State bail-outs used to be so black-and-white. In the past, the government of the day would hear pleas from a manufacturer for some “last resort” money that it needed to avoid bankruptcy. Ministers would then work out how many jobs would be lost if the company were to go bust, calculate the political fall-out, and hand over the cash in return for promises to use the support to “come out the other side as a world-beater” and not to cut any jobs. Things are now much more complicated.
In part, they are greener. When he announced his package of loan guarantees for the automotive industry yesterday, Lord Mandelson argued that he was “laying the foundations for a reinvention of its future.” This claim was odd in several ways. First, the CO2 emissions of new cars produced in the UK have been falling for years. In 1997, new models produced an average of nearly 190g of CO2 per kilometre, now they produce only 165. Second, because the top four producers in the UK are foreign companies, any revolution in car manufacturing will not be driven by British firms. The profits and intellectual property rights generated by the much-vaunted new era of motoring will be collected by other countries.
Lord Mandelson’s desire to “prevent an irreversible loss of capacity, skills and technology” from the sector is also more complicated than it seems. The production of commercial vehicles has dropped substantially in the past few months, as has the production of cars, but the latter figure reached a post-millennium peak of nearly 1.7 million units in 2004, so the industry was declining even in an era of easy credit. The number of jobs in the sector has dropped commensurately: in 2000 there were 900,000 people employed in the sector; in 2007 there were only 841,000.
It is thus difficult to see what the government hopes to achieve. Lord Mandelson wants to save the automotive industry in the UK, but it is not clear what he wants to save it for. If demand for new cars does not pick up soon then all of the loan guarantees will be swallowed up by the companies that first need to keep themselves afloat. The prospect of innovation will thus be lost to the spectre of bankruptcy. If that happens, jobs will still be lost. Bail-outs have always been difficult; now they are complicated aswell.
Lawrence Kay is an Economics Research Fellow at Policy Exchange.
