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The Forum > Article Comments > Why the Government's car plan is a scandal > Comments

Why the Government's car plan is a scandal : Comments

By Henry Ergas, published 5/12/2008

The Rudd Government's car plan provides the industry with far more compensation than the producers are losing from lower tariffs.

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The statement that proposed subsidies are unprecedented is pre the looming Detroit bailout, to be some $US24bn initially just for GM I believe. As Michael Moore says having spent that they'll come back for another handout next year. The problem I think is that the car market is set for a major transformation but nobody is quite sure what form it will take. Some people's mobility needs will be met by plug-in hybrid electric cars and they will have the purchasing power to buy them. Others will miss out on both counts. People doing heavier work or long commutes could benefit by natural gas cars, except that few garages have the filling points and home fuelling equipment is expensive. So any retooling by car companies is a leap of faith that may backfire disastrously. The natural reaction is to ask for protection and try to resume business as usual.

I'd be inclined to give timed out protection to develop green cars to see if they meet market needs. If after say two years the market is paralysed then try something else.
Posted by Taswegian, Friday, 5 December 2008 8:59:03 AM
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I'm surprised that an economist as esteemed as the author would ignore the fundamental concept of "knowledge spillovers'. The diversity of high level technical skills in the automotive industry eventually show up in other industries and enhance them as staff turn over. This is different from the immediate economic multiplier (which is generally close to 3 with high local content industries). A good example of the knowledge spillover is Telstra. Technical people trained in Telstra became the wellspring of our electronics industry. The downscaling of Telstra's research labs was a national calamity because of the loss of ongoing knowledge spillovers, although there was an immediate gain (Ergas wrote on this 20 years ago comparing various national technology strategies). As Ergas would know, knowledge spillovers are a "market failure" because they can't be appropriated by the knowledge generator. Inappropriability, along with indivisibility (eg size) and risk (eg R&D) are the well-accepted areas for Government subsidy to induce a socially desirable level of activity.

Personally, I suspect that hybrids as we know them won't do much to improve the environment (see my OLO of 28 October on Net Energy Analysis). However, it will take time to figure all this out and the meantime we need to preserve our skills base as best we can. It won't be done by the hamburger flipping children of classical economists.
Posted by Jedimaster, Friday, 5 December 2008 10:16:00 AM
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The 'assistance' package is all the more absurd when one considers there are three manufacturers serving just 17 per cent of the population (more than 80 per cent of the population buys imports). One can say therefore that there is ONE car manufacturer for a ONE MILLION of population. Absurd to think this is sustainable where countries with 20 times this dont contemplate manufacture, but Australia does.

This is real beggar-thy-neighbour stuff when one considers that 80 per cent of Australians are paying inflated prices for cars to keep that other 20 per cent supplied with oversized, old-technology cars (mainly bought by the commercial sector.

A word comes to mine, obscene and naive economics.
Posted by Remco, Friday, 5 December 2008 10:26:31 AM
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Jedimaster is rather optimistic (and demeaning of the writer) in asserting that he is not aware of knowledge spillovers. Spillovers (and externalities, multipliers etc) are oft quoted by those seeking to amplify their industry's contribution to the economy. We have been making cars for five decades, and while during that time there may have been some spillover, the cost from assistance measures has been huge. More than that, if the same assistance (or money left in our pockets, for lets be clear "assistance" is our money)was applied to new technologies, how much bigger would the value of the spillovers have been than applied to car production?

Nice try to talk of green cars, hybrids etc, just like what the Big Three are doing in the US in pleading for survival money, but lets be clear, five decades to produce old technology.

It will hurt but its time to pull the lifesupport system. The patient is brain dead.
Posted by Remco, Friday, 5 December 2008 10:48:18 AM
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REMCO
If you read my posting properly, you would see that I did not say that Ergas is unaware of spillovers. In fact, my reference to his earlier work recognises that he is clearly aware of knowledge spillovers. In about 1988 (I have lost the exact reference) he wrote a very illuminating article on different national technology strategies, For example, the US style was to build up a national vision (like project Manhattan, race to the moon, etc) and then kill the project, thus ensuring that the competencies did not remain in an enclave. I found that many of the NASA engineers turned up in the solar energy businesses of the 1970s when I worked there. As I said, there was an immediate benefit for Telstra downsizing and outsourcing, but we have lost critical mass for further training. Most small subbies don't train apprentices for example.

Further, if you read what I wrote (including my previous article) I am skeptical about the present (global) approach to green transport.

As usual, I make a plea for INFORMED on line opinion, not Pavlovian responses at the first trigger word.
Posted by Jedimaster, Friday, 5 December 2008 11:07:08 AM
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OK it gets on my goat to bail out large American corporations who got into difficulty because they made the wrong decisions and use the wrong business plan. These are corporations that have operated in Australia with Australian financial backing since they opened their factories in 1946.

The car industry employs people directly at Ford, Holden and Toyota and indirectly at Ion, Johns Valves, Nippondenso, Lucas, Bosch and all the myriad of small component manufacturers. However if the car plants close what do the unemployed workers do? Become computer programmers? work for Bunnings? go on the dole? ACTU longtitudinal statistics show that 55% of retrenched workers will never work again. When we close plant we quickly lose that skill base - even if we used to pay those skilled workers poorly.

It took 40 years to build at IT industry in Australia that employed 250,000 people by 1992. In that year Telecom was responsible directly and indirectly for $1 in every $4 spent on IT in this country. After retrenching over 100,000 skilled workers large organisations believe we are no longer able to undertake large software projects so the Victorian government invited 5 foreign firms to tender for a large software project 2 weeks ago.

You have to wonder what jobs are available for Australian youth - sales and service jobs with face to face customer contact. Do we go the Brazilian route and confine the labour that' surplus to requirements in slums riddled with disease and poor educational outcomes?

Since 1946 there have been a number of Australian cars, Harnett, Sarich. Can't we build a car for Australian conditions again? If Detroit wants to close its doors then reuse the plant for an Australian design.
Posted by billie, Friday, 5 December 2008 11:27:14 AM
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It is most peculiar (even with its poor record of understanding economics) that the Rudd Labor Government is committed to tariff reduction to encourage the Australian car industry to become more competitive, but then rewards it for being uncompetitive with billions of tax payers’ dollars.

No sympathy should be wasted on our car industry. For a very long time now, car makers in Australia have ignored the fact that their prospective customers wanted smaller more fuel efficient cars. Surely, the basic idea of any business is to please customers by providing what they want?

Holden now says it will build a small 4 cylinder car, but it could be too late. People who want small cars have got used to the idea that if they are to get what they want, they have to buy imports. It also seems that the Australian industry is kidding itself to think that it can maintain operations when countries like America are in trouble, and Britain no longer manufactures any cars. All their brands are built in low-wage countries. Places like Sweden seem to manage with small local markets, but we don’t hear much about their current position.

The much touted protection of jobs is a furphy. This government and the previous kidded some of us that bringing in skilled migrants was a good idea. At least 40% of these migrants don’t understand or speak enough English to perform their skilled occupations in Australia. Most of them are driving taxis, and even there, their lack of English and knowledge of Australia is the cause of non-stop complaints.

Let the car industry go, and re-train the workers in it.

Overpopulating the country and still having to buy jobs for workers in failing industries is bizarre.

Here is an economist talking sense. The Rudd Government should be listening to him, instead of whoever are they are listening to now
Posted by Mr. Right, Friday, 5 December 2008 11:36:15 AM
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i understand that a two billion car seller fund is now created[where does this free lunch end?]when is govt going to subsidise the buyer [not the seller]

,if cars arnt selling give intrest free loans to those needing work vehicles [or vehicles to live in when their homes get reposessed.

govt is good at giving huge sums of subsidy to big buisness ,it is their generosity that has set this trouble in train

[why hasnt the industry diversified ,it could easilly produce mobile bed size ,vehicles that meet human needs ,yet insists on producing the rebadged clones it wants to build[or gets ordered to build] by special intrests.

our whole lifetimes we have paid more for these items than we needed to ,where basiclly war machines get a makeover to keep the war industry ticking over till the next war[where is the inovation?]

why cant industry find a way to service us instead of us servicing their vehicles[and their industry]

the subsidy to the auto[read petro owned auto industry is frozen in time past[ before govt largess deflated the value of our money] ,by gifting it to support a dying transport sector[dont forget to calculate in the costs we bear building roads for these monsters]

its not as if the industry NEEDs to run cars on petrol, but hey the oil industry owns the auto accesory industry [and they all love the govt freelunch]

govt has commited to the industry all the money it should be allowed to recieve for free[this should be clearly stated [get viable or get out]the bucks dont come from govt anymore ,[yeah right]they will just take over the 2 party system and line up for their next freelunch, via their latest guy in govt
Posted by one under god, Friday, 5 December 2008 4:56:31 PM
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First apology to Jedimaster for my lose writing. My comment about "green cars" was aimed at the sycophantic car makers who particularly in the US are making promises of going green in return for a bailout. Even we are going to get an assembly operation (with notional r&d no doubt) in return for Rudd's $32m gift.

Our car industry should have been allowed to rationalise years ago to at best just one manufacturer. Democracy as practised in Australia with its over-governance means governments actually worked against efficiency gains by propping up the Elizabeth plant. The patient died anyway, one down, two or three to go.

By any measure, Australia has been abysmally managed with 13 layers of government more about preserving than working to an efficient industry. If it wasnt for our removalist industry (ie. resource rippers), we'd be in a parlous state. Perhaps in that parlous state, we might have gone like our cousin across the Tasman who under Lange and Douglas closed down their car plants (and got fundamentally a much healthier economy - at least healthier than ours without the resources).

We have governments where the Howard government gave GMH $50m to produce a V8 engine. Expedient governance the price of our federalism.

The car industry is brain dead.
Posted by Remco, Saturday, 6 December 2008 11:35:15 AM
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Good article but some pertinent points about retaining skills by Billie. I have a major problem with the car plan in that it will probably have a net negative effect on start up Australian R & D firms who will not be able to meet the funding requirements of the mooted Green Car Plan aspect of the package. It will throw money at the multinational car companies and encourage them to spend it on their own R & D in-house putting smaller, local firms at an added disadvantage.

The fact that the main body of the plan is one huge employment program for Labor voters is stating the bleeding obvious. If, as Billie states, we want to put money into employment and skill retention may I suggest that we start with existing efficient and smaller companies that are producing things that people actually want to buy. If GM and Ford hav'nt been able to efficiently manufacture petrol cars at a reasonable cost, why should we expect them to do so with Green / Electric cars. It was just a few years ago that GM went out of it's way to "kill the electric car" (see movie). With such brilliant forsight then why trust them now ?
Posted by The Sheep Farmer, Sunday, 7 December 2008 10:07:53 AM
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The headlines that wont appear.......

$2 BILLION FOR BITUMEN AREAS USED TO TRANSFER OWNERSHIP OF CARS.

I voted for Rudd and the last time I voted Labor before that was "It is Time" for Whitlam. It will be a very very long time before I vote Labor again.

That is now $8 billion on life support on a brain dead industry. A US$0.48 cent dollar on the way under Rudd's economic mismanagement. (Nice guy though).
Posted by Remco, Sunday, 7 December 2008 6:41:15 PM
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"Indeed, this is becoming the government’s modus operandi: set up massive slush funds that can be used to strengthen existing constituencies, or even create new constituencies, whose fortunes hinge on its remaining in office." I.e., Rudd and Swan from Queensland and Carr from Victoria are embracing the politically successful but economically damaging policies of their state mentors such as Peter Beattie.

10-12 years ago then Reserve Bank Governor Ian MacFarlane abused me for contesting his statement that protectionism was dead. How now, Mr Mac?

Jedimaster, the evidence for spillovers is contentious, many case studies have found that when one looks at the producer-client group that gains are contained by them; cf the work of Paul Geroski. Additionally, in his final work, the prioneer of statistical analysis of R&D and innovation, Zvi Griliches, concluded that after more than 40 years it was still almost impossible to find usable data rather than highly-imperfect proxies ("R&D and Productivity: the econometric evidence," 1998).

DISCLOSURE: Henry Ergas is my favourite economist.
Posted by Faustino, Thursday, 11 December 2008 8:06:14 PM
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