Yesterday’s announcement of massive subsidies for the car industry is a big victory for industry minister Kim Il-Carr and the auto lobby. But it is a big defeat for consumers, taxpayers, and alternative beneficiaries of government largesse. On my rough calculation, every taxpayer will contribute the best part of $700 to this plan (where is suspicion of foreign multinationals when you need it?).
My CIS colleague Stephen Kirchner points out the additional hidden costs in diverting resources away from more productive uses.
And in the latest issue of Policy, Malcolm Roberts gives the sorry history of car industry protection.
We can be sure that this latest scheme, like all those before it, will fail to make the car industry viable, and this will not be the last of the corporate welfare bail-out packages.
Update 12/11: Shaun Carney’s argument for the subsidy. Summary: Other industries, and other countries, have stupid policies, and therefore the car industry deserves a stupid policy as well.
Andrew Norton 
I particularly like Laura Tingle’s description today (AFR: p5) of the car policy as “sloppy, badly constructed, fiscally negligent, irresponsible, protectionist, irrational appeasement of rent seekers, which is now being camouflaged not only as a response to climate change but the global financial crisis”.
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“the car policy as “sloppy, badly constructed, fiscally negligent, irresponsible, protectionist, irrational appeasement of rent seekers, which is now being camouflaged not only as a response to climate change but the global financial crisis”. ”
But apart from that, what is wrong with it?
I haven’t checked, but I assume that the free-trade, free market Liberals have condemned the policy and promised to overturn it when they get back into government …. LOL
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It wold be interesting to know the taxes paid by the industry as well as the assistance given. If the assistance is balance by the taxes then it really is pretty much a zero sum game. The question is, can the labor be put to better use.
The USA soaks up it’s labor building a war machine ( and it looks like cars are going to be added to the list), sucking production capacity up in a car industry is likely to lead to less trouble, I think less wars is is a plus, a war machine does have the advantage that the stuff built is simple blown up if you can find an excuse to use it.
Consumerism leads to more landfill, right wing politics exclude the possibility of feeding the hungry, wars really are pretty much a waste of time. I’m for free education, but the right don’t want that. Burning a bit of production capacity on global warming is out because the right don’t believe in global warming ( missing the point that there is money to be made in that little game). I’m curious, what should a society do to keep the capital flowing and the masses busy.
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Kim Carr didn’t give any defensible reason for the policy this morning on ABC tv. Any takers for a bet on when the car industry won’t be given any “assistance”?
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Spiros – Have the Liberals ever believed in free trade or free markets!! One of Johnnie Howard’s first policy decisions on becoming PM was to slow down Hawke’s tariff reductions. One of the few Liberals who understood the benefits of free trade – Bert Kelly – was an outsider in the Liberal Party as he waged his relentless campaign for freer trade. Effective tariff protection reached its highest levels under Fraser. Since the Liberal Party’s inception, free trade has only been pursued by Labor under Whitlam and Hawke.
Don’t fall into the trap of many commentators in thinking the Liberal Party believes in free trade or free markets. That’s their rhetoric, not their actions. Look at what they do, not at what they say or what others say about them!
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Johno – It’s barely even their rhetoric, except under Hewson. Though obviously there are free traders in the Liberal Party, of the party as a whole it would more accurate to say that it is the party of private enterprise, rather than the party of free markets. I would criticise protectionist tendencies as bad policy rather than hypocrisy.
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Andrew – Carney is just faithfully pushing the protectionist line made famous by the Age’s founder, David Syme, more than a century ago. Once you become an Age editor, you probably have to swear fealty to Syme-ism whether you believe it or not.
Why isn’t Malcolm Turnnbull out in front leading the criticism? He has no excuse. He’s a Sydney banker and lawyer. It’s not as though he was brought up in the Victorian Liberal Party, where protecting Repco was accepted as synonymous with the national interest and the Liberal party interest.
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Not only is the handout to a mendicant industry bad in principle, it is disastrous timing. GM is likely to be in receivership within weeks – and probably Chapter 7 (ie liquidation) rather than chapter 11 (ie trade out of it – which needs access to cheap funds, which aint available now). Ford isn’t far behind. Do you think the receivers are gonna keep open patently unviable plants as a favour to the Aussie government?
So I predict this package will be soon be followed by even worse – a panic-stricken attempt at bribing the receivers with extra taxpayer funds. The recievers will then, following their duty to the debtors, say “What nice people you ossies are. Thank you so much and have a nice day”, and promptly package the plants and funds as a complex package with obscure clauses to sell to, say, a Hong Kong businessman. Said entrepreneur will use those clauses to effectively pocket the money. After the shortest of decent intervals he’ll then look for a sucker to offload the plants on to (the Aust government?). When he can’t find one (not even Kim Il Carr is that dumb, surely) he’ll close them down pleading poverty (“very, very sorry – its the Credit Squeeze, you know”).
So we’ll eventually end up with a viable car industry – just one manufacturer in Australia, with a very narrow range of specialist models – but of course we could save our money and achieve that by just letting nature take its course.
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DD, if GM and Ford go down in the US, then their Australian subsidiaries will simply follow. Only Toyota will be left and the cost of the package by be cut by 2/3.
Not a bad outcome, actually, though not for the tens of thousands of people who will lose their jobs.
Could it be that Carr has been advised all along that GM and Ford are likely to fold? He can say that he did his best for the industry ($6 billion package), but hey, he has no control over world events.
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This subsidy is clearly nothing but “green” pork. Australia would certainly be better off with no automobile industry at all, rather than propping up one that is not economically viable on its own.
However the saving grace is that Rudd did not mess with the tariff reductions despite significant lobbying. I suspect that the resulting savings will come to much more than the $500 million per year in subsidies.
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“Australia would certainly be better off with no automobile industry at all, rather than propping up one that is not economically viable on its own.”
Toyota is fine. They make good cars at a profit. The industry just needs slimming down a bit.
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Some reasons for the problems in GM in the US.
http://mises.org/story/2124
“Unbelievably, at its assembly plant in Oklahoma City, GM is actually obliged by its UAW contract to pay 2,300 workers full salary and benefits for doing absolutely nothing. As The New York Times describes it, “Each day, workers report for duty at the plant and pass their time reading, watching television, playing dominoes or chatting. Since G.M. shut down production there last month, these workers have entered the Jobs Bank, industry’s best form of job insurance. It pays idled workers a full salary and benefits even when there is no work for them to do.”
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Rafe, that’s not the cause of GM’s problems, though it doesn’t help. If they had a viable business to begin with, they wouldn’t be shutting down plants. GM bet the company some years ago on gas-guzzling SUVs; not a good move when energy prices are on a permanent upward trend.
And yes, the retirement and health care deals they struck with the UAW are unaffordable, but whose fault is that? Answer: generations of poor senior management who have run the company into the ground.
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GM and Ford have been making good money out of little trucks and none from cars for years, with oil going to US$140 it looked as it it was over, the oil price has halved since then, who knows, the party may start up gain, we are after all slow learners.
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Charles said: “It wold be interesting to know the taxes paid by the industry as well as the assistance given. If the assistance is balance by the taxes then it really is pretty much a zero sum game.”
Not so. The alternative uses of the resources tied up in the car industry would also generate taxes for the government. For there to be any chance of a positive sum game from assistance, generally the car industry would need to generate external benefits; taxes and multipliers do not qualify as such.
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I heard someone on the radio this morning saying that one reason the US couldn’t let its car industry collapse was that it was concentrated in a few places and that the population in those places was nearly totally dependent on it. The kind of economic and social collapse that would follow the loss of employment in those towns and cities couldn’t be borne. Perhaps it’s the same in Australia.
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Maybe it`s a Freudian thing: the PM and Kim Il Car are obsessed with broom brooms because Mummy bought them a Matchbox set each Chritsmas?
Or they get a testosterone burst when they see big machinery moving about, sparks flying from angle grinders, the sound of nail guns, etc?
There is absolutely no logical explanation able to stand up to any scrutiny which could explain the continual lavishing of billions of dollars on a loss-making industry run by foreign multinationals. We have to move into the realms of biology and psychology.
Anyway, the problem could right itself soon. I doubt the US government will be able to give the carmakers the money that they need to survive, and Australia`s tiny Detroit-run operations will be closed. Even if the US carmakers do survive, consumer tastes will see the Commodore and Falcon go the way of the Bluebird, the Magna and the 380. The government will then be left having to justify subsidising the operations of an immensely profitable $218 billion giant multinational.
Notwithstanding the government`s splashing money around like a drunken sailor, the end of the appalling Australian car industry is in sight.
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“On my rough calculation, every taxpayer will contribute the best part of $700 to this plan (where is suspicion of foreign multinationals when you need it?).”
The tax payer does not contribute anything, it is the government that is spending the money. It is aggregate demand that is waining at the moment. Giving money to car companies will not fix that, but all spending is in the end a political choice and giving them the money will find its way into the economy somehow. The car manufacturers worldwide need to sell more cars, especially in detroit, to save themselves. If your going to have a subsidy it would have been a better to subsidise the consumer market with cheap loans and let them decide which cars they will buy.
Regards
Paul
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