Around the world, the level of activity in the car business is a good indicator of the state of an economy. This is true for rich countries like the United States and Germany, as well as small struggling developing economies like Jamaica's.

When the US financial giant, Lehman Brothers, collapsed one year ago, the mood in the car industry was grim; the writing was on the wall. It took only a few brief months for the top business executives of General Motors (GM) and Chrysler to appear in Washington like a pathetic bunch of mendicants trying to secure bailouts for their bankrupt companies. In Europe, the situation was not much different either. It was the intervention of the German government that made it possible for Magna, an auto-part company, and Serbank of Russia, to rescue Opel/Vauxhall by acquiring a majority stake from GM. In Jamaica, rising unemployment, a depreciating dollar, declining remittance inflows, and a fall in export have left the retail car business gasping for life.

Not surprisingly, the news that the Government has decided to provide a "stimulus package" to the retail car business has been greeted warmly by the Automobile Dealers' Association. Information minister Daryl Vaz, who made the announcement, indicated that the special consumption tax (SCT) on motor vehicles would be "rolled back" as "part of an effort to stimulate sales". For the smallest category of vehicles (1,000-1,600 cc) the SCT of 10 per cent was completely removed, while at the high end (3,000 cc and above), the tax was chopped from 70 per cent to 35 per cent. The package will be in place until March 31, 2010. Vaz, a former automobile dealer himself, was sanguine about the economic potential of the package. He suggested that the package might result in higher tax compliance among car dealers.

bewilderingly generous

However, the stimulus package has raised more than a few eyebrows, as it seems bewilderingly generous. It is natural to think that within the Jamaican context, the car business would be at the back of the queue when it comes to handouts in a recession. Surely, the Opposition People's National Party has not missed out on the opportunity to berate the decision as "counterproductive". So, from a strict economic perspective, are objections raised in relation to the stimulus package reasonable, or are they the ramblings of an opposition party and sympathisers still trying to get accustomed to the reality that it is no longer in power?

First, it is important to determine if in general, there is any basis for a stimulus package. The idea of stimulus packages was born in the era of the great depression. Maynard Keynes, the greatest economist of the 20th century and the architect of the stimulus package, argued that economies go through cycles of booms and recessions because of the nature of investment. Economic growth is derived from investment. In general, investments tend to be made in chunks. Whenever capital investment occurs, it is not done simply to satisfy immediate demand, but also future demand. So, if a company builds an electricity power plant today, there will be no need to build another one next year. Consequently, investment goes through stop-start phases, which lead to economic growth and recessions.

In a global recession in which innumerable parallels have been drawn with the great depression of the 1930s, there is a renaissance in Keynesian economics. Indeed, governments are happily intervening in economies and there seems to be little protest that their action may lay the path for socialism. Stimulus packages are, therefore, the accepted approach within orthodox economics and among economic policymakers as the cure for recessions. In light of this, the stimulus package for the car business might not be a bad idea.

Second, it is critical to understand what position the car business should hold in the queue if stimulus packages are to be handed out. Apart from buying a house, for the average man, the single largest expenditure he will ever make is the purchase a car. Moreover, a car is not just acquired for transportation - it is a status symbol; it reflects the degree of an individual's affluence. Therefore, expenditure on cars tends to be income sensitive. When an economy is going through a slump and people's income fall, the car business tends to be among those hardest hit.

government sympathy

Consequently, governments are often sympathetic to the survival of this industry. However, it is critical that in providing a stimulus attention be paid to whether the recipient industry contributes to production in the country. When the US government provided stimulus to the automobile industry, its main concern was how to boost domestic production and maintain jobs in its own economy. In providing assistance for the rescue of Opel/Vauxhall, the German government made sure that none of the plants in the country would be closed.

The question that must be asked with regard to this stimulus package is whether it will cause the Jamaican economy to grow, or some other economy.

By dint of the fact that Jamaica does not produce cars but imports them, the stimulus package will neither create new jobs nor increase economic output. In addition, it should put greater pressure on the demand for foreign exchange in a fragile market and negatively affect the country's external balance. The car business represents a sector which admittedly serves a purpose from the point of view of consumption; however, it should occupy a position at the back of stimulus packages queues.

lower prices

Another reason why the car business should be in the rear of the queue is that a stimulus package is achieved through the mechanism of a reduction in the tax rate. Undoubtedly, this will benefit consumers who should see lower prices in the car dealer's parking lots, but it is likely to lead to lower revenue inflows for the exchequer. Surely, there is a thesis in economics that under certain conditions lower tax rates result in an increase in government revenue. However, there is no evidence that this thesis is applicable in this case. Moreover, if this strategy is expected to generate greater revenue inflows, then it should not be a stop-gap six-month package; it should be established for the long term.

Already, the economic slump has adversely affected the fiscal deficit, and the forecast is not at all rosy. therefore, this stimulus package is puzzling, to say the least.

Furthermore, if the government intends to increase tax compliance in the car-business sector, it should not be casually based on a temporary reduction in the SCT. It should be established on a surer foundation - a good database of the dealers, proper monitoring, and greater accountability, and so on.

It is evident that the tax-compliance argument proffered was simply a pretext for something that should not have been done in the first place.

Weathering the present economic storm with Keynesian economics in a small dependent economy requires that government ensure that economic players keep the correct position in the queue. It is obvious that the car business belongs at the back.

Cedric Wilson is an economics consultant who specialises in market regulations. Send your comments to: conoswil@hotmail.com or columns@gleanerjm.com.