Back to the future: Labor revives failed policies of the past

Having once ridiculed the Liberals for pining for the 1950s, Labor is now lifting its economic policy from the same era.

Although doubtless more information will be provided in the budget, and in the act itself, we can already see what Labor intends - and what consequences will surely follow.

First, the government has announced hundreds of millions of dollars of subsidies to critical minerals projects in Queensland and South Australia, on top of support for refinery projects in the Northern Territory and Western Australia.

Second, it has signalled its intention to provide significant handouts to domestic solar panel manufacturers.

The industries involved might be different to the 1950s, but the policies are basically the same. Remember when the Treasurer said his 'values-based capitalism' wasn't just about picking winners? Well, he can't say that anymore.

The government is attempting to use taxpayers' money to force the economy into the shape Labor wishes it was.

Supporters cite the supposed success of Biden's deceptively-misnamed Inflation Reduction Act as both evidence that industry policy works and a template for Australia's potential approach.

But this is actually not the case. There is no question that creating a bunch of taxpayer-funded subsidies to green manufacturing businesses in the US has attracted rent seekers who want access to easy money. Unfortunately, this has yet to translate into manufacturing jobs.

Data from the US Federal Reserve in St Louis shows there were just 131,000 more manufacturing jobs in the US in March 2024 than in March 2019.

Given the US labour force numbers almost 170 million people, this represents an increase of less than 0.1%.

Of course, this is consistent with every informed critique of the decline of manufacturing for the past several decades: many more jobs were lost to automation than to offshoring. The manufacturing may come back but the jobs won't.

Not that this is stopping the government, which is signalling its intention to willingly join this global trade war on green manufacturing - and on the losing side, no less.

Wayne Swan might believe that "we have to be in it to win it" ... even if it isn't clear what 'it' is. Regardless, a far more appropriate cliché would be "if your friends jumped off the Sydney Harbour Bridge would you do it too?"

The fact that other countries are introducing green manufacturing subsidies too is precisely what makes the idea even worse than other types of industry policy.

Australia is starting from behind on manufacturing because we are a high wage, high cost country with long supply lines to the main consumers of the manufactured goods. History suggests that industry policy simply can't effectively bridge that gap.

But on top of that, we then have to counter the impact of subsidies from countries that have already started with a competitive advantage in green manufacturing.

The effect, as Productivity Commission chair Danielle Wood warned, will be to divert "jobs and capital investments from elsewhere in the economy where they could generate a higher value".

Predictably, the government has not demonstrated a willingness to take advice from the current head of the Productivity Commission - or former chairs, like Gary Banks - on its policies; preferring instead to trade in abuse and insult.

Perhaps it might listen to the supercomputer from the 1983 movie WarGames, which figured out: "the only winning move is not to play".

It is important to note that, despite the rhetoric, these policies will do little or nothing to facilitate the green energy transition.

The government is just using the cover of the public's broad support for the energy transition as a way to dole out taxpayers' money to its favoured industries and placate their union mates.

And all the while indulging the government's barely thought-out fantasy of becoming a renewable energy superpower.

The economic effect of subsidies like these is actually crystal clear. It is a direct transfer from the taxpayers in the subsidising country to the consumers of these products.

What possible benefit could there be to Australia from effectively bribing foreigners to use Australian solar panels over Chinese or US ones?

Instead, we could take advantage of the trade war in solar panels to at least try and make the clean energy transition cheaper for consumers and taxpayers here in Australia.

Increasingly politicians on both sides of politics seem to be turning their backs on the benefits of trade.

It is a rather cruel and unfortunate irony. For a long time, free trade was the issue that had the strongest consensus among economists across the political spectrum. And it wasn't because other approaches hadn't been tried.

MORE SIMON COWAN:

In fact, as economist Douglas Irwin noted in a 2020 US National Bureau of Economic Research paper, policies to restrict import of manufactured goods to boost domestic manufacturing fell out of favour with economists in the 1960s precisely because it became clear they didn't work.

At that time, Australia was one of the most closed and protected economies in the free world. It was the Labor government under Whitlam, and later Hawke and Keating, that began the process of unwinding the barriers holding back our prosperity.

People had become sick of paying higher prices for inferior goods just because they were made in Australia.

Australia became one of the freest markets in the world. Not coincidentally, we also became one of the richest.

Now, instead of continuing to reap the benefits of past wisdom, the government is in the process of putting the barriers back in place.