Messing With Markets Today -- To The Detriment Of The People Of Tomorrow Who Have To Pay The Price
Economist Donald Boudreaux writes in a column at AIER:
Suppose, for example, that a majority of today's citizens-taxpayers in America conclude that it's a good idea to nationalize the steel industry. Further suppose that a Supreme Court ruling prohibits government from simply seizing steel mills; the Court rules that if government wants to acquire steel mills it must pay market prices for these firms. Finally suppose that upon learning that the market price is $500 billion, Americans today are unwilling to have their taxes raised by this amount for this purpose. If deficit financing were unavailable, the steel industry would remain in private hands.Deficit financing, however, is available. By borrowing the $500 billion to purchase steel firms, government enables that subset of Americans who support nationalization of the steel industry to achieve their policy goal without having to pay for it. The entire $500 billion will be repaid in the future by citizens-taxpayers not yet born.
But there is nevertheless a burden that emerges in the current period from this deficit-financed policy move - namely, the inefficiencies that immediately arise from the nationalization. The amount of resources consumed to produce each ton of steel rises inefficiently because government bureaucrats have fewer incentives than do private owners to ensure that mills operate efficiently. The costs of this excessive consumption of resources by government-owned steel mills ripple throughout the economy in the form of diminished outputs and higher prices of countless other goods and services.
In this example, nearly all Americans - and even some non-Americans - today suffer an immediate (and ongoing) burden as a consequence of this deficit-financed policy. Some Americans who are so ideologically enamored with the notion of industry nationalization might be content to bear this burden, while many other Americans might remain unaware that the higher prices they experience throughout the economy are a direct result of the nationalization. But the fact remains that, in this example, deficit financing imposes a real burden on the current generation despite the fact that full responsibility for repaying the loan falls only on future generations.
This example of a nationalized steel industry is, of course, hypothetical. But its lessons apply in the real world. For instance, to the extent that government subsidies of farmers and of aircraft producers are funded with borrowed money, similar burdens are created immediately: Resources are diverted from efficient to inefficient uses, causing even today's citizens-taxpayers to suffer as a result of deficit-financed government programs.
Deficit financing - by enabling people today to free-ride on people tomorrow - allows government to expand its size and reach beyond that which would be obtained if government were required to fund all of its current expenses out of current revenues, with no opportunity for deficit financing. In short, deficit financing paves a path for the unwarranted and wasteful expansion of government activity. Only someone who is convinced that government will undertake only economically worthwhile projects regardless of the means of financing - or someone who doesn't understand economics - can look favorably upon deficit financing by government.
In this scenario is there any reason they can't just buy a few steel mills?
NicoleK at October 14, 2021 3:11 AM
When little Johnny gets cash for a birthday or Christmas and basically wastes it, nobody takes the lesson: unearned money IS not only wasted, the transaction devalues everything valued by the dollar. Little Johnny expects to continue in this fashion.
This is a major part of the principle behind much foolishness regarding minimum wage and the law: the number assigned to the value of goods or services is not absolute.
If you told 10-year-old me a 15¢ Coke was going to be $2 in the future, I'd pedal rapidly away from the crazy person.
Everybody wants more, and for less. This is the principle dooming us all, led by those efforts in which pay is not tied to results.
Radwaste at October 14, 2021 4:34 AM
Yes. Well, none that they can't, but many that they shouldn't.
Nationalized and government-run industries are notorious for being inefficient and unresponsive to the market. Governments generally close their markets to make sure their nationalized industries have no domestic competition. Look to the Soviet bloc for good examples.
In East Germany, the Trabant, which debuted in 1957, is a prime example. With no domestic competition, there was never any incentive to make the car better. "...the Trabant’s biggest problem was that it never really improved. Perhaps it’s no surprise that the 1957 Trabant had no tachometer, no turn signal, no seat belts or fuel gauge, no trunk liner.... The fact that these basic amenities were still missing when Taylor Swift was born is a bit more surprising."
For reference: Taylor Swift was born in 1989.
Outside the East Germany, European automakers competed with each other in terms of fuel efficiency, safety features, pollution controls, comfort, handling, and engine power. Inside East Germany, the Trabant stood alone in the market. It was the only car East Germans could buy.
And, to keep the production "efficient," that longstanding Marxist bugaboo, the factories produced a limited number each year, a number far below market demand. That way, every car manufactured was sold and there was no waste.
Such shenanigans meant that the wait period for a new Trabant grew to 10-15 years. Used Trabants often went for double or triple the price of new ones, since they could be driven that day with no long wait.
Because there was no incentive (i.e., no competition) to improve, the Trabant ran on its puny oil-and-gas two-stroke engine for nearly forty years, until the Berlin Wall fell. The Trabant spewed four times as much pollution as modern European vehicles ("smoked like an Iraqi oil fire") and did not meet European emission standards. Thus, the company was unable to even attempt to sell its cars in upon German unification.
The Trabi was dubbed one of the "worst cars of all time" and "the car that gave Communism a bad name" by Time magazine.
There's a reason there is no world-class automaker from the old Soviet bloc, land of nationalized industries. Their automakers were never subjected to competition and used government accounting and performance measurements.
You do not want the government in charge of an industry, even if it were to only "buy a few steel mills."
Conan the Grammarian at October 14, 2021 5:50 AM
You can even look at the current US public school system. Recently we even had Terry McAuliffe of Virginia claiming parents shouldn't be allowed to influence schools or control what their children are taught. A view echoed by teacher union representatives and many others. Really highlights what some have said, if you aren't paying then you aren't the customer.
The effect also shows up in medicine. The more government control the slower the progress and the higher the price.
It is harder to measure this effect on research. But it is still there. The more your government spends on it the slower the progress will be.
Ben at October 14, 2021 6:56 AM
Silly Boudreaux, our grandchildren won't be paying back the borrowed trillions. The money will never be paid back. But they will be on the hook for the interest payments. That's why inflation is so terrifying. We've been adding to the balance at near zero interest rates. When quantitative easing ends and easy money is hard to find, the competition for funds will raise the rates for government borrowing and increase the proportion those payments take out of the budget.
Our kids are headed for debt slavery on the minimum payment plan. Maybe another war would be a good choice to overcome resistance for more borrowing. Iraq and Afghanistan were worth at least $6 trillion. Who has that money now?
There was no need to nationalize anything. That's kind of a red herring. "What's good for GM is good for the country," eh?
Coyote Blog/Warren Meyer has a more sophisticated discussion from 2012. It looks like his warning is coming true.
https://coyoteblog.com/coyote_blog/2012/09/risks-of-qe.html?doing_wp_cron=1634224857.4507930278778076171875
Baker at October 14, 2021 8:45 AM
One of the unseen costs of gov deficits is that the gov is sucking up all the excess cash in the economy so it is not available for investing or new businesses. The bigger the gov slice of the economy, the slower econ growth.
cc at October 14, 2021 8:47 AM
In this scenario is there any reason they can't just buy a few steel mills?
NicoleK at October 14, 2021 3:11 AM
What? Buy a few steel mills and then exempt the government owned ones from the EPA and the Union labor requirements that put the privately owned ones out of business?
What do you think a steel mill runs on? The answer is, lots and lots of energy, mostly coal, which is why industrial production (heavy industries) is now mostly in commie China where the government doesn’t give a shit about either slave labor or dirty air.
Isab at October 14, 2021 12:04 PM
The Soviet block is a terrible example. A fascist may have stated this, but it applies to all socialists:
All within the state, nothing outside the state, nothing against the state.
The only thing State owned industry owes is that it hits their assigned 5 year plan. Does it matter that they're wasteful, inefficient, and have no competition? nyet, comrade. Did we hit our 5 year goal, get a bonus and avoid the gulag? da.
See Solyndra for a more modern less socialist example.
I R A Darth Aggie at October 14, 2021 2:00 PM
It's almost like the columnist read Atlas Shrugged. Even picked the right industry. Now, if only someone would go invent 'Miracle Metal' for us
Anon at October 14, 2021 6:16 PM
Government ones would have more requirements, not less. Like schools. Private schools have less requirements for staff than public ones, and pay a lot less, too.
NicoleK at October 15, 2021 12:48 AM
NicoleK, the problem is they are the wrong requirements. As Isab pointed out they would not have to follow the same EPA requirements all other businesses have to. As Conan points out they wouldn't have to provide the same safety protections. And as the article points out they wouldn't have the same efficiency or profitability requirements a normal business has. Instead they have a lot of political requirements . . . just like public schools.
It is a bad deal for the nation as a whole.
Ben at October 15, 2021 6:26 AM
In this scenario is there any reason they can't just buy a few steel mills?
NicoleK
Then you'd have private-sector mills showing how badly run the government-owned ones were.
markm at October 16, 2021 11:45 AM
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