We need a lighter touch, not a heavier hand

Australia’s Treasurer, Jim Chalmers, gave his thirteenth speech on the “defining decade” this week, which he also calls the “turbulent twenties”. But other than those zingers, the speech was incredibly light on substance. So light that even a large language model was critical:

“The speech’s structure was convoluted and lacked a clear focus. The audience was left struggling to discern the main points, with the speech jumping between various topics without a cohesive narrative.

While the speech touched on critical economic issues, it failed to provide specific policy proposals to address them. For instance, the address emphasised the importance of transitioning to renewable energy but did not outline actionable policies or incentives to support this transition.”

Fair enough, too. I had to work hard to get anything at all out of the speech, which was supposed to discuss “Energy, the economy, and this defining decade”. What I found instead was the now-familiar Chalmers rhetoric calling for the heavy hand of government to guide a new, undefined industrial policy that considers a “different set and kind of economic and social challenges than the 1950s or the 1980s”:

“And as we look to the 2024-25 Budget we’ll be backing our ambition with further action ‑

Through government investment and doing more to get private capital flowing towards our priorities effectively and efficiently.

That means transforming our own industry policy, in our own way, so that our energy transformation succeeds on its own terms and contributes to a future made in Australia.”

Government investment and “doing more to get private capital flowing towards our priorities”, is code for favouritism or protectionism of some kind. Despite stating otherwise, Chalmers appears to be making exactly the same mistakes as did the architects of prior industrial policies:

“Supporting manufacturing of generation and storage technologies will ensure our supply of more than half of the world’s battery minerals finds its way into home-grown advanced manufacturing, so more of the renewable energy technologies used in our transition are made in Australia.

We will transform other industrial processes by using low-cost renewable energy to produce renewable hydrogen and its derivatives like ammonia at some of the most competitive prices in the world ‑ Which will help us unlock a future in green metals, leveraging our abundance in iron ore and bauxite to become a leading producer of green iron, steel and alumina.”

Read those paragraphs carefully: “home-grown advanced manufacturing”; “produce renewable hydrogen and its derivatives like ammonia”; “become a leading producer of green iron, steel and alumina”.

Who doesn’t want all of those goodies? The problem is they’re all ends, rather than means. I don’t know, and Chalmers certainly doesn’t know, whether Australia has, or can have, a comparative advantage in any of those industries. Chalmers doesn’t have the information needed to work out whether government investment and taxpayer-funded support for “private capital” in those sectors will create benefits that exceed costs.

Chalmers also has no personal skin in the game (and is removing some of it for “private capital”), so the incentives aren’t aligned – if he fails, he bears a cost much lower than if you or I invested in these projects. And you can be sure that we won’t hear about any failures! No, it will be nothing but ribbon cutting and media releases announcing the number of “green jobs” created, regardless of how much it cost to get them – and importantly, whether those finite tax dollars could have been better used elsewhere.

The problem with all prescriptive industrial policy is that no one can know which industries will be the green energy superstars of the future. A much better approach would be through a light touch of government – making sure the rules of the game are conducive to entrepreneurship, while taxing the stuff you don’t want – to give enterprising Aussies the best chance at success.

Alas, industrial policy of the kind envisioned by Chalmers takes almost the polar opposite approach: only the established, big end of town will be able to take advantage of the Government’s ‘partnerships’ (it’s often prohibitively costly for start-ups to apply for these things), and they will benefit greatly from whatever subsidies, tax credits, grants and subsidised loans are dished out – at your expense. Not just in higher taxes, but also from slower growth due to less capital being available for investment elsewhere.