If you have a vague inkling of economics and the closely related topics of taxes and subsidies, combined with a working assumption that most civil servants are totally clueless and there is no co-ordination between different government departments, it must have been perfectly clear that the car scrappage scheme just would not 'work'. It was just a question of sitting back and wait for it to fizzle out.
For starters, it would only appeal to people driving cars more than ten years old that are worth less than £2,000 but who could afford to buy a new car, which appears to be about six per cent of respondents to this Fun Online Poll. Then there's the issue that an average new car will depreciate in value by £2,000 in less than three months, so it's not much of a bribe.
Then, with a huge overcapacity in car manufacturing and a lack of credit, it is a buyer's market - any new car buyer can easily haggle a discount of fifteen or twenty per cent off list price, so even if there were a notional £2,000 subsidy, it begs the question, what is the base price from which the £2,000 is to be deducted? For real hard-core econo-geeks, there's the kinked demand curve*, which says that small changes in the prevailing market price of cars do not actually lead to large changes in quantity demanded anyway, and with huge stockpiles rusting away, the motor industry cares about shifting numbers as much as whether it makes much of a profit on each one.
Then chuck in tax - the most important tax here is Value Added Tax, which makes up £2,000 of the selling price of an average new car costing £15,000. It would have been a damn' sight easier just to scrap VAT on new car sales and have done with it, of course, but we can't do that because of the EU - so with VAT, there is the fundamental point, should the supplier pay VAT on the selling price before or after deducting £2,000? This appears to be one of the sticking points (although I can't say for sure from the scant reporting).
Finally, stir in a handsome dollop of civil service incompetence and garnish with waffle about 'green cars', and what do you get?
Twenty-eight thousand Google results like this.
* My own explanation for the kinked demand curve is that the flat section represents private buyers who buy cars for fun, so demand is price elastic, while the steeper demand curve represents people who need a decent car for business use, so their demand is price-inelastic, but hey.
Tuesday, 19 May 2009
Why I love economics
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12 comments:
It would have been a damn' sight easier just to scrap VAT on new car sales and have done with it.
Which was what we all said!
Why can't government do easy?
A lady I know who owns a bakers shop suggested the VAT scrap on new cars would be far more beneficial than the scrappage.
Not to deride this intelligent lady, just to point out that a small business owner, looking to buy a new van, decided against as the incentive was complicated and the rewards minimal. And her vans, as with many companies were 3 and 5 years old.
You are making the mistake of thinking that it was ever intended to have an economic effect in the real world.
It was a PR stunt, based on "it sounded good in Germany" and the aim was to secure temporary positive headlines. Job jobbed. There is even a cheery advert suggesting that the car scrappage scheme amounts to a fantastic special offer.
It is a let-down that now there are negative headlines, but they are way down the news agenda. This government is not bovvered when something goes wrong later. If they ain't bovvered about a war, they ain't gonna be bovvered about a car, are they?
It was a stupid idea based on the "it works in Germany" argument - an argument that forgets the fundamental point that we are not Germany.
The Government is trying to offer £1000 to split between the car buyer and car seller. What effect will this have on the price in the market? Presumably the price will fall between £0 and £1000 depending on elasticities, frictional costs etc. What effect will it have on quantity supplied? I don't see what relevance the sellers agreed "contribution" of £1000 is - how does this affect anything?
I suggest the market price will fall by less than £300, and sales rise by less than 5%. Just a hunch. What do other people think? Hopefully we'll be able to see how the sales and prices of the participating sellers compare with the non-participating ones. What was really the effect in Germany? Is it the same scheme design?
Of course the woman above is right - it's about spin. But after all this time in Office, can't the Government produce any better than this?
Whether it is a PR stunt or a genuine attempt at a 'fiscal stimulus' (and yes, I do know that they do not work) is irrelevant. What it is is just another pointless bit of political policymaking by the worst chancellor and now the worst Prime Minister in history.
Once you realise that pretty well every policy or programme promoted or set up by Brown is completely useless, then you just know that everything he does is useless. If its got his spoor over it it will fail. And it will cost us money.
@ AW, a similar scheme in Germany increased sales by something staggering like 40% compared to a year earlier. But their mentality is different - they are addicted to cars* and are a sucker for tax-breaks**
* When I lived in Germany, I once sub-let my parking space at a block of flats (not owning a car at the time) to some guy who owned three Merc's who admonished me as unpatriotic (despite me being Englis!) for not owning even one.
** I used to work in tax in Germany, you'll have to accept this as a given.
I'm to hungover to totally logic check this, but isn't a more likely explination that the flat section of the curve is due to fleet buyers, which make up a huge proportion of new car sales for company car geezers, who are usually tied into 3 year replacement contracts, and employment contracts ~ i.e. demand in this area of the market will remain relatively stable, as companies have to relace the cars every 3 years, and have to provide them to employees because they are a stipulation in the employment contract? Sure, eventually, the cost of cars will make them sack people / re-negotiate contracts, but this has knock on effects, until these are outwayed by really expensive cars we have the kink? No? I'll go get some asprin.
Mr S - don't forget that the vertical axis is price. A fleet buyer or a salesman who needs a reliable, new-ish car will replace it every three years regardless of the price therefore their demand curve is steep - a large increase in price only -> a small fall in demand.
I don't understand how the car depreciating by the amount of the scrappage scheme is an issue.
Cars always depreciate, but people do not treat cars as investments.
Anon, if you drive an old car worth £500 and are penny-wise (which is likely to be the case if you drive an old car worth £500), you could achieve the £2,000 "saving" by waiting a few months, selling your old car for £400 and buying nearly-new.
That puts you in exactly the same position as your neighbour who also has a £500 old car and who goes for the £2,000 'voucher' today.
The German scrappage scheme (2,000,000 vehicles) is nearly seven times larger than the UK scheme (300,000 vehicle). The Germans say sales in one month are 40% up.
I imagine that the impact will decline over the year, perhaps becoming negative. If the quarterly data showed +30%, +10%, -10%, -10% over the year, compared with some hypothetical baseline, what has been achieved? This would be a 5% average increase in sales plus a shift of a couple of quarters. People who would have bought during the year buy sooner.
There is also the problem of no controls in this experiment. Are we supposed to compare with adjacent countries which didn't have scrappage? Or non-participating dealers? Or similar industries (eg motorbikes)? The politicians will have fun spinning the data to show their points!
A bigger problem is with the whole concept of taxing/borrowing from people and businesses to pay bribes. We never hear of how many jobs are destroyed by schemes like this as they drive up tax rates or inflation. Remember that the "subsidy" is a transfer from the productive in society to the consumptive. The marginal cost of collecting £1000 from these people is around another £1000 in lost economic output. Then you have to add in the government and private direct costs of the scheme (bureaucratic/compliance costs). And then consider the possible effect on misallocation of the buyers' resources. Perhaps the buyer was about to install (ie invest in) double glazing to cut heat loss and reduce noise in their home. The government tells them to buy a car instead and disinvest from their existing one. One would hope most of the returned cars would be sold to other motorists - but the implication is they will be destroyed instead.
Hmmm... the more I think about this, the dafter and more destructive it seems.
@ AW, that is another excellent point - even if the scheme had an impact (which it indisputably did in Germany), all it does is accelerate purchases.
If and when the scheme is ended (and we know what happens to 'short term measures'...) then sales will probably fall to less than the original pre-scheme level.
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