The car industry

Here’s a repeat of some stuff I’ve written here at least a couple of times – on each occasion provoking the usual Pavlovian responses of rent seeking. Crikey rang me and asked me for a comment on the Ford closure which is reproduced below.

In the wake of the downsizing of Fords Geelong operations, Victorian Premier Steve Bracks has urged the federal government to reconsider its planned 5% tariff reduction on imported cars, due in 2010, in an effort to help the domestic market.

Theres that special pleading again for the car industry. I expect Steve Bracks is on stronger ground than he realises. Cutting tariffs below their current levels will of course harm the car industry. Thats actually how tariff cuts have helped economic growth in the last decade by slowly moving resources from lower productivity industries to higher productivity industries.

Thats going on at greater pace right now as returns to mining surge and the economy directs increasing resources to it.

But below some level, cutting tariffs actually makes little sense. Like some economic advice followed during the depression, the pain appeals to our sense of virtue but if anything it makes things worse in the long term not better. Why? Because cutting tariffs increases imports which must be paid for by increased exports. And for some exports like wool and wheat and coal we cant increase them without cutting their price.
So, as the Productivity Commissions modelling illustrates, the economic gains from shrinking the industry a little are outweighed by losses from export price falls. The argument is actually stronger than this, but the industry hasnt funded the necessary work to demonstrate it.

Nor has the Bracks or Rann Government. Surprising yes. Sad definitely. But true.

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37 Responses to The car industry

  1. Uncle Milton says:

    “And for some exports like wool and wheat and coal we cant increase them without cutting their price.”

    There’s a few issues here.

    In recent years we’ve managed to increase our resource exports while getting much higher prices.

    In the PC modelling, is the optimal tariff on cars 10%?

    But most important of all, what evidence is there that Ford’s decision on reloacting its engine making plant has anything to do with prospective cuts on the price of imported Hondas, Nissans, BMWs etc? If less of these cars are imported, is Ford really going to sell more of its engines?

  2. Milt,

    you’re right, commodity prices have risen while we’ve exported more. Ceteris paribus old chum – ceteris paribus. There are many things going on.

    And yes, Ford may well have done what it did even with tariffs at 5%. The argument remains to be judged on its merits, not on what’s happened lately. The argument is that, given current settings elsewhere, there is an optimal car tariff and it isn’t zero or even five percent.

    In fact the optimal response to the whole line of reasoning is not a tariff on cars but an export tax on the relevant commodity exports. But while there is not tax on them, the fact remains that below some level reduced car tariffs reduce national economic welfare.

    In my book that’s a reason not to go ahead with them.

    From memory the PC modelled cuts in tariffs from 15% and found welfare losses. But they didn’t nominate an optimal tariff. They didn’t want this output from their model so they made an additional assumption that tariff cuts would stimulate productivity growth. There’s something to be said for this I guess. Certainly observed gains from trade seem to be larger than the (neoclassical) theory suggests. But it’s very ad hoc.

    So ad hoc that there’s a glaring problem. The model suggests that the optimal policy would be an import subsidy. And the imposition of costs on firms more generally – just to ginger them along in improving their productivity.

  3. Damien Eldridge says:

    Of course, the reason the PC/COPS modelling, and most CGE modelling, comes up with the result that the optimal trade tax rates are positive is built into the CGE models from the start through the use of the Armington specification. In effect, most CGE models assume that imported goos of a particular type are imperfect substitutes for domestioc goods of a similar type. As a result, each country possesses market power in every traded good industry. This assumption is used because it is a relatively nice way to explain things like intra-industry trade between countries. But there is a question about how realistic it is for at least some industries. Furthermore, I seem to recall reeading that the Armington elasticities that are used in the CGE models used by the PC and COPS are based on estimates that were derived in the 1970s. How accurate these estimates are today is another question that needs answering. I believe that the PC has been looking into these issues recently.

    If we are going to justify non-zero levels of protection on the grounds of market power, I think it is much better that we set trade taxes based on the level of market power in the market in question, rather than setting them indirectly. The reason for this is that it forces people who want to argue for optimal tariffs or optimal export taxes to actually establish that Australia is a large country in world markets for the commodity in question. It is much easier for a lobbyist for Australian car manufacturers to say lets keep our car tariffs where they are because we have market power in some other market. In other words, I think that setting optimal trade tariffs indirectly is more likely to increase the amount of rent seeking activity that takes place. Furthermore, allowing indirect trade tax arguments to be made makes the assessment of optimal rates of protection much harder, since you have to consider every single market rather than just the one in which you are interested. (You probably have to do this anyway. Hence the use of CGE models rather than a straightfoprward partial equilibrium analysis. But why complicate things even further?)

  4. Uncle Milton says:

    Also it is not true that more imports today will cause a fall in our export prices today because we have to export more today to pay for the imports. We can import more today and borrow from overseas to pay for it.

    Eventually, we will have to export more to pay for more imports but that day could be a long time into the future. As a nation we have a remarkable ability to keep running trade deficits and borrowing the difference. Our overseas cfeditors, bless them, aren’t too fussed about asking for their money back.

    By the time we need to export more to pay today’s extra car imports, who knows what the economy will look like? There might not be any terms of trade effects at all.

  5. harry clarke says:

    Damien is right the wrong conclusion that you propound yet again is due to the invalid Armington assumption in the COPs-type models that the PC uses. It exaggerates the strength of terms of trade effects on export demands markedly.

    Monash-type modelling is producing silly results on protection, silly results on immigration (skilled immigration makes us worse off according to their recent reports) and is confusing Australian policy debates by understating the elasticity of demand of our exports.

    Moreover there are plenty of good trade theorists about the place who could set the PC straight. You have to ask about the reasons for their obstinate stupidity. Why not at least listen to the numerous viewpoints that question these specifications?

    Nicolas think about it – this is a crazy argument. Setting tariffs on cars because an optimal export tax is not set on coal or iron ore exports. The idea is presumably that the tariffs will drag resources out of mineral exports, decrease production of iron ore causing a terms of trade improvement.

    Simple question: What resources will it release? What factor substitutions might occur between the industries?

  6. Mark Hill says:

    Well said Harry and Damien. It truly is a load of bunkum.

  7. Mark Hill says:

    Oh dear, what have I done?

  8. Mark Hill says:

    Crazy italics on and off like a hollywood power couple…

  9. harry clarke says:

    Nicholas, Have you been enjoying a vino or just taunting us by ignoring the argument we put. Where are the resource transfers from coal and iron ore to the auto industry that your argument relies on?

    If there are none the tariff you impose will just impose a deadweight loss.

    What you are saying is that we want import tariffs to substitute for an export tax. So you would be equally happy with an export tax which has the same effects? Its the Marshall-Lerner theorem. Which industries please?

    Make sure the industries you select are competitive – not firms like BHP-Billiton which might have some have market power in coal and iron ore. They will be already extracting the monopoly rents and won’t need any export tax.

    Your argument dissolves whichever way I look at it. We are not being puritan in rejecting tariffs – the argument for them does not arise on the grounds you assert.

  10. Harry,

    I’m not sure what more can be said. We agree that an export tax is the first best policy. It is better than tariffs. I think we could both agree that one is unlikely to be implemented any time soon. That leaves the question of what, in those circumstances, the car tariff should be.

    You believe that the Armington assumptions are driving the result in the models that cutting car tariffs below some point worsen welfare. I concede that they may do to some extent but that the same kind of argument will remain even if one increases the elasticities somewhat.

    We have a policy to lower the car tariff to 5%. I think it will lower national economic welfare so I oppose the tariff cut in these circumstances and say why. I’m not doing that to taunt anyone. It’s where the arguments lead me.

  11. Damien and Harry – as I indicated, the first best response to the terms of trade arguments is an export tax. No doubt about it. While we’re waiting for such policies to be introduced, should we pursue policies that the modelling suggests make us worse off? I’m just old fashioned I guess but I’m against pursuing policies that make us worse off. I prefer policies to make us better off.

    Even if the Armington assumptions understate export elasticities, higher elasticities than those still justify (lower) optimal tariffs (as a second best policy to the first best – but lower – optimal export taxes).

  12. Uncle Milton says:

    “Its the Marshall-Lerner theorem”

    No, that’s about devaluations improving the trade balance (or not).

    Harry, you’re thinking of the Lerner symmetry theorem which says that, assuming a a zero trade balance, an export tax will have the same effects as an ad valorem import tariff.

    Nicholas, these optimal tariff arguments rely completely on the myopic
    assumption that other countries won’t impose optimal tariffs on our exports.
    As you know, if they do, we are worse off imposing a tariff, even with
    favourable terms of trade effects.Equally, we are better off by cutting our tariffs if other countries cut theirs on our exports, despite unfavourable
    terms of trade effects.

  13. hc says:

    Uncle Milton, Yes I am thinking of Lerner symmetry theorem. You are right.

    Imposing this theorem here is crazy since the theorem only suggests that an export tax is equivalent to a tax on imports. It doesn’t pick out the car industry as the sort of import you would want to impose the tax on.

    The industry that you would choose would be one which drew resources away from the exporter to reduce its output and increase the prices it could charge. Again I ask Nicholas: Which resources will a protected car industry draw from being mining firms or tourism or agriculture – our main exports?

    This is a difficult quiestion involving an analysis of substitution and complementarity issues throughpout the economy. You’d need to crank the answer out of a compllicated GE model.

    But why would you ever do this? If you did think you could get away with an export tax (without incurring the retaliatory issues Milton mentions) you would levy the specific export tax – not spread a low level of protection across the economy’s imports or arbitrarily pick one troubled industry and give the protection to it.

  14. Uncle Milton says:

    The politics of an export tax are impossible.

    In the public mind, exports are good and taxes are bad, so who in their right mind would want to tax exports?

    And export taxes would probably run afoul of 57 different WTO rules as well.

  15. hc says:

    Milton, I partly agree. Notice that in countries such as Thailand, who are significant global rice exporters, export taxes are introduced to lower the local price of rice.

    Hotel services are often subject to bed or room taxes and these can be an export tax.

    On minerals export taxes can be hid in various types of provisioning taxes (transport, port charges) etc.

    But don’t misrepresent me. I am not arguing for such taxes – in areas where we have market power I think firms will already extract the rents.

    I am not arguing for dumb export taxes – just saying that import duties spread throughout the import sector are even dumber than export taxes.

  16. I think a prawn and lobster export tax might generate some domestic support in Australia :) I’m assuming we’re net exporters and that that’s a major reason for the high price.

    I’m not suggesting it – though I might be a beneficiary. Yum!

  17. epicurean says:

    The Dismal “science”. NG, HC & Uncle Milton may be right about the pin dancing angels but WTF cares?
    Of all the non jobs thrown up by capitalism (for want of a better word, pace G Gekko)’economic expert’ has got to be the ultimate oxymoronic waste of oxygen.
    Every time finace stats. come out, doesn’t matter if it’s Current A/c, Budget Deficit, exchange rates or ANYTHING with a $ sign attached, they are invariably, eternally, inevitably wrong.
    And yet we, the tax payers, feed them! WHY, fCs?

  18. Milt,

    I wrote this in response to your comment this morning – and then didn’t press ‘submit’. So it’s in response to your comment no. 12.

    The argument I’m putting is about tariffs. Govt policy is to reduce car tariffs. My understanding of my discipline leads me to believe that that will generate net economic losses not gains. It is also true that if my argument holds the car tariffs could be replaced by targeted export taxes to good effect. I agree that one among many considerations that need to be taken into account if one were heading down that track is whether or not other countries would retaliate.

    Since you raise the matter it seems fairly specious. Countries tend to ‘retaliate’ against each other by imposing tariffs on items they fear have an artificially low price, not a high price. But the argument is pretty academic in this context.

    I presume you don’t think that other countries will impose taxes on our exports in retaliation against our tariffs on imports?

  19. Damien Eldridge says:

    Nick, what evidence do you have that Australia as whole can exercise market power in the world market for particular goods that is currently unutilised? Which goods in particular? On a related topic, how is something like the single desk for wheat exports handled in the CGE models? If we have market power in world wheat markets, surely the single desk would be exercising it already?

  20. Damien,

    The other markets I mentioned were wool and coal. On the single desk, if you were to go after an optimal trade type of argument a single desk is a problem for extracting rent because that rent has to be got back into the hands of the growers which creates problems as it creates incentives to grow more wheat. So if you were to try to capture the rent an export tax is the simplest way of doing so.

    One doesn’t need a lot of market power to generate an optimal tariff argument.

    However, I think I’m being pretty comprehensively misunderstood here. I’m not actually advocating making any changes to existing policy to go after any rents. I would agree with you that that would be a difficult and somewhat speculative business even as a technical exercise – and it’s politically impossible in any case.

    My argument is a conservative one (in the literal sense of that word). I suspect the underlying economic arguments to which I’m appealing are not strong enough to justify making some change of policy. Certainly the kinds of effects we’re talking about – both the efficiency benefits of the tariff cuts and the terms of trade losses on the export side – are pretty small.

    I’m making a simpler claim – that there’s no point in changing policy – in reducing car tariffs unilaterally when it looks like the benefits are small and there are costs which probably outweigh them. I would be happy to negotiate them away in seeking better access to others’ markets.

  21. Graeme Bird says:

    “Because cutting tariffs increases imports which must be paid for by increased exports. And for some exports like wool and wheat and coal we cant increase them without cutting their price.
    So, as the Productivity Commissions modelling illustrates, the economic gains from shrinking the industry a little are outweighed by losses from export price falls.”

    This has got to be the most fallacious reasoning available. Its a straight gyp.

    It typical Keynesianism because you have just made rigid the exchange rate the relative price level and you have turned the business decision-makers into mindless robots.

    Why do we have the productivity commission. For them to come up with this Keynesian 101 idiots model means that we could save a bunch of money by sacking them and improving our exports via the route of cost savings.

  22. Damien Eldridge says:

    Nick,

    I am not arguing that we don’t have market power as a country in any world markets, but I suspect that the set of world markets that we do have market power in is extremely limited. When I was a student, fine quality woll was the one that used to get mentioned. I would imagine that at least some minerals and the like could be added to that list. I am not sure about wheat. In general, I think the characterisation of Australia as a small open economy who has higher transport costs than average due to distance is quite reasonable. Furthermore, I do not think it is a good approach to policy design to resort to indirect arguments for trade protection. This simply reduces the transparency of the justification for any trade policy that is chosen and makes rent seeking easier.

    As an aside, I suspect that market power is a much bigger issue for non-traded goods industries within Australia than it is for the country as a whole in traded goods industries.

  23. Damien Eldridge says:

    Actually, it is worth noting that when I was a student, I think there was some debate over the commodities in which Australia might have some market power on world markets. I think the usual suspects were fine quality wool, some minerals and wheat. However, I am not sure that there was general agreement on the exact members of this set or the extent of any market power that existed for any particular member of the set.

  24. Graeme Bird says:

    If we freeze aggregate nominal demand we can analyse things in such a way as not to stooge ourselves.

    So freezing aggregate demand we find that economic progress is a process by which nominal wages fall but the cost of consumer goods falls faster. Hence real wages rise in response to economic growth and productivity improvements.

    Trade doesn’t change this process. It just allows us to sell HIGHER and buy LOWER (given frozen aggregate demand) then we otherwise would without the other countries.

    Now there is immense sophistry in what Nick is saying. When we trade more we get HIGHER prices for our exports and LOWER prices for our imports…. Given a frozen aggregate GDR. Or at least we get a situation where our goods that we otherwise would have bought locally fall faster in price then our exports. Hence a overall fall in the price level hence a higher real standard of living.

    Look at the process of it in practise. We didn’t start exporting coal like there was no tommorrow because the coal industry eyeballed the trade deficit and assumed it was forced into selling more so started doing so at a lower price.

    NO WAY.

    Rather what happened is that more trade started going on so we have access to cheaper goods via imports and at the same time could sell dearer coal because of the extra export demand generated from the imports of the cheaper goods.

    Think of China and the rest of the world in relation to what we are saying here. We demand their cheaper imports and that demand is repaid by higher prices for our exports. At least higher prices for our exports IN RELATION TO the lower prices for our imports.

    Thats what we would have perceived if we had frozen aggregate demand. Or at least our exports would have dropped in price less then the massive drop in import prices.

    Look at a supplier. He will supply more at a higher price. But he is not COMPELLED to supply more and force a low price upon himself.

    If you have more resources you go after higher margin business.

    I cannot believe that a grown man, whose studied economics, could fall for this disgraceful bit of sophistry the way that Quiggin and Gruen have done.

  25. Graeme Bird says:

    “Certainly the kinds of effects were talking about – both the efficiency benefits of the tariff cuts and the terms of trade losses on the export side – are pretty small.”

    Our terms of trade will IMPROVE from our own point of view.

    We are not trying to maximise terms of trade here. We are trying to have greater purchasing power locally. But our terms of trade will IMPROVE no question.

    Think of it from the point of view of Chinas progress.

    Is them exporting so very much that they end up selling tons more cheap goods a problem for them? They can sell more at a lower cost because their own people can make more stuff at a lower cost.

    Back to constant aggregate demand. Supposing Australia has heaps of GDR growth. Its wages will fall but its ability to produce cheap stuff will mean that its real wages will increase since the cost of consumer goods will fall faster then wages will.

    Now that we’ll have this greatly increased productive power and greatly lowered price level will we worry that we might have affected our terms of trade a tiny amount?

    No of course not. And from our point of view our terms of trade will be greatly improved. In relation to our own price level we will be getting higher prices for our exports and lower prices for our imports.

    The productivity commision model is junk and they ought to get my advice to help fix it.

  26. Damien,

    I think we’re pretty much in agreement over the merits of these issues – though we may differ about our final policy conclusions. We agree that

    1. There isn’t sufficient mileage in the idea of rents in international markets to develop policy to go after them.

    2 You argue further that “Furthermore, I do not think it is a good approach to policy design to resort to indirect arguments for trade protection”. Well it would depend on the magnitudes I think. If I were OPEC I’d go after them at least if I could do it collectively with enough other countries. If I were Australia I’d exercise extreme caution as the rents are small and the scope for technical or political failure is high.

    Further:

    3. That leaves our current situation and a single question. Should we reduce tariffs further than we have? I say that there are probably small economy wide losses involved. I’m not sure what you think. But based on that view I believe we should not proceed with further tariff cuts without <i>additional</i> reasons to do so which tip the balance into positive territory.

    4. One such additional reason would be gaining access to others’ markets.

  27. Kevin Cox says:

    We put tariffs on goods to make our locally made goods more competitive. There are good reasons for us to support certain industries because of the skills and techniques they keep within the country etc. That is, there are some reasons that are not measured by the simple price – the so called externals.

    If we deem it appropriate to put a tariff on goods and services for these reasons then it is what we do with the money collected that also becomes important. How about using the money to make the industries more competitive by using to the money to invest in better techniques and methods? Do this for a short time then it might make it possible to remove the tariffs. The problem is the same with all taxes that are put on to address a particular problem – say cigarette taxes as a means to reduce smoking. If we used the money to try to stop smoking in other ways through advertising etc. then we would achieve our objectives more rapidly.

    Why the idea of hypothecation of a tax put on for a particular purpose as being bad economics remains a mystery to me. An example of not using taxes on water to increase the supply of water has resulted in Australia having an inefficient urban water supply system where restrictions have become permanent, Sydney is building an unnecessary desalination plant, Canberra is toying with an expensive recycling plant and Melbourne looks as though it is going the desalination route.

    I would suggest that the problem with tariffs is not that they are put on but that it is difficult to get rid of them because governments become addicted to the “easy money”. If the money was used to help solve the problem then when the problem was “solved” then the tariff could be dropped without pain to the government revenues. If you don’t believe me look at the Ansett tax.

  28. Kevin,

    The problem of hypothecation is that it is arbitrary. If something is really a fee for running something then the money thus raised should (generally) be sufficient to run it and the money should be used on running it. If it is a tax then it should be there to raise revenue in a maximally efficient way – and the revenue thus raise should be spent in a maximally efficient way.

    So . . . we should raise revenue from petrol taxes to the extent that it’s efficient. Some of this might be a road user charge in which case there may be a case for rebating that amount back to road building etc (thought that’s subject to caveats I won’t go into here. The rest is a tax. And if it’s efficient to raise the tax that way, it’s completely arbitrary to say that that amount should be spent on something like roads whose only relationship to the revenue raised is word association.

    If we raise 50% of our income tax from people with the top 10% incomes should we hypothecate the revenue back to expenditure on the top 10% of income earners. Perhaps we could subsidise BMW clubs and large houses. the point of taxation is generally to spend the money somewhere other than where you raise it. If you don’t want to do that it raises the question of whether you should be taxing at all and not just letting the market sort out the funding issues.

  29. Kevin Cox says:

    Nicholas I am not saying all taxes should be hypothecated but that taxes put on for particular purposes should address the problem being solved. Tariffs are a classic case. Tariffs should not be imposed to raise revenue but they are to address the problem of keeping industries competitive and so the money raised should be used to make the industries more competitive.

    The taxes you use in your examples are not taxes put on for a particular purpose but are taxes for revenue raising and I am not arguing that ALL taxes should be used for particular purposes.

    To give you another example. I believe we would have a more efficient health system if the medicare surcharge was given back to the people of Australia equally in a form where they can only use it for health related purposes.

    We hypothecate our compulsory superannuation 9% and that seems to be a spectacular success. Why not try it in a few more cases.

  30. We hypothecate the super because it’s not taxation – it’s forced saving. It remains your money, the govt just stops you spending it.

    I agree there may sometimes be a case for hypothecation, but you need to work out the criteria for deciding when it’s worth doing. And the criteria you propose don’t work for me. If there is a case for imposing a tariff (and in this debate my case is that there’s a poor case for removing it, not that if I were starting with a clean sheet of paper I’d introduce it) then it’s not at all clear that that establishes the case for also hypothecating the revenue to spend on the same industry.

  31. Kevin Cox says:

    Nicholas we have been having this discussion for ages and now I see that you agree with me:) If you reexamine the cases where I advocate hypothecation you will find that I always advocate that the funds collected are never spent by “the government” but are returned to all or some citizens and are spent by the citizens for the purpose for which the tax (surcharge, enforced savings, tariff) was introduced.

    Thus the sequence is.

    We have a problem where we all need to act together and not have free riders (e.g. we want to support an industry be able to compete internationally).
    We introduce a tariff (not a tax) which is established so that our industry can survive.
    We give the tariff back to some (or all) members of society to spend to help solve the problem being addressed. The important thing is that we give the tariff funds to many different groups to spend.
    We call on members of society to come forward with proposals on how they are going to make the industry more competitive and we let the people with the funds choose from the market of schemes to make the industry more competitive. We now let “the restricted market” of schemes do its magic. The good schemes are likely to survive and the bad schemes are likely to die.

    This approach in the case of a tariff multiplies the value of the tariff in terms of making the industry more competitive.

    The problem people have with this idea is that they forget the reason why they collected the tariff and they find “a better use” for the funds. I would argue that if you introduce a special purpose surcharge (tax) on any product or service to address a particular problem it is best to spend the funds collected addressing the particular problem and as the problem starts to “go away” you reduce the (tariff, surcharge, tax).

    Once this idea is accepted we have a very powerful (I would claim market based) tool to address the funding of “public goods” and alleviate the effect of “public bads”.

    This is what we have been trying to do with Water Rewards (and we are getting closer to success in getting it introduced). However I am most excited about the application of the idea as a way to reduce greenhouse gases and we are proposing Energy Rewards (or surcharge) as an alternative to Emissions Trading.

    That is we introduce a surcharge on energy that is proportional to the amount of emissions created in its generation.
    Distribute the surcharge to any or all the citizens. (the details are not all that important as long as there are many who receive the funds).
    Require that the surcharge be spent on ways that are likely to reduce emissions.
    My back of the envelop calculations say that we can have zero net emissions Australia in 10 years with a 30% surcharge on the retail price of polluting energy. It will take 20 years with a 10% surcharge.

    With the approach we are guaranteed of success because we increase or decrease the surcharge depending on our success in reducing our emissions.

    Back to the car industry. Using this approach here is one way of addressing the problem of having a local car industry. We put a surcharge on every car being sold depending on the amount of overseas content. We leave the surcharge with the purchaser but we require it to be spent on some way to make the local car industry more competitive. It could be investing in factories to produce local components, it could be investing into research into ways to improve manufacturing, it could be into ways of promoting locally built cars. We don’t try to pick the projects but what we do is to ask that people come up with proposals for “worthy” expenditure then we let the market decide which projects gets the funds. The system will be self regulating because as the Australian content increases so the amount collected from the surcharge will decrease.

    The approach can be applied to just about any collective endeavour. It leaves the government (community, industry group) to decide “the policy” (we should have an Australian car industry, we should increase the living standards of indigenous Australians, we should reduce carbon emissions) and we give them a market based tool to realise the policies.

    There are all sorts of ways of viewing the approach. One is an economic tool to achieve non economic objectives.

  32. As you say Kevin, we’ve (personally) been over it lots of times (by email and phone). I believe I fully understand what you’re saying but I don’t think you understand what I am saying – or rather why it’s a powerful point.

    To try to illustrate, you’re proposing that the money raised from car tariffs be spent subsidising car production in some way.

    You say you want to do this because it’s consistent with the (putative) intention of the tariffs. But we currently raise a lot more by way of the car tariffs than we spend on them as a subsidy. So you’re proposing taking money from where it’s currently going now in the budget and spending it on the car industry. Why? Because the pile of money happens to have been raised with the word ‘car’ in mind.

    An economic approach would be to say that we divert the money from its current use to the use you propose if it has a higher benefit there – not on the grounds that the word ‘car’ was in the name of the revenue raising measure (or to put it more charitably) that the purpose of the original intervention was to assist the car industry.

    Either way the proposal reduces economic efficiency by diverting money from a higher value use to a lower value use.

    On the other hand as I’ve said to you, I think a lot of the projects you’re working on have an intuitive appeal to those involved and so they may well be good policy in the places they’re implemented.

  33. Kevin Cox says:

    If tariffs are for general revenue purposes then what governments do with the funds is up to them. I am not arguing for all taxes to be hypothecated which is what you seem to think I am saying. What I am saying is that when we have problems that have “externalities” that cannot be easily solved then we can do better by creating markets that address the problem directly.

    For example once we decide that we need to support the car industry then we need to find the most efficient way of being able to do this and to have a way of measuring whether we are succeeding.

    As mentioned previously one way of helping solve this issue would be to put a surcharge on car components made overseas. We leave the surcharge with the purchasers of the car but require them to spend the money on things that will in some way support the local car and component industry.

    This approach will give us a way of knowing how well we are doing in supporting the local industry. It will remove the need for governments to get into the business of supporting industry with taxes and in giving special deals. If we find that our industries are not succeeding then we increase the surcharge or add in money from other taxes. If we find that we are succeeding then we decrease the surcharge or use the surcharge for other purposes.

    The money will be spent efficiently on the car industry because there will be many individuals who will have money to spent on supporting it and they will tend to choose the best way for them.

    The real problem we are trying to address is how to make an efficient car industry. To do this it could be partly about increasing prices of overseas components but it is more about how to spend money wisely to support the industry.

    What these schemes we propose are about is the best way to spend funds to help solve a problem. They are not about how to raise the money which is relatively unimportant. To raise money sometimes hypothecation of taxes is appropriate sometimes a surcharge is better sometimes it is best to get the funds from general revenue.

    Economists seem to use price increases as their main weapon to achieve results. An increase in prices through a tariff to help support an industry is a relatively ineffective approach compared to spending some money wisely on supporting industries. I think collecting money by taxes then letting governments decide how to spend the money on whatever they think is most appropriate is not an efficient use of taxes or of achieving desired results.

  34. derrida derider says:

    Arguing either way about the car tariff these days really is arguing about a really minor issue – the deadweight losses of such a small tariff must be pretty trivial in the scheme of things, and for the same reason any effect on the TOT must also be immeasurably small.

    The real issues that gets my goat in industry policy are are the extensive non-tariff barriers. The peculiarities of ADRs, which seem to have no reason but to force overseas manufacturers to make inefficiently small runs for our market; the massive hidden subsidies from state governments, details of which are “commercial in confidence”; government fleets being mandated as Australian-built cars; the banning of most secondhand car imports; and etc.

    The result is we have a fragmented industry that builds expensive mediocre cars in a segment (overpowered space-inefficient rear-wheel drive sedans) that people no longer want. The irony is that we probably could still have a viable industry while keeping the cost of transport down in the world’s most sparsely populated developed country. All we need to do is bite the bullet and get rid of a couple of manufacturers. The short-term loss in jobs would be so small as to be barely noticeable in current labour markets (in the long term of course the higher real wages from more efficient use of resources would increase employment).

  35. What ADRs did you have in mind DD?

  36. Kevin Cox says:

    derrida you are right. This is what happens when governments spend money and this is inevitable whileever governments have control over expenditure of taxes.

    By approaching the problem in the way I am suggesting then the assistance to the car industry is explicit and measurable – and the money will be spent efficiently for the purpose of helping the car industry.

    The real problem is that governments collect the money, decide how it is to be spent and then spend it. Of course they will spend it unwisely because they have no idea whether their expenditure works at implementing the policy. They will in fact spend it (or promise to spend it) on ways to get reelected – witness the policies coming from all sides over the past few months.

    In the approach we are advocating we would have the government deciding a policy and expressing it in some measurable term. In the case of industry it could be 50% of the value of vehicles sold in Australia are to be made in Australia. This policy would be handed to an independent group to implement. They would start with a surcharge of anything – say 10% – and they would ask industry to come up with proposals and investments that would help local manufacturing. The surcharge would stay with the purchasers of cars and the money would have to be spent on these proposals and investments.

    For control purposes the surcharge would be given to the purchasers as a new currency for this special purpose. That is – it can only be redeemed for cash after it is used to pay for one of the approved projects. This currency can be traded and the value of these trades will tell us how economically inefficient the policy is. That is it will tell us how much the policy is really costing the economy.

    The independent body administering the system will know exactly how well the system is doing against the target of 50% and the policy makers can then decide whether it is worth continuing or whether a target of 20% Australian made is enough or whether it should be 100%.

    Most expenditure of taxes could be done this way including the expenditure of the collection of taxes and the distribution of welfare, health and education monies. I’m having a bit of trouble with defense:) but think most defense functions could be covered with policing and legal expenditures.

    In the long term the system being envisaged might mean government expenditures to set policies might end up being say 5% of total expenditures but collective expenditures might well be of the order of 50%. It will work well because the system gives us a way of spending money on public goods and alleviating public bads using markets to ensure the money is spent efficiently.

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