Then there was the unexpected jump in numbers. Net overseas migration for the 2022–23 financial year hit a record 510,000 people, more than 25 per cent above the 400,000 anticipated in the May budget and more than double the October 2022 forecast of 235,000. Not only are more people arriving but fewer are leaving, especially students; the catch-up after Covid means many international students are still in the early stages of their courses and won’t return home for two or three more years.

Combined with the shenanigans of sacked former home affairs secretary Mike Pezzullo, these developments have made it easy for the opposition to conjure up an image of out-of-control migration and link this to housing shortages and other pressing issues. Immigration isn’t the cause of a housing crisis decades in the making, but the surge in arrivals does make a tight rental market even worse.

Arrival numbers would have been no lower under a Coalition government and Australia’s population would be higher if not for Covid. But facts count for little in an overheated debate. Migration is now Labor’s problem and it would be easy to construe the release of its new strategy as an attempt to wrest back the initiative on this fraught topic.

But the strategy is no knee-jerk response. It is the product of months of work, building on an expert panel’s finding that the migration program is “broken” and a report by former Victorian police commissioner Christine Nixon confirming widespread abuse of Australia’s visa system.

The strategy adds detail to the government’s early responses to those two reviews and affirms its commitment to keeping both unions and business onside. It shows a government aspiring to wholesale reform rather than bolting yet more fixes onto an already unwieldly, overloaded and outdated migration machine.

In its existing form, the system satisfies no one. Employers and migrants complain about high costs, slow processing and uncertain outcomes, while the public questions the scale and integrity of the program. In their joint foreword to the strategy, the responsible ministers, Clare O’Neil and Andrew Giles, recognise the need to restore migration’s “social license.”

The strategy articulates four policy objectives, and while they are not ranked, the tone and content of the strategy indicate a descending order of priority. Migration, it says, should first, raise living standards; second, ensure a fair go in the workplace; third, build stronger communities; and fourth, strengthen international relationships.

To achieve the primary aim of higher living standards the government wants to refine migration to boost productivity, counter the perceived impacts of an ageing population, fill skills gaps and expand exports.

One step is to reform the points test, which scores and ranks applicants for permanent skilled migration according to their age, qualifications, experience and English language proficiency. A discussion paper will canvass options that are likely to give greater weight to the skills and qualifications of an applicant’s partner and downgrade factors that are “poor predictors” of labour market success, such as studying in a regional area and fluency in a community language. The aim is to reward skill over “perseverance” so that international student graduates working in their professional fields have a faster route to settlement while graduates stuck in lower-level jobs are screened out and leave Australia.

Another measure introduces a “skills in demand” visa to replace the “temporary skills shortage” visa. This is more than a name change. The government had already lifted the threshold wage for temporary skilled migrants from $53,900 to $70,000 to ensure that these visas are not used to recruit cheap labour. (The threshold, frozen since 2013, will now be indexed annually.) New rules allow temporary migrants to switch employers and sectors more easily, which should improve productivity as these workers move to jobs where their skills are more highly valued.

Labour market testing will be simplified, employers can pay sponsorship fees periodically instead of up front, and visas will be issued more swiftly, with the government committing to a median processing time of just seven days for applicants in the top “specialist skills pathway.” This applies to workers earning at least $135,000, who will no longer have to match one of the occupations in demand identified by Jobs and Skills Australia (though the category is closed to trade workers, machinery operators, drivers and labourers).

Workers paid between $70,000 and $135,000 are on the “core skills pathway” and must still have an occupation identified as being in shortage, with a promise that these lists will be updated more frequently to better reflect rapidly changing labour market needs. Both the core and specialist pathways will offer a route to permanent residency.

The details of a third “essential skills” pathway are yet to be worked out. This option will apply to lower-paid, hard-to-fill jobs with a focus on the care economy. The government says it will “further consult” on lower-wage migration next year, but any arrangements will be sector-specific, capped in size, closely regulated and designed to maintain the primacy of Australia’s relationship to the Pacific as “a guiding principle.”

The latter is a reference to objective four of the strategy — strengthening international relationships — and we can expect further development of PALM, the Pacific Australia Labour Mobility scheme, which has its genesis in a seasonal labour program for workers from Pacific island nations and Timor-Leste. Only 3000 Pacific islanders were working seasonally in Australia in 2016, but by October 2023 there were more than 38,000 PALM participants. The original scheme was broadened from horticulture to meat processing and other agricultural industries, and then extended to encompass tourism, hospitality, retail and care. It is mostly limited to regional and rural areas, but is no longer just seasonal, with workers granted visas for between one and four years.

But the scheme remains purely temporary, with no path to permanent residency. Pacific workers can bid for one of 3000 new Pacific Engagement Visas offered annually, but success is a matter of luck. Former top immigration official Abul Rizvi has highlighted a sharp rise in PALM workers applying for protection as refugees and attributes this to dissatisfaction with their treatment in Australia. He says the “silliness” of the Pacific visa lottery will just add to PALM workers’ frustrations and suggests the government should instead help them “develop higher level skills as a pathway to permanent residence, especially skills relevant to the regional communities in which they are currently working.”

Rizvi’s sensible suggestion points to an enduring dilemma of low-skilled migration. Once workers secure permanent residency they tend to quit poorly paid jobs in remote locations and move to better-paid positions in cities. Keeping migrants on temporary visas limits their labour market mobility and ensures they stay put, but it’s a recipe for disaffection and exploitation.

The structure of the PALM scheme runs counter to the second major policy objective in the new migration strategy, “ensuring a fair go in the workplace.” By allowing temporary skilled migrants to shift jobs more easily, the government has increased their power to challenge underpayment and resist unreasonable demands. Temporary skilled migrants who suffer abuse will have six months instead of two to find an alternative sponsor and be less reliant on any single employer to support their applications for permanent residence. The contrast with the purely temporary PALM scheme that ties workers to specific employers and regions is stark.

To tackle abuse, the government has introduced a bill to make it a criminal offence for employers to misuse visa programs to exploit temporary migrant workers. This recommendation by Allan Fels’s 2019 Migrant Workers’ Taskforce was ignored by the previous government.

The idea of a “fair go” also has a domestic element. The government wants to ensure that migrants don’t displace local workers or bring down their wages. Its primary move here is to tighten entry requirements for international students to ensure that their main intention is to study, not work. The strategy erroneously calls this closing “back doors and side doors” when, in reality, Australia opened the front door wide to support the growth of education for export; unsurprisingly, international students walked through in large numbers.

New barriers are being erected. International students must pass a higher English language test and prove they have significantly more savings. They will find it harder to switch from one course to another, especially if they appear to be going backwards — by, for example, swapping from a degree to a certificate-level course. The government will prioritise visa processing based on the “risk level” of educational institutions. Applications to study at top-tier universities will sail through while visas to attend private colleges languish in the bureaucratic pipeline.

The Australian Skills Quality Authority will also have extra funding to crack down on ghost colleges, those dodgy providers that are shopfronts for obtaining a visa with work rights.

Evidence of a more stringent approach is already apparent. In 2018–19, the last full year of Coalition government before Covid, only 13 per cent of student visa applications lodged outside Australia were rejected. In 2022–23 (the first full year of a Labor administration) 20 per cent were knocked back. The change was especially pronounced in offshore VET applications, where average rejection rates grew from 38 per cent under the Coalition to 46 per cent under Labor. The perception that Dutton was tougher on border control than his successor as home affairs minister doesn’t match reality.

Labor is also winding back generous post-study work visas, which the Morrison government made even more attractive in late 2021 to help international education “roar back” after Covid. Visas will be shorter: three years instead of four for a PhD and two years instead of three for coursework masters. The eligible age limit will be reduced from fifty to thirty-five years.

When the Gillard government introduced the 485 post-study work visa a decade ago, some of us warned that it would produce a large new cohort of “permanently temporary” graduates — migrants living and working in Australia for years without any prospect of settling. This has come to pass. Of the almost 200,000 temporary graduate visa holders in Australia, most are stuck in limbo. They struggle to find jobs in line with their qualifications and do low-skill work that will never enable them to amass the points needed to qualify as skilled migrants. It makes sense to rein the scheme in.

Over time, these measures could see international student and graduate numbers decline further than they would have, which may reduce the pool of casualised and precarious labour staffing kitchens and delivering meals. On the other hand, the government has reinstated restrictions on working hours lifted during the pandemic. Students can work a maximum of forty-eight hours each fortnight, up from forty hours pre-Covid. Some will need to work more “off the books” to make ends meet, making them vulnerable to ruthless employers.

The government will also evaluate another visa category rife with wage theft, poor working conditions and sexual harassment — working holiday visas — which have morphed from a cultural exchange program into a low-wage labour scheme, especially for agriculture. The scale of abuse has repeatedly been documented over the past decade, and it’s hard to see how the program can be rehabilitated short of scrapping the second and third visas backpackers can acquire if they complete three or six months of “specified work” in regional Australia. As with the PALM scheme, linking work and visas makes young travellers beholden to employers, often in remote towns and isolated workplaces. The PALM scheme is, at least, more closely regulated.

Improved conditions for student workers and backpackers would be a significant achievement and help to restore public faith in the migration program, even if we had to pay more for our food and collect our own takeaway. Whether the proposed measures can achieve this is an open question, but Labor is at least demonstrating a level of intent that was absent under the Coalition. In the words of former senior public servant Martin Parkinson, who chaired the expert review, the migration system has suffered “a decade of almost wilful neglect.”

The government hopes to meet the third objective of the migration strategy, “building stronger communities,” by shifting the emphasis from temporary to permanent migration and providing greater clarity about who can (or can’t) hope to settle here.

The commonsense implication is that permanent migration is more conducive to building “a cohesive multicultural society.” But the strategy is silent on family migration, apart from the strange formulation that the government will support “relationships with family abroad.” That doesn’t sound promising for overseas-born Australians who want to bring parents here to live with them. Parent migration could build stronger communities but clearly runs counter to the higher-priority goals of boosting productivity, filling skills shortages and slowing demographic ageing.

The conundrum of parent visas has been left to fester so long that the shocking blow-out in applications and waiting times means many parents are likely to die before they get a visa. This is causing distress and anxiety for tens of thousands of families.

One immediate option would be to suspend new applications pending a review of the system, just as Canada did in 2011. This would halt the growth in the waiting list and buy time to figure out what to do while working through the backlog. It is cruel to keep applications open and foster false hopes.

The migration strategy draws quite a clear outline of the government’s vision for skilled migration, even if there is lots of colouring in to do. When it comes to family migration, though, the page remains virtually blank, and the government is still “exploring” what visa settings are “appropriate.”

To support all four objectives, the migration strategy promises to make the system easier to navigate and administer. This entails, among other things, merging or closing some of the one hundred “visa products” to simplify offerings, as well as adding extra staff and upgrading IT systems.

The challenge will be to find a balance between the clear regulations and procedures needed to process a high volume of visas efficiently, on the one hand, and retaining enough flexibility to fit individual circumstances, especially in compassionate cases, on the other. Whenever the migration system re-gears, some people get chewed up, including many with compelling reasons to stay in Australia. Foreign parents of Australian-citizen children, for example, will often cycle through a series of temporary visas in a desperate bid to stay close to their sons or daughters. This will get harder as visa rules tighten. It would be ironic and disappointing if attempts to streamline migration mean even more decisions landing in the lap of the immigration minister in the form of last-ditch appeals for him to exercise discretion under various “god powers.”

The strategy is pitched as a bid to get migration working for the nation: “For workers. For businesses. For all Australians.” Noticeably absent from this top-line list is a desire to get migration working for migrants. The strategy (and the ministers’ language promoting it) tends to present migrants, especially student visa holders, as highly calculating and instrumental — as people who use “back doors and side doors” to milk the system for whatever they can get or even engage in outright rorts.

What gets forgotten is that circumstances and aspirations change, especially for young adults at a formative stage of life. Students may come to Australia with every intention of leaving when they complete their courses but then discover new freedoms and possibilities that were not previously available to them. Perhaps they can openly express their sexuality, their creativity or their politics for the first time. Perhaps they find a new vocation or meet the love of their life.

Yet the strategy essentially tells young temporary migrants: please come to Australia for a few years but don’t put down any roots, or even put out feelers, unless you are pursuing an occupation in demand and can help build Australia’s economy. Not only is this unrealistic, it also shows we might be the ones who are calculating and instrumental.

As long as we rely on international students to fund our higher education system and backpackers to pick our produce, temporary migration will continue at a high level. The least we can do is be honest with temporary visa holders about their limited prospects for building a life in Australia, and the new strategy points in that direction. Yet we should recognise that this might inflict an emotional and psychological toll.

In their foreword to the migration strategy, the immigration and home affairs ministers say they want to bring migration levels “back to normal.” It’s not clear what might constitute “normal” in 2024, but a better-targeted and more efficient system would certainly be an achievement, especially if it offers greater clarity and certainty, reins in workplace exploitation, and reduces the number of migrants who are rendered permanently temporary and stuck in a state of being not quite Australian. What it won’t do is resolve the practical and ethical challenges that arise when the number of migrants coming to Australia on temporary visas is so much greater than the number who can hope to settle here. •

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The Liberal and National parties also have a big problem with climate science, as we’ve been reminded this week. A small but noisy section of their membership demands that no quarter be given in what they see as an ideological battle. In the latest instalment of the saga, an eruption among a minority of National MPs, themselves a small minority of government MPs, has propelled the government even further from reality. It would take a prime minister with a very large dollop of internal authority to drag his or her party towards a rational long-term approach — but Scott Morrison, in 2020, is not one of those.

And if Labor wins the next election, it will again be reliant on the Greens to pass legislation in the Senate (or, if it’s unlucky, the Greens plus others, as the Rudd government faced), and the minor party, especially under fire-breathing leader Adam Bandt, will drive a hard bargain. Labor, in any event, has gone cold on climate action since the sad events of last May.

Australia exports lots of coal; fossil fuel interests have deep pockets. Some of the coal we dig up is burnt here. Most of it is used overseas (counting as others’ emissions), which provides an added incentive for vested interests not only to hold Australia back from doing its bit, but also to hold back the planet as a whole. If China and India suddenly moved to 100 per cent renewables who would buy our wonderful shiny black product?

And let’s not get started on News Corp.

For these reasons and more, Australia is one of the laggards when it comes to action on climate change. Fortunately — and please don’t take this the wrong way — we only produce a tiny proportion (between 1 and 2 per cent) of the world’s greenhouse gasses (though more like 5 per cent if you take into account our fossil fuels burnt in other countries), and so our actions don’t matter that much in the scheme of things. Australia’s fire catastrophe is evidence the world is not doing enough. Nothing this country could have done over the past decades would have made a discernible difference.

That common riposte to questions about the cost of taking climate change action — “well, how about the cost of not taking action?” — is too glib by half. For the planet it’s definitely the right response, but for one small country the equation is obviously much more complicated. In theory Australia could freeload and hope that others do the right thing, and whether they do or don’t, we’re still better off.

The big majority of international elites, technocrats and heads of government, including our own Scott Morrison, know what needs to be done. Australian governments have put in place policies with far less popular support than this.

As we all know, the problem is the prisoner’s dilemma, or tragedy of the commons, or whatever else you want to call it. If each nation were actually responsible for the temperature inside its borders, those calls for a gun buyback–style response to the fires — for quick action by all Australian governments — would make sense. And overseas, even overt climate science deniers like Vladimir Putin and Donald Trump would be motivated to prioritise practicality over political expediency. (Okay, maybe not Trump.)

As it is, everyone thinks they can get away with doing little. And it works this way because each country’s contribution to solving the problem is measured by how much it reduces emissions within its borders.

But does it have to be this way?

Let’s take a step back. The most common method of reducing carbon emissions, both in advocacy and in practice, is by putting a price on carbon at the level of production. As a rule, the money raised is returned to consumers in one way or another. The price both lessens demand for the product and incentivises producers to find less carbon-intensive ways to make it.

John Howard’s 2007 emissions trading scheme would have been like that, as would Kevin Rudd’s. The Gillard government’s carbon price worked that way from July 2012 to June 2014. Once the Abbott government abolished it, to the thunderous applause of one hand clapping, Australian emissions began growing again.

But, particularly since the global financial crisis, nation after nation has baulked at doing this, or at least doing it to great effect, because the prospect of economic pain is too off-putting.

Pricing carbon at production means the widgets Australia produces become more expensive, at least in the short term. They are therefore less competitive with those made overseas, both in the domestic market and beyond our borders. To the extent that it leads to more widget production in other countries, the end result can actually be more global emissions.

Of course, it would work if all countries did it simultaneously. And if it were under an international cap-and-trade system, even better, with Adam Smith’s invisible hand working its wonders. But that’s not even close to happening.

One problem is that international frameworks, such as the Paris Agreement, talk in terms of emissions by country. Each country must lower its emissions.

For years, if not decades, some people have been suggesting a different approach, one that would all but eliminate freeloader incentives. They reckon that the measure should not be production, but consumption. Countries should aim to lower their use of goods whose production leaves a carbon footprint. Carbon should therefore be priced at consumption, not at production.

Economist Geoff Carmody was spruiking a carbon consumption tax back in 2008 when the Rudd government’s doomed carbon pollution reduction scheme was still in endless negotiation. (See his various articles here; his thinking seems to have evolved over the years to perhaps take into account emissions embedded in exports.) Under such a scheme, Australian consumers would pay a levy on goods whose production created emissions, regardless of where they are manufactured.

What would that change? It would change everything.

It would mean a domestically produced widget would be taxed the same as an imported one. That would be good for our manufacturers. And, as with the GST, our exports would leave these shores without a carbon price; it would be up to others to price them if and when they get serious about climate change.

There would be no need for the carve-outs and exemptions of trade-vulnerable industries that have characterised all carbon-pricing policies.

It would mean we reduce the emissions from producing and selling goods in Australia but don’t have an incentive to do the same with goods for export — unless and until other countries do what we do and price carbon emissions.

The tax on consumption was, to be blunt, the preferred policy of people who didn’t really want the country to be too gung-ho about unilateral action on climate change. Big business liked it. (Before the 2010 election campaign this was what people usually meant by a “carbon tax,” an alternative to an emissions trading scheme.)

It wouldn’t cut our emissions as much as pricing production would, but it would (in a small way) provide material encouragement for other countries to make inroads. And it would more likely be taken up around the world, because unilateral adoption wouldn’t be too painful. And if a tax on consumption were taken up by all countries, the outcome would be roughly the same as all countries pricing production. The more countries that did it, the greater the incentive on others to do the same.

That road wasn’t taken, and in 2020 the planet’s prospects seem bleak. Expecting countries to take responsibility for their own emissions has turned out to be unrealistic. Some are pricing carbon, but modestly. Few are doing very much, partly because they fear losing trade competitiveness.

But help may be on the way, in the form of a carbon border adjustment (or carbon border tax), mooted by the new president of the European Commission, Ursula von der Leyen. Stripped of complexity, and filling in the gaps (it’s just an idea at the moment), the plan would add one or perhaps two accessories to Europe’s current scheme of pricing carbon at production. The first is a tax (or, more accurately, an obligation on importers to buy carbon allowances) on imports that haven’t faced a carbon price in their country of origin . This would help European producers who sell domestically and already pay a carbon price. The other element, and this is only mentioned in some descriptions of the scheme, would be a subsidy for carbon exports, to eliminate the competitive disadvantage of Europe’s carbon price. If this second component were put in place, it isn’t clear whether exports to countries that do price carbon would receive the subsidy.

All told, a carbon border tax “adjusts” for the competitive disadvantage suffered by European producers because of their carbon price. It levels the playing field.

Notice that the dynamics are very similar to simply pricing carbon consumption. All widgets purchased in Europe would incur a carbon price, regardless of where they’re made. And all goods exported from Europe wouldn’t, unless the importing country priced it. Like a carbon consumption tax, it would be somewhat inflationary, but good for European jobs.

It’s more complicated than that of course. But like a carbon consumption tax, it shifts some of the burden to other countries. And (also not spelt out) it means Europe would emit more carbon than it would otherwise.

The impact on Australia, for example, might go like this. Europe prices carbon in the aluminium we export there. That would be an incentive for us to price it instead, along with aluminium sold domestically, because then our government would receive the revenue. Australia (and other countries) might choose a consumption tax (in which case the EU gets to keep the tax on the aluminium it buys from us) or (like the EU) a production price plus border adjustment. Or another combination.

One problem with a carbon border adjustment is that, even if designed to be consistent with World Trade Organization rules, it looks a lot like trade protection. The United States has indicated it would not take it lying down.

A tax on consumption would be more transparent, but that would mean totally undoing Europe’s current production-pricing arrangements. Both systems largely eliminate the freeloading incentives, and indeed motivate other countries to follow suit. Pricing carbon at production doesn’t do that.

There would have to be rules, such as not taxing others’ carbon if you’re not taxing your own. Provided it doesn’t blow up into a trade war, the border adjustment could catch on. If it did, that would be brilliant for the prospect of global climate change action.

Let the race to tax carbon begin.

And, yes, the scheme could even potentially prod our own troubled nation to lift its game. •

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The commission called the results “mediocre” and “troubling,” but for some sectors they were downright appalling. In farming, mining, construction, transport and retail, labour productivity went backwards. In other words, workers in those sectors were producing less per hour than they had the year before. The latest numbers continued a trend of weakening productivity growth that the commission dates back to 2013.

To understand why Australia’s productivity crisis is so serious, it’s worth recognising why productivity matters. Through Australia’s history, our economy has become massively more productive. Australian workers today produce nearly four times as much output every hour than in the 1960s. This has been a central driver of rising living standards.

Productivity measures how efficiently the economy turns labour and capital into goods and services. When the Australian economy becomes more productive, we are producing more output from a given level of inputs. Higher productivity creates the potential for household incomes to rise faster than the rate of inflation. A more productive economy can be more generous to the disadvantaged, can reduce its impact on the natural environment, and can play a bigger role in international affairs.

Productivity doesn’t automatically bring fairness: in recent times, workers haven’t received their fair share of the modest productivity growth delivered by the economy. But without rising productivity, wages will eventually stagnate and living standards will stop increasing. Whether your priority is longer lifespans or lower taxes, raising Newstart or building motorways, you should be in favour of productivity growth. Productivity is the engine of the economy, and right now, that engine is making a nasty rattling noise.

A few weeks after the Productivity Commission delivered its damning annual update, a group of boffins gathered together in Sydney for a conference about productivity. Convened by the OECD, a global think tank for advanced countries, the event brought together international experts to discuss the problem and suggest solutions.

For Australia, the most hard-hitting presentation came from Treasury’s Meghan Quinn, who revealed that researchers in her department, led by Dan Andrews, had been investing in a new analysis that links together workers and firms, and delving deeply into fresh data about the dynamics of the Australian economy. Since 2002, Quinn showed, the most productive Australian firms (the top 5 per cent) had not kept pace with the most productive firms globally. In fact, Australia’s “productivity frontier” has slipped back by about one-third. The best of “Made in Australia” hasn’t kept pace with the best of “Made in Germany,” “Made in the Netherlands” or even “Made in America.”

And then there’s the other 95 per cent. For these firms, productivity seems an alien concept. In the past two decades, their output per hour worked has barely risen. In other words, nineteen out of twenty Australian firms don’t produce much more per hour than they did when Sydney hosted the Olympics,

What’s going wrong? Part of the problem is that many firms aren’t investing in new technologies. Less than half have invested in data analytics or intelligent software systems. Only three in five have invested in cyber security, making them vulnerable to hacking and ransomware attacks.

It’s not just that companies aren’t investing in technology — they’re not investing in anything at all. This year, the Productivity Commission had to use a new term in its report. Typically, the commission measures how the amount of capital per worker has increased — a concept known as “capital deepening.” This year, for the first time on record, the amount of capital per worker went backwards. The economy had experienced “capital shallowing.” Given that capital deepening has accounted for about three-quarters of labour productivity growth, this is frightening.

Across the economy, businesses are cutting back on research and development and investing less in good management. The share of firms that are “innovative” is no longer growing. A survey of management practices in manufacturing firms found that Australia’s managers rank below those in Canada, Sweden, Japan, Germany and the United States.

It’s been said that you could already tell in the 1950s that Detroit would one day suffer a crash. Although automakers were thriving, the city lacked start-ups. Once the traditional car-manufacturing plants got into trouble, the city slumped. What is true for Detroit holds for cities, regions and countries across the globe: newborn firms are as critical to an economy as newborn babies are to a society’s demography, bringing fresh approaches, shaking up existing industries, and offering new opportunities to workers.

Yet for all the talk of Australia as a “start-up nation,” our new-business creation rate isn’t accelerating. In fact, our start-up rate seems to be stalling, though it’s partly masked by a quirk in the way we measure new businesses. The conventional start-up figures, which are rising, include anyone who registers for an Australian Business Number. This means that when a public servant takes a voluntary redundancy, only to come back the next month as a consultant, he is registered as a new business. Likewise when a tradie is “encouraged” by her boss to become a sham contractor. Neither of these cases involves true business formation, so each distorts the data.

The way to get around this issue is to look only at “employing businesses”: firms that hire at least one worker. On this metric, Treasury estimates that the new-business formation rate in the early 2000s was 14 per cent a year. Now, it’s down to 11 per cent a year. Strip out non-employing businesses and it turns out that our economy simply isn’t hatching new firms like it used to.

Another sign that the economy may be stagnating comes from figures on job-switching. A common myth is that changing jobs is bad for workers, and is happening more frequently. In both cases, the reverse is true. Workers who switch jobs typically experience a significant pay increase. In fact, if you study wages over a career, the largest salary rises tend to come when employees switch firms. Occasionally, job changes will be involuntary and painful — but more often they are voluntary and beneficial.

To see why, imagine for a moment that Australia instituted a rule saying that no one can switch jobs. People who don’t like their boss or want to try working in a different sector wouldn’t be allowed to make the change. Growing companies couldn’t attract workers from their competitors. Such a rule would be profoundly anti-worker. Consistent with this, Treasury’s analysis finds that a drop of one percentage point in the job-switching rate is associated with a 0.5 percentage point drop in wage growth across the economy.

While changing jobs tends to benefit workers, it is happening less often than in past decades. Forget what you’ve read about a fast-churning labour market and the end of “jobs for life”; workers are staying longer in their jobs. In the early 2000s, the rate of job-switching was 11 per cent a year. Now, it’s down to 8 per cent. It’s not the fault of employees: there are simply fewer good opportunities available. According to Treasury’s analysis, much of the drop in job-switching is because workers are less able to transition from mature firms to young firms. With fewer start-ups firms, it stands to reason that there are fewer start-up jobs.

What is to be done? Some people see productivity as a matter of cutting: cutting protections for employees, cutting environmental regulations and cutting the social safety net. Yet when the Productivity Commission was commissioned by the Coalition to compile a list of reforms that might raise national productivity, weakening workplace protections didn’t appear among its top twenty-eight recommendations. Rejecting claims by groups such as the Institute of Public Affairs and the Minerals Council of Australia, the commission’s 2017 Shifting the Dial report noted that “most of the workplace relations law works well to get the balance right between the desires of firms for a fully flexible resource and the need to protect workers from exploitation.”

By contrast, a progressive plan to raise productivity would recognise that the productivity slump has coincided with the marked rise in inequality over the past generation. Earnings inequality, household-income inequality, wealth inequality and top-income shares have all risen in Australia since the 1970s. In several advanced countries, including Australia, productivity growth has outpaced real wage growth: a problem the OECD calls “the productivity–inclusiveness nexus.” Ensuring that workers get an equitable share of productivity gains isn’t just a matter of fairness. Middle-class growth supports consumer demand, which in turn allows businesses to grow. It is not a coincidence that household consumption is languishing at the same time as real wage growth has slowed.

A progressive agenda for raising productivity would fall into three categories: investing in individuals, investing in infrastructure, and investing in institutions.

Investing in individuals: Education is a critical component of productivity. The median woman with a bachelor’s degree earns roughly $800,000 more in a lifetime than a year 12 graduate who completes no further study. For men, the lifetime difference is $1.1 million. This represents a 65 per cent earnings boost for men and an 80 per cent earnings boost for women.

Graduates are more likely to start new enterprises, and more likely to engage in social entrepreneurship. Education also has positive spillover effects, with better-skilled employees raising the productivity of their co-workers.

Over the past generation, the average educational attainment of the workforce has significantly increased, with Australians more likely to complete year 12 and more likely to attend university. But the share of people completing an apprenticeship or traineeship has collapsed, and is currently at its lowest rate since at least 2005. Scandals among private vocational education providers have eroded confidence in that system.

At a school level, completion rates are up, but we have a massive challenge with test scores. The OECD’s PISA tests show a troubling trend, with teenagers’ scores in literacy, numeracy and science declining significantly since the turn of the century. This continues a pattern that Melbourne University’s Chris Ryan and I documented some years ago, when we showed that teens’ literacy and numeracy levels had failed to rise between the 1960s and the 2000s.

At a university level, arbitrary caps on domestic student places were removed several years ago. The principle was simple: if a young person is talented enough to complete a degree, why not allow universities to make a place available? The policy significantly expanded university places, and therefore the productive potential of the economy. But since the beginning of 2018, the federal government has frozen university grants, which has effectively ended the demand-driven system. This has particularly hurt universities with expanding enrolments, and has hit students who want to study in disciplines that rely heavily on government funding, particularly engineering, sciences and allied health.

In a changing labour market, we should aspire to an Australia in which all young people get a great high school education and a post-school qualification. A much stronger focus on teacher quality would improve the performance of Australia’s schools. Pre-apprenticeships can reduce dropout rates in vocational education (currently half of those who start an apprenticeship do not finish). Restoring the demand-driven funding system would enable almost 200,000 more Australians to attend university by 2030. Many of those new students would be Indigenous, from low-income families, or the first in their family to attend university.

To be productive, people also need to be healthy. As the Productivity Commission’s Shifting the Dial report highlighted, it is also vital to ensure that the healthcare system is run as productively as possible. Medicare needs to adapt to provide comprehensive care that rewards general practitioners and other providers for managing complex cases of chronic illness. An examination of the primary care system by the Grattan Institute found that the dominant Medicare fee-for-service model encourages “reactive rather than systematic care,” and that “much greater emphasis needs to be placed on service coordination and integration for people with chronic disease.” Where interventions have been identified as low value, more effort should be put into informing healthcare providers, including through “do not do” lists. Electronic health records can also improve the productivity of the healthcare system by avoiding duplicate tests and ensuring that physicians have the information they need to make the right decisions.

Investing in infrastructure: As technologies advance, no piece of infrastructure is more important than high-speed internet. The difference between fibre-to-the-premises and fibre-to-the-node is critical for applications such as cloud computing, high-definition videoconferencing, telemedicine and distance education.

Choosing to replace the fibre rollout with a multi-technology mix has led to services that are slower, less reliable and more expensive. Time without internet connectivity is a critical source of lost productivity for students and professionals working from home. Unreliable copper services are letting many companies down. The immediate needs for the NBN sound like the advice parents might give a wayward teen: more fibre, higher standards, and proper accountability when providers fall short. It’s also vital that Australia gets the rollout of 5G right, providing the enabling infrastructure not only for smartphones but also for the Internet of Things.

Open data innovation can also be a major driver of economic growth. Four-fifths of American smartphone users use an app that relies on open data every day. The British Open Data Institute has identified open data–driven businesses that employ more than 500,000 people and turn over £92 million. New Zealand’s Integrated Data Infrastructure approach combines anonymised information on health, education and crime to offer insights to policymakers and researchers. Governments at all levels should be identifying high-value datasets that can be anonymised and made available to boost productivity.

Governments also need to improve their data policies. Reinventure’s Danny Gilligan points out that government policies on privacy and cybersecurity are like a brake, while innovation policies are like an accelerator. Yet unlike a car, governments often put the brake and the accelerator a long way away from each other. “Brakes” like the Critical Infrastructure Centre don’t spend enough time talking with “accelerators” like Data61. Gilligan contrasts the situation with Singapore, which coordinates how government engages with data-economy policies to minimise the costs and maximise the benefits. Data could be a significant source of productivity gains for the Australian economy in coming decades, but only if we get the infrastructure right.

Information superhighways aren’t the only kind of highway. Traffic congestion erodes our quality of life and acts as a handbrake on productivity. A fast-growing nation clearly needs better road networks, urban public transport projects and additional parking spaces at public transport hubs. But the answer isn’t merely to “build more stuff,” it’s to build the right stuff. Infrastructure spending must be based on economic cost–benefit analysis, not political calculus. This means giving greater focus to projects that are on the Infrastructure Australia priority list, and for which a business case has been completed.

Real social gains can sometimes come from arrangements such as value capture and public–private partnerships, but the trickiest infrastructure question is “should we build it?” not “how do we finance it?” If the benefits don’t exceed the costs, transport infrastructure is a bad idea, regardless of whether it will be paid for by today’s taxpayers or tomorrow’s taxpayers. And there’s a semitrailer barrelling towards us: as the Productivity Commission’s Shifting the Dial report notes, road-user charging is set for a shake-up whether we like it or not. Right now, the system depends almost entirely on fuel taxes, which will disappear with the advent of electric cars.

Although a smooth transition to clean energy is critical to maintaining strong productivity growth, Australia’s emissions and energy prices are rising. That contrasts with twenty-one other nations — including the United States, Britain, France and Germany — that have decoupled their carbon pollution from economic growth since the start of the century.

Inevitably, our energy system will move from old coal generation to gas generation and renewables. A more productive energy system will improve the productivity of the whole economy. Delaying the transition will only push up prices and increase pollution. As the Reserve Bank warns, climate-related losses pose a risk for businesses and households, and financial stability “will be better served by an orderly transition rather than an abrupt one.”

Straightforward energy reforms can be introduced. The Productivity Commission estimates that reforms associated with the electricity transmission network — such as critical peak pricing and the rollout of smart meters — could generate large efficiency gains. It points out that plenty of other nations have replaced piecemeal solutions with a single price on carbon. It recommends that governments more clearly articulate the trade-off between reliability and cost. And it suggests that we get pricing right, so that producers pay for additional costs they impose on the system (such as frequency management), and users pay for access to the grid (so that people cannot simply use it as a back-up system).

Investing in institutions: The third part of the progressive productivity agenda is to improve institutions so that they support a more productive economy. This starts with how government institutions support innovation. As past Australian Innovation System reports have noted, innovation and adaptation to technology are vital for productivity growth. However, the 2019 Global Innovation Index ranks Australia just twenty-second in the world. Since the global financial crisis, the volume of venture capital investment has fallen by nearly two-thirds. Innovation collaboration between government, business and academia is less common in Australia than in many other OECD nations.

The economic rationale for subsidising research and innovation is that it is not only businesses that benefits from new techniques and products — the community does as well. Federal government funding for science, research and innovation through grants and tax subsidies amounts to at least $10 billion annually. But right now, there isn’t much incentive for firms to work with universities. The government has been slow to implement its proposed Consumer Data Right. Educational bodies and disability groups have complained about the stultifying effect of a copyright law that lacks fair use exemptions. Ironically, innovation policy isn’t very innovative, since the federal government doesn’t devote enough energy to evaluating the impact of its many innovation policies.

The institutions that support trade and investment are also essential to improving productivity. As a medium-sized economy, Australia’s productivity performance is invariably intertwined with our engagement in the region. World trade is just another form of comparative advantage, letting countries specialise in what they do best. Just as your hairdresser doesn’t defeat you when you get a haircut, Japan doesn’t defeat you when you buy a PlayStation. Sellers aren’t vanquishing buyers — both are benefiting from specialisation.

We must do openness better. When it comes to trade, it’s vital to recognise that the best type of trade agreements are multilateral agreements, followed by regional and then bilateral. Bilateral deals can have benefits but can also distort trade. One way of ensuring that trade agreements are in Australia’s economic interest would be to allow the Productivity Commission to scrutinise them before signing, and again a decade after they come into force. This would provide some certainty that vested groups had not captured the negotiation process, and ensure that if we make mistakes, we learn from them.

On foreign investment policy, it would be worth reviewing the plethora of screening thresholds. It is difficult to mount an economic justification for requiring the Foreign Investment Review Board to approve a $300 million business acquisition by a Canadian investor but not a US investor. It would help the public conversation on foreign investment if the Treasury set out reasons for all significant foreign investment decisions: both acceptances and rejections.

We can also be more productive through an institutional push to improve Asian engagement. As the Committee for Economic Development of Australia notes, Australia has less outbound foreign direct investment in China, Japan, Korea, India and all ASEAN countries combined than it does in New Zealand. Among year 12 students, only one in fifty study Chinese. Fewer year 12 students study Indonesian than in 1972. AsiaLink found that more than half of all ASX200 board members demonstrated little or no knowledge of Asian markets. If we are to grow services exports to our region, a higher level of Asia literacy is essential: from the classrooms to the boardroom.

And then there are the institutions that govern markets. In uncompetitive markets, firms have a weaker incentive to pursue productivity gains. One British study found that a 25 per cent increase in market concentration leads to a 1 per cent fall in productivity. Another study attributed about one-fifth of productivity growth to better competition policy.

Over recent decades, several sectors have become significantly more concentrated. The annual volume of mergers has increased fivefold since 1990. At the same time, as we’ve seen, the new-business formation rate has fallen. The result is a significant increase in market concentration across key industries in Australia. One rule of thumb is that a market is excessively concentrated if the largest four firms control more than a third of it. Under this definition, ANU’s Adam Triggs and I found that over half of Australian industries are overly concentrated. In department stores, newspapers, banking, health insurance, supermarkets, domestic airlines, internet service providers, baby food and beer, the biggest four firms comprise more than 80 per cent of the market. The World Economic Forum’s Global Competitiveness Report found that Australia does badly on “the extent of market dominance,” ranking us fifty-third in the world.

Compared with many other countries, penalties for anti-competitive conduct in Australia are too low, and our competition watchdog is underfunded. Unlike in other countries, the Australian Competition and Consumer Commission lacks a market studies power, meaning it can’t use investigatory powers to explore public interest issues such as pricing discrepancies and increased market concentration. And after approving a merger, the commission has no systematic process of deciding whether it made a mistake. Like a coach who watches the video replays, post-merger reviews of productivity, wages and prices could help improve decisions in the future.

Tax institutions matter too. Good tax reform involves closing loopholes. As the late Harvard economist Martin Feldstein liked to point out, winding back tax concessions raises revenue more efficiently than increasing tax rates. In economic jargon, closing loopholes has a lower deadweight cost than raising rates. Yet, as the 2019 federal election showed, the economics are easier than the politics. Every loophole in the personal and corporate tax system has its ferocious defenders. If Australia wants to increase productivity, it needs to consider whether it can do so with a tax system that has more holes than a block of Swiss cheese.

Another key set of institutions are those governing management quality. Firms with a healthy management culture are places where employees look forward to arriving at work, where people respect one another, and where diversity flourishes. The best companies listen to their employees, implement good ideas regardless of their origins, and aren’t afraid of change.

The quality of management directly shapes the ability of businesses to adapt and innovate. Managers who lack appropriate technical and personal skills can’t provide the leadership that their firm needs to find continual productivity improvements. Managers who face overly short-term incentives may fail to focus on sustainability and longer-term productivity gains. Discrimination and unconscious bias may lead organisations to overlook talented applicants for appointment and advancement.

There are many creative ways companies can draw on the ideas of their workforce. In one large New Zealand dairy company, for instance, the union initiated a management improvement system with the aim of boosting productivity. Workers are trained in productivity measurement, and the concepts underpinning productivity growth, such as change management and improved teamwork. From their first day on the job, they are encouraged to take responsibility for raising quality, reducing waste, and even considering whether new products can be made with material that is currently being discarded. Managers play a role more akin to coaches than commanders, urging workers to think about improving the way the firm is run. The firm raised its output and quality, but without any loss of jobs.

On a systemic level, a number of German companies foster productivity growth by having worker representatives on company boards. There is even a word for it — Mitbestimmung — meaning worker participation in a company’s decision-making. Many of these firms find that a less confrontational approach produces significant efficiency gains. This occurs to some extent in Australia through our industry superannuation system. Industry superannuation funds are established jointly through employer and employee representatives, and as they become significant investors they have the ability to encourage corporate managers to make better long-term decisions.

There is some evidence that employees in worker-owned firms, such as cooperatives, are more productive and more satisfied. Government policy could do more to foster the growth of cooperatives and mutuals by facilitating greater access to capital for such firms, and access to government grants, particularly for Indigenous cooperatives under the Indigenous Advancement Strategy program.

Productivity gains also need to be shared. Just as business owners would have little incentive to invest in productivity-boosting improvements if none of the benefits translated into higher profits, so too workers have less incentive to support measures that increase productivity if they do not lead to higher wages.

In the 1970s, real wage growth outpaced productivity gains. Economists called it “the real wage overhang,” and the solution was to moderate wage growth so that it came back into line with labour productivity. Today, the economy faces the reverse problem. Even the modest increases in labour productivity that the economy has been producing haven’t flowed into workers’ pay packets. Australia is now experiencing a “real wage underhang.”

As in other nations, this decoupling of wage gains from productivity growth has led to a fall in the labour share of national income. Some estimates suggest that the drop in the labour share since the 1970s might have been as large as 15 percentage points.

One of the theories for the drop in the labour share is that monopolies don’t need as many employees. As economist Jan Eeckhout argued at a recent Reserve Bank conference, “market power depresses the demand for labour: firms set higher prices and therefore they produce less output, for which they need less labour. For the labour market to be in equilibrium, the economy moves along the upward sloping labour supply curve until a new, lower wage is obtained.” Other research presented at the same conference found that the wage slowdown was especially pronounced in sectors that don’t face international competition. Economists have long known that monopolies hurt consumers — now it appears they can harm workers too.

Left unchecked, this trend threatens to undermine the incentive for employees to continue to pursue productivity gains. A more collaborative approach to industrial relations is likely to be in the long-term interests of capital as well as labour. As economist Saul Eslake points out, corporate managers aren’t judged on their share of profits but on their actual profits. Firms would be better with a smaller share of a growing pie than a larger slice of a shrinking one.

Government institutions often pay lip service to evidence-based policy. Instead, they’re often driven by the idiosyncratic ideas of a few people in charge — what has been called “eminence-based policy.” In my book Randomistas: How Radical Researchers Changed Our World, I argue that agencies should be more modest about theories, and more willing to rigorously evaluate programs. One way of doing this would be to systematically conduct randomised policy trials, using treatment and control groups to test government programs in the way that companies test new pharmaceuticals. Already, randomised trials have provided unexpected insights about how to reduce recidivism by drug offenders, how to use video feedback in teacher training, and how to encourage new-business formation in developing nations. Building a better feedback loop helps drive continuous improvement in the productivity of government.

Too often, Australians see productivity as a dirty word — synonymous with working harder, rather than working smarter. But productivity should lead to a better quality of life, in which people have more choices in the workplace and more opportunities to spend time with friends and family. The path towards higher productivity should also allow us to live in a cleaner environment, and to be more generous to the needy. Tackling major challenges, from gender equity to traffic congestion, is easier in a highly productive economy.

Economists talk about the “rule of seventy-two.” If you want to know how long it takes to double living standards, just divide seventy-two by the growth rate. This means that a 2 per cent growth rate doubles living standards every thirty-six years, or about once a generation. But a 4 per cent growth rate doubles living standards every eighteen years, or twice a generation. That’s why we should invest in individuals, infrastructure and institutions, to lay the groundwork for lasting improvements to Australia’s productivity growth rate.

Australia doesn’t have to choose between fairness and productivity. We should be aiming to achieve inclusive growth by sharing productivity gains across the community. This not only creates greater wellbeing but also supports ongoing reform. If an elite cabal captures all of the benefits of reform, its members should not be surprised if the next round of reforms meets a public backlash. The goal should be to raise productivity to the benefit of all Australians. •

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Chart 1 shows the pattern of employment in Australian manufacturing from 1966 onwards. After reaching a peak of 1.38 million in 1973, employment declined to 870,000 by 2017. But then came a turnaround, with a net addition of 85,000 employees in the past year.

Chart 1: People employed in manufacturing in Australia, August 1966 to August 2018 (Labour Force Survey original data)

Note: The break between 1984 and 1985 reflects a change in official classifications.
Source: Australian Bureau of Statistics, Labour Force, Australia, Detailed, Quarterly, 6291.0.55.003, Table 04; Australian Bureau of Statistics, Labour Force Australia Historical Summary 1966 to 1984, 6204.0, Table 20.

The same pattern is evident when we look at manufacturing’s share of total employment in Australia. In 1966 it was 25.5 per cent. It declined to just 7.1 per cent by 2017, before rising to 7.6 per cent in 2018.

Chart 2 uses quarterly data to look in more detail at employment in manufacturing over the past decade. The growth in employment commenced in August 2017, and by August 2018 employment in manufacturing had returned to the same level as in November 2010.

Chart 2: People employed in manufacturing in Australia, third quarter 2008 to third quarter 2018 (Labour Force Survey trend)

Source: Australian Bureau of Statistics, 6291.0.55.003, Table 04.

Before getting too carried away by a renaissance in manufacturing, though, a cautionary note is necessary. Figures from the new Australian Bureau of Statistics Labour Account don’t show the same jump in manufacturing employment. (According to the Bureau, the Labour Account uses “the macroeconomic framework and statistical techniques used in the Australian National Accounts to help address the inconsistencies, scope gaps, frequency and timeliness shortcomings of labour data drawn from a variety of business and household surveys and other administrative sources.”)

Chart 3 presents the numbers for employment in manufacturing from both series, the LFS and the Labour Account. For the period from the second quarter of 2017 to the second quarter of 2018, the LFS shows an increase in employment of 54,600 persons whereas the Labour Account reports just 7300.

Chart 3: People employed in manufacturing in Australia, third quarter 2008 to third quarter 2018 (Labour Force Survey and Labour Account trends)

Source: Australian Bureau of Statistics, 6291.0.55.003, Table 04; Australian Bureau of Statistics, 6150.0.55.003, Table 4.1

But both series show similar increases in total employment over the same period — 335,100 in the LFS and 372,600 in the Labour Account. The implication is that increases in employment attributed to the manufacturing industry in the LFS are being attributed to other industries in the Labour Account.

Chart 4 shows the main industries where the two data sources differ in attributing employment growth between the second quarter of 2017 and the second quarter of 2018. Whereas the LFS attributes 16 per cent of the growth in total employment to the manufacturing industry, the Labour Account says it is only responsible for about 3 per cent. By contrast, construction, education and training, and administrative and support services explain much larger shares of the increase in total employment in the Labour Account than in the LFS.

Chart 4: Share of increase in total employment accounted for by selected industries, Australia, second quarter 2017 to second quarter 2018 (trend)

Source: Australian Bureau of Statistics, 6291.0.55.003, Table 04; Australian Bureau of Statistics, 6150.0.55.003, Tables 1–20.

Of the main two likely reasons for the difference, the first is sampling variability. “After adjusting for conceptual and scope differences between data sources,” says the Bureau, “a statistical discrepancy remains between the number of filled jobs as reported by businesses and the number of filled jobs as reported by households. These discrepancies represent the cumulative impact of data source error, including survey error, and modelling error.” It is unclear, however, whether sampling variability can explain such a large difference in manufacturing employment.

The other potential reason relates to differences in how employment is calculated at the industry level. In the Labour Account, “the number of employed persons is the sum of those holding main jobs in the industry, plus those holding secondary jobs after adjusting for double counting (i.e. for persons holding multiple jobs in the same industry).” The LFS only counts an individual’s primary job.

This means that the LFS and Labour Account would differ where there is a change in the number of workers who have a seconday job in that industry. On that basis, the different estimates of changes in manufacturing employment could be explained if, in the past twelve months, there was an increase in the number of workers whose main job is in manufacturing and an equal-sized decrease in the number of workers with a secondary job in manufacturing. But Labour Account data suggest little change in either series between 2017 and 2018.

In other words, these different estimates of the change in manufacturing employment between 2017 and 2018 are something of a puzzle at this stage. But they do suggest the need for caution in interpreting estimates from the LFS.

Changes in employment over the past twelve months have not been uniform across manufacturing industry sectors. Roughly speaking, two types of experiences can be identified. First, there are several sectors (see Chart 5) in which employment has rebounded in the past year after decreasing between 2008 and 2017. Second, there are other sectors in which employment has continued to decrease after 2017.

Chart 5: Rising and falling sectors: people employed (thousands) in Australian manufacturing industry, selected sectors and years (original data)

Source: Australian Bureau of Statistics, 6291.0.55.003, EQ06.

Finally, the story by state is also uneven. Employment has rebounded in the manufacturing industry in New South Wales, Queensland and Western Australia after 2017, but in Victoria, South Australia and Tasmania it has either continued to decrease or risen only minimally.

Much of these differences in state-level changes in manufacturing industry employment appear to be explained by the make-up of employment across states. What appears to differentiate Victoria most from New South Wales and Queensland is not an absence of growth in employment in sectors such as food, textiles, clothing and footwear, and machinery/metals production, but simply the much larger negative impact of decreases in employment in the transport equipment sector. South Australia has been adversely affected in the same way, and has not had the benefit of strong employment growth in the machinery/metal production sectors. •

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Australia acquired a large aluminium industry on the back of the oil price increases that crippled Japan’s smelters in the 1970s. Companies were attracted here by the offer of cheap electricity from new generators, which had been encouraged by federal treasurer Phillip Lynch. In effect, state governments were encouraged to borrow with Commonwealth backing and then compete with one another to offer the lowest-cost power.

In Queensland, the obvious candidate to set up an aluminium smelter was Rio Tinto, which had been trying to establish bauxite mining operations at Weipa since 1957 and had set up an aluminium refinery at Gladstone a decade later. Boyne Island smelter, the largest in Australia, took shape from 1977; despite a weak global market for aluminium, a consortium headed by Comalco (a Rio subsidiary) was in place by 1979. The first potlines at Gladstone smelted alumina from the nearby refinery in 1983.

Also opened in 1983 was Tomago Aluminium’s smelter in the Hunter Valley of New South Wales, part-owned by Rio Tinto. With backing from CSR and the French company Pechiney, Tomago beat off a BHP-led consortium that had also planned to base its operations in the Hunter, close to the state’s major coal-fired power stations. These days, Tomago is said to account for 12 per cent of NSW electricity consumption.

While the NSW deal was swung in quiet negotiations between premier Neville Wran and Pechiney’s Xavier Nosten, Rio’s operations in Queensland had been shadowed by controversy right back to 1970. That was the year state parliament first debated how a Comalco share issue had been taken up on preferential terms by a number of cabinet ministers and senior opposition politicians.

But the most publicly controversial deal was Victoria’s. There, backed locally by Western Mining Corporation, Alcoa reached an agreement with the Hamer government’s state development minister, Digby Crozier, in 1978. Alcoa chose to site its new smelter in Crozier’s electorate at Portland, on the South Australian border. Critics of the deal, notably state Treasury, highlighted the cost of locating a power-intensive industry so far from Victoria’s coal-fired power stations in the Latrobe Valley, east of Melbourne. But there was an even bigger cost problem.

Unlike deposits in New South Wales and Queensland, Victoria’s coal was of very poor quality. Also unlike its northern neighbours, Victoria had no easy way of significantly increasing the supply of electricity. To meet such massive new demand, it had to build very large new turbines. Yet Crozier offered prices based on the prevailing cost of power in Victoria. When the details of Alcoa’s deal leaked, power pricing and the overall bill for taxpayers fuelled a controversy that ran through to the 1982 state election, which saw a heavy swing deliver government to John Cain’s Labor Party.

Labor took a close look at Crozier’s deal but quickly discovered that Alcoa was on strong legal ground. Unable to change the terms of the contract, cabinet sought to decorate the pig with some lipstick by taking a notional profit share based on plainly optimistic aluminium prices. A decade later, when Labor was itself tipped out in a heavy swing to Jeff Kennett’s Liberals, the new government’s Commission of Audit reported that the thirty-year life of Alcoa’s deal would cost Victorians billions of dollars. Treasurer Alan Stockdale tried to follow up with a renegotiation, but to no effect.

When Kennett and Stockdale privatised Victorian power stations and other assets, they obtained extremely high prices. The subsidy to Alcoa stayed on as a $114 million annual charge to consumers. In 2010 Alcoa signed a supply contract for power to 2036 with Mitsui, the then owners of Loy Yang A power station. Remarkably, the subsidy was topped up with another $240 million in 2017 after the original bulletproof Alcoa contract expired and the company began talking about closure.

Gladstone power station was brought online in 1976; the Queensland government approved an expansion two years later, and in 1995 the power plant was privatised. (Rio Tinto is now part-owner.) Boyne Island smelter began construction in 1979 and opened in 1982. New South Wales’s Eraring Power Station came on stream in 1982, a year before Tomago Aluminium began operations. (Eraring is owned now by Origin Energy.) Loy Yang A’s four electricity turbines were commissioned progressively from 1984 to 1988, and the Portland smelter came online from 1986 to 1988.

In other words, Australian governments financed large increments of power supply in the 1980s to meet the demands of aluminium companies for new smelters. The pricing of power and other terms were secret — and largely remain secret — except for the Victorian deal. Victorian government decisions effectively maximised the public cost of subsidising aluminium, to a total of $4.5 billion on some estimates. But New South Wales and Queensland also built new power stations in line with what were (and are) very large claims on their grid — and power prices increased unexpectedly and very significantly in the years that followed.

Amid the hubbub of rhetoric over energy policy, the economic frailty of aluminium smelting barely gets a mention. Yet we know that subsidies are deeply entrenched globally in this Russian- and Chinese-dominated industry. We also know — because it has happened — that governments are willing to overlook the economics and give smelter operators even more public cash, Alcoa’s 2017 deal being the prime example.

There is no reliable way to forecast when power stations run out of useful life. Wallerawang, in New South Wales, closed in 2015 after thirty-eight years’ operation, but Redbank, in the same state, was shut down in the same year after only thirteen years’ service. One sign of where we are headed with ageing plant was this year’s tightness of supply in New South Wales, when units at five NSW generators went down for maintenance. Tomago Aluminium was forced to accept several days’ downtime. Smelters need to operate around the clock, so that incident naturally provoked Tomago management — who naturally blamed renewables.

According to Tomago chief executive Matt Howell, Australia’s energy system is at a crisis point because it is losing baseload generation needed for heavy industry. “This is a direct result of renewable energy hollowing out the baseload generation in this country,” he told the Australian. There’s another way of putting that argument: no one wants to build baseload, coal-fired generators.

Of course, Australia’s aluminium smelters could deal with the problem by buying or building their own supply. The bulk of Rio’s power comes from its own power station, yet Boyne cut production and staff in 2017 after a jump in spot-market electricity prices. Boyne had earlier rejected a fixed-price power contract, saying it was too high. It would seem clear, from what Alcoa has done and what Rio is saying about Tomago and Gladstone, that the largest consumers of coal-fired power in Australia do not have a sustainable commercial case for investment in their essential input: coal-fired power.

History would suggest that we will hear much more yet about the national imperative for public investment in coal-fired power. •

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When the news hit the markets, the dollar plunged below US70 cents. But are the figures really as bad as all that?

No: large parts of Australia, including such out-of-the-way places as Sydney and Melbourne, are actually doing quite well. Where output is crashing, above all, is in the construction of new mines, gas fields and associated facilities in remote parts of Queensland and Western Australia.

Just as the growth figures gave us a misleading picture during the mining boom of how the mainstream Australian economy was faring – when in fact it was being hammered by the high dollar – these figures understate how much mainstream economic activity is returning now that the dollar is back around its long-term average levels.

First, a boring technical note. The conventional seasonally adjusted measures are not the best ones to use, because they bump around as a result of measurement problems. The Bureau of Statistics tells us to use its trend measure, which smooths out those bumps. This time that doesn’t make much difference – trend growth for the year to June was 2.2 per cent – but as it is a better measure, the figures cited here are trend figures.

The Bureau measures GDP in three different ways, tracking spending, production and incomes and then averaging them out. The spending measure is the most fun to look at, because it tells you what households, governments and businesses are doing. The Bureau sums all that up in a measure called domestic final demand, then adds exports and changes in business inventories, and deducts imports, to work out GDP.

Domestic demand is a pretty good measure, and it looks even worse than GDP: it grew by just 1.2 per cent last year, on top of growth of just 0.9 per cent the year before, and 0.8 per cent the year before that. With population growth averaging 1.5 per cent a year over that time, those figures look sick. Spending per head was flat last year, and is down 1.6 per cent over the past three years.

But suppose we divide domestic demand into two parts: engineering construction and everything else. Engineering construction is the story of the mining boom: it grew by an incredible 128 per cent in just two and a half years between early 2010 and late 2012 – and has slumped back by a third since then, falling 21 per cent last year alone. So the mining investment boom has bust, as the wiser economists always said it would.

But how about everything else we spend money on? Our spending on Everything Else grew just 1 per cent in 2012–13, but accelerated to 1.8 per cent in 2013–14, and then to 2.6 per cent in 2014–15. In the first six months of 2015, it was growing at an annualised rate of 3.4 per cent. Is that evidence of a weak economy? Don’t think so!

What is pushing it along? Consumer spending makes up a bit over half of it, and it’s kept growing at a decent clip: 2.6 per cent in the past year. The apartment building boom is certainly doing its bit: new housing investment is up 15 per cent year-on-year in the June quarter. Basically, we’re now building four new homes for every three we built in 2012.

Then there is a surprise source of growth: the Abbott government. Having abandoned any serious attempt to get the budget back into surplus, the government has increased its own-purpose spending by 4.7 per cent over the past year (excluding its transfers to us and the states), the Bureau estimates, on a combination of defence equipment, infrastructure and routine activities. It also estimates that taxes grew just 3.6 per cent in the same period, and on its preliminary estimate the 2014–15 budget deficit was $38.1 billion, only marginally less than the $39.9 billion run up in 2013–14.

But the big source of growth in Australia today is exports, which grew by 5.3 per cent in volume over the past twelve months. And while the slump in coal and iron ore prices means mining companies are getting less for what they sell, the lower dollar means other industries are getting much more – and the pressures of an overpriced economy have eased remarkably.

Take tourism. Tourism Research Australia reports that after the years of stagnation when the high dollar priced us out of global markets, the number of overseas visitors increased 7 per cent in 2014–15, and the amount they spent increased 10 per cent. And while there was a welcome rebound in tourists heading to depressed tropical north Queensland, the big winner was Melbourne, where visitor nights and total spending alike swelled 16 per cent year on year.

Take agriculture. Rural exports in the first half of 2015 grew 4 per cent in volume from a year earlier, but 10 per cent in value. Or services: the total value of services exports shot up 7.4 per cent in the first half of this year, and the value of all those professional, financial and business services exported swelled 10.5 per cent. All that money comes back into the community.

Take manufacturing, which had been flattened by the high dollar. The Bureau estimates that after manufacturing output had shrunk for fourteen quarters in a row, it is now growing for the first time since 2011. Manufactured exports in the first half of 2015 grew just 2 per cent in volume, but 9 per cent in value, thanks to the dollar’s fall.

Most startling of all are the Bureau’s estimates of growth in demand in each state. Its table now shows Victoria at the top of the growth ladder, with total spending in the state up 3.9 per cent year on year in the June quarter (and that’s in volume, not value). It was followed by New South Wales (2.6 per cent), South Australia (1.7), and a limping Tasmania (0.5), while the mining investment bust sent demand falling by 2.4 per cent in Queensland and 2.6 per cent in Western Australia.

There is still a lot of water to flow against our bridge. Mining investment still has a long way to fall, and that will have some impact in the rest of the economy. The car industry will still close over the next year or two. China’s bubble of excessive investment has burst, and that too will drag us back. And some day, some federal government is going to have to get serious about economic reform and fiscal repair.

Even so, when you look closely at these figures, they show the economy is in much better shape than we had thought. The real problem was always the high dollar; it just took policy-makers a long time to realise it. Now it is gone, and the economy is flowing again. It helps explain why jobs have grown so much in recent months. And it helps explain why the Reserve Bank sees no need to cut interest rates again. •

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Hidden Innovation sets out to demonstrate the breadth and depth of innovation in those industries, which are grounded in the humanities, arts and social sciences. For the most part, Cunningham argues, innovation in the creative industries is hidden from view by technological innovation, which is grounded in the sciences, technology, engineering and mathematics.

Cunningham is well qualified to pitch his case. He is the director of the ARC Centre of Excellence for Creative Industries and Innovation, and was instrumental in “rebranding” the humanities, arts and social sciences at the Queensland University of Technology as the “creative industries,” and in establishing a Creative Industries Precinct in partnership with the Queensland government as part of the Smart State innovation policy during the 2000s. Cunningham draws heavily on that experience in the course of Hidden Innovation.

A point of departure for the book is C.P. Snow’s concept – introduced more than fifty years ago – of “two cultures,” which described a divergence in the world views of science and the arts. Since then, according to Cunningham, science has become “so closely associated with, and regarded as the wellspring of, the advancement of knowledge and technological progress that the concept of innovation has been virtually soldered to science.” In turn, innovation in the humanities and creative arts has become invisible to the community in general, and policy-makers in particular.

Another point of departure is a typology of four models for the relationship between the creative industries and the rest of the economy, each of which invites a distinctive policy approach. Two of the models are long-established and well understood: the first, grounded in the idea that the market economy fails to adequately support the arts, provides a rationale for public support to keep these activities alive; the second acknowledges that many creative industries – such as the movies, TV shows and games consumed by my fellow passengers – are mature industries, which simply require regulation to ensure public standards and market-competitive conditions.

The third and fourth models are newer and less widely known. The third sees the creative industries as drivers of growth across the whole economy – through their creation of design solutions, for example. This model would call for what Cunningham calls an “investment model of policy response.” The fourth model, which Cunningham frames in terms of “innovation,” proposes that the creative industries are part of the “innovation system of the broader economy, originating and coordinating change in the knowledge base of the economy, as much on the demand side as the supply side.”

Cunningham subscribes to the fourth model. In his view, long-term structural changes are making creative industries more pivotal to the economy as a whole than was once the case. He describes this process as the “culturalisation” of the economy, a concept coined by the English sociologists Scott Lash and John Urry. This means not only that cultural products and services – such as social networking sites and mobile phone apps – are a growing part of the economy, but also that cultural processes increasingly inform the rest of the economy.

In turn, governments are becoming more engaged with innovation through creative industries. The reworking of the OECD’s two innovation “bibles” – the Frascati and Oslo manuals – is a case in point. The creation of the ARC Centre of Excellence for Creative Industries and Innovation is another.

In this context, Hidden Innovation elaborates on four policy fields. First, it addresses creative enterprise. Here, Cunningham describes the blurring of established distinctions between the amateur and the professional through the “monetisation” of online video and the “socialisation” of creative enterprises across diverse media platforms. More generally, he observes the “exponential increase in creative expression and communication facilitated by the explosion of social media.” This is accompanied by “threatening crises in the business models of the established mass media,” notably music, newspapers, film and broadcasting.

Second, Cunningham addresses “public service media,” formerly known as public service broadcasting. Following Mark Twain, he declares that rumours of the death of public broadcasting have been exaggerated. On the contrary, public broadcasters have enhanced their activities and profiles. SBS’s “high-concept, explicitly tendentious social documentary broadcast programming” is one example. ABC Online, which began on “the smell of an oily rag” and is now one of the top five websites in Australia, is another.

Third, Cunningham considers creative labour. Here he wades through a swamp of empirical evidence to determine whether creative labour is precarious or growing. He concludes it is both. Creative workers manage this tension “by balancing between a range of labour conditions – for example, by pursuing a precarious artistic practice while holding down more secure employment.” I have heard Robyn Archer describe her career as a festival director in precisely these terms.

Finally, Cunningham discusses creative cities. A key point of reference here is the work of the American scholar Richard Florida, who argues that cities need to make their amenities more attractive to creative workers. Cunningham thinks that Florida is simplistic, but clearly likes the idea that good policies can promote creative industries.

Cunningham draws the book together with a chapter on “policy and research praxis.” The policy challenges, he says, are “knotty and difficult.” Cunningham proceeds to provide three case studies of “programs that have brought innovation and the creative industries together,” drawn from Australia, New Zealand, Britain and Finland. The case studies are not compelling, so the book ends not with a bang, but a whimper.

Hidden Innovation is an important book. As Cunningham observes, innovation policy is heavily weighted towards science and technology. It routinely overlooks the importance of creative imagination. Sure, my fellow passengers depend on technology to deliver the creative industries to their seats, but the technology is nothing without content. Cunningham provides a thoughtful and detailed exposition to support the case for the creative industries in Australia.

Yet Hidden Innovation takes too much for granted. Cunningham never really establishes that the humanities, arts and social sciences are the driver of innovation in the creative industries, for example; he simply assumes it. Early in the book he acknowledges that the relationship between organised science and industrial innovation has changed over time. I’m sure that the same is true for the relationship between the humanities and creative innovation, yet he simply doesn’t explore this relationship.

Similarly, he never really establishes why his preferred model for understanding the relationship between creative industries and the larger economy – the “national system of innovation” model – is so much better than the three alternatives. He clearly thinks the debate is done and dusted.

Cunningham does provide references to his other writings for readers who want to understand the debate better, but this is asking too much of the reader. The whole book is constructed on the basis of his preferred model. He needs to make his foundations stronger if he wants the reader to stay with him.

I think that Cunningham takes so much for granted because – when all is said and done – he is writing for his colleagues in the humanities in general, and media, cultural and communication studies in particular. The book is not for cultural entrepreneurs, artists, scientists, policy-makers or a general audience.

Cunningham gives it away early in the book when he describes how humanities scholars are often “suspicious of the invocation of innovation.” They see the idea of creative industries as “a kind of Trojan horse,” corrupting culture with the values of “neoliberal hypercapitalism.” Hidden Innovation is fundamentally an engagement with these scholars, although I would be surprised if it changed their minds.

On account of its focus, Hidden Innovation misses the opportunity to engage with a wider audience, and innovation in the creative industries will stay hidden for longer than might otherwise be the case. •

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