Bailouts buy time, but for whose benefit?

14/01/2009 - 22:00


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Are the federal government's bailout packages focused on the wrong industries?

Bailouts buy time, but for whose benefit?

AS we enter the second half of 2008-09, the year of the bailout and government intervention, it is timely to ask ourselves what it is that we want our elected representatives to achieve by spending our taxes in this way.

We've already seen our banks and car industry bailed out because they are too important to lose.

It's hard to argue against the former. Our banking sector is heavily regulated and pays a certain price due to its important place in the economy. When the disaster was looming I felt bank guarantees were a reasonable precaution, given the global mood.

But I'm a little less impressed with the bailout of the car industry.

While there are economic arguments for having vehicle manufacturers in Australia - such as the impact on the balance of trade and the retention of sophisticated manufacturing skills as a national asset - I struggle to see the big benefits.

In fact, all I see is a cycle of bailouts or handouts broken by short periods of underwhelming innovation. Where is the great Aussie car adapted by our difficult conditions? The most popular outback vehicle is Toyota's imported LandCruiser.

A lot of local research dollars have been spent on solar-powered vehicles in Australia, but we have yet to see any of that incorporated into locally manufactured cars

In fact, if the Australian car industry disappeared tomorrow, it would leave little in the way of a legacy.

In my view, if industries are going to ask for protection against the real forces of competition they need to be offering more than a few jobs in some sensitive electorates in the good times as compensation.

Personally, I'd let the market dictate terms and direct capital to where it is being used; otherwise you are simply robbing Peter to pay Paul.

Banks and cars are the obvious cases, but there are plenty of other examples.

The housing industry has lobbied hard for the special benefits to first homebuyers to help them get into the market. It argues, quite rightly, that homes are out of reach for most young people wanting to start out. The industry also argues, wrongly, that it is some sort of engine room in the economy. In my view, house building reflects a strong economy; it doesn't drive it.

In the good times the industry gorged on first homebuyer grants. Now it has more.

Housing builders are especially privileged in that a first homebuyer who chooses to build a house can receive as much as $21,000 from the government. That is a huge amount of money.

To me it seems reckless to entice someone to make one of the biggest financial commitments of their lives at a time of economic crisis.

When I look at the new project homes being advertised for first homebuyers I ask myself whether someone just starting out really needs four bedrooms and an audio-visual theatrette.

Are we really helping first homebuyers or are we making them the front-line soldiers in the war against the economic downturn? Do they realise that's what they are?

Of course, the housing industry will argue that it was overtaxed and under-serviced by bureaucracy in the good times. That is certainly the case but, the more the industry seeks bailouts veiled in the language of helping the so-called underprivileged, the less right it has to argue it is overtaxed when the good times come around. You can't have your cake and eat it.

I realise that everyone has become very interventionist since the global financial crisis erupted and fears of widespread depression loomed.

But I fear the long-term impact of bailing out industries that won't add to the economy in the next cycle. For instance, why do we favour homebuilders over our minerals explorers, which have long sought government support through special tax structures?

I would argue that bailing industries out now simply sets them up for failure in the future.

I have always argued that the best form of support government can provide is to tax its citizens and corporations at the lowest possible rate and allow that additional capital to flow where it is most needed.

Industry FUNDS WIN

SPEAKING of special privileges, news that the Australian Industrial Relations Commission has favoured some industry funds by making them the default superannuation choice in certain awards is of great concern.

Many in the sector believe that, due to the burdens of bureaucracy, cost and laziness, this decision means that much of the 9 per cent mandated superannuation money will flow to these funds because, as a default choice, they represent the path of least resistance. So much for the concept of choice.

This is a huge windfall for a sector I am already suspicious of.

My first suspicion is that these industry funds are not as efficient as they say they are. They have spent huge amounts of money advertising how their lower fees lead to better long-term performances.

But many industry funds have also been heavily exposed to infrastructure investments, which are much less transparent than typical retail investment funds that concentrate on shares and bonds. As the investment sector deals with the seismic shift in the markets, expect heavy losses to emerge in infrastructure.

Another, much darker, suspicion is that some of these industry funds are aligned to political forces - such as unions or particular industries - which means they may find it hard to separate their investment philosophies from other ideologies.

I hear alarm bells ring when the federal government, via the AIRC, decides to favour such a segment of the economy.

Is the government directing super money towards some organisations run by like-minded people? Possibly even its buddies or those it would like to reward for past service?

Will some of these funds act to support government policy ahead of looking after their members?

That could occur in investing in infrastructure in certain locations or of a certain type.

Or it could result in investment in companies that reflect a certain way of thinking, without its members realising the cost to them in retirement.

If an elected government wants to deliver change it ought to make laws to achieve that.

It should not seek a backdoor way by pushing mandated superannuation funds in the direction of its unelected mates.

It's another version of robbing Peter to pay Paul.


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