Note: This letter was addressed to Prime Minister Keating of Australia, 8 July 1995. The reply from a minder was what you might expect: vapid. Nevertheless the points made here remain germane to any Australian government.
Update note: since the argument presented below remains relevant (2011), I have reposted this material to my Wordpress blog, Thor's Unwise Ideas
Dear Prime Minister,
Your government does not have my confidence on the matter of tariffs. You won't get to read this, being a busy person, but with luck an economist somewhere will put the following arguments into a computer. For the record, here is the main reason for my disquiet, and a couple of suggestions.
1. The Government has lost the plot on macro-economic policy. Specifically, it needs to get sophisticated about the ancient contest between free trade and protection. A binary mind-set on this matter is as naive as a so-called left/right distinction in political belief. There have been good reasons to demolish blanket tariff barriers over the last two decades. There are now compelling reasons to gradually establish what I will call "performance-linked micro-tariffs" in selected sectors of Australian industry.
2. The proper role of Federal Government is to set incentives and mechanisms that will keep the Australian population socially stable, employed, prosperous and relatively safe. The Government's desire to overcome a certain complacency and laxness in economic performance has been laudable, but its doctrinaire cure is laying the seeds of a long-term disaffection which will erode the state itself. The Government has become the victim of it's own "free market" rhetoric, a common fate of all propagandists.
3. Performance-linked micro-tariffs are one proposal to address a nexus of socio-economic problems. Let me briefly identify the main problem factors that must be reconciled:
<> Australia must channel its economic surplus, the savings of individuals and industry, into productive local investment (and that doesn't mean real estate development).
<> Australia must prioritize its imports, ensuring the entry of productive equipment, services and knowledge, but rationing the inessential according to the balance of trade.
<> The Reserve Bank or some comparable institution must regain control of transnational capital flows without stifling industry.
<> Australian industry must remain competitive and a credible player in world markets.
<> Australian management must remain open to international "best practice", but also committed to those social values which make our culture fairly attractive to the gifted, the lucky and common folk alike. We note that much past management practice has been insular and timid.
<> Australian people must be able to anticipate a reasonable reward for effort, reasonable security of employment, and a reasonable prospect for the ambitions of their children. These conditions have diminished drastically for well over half the population: the less gifted half. I know this half. As an educator I pick up some of the human flotsam in a TAFE college. For all the value of DEET funded literacy programs and the like, I know in my heart of hearts that Australia, like every country, will always have a huge population of individuals only suited to semi-skilled work. For such folk, vague political nostrums about reskilling the population have the smell of Marie Antionette's advice to "let them eat cake". Prime Minister, we have to put the less gifted half of Australia's population to work in industry (they can't all sell hamburgers), or they will bury us. This search for unskilled or semi-skilled work is the major imperative facing all governments everywhere.
4. Whatever the past shortcomings of earlier attempts to build import replacement industries in Australia, those industries which were established behind protective tariffs did provide employment for the less gifted half of the population. The tariffs were surely an impost on the whole population, but they were also a way of redistributing income, a way that was politically subtle and acceptable. Nowadays we have a much vaunted "social wage". This includes a huge bill for unemployment payments, and all kinds of subsidies for the unemployed. We have thousands of "outworkers" working in pitiful conditions for low, undeclared income which they use to subsidize unemployment benefits. We have a huge population of unemployed young people who are educated into being social and economic outcasts. These outcomes are neither politically rational nor economical.
5. Never mind "import replacement" for its own sake. The government needs to develop clear, credible incentives for the development of "employment generating industries". There is a popular belief abroad that the two centuries-old contract between capital and labour is breaking down under the impact of computerized automation. It need not imply a Luddite mentality for the Government to take a lead in encouraging technologies, new and old, which will soak up the unskilled and semi-skilled labour pool. However, useful policies will first require the Government to accept that such a semi-skilled labour pool is permanent (i.e. let's get past the ideological cant).
6. Present global economic conditions imply that (at least) traditional employment replacement industries like textile, clothing and footwear, would require some kind of tariff protection to survive on a large scale in Australia. The trick is to provide protection without engendering the diseconomies from inefficiency seen in the past. Any kind of general tariff would be a blanket with many dark, musty corners for breeding the wrong kind of advantage. When I worked for the Tariff Board in the mid-1960s fairly generalized tariffs were the only kind which seemed administratively sensible. Electronic compliance technologies, used creatively, should offer more flexible options now.
7. The purpose of a performance-linked micro-tariff would be to establish a set of ground rules under which designated industries could earn a degree of market protection. The mechanism would need to be transparent and self-adjusting. With enough political will, any affront to World Trade Organization rules could surely be finessed. The overriding criteria must be fairness to a population for whom the Government has a direct duty of care, before fairness to international fora. Better economic minds than mine can devise clever mechanisms, but here is one suggestion to stimulate invention.
<> Let every worker in a designated industry be worth a "taxation unit" to an employer. The value of the taxation unit would be linked to the social security cost of an unemployed person plus an indexed productivity measure of the employee in his or her particular workplace.
<> Let a generalized sales tax be added to goods or services generated by the industry.
<> Taxation units earned by an industry employing workers would be transferred as a "productivity credit" to earn a sales tax rebate. The taxation unit transfer would thus amount to a variable tariff on competing imported goods and services. The productivity component would advantage progressive enterprises. This tariff could be achieved, however, without nakedly appearing to violate world trade rules.
As a free citizen with 1/17 millionth of a decisive electoral vote I can hardly expect to be heard. Yet every echo begins as a whisper. I hope that the preceding comments find a resonance before we all face serious political trouble.
Performance-Linked Micro-Tariffs *(c) Thor May 1996
email: Thor May - email@example.com