Mittwoch, 27. Mai 2009

The Economic Effects of a Car Bail-Out

What are the economic effects of a car bail-out?

If (as everyone seems to agree) there is significant overcapacity in the industry, and if the government decides to prevent the collapse of a major industry player that would reduce overcapacity, the consequences are as follows:

- Industry profitability will remain lower as it would otherwise be, i.e. shareholders of all competitors (= car manufacturers selling cars in Europe) will suffer.

- Due to the delayed correction in industry capacity, there will be more jobs for an interim period (until existing players collectively reduce their headcount to an adequate level), i.e. car workers as a group will benefit.

- There will be more car-related jobs in the home country of the company that is bailed out (if it is allowed to fail, many of the cars will instead be produced by international competitors).

- Car buyers will profit due to higher competition (and therefore somewhat lower prices).

- Economy-wide structural adjustments will be delayed (i.e. the reallocation of labor resources from the car sector to other sectors will happen less quickly). If the economy is close to full-employed, this is bad. But if - as is currently the case - there is anyway a shortfall of overall demand and little hope of "alternative jobs" for laid-off workers in the short run, this doesn't matter much.

- Due to redistributional effects (labor gains, capital loses) and additional government deficit spending, there will be a positive effect on overall world demand, and in particular on domestic demand (as domestic production is protected at the expense of foreign production).

Oh, and I forgot the taxpayer, who will have to pay...

Kommentare:

  1. That's a well thought out and astute analysis.

    I think what's happening right now corresponds to a game of musical chairs, "Reise nach Jerusalem" in German. The question is, which country, region and manufacturer reduces its capacities and kills jobs. Everyone is trying to hold out as long as possible and waits for others to go down.

    In this environment, a car manufacturer can only sustain or even grow its capacities if it manages to get sustainable mobility solutions to the market earlier than competitors.

    So who's going to succeed in that respect? I used to be fairly optimistic about Daimler because Dr. Zetsche announced at the beginning of March that they're going to ramp up production of fuel cell cars as early as this summer. I've become more sceptical though. As it turns out, Daimler's management made a lot of really short-sighted decisions in 2007/2008, diminishing what could have otherwise been an excellent position to come up with sustainable cars much earlier than the competition.

    Upon reading your article, I've been wondering: What consequences does a car bail-out have with regards to climate change? Not sure. It might have a positive effect as it keeps up the pressure on manufacturers to work on sustainable (i.e. emission free) cars.

    The consequences to climate change, in turn, do have an economic impact, e.g. for reinsurers.

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  2. I agree with the post and taurus. They call it bail-out, I call it protectionism. They may do the same mistakes as during the great depression, just not via taxes and toll, but via direct helps of national firms.

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  3. Quote taurus: "What consequences does a car bail-out have with regards to climate change? Not sure. It might have a positive effect as it keeps up the pressure on manufacturers to work on sustainable (i.e. emission free) cars"

    On one hand, it might have a positive effect, if companies think that innovation will give them a competitive edge.

    On the other hand, more intense competition reduces the cash-flow available for r&d (unless it is provided in the form of yet more government subsidies). I assume Daimler, BMW and even Toyota are thinking long and hard as to how much money they can still afford to spend on "longer-term projects".

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  4. Intense competition forces firms to become innovative: Either cut costs or offer new products/features. With little competition they will over the same product for the same price for years - see telecoms before liberalization.

    PS I do not know why I show up as "verlorenegeneration" now. It's just me "ketzerisch"

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  5. I certainly agree that too little competition leads to less efficiency and less innovation.

    What I meant was that too much competition (of an extent that doesn't allow companise to make profits and therefore causes them to be short of funding, because they are neither attractive for investors to put in more money nor can earn enough money from their core business) may increase the pressure for "cheap" innovation (such as: good ideas to improve production processes and cut costs), but can also make costly r&d (of the kind needed for real breakthroughs) unaffordable.

    I'm not really saying that the specific case of Opel's disappearance would lead to more innovation in the car industry because of such an effect. Just doing overall brainstorming regarding the kind of effects that can in principle happen if the industry framework changes.

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  6. @Thomas

    I agree. Too high competition (i.e. overcapacity) may well lead to a cut in R&D spending, because everyone only fixes on trying to survey - until the overcapacity is resolved.

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