Last thing the government should do is buy a power station

Robert Carling

09 September 2017 | Australian Financial Review

liddell power stationOne of the most common debates in economics is when should government intervene in markets? Government itself – judging by its recent actions – clearly thinks the answer should be ‘quite often’. Can there be any doubt that intervention is increasing, not just in energy markets — see the furore over Liddell as a prime example —but in other areas too?

But the condition of market failure that might justify intervention is not as widespread as believed. When people say markets have failed what they often mean is that they don’t like what the market is doing to them. Even when there is proven market failure, government intervention doesn’t necessarily ameliorate it, and may actually increase economic inefficiencies.

It is difficult to identify the outbreak of market failure that may explain the increased intervention we are witnessing. Where was the market failure that justified government subsidies for the Arrium steelworks for example; or the subsidies to Cadbury (which regardless, has just announced it is axing 50 jobs) and the Goulburn Valley fruit-growers. Or for that matter, the creation of a government-owned monopoly wholesaler of fixed broadband? You don’t need to be a tech head to know that other countries have managed quite well without an NBN-like behemoth.

The intervention du jour is undoubtedly in energy markets, ranging from export controls to the extraordinary proposition that the federal government — or even the New South Wales government — may invest directly in, or subsidise, a power station or two; with the main focus this week on Liddell. However, the energy crisis is not a result of market failure, but a litany of government failure over many years. Successive governments – federal and state, Coalition and Labor – share the responsibility for making a hash of energy policy to the point that now, no government should or politically could just stand there and allow supply shortages to occur. We can withstand shortages of bananas or tomatoes for months on end, but we can’t withstand blackouts for more than five minutes.

So it’s a case of bad market intervention begets more intervention. This time they need to get it right – and ‘they’ means both government and opposition, because investment in increased supply depends on a stable, predictable policy environment for the long-term.

More generally, we need less intervention in markets and more emphasis on policies to promote competition, for it is competitive markets that work best. Yet, whole slabs of the Harper review of competition policy that would have fostered a more vigorous market landscape have gone un-actioned by the government.

What we do not need is more ‘industry policy’. When those words pass a politician’s lips, a shiver should go down the spine of everyone who believes in free markets, for it usually means more intervention to save or promote politically-favoured industries or firms. The economic problem is scarcity of resources relative to wants, and resources (meaning factors of production such as labour and capital) must be allowed to move around in response to market signals to find their most productive uses.

Just this week there has been another official study drawing attention to Australia’s sluggish productivity performance. Competitive markets and efficient resource allocation will do more than anything else to stimulate productivity growth; interventions in markets will stifle it.

Resources are about to leave one high profile industry. Next month the lights will finally go out on the Australian car manufacture industry. Intervention in various forms struggled over many years to stop that from happening and to encourage a viable industry. In the end the world market for cars told us it could not be done. When the three companies’ announcements of closure came in 2014, they were accepted with a surprising degree of equanimity, at least outside South Australia. One wonders what the policy response would be if the same announcements were lobbed into the febrile political environment of 2017.

The economy is remarkably adept at accommodating structural change, or the rise and fall of industries and firms. Just look at how the largest mining boom in the country’s history and the subsequent retreat have been accommodated. Governments have a role in assisting those directly and adversely affected by structural change, but the worst thing policy can do is try to keep resources locked in to sub-optimal uses.

Robert Carling is a Senior Fellow at the Centre for Independent Studie

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