The miraculous multiplier and other myths

Henry has a great piece in The Weekend Australia in which he recounts the depressing history of one of our most protected- at least in a border protection sense and more latterly in terms of government handouts – industries, the passenger motor vehicle industry.

(The other one, textiles, clothing and footwear has pretty much left the premises, Australia, that is.  Interestingly, there was never the same fuss and bother about TCF – I put it down to masculine attraction to fast cars!)

In that article, Henry pounces on the multiplier argument in favour of subsidising the PMV industry.  You know the sort of thing – for every dollar invested in the industry, a further $18 is added to the economy.  Of course this is piffle.  (One of my former bosses, Dick Blandy, used to argue that the SA government should subsidise the pie cart (yuck, pie floaters) in North Terrace – just think of the multiplier effect!)

Henry turns this argument on its proponents and calculates the ‘multiplier’ figure for the mining industry, using the same methodology.  And the answer is $150 for every $1 invested in mining.  Now we are talking.

One of the most depressing aspects about the debate on industry protection is the emergence of new hired guns, a role assumed by people who should know better – I am thinking Allen Consulting and Peter Dixon’s mob at Monash.  Oh dear.

And while we are in the game of revealing myths, here are three more:

  • There are at least 200,000 workers who are employed, directly and indirectly, in the PMV industry who will be affected.  This is just tosh because most of those 200,000 workers will be completely unaffected – indeed, they will probably benefit – because they are involved in retailing, distribution, repair and the like.
  • Other countries subsidise their PMV industries to a much greater degree than Australia.  When I looked at the figures, it is clear that there is some serious fudging going on with these figures.  In particular, all general industry assistance overseas in counted as subsidies to the PMV overseas but not here.  And then there is adjustment for differential taxes, etc.  These ‘studies’ were designed to reach the conclusion required by the parties requesting the study – the unions and the local car manufacturers, at the behest of head office.
  • The idea that there are all sort of technology and skills spillovers from the local PMV industry is simply not borne out by the facts.  There are not great swaths of former PMV workers applying their skills in other industries and there is no evidence of technology invented in the Australian PMV industry being applied elsewhere – at least to any great degree.

In the meantime, the three things that will save Toyota Australia are:

  1. Producing cars that are popular with the public;
  2. Dramatically reforming work practices at Altona;
  3. Face-saving by Toyota headquarters manifested in a preparedness to accept returns that are lower than the cost of capital in its Australian operations.

The government should also get on with the further reforms needed in this industry such as eliminating the Luxury Tax on cars and the effective prohibition of the importation of second hand cars.  There is also a case for looking at the emissions and other specifications imposed by regulation.

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22 Responses to The miraculous multiplier and other myths

  1. johno

    If Abbott really wants to do something useful to help Toyota and the rest of Australia, he should start reforming industrial relations. Even if all he did was to get Australia back to where Keating got us with IR legislation, that would be a good start.

  2. Grant B

    There is absolutely nothing yuk about a pie floater in the early hours after a night on the turps. Garnished with half a litre of tomato sauce.

  3. johanna

    Well, if there are all these “spillovers”, the people involved should have no difficulty in moving into other parts of the market, just as happens all the time across the economy. One door closes, another opens.

    These arguments are pathetic.

  4. boy on a bike

    We used to produce a lot of bicycles in Australia. Think Malvern Star etc. These days, just about everything of quality comes out of a few factories in Taiwan.

    Has cycling in Australia suffered as a result?

    Well, internet shopping has smashed a lot of badly run, over priced local bike shops. (Example – the first jersey I bought cost me $200 about 9 years ago. I now pay $50 for the same item via internet shopping). However, there has been a lot of growth in what I’d call high end service establishments – the places that charge you $350+ to properly tailor and fit your expensive money burner to your aged and unbendy body; and then happily service it for you numerous times per year. They also assemble the fancy bikes, which come flat packed in about 100 bits from the factory. Plus sell you coffee every Saturday morning when you pull in with a bunch of your mates after a ride.

    Bikes have outsold cars for about the last 5 years. Cycling as a sport, and a recreational activity, is booming. Bike tour companies are popping up like rabbits.

    The death of the local mass produced bikes, and the flood of cheap imports, has led to a veritable revolution. Jobs have been lost, but new jobs have been created. Some businesses have gone under, but others have arisen out of nowhere. As a consumer, I am a truckload better off.

  5. stackja

    johno
    #1110377, posted on December 14, 2013 at 12:50 pm
    If Abbott really wants to do something useful to help Toyota and the rest of Australia, he should start reforming industrial relations. Even if all he did was to get Australia back to where Keating got us with IR legislation, that would be a good start.

    The Australian people voted against reforming industrial relations in 2007. ALP will not help now. So the problem is the Australian people.

  6. James of the Glen

    “Garnished with half a litre of tomato sauce”.

    I think you mean, in local parlance, “with its throat cut”, Grant.

  7. stackja

    Saturday, December 14, 2013
    The threat to the economy from Holden’s decision to cease making cars has been greatly exaggerated by those with axes to grind – the opposition, the motor vehicle union and other industry apologists, plus the overexcited media.

  8. wreckage

    Well, the “luxury car tax” was always a garbage idea and pushed a LOT of money out of car sales and into aftermarket kit-out. If the ALP wanted to save the Australian car industry, that should have been first to go. Then any vestigial tariffs on car parts and components, and of course the price-pegging of Australian fuel. With proper reform and flexibility we might have seen a Ford or GMH Australia focused on high-return performance cars, or similar, but that market was already being anti-subsidised.

    Look, ALP/Greens policy was to rid everyone of cars and make fuel really expensive to Save The World. They can’t then bewail the fact that they’ve succeeded.

    What kind of lunatic tries to reduce fuel and energy consumption, reduce the number of cars on the road, opposes road development, taxes cars to buggery and then subsidizes cars to save the car industry?

    The main reason to vote for the LNP (and LDP) is that they are substantially less batshit insane.

  9. Noddy

    >There are at least 200,000 workers who are employed, directly and indirectly, in the PMV industry who will be affected. This is just tosh because most of those 200,000 workers will be completely unaffected – indeed, they will probably benefit – because they are involved in retailing, distribution, repair and the like.<

    All bull-shit…. "repair and the like" … hardly true and vague!
    What is repaired today? It is a 'throw-away' society… see the garbage dumps.
    'and the like' .. 'and the like'.. 'and the like'.. I have failed… I have failed… self destruct… self destruct!
    Yep… Australian manufacturing in on the rocks and 'free trade agreements' and Trans Pacific Partnerships will not help. Keating's 'banana republic' (he started it!) is coming to fruition,

  10. Louis Hissink

    Face-saving by Toyota headquarters manifested in a preparedness to accept returns that are lower than the cost of capital in its Australian operations.

    This is called going broke – seriously, you can’t save any face by going down that path.

  11. wreckage

    Noddy, there are two alternatives: trade and prosper, or isolate and starve. It is an undeniable and absolute law, repeated down through history, again and again.

    Bastiat laid this out very, very clearly

    Abundance and Scarcity

  12. stackja

    Liberty Quotes
    “The taxpayer; that’s someone who works for the federal government, but doesn’t have to take a civil service examination.” — Ronald Reagan

    Or Toyota?

  13. Poor Old Rafe

    I don’t see any need to subsidise them but WTF have normally intelligent and discriminating people got against the humble pie floater? Que :)

  14. jupes

    I put it down to masculine attraction to fast cars!

    A very astute observation Judith.

    There are not many things men can get emotional about but cars are definately one of them. Cricket and football being a couple of others. TCF not so much.

  15. wreckage

    If multipliers work, we should subsidize mining and agriculture. Probably fisheries and forestry, too.

    And if subsidies create wealth for all, why don’t tax cuts?

  16. johanna

    Yep, it’s a variant of the arguments that we should keep government businesses if they make a profit. Why, all we need to do is buy up all of the profitable companies in Australia and live off the profits. Why hasn’t anyone thought of that before? Oh, wait …

  17. Kaboom

    Wreckage @ 3:05:


    Look, ALP/Greens policy was to rid everyone of cars and make fuel really expensive to Save The World. They can’t then bewail the fact that they’ve succeeded.

    What kind of lunatic tries to reduce fuel and energy consumption, reduce the number of cars on the road, opposes road development, taxes cars to buggery and then subsidizes cars to save the car industry?

    The main reason to vote for the LNP (and LDP) is that they are substantially less batshit insane.

    Awesome commentary, and it succinctly summarises the issues, so much so that even leftists could understand the thrust of your argument.

    Eloquently put, and I request permission to steal it!

    Bravo, Sir!

  18. Tator

    Johanna,
    according to the Greens and the ALP, mining, forestry and agriculture are heavily subsidised via the Fuel tax rebate scheme. This interpretation of reducing a cost to business is a crock of shite which Sinkers debunked earlier this month.

  19. Jeremy

    Protection of industry in Australia is not an economic argument. The economists are having a great time beating up the strawman who says that industry protection helps the economy. Clearly it doesn’t, and I look forward to the day when we stop wasting money on Australian economists on their grossly inflated pay and outsource economic commentary to genuinely competitive economic commentators in Pakistan or Sri Lanka or Poland.
    Protection of industry in Australia is a strategic national survival argument. The reason Keating was able to reduce tariffs was that the WW2 returned soldiers who had been in Parliament (on both sides) had mainly retired. They had been the ones insisting on Australia having manufacturing industry because they remembered the beginning of WW2 when we spent the first 3 years of the war building factories to make guns and planes. Had the Japanese not mucked around we would be a Japanese protectorate today through not having guns. Before WW2 the governments had been listening to the economists and we were living high on wool and wheat and some minerals (iron ore to Japan hence “pig iron” Bob Menzies). We didn’t need to waste money on a manufacturing industry, we could import everything we needed cheaply! Then WW2 started and the import tap turned off the next day. We had to build the machines to make the machines to make the guns from scratch because we didn’t have a manufacturing industry. That is why industry assistance and tariffs existed, because it is so easy for the world to have an unpredicted hissy fit and turn off the tap. That is also the time when the Government took control of the privately owned QANTAS to ensure they had air transport. (Any responsible manager would have flown the airplanes to New Zealand rether than have them involved in the war).
    To repeat, this is not an economic argument unless you consider industry protection the insurance premium that the nation has to pay in case the worst should happen.

  20. Jeremy,
    To repeat, this is not an economic argument unless you consider industry protection the insurance premium that the nation has to pay in case the worst should happen.

    That’s the beauty of unilateral free trade, it’s much cheaper for the ‘enemy’ to buy our stuff than fight a war to steal it.

    And you’d get to take the wife on an ‘Australian Study Tour’, send your (unmarriageable) son to ANU to learn English and pick up a homie…

    And when you’ve melted all that boring red stuff down and bend it up a bit you can sell it back to them!

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