Ideas that may or may not matter: Population, the home market effect and manufacturing

Posted on by
4

This is sort of in the vein of the intermittent series (1, 2), its adopted sibling and an older post on “hollowing out”. But it’s also much less thought out.

Earlier today, following the announcement that Ford would shut its Geelong plant,  Scott Steel tweeted

Although the following conversation indicated he may have been concerned largely with products designed for Australian consumers rather than domestic production and certainly not exports, it did remind me of something very interesting, but possibly unimportant – the home markets effect, a product (partly) of the equally fascinating and possibly unimportant New Trade Theory and New Economic Geography.

In short, companies that produce for a market in their own country have an advantage when exporting. If we have increasing returns to scale, that is it keeps getting cheaper to produce more once you’re already producing, then the efficient, cheap producers are those who are already producing. This might simply be because the factories are already built, the workers trained, the know how known etc so there are no start up costs.

If so, then when it comes to trade, the countries who were producing widgets for their own market are those that provide it cheapest to everyone else. The home market has become part of the country’s comparative advantage.

The trivial example might be in your cupboard. If you have a tin of tomatoes, unless it is SPC, its almost certainly from Italy. The most expensive part of a tin of tomatoes is the canning. Italian plants already produces heaps of tins for Italians, so they can provide them for just 79 cents to us. Continue reading →

Tax games in Europe

Posted on by
3

As I said a few months ago, tax evasion is the big cliff in terms of the future of the EU project. It was thus fascinating to see the tax evasion games played out at the latest ‘summit’ In Brussels yesterday.

To understand what really goes on at these summits, imagine yourself to be the PM of a small country that makes a lot of money by the tax avoidance activities of big companies operating in much bigger countries. You could be the PM of Ireland, Austria, Switserland, Luxemburg, London, Monaco, or even the Netherlands. Depending on which small country you are, the particular way you make money from tax evasion differs. The Dutch for instance make money by allowing ‘post-office’ firms which essentially make it particularly easy for foreign firms (Italian, Spanish, and Greek in particular) to be ‘international’ and to nominally park all the activities in the Netherlands that are taxed lower there (profits). London makes money by intermediating the setting up of all those ‘head offices’ in the Virgin Islands and a hundred and one other schemes. Ireland makes money by complicated off-sets to capital taxation, which is why large US companies (Google and others) have their head offices there. Switserland and Luxemburg make money by having rich tax evaders simply hide their money in their banks. Etc.: the particular way in which your country makes money by under-cutting the big boys depends on the small country involved.

Now, of course the big boys (US, Germany, Japan, France, Italy, the European Commission, etc.) want to tax the activities of the rich individuals and companies operating on their shores. Without that taxation their governments would collapse so they are really serious about trying to reduce the degree to which their companies and rich individuals avoid national taxation. The big boys are hampered by the fact that they do want their companies to be international and sophisticated because that is needed for them to be so successful, and so the big boys can’t really do without complicated international tax arrangements, which invariably will lead to loop-holes and fudges in definitions. One should not think of this as a once-and-for-all kind of ‘finding the solutions’ problem. Rather, it is a perennial race between closing down the loop-holes and new ones opening up. To minimize the tax evasion one needs to have fast and central tax decision making to close the new loopholes. So it was, unsurprisingly, the European Council President, Van Rompuy, who dedicated the summit to tax evasion on behest of the bigger powers.

As one of the bottom-feeders of the tax avoidance inside big countries, what do you do? Well, you lie, you stall, you create confusion, and you generally try to be as uncooperative as possible without openly picking a fight with the bigger countries. Every week you delay is worth several billions. Normally speaking, stalling works beautifully. Just 5 years ago, for instance, the G20 promised the end of banking secrecy and transparency in financial arrangements, which lead to absolutely nothing in the ensuing 5 years as discussions in ‘working parties’ came to nothing. So, the tactic of bending a little on the rhetoric whilst being quietly obstructionist when it really matters has worked for you in the past. Continue reading →

Vale Ford

Posted on by
9

Well, as Ned Kelly may have said on the scaffold, “I suppose it had to come to this”. Ford has been prosecuting a strategy of risk minimisation which has principally been about investment minimisation in Australia for at least a decade and naturally enough, if you don’t invest you end up uncompetitive.  It’s been sad to watch how little dignity our politicians have had in negotiating with Ford. We’ve tossed them money begging them to stay.  Even if you accepted the protectionist argument that manufacturing is the salt of the earth and that we should therefore subsidise it if necessary - which I don’t – the real pity is that it has been evident with Ford for a decade or so that our subsidies were good money after bad.

As I’ve argued, if you did want to build the industry, we tossed these guys a lot of money and had we made that available in a ‘beauty contest’ I think it’s quite likely we could have got one of the emerging Asian giants of India or China to buy Ford’s assets and use them not just to accelerate their entry into what is an important developed country market but also to export a large car to stick in their showrooms around the world to fill out their model range. This would have been the cheapest way available for them to build a unique, large flagship car for those showrooms – where the game is largely to present buyers with a large, luxurious and highly priced car which then ‘frames’ their main range as better priced.

I’ve discussed this and some other issues in numerous columns and since I enumerated them the other day in an email to a journo who was doing a feature on the industry, I thought I’d copy them all down for you here for your reference:

http://clubtroppo.com.au/2006/08/05/some-ideas-for-the-car-industry/

http://clubtroppo.com.au/2007/07/19/the-car-industry/

http://clubtroppo.com.au/2009/02/23/choosing-your-parents/

http://clubtroppo.com.au/2012/02/13/car-industry-policy-the-podcast/

http://clubtroppo.com.au/2012/01/12/back-to-picking-losers-the-current-woes-of-the-car-industry/

Postscript: I’ve done some radio interviews on this subject and here’s one which was quite fun.

The politics of envy or something more worthy?

Posted on by
24

Marshall2One of the most successful memes of the right in the last decade or so is that redistribution is the politics of envy. Of course politicians have to appeal to the emotions, and they have to appeal to all denominators including the lowest common ones. Well they don’t have to and there are limits, but if you’re in favour of progressive taxation it’s asking too much of a democratic politician to expect them not to point out to those at the bottom of the pile that those further up are doing better than them.

But it seems that so high minded am I that I never thought of this as the politics of envy. I thought of it as part of a long and distinguished sensibility of modern reform which, as it turns out is supported with remarkable uniformity by the great economists, from Smith through Mill, Marshall, Pigou and Keynes. That world is disdainful of the value of the “baubles” of power and wealth. Smith was particularly vigorous on the subject, indeed, making irrational hankering of the rich and powerful for baubles one of the major engines of the decentralisation of economic and political power in Europe.

But for all of them, the utility benefits of income encountered strongly diminishing returns once a degree of comfort had set in. As Marshall and Pigou were at pains to point out a dollar to a poor person meets more urgent needs than a dollar to a wealthy one, or to put it another way (which Marshall and Pigou did), other things being equal, dollars going to the poor are a more efficient use of dollars – in achieving the ultimate output (which got called ‘utility’) than dollars going to the wealthy.  (Oh, and of course they would have understood the point that other things are not equal, and that paying money to poor people can have incentive effects, so then one would pursue some joint optimisation problem of optimising utility subject to undesired incentive effects.)

This whole perspective was one that was shared by many reformers in my father’s generation. For me one of the touchstones of it in individual conduct is attitudes to classes on airlines. Why would you want to sit in business class?  Well the seats and food are nicer, but for three times the price of an economy fare? Are they that nicer? Further there’s something a tad awkward about lording it over others by sitting at the front of the plane. Some people who could clearly afford it don’t fancy it. The great billionaire philanthropist Chuck Feeney doesn’t like flying up the front of the plane as he travels the world giving his money away. That’s not like Cardinal Pell, the apostle of Christ for whom business class is not adequate. He travels first.

And in the 1980s and even the 90s I think there were a few politicians who travelled economy class. I think Peter Walsh was one of them. I wonder if any do today. How do the Greens travel?  Even by the time I got to the Productivity Commission – then the Industry Commission in 1993 – I’d say maybe 15 odd per cent of the staff entitled to travel business class travelled economy class. I doubt there’d be many there now, but I hope I’m wrong. I recall one Commission meeting where we were encouraged to travel business class.

In any event I came across this post on Alfred Marshall today and its quotes from Marshall reminded me of some of his own aspirations about wealth, and they’re worth sharing here: Continue reading →

Google Glass, Google Class

Posted on by
7

Google Glass

Something I picked up recently in San Francisco. OK I don’t own it, but got to play with one waiting in a queue and talking to a developer waiting to get into a function at the conference I was attending. I was impressed. It looks a bit weird, but you ignore it until you want to look at it, at which point you look up and to the right a little and there, apparently a foot or so from your head is a little TV screen.

I liked the way they’d set up the interface which, as we’ve known ever since the Mac is the secret source of a great IT product like this. You talk to it and ask it to look stuff up, show you stuff, take pictures etc. And you can gesture to it by running your finger along the side of the black plastic near the eye-piece. This works like a scroll bar or dial and you can replay your day and generally use it to help you access files.  One of the people in the queue said that it would likely replace a lot of smartphone use. One’s phone would stay in one’s pocket and you could use Google Glass to consult it most of the time, and you would then take out your smartphone when it was particularly apposite. I don’t know if that will happen, but I could see why he thought that.

Anyway, I was impressed. I doubt I want to be a leading edge user, but when they get it (even) better and cheaper, I might well be in for my chop.