Vorsprung durch scrappage
The car industry is delighted that Lord Mandelson has expanded the government's car scrappage scheme. But I'm tempted to say they lobbied the wrong government. Getting Germany to extend its much more generous scheme - which expired at the start of this month - might have done the average British car worker more good.
Consider the arithmetic. The UK now plans to spend another £100m on its scrappage scheme, bringing the grand total to £400m. That sounds exciting until you hear that Germany's scheme cost 5bn euros (£4.6bn). In other words, more than ten times as much. Under the German scheme, the government provided a rebate of 2,500 euros to everyone exchanging an old car for a new one. Two million Germans have bought cars under the scheme - compared to 227,000 so far in the UK scheme.
Why does this matter - other than confirming that German governments are a lot more into cars? It matters because some of those new cars being bought in Germany were made in the UK.
Though Germany is a world-beating car exporter, Germany is also Europe's biggest car importer. About 40% of sales last year were imports. But importers have benefitted even more than you might expect from the German car scrappage scheme, because people trading in their clunkers tended to buy smaller, compact cars, which are more often made abroad. In the first few months of the scheme, nearly two-thirds of the cars bought under the German scheme were made overseas.
It hasn't exactly caused a surge in demand for British cars. But according to the HMRC's trade figures, our car imports from Germany in the first seven months of the year were 34% down on the same period of 2008, whereas car exports to Germany "only" fell by 19%.
It's true that we still bought a lot more of their cars than they bought of ours - £3.6bn worth versus £515m. But every little helps. Our car "deficit" with Germany has shrunk by nearly £2bn - from £4.9bn in the first seven months of 2008 to £3.1bn now.
Put it another way: we import around 80% of the cars sold in the UK. So, by a very rough approximation, you could expect that around £45m of the £227m spent on the car scrappage scheme went toward buying a British-made car. (I know that the scheme's supporters point out that some of those cars have UK-made parts, but this calculation is tricky enough already.) By the same logic, the German government appears to have spent about £2.8bn on helping Germans buy foreign cars.
Now the vast majority of those imports weren't British. But if a mere 1.7% of that money was spent on a car made in Britain, the German scheme has made a greater direct contribution to the sale of cars made in the UK than our own government's scheme.
First, it's a reminder that the Germans have done a lot more to boost their economy than their rhetoric would suggest, whereas the British have done a lot less. To hear the Chancellor speaking today, you would think that the government planned an enormous boost to the economy next year - which the Conservatives would callously take away. But the IMF estimates that discretionary programs (that is, special policies to combat the recession) will not support the economy at all next year. By contrast, Germany is planning to spend another 2% of national income on boosting growth.
The Germans have a reason for being low-key about their stimulus packages - they think it makes them work better. On their theory, people (German people anyway) will spend more of a given cash windfall if they're not worried about the tax rises to come.
It seems to work for them - the rise in car sales was almost single-handedly responsible for the very modest growth in GDP which Germany achieved in the second quarter of this year. According to Capital Economics, German consumer spending grew by an annual rate of 1.2% in the three months to the end of June, at a time when spending in the UK was falling at an annual rate of 3.4%. Without car sales, spending would have fallen in Germany as well.
Possibly, the average Brit is less likely to lie awake at night worrying about the public finances than his German counterpart. Maybe we get a warm glow from the idea that our government is valiantly running up debt on the economy's behalf. Either way, our government has taken the opposite approach to the Germans. Ministers have endlessly talked up the stimulus, even though by US or even German standards, it was pretty small. We'll never know whether it would have been more effective to play the stimulus down.
Second, it shows us once again, why sometimes it's better to be a spender than a maker.
Almost by definition, countries with big trade deficits will be less affected by a global downturn than countries with big surpluses. Why? Imagine Country X has a 10% of GDP current account deficit - meaning that it only makes 90% of what it consumes. Whereas its neighbour, Country Y, has a 10% of GDP surplus.
Then imagine global demand falls 5% across the board. Other things equal, the country that contributes 110% of its GDP to global supply will be worse hit than the country that only produces 90%. On this example, X faces a hit of 4.5% of GDP versus 5.5% of GDP for country Y. And so exports of Country Y fall more than imports, whereas the opposite will be true for Country X. The numbers are smaller, but this the essence of what has happened in Britain and Germany.
And that's if other things are equal. Country X benefits even more when Y decides to spend £4.6bn boosting domestic demand for imported cars, while its exporters are being hammered by falling foreign demand. Thanks to cash-for-clunkers, German car sales in the year to August are up 27%. By contrast, car exports are 29% down on last year. Though something tells me they'll be back.