Bite Size Advice. Paul J. Thomas

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       Posting Date: 18 November 2013

       Corporate welfare

      In 1974, corporate Australia witnessed one of the costliest new product failures in its history. A year earlier, the vehicle manufacturer, Leyland Australia, launched a large family car called the P76. The car was plagued with quality problems from poor assembly practices and was quickly labelled a lemon.

      Aside from the quality problems, Australians did not want a petrol guzzling car at a time when the world was in the midst of an oil crisis. Australian car buyers felt the P76 was too big and too thirsty – not to mention its ugly wedge shape – and opted to stick with their Holdens and Fords.

      Fast forward forty years and it is now Holden and Ford that are producing cars Australians don’t want. Due to changing consumer preferences, we have lost our appetite for home grown cars. Fewer than half of Australia’s 15.6 million drivers prefer to buy an Australian made car.

      Australia’s car market is now primarily composed of cars imported from Asia and Europe. Our local auto sector cannot compete with cars made better and cheaper overseas. Sales of locally made cars are at record lows with Australian manufacturers propped up by government subsidies.

      Just like Leyland, Holden and Ford misjudged the market, yet they – along with Toyota – have been enjoying a $5.4 billion aid package to the industry. According to the Productivity Commission, subsidies to the industry have averaged about $550 million a year for the past six years.

      The Commission recently recommended that Federal Government assistance to the embattled local car industry should stop. It said that the justification for subsiding car makers is weak and that “ongoing industry-specific assistance to the automotive manufacturing industry is not warranted”.

      Workers in the auto sector are paid allowances which are more generous than in most other areas of manufacturing. The perks include Sunday pay of 2.5 times the normal rate, ‘wash up time’ after shifts, paid time to donate blood, cash bonuses and forced plant shutdowns over Christmas.

      These uncompetitive work practices contributed to the decisions made over recent months by all three car manufacturers – Ford, Holden and Toyota – to close down their Australian car manufacturing operations. The harsh lesson is that government spending alone cannot sustain an uncompetitive industry.

      This also applies to the agricultural sector and the recent decision by the Federal Government to reject a request for $25m in financial assistance to fruit canner, SPC Ardmona. Our national carrier, Qantas, also made a request for government support.

      The Federal Government recently signalled that multi-billiondollar corporate rescue packages will become a thing of the past. “The age of entitlement is over, the age of personal responsibility has begun,” warned Treasurer, Joe Hockey.

      As I opined in my post, Free trade versus protectionism, it’s in Australia’s best interests to specialise in those things in which it has a comparative advantage. It’s clear that protectionism cannot preserve jobs in the long-run and taxpayers should not be subsidising underperforming industries.

      Only profitable industries create jobs and while job losses in one sector are always painful, local production should not be defended from imported competition. As a general rule, I believe that markets should be allowed to operate free from government interference.

      To be sure, I don’t believe in unrestrained competition where one wins at any cost. Governments have a role to play in defining the rules of competition so that it’s not survival of the most ruthless or the most deceptive. Beyond that, it’s up to each market participant to avoid extinction.

      At the end of the day, it’s consumers and not governments who really determine business survival. As in the natural world, Darwinian selection should determine the winners and losers in the corporate world. In this jungle, the brutal reality is that some companies will thrive while others will perish.

       Posting Date: 24 February 2014

      Economics is a social science. It is the study of human nature as it applies to money. Economists analyse the behaviour of individual people and firms within an economy (microeconomics) and examine the economic activity of an entire country (macroeconomics). When it comes to money we do not always make rational choices and, as explained in a number of the blog posts in this chapter, this contributed to the Global Financial Crisis. Other topics covered include household debt, personal savings, interest rates, property prices, money management, GDP measurement and money supply.

       Financial crisis defies logic

      The academic world of economics may fit neatly into mathematical equations, but does it describe the real world? I think we humans are far too emotive for rational economic models to accurately predict our behaviour. The Global Financial Crisis is proof positive of that.

      The dislocation in financial markets was caused by irrational lending practices – saddling borrowers with dodgy (subprime) loans they could not afford. As the loans went sour, markets overreacted and then fear and panic set in. Investor confidence plummeted and everyone rushed to the (stock market) exit door.

      The human species was convinced it faced financial Armageddon and this supposedly intelligent herd animal behaved like one of Pavlov’s dogs – the market rings the bell and hysteria starts. The great panic was fuelled by apocalyptic reporting from the media which whipped us into a frenzy.

      The white knuckle ride has been made even more exciting by market rumours. Nothing like wagging tongues to propel gloom and doom! But if we had acted more rationally, could we have avoided or mitigated the financial system death spiral?

      Conditions in financial and equity markets remain jittery. When the dust eventually settles on this damaging saga, teachers of media and political studies will try to make sense of what happened. Hopefully, economists will learn that markets are not populated by rational decision makers.

      They might also learn that the really big events in world history, as outlined in the bestselling book, The Black Swan:The Impact of the Highly Improbable, are rare and unpredictable. The author argues that economists live in a fantasy world where they believe the future can be controlled by sophisticated mathematical models.

       Posting Date: 29 September 2008

       Who caused the GFC?

      When СКАЧАТЬ