Bailing out British Leyland – The Iron Lady’s feet of clay

British Leyland devoured billions pounds of taxpayer’s money before it was finally broken up and sold off. According to New York Times journalist Nelson Schwartz the Thatcher government’s bailout "remains the classic example of a futile government intervention."

Mrs Thatcher was unable to resist the car maker’s insatiable demands for cash. According to Schwartz, her government ended up handing over £3.6 billion (£11 billion adjusted for inflation) to keep the factories open. "On any rational commercial judgment, there were no good reasons for continuing to fund British Leyland", she concedes in her autobiography. The company was a high cost, low volume manufacturer in a world where low costs and high volumes were essential for success. So why did she do it? The "political realities had to be faced", she says, "BL had to be supported":

I knew that closure of the volume car business, with all that would mean for the West Midlands and the Oxford area, would not be politically acceptable to the Cabinet of the Party, at least in the short term. It would also be a huge cost to the Exchequer — perhaps not very different to the sort of sums BL was now seeking (p 120).

As political scientist Fiona McGillivray explains, no government could afford to allow British Leyland’s huge plant in Longbridge to close:

Longbridge was on the southern edge of Birmingham, and its surrounding electoral districts were a mix of middle-class semirural housing and council estates. In the 1959, 1964, 1970, 1974, and the 1979 elections these districts held the key to victory. In an area so rich in marginals, no government could risk harming it; whether the government was Labour or Conservative, it bailed out Longbridge.

By the late 1980s however, the Conservative party was less dependent on marginal seats strongly affected by the fortunes of the car industry. It was then safe to break up the company and sell off the parts. When MG Rover finally stopped producing cars in 2005, a report by the Cambridge-MIT Institute’s Centre for Competitiveness and Innovation concluded that the failure was the final act in cycle of decline that took four decades to work through. Even by the 1970s the company was unable to use government cash injections effectively.

According to Steven Kates at Catallaxy, Mrs Thatcher remains "the gold standard of a conviction politician on the right side of history". But even she couldn’t resist subsidising the car industry when the electoral deck was stacked against her.

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Patrick
Patrick
9 years ago

No, but that doesn’t mean we have to like it now anymore than we (would have had to) like it now.

For starters, we have a clearer historical record to go off. If you really want to do something for the sake of doing something spend it on transitional assistance for the affected workers.

Thomas the Tout
Thomas the Tout
9 years ago

Apropos subsidising car-workers. If it is a ‘good-thing’ to subsidise domestic industry, then we ought do the same for fisheries, forests and agriculture.
Just how many seats will the Libs lose if Holden and Ford leave Australia?

Pedro
Pedro
9 years ago

I don’t know if that story is evidence against Kates’s proposition. You don’t get elected if you are not pragmatic first and foremost.

JMB
JMB
9 years ago

As with so many matters political, it requires much more than economic or scientific validity to make a political option viable.

Action to avoid damaging climate change, either via Australia doing its share or the world as a whole coming to the party, is one such. Science clearly isn’t sufficient to drive the necessary changes.

Action to prevent free-loading by multinationals via tax avoidance strategies centred on tax havens is another. If any nation, eg Australia, outlawed all corporations with links to tax havens, this would be knocked back on legalities based on (Un-)Free Trade Agreements and more, so we put up with most of the damage while acting only against those corporations and individuals who are silly enough to get caught by the available weak sanctions.

Good old USA pleads for free markets for industrial products, where it is able to compete on price, but is unwilling to free the markets for primary products, eg food, where it has no natural comparative advantage.

To these I might add family trusts, tax exemption for religion, capital gains tax (or absense of) and many other issues, most of which were flagged by Ken Henry before he left the building. They have been comprehensively ignored by both the Government and the Opposition, to their detriment.

Clearly, politics trumps economic rationalism and scientific theory and even fairness every step of the way.

How smart was it to bail out every bank in the world a couple of years back when they got in over their heads? And how smart is it for Europe to be doing the same right now?

All that matters is that the decision-maker’s chances at the next elections will be improved.

And that is why political parties having broad and democratic membership are so important. Where are they?

Patrick
Patrick
9 years ago

If any nation, eg Australia, outlawed all corporations with links to tax havens, this would …

Option Z, outlaw the S&P500, ASX100, FTSE100, et al. Maybe not ideal for Australia’s economic future.

Also it isn’t clear that we have a lack of capital gains tax in Australia, not since 1986 I believe.

But party membership, you will be relieved to know, is quite democratic, you can in fact join any Australian party as far as I am aware simply by asking.

JMB
JMB
9 years ago

@ Patrick, re capital gains tax.

Agreed there is a tax on some capital gains. Perhaps not so re family homes and, to a lesser extent, re some other investment classes. But try to change anything and, Ken Henry included, the political will far outweigh the rational.

My point remains, that politics regularly outweighs rational considerations, so politicians of all persuasions can be relied upon to reject change, including change brought about by collapse of ay industry, including auto manufacturing.

You are also correct, in that I agree that virtually any listed corporation would be affected by closure or outlawing of tax havens. Most would adjust perfectly well over time. Or are you suggesting that tax havens perform a benefitial function?

Pedro
Pedro
9 years ago

“Good old USA pleads for free markets for industrial products, where it is able to compete on price, but is unwilling to free the markets for primary products, eg food, where it has no natural comparative advantage.”

One of the great foodbowls of the world has no comparative advantage in food? Que? Farmers generally aren’t protected because of a lack of comparative advantage. It’s more a surfeit of electoral advantage.

Sure tax havens perform some beneficial functions, like bringing a few bucks into the god-forsaken places that are them.

derrida derider
derrida derider
9 years ago

You have to remember that the short-run employment effects of closing a single massive employer in the middle of a deep recession would be a much bigger deal than closing a fringe employer (and that’s what any one of the current Oz car builders is) in the middle of a mild slowdown (our circumstances). In the long run it was indeed futile and a burden on other industries to put Leyland on life support, but in the short run it was either cough up the money as a disguised dole scheme or cough up the money in actual dole payments. We’re not in that position.

Of course BL’s 1970s cars were so dreadful that if they had let it disappear UK consumers would at least have got useable imported cars (I once owned one – I swear I’ll never own a pommy car again). Thatcher was wrong – the main issue wasn’t about economies of scale but unsaleable products. Some European car makers were doing just fine at the time on volumes considerably less than BL’s.

Patrick
Patrick
9 years ago

No, DD, all right-wing politicians are hypocrites and that’s all there is to it ;)

JMB I’ve many a fine word in favour of tax havens, I think they play a valuable role in permitting the tax-neutral pooling of cross-jurisdictional funds. There is still tax in the source and destination jurisdictions, but why anyone should object to being able to pool those funds without incurring additional tax, I can’t fathom.

They also help provide some form of tax competition to larger states, which is also a good thing to my mind.

Finally, they provide an essential service to those at risk of expropriation or confiscation in their home jurisdictions. I realise that the current fashion is to support boosting poor-country tax revenues, but in all too many cases this would mean only boosting the (usually also offshore) bank accounts of senior officials – hardly a ‘win’ for development.

Pedro, Delaware is a fairly pleasant place by all accounts?

Dan
Dan
9 years ago

Does anyone know the answer to Jeremy Clarkson’s question?

I can't resist
I can't resist
9 years ago

Presumably, Dan, they lacked private equity firms to come in and buy the joint and make it run efficiently.

phil@vvb
9 years ago

@Dan

Management. The two divisions, Rover and Triumph, were competitors (as well as colleagues within BL). But mainly competitors.

THe 3 litre Triumph V8 was indeed a shocker whereas the ex Buick Rover V8 (which also was the basis for the 4.4 litre V8 in the P76) was a stonkin’ great donk.

On your Marx
On your Marx
9 years ago

There are NO conviction politicians only politicians that seem to show more conviction than others.

Maggie was good for her times although her times ended abruptly.

My guess (and it is only a guess) is that you cannot privatise everything straightaway.

Leaving BL until much later showed her to be more ‘human’ and flexible.

After the 1983 elections She had no need to worry about ‘marginal’ electorates as the British Labour party was unelectable.

So that is when she sold it!

Dan
Dan
9 years ago

Thank you Phil :)

Dan
Dan
9 years ago

Oo-er, compacts with V8s. Well before my time and I regret to say my car is both larger than a compact and has an engine substantially less impressive than a 3.5L V8.

This has been informative, thank you both.

phil@vvb
9 years ago

Us P76 tragics are everywhere :-))))

phil@vvb
9 years ago

Arrrggh.

“We.”

rog
rog
9 years ago

A story told to me by an ex British Leyland manager in Sydney. They were required to keep spare parts for all vehicles yet when Jaguar parts were scarce they had to cannabilise a new car. A new manager was appointed and when he saw the car instructed staff to get rid of it, so it went to auction. An astute mechanic who knew the car was the successful bidder, he simply went around to spare parts with a list of the missing bis. They had no choice but to go to car #2.

Tel
Tel
9 years ago

There are NO conviction politicians only politicians that seem to show more conviction than others.

I would argue that both Peter Garrett and Andrew Wilkie are indeed conviction politicians, and their careers should stand as warning to other people considering the dearth of conviction politicians. One could also argue that Bob Brown is a conviction politician and although I respect all three people mentioned for their gumption, I can’t help thinking that maybe pragmatic politicians are better. Well, better value for buyers at least.

Dan
Dan
9 years ago

And Peter Garrett’s decision to join the Labor Party is an example of…?