“What Should We Build?”

Over the past week, the Leader of the Federal Opposition has been asking a series of questions on Twitter and elsewhere, about “what should Australia be building?”. As well as building the foundations of Labor’s Federal Election policy platform for boosting jobs in the manufacturing sector, it also provides lots of photo ops for pollies in hard hats and hi-viz clothing. (I do wonder why the potential Prime Minister hasn’t thought of this idea before, or why he appears to not know the answer – isn’t that his job? It also makes me wonder whether we need Parliament anymore, since our elected representatives prefer to conduct their “debates” via Social Media and Press Conferences…. it would save a lot of time and money!)

By this time next year, Albo could be PM (Photo sourced from Twitter)

There has been no shortage of suggestions from the Twitterati, which fall into the following main categories:

  • Renewable energy
  • Trains
  • Trams
  • Ferries
  • High-end engineering

But there has also been commentary around Labor’s ambivalence on the coal and gas sector (especially in the key state of Queensland), and the irony that we export cheap raw materials and import expensive finished goods. Then there is debate on the amount of local manufacturing content that already exists in Australia’s state-based trains and urban trams/light rail systems (skewed by the question of local vs foreign ownership). Plus, there’s the thorny issue of high-speed inter-city trains…

As I commented recently, the manufacturing sector accounts for fewer than 1m local jobs (less than 10% of the working population), and 6% of GDP. It has been declining steadily as a contributor to GDP since the 1960s, and more rapidly in recent years since we abandoned key subsidies to the car industry. I don’t think anyone is suggesting we return to the days of metal bashing and white goods. And while we’ve got to be selective about the type of manufacturing base we want to to develop, we also have to be realistic about the manufacturing capabilities we want to encourage and enhance.

The latter involves developing transferable skills, creating interoperable production lines, deploying modular designs and inter-changeable components, and recycling/repurposing. All of which should mean we don’t need to make every part of every item domestically, but we know how to assemble, service, maintain, repair and replace goods locally, and we can focus on adding value that can be fed back into the supply chain, which in turn can be exported (via know-how and services). Australia has some decent research and development capabilities, but we are not always very good at raising domestic investment, or commerciliasing our IP (so this value ends up being transferred overseas, with little to no return accruing locally).

I’m not a huge fan of simplistic “buy local goods/support local jobs” campaigns, or local content quotas. The former can degenerate into trade protectionism and economic nationalism; while the latter tend to favour inefficient incumbents within cozy duopolies (see the broadcasting and media sector). The current debate has also raised questions about procurement policies, and I for one would welcome a total revamp of government IT purchasing and deployment at Federal, State and LGA levels.

There’s also the consumer angle: Australians are notoriously “cost conscious”, so will they be prepared to pay more for locally-made goods, even if they are better designed, well-made and energy efficient, compared to cheaper, less-sustainable imports? (This is also linked to the question of wage growth and restrictive trade practices.)

The recent pandemic has highlighted some challenges for the structure of the local economy:

  • Disruption to distribution networks and supply chain logistics
  • Food security
  • Energy self-sufficiency
  • Inability to service equipment locally or source spare parts
  • Different standards across the States
  • Medicine and vaccine manufacture, sourcing and distribution

For an up-to-date perspective on where Australian manufacturing policy needs to be heading, I recommend taking a look at the Productivity Commission’s latest submission to a current Senate enquiry. (Am I alone in thinking that the PC, along with the ACCC, is doing more to develop and advance economic policy than our elected representatives?)

The PC’s submission addresses a number of key points:

  • R&D incentives are hampered by complex tax treatment
  • Policies (and subsidies) favouring one industry create uncertainty for others
  • Need for IP reform (especially “fair use” of copyright)
  • The National Interest test needs clarifying
  • More effort on up-skilling through more relevant education and training
  • The role of manufacturing capabilities in supporting supply chain infrastructure

Finally, while I agree that there needs to be some focus on renewable energy and public transport, we should not ignore food and agriculture, bio-tech, IT, automation, robotics, materials science and other high-end capabilities in specialist design, engineering and recycling (including reclaiming precious minerals from obsolete equipment).

(And did I mention the “Innovation Agenda” and the revolving door at the Federal Ministry?)

Next week: Dead Pop Stars

Same, same – but different?

At the time of writing, Melbourne and the rest of Victoria are waiting to know when (if?) the current lock-down will be lifted.

Just to recap: Melbourne is presently in its sixth shut down since March of last year, and the fourth so far of 2021. All combined, Melbourne has now clocked up more than 200 days under lock-down. The present measures were introduced on August 5, originally scheduled to last one week, and came barely a week after the previous lock-down ended. Lock-down #6 was soon extended by another week, and then by another two weeks, and will now extend beyond September 2. This is not counting the “stay at home” directive that was in place for most of 2020, along with the various limits and restrictions on social interaction, workplace capacity, public gatherings, hospitality, events, sport, gyms, retail, schools, funerals and weddings. We also have a night-time curfew for good measure.

The following two pictures convey similar human sentiments, but they also represent very different responses to the situation we are living under. One is an example of the numerous messages of hope and encouragement that I see around my neighbourhood on my statutory daily walks. The other is a discarded placard seen a few days after an anti-lock-down protest.

The first reflects a “let’s grin and bear it” attitude – nobody likes being in lock-down, but we are all in this together, and if we can just remain positive, we will come through it OK.

The second is more reactive, and emotionally charged – the enforced isolation brought on by the lock-down is having an enormous effect on peoples’ mental health.

It’s hard to argue with either message….

I thought I would be able to cope better with each successive lock-down. Building a daily routine, maintaining some physical discipline (courtesy of the permitted daily exercise), managing at least 2-3 AFDs per week, treating myself to a nice restaurant-prepared meal now and then, catching up on films that I didn’t get to see at the cinema. But despite the recurring groundhog scenario, this lock-down seems different, and much harder to manage mentally.

First, the uncertainty of when it will end creates a sense of dread that we could be like this for 100 days or more (like lock-down #2). Second, the daily drip feed of data and the endless press conferences only reinforce the sense that we are not being given the full picture. Third, the sense of helplessness that for all our individual sacrifices of the past 18 months, we don’t seem to be any further ahead (if anything, we have gone backwards on so many counts). Fourth, State politicians seem to view this public health scare as a war of attrition between themselves and the voters (and their interstate and Federal counterparts). Gone is any sense that we are all in this together.

Quite apart from the cracks in Federation that the pandemic and its response has exposed, entire sections of the community are being driven apart and/or pitted against one another. Despite the so-called “National Plan” that the Commonwealth, State and Territory governments have all signed-up for, it’s clear that individual Premiers each reserve the right to interpret it differently, and will continue to impose internal border closures if they see fit. So, while Victoria and New South Wales seem aligned on this National Plan, Western Australia and Queensland in particular are more circumspect. Then there is the “race” to vaccinate their respective populations (or, as has been said a few times already, “our State citizens”, rather than “our Commonwealth citizens”).

At what point will the 70% and 80% vaccination levels be achieved to herald the promised social and economic freedoms? Is it the % of total population, or only the adult population, or only the eligible population, or only those between certain ages? Is it going to be calculated Federally, or at the State/Territory and/or LGA level? What about mandatory vaccinations for essential and front line workers, and those that have face-to-face dealings with the public? What about employers who require their staff to be fully vaccinated, but face resistance from unions?

Continued lock-down risks becoming a blunt instrument, and a tool of first (rather than last) resort. As such, it also risks alienating the majority of the population who are doing the right thing, in observing the public health directions and getting vaccinated (like, where’s the benefit?). And a prolonged lock-down risks undermining the efficacy of the vaccine, so we’ll need booster shots before we know it!

It seems that Covid19 is challenging our notions of the social contract between the government and the governed, and even testing the social license to operate we grant to big business (especially monopolies and cozy duopolies). The pandemic is also demonstrating the limits of individual responsibility and accountability, and potentially undermining the duty of care we owe to one another. If I knowingly, recklessly or carelessly (and as a result of breaching public health orders or OH&S measures) infect my family, my neighbour, my colleague or my customer, am I culpable? Does that mean I forfeit certain of my rights, especially if infection leads to death?

Just on the data, another reason the current lock-down seems different is because the information is being presented is not the same. Last year, everything was about the R0 number, flattening the curve, and “double-donut days”. There was also confusion over agreed terminology for “clusters”, “unknown cases”, “hot spots”, “red zones”, “complex cases” and “linked cases”. Politicians and bureaucrats talked about “settings”, “circuit breakers”, and “gold standards” for contact tracing. This year, it’s all about the “number of days infected”, “chains of transmission”, “mystery cases”, as well as the number of tests and vaccinations – much less analysis, it seems, on the number of confirmed cases per 1,000 tests or per 1,000 of the population, recovery rates or deaths as a percentage of cases.

From what I can glean, the stubborn levels of “mystery” cases can only be explained by the following:

  • more asymptomatic cases (are people building natural immunity?);
  • legacy cases shedding (a result of long Covid?);
  • longer incubation (and reporting) periods (less obvious initial symptoms?);
  • novel forms of transmission (or the virus is lingering longer on outdoor surfaces?);
  • QR codes and contact tracing not working (or the data is not usable?);
  • confusion over domestic/social/workplace/health/retail settings (e.g., extended families and multi-generational households?);
  • people being unclear about their movements (for fear of being victimised?).

Finally, I’m also not sure if lessons are being learned from elsewhere. We are still applying 14 day quarantine/isolation periods (albeit now with a day 17 test), yet in Hong Kong, for example, quarantine was extended to 21 days some time ago.

Next week: To be or NFT?

 

Is Federation still working?

As three of the six Australian States (and one of the two Territories) grapple with fresh COVID outbreaks, their respective lock-down measures reveal quite different responses to what should be considered a common problem. It’s not just the differences within their own borders, but also how they react in relation to each other in terms of classifying “hot spots” and imposing travel restrictions. It’s a fresh example that despite defining itself as a single nation, the Commonwealth of Australia remains a patchwork quilt, hurriedly stitched together from the remains of colonialism, under the pretext of “Federation”.

Federation feels even more of an artificial construct than the former British colonies themselves. In my view, the inconsistencies between each State and Territory in dealing with COVID, and their fractious collective and individual relationships with the Commonwealth, can be linked to questions of national identity, the legacy of imperialism, a lack of consensus on a Treaty with our First Nations people, and the failure of Republicanism to pave a way forward.

For a start, Australia tries to maintain four different codes of professional football – yet not every State or Territory is represented in the national competitions. Of these codes, one is essentially a Victorian competition, with a couple of other States brought in on merit, and a couple of the others only included after some fabricated interstate franchises. (And how long before a Victorian club has to relocate to Tasmania?)

Another football code runs an interstate competition, but only two States compete – and sometimes they compete in another State (just for the hell of it, or to try and instill “national” relevance?)

Cricket may rightfully claim to be a national sport at a professional level, but even the major Sheffield Shield competition excludes the two Territories.

These observations may appear flippant, but in a sport-loving nation, such examples might help explain why we don’t feel a very cohesive place – not all of us even get to barrack for our own State or Territory on the playing field!

There are many other examples of arbitrary differences between the States – e.g., unicameral or bicameral Parliaments; recognition of Public Holidays; the calculation of State election dates; the width of railway tracks; connectivity with energy grids; the minimum legal age for driving a car; the size of beer glasses in pubs; and the term for a “corner shop”.

Back in 1901, Federation must have felt like part of a grand scheme towards a modern era, designed to galvanize a bunch of colonies into a cohesive whole, and forge a new nation. But we don’t formally celebrate its existence with a public holiday. Rather, each State prefers to mark the Queen’s Birthday (albeit on different dates…) instead of recognizing the Act of Federation, which was supposed to confirm Australia’s independence from the UK. Not only that, but the “National Day” we do observe is Australia Day, which is highly contentious and increasingly overshadowed by its association with foreign invasion, imperial expansion and colonial oppression.

Back to COVID: recent events have shown that the “social contract” between the Commonwealth of Australia on the one hand, and the States and Territories on the other, is purely transactional. In respect to the pandemic, the Federal government has had two primary responsibilities: 1) international border control and quarantine; 2) vaccine acquisition and distribution. Although they have maintained closed borders, the Commonwealth has “delegated” quarantine arrangements to the States, with all the resulting inconsistencies and glaring mistakes. The Commonwealth has also fudged the vaccination roll-out (too many reasons and causes to go into here).

On the need for dedicated quarantine centres: while the States have taken on (or been lumped with) an unenviable task, after 18 months of the pandemic, I don’t understand why the States haven’t taken it upon themselves to build their own facilities, and then stick the Federal Government with the bill. If landlords won’t undertake essential property repairs when brought to their attention, I think most of us would agree that their tenants would have a valid case for getting the work done themselves and deducting the cost from the rent.

Except that the States don’t have that sort of leverage over the Federal Government (despite what Queensland and Western Australia might say and think).

In short, Federation is merely a way to distribute taxes levied by the Commonwealth – even then, this distribution is mired in political horse-trading and pork-barreling. The States, unable to raise their own revenue (other than via payroll tax, stamp duty, land tax and fees from providing certain services, issuing permits and granting licenses), are heavily reliant on Federal handouts. While this allocation is often dressed up in the guise of achieving minimum targets and standards, in reality funding is tied to political objectives.

I suppose even after 120 years, Federation can still be called a work in progress. Whatever the future debate on Australia Day and an indigenous Treaty (plus constitutional recognition and parliamentary representation), and whatever the prospect of a Republic, we may need to consider that the States, as currently constituted, have had their time and are increasingly redundant. Part of me thinks we might be better off by dissolving them (along with our local authorities) and re-constituting regional government and administration around the lands of the original settlers to this island. Just a thought.

Next week: Startup Vic FinTech Pitch Night

Where is wage growth going to come from?

How good is the Aussie economy? On the back of the stable outlook on our AAA sovereign credit rating, last week’s employment data showed a better-than-expected post-COVID recovery in terms of the headline unemployment rate and overall workforce participation. This has led to speculation of a potential uplift in wages, due to labour shortages amplified by the current halt on immigration (thanks to closed borders).

But where will this expected wage growth actually come from?

According to ABS data for February 2021, the top 5 industries by number of people employed are: Health Care; Retail Trade; Professional, Scientific and Technical; Construction; and Education. (See above chart.)

Now, contrast this with three other relevant data points: 1) the number of Australian companies by size; 2) the annual change in employment growth/reduction by industry; and 3) the national GDP contribution by industry.

First, there are nearly 2.5m registered business entities, according to ABS data. Over 1.5m of these are designated as “Non-employing” – including sole traders, self-employed, independent contractors or freelances. Over 850 thousand establishments employ fewer than 200 people. Fewer than 5,000 businesses employ more than 200 people. Although there was an overall growth of 2% in the number of registered businesses, the largest increase was in the “sole trader” category, while the largest decreases were among medium-sized companies, and large enterprises. (See table below – the next ABS data is due in August.)

Second, the largest employment growth by industry sector in 2019-20 came from logistics and healthcare – no doubt in large part to the impact of COVID. Primary industries and mining both registered decreases.

Third, the main contributors to output (GDP) are Health and Education (13%), Mining (11%), Finance (9%), Construction (8%) and Manufacturing (6%) – based on a recent RBA Snapshot. But the data is always subject to further examination and clarification – for example, while construction employs over 1.1m people, many of these are engaged as independent tradies or through sub-contractors, and in spite of the huge number of major infrastructure projects (just look at Victoria’s Big Build and all the cranes in Melborne CBD), there was only negligible growth in overall employment within the sector. And while mining is a major contributor to GDP, it does not employ huge numbers of people (it’s actually on a par with the arts…), yet the fewer than 9,000 people who are employed as mining engineers are in the top 10 occupations by salary (according to ATO data analysed by the ABC.)

Some other factors to consider as we ask, “Where will wage growth come from?”:

  • While most people are employed by SME’s, these companies are probably under the greatest strain when it comes to overheads and inputs, as they have relatively high fixed costs, and can ill-afford higher wages in the current trading conditions.
  • On July 1, the Superannuation Guarantee is due to increase from 9.5% to 10% – some commentators suggest employers (especially SMEs) may have to reduce or offset wages to pay for the scheduled increase.
  • We have an apparent choice between an asset-led recovery (inflated house prices – but risks leaving people “asset rich and cash poor” when interest rates go up ); a consumption-led recovery (reliant on higher wages so people feel comfortable to spend money); or an investment-led recovery (businesses need to invest in new equipment and projects to boost productivity, and not just bring forward planned expenditure thanks to tax incentives).
  • The sectors where we need more people (health care, aged care, child care and education) are still among the lowest paid on a per capita basis.
  • What is happening to boost manufacturing, or aren’t we interested in making things anymore?
  • Our IT and technical skills shortages have been exacerbated by the absence of overseas students and graduates – there is anecdotal evidence of wage and hiring pressures in this sector, one which is probably more important to our future economy and sustainability than mining coal or building more roads.
  • One leading economist reckons that household incomes have increased by 30% over the past 10 years. If wages have been stagnant, where has this growth come from? Is it because of tax cuts, low interest rates, quantitative easing, real estate prices (or their crypto holdings)? And do we actually feel any wealthier as a result?

Finally, will inflation and/or interest rates undermine any potential increase in wages?

Next week: Is Federation still working?