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Wasting our tax dollars on symbolism

By Sinclair Davidson

Posted August 22, 2008 08:23:00
Updated August 22, 2008 09:26:00

The government should consider totally abolishing the import tariff on cars and the luxury car tax. (AFP: William West)

Australian policy makers have an obsession with motor cars. Australia, they say, should not only 'make things' - as Kevin Rudd so simply put it during the election campaign - but they should specifically make automobiles.

But Australia isn't very good at making cars. Consider the evidence. The Bracks Review into government assistance for the automotive industry indicated that the average fault per vehicle for Australian manufactured cars was well above the appropriate benchmark. Furthermore, the proportion of domestic manufactured cars in the Australian fleet has declined over time.

But rather than face reality and allow the local automotive industry to survive or fail according to the dictates of the competitive market, the government is proposing more industry policy.

Industry policy has an entirely disreputable history with an appalling track record of failure - it is amazing that politicians still think they can get away with proposing these sorts of winner picking ideas. In essence it constitutes a supply side conspiracy of government and industry in order to collude against consumers. As Adam Smith warned, "to narrow the competition must always be against [the public interest], and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens".

'New style' industry policy

The failure of old-style industry policy is plain to see. Governments have rightly shifted their tack a little - we now have "new style" industry policy. Here the government proposes building a culture of innovation, focussing incentives, and accelerating the take-up of new technology. Rather than imposing tariffs and quotas or throwing money at specific products, government now throws money at research and development (R&D). This is widely accepted as being appropriate expenditure of public money.

Certainly, standard economic theory suggests that markets will undersupply basic R&D and the market economy will be less innovative than is socially optimal. Government, by subsidising basic R&D, can correct for that 'market failure'. This is especially the case in environmental issues. Here, apparently, there is a double market failure. The Stern Report makes the argument that the "climate is a public good" and as in the case of basic R&D the market does not ensure the optimal allocation of consumption and investment in climate. Solutions to climate change involve a substantial investment in R&D and so government can correct a double market failure by investing in green technology such as the green car.

At face value that is a plausible argument. Unfortunately, it does not stand up to close scrutiny. The climate is not a public good despite having the characteristics of public goods - it is both non-rivalous and non-excludable. The climate is not produced in a market, it is not bought and sold in a market, nor can government subsidise the production of the climate. The first component of the double market failure is simply not correct.

The second part of the story is also problematic. The benefits of publicly funded R&D are remarkably difficult to pin down. Even the Productivity Commission has failed to find a clear relationship between R&D and productivity. In 2003 the OECD published an official report into The Sources of Economic Growth in OECD Countries, and as part of that analysis, the OECD disaggregate R&D into a private and public component. As expected there is a positive relationship between overall R&D and economic growth, and also between private R&D and economic growth. In contrast there was a negative relationship between publicly funded R&D and economic growth. In other words, it is not at clear that government should be financing or subsidising R&D.

Importing green cars

Looking specifically at the Green Car fund, additional problems arise. Australian political elites and large sections of the population have a low tolerance for wealth and income inequality. As the late Nobel Laureate Friedrich Hayek explained, new products and services are often expensive and initially are viewed as luxuries for the rich. Over time, the prices of these goods fall and the less affluent can access them. Before new products can brought to the market, however, there needs to be sufficient individuals with sufficient disposable income to buy them. Australia's brutally progressive tax system substantially reduces the disposable income that may be spent on new luxury goods. All this means that there are fewer profitable opportunities for Australian firms to trial new products at home before exporting them.

In short, Australia is very unlikely to efficiently develop a viable green car - the domestic market is simply too small. There are, however, a number of overseas markets where such a viable vehicle could be developed - the European Union or the United States are obvious contenders. Rather than waste Australian tax dollars on a symbolic gesture, those Australians who would buy such a vehicle should simply import them from abroad. To ensure the take-up of such vehicles the government should consider totally abolishing the import tariff on cars and, of course, the luxury car tax - these vehicles are unlikely to be cheap.

Sinclair Davidson is a professor in the School of Economics, Finance and Marketing at RMIT University and a senior fellow at the Institute of Public Affairs.

Tags: business-economics-and-finance, industry, automotive, manufacturing, government-and-politics, federal-government, australia

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Comments (75)

Comments for this story are closed. No new comments can be added. If you would like to have your say on this issue, you can do so via the Emails section of our Opinion pages.

Dave R:

22 Aug 2008 9:05:41am

Another expert with no idea.
There is plenty of scope for Australia to develop autos powered by renewable energy for Australian conditions.
If the vehicle is good enough to make people switch then there would be a huge market for it in Australia.
That is a lot better than adding to our import bill bringing in cars that are not built to Australian requirements.
Dave R

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michael:

22 Aug 2008 9:05:49am

If they want to really make a difference with our dollars and R&D why dont they look at a world class mass transport system. imagine Australia coming up with a state of the art mass transport system that would solve our overcrowded roads and could be sold to the world. instead we look over everyone elses sholder and do what they are doing. focusing on more cars. too little too late.

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David:

22 Aug 2008 9:13:29am

Part of the problem for the Australian car industry is that the cost of imported cars is artificially low, because the cost of transporting them from overseas is artifically low. However, the main problem is that we have too many car companies, all refusing to make cars that people actually want to buy.

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Michelle:

22 Aug 2008 9:14:45am

Tax cuts for rich, luxury car buyers!? Doesn't sound like a very good way to win votes.

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Geoffrey_Chaucer:

22 Aug 2008 9:26:17am

Sinclair Davidson's allusion to the poor quality of manufacture in Australia seems to imply a comparison with Japanese manufacturing standards.

In fact, the problem is worldwide and includes Japan. It will persist as long as the manufacturers' idea of competition is to produce not the best product, but the least bad product.

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dragon:

22 Aug 2008 9:27:14am

The Aussie car industry has been propped up by the taxpayers for way too long with no net global result other than providing employment for specific locations. Even Holden's exports are weak for the Commodore. I think that the money is now better spent in the sciences and technology and export those to the world. Our manufacturing (in all areas) is crippled by the high dollar and by our standard of living compared to the likes of China, Korea, India etc. I'm not bagging unions but you can add them to the mix too.
I've never understood why the tax payers have to provide incentive for global megacorporations to manufacture in Oz just to support a small group of workers in localised areas.
Get rid of this 'icon' mentality, it's starting to cost us a fortune !

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Juliet:

22 Aug 2008 9:32:56am

hear hear!

stop wasting our tax dollars propping up multinational dinosaur companies.

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Xlabnowgreen:

22 Aug 2008 9:38:02am

Wake up Australia! Walk out of the dark into the light - Take the Bull by the horns - we can build almost anything and do amazing things - this is a chance to show the world and our dumb economists, sheep minded-politicians, and their party first - common sense second followers, profit freaks, greedy Big & Small business people that enough is enough. Forget this world big picture rubbish! Lets start from within - we are the centre of our universe.

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Timothy:

22 Aug 2008 10:02:39am

Why did the Govt. spend millions of tax payers money on a hybrid Toyota which they were already going to build? By the time it is released in Australia in 2010, it will hardly be breathtakingly new technology. Why don't we invest in something really hi-tech?

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Mick R:

22 Aug 2008 10:03:39am

It seems to me that Sinclair Davidson is a part of the group that has meant to be making us the clever country. THAT hasn't worked either!

Should we now shut down the educational facilities? No! We will need them to sell their overpriced & under achieving degrees, to overseas students, so that we can feed the hundreds of thousands of people the good professor plans to put out of work.

What other pearls of economic rationalism does this demigod of education have for us?

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ram:

22 Aug 2008 10:04:11am

If the government wants to help restore Australian manufacturing there are better things they could do to help:

(1) Remove the foreign arms dealers and buy defence goods only from Australian owned Australian companies. Some large items may have to be purchased externally (such as jets) but those should be handled on a government to government basis. Foreign arms dealers not only distort the market due to bribes to our politicians, they also wind up defining our foreign policy.

(2) Remove the GST. Right now a 10 cent part has twenty dollars of paperwork associated with it.

(3) Make real manufacturing expenses tax deductable. Right now patents are considered an asset rather than an expense. Depreciation on machinery does not reflect market realities - i.e. in a year or two the machine is a piece of junk - not an asset worth 80 percent of its purchase price.

(4) Recognize manufacturing companies are not charities for the support of the financial, insurance, and real estate sectors. Manufactures bear most of the risk of investment, they should be able to retain a fair profit.

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sinekal:

22 Aug 2008 10:07:28am

We have it all wrong. Import heaps of big gas guzzling SUV's. Then we can chew gum, shout loudly, speak badly, behave arrogantly and invade a couple of nearby countries.

Driving on the right (wrong) side of the road is not really a problem if we all do it instead of the current 3%.

This will fix the USA's ecomonic problems and our share market can return to what it was before our banks lent money to people overseas who cant pay it back.

Oh, and don't worry about global warming, that is the fault of millions of people cooking rice for tea using yak poop.

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Aaron:

22 Aug 2008 10:13:49am

The author lost all credibility when he said that "the climate is not a public good". The climate is a product of the nature of the planet, as are we humans. How much more "public" and "good" can you get? And why don't economists understand that?

What a wreck of an article. I agree that propping up a declining industry with incessant taxpayer contributions is a plan doomed to fail. That said, to spin such a failure into an argument against taxing rich people is to ignore that almost all cars on our roads were too cheap to attract the luxury car tax - including most locally-built cars and the notoriously-expensive eco-friendly hybrids.

Actually, there seems to be a lot of this on the ABC nowadays: the analysis and editorials have become increasingly conservative. Perhaps it is to appease government criticism of left-wing bias, a fallacy purported against the ABC by its own government. In any case, it seems that any right-wing blogger can get on the front page, if only to "restore the balance".

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Observer:

22 Aug 2008 10:13:57am

I said some years ago we should import all our vehicles, and let Japan choke in the pollution. I now see that we NEED our independence from the global economy and global manufacture-because soon, the cost of tranporting goods around the world will become too great, and local production will be the ONLY affordable way to continue-even down to the individual States (and perhaps cities for some things) Otherwise we will have to trust corporations with privately owned nuclear powered shipping-and that doesn't appeal to me. I gained these new opinions after observing the economic survival of South Africa during its being commercially embargoed, and seeing the vulnerabilities in our current utter dependence on international and interstate transport. Many communities in this land are not self-sustaining in food production, and this will be to their disadvantage in the long term. It is more expensive to do, but it also provides a greater level of capacity to cope in extingencies, which are to be expected and planned for. We will be proven fools to ignore the obvious.

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Raymondo:

22 Aug 2008 10:19:26am

Academics can never fix problems like this in fact they are academics because they have no idea and produce nothing not even good ideas I am part of the car industry and do get R&D but I am told I have to compete on a level playing field when I can buy petrol the same price as my competitors in the USA and pay a top tax rate of 25 % and can employee people under the same conditions as the USA 2 weeks annual leave hire and fire on a whim then I can more than compete until them we need more tariff protection not less I think it supports our workers std of living and we need to have a independent manufacturing industry in this country the car industry does more than produce cars it trains a whole work force for other industries as well

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Bertand:

22 Aug 2008 10:33:14am

Aome things might not make economic sense, but are still in the national interest. What happens if we go to war? Who will make all the things needed for the war effort? Our industry. And what is the most important industry in a war effort? The car industry.

What we need is simply innovation.

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Bruce:

22 Aug 2008 10:45:14am

The cost of cars is not the only factor to consider. The Australian automotive industry fosters and maintains many advanced technical skills that would be lost or in much shorter supply if we lost the industry.

Tariffs, protection levels and assistance should balance the cost of vehicles to consumers with maintaining a national skills base that will certainly be called on for other purposes. In one extreme example, after Pearl Harbour virtually the entire US auto industry switched to making military hardware. This ability to switch an enormous existing production capacity rapidly was a key factor in limiting the length of WW2.

Whilst a level of protection is required to ensure the survival of some local industry, I would like to see MUCH GREATER encouragement of technical development (R&D) to deal with the problems of the future. That means subsidies and grants directly targeting the development and sale of more efficient and alternative fuels vehicles - e.g. natural gas, hybrids, pure electric vehicles, etc.

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Ivan:

22 Aug 2008 10:49:37am

What does an economics professor know about R&D? In fact, what does an economics professor know about anything? Here's an idea Professor Davidson; How about you stick to your own field of psuedo science and try to prevent things like the sub-prime causing my superannuation to lose 15% over the last year. Leave R&D to people who actually know how to MAKE THINGS.

It seems to me that this article is all about trying to get Professor Davidson and his mates at the Institute of Public Affairs a few thousand dollars off their next luxury car.

Car tarrifs is the price we pay for sustaining an industry that employs thousands of people across a wide variety of occupations, from blue collar workers to highly trained engineers. The skills developed here flow through various strands of the economy, for example mant tradespoeple in small industry got their start in the car industry, as have many of the people now working in the resources sector. Australia may no longer be willing to pay that price, but then we should not whinge about the consequences (i.e. skills shortage) when we no longer have people who can actually make anything.

Finally, I'm sure that if the car industry employed economics professors rather than engineers Professor Davidson would feel different. Here's another idea; how about the government stop pouring money into unversities, I mean ultimately this is just another form of trying to pick winners!

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SpaceChimp:

22 Aug 2008 11:13:52am

Australia's automotive industry has been propped up for years at the taxpayer's expense, and 4/5 packed up their Australian operations and left.

Not that any of them are really Australian cars anyway. Holden is a brand of GM - get over it people.

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Mark:

22 Aug 2008 12:24:01pm

Has everyone forgotten that when Australia introduced electricity, water and paved roads the Government did not only subsidise them it paid for them and owned them out right.

It was not possible for the market to justify electricity to every house so the government stepped in and got building coal and hydro plants and connected them to the grid they built *and paid for).

So IF the government decided that it is in the Australian interest to have a new industry built up, it will throw (our) money at it. So if our representatives thought it was in their best interest to build up a solar industry or wind powered base load or a new hydrogen car industry they would.

But when electricity was introduced it was so that our representatives financial backers could sell more TVs and fridges etc to us. Then we got petrol stations and cheap cars so they could be sold to all of us and we built our cities to help keep them. BP and Ford have donate to both parties. If we want them to start a new industry and compete with the business that currently give them campaign funding we as a nation will have to become much more politically active. I doubt this will happen as Australians are mostly very comfortable with the current situation, even if it means that our children loose some coast line and a few houses owned by retirees.

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Jeff N:

22 Aug 2008 12:38:40pm

I would like to contribute a criticism on part of Sinclair Davidsons article.
He does not define the term public good. He states why climate is not a public good (non-rivalous, non-excludable, not produced in a market etc) and then uses that to argue why government cannot correct for the markets failure in ensuring optimal allocation of consumption and investment in climate.
Whether it is a public good or not, the climate it vital in sustaining resources for our society. The market will (has) damaged climate/society, and so intervention is required to protect climate/society. If economic theory cannot deal with this reality, then it is a shortcoming of economic theory. Such policy decisions of government rest on input from science, sustainability principles, and historical knowledge of societies that have collapsed because of climate change.
Economics is just one discipline that can contribute to policy development, and often it is not the appropriate tool.

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tonks:

22 Aug 2008 1:12:48pm

instead of focussing on how to make green cars, we should be focussing on how we can get around WITHOUT cars

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quinny:

22 Aug 2008 1:40:28pm

Economic debate aside, what's wrong with symbolism in this case? In a region of predominately developing nations, isn't our responsibility to at least try to lead the way towards 'greener' pastures? It will at least give us some credibility/leverage when we try to impose greener notions onto our neighbours. They won't be able to say, "we'll you didn't have a go either!".

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Warshawski:

22 Aug 2008 1:58:31pm

A pure green car is unrealistic in the short term. Batteries have high life cycle costs and environmental footprints so pure electric is out Hydrogen fuel cells do not yet provide the long life and at the moment most hydrogen is derived from coal so it is out. But there is no reason why Australia should not be making less polluting cars nowIndustry needs to wake up and produce what the market wants.
1. Family Friendly SUV.
2. Fuel efficient city car.

The era of the big V8 is over except for a few die hards, and they can be imported. Australia should be making more effort in making a fuel efficient Family SUV and a city (small) car in Australia.

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Stine:

22 Aug 2008 2:17:46pm

COMPRESSED AIR CARS CAN I SCREAM ANY LOUDER?

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Comments (75)

Dave R:

ravensclaw:

Ben:

ravensclaw:

Ben:

ravensclaw:

Odge:

ravensclaw:

Stine:

John R:

Bertand:

Bullfrog:

ravensclaw:

Stine:

berkrand:

Bullfrog:

ravensclaw:

L:

ravensclaw:

Bullfrog:

Stine:

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michael:

Bullfrog:

Stine:

Bullfrog:

Stine:

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ravensclaw:

Michelle:

ravensclaw:

Ben:

Bertand:

ravensclaw:

Ben:

ravensclaw:

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dragon:

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dragon:

dragon:

sillyfilly:

Doh:

sillyfilly:

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Juliet:

Xlabnowgreen:

Ben:

Timothy:

Doh:

Mick R:

ram:

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Aaron:

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Bertand:

Doh:

John R:

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John R:

Mark:

Jeff N:

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