never be sensible to produce computer chips or minor printed circuits, or even laptops, but it would be sensible to produce refrigerator and washing machine cabinets and drives, television sets, cars trucks and buses, trains and other rolling stock, furniture, fasteners, pots and pans and even our shoes and clothing.

This is crucial, given that the ease back suggested would result in a fall in our exchange rate. That would improve the sales return per tonne for our reduced exports of coal, metal ores and surplus agricultural products. The lower exchange rate would also improve the competitiveness of our processing and manufacturing industries.

Some protection would be required. The level of that protection is the only real point of contention. In my view, after easing back our current exports of our resources assets, the protection would need to be little more than an import duties rate that would replace the income taxes and business taxes foregone when compared to manufacturing the products within Australia.

Possible rising international shipping costs will assist, as oil supplies decrease and oil becomes more expensive. Although, nuclear fuelled freight vessels may come to the fore.

The GST is now recovered on the sale of consumer product imports but governments, such as the NSW Government when it imports trains, probably avoid that. One government importing trains while another government is paying unemployment benefits to the unemployed (and the under-employed) makes no sense whatever. Dumping protection should be made more readily accessible and enforceable. This is one instance where the onus of proof could be on the imported goods supplier.

What jobs do we want for the generations I am considering?

My experience in manufacturing has been that such work can be satisfying. Productive and caring jobs tend to provide more satisfaction and fulfilment than repetitive jobs that employees often perform for people who could do such work for themselves. Taking in one another's washing or making coffee is not desirable or productive employment.

Neither is excessive vocational education. For example, pre-employment education for nursing is both excessive and probably counter-productive. Years ago, young people could start productive work as trainee nurses at aged seventeen and get adequate education in their duties throughout the next few years. I have no objection to some university education for experienced supervising nurses who have completed, say, three earlier years in a hospital. But, that time in the hospitals could have included about 200 days per year of useful work and regular days off for off-the-job education and training.

Teacher training for early school years suffers from a similar problem. Years ago, after leaving high school at 16-17 years of age, a person with two years of teacher training was considered fit to ease into full time teaching up to at least primary level. I was educated by such teachers and went on to become competently educated in my field of science and technology. Now such teachers have an extra year at high school followed by about 28 weeks per year of university education, for up to four years. They also end up with a substantial HECS account just at about the time they are contemplating marriage, possibly starting a family, and buying a home.

An educated citizen, and shouldn't all citizens have a sound basic education, needs a solid grounding in understanding maths, language, science and civic matters. They need to be able to competently develop their ability to collect and assess evidence and be able to think clearly.

Recently, Mike Carlton in his weekly Saturday Herald column drew attention to what happened to the citizens of Nauru once the only natural resource of their island was exhausted. There, the citizens have basically returned to subsistence. They had attempted to exchange their phosphate rock for holdings of foreign assets, but those assets have now disappeared. The situation would not be quite so bad for Australia, but near exhaustion of our non-agricultural resources will still be close to disastrous.

I recall hearing Sir James Killen, in the Whitlam era, being very critical of a proposal for a federal public interest committee/authority, to be charged with contemplating and reporting on future economic development possibilities. Sir James was witty then, but wrong, and we certainly need such an authority now.

I also recall writing nearly forty years ago, in a paper on tariffs and trade at the Australian Administrative Staff College, Mt Elisa, that many conservatives still believe that the proper role for the working class is, as "boundary riders on the squatters fences'," or as the downstairs servants in an upstairs/downstairs economy. They never seem to realise that without an educated, reasonably well-paid workforce, the market for their goods and services is seriously curtailed and the society is unjust and deficient. Wide income spreads have a similar effect.

The Australian Government needs to give much more thought to the probable future outcome of present mining and manufacturing policies.It urgently needs to educate citizens in the need for change, even as it sets about initiating it. To assume that completely free trade is feasible, and that protection is always undesirable, is to believe that all other governments and all manufacturers and agents in other countries are wedded to and willing to adhere to those concepts. They aren't, and never will be, so therefore the assumptions are asinine.

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About the Author

John Turner has an applied science degree on top of a diploma in metallurgy.

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