Saturday, January 29, 2011

How Government "Investment" and National "Competitiveness" Quickly Turn Into Protectionism

My round-up of State of the Union commentary had a fairly consistent theme: that the President's push for national "competitiveness" and government "investment" was misguided and dangerous because it often lead to anti-market, anti-growth and anti-trade policies.  In a great Forbes op-ed, Art Carden discusses two big problems with these themes:
First, while a group of White House speechwriters apparently thought that “win the future” would have the same rhetorical resonance as “yes we can,” the Address conveyed an incorrect zero-sum worldview in which what others gain comes at our expense. As economics has shown over and over and over and over again, trade creates wealth. Voluntary exchange is a positive-sum game. If China gets richer, it doesn’t imperil our ability to get richer, too.

Second, I have always been struck by how politicians refer to spending programs that almost inevitably turn into special interest bonanzas as “investments.” President Obama exalted the teaching profession, but let’s not be na├»ve: teachers’ unions are some of the biggest spenders in politics, almost all of their money goes to Democrats, and they fight educational innovations like vouchers and charter schools at almost every turn.

More fundamentally, governments don’t get the kind of feedback on the success or failure of their “investments” that private firms get. Private firms can tell from their profits and losses whether they are creating value. A firm that earns a profit is using resources to produce something that people value more highly than anything else that could be done with those resources. A firm that earns a loss is using resources to produce something that people value less than at least one other thing that could be done with those resources.

Governments respond to political incentives rather than market incentives, and perhaps most importantly, they can’t go out of business. A government can acquire resources. A government can spend money. There is no way to know whether that spending really qualifies as “investment” or not.

Consider biofuels, high-speed rail, and other “green economy” initiatives. I was excited when the President mentioned getting rid of oil subsidies, but my excitement turned to disappointment when he said he wanted to spend more to subsidize things like biofuels and high-speed rail....

I’m extremely skeptical of the government’s ability to make these kinds of “investments” without turning them into massive giveaways to powerful special interests. As Steven Horwitz wrote recently on the prospect of a Libertarian-Progressive alliance, the tendency for government to serve powerful interests is a feature of politics rather than a bug. When we give people the power to rule others, we shouldn’t be surprised that people use that power to benefit themselves and their friends.
I've addressed the first problem that Carden identifies - how an adversarial approach to international economics is wrong and troublesome - many times, and the post-SOTU articles I listed the other day also make this point clear.  I've also briefly addressed the obvious differences between government "investment" and private investment.  So there's no need - for now at least - to elaborate on those points.  On the other hand, Carden's explanation of the pernicious side effects of government "investment" deserves further discussion.  He does a great job laying out how special interests inevitably distort government investment plans, but I think he glosses over perhaps the bigger problem with state meddling in the private sector: it breeds economic nationalism.

As Carden rightly notes, government "investors" (i.e., elected officials subsidizing commercial enterprises with your and my tax dollars) respond to political, rather than market, incentives and can easily throw more money (again, our tax dollars) at a project regardless of the economic return on that investment.  In short, as long as the political returns - be they votes or campaign contributions - remain high, then the government investor has an incentive to keep on investing.  It's this troubling dynamic that has given us more than three decades of government "investment" boondoggles in corn ethanol and other "green" technologies.  (To see just how long we've sucked at "investing" in environmental technologies, Google "carter synfuels" some time.)

At some point, however, the money does run out, and that's where things can get really scary.  As we've learned during the current state and federal budget crises, government funds aren't truly unlimited (thank goodness).  But, even though the state/federal coffers are dry(er), the political incentives remain equally strong - government investors still have a serious political stake (read: re-election) in seeing their investments be successful.  Without a limitless supply of money to throw at a politician's chosen company/industry, he will almost inevitably seek other means to ensure the political returns on his "investments."  And, unlike private investors, he has at his fingertips the full force of the government to improve his investments' prospects should things go sour.

Of course, when it comes to government "investment," things almost always go sour (see above).

So not only do we get bajillions of tax dollars thrown down the toilet for government projects captured by special interest lobbying, but we also get a healthy dose of government coercion to tilt the playing field in those projects' favor.  Sometimes, this coercion rears its head through top-down usage mandates like the gas/ethanol mix.  More often, it appears in the form of economic nationalism - particularly trade protectionism - because in today's global economy eliminating foreign competition is one of the easiest ways to improve your investment's chances.  (See, e.g., the current tariff on sugar ethanol.)  Of course, when a government official can't do that, she can at least blame the foreigners for the failure of her blessed programs and convince the public that "free trade," not her programs, caused all of their economic ills.

And that brings us back to the troubling protectionist implications of the President's repeated calls for more government "investment" during the SOTU.  Henry Payne over at NRO deftly pointed out that Obama's speech closely paralleled that of former Michigan governor Jennifer Granholm back in 2006:
Former Michigan governor Jennifer Granholm has yet to start teaching her new Cal-Berkeley course on green governing — but she already has a devoted student in the White House.

President Obama’s State of the Union speech Tuesday night was eerily similar to the failed economic vision that Granholm laid out in her State of the State address exactly five years ago: It even included her rhetorical ruse substituting “investments” for “spending.”

“If the states are the laboratories of democracy,” Granholm wrote in the Huffington Post last December, “Washington can take a lesson from what is happening in Michigan.” Sadly for the nation, Obama listened to his teacher.

“We need a moon shot,” said Granholm in the Huffington Post. “This is our Sputnik moment,” echoed the president on Tuesday. Granholm envisioned a transformation of Michigan from “Rust Belt to Green Belt” with massive, European-style public investments in infrastructure and alternative energy. “In five years, you’ll be blown away,” she predicted, in what would become her signature line.

It was, in fact, thousands of state jobs that were blown away, as Granholm’s vision diverted pols’ attention from much-needed reforms to the state’s budget and business climate. Since her speech in 2006, the state’s unemployment rate has exploded from 7.4 percent to 11.4.

Now Obama wants to take the Granholm model national. “The 21st Century Jobs Fund [is] the largest investment in diversifying our economy this state has ever seen,” said Granholm in her 2006 SOS. “It’ll create tens of thousands of new jobs. We’ll invest more than $2 billion in public and private funds to develop new sectors of our economy: Advanced manufacturing. Homeland security and defense. Life sciences. Alternative energy.”

“We’ll invest in biomedical research, information technology, and especially clean-energy technology — an investment that will strengthen our security, protect our planet, and create countless new jobs for our people,” mimicked Obama in this year’s SOTU.

Like Granholmnomics, Obamanomics is not only unsustainable — it diverts important investment dollars from the private sector. Welcome to Michigan, America.
What Payne doesn't point out, however, is that the failure of Granholmnomics' state-capitalist model caused her to become one of the loudest protectionists in the country.  As I noted last year, "Michigan Governor Jennifer Granholm went on CNN this morning to discuss President Obama's new trade initiative and to explain away her administration's dreadful, job-killing policies by - you guessed it - scapegoating free trade (start at about 1:00)":

So if/when President Obama's "investments" in green technology and other industries fail (as they probably will), and when the federal budget (and House Republicans) simply can't tolerate even more money being thrown at these failed investments, where will he turn?  Will he cut his losses and admit failure?  Will he force Americans to buy/use these failed products regardless of their economic (and environmental) value?  Or will he blame the country's "adversaries" (i.e., foreign competition) and attempt to erect trade barriers?

According to the "Granholm model," it'll be the last option, and, really, we shouldn't be surprised if/when that happens.  I mean, it's the natural result of an economic model based on national "competitiveness" and government "investment," now isn't it?

UPDATE: Looks like Michigan's new governor is going in a different - and far better - direction.  Good riddance.

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