The Economy of Coercion

John Stossel's latest column at Town Hall echoes some of my latest reading material. Stossel makes his point far more eloquently than I would, but it won't prevent me from trying to expand on what he wrote. Von Hayek wrote about why government cannot run an economy better than the Invisible Hand made famous by Adam Smith. A government run economy depends on experts in their field to plan the best route for production and, through that, the best route for consumption. The major flaw with this is that experts have a very narrow scope of vision, primarily the field in which they have studied. What happens then is they all vie for the important aspects of their division to be paramount while not being able to comprehend the total interaction of all aspects of the economy.

If the experts can't put it all together, how can the average citizen, you ask? Simple, the average citizen merely has to concentrate on that which is pertinent to his or her life. When you have an entire populace looking out for number One, the invisible hand appears. Market forces shape the flow of commodities by making the most used products and industries buy more and industries and products that aren't economical fall off the map or become a specialty and niche market. It makes for a very fluid and sometimes unpredictable economy. However, it also creates something of a market Darwinism, an evolution of production. Those companies that are useful and have a working business model profit and continue be useful in the economy; those that lack those things fail and remove the excess fat and chaff from the market.

Yes, a free market makes uncertainty a part of life, but it also drives innovation and development. The liberal ideas that sparked the explosive growth of the past three- hundred years still work but they also mean that we must be able to understand that sometimes things must change to continue that growth. This brings me to my next point: What will happen if we bail out the Detroit automakers? What happens when we artificially prop up failed business models? In the short run, a bail out may allow the companies to free up and divert capitol to projects that make them more competitive. Or it might give them the illusion of a cushion against the current push of the markets and make them even more sluggish in response to changing consumer needs, merely prolonging the death throws of a dieing business model which other companies have already left behind (including the continued leaching by the UAW.) The biggest hurdle the American automakers face in becoming competitive is the cost difference in production compared to their foreign brethren. GM has hourly labor costs (including benefits) of $78 per hour, while Toyota has a mere $35 per cost. At half the cost of labor, the non-union model is more streamlined and can cut consumer cost further. Add to this the perception that Toyota has higher quality cars and you get a compelling reason to cut the chaff that is GM from the economy.

The above is one example where a free market would cause fluctuation and uncertainty, but the economy would come out stronger. What worries me the most about the auto bailout currently proposed would pave the way for nationalization of the auto industry. If the government already owns a portion of the company, how big of a step would it be to buy the rest of it in the name of helping direct the company to more effectively aid the economy? Why does nationalization worry me? If my opening paragraph doesn't paint a clear enough picture, let us examine what happens to any industry when it gets taken over. First, it is important to note that most countries that at one time nationalized various industries re-privatized them later. It seems that the main effect of nationalization is to remove the incentive to innovate: profit for the individual (or group of investors.) Without that drive to innovate the economy stagnates and flounders, see the example of the "progress" experienced by the ultimate example of state control, the Soviet Union. The USSR did increase production under state control with a mandated shift away from agriculture to industry, but it also increased the cost of such development (including the human cost of producing less food,) resulting in the lowering of the standard of living. I suppose that is one way of achieving equality, and perhaps the only way. To make everyone equal you must bring everyone to a common denominator, usually down.

From Russia With Love

In my last post I briefly mentioned my concerns over Russia and its actions in the Middle East, I would like to take this space to comment on my growing concern over Russia's actions and political developments. When the Cold War ended almost two decades ago, it seemed that the USSR under Gorbachev and then Russia under Yeltsin would be able to slowly re-integrate itself to the expanding global economy. Gorbachev started the trend toward real economic development and integration with the glasnost and perestroika policies, gradually pulling his government away from state domination of the internal markets, allowing for foreign competition, and releasing the communist strangle hold on civil liberties. With the demise of the Soviet Union and the election of Boris Yeltsin as the first ever popularly elected leader of Russia, the country continued to attempt a decentralization of economic power and the privatization of corporations. Unfortunately, much of the corruption present under communist rule remained in place and derailed the planned economic development, centralizing it once again. After Yeltsin's resignation, Putin was elected by the people to contain the corruption and expand economic freedom. Here is where Russia's progress becomes cloudy.

Putin has led an interesting life, and I think it offers insight into the man's leadership style and goals. He has a history of combining state positions, but only to consolidate his own power. Beyond that he has ballooned the size of the bureaucracy (11-17% in 2005 alone) and nationalized corporations in an attempt to regulate and control economic growth. By statistical standards, he has succeeded in leaps and bounds with an economic growth rate of 6.7%, compared to the US's rate of 2.9%. Growth in personal incomes has been approximately 12% per year. While these figures are good, there are some problems. The most well known problem in Russia's economy is the well-publicised corruption and organized crime network, both of which act as a funnel for wealth away from the Russian labor force. Also, there is the problem of not having a diverse basis of exportable products. The majority (80%) of exports consists of market driven commodities, such as oil, natural gas, metals, and timber. With any sort of global downturn in the market, or even a recession within one of Russia's major trading partners, a major source of income could vanish. As I mentioned in the last post, much of the state's exports in industrial goods comes in the form of military technology and equipment. Lastly, while productivity and income are up, they still lag far behind the rest of the developed world. Russia's work force is about half of that of the United states and the total GDP is one thirteenth of ours. Russia's GDP per capita in 2006 was just over $12,000, as compared to the United States GDP per capita of around $43,000. None of that can sit well with the world's only former-superpower.

In addition to the economic troubles, some of Russia's policies are disconcerting as well. Putin has developed such a cult-of-personality (his 2000 election was with a 56% majority vote, followed by the 2004 election by over 70% of the vote, along with a high approval rate) that he can organize the wildly popular youth movement, the Nashi, and even name his successor, Dmitri Medvedev. Putin's nationalistic youth movement indoctrinates the next generation of leaders to state (read: Vladimir Putin) approved ways of thinking and revisionist history, glorifying the exploits of the USSR. The group is strikingly reminiscent of the Hilter-Jugend in the 1930's, even being accused of silencing dissenting voices within the country. Also, Russia's handling of the situation with Chechnya demonstrates the lessons in diplomacy Putin learned during his time in the KGB. Finally, Putin's ability to virtually assure Medvedev's election this year tells me that the former state security officer become president will continue to be a major player in the formation of policy and diplomatic affairs.

Let us not forget, Putin is a man who was trained by one if the best propaganda machines the world has ever seen, the KGB. Win the hearts and minds of the people, or beat them into agreement, all is fair in the secretive and brutal world of the secret police.