Industrial Policy

A Man of Letters, Part II

The following is another terrific industrial policy related letter from Don Boudreaux over at www.cafehayek.com that you may enjoy. It was sent to the Washington Times.

 

Dear Editor:

 

On top of Uncle Sam's unprecedentedly large bailout plan comes calls from top business executives for "comprehensive industrial policy" ("Ford, Dow execs to discuss national summit in '09," September 22).

 

Let's keep our heads.  Despite the turmoil, Americans today remain incredibly wealthy.  This fact is evidence that capitalism works very well even though it is never textbook perfect.  Calling for a fundamental restructuring of an economy that produces such widespread prosperity is, at best, an irresponsible overreaction.

 

More likely, though, this call for industrial policy is a ploy by business executives to find shelter from the bracing winds of competition.  By trying to plan the economic future, any such policy necessarily tramples innovation and consumer sovereignty.  Anything at odds with the policy - such as an unforeseen new product, a creative new technique of production, or simply a change in consumers' tastes - must be squelched, for otherwise the policy falls apart.  Many existing firms (especially large ones such as GM and Dow Chemical, who have the resources to influence government) will benefit from industrial policy - but only because such policy inverts the economy from one in which producers exist to satisfy consumers to one in which consumers (and taxpayers) exist to satisfy producers.

 

Such a policy will make most of us much, much poorer.

 

Sincerely,

Donald J. Boudreaux

The Tennessee Waltz

The Detroit Free Press featured an article August 19 (“Ex-Kilpatrick aide faces corruption probe”) about a wide-ranging and  ongoing investigation in Detroit by the Federal Bureau of Investigation that apparently involves “informants and scrutiny of several multimillion-dollar deals such as the Synagro Technologies sludge removal contract,” not to mention secret videotaping.

Two items in this story caught my attention. The first was the apparent connection to the “Asian Village,” a development that was supposed to contribute to Detroit’s revitalization, rebirth, or renaissance. The village went belly up within in a year.  In the Detroit probe federal agents had been looking for records involving a businessman’s firm that had ties to the Asian Village.

As I write this I do not know if there were government funds or favors involved at all with the Asian Village, and this brings me to my first point. Government development officials are not the only people who make poor investment choices. It can and does happen in the private sector too. The difference of course is that investors are risking their own money and not that of a stranger. Moreover, when it becomes evident that a project is failing it is easier to change the development’s direction. For instance, the investors can pull the plug on the project.

The second item that caught my attention was the use of “undercover videotaping” in its probe. This reminded me of a 2005 development-related corruption story humorously dubbed “Operation Tennessee Waltz,” that also involves a videotape.  

According to the online encyclopedia Wikipedia, Operation Tennessee Waltz involved a fake company called “E-Cycle” whose fictional officers asked lawmakers to push legislation designed specifically to benefit their company.  Of the 10 people arrested, seven were state lawmakers who “agreed to do so if they were to be paid for their introduction of legislation.” You can watch the video of ringleader John Ford taking a bribe by watching the imbedded video, below. Money changes hands at about the 3:55 mark.

Imagine how often the opportunity exists for politicians across the globe to exchange favors under the guise of creating jobs or facilitating development of some sort for cash or other gifts.  States run scores and scores of programs designed to encourage cozy relationships between business and government. This, one would think, would increase the likelihood that one side will try to game that system to illegally or unethically advance their self-interest and do so under the very public illusion that it facilitates economic development and creates jobs for people desperate to acquire them.

It doesn’t have to be economic development legislation that makes such corruption easy, either. It could be any subject. That is why it is so important to strictly limit what government can and should do. Moreover, even a government with strictly limited powers should try to conduct its business with the greatest transparency possible.

Circus Poodle of the State

Last June I was in Lansing on business when I bumped into a state legislator I have known for many years. Our exchange got me thinking about economic development programs and personal liberty.

He asked me what I thought of the possibility of a new and special program of state incentives that would be given only to a specific industry.  I told him it was a bad idea and explained that the there exists a great deal of empirical evidence to suggest that such programs just don’t work. His response shocked me:

“So you don’t think we should use the tax system to get people to do what we want them to do?" he said.

I responded with a rhetorical question: “Am I am man or a circus poodle made to jump through state government hoops in order to collect a biscuit that belonged to me in the first place?” Naturally, the biscuit represents the incentive (tax credit, abatement or subsidy perhaps) that the government dangles in front of people and job providers in the hope they may use it in a way that pleases Lansing (or other) politicians. He had no answer.

Every time the state grows it necessarily makes the rest of us smaller. Why? These programs are not costless. At a minimum they require a bureaucracy to oversee them, and most government employees are not working gratis. The money used to fund these programs is taken from those of us that would like to fund our own personal development programs. If we could keep more of our own money we could start or expand a business, save or invest, or anything else that strikes a free man’s fancy.