Cars

January 17th, 2012

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

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  1. rog
    January 19th, 2012 at 19:13 | #1

    The argument against wind farms and other technologies seems to be based on “because there was once a cart drawn by a donkey all carts, or variations thereof, and all traction devices incl donkeys are doomed because they are inefficient etc etc”

    And then it is back to boiling more water for the steam driven mills.

  2. Tom N.
    January 19th, 2012 at 19:49 | #2

    Do you want more?

    The point of my post was to make you differentiate between the “cultural right” and “economic rationalists”, which your article did not do.

    In your response above, you’ve managed to cite some right wing hacks who you see as guilty of hypocracy*. Those hacks may well rank as part of the cultural right but who certainlyl don’t rank as economic rationalists if that terms is to be anything more than a convenient perorative.

    I hope that you will now carry the distinction between cultural right and economic rationalists through into future articles and blog posts.

    _____

    As Sinclair pointed out over at Catallaxy, there is not necessarily anything hypocritical in supporting lower tariffs on cars and resisting higher taxes of mining. Certainly, both policies take one closer to a “free market” (if not necessarily an economically efficient one in the case of opposition to higher mining taxes). However, that’s another debate.

  3. Tom N.
    January 19th, 2012 at 20:08 | #3

    Woops – sorry John, I overlooked the last paragraph in your post #49. Nevertheless, your article does in fact mention economic rationalists or, at least, it makes the claim that the “economic ratiionalist” case for lower car industry assistance is undermined by the fact that opponents of tariffs lined up with the mining industry against the MRRT. I put it to you that most readers would take from from that the people who ‘lined up with the mining industry’ are economic rationalists – and hypocrtics. I would thus repeat by call for a more careful delineation of economic rationalists/rationalism from the cultural right in future – or, better still, that you desist using the pejorative “economic rationalist” which is poorly understood by most readers and leads to the type of unjust smearing I mentioned in my first post.

  4. John Quiggin
    January 19th, 2012 at 20:24 | #4

    OK, as I said, I wrote the post a week after the article, and specifically used the term “cultural right” to identify a group, including, for example the Catallaxy crew. Most of these people claim to support free markets, so picking winners and losers among tehcnologies are hypocrites.

    As regards the original article, many of the people who lined up against the mining tax were self-proclaimed economic rationalists – some (eg IPA) have consistently shown themselves to be hypocrites, others may simply have been inconsistent because they aren’t very good economists, and react to words like “tax” in a knee-jerk fashion (see, eg, carbon tax). Unfortunately, it seems to me that members of the same group were more prominent among the opponents of the car policy than were the consistent economic rationalists who supported the mining tax and carbon tax. I think it weakens the presentation of a case against subsidies if those making it have just been arguing for subsidies .

  5. Peter T
    January 19th, 2012 at 23:01 | #5

    What happens if you re-frame this argument in terms of the choices that the various parts of the Australian political nation saw from the 1840s to the 1950s? They looked around and saw that Australia could be like Fiji, Mauritius and some of the West Indian colonies – a place where a small number of British immigrants lived well on the labour of imported indentured labour, a few other British immigrants lived off the first group, and some others hung around. Everything except raw materials would be imported, but those at the top would live really well. This vision had its partisans – particularly in Queensland, but some elements fitted with some British views of what colonies were for. The alternative was to develop as much of an industrial economy as could be managed, which meant tariffs, subsidies, limited non-white immigration and high wages, selections and state development of infrastructure. This vision had a wider appeal – certainly partly racist, partly fearful of Asia, but also hostile to reproducing the wide class disparities so many immigrants had escaped from, and much more committed spreading the wealth – not by politically-divisive redistribution but by building an economy where just about everyone who wanted one could get a reasonable job that paid reasonably well.

    We have thankfully ditched most of the racism, and some of the fear, and seem pretty happy with a less discriminatory immigration policy. All good things. But we have also ditched a good deal of the commitment to a high minimum wage and the accompanying commitment to as deep an economy as possible. And redistribution is always a politically messy and often long term unsustainable way to deal with need. Maybe a bit of rebalancing is in order? And if it involves paying a bit more for cars, I won’t object.

  6. Charles
    January 21st, 2012 at 07:23 | #6

    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.

    ?

    It just doesn’t make sense; you have given us the squared value divided by 100.

  7. Charles
    January 21st, 2012 at 07:31 | #7

    It just doesn’t make sense; you have given us the squared value divided by 100.

    Yes it does, you have to worry about the base when multilpying percentages.

  8. Tom Davies
    January 21st, 2012 at 08:02 | #8

    Easiest to convert the percentages to factors before multiplying, ie 5% becomes 0.05

  9. PeterD
    January 25th, 2012 at 22:54 | #9

    “so many opponents of tariff protection lined up to support the mining industry in its opposition to a resource rent tax” really? who?

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