Reduction in Inputs = No Production and No Demand?

In the theoretical world of economics when inputs are reduced for a company they will benefit from  lower marginal costs and thus increase their production (Note: Inputs = Costs such as labor, rents, wages, taxes, etc.). It should also be noted that companies will typically produce at levels intended to meet demand and also build the required infrastructures to accommodate such production levels. However, this is not always the case.
Case in point: The Chevy Volt. The Chevy Volt is an electronic car from General Motors (GM). Based upon perceived demand for the Volt the US Government, along with local government entities in Michigan, helped reduce the inputs for a plant operated by LG Chem (South Korea). These governmental grants and tax breaks were intended to help make the production less expensive for the batteries of the Volt.
In 2010, the US Government gave a grant of $150 million to LG Chem to build the battery manufacturing facility. This was in addition to local tax breaks of $50 million in property taxes over the next 15 years and $2.5 million a year in business tax reductions. So, how much has the reduction of inputs help increase the production levels of Chevy Volt batteries at the LG Chem plant? Answer:  ZERO.
Why then if inputs where so drastically reduced by government subsidies has production remained flat lined? The simple answer: There is no real demand in the market right now for these electric vehicles. Some have even claimed that the technology now to store energy in batteries for these cars is no more effective than that of 100 years ago. Demand is so low that now after 2 years of setting up the facility and testing production that each employee receives a one week furlough each month (paid via Unemployment Benefits).
So, can anything be done to increase demand for these electric cars? Well, the government is offering to help consumers reduce the purchase price for the Volt, and other electric cars, via  Federal and State tax rebates. These rebates can combine to be as much as $12,500 off of the MSRP of over $40,000 when one purchases a new electric car. With many of these rebates originating in 2010 and many still existing today the demand has not really changed for the cars.
It seems like the government entities are doing all they can to increase the demand of these cars. They are willing to invest heavily in reducing the inputs of essential parts for manufacturing, thus making production costs as seemingly low as possible, and also offering consumers money, in the form of tax rebates, to purchase them.
Regardless of governmental intervention and incentives to both producers and consumers the demand is just not there. It appears, at this point, no matter how much the government wants to create demand for the Volt that the principle of Consumer Sovereignty is the real driving force in the lack of demand.


Da Boy said...

Clayton makes very good points in this post. The free market, which is driven by consumer demand, can be influenced by government programs, celebrity endorsement, social media campaigns, even by word of mouth recommendations. As this article points out, if there is no demand, no amount of government subsidy, tax break, or other pushing and prodding by the government can CREATE demand where there is none. This article demonstrates the futile desire of the government to control demand. This is not a new concept either, even in this arena! Remember the CitiCar? Built in the 1970's and backed in similar fashion by governments around the world. It is now primarily remembered in history books. No demand was created. Are we looking to repeat history with the Chevy Volt and other such cars? These cars that are supposed to save the planet, while being affordable and releasing consumers from the grasp of oil dependence, are actually more expensive to build, cost governments billions of dollars, and even raise questions as to their environmentally friendly statuses.
In my opinion, when the technology is truly available, and consumers see a reason to demand the product, the demand will create itself. Until then, it's a great idea, and not much more.

Dave Tufte said...

Clayton Parry: 94/100 for inappropriate capitalization.

Da Boy: 50/50 (capitalization in "yelling" is OK).

There's a little confusion in Clayton's terminology. "Inputs" are the actual things put into production, while "input prices" are what ends up as part of marginal cost.

Generally, the sort of subsidies that Clayton is discussing are lump-sum subsidies intended to defray fixed rather than variable costs. Covering fixed costs is a big roadblock to even starting production, so these subsidies could be viewed as a way to start production rather than a way to reduce costs or help make an incremental profit on each item.

Of course, this is why the Volt also needs the tax rebates for purchases mentioned later in the post. Unfortunately for policy-makers, it seems that demand for Volt's is inelastic.

I hate to be a curmudgeon, but I'll double down on what Clayton said, and assert that willful ignorance of consumer sovereignty is a fundamental problem with government subsidization. It's really appalling that policy-makers continue to insist that they can make someone buy something they've already shown that they don't want. Perhaps we ought to be giving policy-makers aptitude tests to see if they have control issues before we ... put them in charge of controlling anything.

I would qualify Da Boy's comment a bit. I think there is always "a demand (curve)", but that quantity demanded may not be very high. I don't think it's futile at all to control demand. But I do think you need to do your homework first, and pick your battles. What the government has done in this case is choose badly at the outset, and then fail to cut their losses.

BTW: I am somewhat confused about the demand for electric cars. People don't seem to have much trouble buying mules and/or golf carts if the price is right (although subsidies on these are over 100% sometimes). But why not larger cars? Perhaps the problem is really the Chevy name.

FWIW: for my part, the real tragedy here is not the money that is wasted, but the encouragement of a lousy technology. Battery disposal is far more environmentally hazardous than greenhouse gas emissions ... but that issue tends to get suppressed.

Jake said...

I've been talking the idea of the hazardous qualities of "green" products for quite a while now. Many products that are claimed to be more environmentally safe than their substitutes are questionable. An example of hazardous products that are often lifted up on a pedestal are the CFLs, or compact fluorescent light bulbs. These light bulbs use mercury which can cause damage to the brain, heart, kidneys, and lungs.

One problem with these new electric cars is the potentially hazardous batteries. I'm not exactly sure if consumers know about the potential hazards causing them not to buy the electric cars. I seriously doubt that is the case causing the low demand. I think I would have to agree with Da Boy; consumers have to create the demand for the electric cars (or for any product). As Da Boy also stated, The CitiCar wasn't a big hit in its time either. Only after consumers are demanding a product will it begin to sell. The government can’t completely create a strong demand that doesn't exist yet.

Dave Tufte said...

Jake: 50/50


All I meant by mentioning the potential hazards of batteries is that there is an aphorism that you should "be careful what you ask for". Indirectly pushing more batteries onto the public might not be something that we'll be happy about in a couple of generations. The funny thing is, the hazards of batteries was something that was fairly commonly known a generation ago, when household alkaline batteries frequently leaked corrosives, and car batteries were more inclined to explode when tinkered with. As we've made batteries safer, I think people have kind of forgotten about the disposal problem.