Albanese finally throws caution to the wind

Take two totally different issues on which the government in recent days has defined itself by its robust stances.

One is the Israel-Hamas conflict. The other is the swing to a highly interventionist industry policy, spelled out by Prime Minister Anthony Albanese in a major address on Thursday. Let's look at each.

The government has steadily ramped up its criticisms of Israel's conduct in Gaza over the months, as civilian casualties have mounted into the tens of thousands, international opinion demanded proportionality, and Labor felt the pressure of pro-Palestinian opinion in some key seats.

But the April 1 killing of Australian Zomi Frankcom and other aid workers by an Israeli strike was a trigger point that has taken reaction to a new level.

This week the government named a former chief of the Australian Defence Force, Mark Binskin, as its adviser to examine the adequacy of the Israeli investigation of the attack.

Regardless of whether it was a good or bad move, that was an extraordinary action. It sent a clear message - Australia was not satisfied Israel's account could be trusted without being checked.

It remains to be seen whether Binskin will get full access to all the data he needs. While he is probing the Israeli inquiry, rather than doing an inquiry of his own, for proper scrutiny he'll presumably have to see quite sensitive military information. It's difficult to believe the Israelis will be happy to hand over such material during a war.

The government's move is likely to be well received domestically, however, given the appalling circumstances in which Frankcom and her colleagues died.

Meanwhile, this week Foreign Minister Penny Wong toughened, albeit cautiously, Australian policy. She floated the possibility of recognising a Palestinian state ahead of agreement on a two-state solution.

This course is being canvassed by countries internationally, and could come to a vote on Palestinian membership at the United Nations before long. But Wong's comments were denounced by sections of the Australian Jewish community and the opposition. Opposition Leader Peter Dutton accused Wong of "irreparably" damaging Australia's relations with Israel "for a crass domestic political win".

Wong justified raising Palestinian recognition by pointing to the fact other countries, including Britain, are discussing it. Albanese also invoked the wider world, when he said Australia has to "break with old orthodoxies" and embrace a more interventionist approach to industry policy.

Albanese argued that in a changed international situation, we need "sharper elbows" to follow our national interest. "We have to think differently about what government can - and must - do to work alongside the private sector to grow the economy, boost productivity, improve competition and secure our future prosperity".

He highlighted a range of countries, from the United States to South Korea, pursuing activist government intervention. Most notably, the Biden administration, under its Inflation Reduction Act, has huge subsidies to attract investment for re-industralisation, with an emphasis on green energy.

Albanese insists the reburnished interventionism was "not old-fashioned protectionism". We had to recognise "there is a new and widespread willingness to make economic interventions on the basis of national interest and national sovereignty." To an extent, this a reaction to the pandemic, which spurred fears of blocked supply chains.

Albanese is extremely comfortable with the interventionist pivot. After all, it takes him back to his political roots, when as a young left-winger he was critical of Labor's embrace of the free market. It also taps into a broad Labor pro-manufacturing strand, partly but not only based in the union movement. Remember Kevin Rudd saying "I never want to be prime minister of a country that doesn't make things anymore"?

To a degree Albanese's interventionism is driven by the acute needs of the energy transition - that requires a massive capital injection only realisable by tangible government encouragement (like its underwriting scheme and other incentives to come). Australia can't compete with the US incentives but it will be trying a mini-me approach.

Albanese's interventionism will be reflected in the May 14 budget but it will also stretch right up to the election, gathering together a wide range of current and future initiatives under a "Future Made in Australia Act".

The obvious question is: what does Treasurer Jim Chalmers think of this? Treasury has traditionally been a manufacturer of free-market Kool-Aid, selling it to its political bosses where it can. So you'd expect Chalmers might be sceptical.

But the treasurer, while he might not be the interventionist zealot Albanese is, walks a separate path towards a similar destination.

More than a year ago, Chalmers set out his views in a major essay about "values-based capitalism". This revolved around public-private co-investment and collaboration and renovating economic institutions and markets. He has been busy with the latter task: changes have been made to the Reserve Bank and reforms are under way to aspects of competition policy, including announcing a new merger regime this week.

Chalmers has also pointed approvingly to a speech delivered last year by Jake Sullivan, National Security Advisor in the Biden administration, in which Sullivan set out the US approach.

"A modern American industrial strategy identifies specific sectors that are foundational to economic growth, strategic from a national security perspective, and where private industry on its own isn't poised to make the investments needed to secure our national ambitions," Sullivan said.

"It deploys targeted public investments in these areas that unlock the power and ingenuity of private markets, capitalism, and competition to lay a foundation for long-term growth."

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While what the Australian Treasury bureaucrats (who are at the centre of the work) privately think of the Albanese interventionism is unclear, some of those working on free trade agreements in the Department of Foreign Affairs and Trade will be finding the approach challenging.

Many economists will welcome the plan. But some, like independent economist Saul Eslake, will be harsh critics.

Eslake says terms like "national sovereignty" and "national security" are "covers for bad policy" and a way of stifling questioning or criticism ("we can't let grubby concepts of cost and benefit get in the way of 'security'"). He recalls such talk when the Morrison government did not make enough efforts to get COVID vaccines from abroad because it had its eyes on local production, leading to delays.

Eslake also derides the "manufacturing fetish" that is one driver of interventionism. In Australia (unlike some other countries) manufacturing is an area of below-average labour productivity, he says - so shifting resources there lowers rather than increases productivity.

As for following other countries' example, "as my mother used to say, just because your sister puts her head down the toilet doesn't mean you should, too".

Wherever the economic wisdom lies, the focus groups are telling Labor it is likely to be on a winner with the new interventionism. People will warm to the sound of it, accompanied by the mantra of extra jobs. There are a lot of manufacturing fetishists about.