Lessons from 19th Century Cronyism

Politicians often support “industrial policy,” which means they get to grant special favors to well-connected companies or industries.

But as explained by Professor Burton Folsom, this approach didn’t work very will in the 1800s.

It’s not surprising, of course, that politicians like having the power to grant favors. It makes them feel important.

But such policies don’t work. At least if our measure of success includes things like competitiveness and efficiency. Or of if we care about the best interests of consumers and taxpayers.

Which is why is better to be on the correct side of this spectrum. In other words, as far from Soviet-style central planning as possible (I used to cite Hong Kong as an example of laissez-faire, but that may no longer be accurate).

By the way, the video also makes a good point about how the United States was not a laissez-faire paradise back in the 1800s.

While we didn’t have an income tax or a welfare state, there were other forms of intervention, as illustrated by the video, as well as lots of protectionism and regulation.

And don’t forget slavery, which was an especially grotesque anti-market policy.

The bottom line is that only politicians benefit when government has more power over the economy.

For the rest of us, the lesson to be learned is that government intervention doesn’t work. Not in the 1800s. Not in the 1900s. And not in this century, either.

If we want more prosperity, we should stick with the tried-and-true recipe for growth.

P.S. Professor Folsom also narrated a video showing how government intervention failed in the 1800s (railroads) and early 1900s (airplanes).

P.P.S. It’s especially disappointing that some self-styled conservatives are supporting industrial policy since – in practice – it means awful policies like Solyndra-style handouts and power-grab schemes like the Green New Deal.

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The “Grabbing Hand” of Industrial Policy

If you want to understand how government really works, learn about “public choice.”

This is the common-sense theory that politicians and other people in politics often make decisions based on self interest, and it does a very good job of explaining why we get so many short-sighted and misguided policies from the crowd in Washington.

Public choice is especially insightful when compared to the naive view that politicians are mostly concerned with helping ordinary people.

The theory also tends to generate some pithy concepts, such as “stationary bandit” and “predatory government.”

Another example is “grabbing hand,” which describes how intervention usually is a vehicle for helping government rather than helping people.

Today’s column is going to be about industrial policy (the incrementalist version of central planning) as an example of this phenomenon.

Specifically, we’re going to look at a new academic study that measured the impact of government control on the performance of companies in China.

Written by Marzieh Abolhassani, Zhi Wang, and Jakob de Haan, it’s a test of whether government is a “helping hand” or “grabbing hand.”

We’ll start with their description of the study’s methodology.

…the impact of government involvement on the financial performance of listed firms in emerging economies has received scant attention. This paper examines the relationship between government control of firms and firms’ financial performance for the case of China. …we measure government control by the fraction of outstanding shares held either directly or indirectly by the government. …We classify firms as state controlled whenever the government is the shareholder with the largest number of shares held either directly or indirectly through pyramid structures.

Here are the key results.

Our empirical results suggest that firm performance is generally lower for firms where the government is the shareholder with the largest number of (direct and indirect) shares. Specifically, the return on assets, the return on equity and the market-to-book ratio are, on average, 1.3%, 2.0% and 8.2% lower for government-controlled firms. Both central and local government control is undermining firm performance. These findings provide support for the ‘grabbing hand’ theory of the government. … we make sure the estimates are not driven by differences in the size, age and leverage of the firms. Importantly, we also control for industry-region-year fixed effects, and therefore compare firms within the same industry in the same province during the same year, further enhancing the credibility of our estimates. …These results provide support for hypothesis and to theories conjecturing that management of firms controlled by the government have fewer incentives to maximize profits and shareholder value.

For those who like the wonky details, here are the key findings from their number crunching.

So what’s the bottom line?

Their conclusion tells us everything we need to know.

The results reported in this study broaden our understanding of the role of government influence on firm performance. …Our empirical results indicate that government-controlled firms have a worse financial performance than non-government-controlled firms. …These conclusions support the ‘grabbing hand’ theory proposed by Shleifer and Vishny.

So why do these results matter?

From an economic perspective, it’s further evidence that government intervention leads to a misallocation of resources. And that inevitably means living standards will be lower than they would be if markets were allowed to function.

A recent article from Foreign Affairs suggests enormous potential benefits if China ended industrial policy.

…state-owned enterprises… These inefficient behemoths control nearly $30 trillion in assets and consume roughly 80 percent of the country’s available bank credit, but they contribute only between 23 and 28 percent of GDP. …The economist Nicholas Lardy has estimated that genuine economic reforms, in particular those targeting state-owned enterprises, could boost China’s annual GDP growth by as much as two percentage points in the coming decade.

Very similar to what I’ve written, so let’s hope that China returns to the policy of economic liberalization that led to genuine progress.

I’ll close with the depressing observation that there are people in Washington who are now agitating for industrial policy in the United States.

Needless to say, there’s zero reason to think that intervention from Washington will produce results that are better than intervention from Beijing.

P.S. It doesn’t matter if Republicans are trying to pick winners or Democrats are trying to pick winners. When politicians intervene, the economy suffers, which means less prosperity for ordinary people.

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Coronavirus and the Threat of (More) Central Planning

The current crisis teaches us that excessive regulation and bureaucratic sloth can have deadly consequences.

Here’s John Stossel’s video with another lesson, explaining that we need more capitalism rather than more government.

This seems like a no-brainer, especially given the wretched economic performance of countries where the government owns or controls the means of production.

But not everyone agrees. The appropriately named Paris Marx wants government to have more power, making the case for nationalization of Amazon in an article for Jacobin.

The government needs to…respond to the needs of people across the country as the pandemic situation deteriorates. The response should be to nationalize Amazon and integrate it with the USPS. …Nationalizing the company would also allow Amazon workers to get covered by the same union as postal workers… Amazon isn’t just an online e-commerce marketplace. …Amazon Web Services (AWS) is a cloud computing platform…the cloud should be placed under public ownership. Taking control of AWS would allow the government to…ensure the cloud platform is serving the public good… We have a rare opportunity to fundamentally alter the economy to serve the needs of people instead of private profit, and it’s time to seize it.

Call me crazy, but if the government takes over Amazon and merges it with the Postal Service, I’m guessing that what emerges will have the inefficiency of the latter rather than the nimbleness of the former.

Just imagine a giant Department of Motor Vehicles (or, on a related note, the government’s track record on teaching kids to drive).

Which is why the U.K.-based Economist warned back in 2017 about the dangers of government-run companies.

Expanded state ownership is a poor way to cure economic ailments. For much of the 20th century, economists were open to a bit of dirigisme. …But in the 1970s economists came to see state ownership as a costly fix to such problems. Owners of private firms benefit directly when innovation reduces costs and boosts profits; bureaucrats usually lack such a clear financial incentive to improve performance. Firms with the backing of the state are less vulnerable to competition; as they lumber on they hoard resources that could be better used elsewhere. …economists saw in the productivity slowdown of the 1970s evidence that an overreaching state was throttling economic dynamism. …State-owned firms pose risks beyond that to dynamism. Government-run companies may prioritise swollen payrolls over customer satisfaction. More worryingly, state firms can become vehicles for corruption, used to dole out the largesse of the state to favoured backers or to funnel social wealth into the pockets of the powerful. As state control over the economy grows, political connections become a surer route to business success than entrepreneurialism.

The good news is that very few politicians are supporting explicit nationalization.

The bad news is that there’s plenty of support for intermediate steps involving cronyism, industrial policy, and various types of direct and indirect subsidies.

Including in the legislation recently approved in Washington (not that anyone should be surprised).

Professor Amit Seru from Stanford and Professor Luigi Zingales from the University of Chicago warn, in a column for the Wall Street Journal, that the U.S. has take a dangerous step on the road to central planning.

The need to help individuals and small firms has provided cover to the largest corporate subsidy program in U.S. history. Under intense pressure from lobbyists, the Cares Act allocates $510 billion to support loans for large businesses. A small chunk of this money ($56 billion) will be used directly by the Treasury to grant loans to airlines and other “strategic” firms (read: Boeing). The Treasury will then confer the rest ($454 billion) to the Federal Reserve to absorb losses the Fed might incur in lending to firms in the private sector. The expectation is that the central bank will leverage this money… This is the largest step toward a centrally planned economy the U.S. has ever taken. And it socializes only losses. Profits, when they come, remain private. …The urgency of the moment facilitated a giveaway to vested interests. Now that the Cares Act is law, policy makers need to find ways to impose restrictions on how the money is deployed. It isn’t only a question of fiscal prudence; the nature of American capitalism is at stake.

In other words, the U.S. is moving in the wrong direction on my “Industrial Policy Spectrum.”

The key unanswered question is whether the government’s new powers will be temporary or permanent.

There’s a legitimate argument for some form of intervention while the crisis in ongoing. But what happens once things go back to normal? Will politicians allow the “creative destruction” of capitalism, or will they use their expanded power to permanently interfere with market forces?

If they choose the latter, there will be less long-run prosperity.

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Five Threats to China’s Prosperity

The coronavirus obviously is bad news, but I repeated my long-held view in this interview that excessive government intervention is the greatest threat to China’s prosperity.

My hypothesis is that the coronavirus almost certainly will be a short-term challenge.

What’s far more worrisome, especially in the long run, is that government has far too large a role in China’s economy. Yes, there was a good period of pro-market liberalization starting in 1979, but there’s been very little progress this century.

As a result, China only ranks #113 according to Economic Freedom of the World. Which makes the Chinese tiger a paper tiger.

Let’s look at five potential threats to China’s economy.

1. Coronavirus. We don’t know whether the disease is contained or getting worse. But unless it becomes a pandemic like the 1918 Spanish Flu, the effects presumably will be transitory. This is why I downplayed its importance during the interview.

2. Trump’s trade war. I gave this issue a passing mention in the discussion. Trump is hurting both America and China with his trade war, but China is probably bearing a heavier burden. In an ideal world, China wouldn’t practice mercantilism. But in that ideal world, Trump would have addressed the issue more effectively by utilizing the World Trade Organization.

3. Hong Kong. The host gave this issue a passing mention at the end of the interview. I’ll merely note that a Chinese crackdown would have an adverse impact on how global investors view China.

Now let’s look at the two biggest threat’s to China’s long-run prosperity.

And we’ll start with an issue that I failed to mention in the interview (though I have discussed it in the past).

4. Bad demographics. This is a global problem, but it is especially acute in China because of the coercive one-child policy. That oppressive system has been relaxed, but that may be too little, too late. Here are some excerpts from a column by George Will.

Demography does not dictate any nation’s destiny, but it shapes every nation’s trajectory… Although China’s working-age population (there, 15-64) almost doubled between 1975 and 2010, fertility has been below the replacement level for at least 25 years. China’s population will shrink after 2027; its working-age population has been shrinking for five years and will be at least 100 million smaller by 2040… Furthermore, there will be “tens of millions of surplus men” in China because during the “one-child” policy (1979-2015), many parents chose abortion rather than the birth of a girl.

5. Bad public policy. I’ve saved this issue for last because it’s the most important and merits the most attention.

A column in the Wall Street Journal by the Hudson Institute’s John Lee neatly summarizes the problem.

The model involves offering state-owned enterprises and national champions such as Huawei cheap finance and privileged domestic-market access at the expense of an independent private sector. China showers state businesses with subsidies… The current Chinese model is self-defeating. Less-deserving companies continue to receive the bulk of finance and opportunity. The staggering misallocation of capital is worsening, which makes the mushrooming debt even harder to manage. And allocation of opportunity is political. This means that the private sector, and therefore household income, will continue to remain artificially suppressed… China’s economy is inefficient, bloated, dysfunctional—plagued by institutions and policies that are not fit for their purposes.

I mentioned in the interview that President Xi may be moving China in the wrong direction.

This article, published last month in Hong Kong’s South China Morning Post, augments my concern.

China has implemented a new regulation to officially put Communist Party committees at the centre of power in running state-owned enterprises, a move reflecting Beijing’s strong desire to enhance the control of its vast state sector. …“All major business and management decisions must be discussed by the Communist Party organ before being presented to the board of directors or management for decision,” according to the regulation. …For those enterprises under the direct control of the central government, the board of directors must include a “special deputy party secretary” who takes no management role and is exclusively responsible for “party building”. The first role of the directors or executives who are party members is to execute the will of the party in performing their duties, it added.

I’ll cite one more article, this one by Desmond Lachman for the Bulwark.

In much the same way as our fears about Soviet and Japanese economic dominance proved to be illusory, there is good reason to think that China’s rapid economic rise will prove to be another paper tiger. …One factor..that does not bode well for China’s future economic performance is President Xi’s apparent intention to destroy the foundation on which China’s economic miracle rested. He is reversing the economic reforms introduced by Deng Xiaoping in 1979, aimed at giving the private sector increased room to breathe dynamism into the Chinese economy. Fearful of the challenge that a thriving Chinese private sector might pose to the Communist Party’s political hold on the country, President Xi is now reestablishing party discipline and increasing the role of China’s state enterprises. …Even more troubling for China’s long-run economic outlook are its highly unbalanced economy and it’s gargantuan credit bubble. …China has a massive amount of unused industrial capacity and an enormous overhang of unoccupied housing and commercial property.

The bottom line, as I stated in the interview, is that China is in trouble. It’s been pursuing a toxic combination of Keynesianism and industrial policy.

My hope, for what it’s worth, is that China’s leaders reverse the current trend and resume the 1979-2000 path of economic liberalization that was so successful in reducing mass poverty.

To modify an existing phrase, let’s call it Reaganism with Chinese characteristics. If this chart is any indication, that would be a good idea.

Or how about Hong Kong with Chinese characteristics?

P.S. Amazingly, both the IMF and OECD want to further hurt the Chinese economy with big tax hikes.

P.P.S. Discouragingly, there are folks in the United States (advocates of ideas such as “national conservatism” and “common-good capitalism“) who think the United States should mimic aspects of China’s failed industrial policy.

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Nazis and Socialism

Politicians such as Bernie Sanders and Alexandria Ocasio-Cortez say that their goal of “democratic socialism” is very different from the socialism of Cuba, North Korea, and Venezuela, as well as the socialism of the former Soviet Union.

And they doubtlessly would get very upset if anyone equated their ideology with the “national socialism” of Hitler’s Germany.

Such angst would be understandable. There are profound differences among the various versions of socialism. At the risk of understatement, a politician who wants to take my money is much better than one who wants to take my life.

From the perspective of economic policy, though, there’s a common link. All strains of socialism reject free enterprise. They want to replace capitalism with some sort of regime based on government planning and coercion.

This observation gets some people rather upset.

In a column for the Washington Post, Ronald Granieri of the Foreign Policy Research Institute expresses dismay that some people are pointing out that Hitler’s National Socialist Workers’ Party was, well, socialist.

Did you know that “Nazi” is short for “National Socialist”? That means that Hitler and his henchmen were all socialists. …There is only one problem: This argument is untrue. Although the Nazis did pursue a level of government intervention in the economy that would shock doctrinaire free marketeers, their “socialism” was at best a secondary element in their appeal. …The Nazi regime had little to do with socialism, despite it being prominently included in the name of the National Socialist German Workers’ Party. …The NSDAP’s 1920 party program, the 25 points, included passages denouncing banks, department stores and “interest slavery,” which suggested a quasi-Marxist rejection of free markets. But these were also typical criticisms in the anti-Semitic playbook …linking socialism and Nazism to critique leftist ideas became a political weapon in the post-World War II period, perhaps unsurprisingly given that the Cold War followed directly on the heels of World War II. Scholars as diverse as Zbigniew Brzezinski and Hannah Arendt used the larger concept of “totalitarianism” to fuse the two. …National Socialism preserved private property, while also putting the entire resources of society at the service of an expansionist and racist national vision, which included the conquest and murderous subjugation of other peoples. It makes no sense to think that the sole, or even the primary, negative aspect of this regime was the fact that it used state power to allocate financial resources.

Mr. Granieri makes some very good points. I’m not a historian, but I assume he’s correct in stating that Nazis hated capitalism in large part because it was associated with Jews.

And he’s definitely correct in stating that there are much more important reasons to despise Nazis other than their version of socialism (private ownership, but government control, often referred to as fascism).

But none of that changes that fact that all forms of socialism involve hostility to capitalism. Especially among the most repugnant forms of socialism.

Indeed, Nazism and communism are like different sides of the same coin. Joshua Hofford, in a column for the Foundation for Economic Education, examines the commonalities and differences between the two ideologies.

Karl Marx and Frederick Engels are the fathers of both…the swastika and the hammer-and-sickle. …The platform for Soviet socialism was nearly identical to that of National Socialism under the Nazi Party. Though the application of Soviet socialism was Marxian in nature—committed to international socialist revolution and the elimination of class enemies—and National Socialism under the Nazi Party was instituted to the elimination of racial enemies, both were dedicated to the remaking of mankind… Endemic to both Soviet and Nazi socialism, the destruction of class and racial enemies was a literal, not figurative, stage of revolution. …both versions of socialism were dedicated to constructing a new social reality by any means necessary… In addition to belonging to the shared brotherhood of worldwide socialism, clearly, both communism and Nazism were equally totalitarian. …The Nazis rejected the call to international revolution and the class warfare of their Soviet Marxist kin, however, this made them no less socialist. All substantial power and ownership of German business under the Third Reich, while managed and owned by individuals, was in the hands of the state. Price controls, salary caps, and production quotas were set by the nation and left owners to navigate a glut of bureaucracy.

In a column for the Wall Street Journal, Juliana Pilon shares a historical tidbit to illustrate the disdain for capitalism that characterized Nazis and communists.

Known officially as the Treaty of Non-Aggression Between Germany and the Union of Soviet Socialist Republics, the Hitler-Stalin pact…stunned the world. …As German negotiator Karl Schnurre had observed…, “there is one common element in the ideologies of Germany, Italy and the Soviet Union: opposition to the capitalist democracies. Neither we nor Italy have anything in common with the capitalist West. Therefore it seems to us rather unnatural that a socialist state would stand on the side of the Western democracies.” …capitalist democracy was their common enemy.

And Michael Rieger, writing for FEE, notes that there are genuine differences among different strains of socialism, though all involve a powerful state.

The Nazis didn’t call their ideology “national socialism” because they thought it sounded good. They were fervently opposed to capitalism. The Nazi Party’s chief propagandist, Joseph Goebbels, even once remarked that he’d sooner live under Bolshevism than capitalism. …why…would the Nazis call themselves “socialists”? In part, it’s because the term “socialism” has been constantly evolving and changing since its inception. …Marxist-Leninists came to more narrowly define “socialism” to mean the intermediary period between capitalism and communism where the state owned the means of production and centrally managed the economy. In establishing national socialism, the Nazis sought to redefine socialism yet again. National socialism began as a fusion of socialist ideas of a technocratically-managed economy with Völkisch nationalism, a deeply anti-Semitic form of German nationalism. …The Nazis also distinguished themselves from Marxists in their support for private property, although this came with some caveats. The Nazi government did not own the means of production in Germany, but they certainly controlled them. They set up control boards, cartels, and state-sponsored monopolies and konzerns, which they then carefully planned and regulated. …democratic socialists don’t believe in total government ownership of the means of production, nor do they wish to technocratically manage the economy as the Nazis did. …The wide variance between utopian socialism, communism, national socialism, and democratic socialism makes it remarkably easy for members of each ideology to wag their fingers at the others and say, “That wasn’t real socialism.” …all self-described socialists have shared the belief that top-down answers to society’s problems are superior to the bottom-up answers created by the free market.

To add to the above excerpts, here are two passages from Paul Johnson’s Modern Times: The World from the Twenties to the Nineties.

• Page 133: “Hitler took over a small proletarian group called the German Workers’ Party…and reorganized its economic aims into a radical twenty-five point programme: …abolition of unearned incomes, state to take over trusts and share profits of industry, land for national needs to be expropriated without compensation. he also added the words ‘National Socialist’ to its title. …the radical and socialist element in his programme always remained strong.”
• Page 293: “He regarded himself as a socialist, and the essence of his socialism was that every individual or group in the state should unhesitatingly work for national policy. So it did not matter who owned the actual factory so long as those managing it did what they were told. …’Our socialism reaches much deeper. …Why should we need to socialize the banks and the factories? We are socializing the people.”

I’ll close by re-sharing my humble contribution to this discussion, which is a triangle to replace the traditional right-vs-left line.

My triangle acknowledges that there are differences between communists and Nazis (as well as between populists and democratic socialists, and between Republicans and Democrats).

But it makes the key point that there are ever-greater losses of economic liberty as one descends from libertarianism.

And the closer you get to the bottom of the triangle, the greater the likelihood that you lose political liberty as well.

P.S. I also recommend reading what Friedrich Hayek, Dan Hannan, and Thomas Sowell have written on this topic.

P.P.S. I also think we can learn something from this tweet by Senator Chris Murphy of Connecticut.

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Industrial Policy Is a Recipe for Cronyism and Stagnation

Ronald Reagan must be turning over in his grave.

• A Republican president is pushing protectionist policies that hurt American consumes and taxpayers.
• A Republican president and Congress are spending like drunken sailors (apologies to drunken sailors).
• Now some Republican politicians are promoting a version of central planning called “industrial policy.”

This newfound flirtation with industrial policy, mostly from nationalist conservatives, is especially noxious since you open the door to cronyism and corruption when you give politicians and bureaucrats the power to play favorites in the economy.

I’m going to cite three leading proponents of industrial policy. To be fair, none of them are proposing full-scale Soviet-style central planning.

But it is fair to say that they envision something akin to Japan’s policies in the 1980s.

Some of them even explicitly argue we should copy China’s current policies.

In a column for the New York Times, Julius Krein celebrates the fact that Marco Rubio and Alexandria Ocasio-Cortez both believe politicians should have more power over the economy.

…a few years ago, the phrase “industrial policy” was employed mainly as a term of abuse. Economists almost universally insisted that state interventions to improve competitiveness, prioritize investment in strategic sectors and structure market incentives around political goals were backward policies doomed to failure — whether applied in America, Asia or anywhere in between. …In the wake of the 2008 financial crisis, however, the Reagan-Bush-Clinton neoliberal consensus seems intellectually and politically bankrupt. …a growing number of politicians and intellectuals…are finding common ground under the banner of industrial policy. Even the typically neoliberal Financial Times editorial board recently argued in favor of industrial policy, calling on the United States to “drop concerns around state planning.” …Why now? The United States has essentially experienced two lost decades, and inequality has reached Gilded Age levels. …United States industry is losing ground to foreign competitors on price, quality and technology. In many areas, our manufacturing capacity cannot compete with what exists in Asia.

There are some very sloppy assertions in the above passages.

You can certainly argue that Reagan and Clinton had similar “neoliberal” policies (i.e., classical liberal), but Bush was a statist.

Also, the Financial Times very much leans to the left. Not crazy Sanders-Corbyn leftism, but consistently in favor of a larger role for government.

Anyhow, what exactly does Mr. Krein have in mind?

More spending, more intervention, and more cronyism.

A successful American industrial policy would draw on replicable foreign models as well as take lessons from our history. Some simple first steps would be to update the Small Business Investment Company and Small Business Innovation Research programs — which played a role in catalyzing Silicon Valley decades ago — to focus more on domestic hardware businesses. …Government agencies could also step in to seed investment funds focused on strategic industries and to incentivize commercial lending to key sectors, policies that have proven successful in other countries… the United States needs to invest more in applied research… Elizabeth Warren has also proposed a government-sponsored research and licensing model for the pharmaceutical industry, which could be applied to other industries as well. …Senator Gary Peters, Democrat of Michigan, has called for the creation of a National Institute of Manufacturing, taking inspiration from the National Institutes of Health. …A successful industrial policy would aim to strengthen worker bargaining power while organizing and training a better skilled labor force. Industrial policy also involves, and even depends upon, rebuilding infrastructure.

In other words, if you like the so-called Alexandria Ocasio-Cortez’s Green New Deal and Elizabeth Warren’s corporate cronyism, you’ll love all the other ideas for additional government intervention.

Oren Cass of the Manhattan Institute also wants to give politicians more control over the private economy.

My argument rests on three claims… First, that market economies do not automatically allocate resources well across sectors. Second, that policymakers have tools that can support vital sectors that might otherwise suffer from underinvestment—I will call those tools “industrial policy.” Third, that while the policies produced by our political system will be far from ideal, efforts at sensible industrial policy can improve upon our status quo, which is itself far from ideal. …Our popular obsession with manufacturing isn’t some nostalgic anachronism. …manufacturing is unique for the complexity of its supply chains and the interaction between innovation and production. …the case for industrial policy requires recognition not only of certain sectors’ value, but also that the market will overlook the value in theory and that we are underinvesting in practice. That the free market will not solve this should be fairly self-evident… Manufacturing output is only 12% of GDP in America… Productivity growth has slowed nationwide, even flatlining in recent years. Wages have stagnated. Our trade deficit has skyrocketed.

So what are his solutions?

Like Julius Krein, he wants government intervention. Lots of it.

Fund basic research across the sciences… Fund applied research… Support private-sector R&D and commercialization with subsidies and specialized institutes… Increase infrastructure investment… Bias the tax code in favor of profits generated from the productive use of labor… Retaliate aggressively against mercantilist countries that undermine market competition… Tax foreign acquisition of U.S. assets, making U.S. goods relatively more attractive… Impose local content requirements in key supply chains like communications… Libertarians often posit an ideal world of policy non-intervention as superior to the messy reality of policy action. But that ideal does not exist—messy reality is the only reality… That’s especially the case here, because you can have free trade, or you can have free markets, but you can’t have both.

I’m not sure what’s worse, an infrastructure boondoggle or a tax on inbound investment?

More tinkering with the tax code, or more handouts for industries?

And here are excerpts from a column for the Daily Caller by Robert Atkinson.

When the idea first surfaced in the late 1970s that the United States should adopt a national industrial policy, mainstream “free market” conservatives decried it as one step away from handing the reins of the economy over to a state planning committee like the Soviet Gosplan. But now, …the idea has been getting a fresh look among some conservatives who argue that, absent an industrial strategy, America will be at a competitive disadvantage. …Conservatives’ skepticism of industrial policy perhaps stems from the idea’s origins. It started gaining currency during the Carter administration, with many traditional Democratic party interests, including labor unions and politicians in the Northeast and Midwest, arguing for a strong federal role… However, over the next decade, as economic competitors like Germany and Japan began to challenge the United States in consumer electronics, autos, and even high-tech industries like computer chips, the focus of debates about industrial policy broadened to encompass overall U.S. competitiveness. …There was a bipartisan response…that collectively amounted to a first draft of a national industrial policy… But as the economic challenge from Japan receded…, interest in industrial policies waned. …The newly dominant neoclassical economists preached that the U.S. “recipe” of free markets, property rights, and entrepreneurial spirit inoculated America against any and all economic threats.

As with Krein and Cass, Atkinson wants to copy the failed interventionist policies of other nations.

But that was then and this is now — a now where we face intense competition from China. …Increasingly leaders across the political spectrum are returning to a notion that we should put the national interest at the center of economic policies, and that free-market globalization doesn’t necessarily do that… Conservatives increasingly realize that without some kind of industrial policy the United States will fall behind China, with significant national security and economic implications. …So, what would a conservative-inspired, market-strengthening industrial policy look like? …it would acknowledge that America’s “traded sector” industries are critical to our future competitiveness… The right industrial policy will advance prosperity more than laisse-faire capitalism would. …there are a significant number of market failures around innovation, including externalities, network failures, system interdependencies, and the public-goods nature of technology platforms. …this is why only government can “pick winners.” …It should mean expanding supports for exporters by ensuring the Ex-Im Bank has adequate lending authority… this debate boils down to a fundamental choice for conservatives: small government and liberty versus stronger…government that delivers economic security

What’s a “market-strengthening industrial policy”? Is that like a “growth-stimulating tax increase”? Or a “work-ethic-enhancing welfare program”?

I realize I’m being snarky, but how else should I respond to someone who actually wants to expand the cronyist Export-Import Bank?

Let’s now look at what’s wrong with industrial policy.

In a column for Reason, Veronique de Rugy of the Mercatus Center warns that American politicians who favor industrial policy are misreading China’s economic history.

…calls from politicians on both sides of the aisle to implement industrial policy. …These policies are tired, utterly uninspiring schemes that governments around the world have tried and, invariably, failed at. …As for the notion that “other countries are doing it,” I’m curious to hear what great successes have come out of, say, China’s industrial policies. In his latest book, The State Strikes Back: The End of Economic Reform in China?, Nicholas Lardy of the Peterson Institute for International Economics shows that China’s growth since 1978 has actually been the product of market-oriented reforms, not state-owned programs. …Why should we want America to become more like China? Here’s yet another politician thinking that somehow, the same government that…botched the launch of HealthCare.gov, gave us the Solyndra scandal, and can keep neither Amtrak nor the Postal Service solvent, can effectively coordinate a strategic vision for American manufacturing. …The real problem with industrial policy, economic development strategy, central planning, or whatever you want to call these interventions is that government officials…cannot outperform the wisdom of the market at picking winners. In fact, government intervention in any sector creates distortions, misdirects investments toward politically favored companies, and hinders the ability of unsubsidized competitors to offer better alternatives. Central planning in all forms is poisonous to innovation.

As usual, Veronique is spot one.

I’ve also explained that China’s economy is being held back by statist policies.

Veronique also addressed the topic of industrial policy in a column for the New York Times,

With “Made in China 2025,” Beijing’s 2015 anticapitalist plan for an industrial policy under which the state would pick “winners,” China has taken a step back from capitalism. …China’s new industrial policy has worked one marvel — namely, scaring many American conservatives into believing that the main driver of economic growth isn’t the market but bureaucrats invested with power to control the allocation of natural and financial resources. …I thought we learned this lesson after many American intellectuals, economists and politicians were proven spectacularly wrong in predicting that the Soviet Union would become an economic rival. …government officials cannot outperform the market at picking winners. In practice it ends up picking losers or hindering the abilities of the winners to achieve their greatest potential. Central planning is antithetical to innovation, as is already visible in China. …the United States has instituted industrial policies in the past out of unwarranted fears of other countries’ industrial policies. The results have always imposed great costs on consumers and taxpayers and introduced significant economic distortions. …Conservatives…should learn about the failed United States industrial policies of the 1980s, which were responses to the Japanese government’s attempt to dominate key consumer electronics technologies. These efforts worked neither in Japan nor in the United States. The past has taught us that industrial policies fail often because they favor existing industries that are well connected politically at the expense of would-be entrepreneurs… We shouldn’t allow fear-mongering to hobble America’s free enterprise system.

Amen.

My modest contribution to this discussion is to share one of my experiences as a relative newcomer to D.C. in the late 1980s and early 1990s.

I had to fight all sorts of people who said that Japan was eating our lunch and that the United States needed industrial policy.

I kept pointing out that Japan deserved some praise for its post-WWII shift to markets, but that the country’s economy was being undermined by corporatism, intervention, and industrial policy.

At the time, I remember being mocked for my supposed naivete. But the past 30 years have proven me right.

Now it’s deja vu all over again, as Yogi Berra might say.

Except now China is the bogeyman. Which doesn’t make much sense since China lags behind the United States far more than Japan lagged the U.S. in the 1980s (per-capita output in China, at best, in only one-fourth of American levels).

And China will never catch the U.S. if it relies on industrial policy instead of pro-market reform.

So why should American policy makers copy China’s mistakes?

P.S. There is a separate issue involving national security, where there may be legitimate reasons to deny China access to high-end technology or to make sure American defense firms don’t have to rely on China for inputs. But that’s not an argument for industrial policy.

P.P.S. There is a separate issue involving trade, where there may be legitimate reasons to pressure China so that it competes fairly and behaves honorably. But that’s not an argument for industrial policy.

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Trump, China, and Trade: Be Afraid, Be Very Afraid of I.E.E.P.A.

Earlier this year, I identified Trump’s “worst ever tweet.”

I was wrong. That tweet, which displayed an astounding level of economic ignorance, is now old news.

Trump issued a tweet yesterday that is far worse because it combines bad economic theory with horrifying support for massive economic intervention. Pay special attention to the part circled in red.

Huh?!?

Since when does the President get to dictate where companies can do business?

Unfortunately, whenever he wants to.

Congress has delegated to the President massive “emergency” powers over the economy. Specifically, the International Emergency Economic Powers Act (IEEPA) is a blank check.

Here are some excerpts from a report by the Congressional Research Service.

By the twentieth century, …Congress created statutory bases permitting the President to declare a state of emergency and make use of extraordinary delegated powers. …The International Emergency Economic Powers Act (IEEPA) is one such example of a twentieth-century delegation of emergency authority. …IEEPA grants the President extensive power to regulate a variety of economic transactions during a state of emergency. …Since 1977, Presidents have invoked IEEPA in 54 declarations of national emergency. On average, these emergencies last nearly a decade. Most emergencies have been geographically specific, targeting a specific country or government. …No President has used IEEPA to place tariffs on imported products from a specific country or on products imported to the United States in general. However, …such an action could happen. In addition, no President has used IEEPA to enact a policy that was primarily domestic in effect. Some scholars argue, however, that the interconnectedness of the global economy means it would probably be permissible to use IEEPA to take an action that was primarily domestic in effect. …Neither the NEA nor IEEPA define what constitutes a “national emergency.” …While IEEPA nominally applies only to foreign transactions, the breadth of the phrase, “any interest of any foreign country or a national thereof” has left a great deal of room for executive discretion.

You can click here for the actual legislative language of IEEPA.

You’ll see that the President has the power, for all intents and purposes, to severely disrupt or even block financial transactions between people and/or companies in the United States and people and/or companies in a designated foreign country.

And there’s no limit on the definition of “emergency.”

One could argue that an emergency declaration and a ban on the movement of money wouldn’t necessarily prohibit a company from doing business in a particular jurisdiction, but it surely would have that effect.

The economic consequences would be profound. In a negative way.

By the way, the White House Bureau Chief for the Washington Post responded to Trump’s tweet with one of his own.

He says the President, who criticizes socialism, is acting like a socialist.

Trump spends a lot of time calling Democrats socialist, but a head of state ordering companies to do things is, well, socialism. https://t.co/CkTKXqEDkP

— Philip Rucker (@PhilipRucker) August 23, 2019

He’s actually wrong, at least technically.

Socialism is government ownership and control of the means of production.

What Trump is seeking is private ownership and government control. And there’s a different word for that economic policy.

P.S. It’s a good idea for the U.S. government to have powers to respond to a genuine emergency. But it shouldn’t be the decision of one person in our separation-of-powers system. It was a bad idea when Obama was in the White House, and it’s a bad idea with Trump in the White House.

In peacetime, an emergency should require the approval of Congress. In wartime, it should require approval of the House and Senate leadership from both parties.

P.P.S. Trade laws are another example of Congress delegating too much power to the executive branch.

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Green New Deal: Cronyism on Steroids

From a macroeconomic perspective, President Obama’s so-called stimulus was a flop. The federal government borrowed and redistributed almost $1 trillion, yet the economy stagnated.

From a microeconomic perspective, the faux stimulus may have been an even bigger failure. One of the worst features was the laughable and scandal-ridden green energy program, which featured corrupt boondoggles such as Solyndra.

Well, if you liked Solyndra, you’ll love the “Green New Deal,” a proposal to dramatically expand Washington’s power over the private economy.  As I explained in an article for the American Conservative, the plan introduced by Congresswoman Alexandria Ocasio-Cortez (AOC) is cronyism on steroids.

Looking at Representative Alexandria Ocasio-Cortez’s Green New Deal, one is reminded of Voltaire’s comment that the Holy Roman Empire was neither holy, nor Roman, nor an empire. But that might be slightly unfair. There is some Green in the GND, though the ideas aren’t New, and it’s definitely not a Deal. At least not for taxpayers. …budget gurus have examined the GND wish list and they calculate that the 10-year cost could reach $90 trillion. That’s trillion, not billion—a staggering amount of money. For all intents and purposes, Ocasio-Cortez wants to expand the burden of federal spending from 21 percent of economic output to about 50 percent of economic output. …The economic implications of these policies are horrifying. The GND would mean Greek-style fiscal policy in the United States, with concomitant economic stagnation.

But it’s not just bad fiscal policy.

The scheme would give politicians and bureaucrats immense powers to micro-manage the productive sector of the economy.

It’s equally important to consider how the GND would dramatically expand Washington’s power over the economy—above and beyond new taxes and higher spending. …the government would be obliged to end any and all reliance on fossil fuels and shift the nation to 100 percent renewable energy. …the government would be obliged to provide universal and unrestricted access to health care for everyone. …the government would be obliged to provide everybody with a job that includes generous benefits, including paid vacations and a comfortable retirement. …the government would be obliged to create a nationwide system that was so quick and so effective that commercial air travel could be ended. …the government would be obliged to gut and rebuild every single structure in the country so that they all met a zero-net-carbon goal.

What would this mean?

A feeding frenzy of well-connected special interests at the expense of ordinary taxpayers, which would be very unseemly.

That’s the direct cost.

But from an economic perspective, what matters is that labor and capital increasingly would be allocated by political forces (i.e., cronyism) rather than market forces (i.e., the preferences of consumers).

For all intents and purposes, the GND is a form of central planning. Not full Soviet style steering of the economy, but nonetheless a step in that direction.

And this indirect costs imposed by this approach wouldn’t be trivial.

Every single one of these costly ideas will serve as a magnet for consultants, contractors, administrators, and others who will want to profit by “helping” to implement the various pieces of the GND. For those who remember the corruption and cronyism of the Obama administration’s green energy program (part of the failed stimulus), Ocasio-Cortez wants to do the same thing. But far more extensive. …what happens if the “invisible hand” of consumer-driven competition is replaced (or substantially weakened) because politicians adopt something like the Green New Deal? …market forces will get squeezed as politicians directly allocate resources in the economy. …cronyism and regulation undermine the free market just as taxes and spending undermine the free market. The mechanism—direct versus indirect—isn’t the same, but in both cases the preferences of consumers no longer drive the economy.

The bottom line is that the GND is a corporatist scheme using the environment as a pretext.

If you don’t believe me, just look at what AOC’s top aide said about the proposal.

The chief of staff for Rep. Alexandria Ocasio-Cortez stated that her signature Green New Deal was not really about saving the planet after all. In a report by the Washington Post, Saikat Chakrabarti revealed that “it wasn’t originally a climate thing at all … we really think of it as a how-do-you-change-the-entire-economy thing.” …The Green New Deal itself was fraught with complications in its February roll-out, which included confusing language and contradictions in the “Frequently Asked Question” section. …The Green New Deal, which some estimated could cost upwards of $93 trillion to enact, also promised “economic prosperity for all.”

Refreshingly honest on the part of Mr. Chakrabarti, but also a stark warning to the rest of us.

By the way, the excerpt mentions the “confusing language” in the original GND documents. I would call is terrifying language. This section is particularly crazy.

David Harsanyi highlighted 10 of the most bizarre provisions in a column for the Federalist.

It is not hyperbole to contend that GND is likely the most ridiculous and un-American plan that’s ever been presented by an elected official to voters. …the plan’s authors assure us that this “massive transformation of our society” needs some “clear goals and a timeline.” The timeline is ten years. Here are some of the goals: …Ban affordable energy. …Eliminate nuclear energy. …Eliminate 99 percent of cars. …Gut and rebuild every building in America. …Eliminate air travel. …A government-guaranteed job. ….Free education for life. …A salubrious diet. …A house. …Free money. …Bonus insanity: Ban meat.

And remember, all these provisions are enforced by politicians and bureaucrats repressing market forces and replacing them with political pull.

Alex Brill of the American Enterprise Institute summarizes why this is a bad idea.

…funding allocations will undoubtedly be determined by political forces rather than market forces. …final allocation will depend on the relative clout of the lawmakers and will inefficiently differ from the allocations that consumers and producers would demand. In short, the Green New Deal would be a deficit financed expansion of federal bureaucratic power to dictate investment decisions in one of the most dynamic sectors of the economy. …further centralizing energy market decisions puts at risk the free market economy that our nation has relied on for economic growth for more than two centuries.

Exactly right, which is why the GND would translate to fewer jobs and lower living standards.

Here are two real-world examples from the Wall Street Journal showing why green cronyism is a bad idea.

The first is from the United States.

…consider the public housing projects near Rep. Alexandria Ocasio-Cortez’s New York office. The New York City Housing Authority (Nycha)…is switching to LED lighting, which lasts longer than incandescent bulbs and consumes less energy. Sounds smart, until you see how many union workers it takes to screw in a light bulb. One recent project focused on 23 housing developments, and changing the light bulbs and fixtures there cost $33.2 million. Supplies account for a fraction of that cost. Under Nycha’s Project Labor Agreement, electricians make $81 in base pay and $54 in fringe per hour, and overtime is usually time and a half. Add administrative and contracting expenses. All in, Nycha paid an average of $1,973 per apartment to install LEDs. …In the private economy, $1,973 could go a long way toward improving a dilapidated apartment. Only in the world of green government spending is replacing light bulbs for two grand a unit a cost-saving measure.

Don’t forget, by the way, that light bulbs also are more expensive once government is part of the equation.

The second is from Australia.

The Green New Deal…calls among other things for “upgrading all existing buildings in the United States…” We’ve tried it in Australia—on a much smaller scale—and it didn’t go well. On Feb. 3, 2009, Labor Prime Minister Kevin Rudd and his treasurer, Wayne Swan, announced the Energy Efficient Homes Package. “To support jobs and set Australia up for a low carbon future the Rudd Government will install free ceiling insulation in around 2.7 million Australian homes…” There were only 250 registered insulation businesses in Australia when the package was announced. That number quickly blew out to 7,000 because the government was handing out free money to installers. …They received their rebates directly from the government rather than from homeowners, who therefore had little incentive to check if the work had been done well or even at all. …Almost every insulation job went right up to the $1,600 cap, regardless of size or ceiling area. …Nearly 100 houses caught fire. …In February 2010, a year after the Energy Efficient Homes Package was announced, it was abandoned.

I also recommend this column about what happened in Germany.

Let’s close with a bit of humor.

Our first example is a modification of the famous map of the Korean Peninsula showing the difference between capitalism and communism.

In this case, however, we show a “successful” low-carbon economy.

By the way, some people don’t get the joke. Jeffrey Sachs actually ranks hellholes such as Cuba ahead of the United States in part because impoverished people don’t consume much energy.

And some environmentalists put together a grotesquely misnamed “Happy Planet Index” that also ranked the grim disaster of Venezuela ahead of America.

To conclude, here’s a cartoon strip that nicely summarizes how the GND is fueled.

In other words, the middle class will pay a lot more if AOC’s scheme is ever adopted.

P.S. Donald Trump is also at least somewhat guilty of wanting to replace market forces with government intervention.

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A History Lesson: Comparing Socialist East Germany vs Capitalist West Germany

Donald Trump is an incoherent mix of good policies and bad policies.

Some of his potential 2020 opponents, by contrast, are coherent but crazy.

And economic craziness exists in other nations as well.

In a column for the New York Times, Jochen Bittner writes about how a rising star of Germany’s Social Democrat Party wants the type of socialism that made the former East Germany an economic failure.

Socialism, the idea that workers’ needs are best met by the collectivization of the means of production… A system in which factories, banks and even housing were nationalized required a planned economy, as a substitute for capitalist competition. Central planning, however, proved unable to meet people’s individual demands… Eventually, the entire system collapsed; as it did everywhere else, socialism in Germany failed. Which is why it is strange, in 2019, to see socialism coming back into German mainstream politics.

But this real-world evidence doesn’t matter for some Germans.

Kevin Kühnert, the leader of the Social Democrats’ youth organization and one of his party’s most promising young talents, has made it his calling card. Forget the wannabe socialism of American Democrats like Bernie Sanders or Alexandria Ocasio-Cortez. The 29-year-old Mr. Kühnert is aiming for the real thing. Socialism, he says, means democratic control over the economy. He wants to replace capitalism… German neo-socialism is profoundly different from capitalism. …Mr. Kühnert took specific aim at the American dream as a model for individual achievement. …“Without collectivization of one form or another it is unthinkable to overcome capitalism,” he told us.

In other words, he wants real socialism (i.e., government ownership). And that presumably means he also supports central planning and price controls.

What makes Kühnert’s view so absurd is that he obviously knows nothing about his nation’s history.

Just in case he reads this, let’s look at the evidence.

Jaap Sleifer’s book, Planning Ahead and Falling Behind, points out that the eastern part of Germany was actually richer than the western part prior to World War II.

The entire country’s economy was then destroyed by the war.

What happened afterwards, though, shows the difference between socialism and free enterprise.

Before…the Third Reich the East German economy had…per capita national income…103 percent of West Germany, compared to a mere 31 percent in 1991. …Here is the case of an economy that was relatively wealthy, but lost out in a relatively short time… Based on the official statistics on national product the East German growth rates were very impressive. However, …the actual performance was not that impressive at all.

Sleifer has two tables that are worth sharing.

First, nobody should be surprised to discover that communist authorities released garbage numbers that ostensibly showed faster growth.

What’s really depressing is that there were more than a few gullible Americans – including some economists – who blindly believe this nonsensical data.

Second, I like this table because it confirms that Nazism and communism are very similar from an economic perspective.

Though I guess we should give Germans credit for doing a decent job on product quality under both strains of socialism.

For those who want to read further about East German economic performance, you can find other scholarly articles here, here, and here.

I want to call special attention, though, to a column by an economist from India. Written back in 1960, even before there was a Berlin Wall, he compared the two halves of the city.

Here’s the situation in the capitalist part.

The contrast between the two Berlins cannot miss the attention of a school child. West Berlin, though an island within East Germany, is an integral part of West German economy and shares the latter’s prosperity. Destruction through bombing was impartial to the two parts of the city. Rebuilding is virtually complete in West Berlin. …The main thoroughfares of West Berlin are near jammed with prosperous looking automobile traffic, the German make of cars, big and small, being much in evidence. …The departmental stores in West Berlin are cramming with wearing apparel, other personal effects and a multiplicity of household equipment, temptingly displayed.

Here’s what he saw in the communist part.

…In East Berlin a good part of the destruction still remains; twisted iron, broken walls and heaped up rubble are common enough sights. The new structures, especially the pre-fabricated workers’ tenements, look drab. …automobiles, generally old and small cars, are in much smaller numbers than in West Berlin. …shops in East Berlin exhibit cheap articles in indifferent wrappers or containers and the prices for comparable items, despite the poor quality, are noticeably higher than in West Berlin. …Visiting East Berlin gives the impression of visiting a prison camp.

The lessons, he explained, should be quite obvious.

…the contrast of the two Berlins…the main explanation lies in the divergent political systems. The people being the same, there is no difference in talent, technological skill and aspirations of the residents of the two parts of the city. In West Berlin efforts are spontaneous and self-directed by free men, under the urge to go ahead. In East Berlin effort is centrally directed by Communist planners… The contrast in prosperity is convincing proof of the superiority of the forces of freedom over centralised planning.

Back in 2011, I shared a video highlighting the role of Ludwig Erhard in freeing the West German economy. Given today’s topic here’s an encore presentation.

Samuel Gregg, writing for FEE, elaborates about the market-driven causes of the post-war German economic miracle.

It wasn’t just Ludwig Erhard.

Seventy years ago this month, a small group of economists and legal scholars helped bring about what’s now widely known as the Wirtschaftswunder, the “German economic miracle.” Even among many Germans, names like Walter Eucken, Wilhelm Röpke, and Franz Böhm are unfamiliar today. But it’s largely thanks to their relentless advocacy of market liberalization in 1948 that what was then West Germany escaped an economic abyss… It was a rare instance of free-market intellectuals’ playing a decisive role in liberating an economy from decades of interventionist and collectivist policies.

As was mentioned in the video, the American occupiers were not on the right side.

Indeed, they exacerbated West Germany’s economic problems.

…reform was going to be easy: in 1945, few Germans were amenable to the free market. The Social Democratic Party emerged from the catacombs wanting more top-down economic planning, not less. …Further complicating matters was the fact that the military authorities in the Western-occupied zones in Germany, with many Keynesians in their contingent, admired the economic policies of Clement Atlee’s Labour government in Britain. Indeed, between 1945 and 1947, the Allied administrators left largely in place the partly collectivized, state-oriented economy put in place by the defeated Nazis. This included price-controls, widespread rationing… The result was widespread food shortages and soaring malnutrition levels.

But at least there was a happy ending.

Erhard’s June 1948 reforms…abolition of price-controls and the replacement of the Nazi-era Reichsmark with much smaller quantities of a new currency: the Deutsche Mark. These measures effectively killed off…inflation… Within six months, industrial production had increased by an incredible 50 percent. Real incomes started growing.

And Germany never looked back. Even today, it’s a reasonably market-oriented nation.

I’ll close with my modest contribution to the debate. Based on data from the OECD and Wikipedia, here’s a look at comparative economic output in East Germany and West Germany.

You’ll notice that I added some dotted lines to illustrate that both nations presumably started at the same very low level after WWII ended.

I’ll also assert that the blue line probably exaggerates East German economic output. If you doubt that claim, check out this 1990 story from the New York Times.

The bottom line is that the economic conditions in West Germany and East Germany diverged dramatically because one had good policy (West Germany routinely scored in the top 10 for economic liberty between 1950 and 1975) and one suffered from socialism.

These numbers should be very compelling since traditional economic theory holds that incomes in countries should converge. In the real world, however, that only happens if governments don’t create too many obstacles to prosperity.

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The Village Experiment that Transformed China

Every Thanksgiving, I share the story of how the Pilgrims nearly starved to death because of their experiment with collectivized agriculture.

Once the settlers shifted to a system based on private ownership, however, their problems disappeared.

The obvious moral of the story is that incentives matter. Socialist systems encourage slackers (see this cartoon strip) and market systems encourage productivity.

A column by X in the Wall Street Journal tells a similar story about China.

It’s actually the story of an important anniversary.

The People’s Republic of China turns 70 in October and will celebrate with flag-waving and fireworks. …2019 also marks the anniversary of the result of a smaller, quieter but just as defiant protest—one that will receive little attention in or out of China, even though it launched the economic reforms that kick-started the country’s rise.

Here’s the background.

After taking power in 1949, China’s Communist Party had effectively abolished private land ownership, grouping farms into “people’s communes” subservient to the state. By 1978 villages were crippled by quotas that seized most of what they grew for redistribution. …there was no food. Xiaogang’s farmers dug up roots, boiled poplar leaves with salt, and ground roasted tree bark into flour. Families left their thatched-roof homes and took to the road to beg.

By the way, the Chinese system of collective farms was an example of hardcore socialism – i.e., government ownership and control.

So it’s hardly a surprise that it produced awful results. Including mass starvation.

But desperate times were the motivation for desperate measures.

…a farmer named Yan Hongchang summoned the heads of the village’s desperate families to a clandestine meeting. On paper torn from a child’s school workbook, the farmers wrote a 79-word pledge to divide the commune’s land into family plots, submit the required quota of corn to the state, and keep the rest for themselves.

And what happened?

Incentives and property rights worked. Spectacularly.

…farmers…reported a grain yield of 66 metric tons. This single harvest equaled the village’s total output between 1955 and 1970—but for once the figure was not exaggerated. In fact, villagers underreported their actual yield by a third, fearing officials would not believe their record haul.

And the really good news is that the successful experiment in Xiaogang led to market-based reform for the entire nation.

The grass-roots experiment did spread. In Beijing, three years after Mao Zedong’s death, Deng Xiaoping urged the Chinese to ignore political dogma and instead “seek truth from facts.” Now came news that dissenting farmers were actually growing food. This year marks the 40th anniversary of Deng’s decision to scrap collective farming. In its place came one of the country’s most popular reforms, the Household Contract Responsibility System, or chengbao, which allows families to farm their own allocation of land and sell most of the harvest at unregulated prices.

Indeed, China now celebrates Xiaogang’s rebellious shift to markets.

Xiaogang village is a “red tourism” attraction, albeit the only one whose “patriotic education base” (museum) celebrates local defiance of government policy. Its exhibition hall displays a copy of the farmers’ pledge—the original was lost years ago—and floor-to-ceiling photographs of its signatories. The men are lauded as heroes, and Xiaogang celebrated with a slogan: “The origin of our nation’s economic rise!”

Maybe future historians will look upon the events in Xiaogang the same way some people look at 1356 in Europe?

In any event, what began forty years ago already has yielded great results for the people of China. Grinding poverty has virtually disappeared.

To be sure, China still needs a lot of reform. It’s only ranked #107 according the latest edition of Economic Freedom of the World.

But if some good reform yielded some good results, just imagine how much prosperity China could enjoy with a lot of good reform?

P.S. Just as the village of X helped to rescue China from hardcore socialism, there’s a grocery store in Texas that played a role in rescuing Russia’s economy.

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The Heavy Cost of Czechoslovakian Socialism

I was in Bratislava earlier today as part of the Free Market Road Show, where I spoke about how European nations are in trouble because of excessive spending and aging populations.

But I’m not going to write about my presentation because Peter Gonda of the Konservatívny Inštitút M.R. Stefánika shared some data on the post-World War II economic performance of Czechoslovakia that is far more interesting.

As you can see from his chart (the English title would be “The Economic Reality of Socialism”), Czechoslovakia, West Germany, Austria, and Finland all had very similar levels of income in 1948. But over the next 40 years, the socialist Czechoslovakian economy (CZ) fell further and further behind the market-oriented economies of those other countries.

Indeed, after just four decades, the market-oriented nations averaged twice as much per-capita economic output at the beleaguered Czechoslovakian economy.

By the way, things have improved since the collapse of communism.

Czechoslovakia in the early 1990s peacefully split into two nations, the Czech Republic and Slovakia. And both of them have since adopted a decent amount of pro-market reforms and have begun to converge with Western Europe.

So our story has a semi-happy ending (though I wrote last year that I’m worried about Slovakia backsliding a bit).

P.S. If you want other compelling examples that show – over multiple decades – the superior performance of market-oriented nations, click here and here.

P.P.S. Under Soviet rule, Czechoslovakia was genuine socialism (i.e., government ownership, central planning, price controls), which obviously is more damaging than what many people think of today as socialism (i.e., punitive taxes and a big welfare state).

P.P.P.S. Ludwig Erhard deserves much credit for West Germany’s post-war recovery.

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The Pitfalls of Central Planning: Government-Directed Industrial Policy Will Hinder China’s Growth

During my early years in public policy, back in the late 1980s, I repeatedly crossed swords with people who argued that Washington should have more power over the economy so that the United States could compete with Japan, which supposedly was an economic juggernaut because of “industrial policy” directed by wise and far-sighted bureaucrats at the Ministry of International Trade and Industry.

Given Japan’s subsequent multi-decade slump, it certainly seems like I was right to warn against giving American politicians the power to pick winners and losers.

But not everybody learned from that experience. In the words of Yogi Berra, “It’s deja vu all over again,” only this time we’re supposed to be terrified because the Chinese government wants to subsidize and promote certain industries as part of “Made in China 2025”.

At the risk of understatement, I’m not scared.

Yes, China has enjoyed some impressive growth since it partially liberalized its economy in the late 1900s, but it will remain far behind the United States unless – as I recently explained on CNBC – there is a new wave of free-market reforms.

Needless to say, a government initiative to favor certain industries is hardly a step in that direction.

Some Chinese policy makers even realize that it’s counterproductive to give that kind of power to politicians and bureaucrats.

Here are some excerpts from a report in the South China Morning Post.

“Made in China 2025” has been a waste of taxpayers’ money, China’s former finance minister Lou Jiwei has said…“[Made in China] 2025 has been a lot of talking but very little was done,” Lou, chairman of the National Council for Social Security Fund, said on Wednesday… “those industries are not predictable and the government should not have thought it had the ability to predict what is not foreseeable.” …“The negative effect of [the plan] is to have wasted taxpayers’ money.” He suggested the market should have played a greater role in developing the industries that MIC2025 was designed to push. “The [resources] should have been allocated by the market; the government should give the market a decisive role,” Lou said. “Why has the government pushed so hard on this strategy? [Hi-tech industry prospects] can all change in a few years, it is too unforeseeable.”

Sounds like Mr. Lou learned from Obama’s Solyndra fiasco that cronyism doesn’t work.

But some of his colleagues still need to be educated.

Made in China 2025 (MIC2025) strategy, Beijing’s blueprint for tech supremacy. …Since the plan’s launch in 2015, the government has poured money into MIC2025 to try to turn a number of domestic industries – including artificial intelligence, pharmaceuticals and electric vehicles – into global leaders by 2025. …Lou said: “It [the strategy] should not have been done that way anyway. I was against it from the start, I did not agree very much with it.

I hope senior government officials change their minds about this harmful exercise in central planning.

Not because I’m afraid it will work, but rather because I like China and I want the country to prosper. The partial reforms from last century produced great results for China, including huge reductions in poverty.

Additional reforms could lead to mass prosperity. But that won’t happen if the Chinese government tries to control the allocation of resources.

Let’s close with a big-picture look at central planning and industrial policy, starting with the common-sense observation that there are degrees of intervention.

Here’s my back-of-the-envelope perspective. We have examples of nations, such as the Soviet Union, where the government had near-total control over the allocation of labor and capital. And I suppose Hong Kong would be the closest example of a laissez-faire jurisdiction. And then there’s everything in between.

I’ve already shared two great videos on government planning versus the market. I strongly recommend this Prager University video, narrated by Professor Burton Folsom, on the failure of government-dictated investment. And also this video narrated by Professor Russ Roberts, which shows how a decentralized market efficiently provides a bounty to consumers.

Here’s a third, which celebrates the work of the late Don Lavoie, one of my professors when I studied at George Mason University.

By the way, there is a terrible flaw in the video. The photo that appears at 1:38 shows select faculty and students in 1987. Why is that a flaw? For the simple reason that I was part of the photo but got cropped out in the video.

P.S. Some people worry that China’s industrial policy will have a negative spillover effect on the United States because American companies will lose market share to the subsidized Chinese companies. That’s a legitimate concern and American officials should use the World Trade Organization to counter mercantilist policies.

P.P.S. To my dismay, some people don’t want China to become a rich nation. I assume those people are hoping China follows the advice of the OECD and IMF.

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Nazism and Communism Are Two Sides of the Collectivist Coin

In 2016, I toured the Tuol Sleng Genocide Museum in Cambodia, which memorializes the victims of communist butchery in that nation.

Earlier today, I was lucky enough to get a tour through the House of Terror, a museum in Budapest that commemorates the horrors that Hungary endured during both Nazi occupation and Soviet occupation

Some of the exhibits are uplifting, such as the photo from the 1956 uprising that shows a toppled statue of Stalin.

Other parts are downright depressing.

Or, in the case of these torture instruments, certain exhibits are utterly horrifying (you can use your imagination to figure out what the communists did with the glass tubes).

If you go to Hungary, the House of Terror should be on your list of things to do.

I was particularly gratified to learn that it’s the most-visited museum in Budapest. Not simply because it’s filled with interesting material, but because it helps people understand that all forms of statism are wrong.

The House of Terror has exhibits on the brutality of Nazi rule and the brutality of Marxist rule.

Which is a good excuse for me to share excerpts from a couple of columns on the common thread between fascism and socialism.

In a column last November for the Foundation for Economic Education, Brittany Hunter shared some of Friedrich Hayek’s analysis of the philosophical link between national socialism and international socialism.

F.A. Hayek’s The Road to Serfdom, …in chapter twelve, …Hayek highlights the very important connection between the socialist and Nazi intellectuals by profiling a handful of prominent German Marxist supporters… Hayek points out that contrary to what many think, Nazism did not simply appear out of thin air and infect the minds of docile German people. There were academic roots that, while grown in the soil of socialist thought, grew into a philosophy that praised German superiority, ultimate war, and the degradation of the individual. …Beginning his list of influential thinkers prior to WWII, Hayek begins with the dedicated Marxist who later embraced nationalism and dictatorship, Werner Sombart (1863-1941). …He seethed with criticism for the English people, who, in his mind, had lost their warlike instincts. …His other main criticism of English culture was the emphasis placed on the individual. For Sombart, individual happiness was hampering societies from being truly great. …Professor Johann Plenge (1874-1963) was another leading intellectual authority on Marxist thought during this time. He also saw war with England as a necessary struggle between two opposite principles: emphasis on the individual and organization and socialism. …Interestingly enough, many…socialist philosophers eventually abandoned Marxism in favor of National Socialism… while Prussian militarism was seen to be the enemy of socialism, Spengler helped bridge that gap. Both schools of thought require an abandonment of the individual identity. …This hatred and fear of the individual is the worldview espoused by these thinkers and it continues on with those who claim to be socialists today. Unless the concept of individualism is completely eradicated, the glorified state cannot come into existence.

Earlier this year, Byron Chiado echoed this analysis of Hayek’s Road to Serfdom in another FEE column, pointing out that all forms of socialism reject classical liberalism.

The bulk of the book makes the argument that central planning and interventionism inevitably lead to authoritarianism… Towards the end of the book, he deals with the undeniable authoritarians of his time and casts the national-socialist movement as one built on disgust with liberalism. …Sombart, like many Germans in the early 20th century, was compelled by a case for war between the British and Germany on the grounds that the British…pursuit of individual happiness, which he saw as a disease contracted from a society built on commercialism. Laissez-faire was an unnatural anarchic order giving rise to parasites and dishonest merchants… another Marxist, Sociologist Johann Plenge…moved into the shamelessly totalitarian realm that attracted so many Marxist leaders… Hayek gives…a warning to England; that the “conservative socialism” en vogue at the time was a German export, which for reasons he details throughout the book, will inevitably become totalitarian. …This was not a sensationalist attempt to prove his point. Hayek was rather calmly pointing out an example of the type of government one could expect in a society that has discarded liberalism for planning.

Amen. Big government is coercive government, regardless of what label is applied.

Which is why libertarianism (what Hayek would have called liberalism, meaning classical liberalism) is the proper philosophy of government. Assuming, of course, one values individual rights and civil society.

P.S. I also visited the Solidarity Museum in Poland a few years ago. Maybe I could put together a guide-book on the horrors of totalitarianism.

 

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Montreal Learned the Wrong Lesson from Ayn Rand

I’ve always viewed Ayn Rand’s most famous novel, Atlas Shrugged, as a warning about the dangers of over-regulation, over-taxation, and excessive redistribution.

I won’t spoil the plot for those who haven’t yet read the book, but it’s basically a story about what happens to a society when the people pulling the wagon decide that’s no longer how they want to spend their lives.

And as these highly productive people begin to opt out, politicians come up with ever-crazier ideas of keeping the economy going.

The most absurd example, something that could only happen in a dystopian work of fiction rather than real life, was “Directive 10-289,” an edict from the government to prevent continued contraction by requiring everybody in the economy to do exactly the same thing next year that they did this year. This meant no changing jobs. No starting new companies. No closing down existing companies. No changes in pay. Or employment. No changes in anything. Freeze the economy at current levels.

In other words, take Nixon-style wage and price controls and apply them to every bit of economic activity.

Unfortunately, some politicians think Atlas Shrugged is a direction manual rather than a warning. In Montreal, they’ve come up with a crazy idea to apply a version of Directive 10-289 to the restaurant industry. I’m not joking. In a column for Reason, Baylen Linnekin explains this surreal new policy.

…lawmakers in Montreal have moved to crack down on new restaurants, in an odious attempt to protect existing ones. “Montreal has one of the highest restaurant per-capita ratios in North America and the amount of places to eat is worrying local politicians,” reads a Canadian Press piece from earlier this week. …Data shows Montreal trails only New York City in terms of restaurants per capita in North America. As in New York City, that competition is great for Montreal’s consumers. But it puts pressure on incumbent restaurateurs. So lawmakers have decided to side with the latter.

The new law isn’t quite as bad as Directive 10-289, but it’s guided by the same attitude: Everything that exists now should be preserved and what’s new is bad.

…a ban on new restaurants from opening within 25 meters of an existing one along the city’s Rue Notre Dame… Notably, the action comes as “a number of commercial and retail properties remain empty” in this same part of Montreal. The law “risk[s] turning the city’s restaurant scene into a heavily bureaucratized nightmare like the province’s construction industry,” says the head of Quebec’s restaurant association

So who could possibly support such an initiative?

Unsurprisingly, the greatest enemies of genuine capitalism aren’t just politicians, but also incumbent firms that don’t want competition.

…some protectionist restaurateurs support the measure. “In Montreal you can apply for a restaurant permit and get it immediately—that’s a problem for me” says David McMillan, a supporter of the restrictions, whose high-end restaurant, Joe Beef, is an intended beneficiary of the ban. He’s not alone. “I don’t believe in the free market anymore,” says restaurateur Carlos Ferreira. “We have to protect the good restaurants.”

Gee, I thought consumers were the ones who were supposed to determine which restaurants are good. But Mr. Ferreira wants politicians and bureaucrats to now have the power.

Though we shouldn’t mock the Canadians too much. After all, Barack Obama imposed a version of Directive 10-289 in the United States.

Heck, he must be a big fan of Atlas Shrugged because he also mimicked another part of the book.

Of course, there are some cities, and even entire nations, that apparently want to replicate everything in Ayn Rand’s classic novel.

And the results in these real-world experiments are similar to what happens in the book. Except the book actually has a happy ending, whereas there’s little reason to be optimistic for a rebirth of freedom in places such as Greece and Venezuela.

P.S. John Stossel and Charles Murray have interesting things to say about Atlas Shrugged.

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If We Want Prosperity, Prices Should Be Determined by Markets rather than Politicians

The communist economic system was a total disaster, but it wasn’t because of excessive taxation. Communist countries generally didn’t even have tax systems.

The real problem was that communism was based on central planning, which is the notion that supposedly wise bureaucrats and politicians could scientifically determine the allocation of resources.

But it turns out that even well-meaning commissars did a terrible job. There was massive inefficiency and widespread shortages. Simply stated, notwithstanding the delusions of some left-wing economists (see postscript of this column), the system was an economic catastrophe.

Why? Because there were no market-based prices.

And, as explained in this video from Learn Liberty, market-based prices are like an economy’s central nervous system, sending signals that enable the efficient and productive allocation of resources in ways that benefit consumers and maximize prosperity.

And just in case it’s not obvious from the video, a price system can’t be centrally planned. Or, to be more precise, you won’t get good results if central planners are in charge.

Now let’s look at a bunch of economic policy questions that seem unrelated.

What’s the underlying reason why minimum wages are bad? We know they lead to bad effects such as higher unemployment, particularly for vulnerable populations, but how do these bad effects occur?

Why is it bad to have export subsidies such as the Export-Import Bank? It’s easy to understand the negative effects, such as corrupt cronyism, but what’s the underlying economic concern?

Or what’s the real reason why third-party payer is misguided? And why should people be concerned about high marginal tax rates or double taxation? Or Obamacare subsidies? Or unemployment insurance?

These questions involve lots of different issues, so at first glance there’s no common theme.

But that’s not true. In every single case, bad effects occur because politicians are distorting the workings of the price system with preferences and penalties.

And that’s today’s message. We generally don’t have politicians urging the kind of comprehensive central planning found is genuinely socialist regimes. Not even Bernie Sanders. But we do have politicians who advocate policies that undermine the price system on an ad-hoc basis.

Every tax, every regulation, every subsidy, and every handout is going to distort incentives for some people. And the cumulative effect of all these interventions is like a cancer that eats away at prosperity.

The good news is that we don’t have nearly as many of these bad policies as places such as France and Mexico.

But the bad news is that we have more of these policies than Hong Kong and Singapore.

The bottom line is that America could be much richer with less intervention. But that would require less ad-hoc interventionism.

P.S. There’s a bit of economic wisdom in these jokes that use two cows to explain economic systems.

P.P.S. Here are two other videos on the price system, both of which help explain why only a decentralized market system can allocate resources in ways that benefit consumers.

P.P.P.S. A real-world example of the price system helped bring about the collapse of communism.

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To Protect Liberty, Don’t Let Governments Collect Data

I’ve written before about the tremendous success of Hong Kong. The jurisdiction routinely is ranked as being the world’s freest economy, and its fiscal policy is a role model for spending restraint.

One reason Hong Kong has prospered is that it has enjoyed a policy of benign neglect, particularly when it was a British colony prior to 1997. More specifically, the United Kingdom by happenstance appointed John Cowperthwaite to help govern the colony. And his view of governing was to leave things alone.

…while the mother country lurched in a socialist direction at home under Clement Attlee, Cowperthwaite became an advocate of what he called “positive non-interventionism” in HK.

Cowperthwaite was especially wise in realizing that collecting statistics was risky because advocates of big government would want to justify and implement intervention on the basis of data.

To Cowperthwaite, the planner’s quest for statistics was anathema. So he refused to compile them. When Friedman asked him in 1963 about the “paucity of statistics,” Cowperthwaite answered, “If I let them compute those statistics, they’ll want to use them for planning.”

This may seem to be an arcane point, but imagine how much freer we would be if Washington didn’t have access to our private information.

Consider these examples.

1. The burdensome modern income tax would be impossible if government didn’t have information on our income and assets.
2. Disgusting examples of asset forfeiture would no long occur if the government didn’t have data on our bank accounts.
3. Failed interventions such as No Child Left Behind and Common Core would be impractical if Washington didn’t have education statistics.
4. Our medical system wouldn’t be messed up by Obamacare, Medicaid, and Medicare if politicians didn’t have data about healthcare.

The list is almost endless.

And now we have another disturbing example. As the New York Post reports, the Obama Administration is engaging in an intrusive and Orwellian data-collection exercise as a precursor for central planning of the economy and manipulation of private behavior.

Unbeknown to most Americans, Obama’s racial bean counters are furiously mining data on their health, home loans, credit cards, places of work, neighborhoods, even how their kids are disciplined in school — all to document “inequalities” between minorities and whites. This Orwellian-style stockpile of statistics includes a vast and permanent network of discrimination databases.

Why are they doing all this snooping? To justify more intervention, of course.

The bureaucrats are guided by the theory of disparate impact, which is based on the absurd notion that any difference in racial statistics somehow is a sign of malignant racism.

So it doesn’t matter if there isn’t any evidence of racism. It doesn’t matter if there’s any suggestion of actual discrimination.

What matters if that a bunch of bureaucrats want power to micro-manage the economy and control our lives.

Here’s what’s happening, for instance, in housing.

…the Affirmatively Furthering Fair Housing database, which the Department of Housing and Urban Development rolled out earlier this month to racially balance the nation, ZIP code by ZIP code. It will map every US neighborhood by four racial groups — white, Asian, black or African-American, and Hispanic/Latino — and publish “geospatial data” pinpointing racial imbalances. The agency proposes using nonwhite populations of 50% or higher as the threshold for classifying segregated areas. Federally funded cities deemed overly segregated will be pressured to change their zoning laws to allow construction of more subsidized housing in affluent areas in the suburbs, and relocate inner-city minorities to those predominantly white areas.

By the way, if you think this is just hyperbole, the federal government has been using Westchester County in New York as a guinea pig based on residential housing data. With terrible results, as you can imagine.

And the Department of Housing and Urban development also has been using subsidized housing as a tool for central planning of society.

Needless to say, this is the wrong approach. Instead of letting bureaucrats in Washington act as some sort of national zoning commission, we should shut down HUD and get the federal government completely out of the housing sector.

And, more broadly, we should heed the wise words of John Cowperthwaite, who helped Hong Kong become rich by denying bureaucrats access to data.

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After Reviewing the Federal Reserve’s Lousy Track Record, Thomas Sowell Asks Why such a Deeply Flawed Institution Should Be Allowed to Accumulate more Power

When speaking about the difference between the private sector and the government, I sometimes emphasize that mistakes and errors are inevitable, and that the propensity to screw up may be just as prevalent in the private sector as it is in the public sector.

I actually think the government is more likely to screw up, for reasons outlined here, here, and here, but let’s bend over backwards to be fair and assume similar levels of mistakes.

The key difference between capitalism and government, though, is the feedback mechanism.

Private firms that make errors are quickly penalized. They lose customers, which means they lose profits. Or perhaps they even fail and go out of business (remember, capitalism without bankruptcy is like religion without hell).

This tends to concentrate the mind. Executives work harder, shareholders and bondholders focus more on promoting good corporate governance. All of which benefits the rest of us in our roles as workers and consumers.

But mistakes in the public sector rarely lead to negative feedback. Indeed, agencies and departments that make mistakes sometimes get rewarded with even bigger budgets. This means the rest of us are doubly victimized because we are taxpayers and we have to rely on certain government services.

Citing the Federal Reserve as an example, Thomas Sowell explains how this process works. He starts with a look at the Fed’s recent failures and asks some basic questions about why we should reward the central bank with more power.

The recent release of the Federal Reserve Board’s transcripts of its deliberations back in 2007 shows that their economic prophecies were way off. How much faith should we put in their prophecies today — or the policies based on those prophecies?

Here’s another example.

Ben Bernanke said in 2007, “The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.” It turned out that financial disasters in the housing market were not “contained,” but spread out to affect the whole American economy and economies overseas.

And here’s the icing on the cake.

Bernanke said: “It is an interesting question why what looks like $100 billion or so of credit losses in the subprime market has been reflected in multiple trillions of dollars of losses in paper wealth.” What is an even more interesting question is why we should put such faith and such power in the hands of a man and an institution that have been so wrong before.

Sowell acknowledges that we all make errors, but then makes the key point about the risks of giving more and more power to a central bank that has such a dismal track record.

We all make mistakes. But we don’t all have the enormous and growing power of the Federal Reserve System — or the seemingly boundless confidence that Fed Chairman Ben Bernanke still shows as he intervenes in the economy on a massive scale.

Sowell then highlights some of the reasons why we should worry about concentrating more power into the hands of a few central bankers.

Being wrong is nothing new for the Federal Reserve System. Since this year is the one hundredth anniversary of the Fed’s founding, it may be worth looking back at its history. …In the hundred years before there was a Federal Reserve System, inflation was less than half of what it became in the hundred years after the Fed was founded. The biggest deflation in the history of the country came after the Fed was founded, and that deflation contributed to the Great Depression of the 1930s.

If you want a more detailed examination of the Fed’s performance, this George Selgin video is withering indictment.

In other words, instead of giving the Fed more power, we should be looking at ways of clipping its wings.

I realize my fantasy of competitive currencies isn’t going to be realized anytime soon, and I’ve already explained why we should be very leery of trusting the government to operate a gold standard.

So I’m not sure whether I have any firm recommendations – other than perhaps hoping to convince policy makers that easy money is the not the right way of boosting an economy that is listless because of bad fiscal and regulatory policy.

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So-Called Paycheck Fairness Act Would Allow Government to Second-Guess Private Markets

Back in 2010, I cited the superb work of Christina Hoff Summers as she explained that we should let markets determine wages rather than giving that power to a bunch of bean-counting bureaucrats.

She wrote that article because leftists at the time were pushing a so-called Paycheck Fairness Act that would have given the government powers to second guess compensation levels produced by the private marketplace.

For all intents and purposes, proponents were arguing that employers were deliberately and systematically sacrificing profits by paying men more than they were worth (which is the unavoidable flip side of arguing that women were paid less than they were worth).

Well, bad ideas never die and the Senate recently took up this statist proposal.

That’s the bad news. The good news is that it didn’t get enough votes to overcome a procedural objection.

Writing for U.S. News & World Report, Christina Hoff Summers explains why we should be happy about that result.

Groups like the National Organization for Women insist that women are being cheated out of 24 percent of their salary. The pay equity bill is driven by indignation at this supposed injustice. Yet no competent labor economist takes the NOW perspective seriously. An analysis of more than 50 peer-reviewed papers, commissioned by the Labor Department, found that the so-called wage gap is mostly, and perhaps entirely, an artifact of the different choices men and women make—different fields of study, different professions, different balances between home and work. …The misnamed Paycheck Fairness Act is a special-interest bill for litigators and aggrieved women’s groups. A core provision would encourage class-action lawsuits and force defendants to settle under threat of uncapped punitive damages. Employers would be liable not only for intentional discrimination (banned long ago) but for the “lingering effects of past discrimination.” What does that mean? Employers have no idea. …Census data from 2008 show that single, childless women in their 20s now earn 8 percent more on average than their male counterparts in metropolitan areas.

At the risk of sounding extreme (perish the thought), let me take Ms. Summers argument one step farther. Yes, it would be costly and inefficient to let trial lawyers and bureaucrats go after private companies for private compensation decisions.

But what’s really at stake is whether we want resources to be allocated by market forces instead of political edicts.

This should be a no-brainer. If we look at the failure of central planning in the Soviet Union and elsewhere, a fundamental problem was that government officials – even assuming intelligence and good intentions – did not have the knowledge needed to make decisions on prices.

And in the absence of a functioning price system, resources get misallocated and growth suffers. So you can imagine the potential damage of giving politicians, bureaucrats, and courts the ability to act as central planners for the wage system.

But that didn’t stop the economic illiterates in Washington from pushing a vote in the Senate.

Here’s some of what Steve Chapman wrote for the Washington Examiner.

President Barack Obama said it would merely mandate “equal pay for equal work.” Senate Democratic Leader Harry Reid of Nevada warned beforehand that failing to pass the bill would send “the message to little girls across the country that their work is less valuable because they happened to be born female.” …This is a myth resting on a deception. …The gap reflects many benign factors stemming from the choices voluntarily made by women and men. …Women, on average, work fewer hours and are more likely than men to take time off for family duties. A 2009 report commissioned by the U.S. Labor Department concluded that such “factors account for a major portion and, possibly, almost all of the raw gender wage gap.” “The gender gap shrinks to between 8 percent and 0 percent when the study incorporates such measures as work experience, career breaks and part-time work,” Baruch College economist June O’Neill has written. …What the alleged gender pay gap reflects is the interaction of supply and demand in a competitive labor market. Even in a slow economy, companies that mistreat women can expect to lose them to rival employers.

Regular readers know that I’m very critical of Republicans for their propensity to do the wrong thing, particularly since they presumably know better.

But I also believe in giving praise when it’s warranted. That’s why I’ve written nice things about Bill Clinton and also why I praised House Republicans for supporting entitlement reform.

Well, here’s a case where a very bad idea was blocked because every single GOPer in the Senate held firm and voted for economic rationality. Those Senate Republicans did the right thing and prevailed, just as they were victorious when they did the right thing on taxes a couple of years ago.

Mitt Romney, on the other hand, refused to take a position on the issue, showing that he is trying very hard to be the Richard Nixon of 2012.

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Obama’s Medicare Appointee Has Accidental Encounter with Reality, Learns Nothing

I just read something that unleashed my inner teenager, because I want to respond with a combination of OMG, LMAO, and WTF.

Donald Berwick, the person appointed by Obama to be in charge of Medicare, has a column in the Wall Street Journal that makes a very good observation about how relative prices are falling for products bought and sold in the free market. But he then draws exactly the wrong conclusion by asserting that further crippling market forces for healthcare will yield similar cost savings for programs such as Medicare.

Here’s the relevant passage from his Wall Street Journal column.

The right way is to help bring costs down by making care better and improving our health-care system. Improving quality while reducing costs is a strategy that’s had major success in other fields. Computers, cars, TVs and telephones today do more than they ever have, and the cost of these products has consistently dropped. The companies that make computers and microwaves didn’t get there by cutting what they offer: They achieved success by making their products better and more efficient. …Under President Obama’s framework, we will hold down Medicare cost growth, improve the quality of care for seniors, and save an additional $340 billion for taxpayers in the next decade.

I have no idea whether Berwick realizes that he has inverted reality, so I can’t decide whether he is cynically dishonest or hopelessly clueless. All I can say with certainty is that what he wrote is sort of like asserting “gravity causes things to fall, so therefore this rock will rise when I let go of it.”

To explain, let’s start by looking at why relative prices are falling for computers, cars, TVs and telephones. This isn’t because the companies that make these products are motivated by selflessness. Like all producers, they would love to charge high prices and get enormous profits. But because they must compete for consumers who are very careful about getting the most value for their money, the only way companies can earn profits is to be more and more efficient so they can charge low prices.

So why isn’t this happening in health care? The answer, at least in part, is that consumers aren’t spending their own money so they don’t really care how much things cost. As this chart illustrates (click to enlarge), only 12 percent of every healthcare dollar is paid directly by consumers. The rest comes from third-party payers, mostly government but also insurance companies.

In other words, Berwick’s column accidentally teaches us an important lesson. When consumers are in charge and responsible for paying their own bills, markets are very efficient and costs come down. But when government policies cause third-party payer, consumers have little if any incentive to spend money wisely – leading to high costs and inefficiency.

Defenders of the status quo argue that the market for healthcare somehow is different than the market for things such as computers. But here’s a chart (click to enlarge) showing that relative prices are falling in one of the few areas of the healthcare system where consumers spend their own money. And I’ve previously noted that the same thing applies with abortion, where prices have been remarkably stable for decades. Regardless of one’s views on the procedure, it does show that costs don’t rise when people spend their own money.

That’s common sense and basic economics. But it’s not a good description of Obama’s healthcare plan, which is explicitly designed to increase the share of medical care financed by third-party payer.

The White House presumably would argue that price controls will help control costs. And the President’s Independent Payment Advisory Board (a.k.a., the death panel) will have enormous power to directly or indirectly restrict care, but that’s probably not too comforting for the elderly and others with high healthcare expenses.

The right approach, needless to say, would be to restore market forces to healthcare, which is the core message of this video narrated by Eline van den Broek of the Netherlands.

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Low-Income Workers Are the Second Victims of Obamacare

This blog already has noted that Obamacare crippled the market for “kids only” health insurance policies. Unsurprisingly, that is just the beginning of the bad news. The latest development is that health policies designed to provide insurance to low-income workers may no longer be economically feasible. The Wall Street Journal comments.

Among President Obama’s core health-care promises was that Americans can keep their current coverage if they like it. Among the reasons that a new ObamaCare squall blows in every other day is that this claim simply is not true, as people are discovering. The latest fracas was incited by Janet Adamy’s scoop in the Journal this week that McDonald’s Corp. may be forced to cancel its current coverage for 29,500 employees as a result of ObamaCare. McDonald’s told Health and Human Services regulators that new mandates will make its plans “economically prohibitive” and cause “a huge disruption” unless it gets a waiver. …The entire philosophical and policy architecture of ObamaCare is explicitly designed to standardize health benefits and how those benefits should be paid for. Those choices and tradeoffs will be made for everyone by Ms. Sebelius’s regulators. …Around 2.5 million consumers are covered by “mini-med” policies, most of them concentrated in low-wage industries like fast food, hospitality and retail that have large numbers of part-time or temporary workers. In the case of the restaurants, 75% of the workforce turns over every year and nearly half are under age 25. Mini-med plans are a temporary stopgap for businesses that have low margins and face high labor and health costs. But Democrats hate mini-med and other skinny-benefit plans, calling them “underinsurance.” ObamaCare is meant to run them out of the market by mandating benefits, eliminating coverage caps and certain technical rules about how premiums must be spent. …In other words, the choice is between relatively affordable coverage that isn’t as generous as Democrats think it should be and dumping coverage entirely. McDonald’s may eventually offer the high-cost plans that Ms. Sebelius favors, or get its waiver, but many of its less profitable or smaller competitors won’t. While subsidized ObamaCare options will be available in 2014, those costs will merely be transferred to taxpayers.

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Wages Should Be Determined by Markets, not Quota-Driven Bureaucrats

Christina Hoff Sommers of the American Enterprise Institute decimates the bean-counting feminist “paycheck fairness” legislation being considered by the Senate. Republicans presumably know this is a bad idea, but one can only wonder whether they will do the right thing and block this initiative that at best will be a boon for trial lawyers and at worst will lead to massive government intervention in employment markets. Here’s an excerpt from her New York Times column.

…on the Senate’s to-do list before the November elections is a “paycheck fairness” bill, which would make it easier for women to file class-action, punitive-damages suits against employers they accuse of sex-based pay discrimination. …the bill…overlooks mountains of research showing that discrimination plays little role in pay disparities between men and women, and it threatens to impose onerous requirements on employers to correct gaps over which they have little control. …proponents point out that for every dollar men earn, women earn just 77 cents. …there are lots of…reasons men might earn more than women, including differences in education, experience and job tenure. When these factors are taken into account the gap narrows considerably – in some studies, to the point of vanishing. A recent survey found that young, childless, single urban women earn 8 percent more than their male counterparts, mostly because more of them earn college degrees. Moreover, a 2009 analysis of wage-gap studies commissioned by the Labor Department evaluated more than 50 peer-reviewed papers and concluded that the aggregate wage gap “may be almost entirely the result of the individual choices being made by both male and female workers.” …The Paycheck Fairness bill would set women against men, empower trial lawyers and activists, perpetuate falsehoods about the status of women in the workplace and create havoc in a precarious job market. It is 1970s-style gender-war feminism.

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Brains and Common Sense Are Not the Same Thing

Thomas Sowell makes a very good point about the ostensibly brilliant advisers working for President Obama. If these smart people think that a high IQ somehow entitles them to “plan” the economy, then history shows the results will not be pretty. This is the difference between intellect and wisdom. Unfortunately, Obama’s people have very little of the latter. The late Nobel Laureate, Friedrich Hayek, referred to this trait among certain intellectuals as the “fatal conceit” and it is an especially common affliction in Washington as Sowell opines:

Many people, including some conservatives, have been very impressed with how brainy the president and his advisers are. But that is not quite as reassuring as it might seem. It was, after all, Franklin D. Roosevelt’s brilliant “brains trust” advisers whose policies are now increasingly recognized as having prolonged the Great Depression of the 1930s, while claiming credit for ending it. …Brainy folks were also present in Lyndon Johnson’s administration, especially in the Pentagon, where Secretary of Defense Robert McNamara’s brilliant “whiz kids” tried to micro-manage the Vietnam war, with disastrous results. There is usually only a limited amount of damage that can be done by dull or stupid people. For creating a truly monumental disaster, you need people with high IQs. Such people have been told all their lives how brilliant they are, until finally they feel forced to admit it, with all due modesty. But they not only tend to over-estimate their own brilliance, more fundamentally they tend to over-estimate how important brilliance itself is when dealing with real world problems. …Argentina began that century as one of the 10 richest nations in the world– ahead of France and Germany– and ended it as such an economic disaster that no one would even compare it to France or Germany. Politically brilliant and charismatic leaders, promoting reckless government spending– of whom Juan Peron was the most prominent, but by no means alone– managed to create an economic disaster in a country with an abundance of natural resources and a country that was spared the stresses that wars inflicted on other nations in the 20th century.

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