Let the mining goose sleep


Flickr image by cavemanThe Prime Minister has been accused of plucking the goose that laid the golden egg. The Federal Government's proposed tax on super profits has sparked a wave of uncertainty among miners. On Thursday, The Australian led with the news of mining giant Rio Tinto shelving plans to spend $11 billion expanding its massive iron ore operations in Western Australia. ABC Radio's AM reported on Canadian MP Brad Trost's glee at the prospect of his country winning the mining investment that Australia could lose.

It seems nobody has stopped to ask the obvious question of what would happen if there was less investment in Australian mining. The simple answer is that more of Australia's mineral wealth would stay in the ground. There would be less taxes of any description for the Federal Government, and less 'fat' profits for the mining companies and their shareholders.

But perhaps most significantly, more minerals would be available for future generations to use for their own wellbeing. As simplistic as it may seem, that is surely the best argument in favour of the 40 per cent super tax. For our own generation, a higher proportion of the admittedly smaller mining dividend would find its way into the public purse. For our descendants, there would be more minerals left for mining activities and wealth generation.

There is no imperative other than self-interest to extract minerals from the ground as fast as we can. China wants them now, and seems prepared to pay what is required. If they don't get them from us, they could look elsewhere. Let them. In the future, current sleeping economic giants such as India and Indonesia are likely to follow China's lead and be similarly hungry for Australia's remaining minerals. Our future generations will be relying on them.

We only need to look at the nearby example of Nauru to see a country move from being one of the richest per capita nations on earth to one of the poorest, in the space of a generation. This occurred only in recent decades, after intensive mining exhausted the island's substantial phosphate deposit. While the phosphate revenues were coming in, there was profligateness. Now there is poverty.

Recently there has been much talk of the size of Australia's future population, and whether 36 million would be sustainable. It is obvious that it would be more sustainable if Australia still had a significant deposit of minerals to fund the import of food or other essentials that we could no longer provide for ourselves.

Our economic modelling needs to move to embrace needs of future generations in addition to the present. Economist John Quiggin criticises the Henry Tax Review, which recommended the 40 per cent super tax. He says that it is flawed by its assumption that GDP should be the primary measure of economic growth. GDP does not take into account the depletion of natural resources. Instead Quiggin prefers NNI (Net National Income), which he argues is better equipped for policies that promote our economic welfare in the long term.

In the context of the present generation and using GDP as a measure of economic wellbeing, it may make sense for us to do all we can to make Australia an attractive destination for mining investors. But it is questionable whether it is good for all Australians in the long run.

Michael MullinsMichael Mullins is editor of Eureka Street.

Topic tags: Michael Mullins, henry tax review, mining, super profits tax, golden goose, kevin rudd



submit a comment

Existing comments

I'm with you on this one, Michael. Contrary to popular economics, minerals in the ground do have an economic value even when they stay in the ground. The race to exploit our mineral wealth has already wiped out our manufacturing industry and is on its way to wiping out our agricultural industry. Do we really want to become another Nauru?
Ginger Meggs | 10 May 2010

A thoughtful article, which raises a good question. We should think of future generations, and on the whole we do. However in thinking of the future we need to consider whether the minerals will have the same value in the future. There is certainty about what they are worth now. How much certainty is there about what they will be worth in the future?
Kevin Prendergast | 10 May 2010

Yes, Michael. You're on to something of fundamental importance not just to Australia, but in the wider context of the resources of this planet. I feel deeply disturbed at the demonic power of corporate greed in the mining industry. Why should Australia goose-step with the rapacious mining corporations? Their majority ownership is foreign, having no interest in the resources of this country other than profitability. Talk about jobs is crap. And what about the uncontrolled offshore drilling for oil and gas on the fragile north west shelf? Last year's oil-rig explosion was not "accidental". Is it not time for a moratorium? Australia must prevent future ecological disasters similar to the BP debacle in the Gulf of Mexico, before it's too late.
neil tolliday | 10 May 2010

Could you please enlighten us on the apparent connection between this new Australian Sovereign Party and the United Nations as they seem to have the same covert objectives as of absolute nationalism; rather than the 40% nationalism inherent in the Labour Party's 40% tax on the biggest industry in the country?
Greig Williams | 10 May 2010

The suggestion is that Kevin Rudd force the mining companies to go overseas so Australia's mineral wealth stay in the ground, so future generations will benefit for their own wellbeing.The questions will then be; Which generation? Why discriminate against the current generation? Will Australians accept the communist ideology, that there is no private ownership of your own house,business, industry, transport, farming and mining?
Ron Cini | 10 May 2010

Michael, the reference to Nauru is misleading - they actually mined the ground under their feet and a clearly finite and limited resource. Our is also finite and limited, but the miners and explorers keep finding more. We are also slightly larger, mate. Let's follow your myopic suggestions and become a sister-state to Greece!
A de Sousa | 10 May 2010

I wouldn't mind betting that all of the commentators so far on Michael Mullins' good essay are either saving for their retirement (or children's welfare) in the form of personal investments or superannuation savings contributions, or already enjoying the fruits of their past prudential saving practices. Why do some of us think that society need not observe the same prudence about the future needs of our children and grandchildren's time?

And as to our generation needing to enjoy more the fruits of its present good fortune, aren't we rich enough already as a society? Australia has never been richer in material goods - as a society we are awash in money and stuff. What has happened to the old-fashioned virtues of stewardship and good husbandry for those who come after us? Has consumerism triumphed over every other value?

I hope not, and I wish the 40% tax well. Both as redistribution of wealth and (I hope) providing wherewithsl for prudent investment in our children's climate security, the tax makes sense. Let the Canadians burn up their mineral assets, good luck to them when the oil runs out.

Of course at 5% or 7% interest rates, nothing is worth holding on to - the family farm is almost worthless in terms of the little it can earn now as a farm, better to sell it off and invest the money in the market at 5% or 7%%, enjoy the good life now and forget the kids. Which shows how morally misleading the market rationalist calculus is, when applied to long-term intergenerational ethical issues.

The physical reality is that in 50 years time the world is going to be running short of precious materials like rich iron ore lodes, coal and hydrocarbons deposits. If only we had the foresight to save some of these precious materials while we get on with converting our society as fast as we can to renewable or nuclear energy. Even in a future renewable energy based economy, we are going to need structural steel, electricity-conducting metals, and lubricants.
tony kevin | 10 May 2010

After all the nonsense spouted over this matter recently, it is a relief and a pleasure to read something pertinent at last, a comment which touches on a very important aspect of the whole subject of mining our resources in general which has been overlooked; until now. Thank you Michael Mullins.
Alan Slatyer | 10 May 2010

And nobody mentions the Norwegian model - creating a Future Fund with today's largess to serve future generations (income only) when today's resources dry up.

That is the sort of forward thinking Australia needs. And the leadership to implement it.
John R. Sabine | 10 May 2010

Michael's reference "He says that it is flawed by its assumption that GDP should be the primary measure of economic growth" brings to mind the booklet published by The Australia Institute "The Genuine Progress Indicator". Recommended!

Tony Kevin's reference to nuclear energy is another worry.

Until we have good answers to the five big issues -
- the high cost of constructing reactors, decommissioning, waste disposal and storage;
- the need for safe storage for ever (at what cost to future generations? – is it fair to them?);
- the limited known supply of raw material;
- the risk of rogues getting hold of it, problems of terrorism and nuclear proliferation;
- the risk of major and catastrophic accidents.

Much better to invest in developing solar power and its storage and transmission.
Geoff | 10 May 2010

"Simplistic" is indeed the word, Michael: it will always be the case that no matter how desperately a given generation feels the need to use resources, future generations might conceivably need them even more. Therefore, consistently following this argument leads to the locking up of all resources forever. There is no all-seeing human eye that can discover the relative needs of future generations to get around this problem.

Besides, we know that imperishable resources like iron, once mined and deployed, can still be recycled - put to varying optimal uses in future generations. Yesterday's Holden Torana in Bondi is tomorrow's patio table in Cape Town. In other words, the same set of molecules can be redeployed as each generation sees the need.

As for non-recyclables like oil, you need a system which gives the best incentives to create an array of substitutes, while achieving the best balance between conservation and consumption while facing the forseeable future.

The best mechanism for both deploying renewables in their most useful way in each generation, and creating substitution arrays and getting the conservation/consumption intertemporal allocations right for non-renewables is, I submit, the free market - something almost totally absent in the sad history of Nauru.
HH | 11 May 2010

The profligate use of our world's resources needs more public discussion. Even those who are not sure that climate warming is man-made have to admit that plundering our resources IS! When we're left with nothing ... what next?

Thanks Michael for speaking up ... keep the ball in the air!
glen avard | 12 May 2010

HH’s letter offers an elegant expression of market rationalist arguments that all natural resources are infinitely substitutable (or recycleable) and that the best mechanism for deciding on exploitation and consumption of these resources is the free market system. I addressed these matters in my book ‘Crunch Time’. Here is a checklist of the main rebuttal arguments. Sorry to be blunt, but these are important issues.

1. The laws of thermodynamics tell us that mining concentrated resources like coal, oil, iron ore (steel), bauxite (aluminium), and making them into diffused products, increases entropy (disorder) in the world and reduces accessible energy gradients. In some cases like ships or cars, some metal can be recycled. But most resources once used are not accessible for recycling, e.g., how do you recycle used aluminium cooking foil? Hair-pins? Rusted reinforcing steel from demolished concrete structures? Or, from hydrocarbons when used as feedstocks, discarded plastic bags? Broadcasted chemical fertiliser? Every manufacturing or recycling process involves work (energy conversion, and loss of some of the usable energy potential latent in raw materials – i.e. increased entropy. We have to learn to manage entropy better, if humanity is to have a long-term material future on this planet.

2. HH’s ‘locking up of all resources forever’ argument is a reductio ad absurdum of conservation arguments. No one suggests Australia stop mining: but it will not be the end of our economic world if we mine Australia a bit more slowly. Indeed, according to the Reserve Bank Deputy Governor last week, it will be good for Australia’s inflation problem if we do.

3. The idea of price-sensitive substitution arrays, beloved of economists, ignores the uniqueness and non-fungibility of particular materials in the physical world. For example, there are only a small number of materials that can efficiently conduct electricity. No amount of price incentives can make non-electricity conducting materials into electricity conductors. We cannot make prestressed reinforced concrete beams without high-tensile strength steel. Economists must relearn that we live in a material, physical world, with not unlimited stocks of materials, each with specific properties and limits. Our greed may be infinite, but our resources are not.

4. Free market economics is unable to ‘get the conservation/consumption intertemporal allocations right for non-renewables’, because its way of valuing the future (interest rates as reward for deferred consumption) is inappropriate for questions of society’s stewardship responsibilities to its future generations. Applying commercial discount rates to the future 25 or 50 years from now produces nonsense answers, which would indicate we put almost zero values on our children’s and grandchildren’s welfare and security. Obviously we do not behave like this in real human life at the family level. Public policy economics needs to catch up with this reality, as Lord Nicholas Stern cogently argued in the Stern Review.

5. Nauru, like Easter Island, were cases of societies destroying their sustainable future through short-sighted greed and improvidence. Apart from the fact that we are a lot bigger, the metaphors are instructive. Societies can eat their own seed-corn, if they are not prudent and provident. To rely on the free market process alone to make these sorts of future-affecting decisions is foolish and dangerous. Previous generations of Australian politicians understood this, when they set real money aside for things like the Snowy Mountains Scheme and the Murray River food-growing irrigation systems. Sadly, too many present-generation politicians make the same mistake HH makes, of over-reliance on what the market dictates.

tony kevin | 13 May 2010


Subscribe for more stories like this.

Free sign-up