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The car scrappage scheme has protected about 4,000 jobs in the UK auto industry, Government estimates have claimed.

At a cost of £400 million.

As stimulus measures go this isn\’t all that effective. The number of jobs saved is of course at the high end of estimates: no, don\’t be silly about this, this is the people who spent that money defending the decision to have done so. Of course they\’ve put the best gloss on it.

So £100,000 per job saved. Given median incomes of around £25,000 saving a job for a year costs four times what that job pays for a year. So we have a multiplier of 0.25…..which really, really, isn\’t the sort of number which gives one confidence in the merits of Keynesian spending. For that we want a multiplier of over 1.

And as for the idea that such Keynesian spending pays for itself….well, the tax take on £25,000 is something like £8,000 (income tax plus NI) so we\’re spending £100,000 to get £8,000 back in tax……which again doesn\’t look like such spending pays for itself.

No, sounds like it was a very bad idea indeed actually.

12 thoughts on “Well, no…”

  1. But ‘cost’ is ill used. Private sector agents are better off (same cars, less cash), public sector worse off. It is a sort of balance transfer.

    It is not ‘cost’ like Buncefield exploding cost a billion. People only focus on one side of the leger – even libertarians like you who surely realise the government isn’t everything ….

  2. “It is a sort of balance transfer.”

    No, it is taxpayers (and indirectly, private sector in general) down £400m, small part of the private sector UP £400m, most of that going abroad to foreign manufacturers.

    Worse still, buying a new car is a luxury and not essential. Forget about “greenCOecoHouseWarming”, as 80% of the energy used in a car’s life is during manufacture, so making new cars is VERY environmentally unsound.

  3. The other problem with such schemes is that every pound that is spent on them is a pound taken in tax, or increase in debt that has to be repaid, etc. In other words, these things carry an opportunity cost.

  4. quite simply, people do not by a new car and keep it until it is only worth scrap. Typically people buy a car, keep it for a few years, then replace it with one about the same age as they bought last time. Since the scrappage scheme effectively brought a new car into reach of someone who was thinking of a two/three year old one the majority of cars scrapped under this scheme were of the order of eight/ten years old- and worth typically around £1500 at auction, having a further eight years of life for those willing (or needing) to put up with an old model with a few marks and scratches. As evidence I have noticed that that price of two/three year old cars has fallen recently whilst the price of eight /ten year old cars has risen. In short the scheme involved destroying some considerable amount of valuable assets in order to get people to pay for replacements.
    Didn’t Basiat have an essay on this? Or perhaps we think that his scheme was too modest, that destroying whole houses rather than just the windows would have made us all wealthier- after all we have destroyed whole cars as well as the windows.
    I’m not inclined to bother with calculations on exactly who wins/loses on such an obvious flawed scheme.

  5. No, that’s double-counting. If Tim had said ‘wow, 4,000 jobs saved and lots of shiny new cars all for free’ your point would stand.

    Roger – why is the private sector ‘in general ‘down £400m?

  6. “why is the private sector ‘in general ‘down £400m?”

    Of course it is not. Deficit spending adds to savings:

    Treasury sells £X gilts.

    Non-govt sector is down £X base money and up £X bonds. The government is simply changing the structure of the portfolio of govt liabilities held by the non-govt sector here (i.e. the mix of non-interest to interest bearing assets). No big deal.

    Govt then spends £X, which is injected into the economy as base money. Aggregate base money position is back where it started from and the non-govt sector has increased its savings to the tune of £X govt bonds.

    Deficit spending increases savings by definition.

  7. I’ve heard–don’t know whether it’s true or not, so take with a grain of salt–that, here in the U.S., a bonus to employers (don’t know whether in the form of cash, tax credit, etc.) for each new hire was part of the stimulus bill passed and that, in order to collect an employer need not have expanded his workforce by even a single employee.
    According, again, to what I’d heard, an employer could merely fire his workforce and subsequently (immediately?) rehire them, or others, to qualify for the benefit. And, the story went on, that was actually occurring in great numbers.

  8. If the government bribes tens of thousands of people to scrap their rustbuckets, what is the effect on the small garages, mechanics and spares people who would have been employed in keeping those cars MOTd and generally running etc?

  9. @Matthew “why is the private sector ‘in general ‘down £400m?”

    Taxpayers are down as they will have to pay for it. If taxpayers are paying for this, then the private sector gets less of their spending.

    As for @vimothy talking about “debt is savings”…well if that were so we’d all be so well off, right?

    Deficit spending does not meaningfully “increase savings” if you realise that it increases debt that bears interest and all must be paid for by taxation.

    I could borrow £5,000 from the bank and then save it in an ISA. Does that increase my savings? Yes, technically, but also no, for I have debt.

    Savings make sense when there is a return on investment. Borrowing to prop up miscellaneous suits on forecourts selling foreign goods is hardly what I would call “investment”.

  10. The vast majority of vehicles sold were imported by Hyundai and Diahatsu, both manufacturers with no production presence or even procurement programmes here in the UK; so they benefitted from our taxpayers cash!

    The only two production bright spots here in the UK were the Ford engine plant in Bridgend and the Nissan car plant in Sunderland, both of which benefitted.

    However, the main driver for their increased production was from increased demand from scrappage programmes in other EU countries. So shouldn’t we have just saved our cash and let other countries’ scrappage schemes boost those two operations?

    The SMMT made much of the 800,000 people employed by the UK motor industry – but 600,000 of those are nothing to do with car production. They are in the sales, service and repair trade, so they had marginal benefit from the scrappage scheme.

    The scheme was a fiscal, economic and environmental smokescreen!

  11. Roger Thornhill:

    For any *sector* to *net* save, another sector must net spend. That’s just obvious. Holding the foreign sector constant, for the private sector to net save, the government must net spend, by accounting identity definition: household savings + corporate savings – government deficit = 0.

    I explained the process step by step, so it’s not clear how you’ve got so confused. To run with your example, I could borrow £5,000 from you, and then spend it in your shop. You have the same amount of money in the bank (£5,000) but also a financial asset (my liability). In this analogy, you are the private sector and I am the government. When the government deficit spends it *necessarily* provides additional net financial assets (new savings) to the non-government sector, as I demonstrated in my comment at Mar 31, 2010 at 5:18 pm.

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