The antidote to a state guided economy

At National Review Online, Reihan Salam worries that with the proliferation of government intervention into business we are veering into the territory of a "state-guided" economy. The problem isn't just that the government is spending taxpayer cash indiscriminately, it's that all this cash comes with strings attached, and the fact that those in power will have influence over where and how this money will be spent.

Once such a system becomes dominant, industry will shift from innovation to rent-seeking. That is, influencing those in power to steer money and business their way. This isn't because our business leaders are evil, or see backroom deals as the preferred business model. This is because once we establish a system of resource allocation that is based on political influence, then the natural tendency of those seeking profit will be to first seek influence. If you think pursuing political influence rather than the encouragement of creativity is the basis of a sound economy, you are sadly mistaken.

Salam looks at the case of Vice-President Biden and a closed GM plant in Delaware as an example. He doesn't fault Biden for his efforts to lure new business to Delaware, that's perfectly natural, but it has negative consequences:

I don't actually think that the vice president did anything untoward. He used his influence on behalf of a community he has represented for decades, and that is perfectly understandable if not admirable in some sense. But it's worth keeping in mind where the push for industrial policy is really taking us. The largess that the DOE and Biden are dispensing isn't really theirs to give away.

For Biden, the reopening of Delaware's Boxwood Road plant is "a metaphor for the rebirth of the country." There ought to be a second half to that sentence: "a metaphor for the rebirth of the country as a haven for crony capitalism." That's a little harsh. But this is really bad, guys.

This critique seems utterly sensible and I think it would appeal to anyone with even the slightest tendency toward free markets.

Of course, if I lived in Delaware, I might see this whole issue differently. I don't, but I do live in Wisconsin.

Here's My Two Cents blog bemoaning the inability of the Wisconsin legislative delegation to use their position to help Oshkosh Corporation secure government contracts:

While we would all like to think that things like major military contracts are awarded strictly on lowest bid and highest quality of work--anyone who knows anything about Washington knows that politics plays a major role in that process as well.

Instead of calling for an end to this influence, he proceeds to detail just how inadequate our legislators are at playing the game when it comes to the military contracts sought by Oshkosh. He ends on this note:

So, as Oshkosh and the Fox Valley enter the biggest game of Hardball ever, Wisconsin is fielding a team of Punch-and-Judy hitters--when we all know that chicks dig the long ball.

Nice touch there at the end, but the whole thing misses the point entirely. Do we send our legislators to Washington to insure we get a big slice of an enormous tax-dollar pie? I'd like to think that those on the right would prefer that legislators in Washington shrink the size of what is undoubtedly a wasteful government bureaucracy, even if this means fewer dollars return home. Better that they never left, I would say.

In closing, Salam offers a real recipe for improvement and hints at why it doesn't get the attention it deserves:

Imagine what we might accomplish if we abandoned targeted giveaways in favor of, say, a lower corporate income tax, better schools, and better roads. That, alas, sounds rather mundane.

When it comes to government I'll take mundane any day of the week.

U.S. Fiddles While China Grows

Economist Simon Johnson has a recent post at The Baseline Scenario highlighting two great dangers to U.S. prosperity; one foreign and one domestic.

On the foreign side, Johnson encourages us to set aside the monetary relationship between the U.S. and China. The real danger he says, is from China's habit of investment with an eye toward productivity growth (e.g. infrastructure, education). This in and of itself might not be so bad if we in the U.S. were doing the same.

This is where the domestic part of the problem comes in. Johnson argues that the U.S. has not worked to increase productive sectors of its economy. Instead, our economy has seen a certain non-productive sector increase dramatically as a share of GDP. Specifically, the finance sector, which he spitefully dismisses as "rent-seeking."

No, rent seeking is not when Mr. Furley knocked on Jack Tripper's door on the first of the month and all of the 70's sitcom hijinx that such a scene entails; it is the practice of extracting benefits above and beyond what those they would receive under free market conditions, often by turning the political process to their advantage.

It's the combination of these two different approaches to economic development that represents the real danger for the United States. Here's Johnson [E.A.]:

Finance in its modern American form is not productive. It is not conducive to further sustained economic growth. The GDP accruing from these activities is illusory – most of finance is simply a tax on what is done by more productive members of society and a diversion of talent away from genuinely productivity-enhancing activities.

The rise of China does not necessarily imply slowdown or demise for the United States. But if they specialize in making things and we specialize in finance, they will eat our lunch.

Anybody know what the Masters of the Universe on Wall Street eat for lunch? Hope the Chinese like it.

Go read the whole thing.