Scrappage Redux?

It is not entirely clear whether the recently announced £75bn round of quantitative easing (QE) is designed to serve as a supply-boosting measure, by expanding the available supply of lending to small and medium size businesses, or whether it is intended, through roundabout means, to plug the shortfall in aggregate effective demand that is perceived by some to exist in the economy.

Some commentators have, working on the premise that a shortfall in demand is the main problem, put proposals on the table that would place funds directly in the hands of the public, as opposed to the circuitous route fostered by QE.   

I’ll save the analysis for another day, but in essence Quantitative Easing (QE) is flawed in the sense that it acts as a regressive tax in that, as with any policy, it creates winners and losers, and in this case the most detrimental impacts concentrate on those at the bottom end of the income distribution.  Moreover, by lowering bond yields it creates a headache for pensions administrators in particular in worsening pension funding deficits.   

As the “Occupy Wall Street” protests, which are being taken seriously by all manner of people from President Obama down, and which have spread to a number of countries including the UK,  are in the throes of demonstrating, this is not an especially propitious environment for the enactment of economic policies that transfer wealth from the poor to the rich.

So, in a spirit of fun, here is another proposal to boost spending without the drawbacks of QE: In April 2009 government through the department for business (BIS) introduced a scrappage scheme designed to boost flagging vehicle sales, give a fillip to the industry and supply chains, and at the same time lower the overall carbon emissions of the vehicle fleet by taking clunkers off the roads and replacing them with new vehicles emitting lower grams of CO₂  per mile.  From 18 May 2009 through to end March 2010 consumers could deliver a ten year or older vehicle to a dealer to be scrapped and receive £2000 or more towards the purchase of a brand new vehicle.  Government contributed £1000 per transaction to the scheme, and this was matched by £1000 from each manufacturer. The objectives of the scheme were threefold: to bolster the carmaking industry; fuel activity in flagging supply chains; and switch consumers into lower carbon cars and vans. All round, the scheme was judged a success. However, what is slightly problematic about the scheme are certain distributional impacts; auto manufacturers are by and large large firms, the bulk of employees in the sector are men, and although auto manufacturers are located in some relatively deprived regions of the country, auto workers tend to be relatively well-paid in that auto industry jobs tend not to be minimum wage jobs. 

Without repeating the exercise for the auto industry therefore, in the same vein, an equivalent scheme could be devised for the fashion industry.  Each household in the UK could be issued with winter apparel vouchers – a sort of coat scrappage scheme, funded by printing new money.  There were approximately 61.1m people in the UK in 2010. If a voucher of £400 was issued for each member of the household to purchase winter apparel, to be redeemed against traded in old clothing, the “cost” in terms of money creation would be about £25 billion.

Drew Barrymore: Stimulating the Economy?

 

A study by Oxford Economics found that the contribution of the fashion industry to GDP be at about £21bn in 2010, approximately double that of carmaking. The same study estimates London fashion week to yield about £100bn in orders. Measures to stimulate the fashion industry would also have the advantage that

• ·         It would help to address the gender imbalance in UK business; the fashion industry employs disproportionately more women
• ·         Despite its glamorous image, it is an industry where low-pay activity is concentrated and minimum wage type jobs abound.
• ·         It also employs a disproportionately large number of young people, who are finding it hardest of all to secure employment in the current job market
• ·         It would give a fillip to one the economy’s most creative sectors, which is at the heart of what is thought by government to constitute the essence of modern Britain.  
• ·         With soaring heating bills people will need to don warmer clothing indoors and cut back on heating, so that, on the margin, such a scheme could even save a few lives.
• ·         It could lower carbon emissions by enabling people to dress more warmly and therefore have less need of indoor heating
• ·         The scheme would principally be of benefit to small and medium-size enterprises, which proliferate in the fashion sector.  
• ·         The incidence of the measure would be progressive, i.e. it would be of greatest benefit to the poorest members of society.  If there was a requirement that old clothes had to be returned in order for people to avail themselves of the scheme, the richest members of society might not even bother to redeem their vouchers.
• ·         “Scrapped” old clothes could be distributed to homeless shelters.  

Models Kick-starting the Economy