Economy

Governments picking winners, again

For 20 years, bureaucrats in Brussels have monitored the curvature and shape of more than 40 types of vegetable and fruit. 

Rule-makers claimed that this protected European consumers from poor quality, but it is hard to argue that a lump on the side of a potato alters its flavour or nutritional value in any way.  A welcome respite came on 1 July 2009, when 36 classes of produce were deregulated.

European risk-aversion is built on the complacency that comes with good fortune. Companies have accepted high taxation, used for social entitlements, in exchange for protectionist agreements.

The credit crisis has exposed an interdependency that confounds unemployment targets, raises prices, and leaves state finances mightily exposed to the experiences of a small number of national champions.

With their political and economic support in disarray, lobbyists have had a ready ear amongst politicians.  The most successful are from the motor industry.  France, Italy, and Germany, amongst others, have all launched scrappage schemes to support the sale of new cars.

The argument for this favouritism is straightforward.  Motor manufacturers are large employers and they are in danger of collapsing under the weight of their inventories and falling consumer demand.

 With state support, car makers get to sell new cars and governments get to promote employment and investment, while also reducing carbon emissions from old cars.

There are many arguments against the subsidies.  Many people would have bought cars anyway.  The sales period has simply been compressed, leaving a precipitous drop later.  All tax payers are subsidising new cars for a few.

These are fair comments.  But they are misleading, giving the impression that supporting an economy involves supporting specific industries within that economy.

Governments are meant to be custodians of a nation’s wealth, both present and future.  An investor who only ventures his own money can take as many risks as he likes.  One who represents the multitude needs to take greater care, ensuring that their risk is evenly spread.

Unfortunately, like compulsive gamblers, governments have chosen to bet once more on a small number of industries in the hopes that they’ll recover their losses with a new throw.   By biasing their support, governments are stating, unequivocally, that they believe consumers are wrong and should be paid to keep buying things they may not want.  That Germany and France are now, tepidly, emerging from recession will only reinforce the view that such guess-work is brave leadership.

Yet the crisis is a tremendous opportunity to confront voters with the need for substantial economic restructuring.  While the crisis has focused people’s attention, politicians have the space to introduce a plethora of reforms that have been held in abeyance; from raising the retirement age, to healthcare reform, to ending innovation-sapping and trade-distorting subsidies.

Markets may fail, but their capacity for constant reinvention and experimentation ensures that new ideas can become successful as old ideas are found wanting.  The bounty coming out of the stimulus bills could have been used to gracefully collapse obsolete industries and pay for the retraining and further education of those with a chance of finding new jobs, or covering those who cannot.

By choosing a single winner, governments have yet again put off the difficult decisions for later.

16 replies »

  1. I’m glad that i live in the United States of America (with God, of course), because we don’t do things like this! No siree, we ain’t got none of that damned Euro-socialism here: too many red-blooded patriots who are armed and ready to defend the reasons why God chooses to live here.

    I won’t even visit Europe on vacation, not until they wise up and starting thanking us – every day – for saving them in WWII. Besides, i don’t want get no commie cooties and i hear that they throw their trash right onto the sidewalk from second story windows.

    (sorry couldn’t help the snark) Whythawk, would you be getting at the corporatism that masquerades as capitalism? Using your thesis of “picking winners” i ran through a quick list in my head; it seems that here it isn’t even so much picking winners in certain sectors but that the winners are specific corporations. Not in every case, of course, but in many of them.

  2. You won’t hear any disagreement from me, Lex. Corporatism (or, more formally, the concentration of economic and financial interests in a handful of corporations) is the inevitable result of protectionism at home.

    When a government feels duty-bound to protect a particular industry from harm, that will become a financial bailout to particular companies. Then, with a history of public protection behind them, it becomes ever-harder to say no to future bailouts.

    “Capitalism is Crisis” said a particularly astute sign at the Climate Camp protesting outside London a few days ago. When it works, yes, but when it becomes an incestuous mix of government and corporate interests, then it isn’t.

    The great power of capitalism is its ability to dump bad ideas and reallocate those resources to those best able to use them (creative destruction). But that power is easily trumped by governments and corporations working together to protect their own influence.

    In other words, if people genuinely want to ensure that corporations aren’t rewarded for failure, they have to stop demanding of their governments that they seek to protect workers from the harm of crisis in capitalism. Otherwise, all of this will just happen again.

  3. Here’s a couple of related questions:
    Do governments have vested interests in maintaining key industries for national security reasons?
    Do governments have a role to play in transitioning an economy from a (theoretically) unsustainable footing to a more sustainable footing?

  4. >Do governments have vested interests in maintaining key industries for national security reasons?

    What? And how? Food security? Social security? Military security? Except the bailouts went to banks and cars, both global industries. Food security is also a misnomer since, if you insist on being entirely self-reliant and cut off ties with other nations, you leave yourself terribly exposed to some local crop blight (or flood, or fire, or…).

    >Do governments have a role to play in transitioning an economy from a (theoretically) unsustainable footing to a more sustainable footing?

    Yes, of course they do. But that won’t happen if they keep bailing out the incumbents to keep doing what they were doing before.

    A question that the ex-head of Intel – Andy Grove – asked when discussing the credit crisis was this, “Did you hear about the major bailout plan from the government to support the mainframe industry?” You didn’t because it never happened, but – if it had – how do you think the PC industry would be doing?

    As far as sustainable vs unsustainable; it was only a few months ago that governments were actively promoting biofuels as a substitute for oil. Now we know that this has a greater environmental and social cost that does oil. But governments were pressurised to pick biofuels as a substitute and provide subsidies to promote it. They picked a winner.

    There are ways and ways of promoting a transition. The first step would be to cut the ostensible subsidy that oil and coal receive via tax breaks. Then, charge them for the carbon they emit (without backhanded subsidies to make up for the inconvenience). But don’t choose an alternative energy provider lest you create a new problem.

    In other words, regulate the means, not the ends.

  5. I was thinking specifically military security. Every country that manufactures vehicles has the industrial base to quickly transfer their production from automobiles to military aircraft, tanks, and howitzers. The same is true of a steel industry. The U.S. will never let Boeing and Lockheed-Martin fail, even if they deserve it, because those two companies are the only domestic aircraft makers, and that expertise can put into manufacturing fighters and bombers instead of 777s. I can see strong arguments (not that I necessarily agree with) for ensuring that they have a domestically-controlled steel, ground vehicle, and aircraft industry. And while these wouldn’t necessarily be the arguments made by congresscritters for public consumption, I can certainly imagine these arguments being made behind closed doors.

    Personally, I think the military security value of tanks is being replaced by other technologies that don’t necessarily require a strong domestic manufacturing base for tank construction in the event of a “conventional” WWIII breaking out. High technology is probably more important, but that’s from a decidedly non-expert position.

    I have no problem with your answer to question #2, though. Regulating the means would totally be something I support. Of course, as a practical matter, figuring out what all the damn subsidies are for oil, coal, and natural gas would be a serious challenge. But there’s very little doubt in my mind that renewable sources would compete a whole lot better with fossil fuels if the hidden subsidies were eliminated, carbon tax or not.

  6. Brian, the problem with your theory re the military industrial complex is about how many of the critical components are not made in the US. Gone are the days when all you needed was an assembly plant and a steel smelter. The combination of complex materials (kevlar, ceramics and other weirder composites) plus software, electronic components and various subsystems means that even the simplest device is an international affair. Boeing already has wing assemblies and major components built all over the world.

    Protection just isn’t possible, even if it made economic sense (which it doesn’t).

  7. Various European governments have what are called “golden shares” in companies. These aren’t really shares, they’re legal rights that governments reserve to themselves for formerly state-owned companies. The EC has been cracking down on these as conflicting with article 4 of the European Convention (I think) which removes barriers to the free flow of capital across borders. Now, this gets interesting–the UK, for example, used to have golden shares in a variety of companies, but has let most of them go–but still retains them for Rolls-Royce and BAE Systems, two defense manufacturers (among other things) and Devonport Dockyards, a naval shipyard–it never bothered to try to retain them for BT or the rail companies. France has golden shares in EADS and Thales (both defense companies), and will probably try to retain one in Areva (the nuclear plant company) when it’s further privatized. Italy has a golden share in Finmeccanica–another defense company. So the EC is letting these stand, On the other hand, it has brought legal actions against countries that have tried to preserve golden shares in the telecom and utility industries. That’s where things stand now.

    The only reason Boeing makes tail assemblies in Australia is to get Qantas to buy Boeing jets. And that’s why Mitsubishi has a place on Boeing platforms as well. Not much of military use is made in either place–it’s purely commercial. Do you know what a pain it is to ship a tail assembly from Australia to Seattle?

    In general, I agree with the main points here–certainly we will eventually pay for not letting more banks go under the past two years. But I think there’s one major exception–agriculture. Check out what happened to the UK during the first and second world wars. Then try to argue that the free market would have solved those problems. There is a strong case to be made for agricultural self-sufficiency. The mess that British agriculture is in, for example, is the direct result of trying to give up traditional agriculture and compete on global markets. Food is (and should be) different. The fact that blights occur is not an argument against self-sufficiency–it’s an argument for greater levels of local diversity and higher storage levels.

    • I’ve heard stories from people who would know that the President can force a company in the US to put all its production and shipments on hold until a critical government need is addressed. It doesn’t happen often because it’s really disruptive, but it has been done.

  8. Brian, I read one extremely amusing (or frustrating, depending on your perspective) story of a chap who had to get special permission to export a stand (a home-made tripod) used to display a satellite component. There was nothing confidential about the stand at all, but …

    Wufnik, unless you’re expecting another major pan-European war, ensuring self-sufficiency wouldn’t be necessary even if it were possible (which I don’t believe it is). More than that, sometimes I believe that the only reason a lot of trade disagreements don’t devolve into full-out wars is because of our mutual need one for another. Call it the pacifying effect of mutual dependency. And that is a good thing.

  9. I remember when the GM bailout was big news and people would cry, “but who will build the military Humvees?” As if GM built them (the Hummer brand was licensed from AM General, who actually makes the Humvee military vehicle). I grew up in the land of autoplants, and once upon a time those factories could be converted…even in short order. Not so any more. The tanks and other vehicles all have their own production facilities.

    I’m of the opinion that a nation should strive towards food self-sufficiency, but that doesn’t mean that it should only feed itself or cut off trade. I think that it’s rather dangerous to rely on international markets to feed a nation.

  10. Interesting post and follow-on discussion.

    Wufnik – here is the exact breakdown of the build sites for the Boeing 787. I don’t think they trust France!

    http://seattletimes.nwsource.com/news/business/boeing/787/partsengineering.html

    and as to getting these parts to Everett for final build – it’s a hideous plane named the Dreamlifter. Several times a week it crosses my backyard. It sounds like a freight train. Before it was painted in Boeing house colors it looked like an enormous bloated airborne green pea.

    http://seattletimes.nwsource.com/news/business/boeing/787/cargoplane.html

  11. Lex, I would like to understand why you think it is dangerous to rely on international markets to feed a nation. Conventional wisdom says otherwise, even for the net importers. I can see where it would be dangerous in areas of famine, as the free food disrupts markets, increases corruption, bankrupts farmers, hurts business, and makes things worse down the road…..but that would be the exception. In the US, our grain exports is one of the few shining stars in our economy.

    Jeff

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