Nissan turns over a new Leaf
This is a hugely important announcement and boost for the North east economy whose long term future must be built on competitive advantages in the emerging low-carbon industries of tomorrow. The decision to manufacture the lithium-iron batteries used in the Leaf electric cars is the key to the employment creation effects of the new investment by Nissan. Note too the role played by government financial support. The investment is backed by a £20.7m government grant and up to £220m from the European Investment Bank.
The Nissan car plant is the most productive in the European Union. The plant opened in 1984 and has so far built 5.6 million cars. It produced a third of all cars built in Britain in 2009. Digby Jones sings the praises of businesses such as Nissan in this super interview on the Politics programme a few days ago.
Labour Peer attacks free care for the elderly
This is a really interesting comment piece by the Labour Peer and Economist David Lipsey who attacks the government’s plans for free care for the elderly. It builds the case that offering free care will generate a number of unintended consequences and risks leading to government failure. It could be a useful article to include when teaching health care and government intervention.
“Every now and again governments pass laws that make you think they must have lost their marbles. Think of the Poll Tax and Dangerous Dogs Bill. But these errors by past administrations pale into insignificance beside the grotesque folly of the Personal Care at Home Bill, which is being debated in the House of Lords….....You don’t need to be much of an economist to know that if you reduce the price of something to zero, the quantity demanded will rise. As Adass also points out, the effect of free care will be that large numbers of people who are at present managing with the support of friends and relatives will start claiming for paid-for support…..”
Economics of Government Subsidies - Teacher Presentation
This new AS economics revision presentation looks at the use of subsidies by government for producers and consumers.
Launch interactive presentation on Economics of Government Subsidies
Download pdf handout of slides
The trade impact of car scrappage
As expected, the UK government has announced an extension to the car scrappage scheme which will expand the consumer subsidy to another 100,000 cars.
The ‘clash for clunkers’ scheme has at least helped to stabilise domestic car production but four fifths of the new cars sold in the UK are imported from overseas. According to the Guardian “For the year to date, production has declined by 44.6%. But the slight improvement recorded last month has prompted some carmakers to hope that the slump is bottoming out.”
So the direct impact on UK car assembly plants is smaller than we might think. Factor in though the multiplier effects on the suppliers of car parts and the boost to retail and distribution businesses.
Stephanie Flanders is on excellent form in her latest Stephanomics blog. She argues that the much larger German car scrappage scheme may have had an even bigger effect on our own producers than the UK government’s modest version. The German subsidy is worth ten times that of the UK and around 40% of German car sales last year were imports. More here.
Second-hand car market – law of unintended consequences
Drive a new car off the forecourt and you it immediately loses a sizeable slice of its value. And, under normal market conditions, second-hand cars lose value by about 15 per cent a year, but this year they are increasing in value – by an average of £600 so far this year – mainly due to a shortage of supply caused by the government’s scrappage scheme.
read more...»World Trade Organisation
Whilst unlikely to be fully resolved any time soon, the WTO has got around to producing its (unhelpfully, confidential!) ruling on whether European government loans to Airbus for aircraft development are illegal subsidies or not.
read more...»Businesses call for youth jobs subsidy
High and rising youth unemployment is one of the most important economic and social policy issues of the day. The CBI has called for extra funding from the government for a youth jobs subsidy - a £2500 per head payment for businesses that offer apprenticeships. The aim is to widen access to apprenticeships and equip school and college leavers with extra skills to improve their human capital and occupational mobility. If the lobbying proves effective, this is a good example to use of an active-labour market policy whose objectives are firmly on the supply-side of the economy.
According to CBI Chairman Richard Lambert, ““Young people leaving education this summer face the toughest job market in a generation. We know from previous recessions that a lack of employment after leaving education can damage young peoples’ long-term prospects at a critical point as they move from education to the world of work.” Their 5-point programme for reducing youth unemployment is available here.
Given that the government was quick to introduce a £2000 car scrappage incentive (paid paid for by the motor industry) - it might make for interesting discussion in the classroom to weigh up the relative benefits and costs of using a similar pot of cash for a direct subsidy for consumers contrasted with an employment and training subsidy for employers. Who should pay for training? Why is the free-rider problem relevant here?
This Guardian article argues that “Apprenticeships are an out of date idea. The only reason that they are back on the agenda is because of the TV show.”
Signs that Scrappage is Driving Demand
Just over one fifth of new new-car registrations in the UK are being attributed to the government-backed scrappage incentives, according to the Society for Motor Manufacturers and Traders.
Hyundai Motor Co led the way in the sales charts for July. The UK version of the car scrappage scheme offers motorists £2,000 in discount on new vehicles when they trade in vehicles that are more than 10 years old.
For the moment it is private buyers who are driving sales higher. My local Citroen dealer confirmed to me today that their sales have been boosted by the consumer discount - which is part financed by the government and by vehicle manufacturers. As our charts show new car registrations have moved higher and car production - affected greatly by winter plant shut-downs and extended holidays - is now showing signs of recovery. Sales and output for 2009 will be down as a whole - but perhaps the worst is now over?
More on the impact of the car scrappage scheme here from the BBC news site Together with an excellent background section on the challenges facing the car industry during this downturn.
Short time working is a sign of labour market flexibility
The Times reports a sharp increase in the scale of short-time working in the UK economy as businesses respond to the challenges of the recession by offering workers reduced hours (and gross income) in return for a better chance of keeping their jobs.
“Some 123,000 workers were working “short-time” between January and March this year, up from 36,000 in the same period last year, the most recent official figures show. Men were the worst affected, with a 286 per cent rise in the number of short-time male workers.” Manufacturing and service industries are both showing a move towards fewer hours, the car industry has been at the forefront of temporary plant closures, reduced shifts and extended holidays.
The true test of a flexible labour market is during a downturn. Are workers prepared to be flexible in their pay demands? Do businesses maintain spending and a commitment to training even when finances are tight? Can the newly redundant be sufficiently occupationally and geographically mobile to find work even though the number of unfilled job vacancies has shrunk considerably?
The trade unions are lobbying for a government subsidy for short-time working to encourage firms to hold onto their workers rather than make redundancies.
Scrappage scheme makes tracks
It looks like the car scrappage scheme may be starting to bring about a softening in the decline in market demand for new cars. Over 85,000 new orders have been taken under the terms of the subsidy which affects cars more than ten years old. Scrap yards are benefitting from a boost in demand for their services and the car industry (naturally) is looking for an extension to the funding given to the scheme. This BBC video looks at some of the early impact - has the car subsidy given much of a shot in the arm for the British car industry? And this article looks at the pros and cons of car subsidies.
Servicing the Car Makers
Our motor vehicle industry appears to be in a fragile state, rarely a day goes by without one manufacturer or another locked in talks with the government about loan guarantee schemes or other emergency measures designed to prop up production in a sector hit by falling sales and the challenge of an industry with huge global capacity. The Society of Motor Manufacturers and Traders estimate that nigh on 800,000 people are employed in the motor vehicle industry in the UK. But how many of them have jobs on the production line itself, physically assembling the vehicles? The answer is smaller than you might think.
read more...»Sewage - The Fuel of the Future?
Waste not want not.
Monopolistic water and sewage companies rarely get a good press but here is a fascinating news story in the Times. Severn Trent, one of the UK’s largest water suppliers which supplies water and waste services to 3.3 million households is researching ways in which the hundreds of thousands of sewage sludge that is generated every year in the UK can be turned into a biomass fuel to produce heat and electricity. The economic incentives to consider this have been boosted by a combination of subsidy, taxation and regulation.
On the subsidy front, since 2003, Renewables Obligation Certificates — a form of subsidy to accredited generators — have been available for electricity that is generated by burning biomass fuels, which include wood, straw or sewage gas and sludge.
On the tax side - the government has gradually increased the size of the landfill tax which covers disposal of waste in landfill sites - the tax is set to increase by 20 per cent to £40 per tonne, up from £32 in 2008. In 2010 it is set to rise again to £48 per tonne.
Regulations now ban the disposal of sewage sludge at sea.
The Times reports that
“About 347,000km of sewers collect more than 11billion litres of waste water in the UK every day. This water is treated at about 9,000 sewage treatment works across the country. Roughly 62 per cent of the country’s sludge is treated and recycled into a type of fertiliser known as biosolids, which is used to fertilise more than 80,000 hectares of British farming land every year.”
This is a good example to use in exam questions because the incentives to develop innovative schemes to find economically viable forms of renewable energy often require a combination of policies working in tandem rather than a single ‘big bang’ approach. Government policies towards waste can be found here.
Electric cars - subsidise the consumer or producer?
We can expect a battery of articles in the days and weeks ahead on government incentives to grow the UK electric car market. Gordon Brown is reported as favouring a sizeable subsidy for consumers to purchase electric vehicles - according to the FT, buyers of electric cars will be offered discounts of more than £2,000 – paid for by the state – under plans by Gordon Brown to make Britain a leading centre for manufacturing “greener” vehicles.
read more...»
Q&A: What is a scrappage subsidy and will it work in the UK?
A scrappage subsidy is a “pay-to-scrap” scheme where a government offers a financial incentive to car buyers if they scrap a car that has reached a specified age and in its place they are offered a payment towards the cost of a new vehicle. Germany and France both offer scrappage subsidies to consumers and there is a growing number of voices from inside the UK business community and motor vehicle industry clamouring for one to be launched in the UK. The Retail Motor Industry Federation and the Society of Motor Manufacturers and Traders (SMMT) are at the head of the queue lobbying for a scrappage scheme to be introduced as soon as possible.
read more...»Fasten your seatbelts - scrappage subsidy in Germany
The Times reports that new vehicle sales are soaring in Germany partly as a result of their car scrappage subsidy.
“Germany is offering €2,500 for drivers who have cars that are over nine years old to scrap them and buy new ones. The scheme is to be extended until the end of the year after fears that the programme would run out of cash by the end of this month because it has proved so popular.” More here
The odds on this being introduced in the UK budget on the 22nd April must be pretty high! If the scrappage scheme is as powerful as it seems to have been in Germany it will provide a big shot in the arm to the embattled vehicle industry.
Is this how EU grants should be allocated?
The European Commission for Agriculture and Rural Development has made grants of up to £5,000 available to farmers in Northern Ireland to help modernise their farms, improving animal welfare and farm efficiency. But with just £6m available, many farmers are set to lose out. The farmers whose grant applications are successful will be able to buy from a government-approved list of items such as cow mattresses, creep feeders and computerised livestock identification systems, and must add to the amount of money they are allocated from their own funds. Michelle Gildernew, the Minister for Agriculture and Rural Development, says that this is an “important boost to the economy”, because many of the items on the approved list have been made in Northern Ireland.
read more...»Steel Industry may face meltdown
The excellent Big Question feature in the Independent today turns its attention to the problems of what remains of the UK steel industry
“Demand is collapsing as the global recession takes the wind out of both the motor and construction industries. The credit crunch and ensuing recession are wreaking havoc in the motor and building industries in both the UK and Europe, which are Corus’s main markets.”
Corus has announced a huge number of redundancies and the steelworkers unions are complaining that competitiveness of the UK steel sector is being undermined by subsidies to manufacturers in other countries such as France. Further background is available here from the Times:
Steelworkers demand same government subsidies as European rivals
“Facing a precipitous fall in demand for steel from the motor and building industries, Corus said that it needed help to subsidise short-time working at mills that are operating below capacity. Demand in Europe had fallen by 40 per cent while the Corus order book was down 30 per cent.”
Jim has blogged about the rise in labour productivity at UK steel plants - but will increasing efficiency be enough to prevent widespread plant shut downs and job losses? Corus will have a tough time riding out this storm.
AS students might consider these questions:
What are the main demand-side problems facing UK steel producers?
What are the main supply-side problems facing the UK steel industry?
Explain how an economic recession affects the market price of steel
Is there a case for the UK government to offer financial support to the industry at this time?
A Collapse in UK Vehicle Production
Car manufacturing and commercial vehicle production in the UK slumped to its lowest level for over 21 years last month as the sector suffers from the squeeze on credit and the broader economic recession.
read more...»Diseconomies of scale are human
One of John Kay’s phrases in his piece in the Financial Times yesterday will stay with me for the remainder of my teaching career. In a piece which focuses on the malign influences of political lobbying by huge economies of scale businesses that have been in relative decline for many a long year, John writes:
“That is true of the carmakers, whose problems are of much longer standing than the current downturn. In automobiles as in many industries, economies of scale are technological, the diseconomies of scale human. Human factors in business are generally more influential than technological ones in determining the long run fate of a company.”
This is a terrific article to use when discussing the root causes of government failures that can result from subsidies and bail-outs given to companies deemed “too large to fail.”
The remainder of John’s article can be found at his excellent web site
Some companies are too powerful to fail
Bailing out Detroit
Leander McCormick-Goodhart looks at the perilous state of the US car market
Surely nobody would allow Detroit, the backbone of American industry, to go bankrupt?
In a last effort to prevent collapse of the US auto industry, Detroit is seeking a bailout. The CEOs of the big three automakers- GM, Ford and Chrysler- have appealed for a $25 billion package.
Detroit has come under scrutiny, with accusations of mismanagement and the fundamental inability to reform itself.
read more...»Economic cost of fuel subsidies
The Economic Naturalist Robert Frank - writing in the New York Times - criticises the use of explicit fuel subsidies (common in many emerging market countries) and also takes a stab at the hidden subsidies that occur when a government does not tax products that create pollution sufficiently highly to reflect the external costs. Many countries are now reining back on such subsidies - a recent example was Vietnam - where the subsidy cut prompted a spike in oil prices for consumers. It is a well written piece and one that could be used when discussing government intervention, allocative efficiency and possible government failure.
“By one estimate, countries with fuel subsidies accounted for virtually the entire increase in worldwide oil consumption last year. Without this artificial demand stimulus, world oil prices would have been significantly lower. Earlier this summer, for example, world oil prices fell by $4 a barrel on news that reduced subsidies would increase Chinese domestic fuel prices by about 17 percent.”
The rest of his article can be found here
How Fuel Subsidies Drag Down a Nation
Will the sunshine on this solar subsidy?
I spotted this article in the Guardian from a little while back - “The largest rooftop solar power station in the world is being built in Spain. With a capacity of 12 megawatts of power, the station is made up of 85,000 lightweight panels covering an area of two million square feet” It brings into play three important economic concepts - renewable energy as a factor resource, economies of scale in production and also the costs and benefits of government subsidy - Spain has introduced subsidies of €0.42 per kilowatt per hour for investment in solar power - though the level of subsidy may be lowered in the months ahead.
