Monday, February 27, 2012

The Name of the Game

Holden Cruze assembly plant in Adelaide (Image from:
The cat is out of the bag. An interview by Allan Kohler of the show Inside Business with General Motors Holden Managing Director Michael Devereux revealed the real purpose of government hand-outs to car manufacturers. It is not as is widely held to prop up failing industries, but to attract annual investments in R&D that have substantial multiplier effects throughout the economy.

Here is an excerpt from that interview:

ALAN KOHLER: So Australia should provide GM assistance in Australia not to help you to become profitable but because of a contest between us and other countries for the money?

We're engaged in a competition, is that correct?

MIKE DEVEREUX: Every country in the world is engaged I think in a competition to attract new, high-tech, highly capital-intensive investments - whether it's Brazil with tariffs, whether it's the UK with regional development funds, whether it's other countries with less obvious forms of either currency manipulation, or things like if you buy a car and you want to get it insured if it's an imported car it costs twice as much to insure as a domestic car [emphasis added].

So there's lots of different ways that countries play the game. The co-investment path is I think the most appropriate one for Australia and, yes, Australia does need to compete with other countries.

ALAN KOHLER: Right so but another way to look at that is the company that is playing the game is General Motors and the other manufacturers. You're actually playing off these countries against each other to improve your profitability by making them compete with assistance money?

MIKE DEVEREUX: Well, what happens around the world is GM is an about $150 billion company and we're looking to spend about 10 per cent of our total revenues on both engineering and capital [emphasis added].

And frankly, as that capital is deployed around the world, we try to deploy it in the way that returns the best return to our shareholders. And that is the purpose of business.

So every country on the planet competes for auto investment because of the multiplier effect that it has in the economy - from R and D jobs to actually capital equipment investments, to transportation and logistics.

It's got a huge multiplier effect. In terms of jobs, it's got about a five or six to one - so five to one multiplier effect.

So it's a large business enterprise. It has I think far reaching benefits into a lot of different sectors of the economy, so it's obviously why countries do that.

ALAN KOHLER: Can you can (sic) see why somebody would see that as fairly cynical - you know, the way that a company like yours would...


ALAN KOHLER: You know, just trying to get the best you can out of each country and you know, play them off?

MIKE DEVEREUX: I think a lot of people wish that the world was flat and that everybody played by the same rules but countries aggressively compete for what Australia has.
Australia is one of 13 places in the world - 13 - that can design, engineer and manufacture a car and a lot of countries want that same kind of capability [emphasis added].

Devereux then goes on to hint that GM Australia would be asking for about $300 million a year in co-investment funds from the Australian Federal government to invest in two facilities or car plants. The trade-off is that they would then have to guarantee that these projects would follow certain milestones in terms of the number and timing of jobs created.

This quite candid conversation reveals a couple of things. One, developing countries like Brazil and China (which was not named but alluded to) which have limited fiscal capacity to provide industry support in the form of co-investments can still compete through other policy instruments like tariffs and currency manipulation. Two, developed countries which preach free trade and open competition like the UK and Australia, actually engage in very interventionist policies to attract investments in high-tech and green manufacturing. 

In other words, the demise of industry policy has been greatly exaggerated in the West, since it has been resurrected in other forms under the banner of "innovation" and "climate change". In the past, opposition to taxpayer funded subsidies to the auto industry has been founded on the argument that this creates a "dead weight loss" by creating encouraging activities that an economy is not competitive in. 

Here we are seeing that it is actually creating public benefits through multiplier effects and a healthy return on public dollars invested that allow a nation to specialize in activities that it is well-suited for. A country such as Australia may not be able to export cars because of its strong currency resulting from the mining boom, but its mature domestic market can still support a profitable car industry within it. This strikes me as a good balance.

Wednesday, February 15, 2012

Oh, what a difference

Back in 2005, Germany had the highest unemployement rate among the major economies of the EU (of the big four including France, UK, Italy and the PIGS economies of Portugal, Ireland, Greece and Spain). Ireland had the lowest. Today, as Moody's downgrades the credit rating of six European countries, Germany has the lowest unemployment among them all. How fortunes have changed in such a short span of time. It should be noted that the Deutschland during the global financial crisis went alone in not stimulating its economy.

Could this be a case of free-loading? Stimulus only works when everyone does it, otherwise some of the fiscal spending leaks out through imports of foreign made goods, not benefiting the local economy. Germany, having benefited from the stimulus spending of its neighbors during the GFC, does not relish its present role in bailing out its ailing neighbors. A classic case of "no free lunch."

Wednesday, February 8, 2012

"Poverty is a choice"

That seems to be the conclusion of Charles Murray, a scholar of the libertarian American Enterprise Institute and author of the controversial book, Coming Apart which looks at the growing divide among white Americans from 1960 to 1910.

After asserting in the Bell Curve a book he co-authored with Richard Hernstein that it was their inherent lack of intelligence or IQ more precisely that reduced African Americans to the bottom of the social and economic ladder, he now claims that poverty among white Americans is a result of the decline of civic culture, a result of changing preferences rather than structural policy imbalances.

Back in 1994, the unknown civil rights lawyer Barrack Obama, as a guest commentator at NPR spoke plainly regarding Murray's work then, that
He's interested in pushing a very particular policy agenda ... With one finger out to the political wind, Mr. Murray has apparently decided that white America is ready for a return to good old-fashioned racism so long as it's artfully packaged and can admit for exceptions like Colin Powell.
It doesn't seem as though there is a role for government either in closing the divide between upper middle class white Americans and their blue collar counterparts. According to Murray, the cure for this malady is for the wealthy "to drop their nonjudgmentalism and start preaching what they're practicing" (a case for cultural imperialism?). Perhaps, in Murray's policy brief, they deserve in exchange for exercising such noblesse oblige or civic duty tax cuts on top of the ones they already receive (?).

The person who could model this kind of behavior the best among the candidates is Mitt Romney. The introduction of the book comes at an opportune time as he recently stumbled over the issue of income inequality and as many independents within the party (blue collar teaparty Republicans) cast a suspicious eye at the 'Washington/Wall Street establishment' that he seems to represent. The 'non-Romney' candidates, Newt Gingrich, Rick Santorum and Ron Paul have all railed against these 'fat cats' and sought to capture the protest vote.

It turns out, these so-called elites share many of the religious and cultural preferences as the party base according to Murray (upper middle class whites more frequently go to church, marry and stay married for longer). Of course the recent research on happiness and income explains why that may be. In the end, Murray may have tried to establish a false causation here.

Given the stagnation of income and productivity in America, the 'choice' faced by ordinary Americans isn't the same as the one they faced in the 1950s when GDP and employment were rising. Consequently, people don't 'choose' to become poor because they have lost their work ethos; the lack of a work ethos comes as a result of people being poor or unemployed for an extended period of time.