From today's FT:
Sir,
It seems that Robert H. Wade (Letters, January 2) has fallen prey to what Frederic Bastiat (1801-1850) called the mother of all fallacies: the failure to examine the effect that a policy has on all groups, both in the short run and the long run. In calling for government assistance to bail out failing industries one must ask: “Where are the funds coming from?”
The answer, of course, is that they must come from the productive sector of the economy, the sector that makes profits and pays taxes. It doesn't take an econometric model to conclude that transferring wealth from the productive to the unproductive sector results in a negative-sum game. For every 10,000 jobs saved in the car industry, it is likely that 20,000 to 30,000 jobs will be destroyed in the sectors that are forced to pay for the bail-out.
Various studies by the Institute for International Economics in the 1980s and 1990s* found that two to three jobs are lost for every job saved whenever the government institutes a protectionist policy. Prof Wade is looking only at the jobs that will be lost if the car (or other) industry does not receive government welfare. He is ignoring the potential job losses that would necessarily result if funds are shifted to prop up the car industry.
Thus, rather than concluding that "no accountable government should sit on its hands", a more reasonable conclusion would be that "an accountable government must sit on its hands"**, since allowing the market process to work results in fewer job losses than any other option.
Prof Wade's advocacy of the concept that the government should allocate resources based on some notion of the common good is downright scary. Allowing "government, business, trade unions and perhaps others" to decide who succeeds and who fails would result in allocating resources on the basis of interest group politics, not consumer wants.
In a free economy, consumers decide how resources are allocated. And that is the way it should be. After all, it is their resources.
Robert W McGee, Florida International University, Miami & Yeomin Yoon, Seton Hall University, South Orange, NJ.
* I'll try and track this down one day, and see whether it's based on empirical evidence.
** Aka Lilley's Option.
Virtuous can-kicking
16 minutes ago
6 comments:
Brilliant. Hits them right in the nuts.
"Allowing "government, business, trade unions and perhaps others" to decide who succeeds and who fails would result in allocating resources on the basis of interest group politics, not consumer wants."
That policy was tested to destruction in the 60's and 70's - beer and sandwiches at N0 10 anyone. It doesn't need a lot of international reseach to show it, just picking up a few of the newspapers of the day will do.
Just an even more expensive and wasteful way to fiddle the dole figures.
I tried to argue this the other day. Someone said it was better to be building cars than having wedding planners.
I just couldn't have disagreed more. Why do people get so worked up about manufacturing as though it deserves some special status, and especially heavy manufacturing?
Even before the HPC, there were people on the TV talking about the bargains you could get on cars and how no-one was buying (which is simply down to overproduction).
I have not heard a squeak out of anyone on the left about the demise of Waterford Wedgewood in the way that they have over how they need a fat loan for Jaguar. I guess the 600 plate makers in Stoke aren't unionised to the same level, so they don't really count as "the workers", but rather, running dogs of the capitalist bourgoise.
It doesn't take an econometric model to conclude that transferring wealth from the productive to the unproductive sector results in a negative-sum game.
Exactly, Mark.
So, the 'do nothing' is the right thing to do then.
Said so all along.
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