Dec 22 2008
Are there smart ways for governments to cushion industry?
In the final analysis a subsidy is a subsidy. We are in that phase at the moment when governments are trying to dress it up. Let’s look at two such schemes – the German employment scheme and the putative UK R and D scheme.
I have been told that in Germany there is a current government scheme to keep skilled workforces together. Apparently an employer can announce that a large number of workers are no longer needed and send them home. The state will then pay between 60 and 67% of their wages, depending on their marital status, for as long as they are doing nothing. The theory is that the downturn will be temporary, and the worker will go back to their company when normal demand resumes.
Such a scheme is not necessarily a good idea for the company concerned. After all, they still have to pay a substantial amount to employ someone who no longer does any work for them. There can be no guarantee that “normal” demand will resume any time soon so they need them again. Nor can there be any certainty that the employee will come back to work for that employer. They may change their mind and resign many months into the enforced period of no work.
It can be an even worse deal for the German taxpayer. Big multinationals could decide to lay off more German workers rather than taking action elsewhere, if someone else paying two thirds of the wages is enough to sort out the cost problem. The scheme could become very expensive, as it is very expensive to cut the size of a German workforce so this could be attractive compared to the full costs of redundancy. It does nothing to resolve the underlying business problem that some German companies are facing. They have too few sales, and need to cut all their costs.
We read that the UK is thinking of an R and D subsidy scheme for certain car makers. The thinking here is that we wish to keep R and D in the UK auto sector here in the UK, and therefore taxpayers should pay to do so. This well intentioned proposal would also be fraught with difficulties when it comes to sorting out the detail.
Spending is spending. Accountants can have long arguments about which part of an auto company’s spending is R and D. How much of the Board’s costs is R and D, as they spend time talking about future products? How much of the CEO and the rest of the executive overhead, as they too are heavily involved? Is investigation of a complaint or a technical problem with the product R and D? Is market surveying and customer contact R and D? How much of the engineering overhead is truly future oriented?
There is no easy way of indentifying and ring fencing all R and D spend. Nor is it magic spending, clearly better than other spending. The government will discover, if it presses on with this, that a subsidy is a subsidy, by whatever name.You keep R and D here if we continue to produce good people who want to innovate and engineer new solutions, and they are affordable.
11 Responses to “Are there smart ways for governments to cushion industry?”
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
Two flawed schemes which are yet more signs of the mad scramble by governments to be seen to do something, anything, regardless of the efficacy.
JR, I know you have lots of devoted EU fans on your site. So I post this link so they know that Neelie has got it all under control. You will see she is delighted with Gordo’s move on Bradford and Bingley; and his UK support scheme for financial institutions! (click on “recent actions” in the following link).
It is good to have the strength of the EU protecting us. (Please no abusive replies, JR will only have to spend his Christmas deleting them). All the best.
http://ec.europa.eu/commission_barroso/kroes/financial_crisis_en.html
I’m sure some Labour types would call a cut in corporation tax a “subsidy” but it isn’t. Putting the same amount of money into cutting CT would help all industry but it would help more the most successful companied rather than the sort of ad hoc subsidy pattern we now see which in practice means most money goes to those most politically connected. This is known as reinforcing success rather than failure. It also ensures much more money actually gets to industry since the cost of (A) collecting the tax & (B) returning the tax, usually amounting to about 30%, is obviated. Because it does not go to those screaming the loudest it is a sort of tough love treatment of the economy, which the BBC would obviously disapprove of.
The final & I think irrefutable argument for putting any money available here is that cutting CT rates is what got the Irish economy growing so that over 19 years it has gone from 2/3rds our standard of living to better than America’s.
JR: “I have been told that in Germany there is a current government scheme to keep skilled workforces together.”
That would be a similar scheme that worked so well for General Motors in Detroit?
OK, lets try to understand the idea of a subsidy. A subsidy is a payment from the government (that has already extracted the money from the company, corporation tax, National Insurance, VAT) to try and reverse in the immediate short term the damage the government has already inflicted over a long period of time by extracting the taxes in the first place.
A subsidy further implies that someone in the Civil Service who has just realised in the last five minutes that a given industrial sector is in dire straights, has the inside knowledge and competance to know that it is even a good idea to subsidise a given industry.
I maintain that the Civil servant hasn’t a clue about that particular industry – even those that specalize in such things, the notorious regional enterprise boards (or whatever they are called these days) are pretty much useless.
It is obvious that the best organisation to decide how to spend its money is the company, if all the leaching taxes were reduced and the self defeating regulations removed then a company would probably stand a very much better chance of survival than it a bung of cash is thown at it by the government, along with all the extra strings that Gordon Brown is disposed to impose as conditions.
In fairness JR, the early 1980’s Thatcher government committed just such a crime with the “Temporary Short Time Working Scheme” as I recall. This was politically expedient rather than sensible.
I’m a simple soul: no subsidy, no bailouts, miniscule taxes and a tiny, tiny state.
Another scheme that is being used is to just make large numbers of people redundant and when things pick up employ large numbers of EEC workers at reduced rates and often in some cases bring in workers from Eastern European states stating that British workers are to expensive and secretly not interviewing anyone British. In one case a power station being built by foreign workers for a French company to sell electricity to Britain. Right wingers hate the EEC but not the cheap workforce that it supplies. National Minimum Wage. NMW next to a Job advert means Eastern European as no British tradesman would work for that rate. What next? Large camps of non EEC workers? The Eastern Europeans though did not turn out to be the ‘magic bullet’ that many employers thought they would be. Any idea why kids?
mikestallard Reply:
December 22nd, 2008 at 5:39 pm
Bazman, I think you are about two years out of date. Now that the Zloty is at 4.5 to the £, the Poles are all safely back in their beloved homeland. OK, there are still a few people from the borders (Latvia, Lithuania, “Lithuania” and Russian Kaliningrad).
I was told this morning that there are lot of new Bangla Deshis with Pakistani passports here in Wisbech. They live in Peterborough and get bused in.
The (low wage -ed) labour of India and China are a real menace. But I am afraid that battle is already lost.
“Right wingers hate the EEC but not the cheap workforce that it supplies.” Can you remember Mr Hague losing the election to Tony Blair on the very issue of immigration? I am sure, too, that you will not dare to call the extreme BNP left wing, will you? Even though, of course, we all know that it is really thrives where Labour has completely lost the plot.
I do not think, myself, that this is a party issue. It is, actually, too vast for that.
63 people were laid off this week, (just before the Christmas holiday of course), at a major food processing firm here in Wisbech. In nearby Peterborough at one of the Malls there, electricians and other building workers were being sacked by text message. In another area, a skilled welding consultant was taken aside by management and asked confidentially if any of the workers were not pulling their weight. He refused to answer.
This is in the Fens!
All politicians will have to answer: how can I save my votes here? What can I do to show that I care?
All managers have a totally different question to answer: how can I continue to keep the show on the road?
Many of the sacked 63 were white collar people who, apparently, needed to be shown the door anyway by the food firm.
If only the government would stop pratting about and follow suit.
Research and Development departments are seen by some, wise, companies as businesses in themselves, just as specialist R&D businesses have long existed without any formal attachment to any particular manufacturer. Develop a new process, sell a licence, get a cut for years; it makes eminent sense.
A failing business with a thriving R&D department always has the option of selling that department as a stand-alone business. Government does not have the knowledge required to assess which R&D department is worth keeping and which should be let go, only the people working in each field know that and they will speak with their cheque books.
Governments prove time and time again that they don’t understand how to make industry work. The best they can do is to pursue policies that maintain economic stability, keep red tape, intervention/or muddling down to a minimum, and support mobility of labour. There you are – 3 smart ways for government to help industry!
mikestallard Reply:
December 24th, 2008 at 6:29 pm
Afraid not.
Red Tape: gives more jobs to the clients.
intervention: if you are the government pursuing votes instead of jobs this is a no-no. You have to be seen to be doing something.
mobility of labour: this is an offence to the tragedy of the people whose jobs have been stolen by the rich capitalists: remember “on your bike”? And what about the complete freezing over of the housing market?