Last week the RBA released a paper showing that, surprise surprise, the mining industry has spill over benefits for industries such as construction and business services. Amongst all of the hype released by the mining industry in response there was no mention of the fact that the RBA found that these spill overs were much smaller than the mining industry usually claims.
These spill over, or multiplier, effects are calculated by economists in an effort to measure the impact a change in the level of economic activity in one industry will have on other industries. For example, an increase in mining activity will likely lead to an increase in demand for transport, energy, construction and business services. No one has ever seriously suggested otherwise.
Interpreting such multiplier effects can be as difficult as calculating them, especially when the economy is experiencing rapid change. In attempting to interpret such numbers it is important to bear in mind the following:
1) All industries create flow on effects not just mining. Growth in, for example, health and education create jobs in other parts of the economy. But if all industries ‘take credit’ for the jobs they create in other industries then when we add up the total number of jobs that industries claim they create we get a number that is much bigger than the Australian population.
2) Multipliers also work in reverse. While the RBA analysis provides estimates of the flow on benefits from the mining industry’s expansion it is strangely silent about the flow on costs of the decline in manufacturing, agriculture and tourism caused by the high exchange rate.
3) Flow on jobs have to come from somewhere. As Dr David Gruen, head of Macroeconomics at the Commonwealth Treasury pointed out last year, “In a well functioning economy like ours, with unemployment close to its lowest sustainable rate, it is not the case that individual industries are creating jobs, they are simply re-distributing them.”
If jobs are just being re-distributed and not created then the benefits to society, as opposed to the benefits to the mining industry, will be much smaller than that suggested by the recent RBA analysis.
Multipliers are an important economic tool but they need to be used with extreme caution. They are open to misuse and have been abused in the past by industries keen to overemphasise their importance to the economy.
For reasons known only to the RBA, their recent analysis focused exclusively on the positive impacts of the mining boom on other industries and it made no attempt to analyse the negative flow on effects to other industries.
It is obvious why the miners’ PR machine would take such a narrow approach to ‘analysis’ but it is much less clear why the RBA would do the same.