Why Mandelson's car plan will initially appear to succeed

Lord Rio of Hinduja, a.k.a. Lord Peter Mandelson, is about to start using £2.3 billion pounds to subsidise car buying, to 'stimulate' the car sector.

This plan will initially appear to 'work', because the dramatic collapse of car purchasing will temporarily reverse and form a small upwards bubble, in the same way that the 'Battle of the Bulge' formed a small bubble for the Wehrmacht in WWII.

This 'green shoot' of recovery will, however, be similarly doomed.

Very few people in the private wealth-generating sector will be contemplating buying a new car at the moment, either personally or via a company car scheme, because most people in this sector are worried about losing their jobs and most of the companies they work for are worried about going out of business entirely.

In these days of much more reliable cars, a three-year buying policy can easily become a five-year or a six-year policy, and a lot more private buyers will be buying separate satellite systems for their cars rather than buying a whole new car to get one 'as standard'.

A few private companies, particularly in the non-discretionary spending sector, will still be buying company cars for their staff, but these will only produce rock-bottom car market figures. Plus, Aldi general managers probably get through a 100,000 miles a year, so they really genuinely need a new car on a regular basis.

So why will Lord Rio's plan appear to work, at first? Because of the millions of state-sector workers who are laughing themselves silly at the moment, because they have rock-solid 'jobs' and gold-plated pensions, and tax-subsidised 'cheap' new cars will be a God-send, particularly for the 'hundred grand a year club' who feel particularly safe, because even if the government is forced to eventually start shedding parasites, they will be the ones deciding which of their less-well paid comrades gets the bullet. Plus, there's all the retired NHS consultants, Whitehall hacks, and other trough-munching politicians, who will use these tax-fed loans to boost their index-linked state pension incomes.

So car sales will probably increase, at least temporarily.

But it won't last. Because overall this is nothing more than another tax hit on the productive private sector, to pay for greater spending on the unproductive government sector. Lord Rio will not directly increase taxes, for the moment, but will either borrow or print the money instead. If he borrows the money, taxes will increase to pay for the bond coupons and the eventual principals, plus he will crowd out private investment in wealth-generating activities. If he prints the money, the value of every pound in the world will be diluted, thus transfering wealth from the productive sector to the unproductive sector, thus making everything eventually more expensive, particularly foreign commodities and other raw materials required by manufacturers.

So this overall tax hit will further compromise the ability of British manufacturing to compete with overseas competitors, so more will go under, sacking more staff, generating more benefits claimants, and further undermining government tax revenues.

But at least the hundred grand a year club will have lots of shiny new cars, thus confirming Mises' time preference theories about the structure of production, which state that artificially lowered interest rates will generate malinvestment into more roundabout production processes than are genuinely required, such as the production of vehicles more luxurious and more expensive than are actually required.

Hence all of the massive car parks full of unsold pick-up trucks, Land Rovers, and Jaguars.

I suppose Lord Rio's plan, if he really knows what's going on, is just to get a 'feel-good' factor going, then win an election, then take the real pain in the five years after this, in which time he will be able to bounce us into the Euro Zone, to favour all of his Russian Oligarch friends and all of their private Luxembourg bank account balances. If he does know the real effects of what he is doing then he is a crook. If he doesn't then he is a fool.

Take your pick.