Elasticity and government policies

Elasticity and Government Policies

In the article "These snobs are blind to the one economic policy that works" the author both details the approach of the British government to stimulate demand for products with the population and puts that in a global perspective by comparing the way the policy was applied in Britain with the way this was applied in different other big economies, such as China, Germany or the United States. There are thus two parts to the article, one in which he details the overall policy to stimulate demand and supply on the market and the second in which he points out some of the flaws of the British approach vs. The other economies.

The article centers on the governmental policy by which British citizens could return their used car and exchange it for less money for a new one. The advantage for the consumers would have been that the new car was cheaper and that he could shortcut the additional administrative and bureaucratic issues that would have involved the longer process of selling one's car and subsequently buying a new one.

For the government, it was an indirect method of financially supporting the car manufacturers and offering them subsidies. As such, the government, in fact, covered the difference between the price the consumer would have paid and the real price of the car to which the supplier would have wished to sell. The gap between demand and supply was thus covered by the government so that the equilibrium price could be at the same level as the higher price. In that way, the car manufacturers remained price competitive on the market, while at the same time making no concessions in terms of reducing their overall revenues or profits.

The author expands the idea, mentioning that this is a valid approach for any industry, not only the car manufacturers. In his opinion, this period of economic recession and economic downturn should encourage the government to spend as much money as it can afford on bolstering demand rather than on any other form of economic subsidies. The perspective he takes supports the idea according to which financing demand in the economy would help carry on along the revival in all other areas of the economy.

As such, by stimulating demand, the producers will need to increase or keep at the same level the supply of products for the market. This means keeping the same rate of production and the same or increased number of employees. This will, in turn, reduce any social problems that the government might have if unemployment went above a certain level. Expanding programs such as the one for used cars to other products will simply mean shifting this positive process into other segments and areas of the economy as well.

The article gives the example of China, where as much as $360 billion were allocated by the government towards the process of stimulating demand on the market. The process did not target only the car manufacturers, but rather all industries, while the instruments of actually putting the money to use ranged from fee vouchers to direct stimuli for the businesses. Countries such as Germany or the U.S. put in more money than Britain into stimulating the car industry, important in the overall national economy of these countries and, at the same time, a potential social issue.

However, as the author pointed out, this was not the case in Britain, where the amount of money allocated for boosting supply was significantly lower than in these other comparable economies. The process of exchanging an old car for a new one, referred to as the "car scrappage scheme," was given only 400 million pounds of governmental financial backing. The reason why this happened was that the British government decided to spend much of its available funding to combat the economic recession on the support of the bank, that is, on the support of the supply side rather than on that of the demand side.

Supporting the banks meant that companies could continue to take out loans and, thus, support their investments in the business, into anything from research and development to creating and supporting new markets. However, with a low demand, supply and production would actually be limited, because there would be a low number of customers ready to buy the products and services that these companies make.