Against manufacturing subsidies

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Christie Romer makes all the right arguments against the special treatment of the manufacturing sector.

This theme is one of my pet peevs in Australian economic policy.

In Australia’s present case it is often framed in terms of Manufacturing v. Mining. With Mining framed for pushing up the currency and hurting Manufacturing.

Manufacturing folks are frequently heard arguing that policy should be changed to weaken the AUD, so as to boost manufacturing.

Leaving aside the many things wrong with this argument, let’s not forget the Aussie worker / consumer. The higher AUD is the primary means through which the mining boom is spread across the nation.

The stronger AUD boosts the real consumption wages of the vast majority of Australian workers. A policy to weaken the AUD is a tax on labour, as it lowers real consumption wages.


  1. Whose to decide the right level for the AUD? If the AUD is too high at these levels, unemployment should go up and the economy should weaken (both possible). In that case, rate cuts will come fast, we may even enter a recession and you’ll see the AUD go back to the long term average or even lower. But if unemployment does not go up and the economy does not weaken, then this is the right level for the AUD for now.

  2. Couldnt agree more
    Without rate cuts, the AUD could see $1.20 sometime in 2012 – which was previously unimaginable
    The rumblings will only get louder if that happens

    1. agreed – but that doesn’t change the economics. depressing the AUD is a transfer from the majority to the minority who work in manufacturing.

  3. the great German manufacturing export ‘miracle’ did not occur with an under-valued currency.

    It is a myth that to export you need a low currency. It helps.

    You cannot manipulate a floating currency anyway.

    What if the RBA cut rates to a much lower level. This plus the commodity boom would mean a large problem!!

    do these people ever think!

  4. That’s all well and good if you believe the value of the AUD reflects fundamentals. If you believe a lot of the AUD’s rise is due to rampant money-printing and competitive devaluations overseas, then perhaps allowing the structural changes being forced by the strong currency to proceed as rapidly as they are now is not so wise.

    Forex and commodity markets can turn on a dime as we saw during 2008-09. When the commodity cycle turns and northern hemisphere money-printing slows, the AUD is very vulnerable to a large downturn. The question is, will we have anything to sell the world when this happens. You don’t rebuild devastated trade-exposed sectors overnight.

    1. It is easy to figure out the cost of intervention: the RBA’s cost of funds is 25bps below their policy rate, and they are an unhedged investor, so net of FX their return is the yield on the asset they purchase (say WAY of ~1%), less their cost of funds. So say -3%

      Thus an 100bn ‘investment’ in a lower currency would probably cost about 3bn per year to carry.

      I do not see support for a 3bn annual subsidy – but i may be wrong.

      Sent from my iPad

      1. I wasn’t suggesting the RBA intervene. I have no good answers to this problem, but I object to being told that it isn’t a problem.

        We are now hopelessly exposed to the vagaries of the commodities markets, and utterly dependent on the China construction boom, where the cracks are now apparent to everyone. We have no insurance policy. We gambled all our chips on China, and if the bet goes wrong, the AUD will be below 50c in a heartbeat and we’ll be labelled “old economy” again with a shattered export sector.

        Don’t tell me there aren’t risks here and we should just have faith that the forex markets are pricing the AUD sensibly.

        1. I would never say that – there are risks, but what can we do?

          the economic forces at work are ridiculously strong. This isn’t a question of tweaking.

          I think Tsy Henry made a speech where he showed that it would take more than the full elimination of Govt spending to offset the expected impact of the mining boom.

          Sent from my iPad

      2. What can we do? Buggered if I know? Pray the heat comes out of the China construction boom sooner rather than later, and that the US recovery is real and they stop printing.

        The longer the current economic situation continues, the bigger the hole we are digging ourselves (no pun intended).

    1. Please don’t read too much into the monthly employment survey. Employment has been flat as a tack now for over a year, hovering around 11,450,000 mark.

      The MoE for these surveys is HUGE and its been bouncing around the trend by tens-of-thousands every month.

      The ABS reports 46,300 new jobs (seasonally adjusted) but at the 95% confidence level that’s anywhere between -8,700 and +101,300.

      Who knows what the ABS does for seasonal adjustments for Dec and Jan, what with Christmas shopping, school leavers and uni graduates looking for work, and the rest of us on holidays.

      Look at the trend! Its still flat. It will take several months of strong numbers for the trend to move up.

      1. You could say the exact opposite if employment fell, ie; oh but really employment may have risen! It’s an argument that doesn’t make any sense.

        There’s no doubting that the trend is pretty flat. But clearly the RBA is not going to be cutting rates if unemployment is steady to drifting lower. Strong AUD may keep inflation in check so after March qtr CPI (May meeting) is the next chance for the RBA to move now.

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