Last week I got an urgent request from the Fin for a quick-turnaround piece on the latest plan to save the car industry. I got it done within a few hours, and planned to post it here. Alas, I was as slow in doing this as I had been fast in writing the original piece (over the fold)
In the meantime, Sinclair Davidson at Catallaxy took exception to my observation that the mining industry’s nearly-free access to minerals under both private and public land was a bigger subsidy than anything the motor vehicle industry got. In support of the miners, he quoted Mitch Hooke of the Mining Council as saying
He said the proposed new tax would hit the mining industry with such a sledgehammer that it would destroy value, deter investment, reduce growth, and affect every mum and dad who has shares of equity or provides goods.
Of course, if you deleted “tax” and put in “tariff cut”, that’s exactly the same as what the representative of every industry demanding continued tariffs or subsidies has said.
What’s striking about this is the tribalism involved. As I demonstrate in the article, as far as economic efficiency is concerned, the effects of current levels of assistance to the car industry are third-order. Yet the political/cultural right denounces the car industry, while defending rent-seekers like Hooke.
This is part of a more general phenomenon on the right that I will post more on later. It’s taken for granted on the cultural right that some technologies and industries (nuclear power, oil, finance) are good and others (wind energy, electric cars, Hollywood) are evil – essentially a mirror image of what they think we on the left think. For people who are supposed to believe in the free market, this is a big problem.
Argument stuck in second gear
The news that the Minister for Manufacturing, Kim Carr, is about to use funds from the Automotive Transformation Scheme to save the local operations of General Motors through ‘co-investment’ has prompted predictable reactions.
The terms of this debate are familiar from last century, and that’s really where they belong. In 2012, the question of whether or not the government should continue assistance to the motor vehicle industry isn’t even of second-order importance, except to those directly involved.
The idea that the motor vehicle industry is central to a modern economy was valid enough when Henry Ford set up his operations in Detroit, Michigan a century ago. Ford’s choice of location attracted suppliers and skilled workers, who in turn attracted other car manufacturers including Chrysler and General Motors. In a short space of time these firms made Detroit one of the great industrial cities of the world, and contributed massively to America’s rise to global economic pre-eminence.
But that was a long time ago. The first half of the 20th century was defined by successive advances in transportation technology, but by the late 1960s (when people were still talking about the ‘jet age’) the industry had matured. Plains, trains and automobiles today are more comfortable and efficient than those of 50 years ago, but they are not fundamentally different.
From the 1960s onwards, the focus of innovation shifted to information technology and biotechnology, which have continued to advance apace. If we are looking for industries with the potential to create an expanding network of firms, they are more likely to be found in sectors such as video game design or genomics than in the assembly lines of Ford and GM.
The only areas of the car industry where we can hope for more than incremental innovation in the next decade or two are those of electric vehicles (including hybrids). The Australian industry, with its focus on large passenger vehicles was never well placed to compete in the electric vehicle industry. Any possibilities in this direction ended when the Green Car Innovation Fund was axed a year ago.
But if the case for promoting the car industry is stuck in last century, the same is even more true of the arguments against assistance. The advocates of microeconomic reform enjoyed their glory days in the tariff wars of the 1970s and 1980s, and the care industry was their biggest target. The mere mention of assistance to the industry produces an automatic reaction, with arguments about distortions the cost to consumers and so on being wheeled out unchanged from the fights of decades ago.
Under current conditions, however, the economic costs of car industry assistance policies are negligible. The general tariff on motor vehicles was reduced from 10 per cent to 5 per cent in 2010. A standard economic calculation yields the estimate that the loss of consumer welfare is proportional to the squared value of the tax rate, that is, 0.25 per cent of the sale price of each vehicle purchased. Distortions in road pricing, cross-subsidies in insurance and many other variables are almost certainly more significant than this trivial impact.
The Automotive Transformation Scheme, with total funding of 2.5 billion over 10 years, was introduced to partially offset the impact of the 2010 tariff cut. In general, it can be expected that a subsidy of this kind will be less costly, in economic terms, than a tariff of comparable magnitude.
The ‘economic rationalist’ case against car industry assistance is further undermined by the fact that so many opponents of tariff protection lined up to support the mining industry in its opposition to a resource rent tax. As with the car industry, the miners relied heavily on claims that jobs would be destroyed unless the industry continued to be given open access to minerals located under both privately and publicly owned land. This massive subsidy is far more socially costly than the remnants of the tariff, yet the leading free-market thinktanks lined up with the political advocates of ‘free enterprise’ to defend it.
In the end, the best case for the decision to use the Automotive Transformation Scheme to support another decade or so of motor vehicle production is that the government promised to do this when it cut the tariff rate in 2010. The damage done to Australian society by another broken government promise would be far greater than that of going one way or the other on industry policy.
John Quiggin is an ARC Federation Fellow at the University of Queensland